132.181.2.68 data library4 law reports concomlaw 274530

8/22/2019 132.181.2.68 Data Library4 Law Reports Concomlaw 274530

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R E P O R T O N T H E E F F E C T O F M IS T A K E S

contracts &commercial lawreform commit tee

Well ingtonNew ZealandHay 1976


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CONTRACTS AND COMMERCIAL LAW REFORMCOMMITTEE

REPORT ON THE EFFECT OF MISTAKES ONCONTRACTS

To: The Minister of Justice

A. INTRODUCTION1. "in this Report we review the law relating to theeffect of mistakes in relation to contracts, expresssome criticisms of the present state of the law, andconclude that a code should be enacted by legislation.We examine the objectives of such a code, discuss thecircumstances in which a party should be relieved fromhis mistakes, and suggest the nature of the relief whichshould be available. A draft bill intended to giveeffect to our recommendations is attached.

2. We wish to record our appreciation of the servicesof Mr R.J. Sutton of the Faculty of Law at the Universityof Auckland, who prepared a paper especially for theassistance of this Committee, and at our invitationparticipated in our deliberations upon the subject.His paper has formed the basis of this Report.3. The reform of the law in this area presentsconsiderable difficulties. It has not been attemptedin any other common law jurisdiction, notwithstandingthe severe theoretical deficiencies from which, in ourview, the law suffers. After discussion over anextended period, however, we have been able to reachunanimous agreement upon the content of this Report.


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4. We see the reform of the law of mistake as animportant part of our programme for the reform of thegeneral law of contract. In our Report on Misrepres-entation and. Breach of Contract (1967) we endeavouredto deal comprehensively with all situations where oneparty to a contract had caused loss to another partyby making representations which were not true, or bybreach of contract. We note with regret that theserecommendations have not yet borne fruit in legislativereform. However, if they are adopted by the legislature,they will still leave untouched the class of agreementswhich come to grief because one or more of the partieshas made a mistaken assumption of existing fact or law.In such cases it is necessary to decide whether or notthe agreements shall attain or retain contractual force,and if they do, whether or not the parties who have beenmistaken shall be entitled to relief. A notable featureof the cases on mistake is that the agreements the partiesmay have made may turn out to be entirely inappropriate,with the consequence that if such agreements are enforced,one party may be grossly enriched at the expense of theother. In days when the ritual of the contract wasregarded more highly than its substantial justice, thisresult might have been looked upon as a fitting misfortuneto befall one who made insufficient enquiries beforeassuming his obligation. In both common law and civillaw jurisdictions, however, it appears that courts haveover the past two centuries become increasinglysympathetic to the idea that, where a serious error hasoccurred, the contract ought not to be enforced accordingto its terms. This change in judicial attitudes no doubtreflects a similar movement in commercial and socialopinion. Unfortunately, it has placed a heavy strainon the established doctrines of contract, and the timehas come when they are no longer adequate. The modernlaw of contract needs reform in this area as much asany other.


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B. THE PRESENT LAW

5. The law which is presently dealt with as "mistake"in the textbooks is in fact a fragmented series ofdoctrines, some of which are overtly announced as rulesrelating to mistake, and others of which are based upondifferent concepts, such as failure of "offer andacceptance to correspond". A number of different typesof mistake are included. Error may be made about thenature of a document which one of the parties has signed(doctrine of non est factum), or about the terms on whichostensibly agreement is reached where one person hasaccepted an offer thinking it to have a sense differentfrom the sense intended by the offeror. There may alsobe error about the identity of one of the parties, where,for example, a swindler represents himself to be anotherperson of good credit. Again, error may be made about thesubject-matter of the contract, where the parties are notdealing with the thing that they think they are. Forexample, a life policy may be sold in the belief that thelife assured is alive and well, when in fact he is dead.The standard texts on the subject present the law as acomplicated network of legal doctrine, in which theseerrors are categorised and different lines of authorityapplied to them. This can result in different techniquesof decision being adopted from case to case. It seems tous, that there is a single thread of common sense whichruns through this patchwork of dogma. It is that the lawmust strike a balance between avoiding the unfairness ofholding a party to an inappropriate transaction which wasnot fully assented to, and protecting other parties tothe contract (and those claiming under them) who have alegitimate interest in seeing the contract performed.Whatever the skill and sophistication which may havegone into the formulation of the present legal doctrines,they must ultimately be justified, if they can bejustified at all, by reference to that purpose.


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6. The present law is open to a number of fundamentalcriticisms. The most obvious is that it often reliesupon "tests" for mistake which are inherently meaningless.This makes it difficult for courts to explain theirdecisions rationally, or achieve consistency in similarcases. The most outstanding example is a trilogy ofEnglish cases, in each of which a rogue purchased goodsby representing himself to be someone else of good repute,who was not known to the seller except by name. Theseller in each case believed the rogue, and gave himcredit, and the question was whether the contract wasvoid for mistake as to identity, in which event theproperty would not pass to the rogue and an innocentperson to whom the rogue had sold it could not asserttitle as against the original seller. In Phillips v.Brooks Ltd. [1919] 2 K.B. 243, it was held that propertydid pass to the rogue. In Ingram v. Little [1961]1 Q.B. 31, it was held that property did notpass.Finally, in Lewis v. Averay [1972] 1 Q.B. 198 it washeld that property did pass. Together the cases seemto stand for the unhelpful proposition that if the seller"intends" to deal with the rogue (represented to be thereputable person) there is no vitiating mistake, while ifhe "intends" to deal with the reputable person (representedto be the person standing before him) the contract is void(see Ingram v. Little, supra, at 59, per Pearce L.J.).The unsatisfactory nature of the distinctions drawn inthis area was discussed by Glanville Williams, "Mistakeas to the Party in the Law of Contract" (1945) 23 Can.B.R. 271, yet nothing occurred in the later decisions whichin any way clarified the law. Other attempts at "defining"operative mistake have proved equally fruitless. Mentionmay be made here of the test for mistake as to thesubject-matter, namely that it relate to an "essentialcontractual assumption"; clearly, judges have helddiffering views on what is meant by this test (see, e.g.


