FACULTY OF LAW
LAW OF CONTRACT
DR ERNEST OWUSU-DAPAA
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VITIATING FACTORS
One of the essential requirements of a valid and enforceable contract is that of
genuine and voluntary consent by both parties to the contract. A contract which
is regular in all respects may still fail because there is no real consent to it by one
or both parties.
There may however arise certain situations where the consent of one
of the parties to the contract has not been obtained. In other words, certain
factors have been used to obtain the other person’s consent to the contract.
These factors consist of:
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a) Mistake
b) Misrepresentation
c) Undue influence
d) Duress
They are known as vitiating factors because they lower the quality,
weaken or even destroy the genuineness of the consent obtained and
the courts in appropriate situations refuse to enforce contracts which
were entered into in the absence of genuine voluntary consent.
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OUTLINE OF MISTAKE
Introduction
Mistakes that will not affect the Validity of the Contract
Mistakes that will affect the Validity of the Contract – Operatives
Mistakes
Types of Mistakes
Mistake in Equity
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INTRODUCTION- MISTAKE
The term mistake may be defined as an erroneous opinion about
something.
In business transactions the quality, nature and range of the mistakes
vary.
A mistake may be of a serious or insignificant nature, depending upon
the nature of the promises made.
It may be made by both parties (mutual) or by one party only
(unilateral), and may be a mistake of fact or law.
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INTRODUCTION-MISTAKE
The general rule of common law is that a mistake does not affect the
validity of a contract.
The guiding principle is caveat emptor, meaning ‘let the buyer beware’.
Most mistakes don’t avoid contracts. Mistake in law is used in
highly technical sense, not in lay person’s sense. Reasons:
(i) Courts keen to enforce apparent agreements
(ii) Not keen to disturb third party rights
(iii)Caveat emptor – errors of judgment, mistakes as a quality don’t
avoid contracts.
An operative mistake will make the contract void and must be
a mistake concerning some fundamental fact.
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INTRODUCTION-MISTAKE
Real issue is what is and is not fundamental.
Position at common law and in equity is not always the same.
Important restriction – must be mistake of fact not law.
Sole v Butcher [1949] 2 All ER 1007
Statement that Rent Acts did not apply to house because
identity wrongly thought to have been changed by work done to
it held to be mistake of fact. Proposition of law involved, that
Rent Acts didn’t apply where identity of house had changed, was
accurate. Mistake was factual i.e. Identity of property in
question.
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Mistakes that do not affect the
Validity of the Contract
The following types of mistake will not affect the validity of a contract:
➢(1) A mistake of law. There is a general presumption that everyone
knows the law. The rule ‘ignorantia juris hand excusat’ (ignorance of
law excuses no one) rules out of all mistakes of law except foreign law
(law of other countries).
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Mistakes that do not affect the
Validity of the Contract
➢(2) An error of judgment about the value or quality of the subject
matter of the contract, unless a misrepresentation was made.
In Leaf v. International Gallaries [1950] 1 All ER 693: Mr. Leaf bought a
painting of ‘salisbury cathedral’ from International galleries for 85
pounds. The Gallery attributed the painting to John Constable. When
Leaf tried to sell the painting five years later, he was informed that it
was not by constable.
Both the buyer and seller had made a mistake about the quality and
value of the painting but this did not affect the validity of the contract.
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Mistakes that do not affect the
Validity of the Contract
➢(3) A mistake about the meaning of a trade term.
See Harrisson & Jones Ltd v. Bunten & Lancaster Ltd [1953]:
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OPERATIVE MISTAKES
Notwithstanding the above stated types of mistakes which cannot
invalidate a contract, there are some kind of mistakes which affects the
validity of the contract.
Such mistakes are called operative mistakes, and they render the
contract void.
