Common Mistake in Contract Law: Void or Voidable?, Lecture notes of Law

Download Common Mistake in Contract Law: Void or Voidable? and more Lecture notes Law in PDF only on Docsity! Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd; The Great Peace CASE NOTE Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd; The Great Peace [2002] 4 All ER 689 By Peter MacFarlane[*] I INTRODUCTION For the most part, contract law in South Pacific jurisdictions is governed by the common law. There is a limited amount of legislation in the area, for example Fiji has a Fair Trading Decree 1992, some jurisdictions have Sales of Goods legislation and yet some others have specific legislative provisions such as the Frustrated Contracts Act (1975) of Samoa and the Marshall Islands Consumer Protection Act (Cap 4). Furthermore, certain United Kingdom and New Zealand legislation still have application in the region. However the question of what legal principles govern the formation of a contract and the impact of factors that vitiate a contract are found, for the most part, in the common law. At common law, one of the factors that is said to vitiate a contract is the mistake of the parties and one example of this is common mistake. Common mistake arises where both parties to the contract share the same mistake. In general terms, this type of mistake can arise in three circumstances. First a common mistake as to the existence of the subject matter of the contract, for example where the subject matter has ceased to exist prior to entry into the contract;[1] second a common mistake as to the ownership of the subject matter of the contract, for example where unknown to both parties the buyer is in fact purchasing his or her own property;[2] and thirdly a common mistake as to the qualities or attributes of the subject matter of the contract, for example where both parties thought they were contracting for a painting painted by a famous artist when in fact this was not so.[3] At common law a common mistake falling within the first two categories renders the contract void.[4] As to the third category of common mistake – mistake as to the subject matter of the contract - the common law has held that these mistakes do not generally vitiate the contract which remains valid and enforceable.[5] To the above proposition two comments need to be made. First, in exceptional cases, the common law will hold a ‘contract’ to be void for mistake as to the quality of the subject matter where, according to Lord Atkin 'it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be'.[6] Lord Thankerton put the test in terms of a mistake as to something that was 'an essential and integral element of the subject-matter'.[7] There is evidence that courts in the South Pacific follow this principle. In the case of Farid Khan v Ali Mohammed and Others[8] the parties entered into an agreement concerning the plaintiff’s withdrawal from a partnership. It transpired that in calculating the nature of work in hand an error was made and the plaintiff’s true share was actually considerably less than the amount provided for in the agreement. The plaintiff sued for the money owed under the agreement. The defendants pleaded that the agreement was signed under a common mistake as to the facts. The Supreme Court of Fiji held that the accounts upon which the agreement was based did not represent the true position of the partnership and that this was a fundamental error going to the root of the contract which was set aside as void at common law. Second, in cases concerning common mistake as to the subject matter of a contract, equity can render the contract not void but voidable 'if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault'.[9] It is this second aspect of the law that makes the case of the Great Peace a case of significance. II FACTS OF THE CASE The facts of the case will be briefly summarised here.[10] The defendant (the appellant in the matter) agreed to provide salvage services for a stricken vessel. To effect the salvage, it obtained the services of a tug which would take five or six days to reach the stricken vessel. It was feared, however, that in the meantime, the vessel might go down with the loss of her crew. Accordingly, the defendant asked its brokers to find a merchant vessel, in the vicinity of the stricken vessel, which would be willing to assist, if necessary, with the evacuation of the crew. The brokers were informed by a reputable organisation that a vessel, owned by the claimant (the respondent in the matter) was the nearest to the stricken vessel and should be able to reach the stricken vessel within about 12 hours. Shortly afterwards, the defendant, through its brokers, entered into an agreement with the claimant to charter its vessel, for a minimum of five days, to escort and stand by the stricken vessel for the purpose of saving life. If the information given to the brokers had been correct, the vessels should only have been 35 miles apart when the contract was concluded. In fact, unbeknown to either party, the two vessels were some 410 miles apart, and it would have taken the claimant’s vessel 39 hours to reach the stricken vessel. When the defendant discovered the true position, just under two hours after entering the contract, it told its brokers that it was looking to cancel the claimant’s vessel, but not until it had discovered whether there was a nearer vessel available which could provide assistance to the crew of the stricken vessel. A few hours later, on finding such a vessel, the defendant cancelled the contract with the claimant’s vessel. The claimant (the plaintiff in the original matter) sued under the contract. The court at first instance found for the plaintiff and from this decision the defendant appealed, contending that the contract was void at common law on grounds of a common fundamental mistake, namely that the two vessels were in close proximity to each other. Alternatively, it contended that the facts gave the defendant a right to rescission in equity. An issue arose as to whether there was an equitable jurisdiction to grant rescission on grounds of common mistake in circumstances where that mistake