Mistake in Contracts

  • Created by: Ldlake
  • Created on: 21-03-16 14:21

Common Mistake

Common Mistake: Both parties make same mistake


1) Must have related to matter which was 'Fundamental to the parties decision' to enter agreement

2) Parties must have 'Reasonable grounds' for thier belief

The Great Peace Shipping Co v tsavliris (International) Ltd [2002]: Common Mistake cannot apply if one party has assumed the risk of event or Contract is subject to Condition Precedent

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Mutual Mistake

Mutual Mistake: Each party believes other is in agreement

Mistake as to the terms of the Contract: Shall render contract void. Raffles v Wichelhaus [1864]especially if the promise renders performance impossible.

Mistake as to the Subject matter of the Contract: Mistake of subject matter shall render Contract void on the basis of the goods in the Contract. Scriven v Hindley [1919] this includes if the subject matter is Ambigeous.  However the contract shall not be void if the mistake as to quality was on the basis of the quality of the goods in question if only 1p was mistaken: Smith v Hughes [1871]

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Unilateral Mistake

Uniliateral Mistake: One party knows of mistake and other is unaware 

Mistake as to the identity of one of the contracting parties: If a party is misled by the other peroson into believing they were someone who they were not this shall be construed as a Mistake. Partyis misled into believing the person was of fundamental importance: Cundy v Lindsey [1878]However person Contracting must exist: Kings Norton Metal Co. Ltd v Eldridge [1897]. Also it must be clear that the person was mistaken before or at time or contract or this shall not make contract void: Boulter v Jones [1857].

Face to face situations regarding Mistake: If the person is Mistaken as to the identity of a person though a identity by card: Lewis v Averay [1971], or by false detalils: Phillips v Brooks [1919], This shall not render the contract void. However if the person checks the details of a perosn and finds them false the contrtact shall be void: Ingram v Little [1961], this also applies if mistaken knows the person in question: Lake v Simmonds [1927]. Intermediary making conttract shall be treated as Face - Face: Shogun Finance Ltd v Hudson [2003]. however Reasonable steps must be taken to identify the person in question: Midland Bank v Brown Shipley & Co [1991]

Mistake as to Terms of the Contract: If the other party is aware of the mistake this shall render contract Void: Hartog v Collins & Shields [1939]. However if the mistake of the term does not relate to the contract, the contract shall be valid: Smith v Hughes [1871]., this includes if the fact in question "does not form term...contract will be binding" (Aikens J): The Harriette N [2008]. 

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Mistake as to Equity 1

Rectification: Allows courts to change Contract to remove issues.Typically available if the Contract does not reflect the prior agreement: Joscelyne v Nissen [1970], However there are limitations. If the Mistake Concerns a particular term of a Contract which is understood by both parties recification shall not be available: Rose v Pim [1953], and for the application it must be evidenced that both parties were in complete agreement: Chartbrook Ltd v Persimmon Homes Ltd [2009]and the writing must remain unchanged: Chaddock Bros v Hunt [1923].

Rescission: Allows courts to set back Contract to very beginning. Available to stop one party taking advantage of the mitake in question: Solle v Butcher [1950]this includes innocent misep: Magmee v Pennine Insurance Co. Ltd [1969]. However is unavailable for common mistake: Great Peace Shipping [2002], and Uniliateral Mistake: Statoil v Louis Dryfus Energy Services [2008].

Specific Performance: Compels breaching party to perfom his part of Contract as if no breach had occured. Available for saving a mistaken party from a negative deal: Tamplin v James [1916], However there are limitations. If the other party took advantage of the mistake it shall not be available: Webster v Cecil [1861], It would be inequitable for other party to perform duties and if the Mistake resuled from Misrep

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Mistake as to Equity 2

Non est Factum (Nature of Written Document): Mistake in written documents can render a document void. the basic rule in relation to Signing of written documents is that if a person has signed a wriiten document without reading it, they are bound by the terms regardless: L'Estrange v Graucob [1934]However under the Non est factum rule the person whom has been fundamentally mistaken as to the nature of signing the document, can make the contract void. However this is narrowly construed.

Saunders v Anglia Building Society [1971]:

  • The Transcation must be fundamentally different in nature from the one signed
  • The Mistake regarding the nature of document must not result of carelessness 

limitations may create injustice. Woman who could not read document she signed was still bound as there was no radical differences: Saunders v Anglia Building Society [1971]. Defendant had acted Wrecklessly therefore was he was still bound by mistaken price on agreement for car: United Dominations Trust Ltd v Westburn [1976].

