#14996 - Mistake - Contract Law

Starting point: the OBJECTIVE approach to contractual formation – the fact that one party was labouring under a mistake is usually irrelevant, because subjective agreement is not needed.

BUT there are two exceptions, which allow a party making a unilateral mistake to say that the mistake has prevented a contract being formed:

(i) mistake as to terms; and

(ii) mistake as to the identity of the other party,

in each case as long as the other party knows or ought to know of the mistaken party’s mistake

There is a third exception, a mistake as to the nature of the proposed contract where the mistaken party signs a written contract (‘non est factum).

Where these exceptions are made out, the contract is void:

• Neither party can enforce it by legal action. So damages are not available for breach of its terms.

• It cannot transfer title in property, even to an innocent third party.

• The parties' dealings may have given rise to non-contractual remedies - for example, in tort or restitution.

• Parties must return any goods and payments transferred to their original owners.

The doctrine has two elements:

• It must first be shown that one party made a mistake as to the terms of the offer. In Smith v Hughes, the claimant offered to sell some oats to the defendant. The defendant thought that the oats were old oats and agreed to buy them. They were in fact new oats.

The fact that the defendant thought that the oats were old would not be enough; he must have believed that he was promised old oats by the claimant. If the defendant actually thought that the proposed contract contained a promise that the oats would be old, and the claimant knew of this belief then it would not be reasonable for the claimant to rely on the defendant’s apparent intent. By looking at the actual intentions of the parties, it is clear that the terms of the acceptance do not coincide with the terms of the offer due to the offeree’s mistake.

• Ie no mistake in this case as no mistake to the terms of the contract, D only knew there was a mistake because of the background information that the oats were for the race horses and thus needed to be old oats

• No duty for seller to sound out buyer’s mistake, as seller neither said nor did anything to contribute to his deception – Cockburn J

• Law only gives relief where the other party POSITIVELY INDUCES the mistake ie misrepresentation

• Second it must be shown that one party knew or should have known of the other’s mistake. For example in Hartog v. Colin [1939] (mistakenly offered hair skins for price per pound rather than per piece. Hair skins usually sold at per piece, C ought to have known there was a mistake), the claim was rejected on the ground that the claimant could not reasonably have suppose that that offer contained the offeror’s real intention – he was ‘snapping up’ an offer that contained an obvious error. Accordingly, it was not reasonable for the claimant to rely on the defendant’s apparent intent. By looking at the actual intentions of the parties, it is clear that the terms of the acceptance do not coincide with the terms of the offer due to the offeror’s mistake.

• Ie if other party knew or ought to have known (based on objective principles), it is a mistake as to the terms

• Illustration of objective principle - Centrovincial Estates v Merchant Investors Assurance [1983] as 65k quid offer for rent instead of 126k quid, held no mistake as D did not know and objectively could not have known about the error

When a mistake is triggered by the claimant’s fault (e.g. if the offer is confusing), the claimant will be taken to have known of the defendant’s mistake (Scriven v Hindley, auction bidding confusing, thought buying something else and C had contributed to the mistake – held C known about D’s mistake)

When these two elements are present, on an objective interpretation of the terms of the purported acceptance (i.e. how the terms of the purported acceptance appeared to a reasonable person in the offeror’s position), the terms of the purported acceptance do not coincide with the terms of the offer due to the offeree’s mistake. The contract is thus void.

• But if mistake not known to or could not reasonably have been known to the other side (ie cannot claim for mistake) -> contract is binding in full from the outset, even if it has not been relied upon (ie even if no reliance, still can’t withdraw from contract)– Centrovincial Estates v Merchant Investors Assurance [1983]

Raffles v Wichelhaus (1864) (Peerless) – seen as a case of unilateral mistake due to “latent ambiguity”, there was never any consensus reached

An offer can only be accepted by the person that it is addressed to. If the offeror makes an offer to A, because the offeror thought A was B, we must ask whether it reasonably appeared to A that the offer was addressed to him. If it does not reasonably appear to A that the offer was addressed to him, there is no valid contract. Ie if not reasonable that offer addressed to A, no contract

Where the offeror knows that A is A, but is merely mistaken about A’s attributes – there is no offer/acceptance problem and so a valid contract ensues. For example, in Fletcher v Krell [1873], the defendant agreed to act as a governess under the mistaken impression that the claimant had not been married. In fact, the claimant was divorced. The claimant brought an action for breach of contract and the defendant resisted the claim on the ground of mistake. The defence was rejected by the court, as the mere concealment of a material fact, except in cases of insurance policies, does not avoid a contract.

However, if the fact that A is who he says he is or possesses a particular attribute is so important to the offeror that the offer is only directed to A on condition that A is who he says he is or possesses that attribute, then we can say that a reasonable person in A’s position cannot have thought that the offer was addressed to A.

• Ie yes contract unless the attribute is SO important that offer is only directed to A because he possesses that attribute

The archetypal case:

Sale of goods on credit by (innocent) A to (wicked) B who impersonates / pretends to be someone else; B then sells the goods in turn to (innocent) C and disappears with C’s money; B’s cheque having bounced, A wants to get the goods back.

A has a claim for fraudulent misrepresentation against B, but that only makes the contact voidable and rescission is barred because third party (C’s) rights have intervened. The only chance A has of recovering the goods is if he can persuade the court that the contract with B was void (in other words, there never was a contract) – that way, B had no title to the goods to pass to C, so C cannot have acquired legal title to the goods.

Transactions in person - where A and B were face to face

In Shogun Finance v Hudson, HL held that there is a strong presumption in face to face transactions that the innocent party intended to contract with the person in front of him. Therefore in the majority of face to face situations it will be held that the rogue did reasonably believe that the offer was addressed to him. The rogue’s claim to be someone else is only a misrepresentation which renders the contract voidable (i.e. valid until set aside).

In Ingram v. Little [1961], the claimants put their car up for sale. A rogue introducing himself as a businessman, Mr Hutchinson, offered to buy it. Having agreed a price, the rogue wanted to pay by cheque but the claimants initially refused. The claimants then verified his name and address in a phone book and let the rogue pay by cheque. His cheque was dishonoured and the rogue sold the car to an innocent third party, the defendant. The claimant brought an action, alleging that no contract had been formed between the claimant and the rogue and so the defendant had not acquired good title to the car.

CA held that no contract had been formed between the claimant and the rogue. Pearce LJ gave two reasons why the rogue should not have interpreted the offer as being made to him.

• First, the parties were concerned with a credit [rather than a cash] sale in which both parties knew that the identity of the purchaser was of the utmost importance. The fact that the claimants would have to trust that the cheque did not bounce and that they had made clear their reservations about this form of payment meant that they had made clear to the rogue how important they regarded it that he was who he said he was.

• Second, the rogue wrote the name and address on the back of the cheque that he had given. Pearce LJ viewed this as an additional indication of the importance attached by the parties to the individuality of Mr Hutchinson.

Transactions where A and B not face to face

In Shogun Finance v. Hudson [2004], a rogue fraudulently claimed to be Mr Patel and bought a car via a hire-purchase agreement, which he then sold on to an innocent purchaser, the defendant, before vanishing, leaving most of the price unpaid.

• Majority of HL held that 1^st contract was between Shogun and Mr Patel since they were named, no contract between Shogun and the rogue. But since Mr Patel’s signatures were forgeries, no contract between Shogun and Mr Patel

For the initial deal, the dealer produced a copy of the claimant’s standard form hire-purchase agreement, onto which Mr Patel’s details were entered. The rogue signed the document and produced Mr Patel’s driving licence. The dealer relayed these details to the...