The following are the various types of operative mistakes:
➢(a) Mistaken Signing of a written Document
➢(b) Mistake as to the Identity of a Party
➢(c) Mistake as to the Subject matter of the Contract
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(a) Mistaken Signing of a written
Document
The general rule is that a person who signs a document is assumed to
have read, understood and agreed to its contents.
However, a person may plead or rely on the defence known as non est
factum (not my deed).
If the contract is to be avoided three elements must be present, namely,
that:
(i) the signature must have been induced by fraud;
(ii) the document signed is fundamentally or radically different from
that thought to be signed; and
(iii) the signatory exercised reasonable care or signatory must have
acted negligently.
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(a) Mistaken Signing of a written
Document
In Saunders v. Anglia Building Society [1971] AC 1004: Mrs Gallie, a 78 year
old widow signed a document which a Mr. Lee had told her was a deed of
gift of her house to her nephew. She did not read through the document
since at the time of signing her glasses were broken. The document which
she signed was in fact an assignment of her leasehold interest in the house
to Mr. Lee. The Angalia Building Society advanced 2,000 pounds to Lee on
the strength of the deed. Mrs Galie brought an action against Lee and the
building society claiming that the deed was void. She pleaded non est
factum.
The House of Lords held that the plea of non est factum must fail.
Although her signature had been induced by fraud, the document she
signed was not fundamentally different from that which she thought she
signed. Moreover, persons wishing to plead non est factum must show
that they exercised reasonable care in signing. Mrs. Gallie had not taken
the trouble to read the document.
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(a) Mistaken Signing of a written
Document
Also in Lloyds Bank PLC v. Waterhouse (1990) Lloyds Bank obtained a
guarantee from a father as security for a loan to his son. The father was
illiterate, which the bank did not know, but he did ask what was the
extent of guarantee, and concluded that it covered the mortgage on his
son’s farm only. In fact it was worded to guarantee all the son’s
indebtedness to the bank. The son defaulted and the bank sought to
recover the full debts, less the amount realized by the sale of the farm.
It was held that the father had not been careless, and had been led
into signing something more than what he believed.
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(b) Mistake as to the Identity of a Party
Mistake as to the identity of one of the parties is usually unilateral,
where only one of the parties is mistaken about the identity of the
other party to the contract. When this happens the contract will be
void if the mistaken party can show that the question of identity was
material to the entering into the contract, and that the other part
knew or ought to have known of the mistake.
In Cundy v. Lindsay (1878) 3 App cas 459: Lindsay & Co, Belfast linen
manufacturers, received an order for a large quantity of handkerchiefs
from a rogue called Blenkarn. The rogue had signed his name in such a
way that it looked like ‘Blenkiron & Co’, a well-known, respectable firm.
Lindsay & Co despatched the goods on credit to Blenkarn who resold
250 dozen to Cundy. Blenkarn did not pay for the goods and was later
convicted of obtaining goods by false pretences. Lindsay & Co sued
Cundy for conversion.
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(b) Mistake as to the Identity of a Party
The House of Lords held that the contract between Lindsay & Co and
Blenkarn was void for mistake. Lindsay & Co intended to deal with
Blenkiron & Co, not the rogue, Blenkarn. Cundy was liable for conversion.
Similarly, in Ingram v. Little (1960) 3 All ER 332: The plaintiffs, who were
two sisters and a third person, advertised for sale the car of which they
were joint owners. A man called on them, and agreed to buy the car for 717
pounds. In order to persuade the plaintiffs to accept a cheque in payment
the man said that he was H, and gave an address in Surrey. Having checked
the name and address in the telephone directory, the plaintiffs accepted the
cheque and parted with the car. The man, who was not H, sold the car to
the defendant and then disappeared, his cheque being dishonoured. The
plaintiffs sought to recover the car or its value from the defendant who had
bought it in good faith.
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(b) Mistake as to the Identity of
a Party
It was held that the plaintiff’s offer to sell on payment by cheque was
made only to H, and could not be accepted by the man representing
himself to be H; no contract had been formed, therefore, and plaintiffs
were entitled to recover the car or damages from the defendant.
