Study Notes on Business and Contract Law: Mistake and Frustration

BUSINESS AND CONTRACT LAW

Introduction to Mistake

Mistake is recognized as one of the vitiating factors in contract law, which include misrepresentation, duress, and undue influence. These factors impact the consent offered by the parties to one another and can lower, weaken, or entirely destroy the consent given.

Definition of Mistake

A mistake in the realm of contract law refers to being incorrect regarding a fact that draws one into the contract. The agreement can be affected in two principal ways:
a) When both parties arrive at an agreement based on a common mistake.
b) When there is merely an appearance of agreement due to either mutual or unilateral mistake.

Mistake at Common Law

Within the context of common law, when parties enter a contract under a mistake, that contract is rendered void. This means that no rights are conferred on the parties involved. Consequently, any third parties who have obtained rights under the contract without knowledge of the mistake cannot acquire any interest in the contract.

Mistake at Equity

The implications of a mistake in equity provide that courts are willing to grant relief in situations where common law does not intervene. This equitable intervention recognizes that equity acts in personam, thereby protecting innocent third parties who have provided value. The three forms of relief available are:

1. Rescission on terms
2. Refusal of specific performance
3. Rectification

Types of Mistakes

Common Mistake

According to common law, a contract may be declared void when a common mistake is identified by the courts, preventing the parties from benefiting from the agreement. The forms of common mistakes include:
a) Existence of the goods or factual statements
b) Qualities of the subject matter
c) Mistake regarding title.

Existence of the Subject Matter

Res Extincta

This principle denotes that if the subject matter of the contract was unknown to the parties at the time of contracting and had ceased to exist, this can lead to the voiding of the contract. For example, in Courturier v. Hastie, corn was sold without either party aware that it had deteriorated and ceased to exist. The House of Lords held that there was a total failure of consideration, and thus, the buyer was not held liable.

Case Law Examples

• Galloway v. Galloway: A payment agreement was nullified because it was made under a common mistake regarding the death of the promisor's wife.
• McRae v. Commonwealth Disposals Commission: This case determined that if one party guarantees the existence of the subject matter, and it does not exist, this can void the contract.

Mistake as to Quality

Mistakes regarding the quality or attribute of a subject matter generally do not void a contract. For instance, in Bell v. Lever Brothers Ltd., the termination of a contract was not regarded as void due to an alleged mistake concerning the employees working elsewhere. The court found that such a mistake was not sufficiently fundamental to void the entire contract.

Lord Atkin's View

Lord Atkin articulated, "Mistake as to quality… will not affect assent unless it is the mistake of both parties, and is about some quality that makes the object fundamentally different from how it was believed to be."

Mistake as to Title

Res Sua: A contract is void if one party agrees to purchase property that they unknowingly already own. For instance, in Cooper v. Phibbs, both parties believed the salmon fishery belonged to the lessor when, in reality, it belonged to the lessee. The House of Lords annulled the lease based on mutual ownership, emphasizing that such a mistake zeroed any contract validity.

Common Mistake in Equity

Common law's treatment of mistakes often resulted in undesirable outcomes, prompting equity to offer relief where mistakes were not sufficiently fundamental. Equity provides remedies like rescission, refusal of specific performance, and rectification to address such injustices.

Rescission

This equitable remedy seeks to annul the transaction. In cases of common mistakes, equity allows the contract to be voidable rather than void, and rescission can be granted if justice can be appropriately rendered to the other party involved.

Case Law Example

In Solle v. Butcher, the trial court's decision granted the tenant rescission based on the mistake both parties held regarding the rental price.

Grist v. Bailey

This case highlighted a defendant's right to rescind a contract when it was based on a common mistake that a tenancy existed, which was incorrect as the tenant had already passed away. Specific performance was not granted under the circumstances.

Refusal of Specific Performance

This remedy is granted when it is found fair and just, particularly if enforcing the contract imposes unfair burdens on the other party. In Webster v. Cecil, a mistaken sale price precluded specific performance.

Rectification

When the terms of a contractual agreement do not reflect the parties' intentions due to a mistake, the court may rectify it. Conditions for grant include the presence of a legal issue regarding rights of the parties, a continued mutual intention before execution, and a disparity between verbal and written agreements.

Mutual Mistake

In cases where parties negotiate without a true understanding, the objective test is applied by the court, considering the words and actions as a reasonable person would interpret them. For example, if party A intends to sell a bed, but party B has a different understanding of the material (metal vs. wooden), this lack of agreement leads to ambiguity in the contract.

Application of the Objective Test

The objective test can protect a party from relying on a mistake as a basis for denying a claim against them. Tamplin v. James involved the sale of a house where misunderstandings regarding included land resulted in a court ruling that the contract remained binding despite the defendant’s claims based on mistake.

Unilateral Mistake

This type of mistake occurs when one party is mistaken while the other is aware. This often results from fraud-related issues. For example, in Boulton v. Jones, the mistake regarding the identity of the person intended to contract with led to the conclusion that the actual contract was void because the offeror had intended to engage another individual.

Case Examples

• King’s Norton Metal v. Edridge, Merret: In this case, a rogue contracted using a stolen identity. After the goods were transferred, the real owner sought to reclaim the items, illustrating that the intent of contract and the awareness of fraud impact ownership.
• Cundy v. Lindsay: In this case, a rogue used a false identity, leading to a determination that the contract was void due to the lack of a legitimate identity.

Face-to-Face Transactions

In Philip v. Brooks, the courts upheld that a contract made face-to-face indicates intent to deal with the person physically present.

Ingram v. Little

Three joint owners of a car faced a fraudulent scenario where a rogue drove a hard bargain. The dissenting judgment in this instance established that a contract can still be voidable due to mistaken identity.

Conclusion on Unilateral Mistake

The courts have wrestled with the concepts within Ingram v. Little, Philip v. Brooks, and Lewis v. Averay, discussing whether the identity of a party was a critical aspect of contracting. In typical face-to-face negotiations, it appears that identity alone does not ruin the contract's validity, lending itself to a voidable status following fraud.

Shogun Finance Ltd v. Hudson

This case illustrated the complexities of identity in contracts with fraudulent undertakings. The majority held that the voidity of a contract arises if the party involved never truly assented due to identity misinformation.

Frustration of Contract

Frustration occurs when unforeseen events render a contract impossible or fundamentally shifted in nature, resulting in the discharge of the parties' obligations. The validity of frustration does not necessitate agreement from both parties; rather, it stems from unexpected, insurmountable events.

Key Cases on Frustration

• Taylor v. Caldwell established that the terms within a contract must be considered in instances of frustration.
• Davis Contractors v. Farnham dealt with extending frustration's principles beyond the established limits.
• Barclays Bank v. Sakari pointed out that a contract's core obligation must face impossibility to be frustrated.

Limitations and Consequences of Frustration

Frustration will not apply if a contract inherently provided for such consequences or if the parties themselves caused it. Generally, the triggering of a frustrating event leads to the immediate end of obligations going forward, not reverting the contract's status retroactively.