Contract - Mistake & Illegality

What is an operative mistake & what is its effect in contract law?

A mistake resulting in the contract being declared null & void from its beginning

What is the principle behind the strict rule of mistake?

Parties have not truly reached an agreement :

- Because of the mistake or

- Because the mistake renders the agreed contract something other than that which was intended

What are the 3 categories of mistake?

Common Mistake

Mutual Mistake

Unilateral Mistake

What is a common mistake?

Occurs where both parties to an agreement are suffering from the same misapprehension

- must make sure that the underlying common mistake is sufficiently fundamental to effect the validity of the contract

e.g., subject matter of the contract has been destroyed, but neither party knows

What is the effect of common mistake?

contract is void

What is the general rule regarding mistake about the quality of goods?

- It does NOT void the contract

- Even if mistake as to quality of goods affects the utility of goods to the buyer or affects value of the goods

(although may be able to make claim for misrep instead)

When might mistake as to quality of goods make the contract void?

If the mistake is such that the subject matter is 'essentially different' from that intended (based on obiter comments)

When will common mistake NOT operate?

- The mistake is NOT sufficiently fundamental

- One party is at fault

- The contract makes provision for the issue

What is a mutual mistake?

Where both parties are mistaken but they are mistaken about different things

They have negotiated at cross-purposes

What is the result of a mutual mistake?

A contract is void - genuine mutual consent is lacking

How will a court decide whether there was mutual mistake?

Objective assessment:

- What would a reasonable 3rd party believe the agreement to be, based on the words & conduct of the parties themselves?

- If they would infer the existence of a contract in a given sense, court will hold the contract to be binding

What is a unilateral mistake?

Where only one party is mistaken, AND

The other party knows, or is deemed to know, of the mistake

What is the result of a unilateral mistake?

- Contract is void

- Acceptance does not correspond with the offer, offer doesn't reflect true intention of offeror - no real agreement

How does mistake operate as an exception to the rule that a person is bound by the terms of any instrument which they sign/seal, even if they did not read/understand it?

When a person signs or seals a document under a mistaken belief as to the nature of the document - non est factum (it is not my deed)

When can non est factum defence (it is not my deed) be available?

When the mistake was due to:

- Blindness, illiteracy, senility of person signing

- A trick/fraudulent misrepresentation as to the nature of the document, provided the person took all reasonable precautions before signing

What is the result of common mistake as to the existence of subject matter?

Void

Unless contract impliedly/expressly allocates or allows for this risk

What is the result of common mistake as to a fact or quality fundamental to the agreement?

Void only in the most severe instances of mistake

Otherwise still valid

What is the result of mutual mistake as to the identity of the subject matter?

Void

What is the result of unilateral mistake as to the identity of the person contracted with?

one party mistakenly believes they are contracting with a person that the other party is pretending to be.

- presumption that the seller intended to deal with the person in front of them identified by sight and hearing

- presumption will only be rebutted, and the contract held void for mistake, if the seller is able to establish that identity, rather than attributes, was of 'vital importance'

(high bar, but may be able to make claim for misrepresentation instead)

A contract which is void is...?

Of no legal effect from the outset

A contract which is voidable is..?

One which can be brought to an end/avoided but until that happens, it remains in force.

When is a unilateral mistake often relied upon?

When there has been a mistake as to the identity

What is a unilateral mistake as to the identity of the person contracted with?

Where one party mistakenly believes they are contracting with a person that the other party is pretending to be.

Is a contract usually void for unilateral mistake of identity?

No

When WILL a contract be void for unilateral mistake of identity?

If the seller can establish that identity, rather than attributes, was of vital importance

What is the burden like for proving operative mistake in face to face contracts?

A heavy burden

What is the position where a contract for the sale of goods face to face is voidable?

Until it is avoided, title still passes from the seller to the buyer, although the buyer's title is a voidable title (can later be avoided)

What happens where a sale of goods face to face is voidable but the buyer seeks to sell the goods on to a 3rd party?

The 3rd party buyer acquires a good title to the goods, provided they buy them in good faith & without notice of the seller's defect in title

What is the position where a sale of goods face to face is voidable but the buyer seeks to sell the goods on to a 3rd party and the 3rd party did not suspect deception??

They have acquired good title

Claimant cannot recover the goods

What is the position where the identity of the buyer is fundamental & the contract is VOID for mistake and the buyer seeks to sell the goods on to a 3rd party ?

It is ineffective from the outset

The buyer has no title & cannot give any sort of title to the 3rd party by selling the goods on

What is the position where a sale of goods face to face is VOID but the buyer seeks to sell the goods on to a 3rd party and the 3rd party did not suspect deception?

The 3rd party has no title as the buyer never had title

3rd party must return the goods to the duped seller, even if they paid good money for the goods & knew nothing of the deception

What is the position if parties contract through correspondence (distance selling)

It is more likely to be avoided for mistake

What is the presumption in face to face contracts?

That the seller intended to deal with the person in front of them

What must the seller show to rebut the presumption that they intended to deal with the person in front of them?

That identity and not attributes (e.g. creditworthiness) was of vital importance

What is the key distinction in mistake of identity?

Whether the mistake is to the IDENTITY of the fraudulent buyer

or

to the ATTRIBUTES of them

What is the legal status of the contract where there is a unilateral mistake as to identity in a face to face setting?

The contract will be void if the seller can persuade the court that the identity of the buyer and not their attributes was of vital importance to the contract.

In what type of transaction is a finding of unilateral mistake of identity more likely?

A distance selling transaction

What was the general rule regarding illegal contracts prior to Patel v Mirza [2016]?

Contracts to perform an illegal act, or those contrary to public policy, were declared void and unenforceable

What changed after Patel v Mirza [2016]?

- The general principle of automatic voidness no longer exists

- Courts now adopt a discretionary approach, and apply principles of public policy and proportionality

facts of the case: P paid M to use inside information to bet on changes in share prices, but M did not carry out the contract. All SC judges agreed that the defence of illegality should not prevent the return of the money

What is the key policy question courts must now consider regarding illegality?

Whether allowing recovery for something illegal would:

a) Produce inconsistency and disharmony in the law

b) Cause damage to the integrity of the legal system

In order to decide the above, must apply the trio of necessary conditions'

What are the 'trio of necessary conditions' established in Patel v Mirza?

1. Consider the underlying purpose of the prohibition and whether denying the claim enhances that purpose

2. Consider any other relevant public policy impacts of denying the claim

3. Consider whether denial would be a proportionate response to illegality, noting that punishment is for criminal courts