CONTRACT LAW

PROBLEM QUESTION SOLVING

MISTAKE
Q.1 Following the death of her estranged father, Felicity has inherited his artist’s studio
and some of what she believes to be his completed works. Felicity’s father, ‘Clarky’,
worked in stained glass and his work was considered radical and progressive in the
1960s, particularly among ‘A’ list celebrities of the time. Unfortunately, owing to the
fragility of the work, not much has survived to the present day. His recent death and the
originality of his creations have rendered Clarky’s work very valuable. Felicity invites
Reah to have a look round with a view to purchasing any items she may be interested
in. She sees a large panel depicting a dragon. She offers Felicity £50,000 for the piece.
Felicity accepts her offer and will deliver on receiving payment in her bank. Reah
immediately goes to her insurers to secure adequate cover in the event of an accident.
The specialist valuer tells her that what she has is probably work done jointly by
Clarky’s evening beginner class students whom he would provide with a template of a
dragon to fill in, to demonstrate and learn technique. Although attractive, the piece
would at most be worth £5,000.

Reah is very upset and wants to know whether she has to proceed with the contract, as
she has not bought what she thought she was buying. Advise Reah as to the application
of the doctrine of mistake.

Ans: The operation of the doctrine of mistake renders a contract void: that is to say that
it will mean that the contract will be treated as though it never existed. If applied, this
would mean that Reah would not have a contract with Felicity and, as such, would not
have to proceed with the purchase of the glass panel. However, the doctrine of mistake
has a very restricted scope of operation and it will not allow a party to a freely entered
bargain to escape easily from that agreement simply because the deal struck has not
turned out to be as beneficial as anticipated. Reah will have to establish that her
mistake was a fundamental one to have the contract set aside on the grounds of
mistake. If she cannot do so, then the contract will be enforceable and she will have to
pay Felicity £50,000.

Traditionally, the doctrine of mistake under the common law falls into three categories:
common, mutual and unilateral. Common mistake is where both parties have made the
same mistake, mutual mistake is where both parties have made a mistake but a
different mistake, and unilateral mistake is where one party has made a mistake and the
other party is aware of this. In this situation both Felicity and Reah are mistaken about
the creator of the dragon glasswork. They both hold an honest belief that the artwork
was created by Clarky. They have both made the same mistake and therefore Reah will
argue that the contract should be set aside on the grounds of common mistake. Felicity
being estranged from her father probably knew no more about the work than Reah.
There is no misrepresentation, nor could it be assumed that she assumed the risk of the
authenticity of the authorship of the artwork.

The doctrine of common mistake will apply only if the mistake is a fundamental one. The
mistake must render the contract essentially and radically different from what the parties
had supposed it to be. The House of Lords in Bell v Lever Bros Ltd [1932] provides the
leading authority on common mistake and what can amount to a fundamental mistake.
In this case, following a company merger, the chairman and vice-chairman of the
company were surplus to requirements but still had five years on fixed-term contracts to
run. By way of settlement for the early termination of the contract, the company paid
them a total of £50,000 in compensation. The company later discovered that both men
had been in breach of their contracts and could have been dismissed without paying for
the privilege. The men themselves were not fraudulent as they had forgotten about the
breaches and believed their contracts to be valid. The company sought to have the
contracts set aside on the grounds of common mistake, that is to say both parties
believed the contracts to be valid whereas in actual fact they were voidable as a result
of the breaches. The court held that the mistake was not sufficiently fundamental as to
render the contract void. Lord Atkin in his judgment concluded that the company and the
directors got exactly what they had bargained for in an early release from their
contractual obligations. Lord Atkin went further in discussing what would amount to
being fundamental for the purposes of a common mistake, the first point being that both
parties must be mistaken as to the fundamental assumption the contract was based on.
However, Lord Atkin articulates his test for this in terms of quality. The mistake of both
parties must be as to some quality, without which the subject matter of the contract is
rendered essentially different from what it was believed to be. Lord Atkin goes on to give
the example of a painting believed to be the work of a great master which later turns out
to be a fake. Reduced to its fundamental purpose, the contract is for the sale of a
painting. A painting is what has been purchased; the mistake as to the quality of that
painting or indeed its value is not sufficient for the doctrine of mistake to operate. Lord
Atkin’s hypothetical example became a reality in Leaf v International Galleries [1950],
whereby the claimants had no remedy in the absence of a warranty or representation
when the purchased Constable painting turned out to be a modern copy.9 Similarly,
here the dragon glass is not of the quality in the terms of its creator being a renowned
artist in the field, but Reah has got essentially what she contracted for: the glass dragon
panel.

