Contract Law - Vitiating Factors: Mistake
Vitiating Factors: Mistake
Big Picture
Question 4: Is the contract or part of the contract liable to be set aside?
Factors that may lead to setting aside a contract:
Exclusion clauses
Penalty clauses
Misrepresentation / s.18 CCA
Unfair contract terms – ACL Part 2-3
Vitiating Factors
Mistake
Duress
Undue influence
Illegality
Frustration
Mistake: Overview
Types of Mistake:
Common/Mutual
Unilateral
As to Identity
Legal approach to dealing with mistakes:
Common law
Constructionist theory: applies the rule of construction to allocate liability
Equity
Relevant when common law remedy insufficient or unavailable
Remedies available:
At common law:
Contract void ab initio, may work hardship on third party though
Applying constructionist theory, contract valid; may need to rely on equity to set aside sometimes (unconscionability).
Equity: rescission or rectification
Mistake is a narrow concept in law; mistake is not about “bad bargains” (Caveat emptor) or being mistaken about a contract term’s effect. It is MUCH narrower.
Part A: Common Mistake
Parties are in agreement but make a mistake/false assumption regarding the same matter, e.g., nature of subject matter, existence of subject matter or term of the contract
Australian courts’ responses to common mistake:
Adopt a constructionist approach
Follow common law by declaring contract void ab initio for common mistake
Grant rescission of the contract in equity
Grant rectification of the contract in equity
Where the court adopts a constructionist approach, one of three outcomes is possible:
a) Valid contract
b) No contract
c) Construe to give effect to intentions
A) Contract is Valid
Contract is valid because there is an implied condition by one party that his/her promise is unconditional.
McRae v Commonwealth Disposals Commission
Commonwealth invited tenders for rights to recover an oil tanker described as wrecked at “Jourmaund reef” off the coast of Papua. McRae won the tender.
McRae incurs significant expenses in organizing salvage operation, and then finds out the tanker does not exist.
Commonwealth had sold rights based on a rumor and failed to duly verify.
Relying on Couturier v Hastie (1856 common mistake about quality of Greek corn) trial court held contract vitiated by common mistake since, not known to both parties, that tanker did not exist.
HCA reversed decision, finding valid contract.
Commonwealth impliedly promised defendant that there was a tanker at or near the specified position.
Damages for breach of absolute promise, warranty and not a common (“mutual”) mistake.
B) No Contract
No contract because of an implied condition that the existence of subject matter is a condition precedent to the contract
Goldsbrough Mort & Co Ltd v Carter: parties contracted for supply of 4000 sheep at a fixed time.
At the time for performance, there was drought and many of the contracted sheep type had perished: only 930 could be delivered.
Privy Council construed contract with an implied condition that continued existence of sheep - a condition precedent to contract. (Cf McRae).
No sheep = no contract
(or rather 930, not 4000)
C) Interpret It
Court generally construe contract to give effect even if both parties made mistake – they would rather do this, if possible, than set the contract aside.
Where mistake results in absurdity or inconsistency and the nature of correction required to address mistake is obvious on the face of the contract, court will interpret the contract to avoid absurdity or inconsistency
Fitzgerald v Masters (1956) HCA read “inconsistent” as “consistent” to accord with parties’ intentions. It was absurd that parties would want to incorporate terms “inconsistent” with express terms agreed to by them – mistake can be fixed by construing it as ‘consistent’.
Void for Mistake
Where the outcome of parties’ contract is fundamentally different from what they intended, the contract should be void for mistake: Bell v Lever Bros Ltd
Lever company (Port Sunlight; Lux; Unilever; Owen) Niger trouble. Cooper is appointed Chairman, gets loans & appoints Bell as chair of subsidiary + Snelling as Vice-chair. Profitable company and merger with competitor.
B agrees with C to “golden parachute” £30,000 for termination/retirement. S got £20,000.
Later discovered B & S in cocoa cartel profiting from price fluctuations.
Breaches of duty? Justification for dismissal?. This would have entitled the management to sack him without compensation. Company sought to avoid the contract for common mistake.
Rescission- agreement void for mistake of fact.
Bell Judgment
House of Lords held, by majority, compensation agreement not void for mistake.
The mistake related only to “existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be” and “party paying for the release gets exactly what he bargains for” (release/termination (Lord Atkin).
Lord Warrington, in dissent negotiating about compensation for termination, therefore “as fundamental to the bargain as any error one can imagine.”
Note: Arguably, Australian courts’ preference is for the constructionist approach in McRae
Rescission in Equity
Relevant when the constructionist or common law approach finds a contract valid
BUT Court resort to it when it would be unconscionable to enforce the legal right
Solle v Butcher: both parties mistaken as to the applicability of the rent control legislation to the property in issue. P’s notice to charge more than the controlled rent not given as a result. Contract valid at common law but equity allowed rescission.
Great Peace Shipping Ltd v. Tsavliris Salvage (Int’l) Ltd. Great Peace is a ship that had structural problems. Great Peace to stand by till tug arrives. Parties thought it was 35 miles away but it was 410miles. Fee for 5 days with a cancellation fee at a minimum of 5 days. Salvage? No fee payable as not canceled immediately but a few hours later when a closer ship was found.
Cancellation –common mistake?
Held: mistake not fundamental to affect the substance of parties’ contract.
Great Peace Shipping Ltd v. Tsavliris Salvage (Int’l) Ltd overruled Solle v. Butcher. The validity of a contract affected by common mistake must be decided under common law by applying Bell v Lever Brothers.
Rectification for Common Mistake
Only where parties fail to accurately record their common intention
Rationale laid down in Franklins Pty Ltd v Metcash Trading Ltd as follows
“It is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time the written contract was entered.”
