chapter 13 Mistake and Illegality

Mistake and Illegality

In contract law, mistake and illegality can impact the enforceability of contracts. A mistake refers to a situation where one or both parties enter into a contract under a misunderstanding that, if sufficiently fundamental, can render the contract voidable. In contrast, illegality refers to contracts whose formation or performance involves breaking the law, leading to their voidness.

The term "mistake" has a more limited legal meaning than in common parlance. In contract law, a mistake must be fundamental to the agreement, and the remedy depends on the type of mistake. Similarly, a contract can be deemed void or voidable depending on whether its formation or performance involves illegal activity or violates public policy.

13.1 Types of Mistake

There are three primary types of mistakes that can affect the enforceability of a contract:

1. Common Mistake:

   • Both parties share the same fundamental mistake.

   • This type of mistake can render the contract voidable if it relates to the existence or identity of the subject matter.

2. Cross-purpose Mistake:

   • Each party has a different understanding of the agreement, but neither party knows the other is mistaken. This can lead to a situation where it is impossible to resolve the ambiguity, resulting in no contract being formed.

3. Unilateral Mistake:

   • Only one party is mistaken, often as to the identity or the attributes of the other contracting party. For a unilateral mistake to render a contract voidable, the mistake must concern vital aspects such as the identity of the other party.

13.1.1 Common Mistake

A common mistake occurs when both parties make the same mistake about a fundamental aspect of the contract, typically the existence or nature of the subject matter. For a common mistake to be legally significant, it must be fundamental enough to make the performance of the contract impossible or radically different from what the parties originally intended.

Requirements for Common Mistake:

• Both parties must share the same fundamental mistake (also known as a "shared mistake").

• The mistake must not be the fault of either party.

• Express contract provisions should not cover the subject matter of the mistake (i.e., the contract must not already account for this mistake).

• The mistake must render the contract impossible or make it fundamentally different from what was originally agreed upon.

Examples:

1. Ruhi and Bharat's Contract:

   • Scenario: Ruhi agrees to sell her car to Bharat, but neither party knows the car has been destroyed in a fire.

   • Outcome: The contract is void because there is nothing to contract about—the car no longer exists.

2. Bell v Lever Bros [1932]:

   • Scenario: Two executives, Bell and A, signed settlement agreements with Lever Bros for compensation when the subsidiary closed. It was later discovered that they had breached their service contracts and could have been dismissed without compensation.

   • Outcome: The House of Lords found that the mistake about the status of the contracts was not fundamental enough to render the agreements void, and the contracts remained valid.

13.1.2 Cross-purpose Mistake

A cross-purpose mistake occurs when both parties misunderstand the terms of the contract, but the misunderstanding cannot be resolved because both are operating on different assumptions about the agreement. In these cases, the court may find that no contract has been formed due to the ambiguity of the agreement.

Example:

• Raffles v Wickelhaus (1864):

  • Scenario: A contract to sell cotton "ex Peerless from Bombay" was made, but there were two ships named Peerless sailing from Bombay—one in October and one in December. The buyer thought it referred to the ship that sailed in October, while the seller referred to the one that sailed in December.

  • Outcome: The court found that the contract was void due to the ambiguity of the term "Peerless from Bombay" and the misunderstanding of the parties. There was no agreement on the essential terms of the contract.

13.1.3 Unilateral Mistake

A unilateral mistake occurs when only one party is mistaken about a material fact in the contract. The most common scenario involves a mistake about the identity of the other party. If a party is mistaken about who they are contracting with, and that identity is crucial to the contract, the contract may be voidable.

Key Aspects of Unilateral Mistake:

• The mistake must be about something fundamental, such as the identity of the other party.

• A mistake about attributes like creditworthiness will typically not render the contract void.

Examples:

1. Cundy v Lindsay (1878):

   • Scenario: A rogue using the name “Blenkarn” (similar to “Blenkiron”) ordered goods from a reputable company, which was sent to the rogue’s address. The company believed they were dealing with Blenkiron and Co.

   • Outcome: The court held the contract was void because the company mistakenly believed they were dealing with the actual company, Blenkiron and Co., not the rogue. The rogue's identity was critical to the contract, so the contract was voidable.

2. Lewis v Averay [1972]:

   • Scenario: A person pretending to be a famous actor, Richard Greene, bought a car from the plaintiff, who relied on the fraudulent identity. The person later resold the car to an innocent purchaser.

   • Outcome: The court ruled that the mistake was not about identity, but about the attributes of the person (creditworthiness), so the contract was not voidable.

13.1.4 Mistake or Misrepresentation?

The distinction between mistake and misrepresentation is crucial, especially when deciding if a contract is voidable or void.

Guidelines:

1. Face-to-face transactions: It is generally assumed that the innocent party intends to deal with the person physically present, so a mistake about identity is unlikely to void the contract. Misrepresentation may be the better remedy.

2. Written transactions: If the transaction is conducted in writing, the written agreement must be analyzed to determine whom the innocent party intended to contract with. If the identity of the other party was mistaken, it could render the contract void.

3. Vital attributes: If the person the contracting party intends to deal with possesses a crucial attribute (e.g., being a particular expert), and the rogue lacks that attribute, the contract may be void due to a mistake about the person’s identity.

13.2 Illegal Contracts

A contract can also be void if it involves illegal activity or the performance of an illegal act. The contract’s formation, purpose, or performance must involve breaking the law for it to be classified as illegal.

Types of Illegal Contracts:

1. Contracts Illegal Under Statute:

   • Contracts involving the commission of a criminal act or breach of a statute are typically void.

   • Example: A contract to smuggle goods is illegal and void.

2. Contracts Illegal at Common Law:

   • Contracts that violate public policy or morality are void.

   • Example: A contract to restrain trade or violate the sanctity of marriage may be considered void for public policy reasons.

3. Contracts with Illegal Performance:

   • Contracts that were initially legal but performed in an illegal manner may still be enforceable if the illegal act was incidental to performance.

   • Example: A contract to deliver goods is not void if the delivery truck is caught speeding during transport.

Cases:

• St John Shipping Corp. v Joseph Rank Ltd [1957]: The court held that the contract for the shipment of goods was not void, even though the load line was below water, because the breach was incidental to the contract performance.

• Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973]: The court ruled that the contract was void because both parties knew the boilers were being transported illegally. The plaintiffs could not recover damages for the illegal performance of the contract.

13.2.1 Contracts Illegal Under Statute

Some contracts are made illegal because they violate specific statutes. For example, the Competition Act 1998 makes contracts that restrict or distort trade in the UK unenforceable.

13.2.2 Contracts Illegal at Common Law

Some contracts are illegal because they contravene public policy or morality. For instance:

• Contracts in restraint of trade may be unenforceable unless they are reasonable and protect legitimate business interests.

Example:

• NW Coaches Ltd (NWC): The enforceability of restraints of trade depends on whether the restriction is reasonable in terms of geography, duration, and scope.

13.2.3 Covenants in Restraint of Trade

Covenants in restraint of trade are often prima facie void but may be enforceable if they protect legitimate business interests (e.g., trade secrets) and are reasonable in scope, duration, and geography. Courts weigh the need for the restraint against the employee's or seller's ability to earn a livelihood.