In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002], Lord Phillips
revisited the criteria needed to establish common mistake as to quality. First, there must
be a common assumption as to the existence of a state of affairs. Both Felicity and
Reah believed the artwork to be by Clarky. Secondly, neither party must give a warranty
that a certain state of affairs exists. Neither Felicity nor Reah provide such a warranty or
assume the risk. Thirdly, the non-existence of the state of affairs is not the fault of either
party. Neither Felicity nor Reah appear to be at fault. The non-existence of the state of
affairs must render performance of the contract impossible. The fact that the glass
dragon is by a different artist does not prevent the contract being performed. Finally, the
state of affairs may be the existence, or a vital attribute of the consideration to be
provided. Successful claims in common mistake have often been where there has been
a total failure of consideration (Couturier v Hastie (1856). Reah has the glass panel she
freely negotiated for.

The Great Peace case put an end to the possibility of a separate doctrine of common
mistake in equity which could be used to soften the approach taken by the common law.
Reah will therefore not have an alternative remedy in equity. The narrow application of
the doctrine of common mistake will mean that Reah is obliged to pay the contract price
for the panel. Her mistake was merely as to the quality of her purchase, not its core
subject matter.

Q.2 Justin is a car dealer. He has the Video Cinque Conceptor on his forecourt hot from
the Paris Motor Show. A limousine arrives outside and drops off someone whom he
believes to be the star of a popular TV show which featured the old-style 1980s’ Video
Cinque. To his delight, the customer places an order for the Video Cinque Conceptor
priced at £60,000, and also a small run-around from the Zsa Zsa range for £12,000 for
his assistant. To Justin’s surprise he asks for details of the hire-purchase terms
available on the Video Cinque Conceptor, as he says that their deal of 0 per cent
interest for six months is too good to miss. He intends to pay for the Zsa Zsa by cheque
and the deposit of 10 per cent for the Video Cinque Conceptor by cash. Justin rings the
finance company, Performance Car Finance Ltd. A finance search is done against
James Dockherty, supposedly the actor’s real rather than stage name, on the address
given on the driving licence produced. The finance company then fax through the
documentation for the customer to sign. As the deposit has been paid Justin allows him
to take the Video Cinque Conceptor. He also allows the assistant to drive away in the
Zsa Zsa. No payment is made to the finance company. Ted purchased the Video
Cinque Conceptor from a private seller in good faith. Stella similarly purchased the Zsa
Zsa. The private seller involved in both sales was the rogue Justin sold the cars to,
whose real identity is not known. Suffice to say he is not the famous actor Justin
thought. James Dockherty does exist but his driving licence and cash were stolen
during a robbery at his jewellery store.

Advise Ted and Stella on how the operation of the doctrine of mistake will determine
whether or not they can keep the cars they have purchased.

Ans: A unilateral mistake is where one party makes a mistake which the other party is
aware of. Unilateral mistake is often relied on in situations where one party to a contract
thought they were contracting with someone else. Justin and Performance Car Finance
Ltd thought they were contracting with ‘Jack Dockherty’. The operation of the doctrine of
mistake will render a contract void. If no contract existed, then property in the cars never
passed from Justin or Performance Car Finance Ltd to the purchaser. If property did not
pass, then under the nemo dat rule the rogue could not pass good title to anyone else.
This could have harsh repercussions for bona fide purchasers such as Ted and Stella.
The law therefore has to provide rules by which it can be determined where the risk and
losses should fall where there has been a unilateral mistake of identity.