To apply:
Party seeking rectification to provide “clear and convincing proof” of the common intention not reflected in the contract;
Common intention to continue until the time of execution of contract;
Terms amended in this way must be certain to be contractually enforceable;
Rectification: Other Cases
Maralinga v Major Enterprises: sale of land through auctioneer; auctioneer’s statement during auction not reflected in subsequent written contract; applicant signed nonetheless; sought rectification to benefit from oral statement; held: no mistake and no rectification necessary.
Pukallus v Cameron: Parties agreed on the sale of land (sub-division 1) which they erroneously thought included a bore and a cultivated land. These additional features actually belonged to sub-division 2. The test for rectification not passed. Rectification not available where parties would have used a different description had they known the true facts.
Similar to Common: Mutual Mistake
This occurs where the parties are both mistaken but about a different element of the contract
In some cases, a constructionist approach may be relevant to determine the objective intention of the mistaken party: the contract is valid if the mistaken party is aware of the true intention of the other party
In other cases, the constructionist approach fails to ascertain who, between the parties, is correct and who is mistaken. Mistake remains mutual here.
Contract then void for lack of consensus ad idem
Raffles v. Wichelhaus (1864) 159 ER 375 –sale of 125 bags of cotton “ex Peerless from Bombay” – 2 ships with the same name (sailing Oct/Dec). Seller’s cotton December; buyer thought October and refused delivery.
Held: mutual mistake no fault of either party
Note that equity follows the law on mutual mistake
Part B: Unilateral Mistake
Only one party is mistaken: may be about terms, subject-matter, or identity
Constructionist theory applies; the outcome will depend on the state of mind of the non-mistaken party
Unilateral mistakes that will be covered include:
‘snapping up offer’ cases
non est factum cases
rescission
rectification
Snapping Up Offer!
Cases of accepting offers that are too good to be true
Court grants relief where it is established that the non- mistaken party is or ought to be aware of the mistake
Court’s decision based on lack of consensus
See Chwee Kin Keong v Digiland.com Pte Ltd where a laser printer worth over SD was mistakenly listed online for SD and the appellants placed orders for over laser printers. Respondent immediately notified appellants of this mistake. Court held contract void
See also Hartlog v Colin & Shields on hare skins.
‘Non Est Factum’: Not My Deed
Originally available to defendants who are illiterate, blind, or victimized
Initial test was whether the document signed was different in nature/character or just in content: no remedy if mistake related to contents.
Saunders v Anglia Building Society: test changed, now: whether the document signed was ‘fundamentally and radically different’ from the document intended to be signed.
Carelessness may be relevant. But where the party who induced the signing was aware of the mistake or ought to suspect it, carelessness is immaterial.
Petelin v Cullen: Cullen presented a document to Petelin for signing, telling them the document was a receipt for a earlier paid to Cullen by Petelin. Petelin signed the document.
Turned out that the document was an extension of an option to buy Petelin’s land by Cullen. Since Petelin had little knowledge of English, she signed. Cullen later exercised the option.
Contract held void and court held that it was immaterial whether Petelin was careless or not.
Rescission for Unilateral Mistake
Contract held valid by common law may be set aside in equity for unilateral mistake
Equity assumes jurisdiction where it will be unconscionable to uphold such a bargain, e.g., where the non-mistaken party has actual or constructive knowledge of the mistake
Taylor v Johnson: there was an option to purchase two lots of land, 5 acres each. While Johnson thought the agreed price was per acre, Taylor claimed it was for everything in accordance with the signed document.
Court found that Taylor was aware of this mistake all along but decided to keep quiet and feign ignorance. Court allowed the contract to be set aside
Rectification for Unilateral Mistake
Court will allow rectification where it will be unconscionable for the non-mistaken party to be allowed to enforce the contract as it is.
Non-mistaken party must have behaved unconscientiously prior to the formation of the contract
See Leibler v Air New Zealand Ltd (No. 2) where rectification was allowed for unilateral mistake
Part C: Mistake as to Identity
Parties Not Face-to-Face (Inter absentees)
Using a constructionist approach, the court will find a mistake if a claimant can show that there is an identifiable person with whom s/he intends to deal. Here, a mistake as to an attribute will not suffice
Cundy v. Lindsay: a rogue named Blenkarn ordered handkerchiefs from Lindsay, signing the order to appear as ‘Blenkiron & Co’, the name of a popular business known to Lindsay and staying on the same street as that contained on the order. The Rogue later sold handkerchiefs to Cundy. Court held contract void since Lindsay intended contracting with Blenkiron & Co.
Shogun Finance Ltd v. Hudson: a rogue concluded a hire-purchase agreement for a car using a dishonestly obtained driver’s license belonging to someone else and signing the agreement fraudulently as the owner of the license; contract held void.
Compare above cases with King’s Norton Metal Co. Ltd v. Edridge where neither the name nor company quoted by the rogue existed. The contract was not void for mistake.
Identity: Face-to-Face
Court presumes the mistaken party intends to contract with the person before them: difference in mere attributes not important, only identity.
Lewis v Averay: a rogue claimed he was the famous actor, Richard Greene. Lewis sold his car to the imposter, who wrote a cheque for the purchase. The cheque was later dishonored. Rogue sold the car to Averay.
Held the contract was voidable and not void and since the sale occurred before Lewis could avoid the contract, title successfully passed to Averay. Lewis intended to contract with the person before him.
Types of Mistake: Mistake During Electronic Transactions
Commonwealth’s and States’ and Territories’ legislation provide for reliefs where a natural person makes an ‘input error’ in the course of a transaction with an automated system.
See Electronic Transactions Act (Cth) s 15D and Electronic Transaction Act 2000 (Tas), s 12D
Recap
A: Common Mistake
B: Unilateral Mistake
C: Mistake as to Identity
Next up: Performance and Breach and Frustration