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(b) Mistake as to the Identity of a Party
Where the parties deal face to face, mistake about identity of the other
party will be more difficult to establish. In face to face dealings the
contract will be valid until one party avoids the contract for a fraudulent
misrepresentation.
In Phillips v. Brooks Ltd (1919) 2 KB 243: A man entered the claimant’s shop
to buy some jewellery. He selected various items of jewellery to the value of
3,000 pounds and offered to pay by cheque. While writing the cheque the
man said, “you see who I am, I am Sir George Bullough”. He gave an address
in St James’ square. The claimant knew of a Sir George Bullough and after
checking in a directory that Sir George had an address in St James’ square,
he asked if the man would like to take the jewellery with him. The man
replied that the jeweller had better let the cheque clear first but he would
like to take the ring as it was his wife’s birthday the following day. The
cheque was dishonoured. The man, who was in fact a rogue called North,
pledged the ring with the defendant pawnbrokers. The claimant sued the
defendants for the return of the ring or its value.
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(b) Mistake as to the Identity of a Party
It was held that the contract between the claimant and the rogue
North was not void for mistake but voidable for fraud. At the time the
contract was made the claimant intended to deal with the person
physically in his shop and his identity was immaterial. As the claimant
had not rescinded the contract by the time North pledged the ring, the
defendants obtained good title (rights of ownership).
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(b) Mistake as to the Identity of a Party
Also in Lewis v. Avery [1971] 3 ALL ER 907: Lewis sold his car to a man
who claimed he was Richard Green, the star of a popular television
series, ‘Robin Hood’. The man paid by cheque, producing a pass to
Pinewood Studios as proof of his identity. He resold the car to Avery.
The cheque had been taken from a stolen cheque book and was later
dishonoured. Lewis sued Avery in the tort of conversion.
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(b) Mistake as to the Identity of
a Party
The court held that Lewis intended to deal with the man actually in
front of him, despite his fraudulent claim to be Richard Greene. The
contract between Lewis and the rogue was not void for mistake, but
rather voidable for a fraudulent misrepresentation. Since Lewis had
not avoided the contract by the time the rogue sold the car to Avery,
Avery acquired good rights of ownership. He was not liable in
conversion.
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(b) Mistake as to the Identity of a Party
The two above stated cases should however, be contrasted with the
case of Shongun Finance Ltd v. Hudson [2004] 1 ALL ER 215, where the
Court declared that the transaction concluded on face to face to be a
nullity.
In this case a fraudster named R obtained P’s driving licence by
dishonest means. R visited the showrooms of a car dealer, where he
introduced himself to the sales manager as Mr Durlabh Patel. R agreed
to buy a mitsubishi shogun car for 22,250 pounds, subject to obtaining
hire-purchase finance. R completed a hire-purchase proposal form in
the name of Mr Patel. The Sales Manager contacted Shogun Finance’s
sales support team, which ran a check on the details of Mr Patel
provided by R. Shogun was satisfied with the information provided and
it accepted the hire-purchase proposal.
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(b) Mistake as to the Identity of
a Party
R paid a 10 percent deposit on the purchase price, partly in
cash and partly by cheque. The cheque was subsequently
dishonoured. The Sales Manager handed over the car with
full documentation. R sold the car to Mr Hudson for 17,000
pounds. Hudson bought the car for his own use and not as a
dealer. R disappeared without a trace. Shogun Finance Ltd
was claiming the return of the car or its value from Hudson.
Hudson argued that he had obtained good title to the car by
virtue of the provisions of section 27 of the High Purchase
Act 1964.
The House of Lords held by a majority of three to two, that
Shogun Finance Ltd was entitled to recover the car.
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matter of the Contract
The parties to a contract may be mistaken as to the identity of the
subject matter.
If a seller makes an offer in respect of one thing and the buyer
accepts, but is thinking of something else, the parties are clearly
talking at cross-purposes and there is no contract.