would not render the contract void at law. The following issues were identified as requiring consideration by the Court of Appeal: (1) Prior to Bell v Lever Bros Ltd was there established a doctrine under which equity permitted rescission of a contract on grounds of common mistake in circumstances where the contract was valid at common law? (2) Could such a doctrine stand with Bell v Lever Bros Ltd? (3) Is this court none the less bound to find that such a doctrine exists having regard to Solle v Butcher and subsequent decisions? III THE DECISION OF THE COURT OF APPEAL In relation to the principle concerning common mistake at common law, the Court of Appeal endorsed the view expressed by the House of Lords in Bell v Lever Bros Ltd. On this basis, the contract concerning the salvage operation was held to be valid at common law. The mistake was not of the kind that made the contract essentially different from the thing as it was believed to be; it did not render the contractual adventure impossible of performance.[11] The test enunciated by Lord Atkin inBell v Lever Bros Ltd is extremely narrow and difficult to meet. Indeed Lord Atkin himself did not give any examples of where a contract might be rendered void in these circumstances; although he did give a number of examples of mistakes which would not satisfy the test. The significance of the Great Peace case is the court’s finding that where a contract is not void at common law for common mistake, there was no jurisdiction to grant rescission on the basis that such a contract could be voidable in equity. The court concluded that Solle v Butcher, itself a decision of the Court of Appeal, could not stand with Bell v Lever Bros Ltd, a decision of the House of Lords and should no longer be followed: The common law has drawn the line in Bell v Lever Bros Ltd. The effect of Solle v Butcher is not to supplement or mitigate the common law; it is to say that Bell v Lever Bros Ltd was wrongly decided.[12] A major reason for the court coming to this view was that the circumstances where equity might render a contract voidable were indistinguishable from the circumstances where the common law would render the same contract void. In Bell v Lever Bros Ltd the test was in terms of ‘a mistake that makes the thing essentially different from the thing as it was believed to be’.[13] In Solle v Butcher the test was in terms of ‘a misapprehension that was fundamental’.[14] The difficulty of course is to discern the difference – if there is In circumstances where many of the courts in the South Pacific are required (for example under their Constitutions) to look beyond the common law to custom and tradition, it is arguable that greater emphasis will be on ‘doing equity’ or reaching a just result than on the strict or rigid applications of the English common law. This means that the principles of common law may be discarded by regional courts if they are inappropriate to the country in question.[35] In light of the above facts and observations, and due also to the fact that a failure to recognise the role of equity in this area of common mistake may cause injustice, it is suggested that courts in the region will continue to follow Solle v Butcher, at least where the justice of the case demands it. It could be a different matter if the House of Lords were to endorse the views expressed by the Court of Appeal in the Great Peace case. [*] Associate Professor, School of Law, University of the South Pacific, Port Vila, Vanuatu. [1] Couturier v Hastie (1856) 5 HL Cas 673 [2] Cooper v Phibbs (1867) LR 2 HL 149 [3] Leaf v International Galleries [1950] 2 KB 86 [4] Unless the existence of the subject matter has been warranted or guaranteed. McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 [5] Bell v Lever Bros Ltd [1932] AC 161 [6] Lord Atkin ibid at 218. [7] Lord Thankerton ibid at 235 [8] (1982) 28 FLR 94 Supreme Court of Fiji [9] Solle v Butcher [1950] 1 KB 671 per Denning LJ at 693 [10] The summary is taken from the Headnote to Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd; The Great Peace [2002] 4 All ER 689. [11] Great Peace Shipping per Lord Phillips on behalf of the court at 730 and 731. [12] Ibid at 729 [13] Bell v Lever Bros Ltd [1932] AC 161 per Lord Atkin at 218 [14] Solle v Butcher [1950] 1 KB 671 per Denning LJ at 693 [15] Great Peace Shipping at 728 and 729 [16] The common mistake being that the managing director could have been dismissed without any payment. [17] Solle v Butcher [1950] 1 KB 671 at 694 [18] Great Peace Shipping at 720 [19] (1867) LR 2 HL 149 [20] Solle v Butcher [1950] 1 KB 671 at 695 [21] Great Peace Shipping at 718 [22] Ibid 720. In Bell v Lever Bros Ltd at 218 Lord Aitkin had expressed this view saying that the decision in Cooper v Phibbs was only subject to the criticism that the agreement would appear to be void, rather than voidable. See also other references at pages 718 and 719 of the Great Peace case. [23] Great Peace Shipping at 728 [24] West Sussex Properties Ltd v Chichester DC [2000] All ER (D) 887 per Christopher Staughton para [42]. [25] As cited in Great Peace Shipping 728 [26] Ibid 723 [27] (1873) LR 6 HL 223, 233. [28] Cited in Great Peace Shipping 718 [29] JW Carter and DJ Harland; Contract Law in Australia, (third edition) 429. [30] For example in relation to estoppel, in Nair v Public Trustee of Fiji and the A-G of Fiji (1996) unreported 8 March, High Court, Fiji Islands and AG of Fiji v Pacoil Fiji Ltd (1996) unreported, Court of Appeal 29 November 1996, the wider doctrine concerning estoppel as found in the Australian decision of Waltons Stores v Maher (1984) 164 CLR 387 was followed. [31] (1993) 151 CLR 422 [32] (1956) 96 CLR 186. See for example the discussion in Taylor v Johnson (1993) 151 CLR 422 at 430 and 431. [33] [1975] 2 NZLR 401. [34] Ibid at 409. [35] For example in Australia and New Zealand Banking Group Ltd v Ale [1980-83] WSLR 468 the Supreme Court of Western Samoa observed: ‘...the courts of Western Samoa should not be bogged down by academic niceties that have little relevance to real life’. See also Jennifer Corrin Care, Contract Law in the South Pacific, (Cavendish publications, 2001).