To render a contract void on the grounds of unilateral mistake as to identity, it will have
to be demonstrated that the party was truly mistaken as to the individual’s identity,
genuinely intending to contract with someone else, and not just mistaken as to the
individual’s attributes, such as being creditworthy. There is a strong presumption that in
face-to-face dealings the parties intend to contract with each other. The presumption
exists that the person in front of you is the one you intend to contract with, even if the
person being dealt with pretends to be someone else, assuming a false name or
identity. In Lewis v Averay [1972] the plaintiff accepted a cheque for the purchase of his
car from a man purporting to be the leading actor from the television series Robin Hood.
The court held that the contract could not be set aside on the grounds of mistake. Two
main lines of argument were put forward to support this. First, Mr Lewis intended to
contract with the person who turned up at his house to buy the car. There was no
evidence that he intended to contract with anyone other than that person. Secondly, the
identity of the purchaser was not of fundamental importance to Mr Lewis. In believing
him to be a famous actor, he had assumed him to be creditworthy. As in Phillips v
Brooks Ltd [1919] the mistake was as to the rogue’s attributes not his actual identity.
Justin intended to contract for the sale of the car with the man in front of him. Following
the face-to-face principle laid down in Phillips v Brooks and Lewis v Averay, the contract
for the sale of the Zsa Zsa would be valid. As such, the rogue took good title to the car,
as there is nothing to suggest that Justin did anything to avoid the contract before it was
sold to Stella. Stella as a bona fide purchaser would have good title to the car she
purchased. Lord Denning in Lewis v Averay believed it to be appropriate that the
innocent purchaser who had acted perfectly properly should not suffer because of the
seller’s lack of judgment in allowing the car to be taken.

The situation with regard to Ted is more complex, as in a hire-purchase agreement the
creditor becomes the owner of the goods until the final payment is made by the debtor.
As such, the car was sold by Justin to the finance company who became the owner,
with Jack Dockherty having a right to possession only. The right of possession would
not allow an individual to transfer title; however, section 27 of the Hire Purchase Act
1964 allows a bona fide purchaser to obtain good title in these circumstances. The
finance company can only recover the car by establishing that the contract between
them and Jack Dockherty was void on the grounds of mistaken identity. Shogun
Finance Ltd v Hudson [2004] revisited the decided case law in this area and managed
to demonstrate that the finance company only intended to deal with the party named on
the contract, on whom they did a credit check, and no other party. They were mistaken
as to identity and not attributes. The presence of another party negotiating the contract
at the dealership was irrelevant. This was treated as an arm’s length transaction.

The courts recognise that where a contract has been concluded at a distance, for
example over the phone or in writing, it may be easier to establish that the intention was
to contract with someone else.8 In Cundy v Lindsay (1878) an order for handkerchiefs
was accepted and delivered to a Mr Blenkarn who had deliberately made his signature
appear to be ‘Blenkiron’. The address the goods were dispatched to was in the same
street as a respectable firm known to the plaintiff called Blenkiron & Co. Cundy had
bought the goods in good faith. If the contract could be set aside for mistake, he could
not take good title to the goods and Lindsay would be able to recover them. It was held
that the contract between Blenkarn and Lindsay was void as he had only ever intended
to deal with Blenkiron & Co. Lindsay could demonstrate that he intended to deal with
someone different from whom he did actually deal with and that the identity was
fundamental to him. By contrast, in King’s Norton Metal Co. v Edridge, Merrett & Co.
Ltd (1897) goods were ordered on company notepaper purporting to have various
offices and trading under the name of Hallam & Co. This contract was not void on the
grounds of mistake, as the plaintiffs intended to contract with the company they had
been in correspondence with. The distinction was that in Cundy v Lindsay they intended
to deal with a different customer not a different type of customer, one who paid their
bills. Performance Car Finance Ltd intended to deal with the real Jack Dockherty, as it
was that client they did the credit check on, and his name they put on the contract. This
would render the contract void between the finance company and the rogue and prevent
Ted gaining good title to the car.

Arising out of the same events, the conclusion can appear harsh in that Stella will gain
good title to her car but Ted will not to his. From a blame perspective, perhaps more risk
should lie with Justin than the finance company, but it seems rather unfortunate for Ted.