#16129 - Mistake And Frustration

If the contract party’s assumption deviates from the state of things at the time of formation mistake
If the contract party’s assumption deviates from the state of things as they turn out to be due to a subsequent and unexpected change of circumstances frustration

Bell v Lever Bros [1932] AC 161

A common mistake does not lead to a void contract unless the mistake is fundamental to identity of the contract.

Facts: D paid 50,000 to terminate the employment of two employees as part of his corporate reorganization. Unknown to D, the employees had breached their contracts, entitling D to dismiss them without compensation. D sought the return of the 50,000 for fraud (failed) or common mistake. The jury found that D would never have paid if they had known the truth, and that the employees were also mistaken because they didn’t have the breach in mind.
Held (HL, by 3/2 majority): there is jurisdiction to void a contract for common mistake, but in this case the mistake was not sufficiently fundamental to void the contract.

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

Sets out test for common mistake to void the contract.

Facts: T in the business of salvaging ships in difficulty, and when informed of a ship in trouble, hired a ship C that they thought was close by. However, this ship turned out not to be close by and when T found a closer ship, they terminated the contract with C. C sued for damages but T argued that the contract was void for mutual mistake.
Held (CoA): Mistake wasn’t sufficiently fundamental to void the contract. Delay of 22 hours (difference between expected and actual distance) wasn’t sufficient to make performance “essentially different from those the parties envisaged”.
Phillips MR:
- Conditions for common mistake:
  - Common assumption as to existence of a state of affairs
  - No warranty by either party that the state of affairs exists
  - Non-existence of state of affairs not fault of either party
  - Non-existence of state of affairs must make performance impossible
  - State of affairs may be the existence or a vital attribute of (i) consideration or (ii) circumstances that must subsist if performance is to be possible

Thus there is a four-step inquiry:

Shared mistake: the mistake must be shared by both parties
Construction: the risk of mistake was not allocated to either party
Fault: the claimant was not at fault (ex. For inducing the other party’s mistake)
Fundamentality: mistaken assumption is so serious as to make performance “impossible”

1/ Shared mistake

2/ Construction

The contract must not (i) have allocated the risk of mistake to either party or (ii) provided (expressly or impliedly) that the contract’s existence is contingent on the existence of an assumed state of affairs.

a/ Risk allocation to either party

William Sindall v Cambridgeshire CC [1994] 1 WLR 1016, 1034, 1035, 1042

Courts usually find that one party has assumed the risk of ordinary uncertainties at time of contract formation that party must perform (or be liable for non-performance)

General principle of caveat emptor ins ale of goods risk of mistakes on the fitness of land for particular purposes means that it is allocated to the buyer. But sometimes it will be allocated to the seller:

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)

Facts: C invited tenders for an oil tanker in the Jourmand Reef, D successfully tendered and embarked on an expensive expedition to salvage the tanker, but turned out that both the tanker and Jourmand Reef didn’t exist.
HCA held that common mistake (as to the existence of the tanker) didn’t apply and C was entitled to damages for breach.
- The only proper construction of the contract was that it included a promise that there was a tanker in the position specified.
- The mistake was deliberately induced by the party seeking to rely on common mistake in the mind of the other party

b/ Condition precedent

If the contract provides (expressly or implicitly) that the parties’ obligations are only to arise if an assumed state of affairs is true, so that no obligation arises if this condition precedent is not satisfied:

Associated Japanese Bank v Credit du Nord [1988] 3 All ER 902

Facts: A fraudster purported to sell to C machines that did not actually exist. D was sued (as the fraudster’s guarantor).
Held (CoA): since the guarantee stipulated that the machines could only be substituted with the bank’s consent, this was an express condition precedent that the guarantee was for existing machines (alternatively, the Court would have implied such a condition from the facts)

NB Smith, “Contracts - Mistake, Frustration and Implied Terms”, (1994) 110 L.Q.R. 400

In determining whether a contract exists, there is no room for a distinct doctrine of mistake additional to the principles of formation of contract and implied terms
Types of mistake:
- Unilateral – A intends to deal with B but actually deals with C
- Mutual – A intends to deal with subject X but B intends to deal with subject Y
- Common – parties both make the same mistake
Argues that common mistake rests on the presence or absence of an implied...

#16129 - Mistake And Frustration - Contract Law

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