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Common Mistake (Allocation of Risk)

Contractaul Allocation of risk: Risk that State of Facts will not materalise many be allocated explicitly or impliedly

Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989]:

"one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevent mistake" (Steyn J)

The Great Peace Shipping Co v Tsavliris (International) Ltd [2002]: (Lord Phillips): Criteria must be present to avoid Common Mistake by allocated risk

  • Common Assumption as to the existence of a state of affairs
  • No warranty by either party that that state of affairs exists
  • Non-existence of state of affairs must not be attribute due to fault of either party
  • Non-Existence must render performance impossible
  • The State of affairs may be the existence or vital attribute of consideration and circumstances required for performance
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Common Mistake (Allocation of Risk)

Express allocation of risk: The risk may be expressly assumed by one party. Williams Sindall Plc v Cambridgeshire County Council [1994]: where allocation of risk has occurred the fact that the contract is agreed cannot be performed may simply be something claimant has to accept. However if the expressiveness is unclear as to party intentions, the courts may need to interpret the contract to find the express intentions of the parties.

Investors Compensation Scheme Ltd v West Broomwich Building Society (No. 2) [1998]:

  • What would the reasonable man having all background knowledge understand?
  • Where background includes 'Matrix of Facts' could this affect langauge meaning?
  • Previous negotiations excludes 'Matrix of Facts' to reduce litigation
  • Words do not have to be taken literally, but contextually
  • Presumption that people do not make linguistic mistakes

(NB. Courts must apply all clear and unambigeous Langauge in the context of the contract: Rainy Sky SA v Kookmin Bank [2011])

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Common Mistake (Allocation of Risk)

Implied allocation of risk: The risk may be not be expressievely assumed by one party, however may be implied in Condition Precedent:McRea v Commonwealth Disposals Commissioner [1951]. However there may be an implied condition precedent that goods shall exist at time of Contract: Associated Japanese Bank (International) v Credit du Nord [1989]. However on this basis the courts may need to construe the contract to give effect to the party intentions.

(Methods of finding the party intention through contructional means)

Contractual implying of Terms by the Courts: The basic position is that the courts should not interefere with the parties bargain: A-G of Belize v Belize Telecom ltd [2009]. However more recently the Courts may allow implication it is a 'necessary inclusion': Dear v Jackson [2013].

Officious Bystander Test: "Something so obvious it goes without saying...'oh of Course!'" (MacKinnon LJ) Shirlaw v Southern Foundries [1939]

Buisiness Efficacy Test: Terms implied which without would render contract unperformable, based on the "Presumed intentions of the Parties" (Bowen LJ): The MoorCock [1889]

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Grounds for Common Mistake if no Allocation of Ris

Res Extincta (Evidence of Subject matter): If a person is dead at time of contract it shall be void: Strickland v Turner [1852]. Problems with validity can render a contract void through mistake: Galloway v Galloway [1914]. Subject matter must exist at time of Contract or it it shall be construed a mistake: Couturier v Hastie [1865]However if one party warrants of the existance of the subject matter but this proves to be false it shall be a Mistake: McRae v Commwealth Disposals Commission [1951]:

Res Sua (Ownership of subject matter): If the party is unknowing of the owning of the subject matter in the contract this shall render the contract void by mistake: Cooper v Phibbs [1867]

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Grounds for Common Mistake if no allocation of ris

Mistake as to Quality: Generally insufficient unless Complete and Fundamental Difference of the Contract.

Bell v Lever Bros [1932]: Mistake will not assent unless mistake of both parties 

"...as to the existance of some quality...essentailly different from the thing...beileved to be" (Lord Atkin)


Associated Japanese Bank [1988]: (Steyn J): "subject matter...essentially and radically different from subject matter...believed to exist". Also see most recent test in The Great Peace [2002].

Although as argued in Brennagan v Bold Burdon [2004]: that a more appropriate test may be required whether ..."parties appreciated that the law was what it is known to be, there wuld still be...basis for thier agreement".(Sedley LJ) This basis also applies to compromise agreements: Kyle Bay Ltd (T/A Astons Nightclub) v Underscribers Subscribing Under Policy No. 019057/08/01 [2007].

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