In Raffles v. Wichelhaus (1864) 2 H & C 906: The defendant agreed to
buy cotton which was described as ‘arriving on the peerless from
Bombay’. There were two ships called the peerless sailing from Bombay,
one in October and the other in December.
It was held that there was no binding contract between the parties as
the defendant meant one ship and the claimant the other.
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(C) Mistake as to the Subject matter of the
Contract
Where unknown to both parties the subject matter of the contract has
never existed, or has ceased to exist at the time when the contract is
made, the contract will be void. This situation is known as res extincta.
In Couturier v. Hastie (1852) 8 Exch 40: A contract was made for the
sale of Indian corn which the parties believed to be on board a ship
bound for the United Kingdom. Unknown to the parties, the corn had
fermented during the voyage and had been landed at the nearest port
and sold before reaching its destination.
The House of Lords held that this was a case of res extincta. The
contract contemplated that there was an existing something to be sold
and bought and capable of transfer but as the corn had already been
sold at the time of the sale by the defendants this was not the case
and the defendants were not liable. The contract was void, and
consequently no bad debt.
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(C) Mistake as to the Subject matter of the
Contract
Also in Galloway v. Galloway (1914) 30 TLR 531: The defendant,
assuming his wife to be dead, married the claimant. The defendant and
the claimant later separated and entered into a deed of separation
under which the defendant promised to pay a weekly allowance to the
claimant. The defendant subsequently discovered that his wife was still
alive and fell into arrears.
When the claimant sued to recover the arrears it was held that she
could not do so because the separation agreement was void on the
ground that it was entered into under the common mistake that the
parties were, in fact, married.
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TYPES OF MISTAKE
The various types of mistakes are classified as follows:
(1) Unilateral Mistake
(2) Mutual / Bilateral Mistake
(3) Common Mistake
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(1) Unilateral Mistake
Unilateral mistake occurs when in a contract, only one of the parties to
the contract is mistaken about a matter of fact relating to the contract,
and the other party knows of his mistake.
The effect of a unilateral mistake upon a contract depends on the
surrounding circumstances.
Where for instance, one of the parties knows or should have known
that the other party is mistaken in his belief as to a fact that is material
to the contract and enters into contract because of that mistaken
belief, the contract is avoided.
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(1) Unilateral Mistake
In Hartog v. Colin & Shields [1923] 3 ALL ER 566: The defendants
contracted to sell 30,000 Argentine hare skins to the plaintiff, but by
mistake they were offered at a price per pound instead of per piece. In
the pre-sale negotiations reference had always been made to the price
per piece and never to the price per pound, and there was expert
evidence that Argentine hare skins were generally sold at prices per
piece.
It was held that since the plaintiff could not reasonably have supposed
that the offer contained the offeror’s real intention, there was no
binding contract.
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(2) MUTUAL MISTAKE
A mutual mistake occurs where both parties are under a certain
mistake or should have misunderstood each other and are completely
at cross-purposes. Where there is a mutual mistake the contract will
be void.
In Raffles v. Wichelhaus (1864) 33 LJ (NS) 160: The defendants agreed
to buy ‘125 bales of surat cotton to arrive ex peerless from Bombay’. It
appeared that the ship mentioned in the agreement was intended by
the defendants to be the peerless, which sailed from Bombay in
October, whereas the plaintiff ordered 125 bales of surat cotton from
another ship called the peerless which sailed from Bombay in
December.
It was held that there was no binding contract between the parties as
the defendant meant one ship and the plaintiff another. There was no
consensus ad idem between the parties.
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(3) COMMON MISTAKE
Common mistake occurs where both parties are mistaken about the
same thing.
An example of a common mistake was illustrated by the case of
Couturier v. Hastie (1952) 8 Exch 40: A contract was made for the sale
of some wheat which at the time was being carried on aboard a ship.
