#2140 - Great Peace Shipping Ltd V Tsavliris Salvage Ltd - Contract Law

Great Peace Shipping Ltd v Tsavliris Salvage Ltd [2002] 3 WLR 1617

Court of Appeal

Basic Facts

X suffered structural damage in the South Indian Sea. D offered salvage facilities which were accepted. D looked for a merchant vessel to assist in this process, and were given the names of four vessels supposedly nearby by Y. The Great Pearce was apparently the closest, so D commissioned from C them to assist. D suddenly found out that the ship was 410 miles away, so instead commissioned a different ship and cancelled the contract with C. The contract stipulated that this was allowed on the payment of 5 days hire to C, but D refused to pay it.

Issue for the Court

When can a common mistake void a contract?

Held Lord Phillips MR

• This principle is as follows:

  • In contracts in which the performance depends on the continued existence of a given person or thing,

    • a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

      • that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel.

• So we have to ask what makes performance of a contract impossible:

  • This is the non-existence of a state of affairs

    • Which is the existence, or a vital attribute, of the consideration to be provided

    • or circumstances which must subsist

      • if performance of the contractual adventure is to be possible

• Thus, a contract may be impossible to perform where

  • The item for consideration does not actually exist.

  • A vital attribute of the item for consideration does not exist

  • The circumstances which make the performance of contractual adventure possible do not exist

    • The latter two only come into play when the mistake over the perceived circumstances or attributes make contract performance essentially different from that which the parties agreed.

Dismissing Implied Terms analysis

• The theory of the implied term is as unrealistic when considering common mistake as when considering frustration.

  • Where a fundamental assumption upon which an agreement is founded proves to be mistaken,

    • it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding.

      • But if not, the avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform,

        • no obligation arises out of that agreement.

• BUT Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation,

  • the same should be true of common mistake.

    • If, on true construction of the contract, a party warrants that the subject matter of the contract exists,

      • there will be no scope to hold the contract void on the ground of common mistake

• However, circumstances where a contract is void as a result of common mistake are likely to be less common than instances of frustration.

  • Supervening events which defeat the contractual adventure will frequently not be the responsibility of either party.

    • But where parties agree to do X which is impossible at the time of making the agreement,

      • it is much more likely that, on true construction of the agreement, one or other will have undertaken responsibility for the mistaken state of affairs.

• Trietel: little inconvenience has resulted from contracts being set aside on the grounds of innocent misrepresentation.

• Wiliams: Accordingly, the decision in Great Peace draws an illogical distinction between contracts coming about following an innocent misrepresentation leading to a common mistake,

  • compared with the common mistake coming about as a result of some other innocent cause.

    • Arguably the decrease in certainty, which the dual approach could allow, would be a price worth paying for allowing a more flexible approach in equity for the rare, but deserving, cases

• Yeo: Before Great Peace, where the contract is not void at law, equitable jurisdiction could be invoked when it would be unconscionable for a person to take advantage of legal rights;

  • the problem is in defining the circumstances that amount to unconscionability in specific types of situations.

    • The Court of Appeal in Solle v Butcher purported to extend the equitable jurisdiction such that, in the absence of blameworthy behaviour of either party at the time of contracting,

      • the court could still rescind the contract on the application of one of the parties on the basis of a common fundamental mistake;

        • it could be unconscionable for a party to insist on strict contractual rights because of the mistake

• Poole: may have the effect that more emphasis is placed on implying terms of risk to those who don’t make such or those who hold themselves out per Mcrae and narrowing doctrine of mistake

  • BUT Potential for three different approaches of equity

    • Remedial

      • This might provide marginal relief in cases where the contract would otherwise be automatically void for common mistake.

        • This assumes that the scope of the doctrine of common mistake is narrowly drawn and the primary emphasis is on party autonomy and leaving it to the parties to bargain more astutely and ensure the allocation of risks in their contract.

        • The practical application of such a principle also assumes that there will be cases where the mistake is sufficiently fundamental but for some reason it wouldn’t be appropriate to automatically void the contract.

    • Supplemental

      • Great Peace held that to have an equitable jurisdiction would lead to the conclusion that Bell was wrongly decided

        • Poole: If Solle established an equitable jurisdiction which rendered a common mistake contract void where common law would hold it valid

          • effect would have been to say that Bell “was wrongly decided”.

            • But fact equitable doctrine has less draconian consequences than common law doctrine doesn’t imply Bell was “wrongly decided”

              • Clear that Steyn J reckoned it could have a positive supplemental effect.

      • The real argument relates to the identification of mistakes that are sufficient to justify the giving of relief

    • ...