Unknown to both parties, when they made the agreement the wheat
had already been sold by the ship’s captain because during the voyage it
had started to overheat. The court held the contract to be void, since it
was a contract of impossibility.
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(3) COMMON MISTAKE
There are, however, some exceptions to this type of claim.
At common law relief from a contract affected by a common mistake
will not available where:
(i) The mistake occurs after the contract is made. See Amalgamated
Investments & Property Co. Ltd v. John Walker & Sons Limited [1977] 1
WLR 164
(ii) The mistake as to quality. See Bell v. Lever Brothers Ltd [1923] AC
161
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MISTAKE IN EQUITY
In certain circumstances equity will relieve a party from the effects of
his mistake where the common law would hold him to the contract.
There are three equitable remedies that a court may grant, namely:
(a) Rescission,
(b) Rectification, and
(c) Specific Performance.
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(a) RESCISSION
The court may set aside an agreement, provided the parties accept the
conditions imposed by the court for a fairer solution to the problem.
In Grist v. Bailey [1966] 2 ALL ER 575: Bailey agreed to sell a house to
Grist for 850 pounds. The price was based on both parties’ belief that
the house had a sitting tenant. The value of the house with vacant
possession would have been 2,250 pounds. Unknown to the parties, the
tenants had died and their son did not stay on in the property.
The court held that the contract was not void at common law but he
was prepared to set the contract aside provided Bailey offered to sell
the property to Grist for the proper market price of 2,250 pounds.
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(b) RECTIFICATION
If a document does not accurately record the true contract between
the parties the writing may be subject to rectification in equity.
Similarly, where parties to a contract have been in error, the equitable
remedy of rectification may enable the court to rectify a written
document executed by the parties so that it accords their true
agreement.
For rectification to operate the following must be present:
(i) The terms were clearly agreed between the parties
(ii) The agreement continued unchanged up to the time it was reduced
into writing; and
(iii) The writing fails to express the agreement of the parties.
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(b) RECTIFICATION
In Craddock Bros v. Hutt (1923): An oral agreement for the sale of a
house expressly excluded an adjoining yard and yet the later written
agreement and conveyance included the yard.
The court ordered a rectification of the documents in order to express
the parties true original intention.
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(b) RECTIFICATION
However, the equitable remedy of rectification will not be available where
one party to the contract has made a miscalculation and the agreement
entered into does not express his intention.
In Riverlate Properties v. Paul [1975] Ch. 133, [1974] 3 W.L.R. 564: The
plaintiff granted a long lease of a maisonette to the defendant and had
intended that the lessee should pay half the cost of exterior and structural
repairs that were required. The lease however, put the entire burden on the
plaintiff. The defendant believed that she was not responsible for those
repairs and the plaintiff claimed for rectification or rescission of the lease.
It was held that a unilateral mistake of this kind could have no impact on
the terms of the lease agreed by the parties. There was no justification for
equity to disrupt the transaction actually entered into and the mistake
was inoperative. The error of failing to include a suitable term in the lease
was the plaintiffs.
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(c) Specific Performance
A party to a contract may ask the court for an order for specific
performance to compel the performance of the contract. Specific
performance is an equitable remedy and as such discretionary. Thus
where damages would be an adequate remedy, the court will not
order specific performance.
If there has been a mistake in a contract which is sufficiently serious,
the court can refuse to order specific performance.
In Grist v. Bailey [1967] Ch. 532: a common mistake case, Goff J. held
the contract was not void at common law but was made under a
‘mutual fundamental misapprehension’ for which the Court refused to
grant specific performance.
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(c) Specific Performance
In the case of unilateral mistake, if one party
contributes to the other’s mistake, albeit
innocently, he may be refused specific
performance.
In Denny v. Hancock (1870) LR 6 Ch. App 1: The
court refused to grant specific performance where
the purchaser’s mistake over the boundary of the
property being sold at auction had been caused by
an innocent mistake on the vendor’s part.
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THANK YOU
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