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the differing judgments in Magee v. Pennine Insurance Co.Ltd. [1969] 2 Q.B. 507, esp. per Fenton Atkinson L.J.at 517). Mention might also be made of a curious rulerelating to offers made to persons who are known to havemisunderstood them. If A sells oats to B, knowing thatB wrongly believes the oats are old oats and thereforesuited to his purpose, then the contract is valid as asale of the new oats. If, on the other hand, A sellsthe oats to B, knowing that B wrongly believes that heis contracting for old oats, then the sale is eithervoid for mistake, or else to be interpreted in the wayB understood it (Smith v. Hughes (1871) L.R. 6 Q.B. 597,608 per Blackburn J., and cf. comments in Stoljar,Mistake and Misrepresentation; A Study in ContractualPrinciples (1968), 35). That such illusory distinctionsshould exist, and that such important consequences shoulddepend upon them, seems to us a reproach to the law.

7. A further criticism is that the law appears tohave difficulty in coping with the concept of negligencein this area. We have already voiced our concern at theintrusion of the concept of negligence into the ordinarylaw of contract. In the Report on Misrepresentation andBreach of Contract, we said at p.17,

"Future cases may demonstrate further over-lappingof the areas of contract and tort, but concernedas we are with the field of contract, the enforce-ment of undertakings, we incline to the view thatnegligence is irrelevant."For a long time, courts dealing with the law of mistakewere disposed to hold that carelessness was not a relevantconsideration in cases of mistake. In the case of nonest factum at least, however, this trend was reversed bythe judgments in the House of Lords in Saunders v. AngliaBuilding Society [1971] A.C. 1004, where it was indicatedthat negligence in signing a document would be a bar tothe plea of non est factum, no matter how grosslymistaken the signer might have been. In Australia, some


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difficulties have been resolved by the High Court ofAustralia in Petelin v. Cullen [1975] 6 A.L.R. 129.In cases of mistake as to subject matter, too, recentformulation of the doctrine might give some ground forargument that negligence is a relevant criterion for theexistence of fundamental mistake (see Solle v. Butcher[1950] 1 K.B. 671, 693, where it is said that the partyseeking equitable relief for mistake must not be "atfault"). It seems to us that carelessness, while it maybe relevant in apportioning any loss that has beenoccasioned to the parties as a result of their transaction,is not a helpful criterion in determining whether theother party to the contract should be entitled to enforcehis expectation interest, and thus make an unwarrantedprofit from another's carelessness. If, for example, Acarelessly signs a contract for sale for his Rover car,thinking that he is only selling his Mini, and the mistakeis discovered before the purchaser B has relied upon thecontract to his detriment, the mere fact of A's careless-ness hardly justifies B in insisting upon getting a Roverfor the price of a Mini. It may well be that a court,after cancelling a contract for fundamental mistake,, maylook at the aftermath and determine that one of the partieshas suffered loss as a result of the carelessness of theother, who ought therefore to make recompense as acondition of being granted relief. This approach is nowestablished as the proper method of dealing with thesituation where one party has received a mistaken paymentand acted on it to his detriment; see Thomas v. HoustonCorbett & Co. [1969] NZLR 151, noted [1969] 3 NZULR 323.It is an entirely different matter, however, to refuserelief altogether where there is carelessness, withoutregard to whether that carelessness has caused loss and,if so, what the extent of that loss was. We believethat this emerging trend in the law requires carefulexamination.


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8. A further criticism of the law of mistake, partic-ularly insofar as it relates to mistake as to subject-matter, is that it rests on theoretical foundations whichare suspect. There appears to be, in English and NewZealand law, a "double standard" for mistake. One is thestandard laid down in the cases purportedly decided underthe "common law". The other is a so-called "equitable"standard, first enunciated by Denning L.J., as he thenwas, in Solle v. Butcher, supra. He maintained thatthere are cases where a contract will not be void atcommon law but will be "voidable" in equity. Hisdoctrine finds some support in a few later English cases,and a considerable measure of acceptance among academicwriters. It has been doubted in Australia, however (seeSvanosio v. McNamara (1956) 96 C.L.R. 186, 196 ), and,although it has occasionally been referred to in NewZealand, there is only one judgment where it has beenunequivocally applied, Waring v. S.J. Brentnall Ltd.[1975] 2 NZLR 401. Even in that case, the learned judgefelt constrained to alter the formulation that DenningL.J. adopted (at 409). Thus, twenty-five years afterthe "equitable" doctrine of mistake was enunciated, itsauthority is not altogether free from uncertainty. Notonly that, but anyone who reads a standard text onmistake will be struck by the fact that quite categoricalstatements made in relation to common law mistake arequalified or contradicted when the author goes on todiscuss equitable mistake. This fact alone might wellbe thought to justify reform, since it introduces anunnecessary complexity and artificality into the law ofmistake. In America, a more uniform approach to theproblem is adopted (see e.g., 13 Williston on Contracts[13th ed. 1970], paras. 1542 et seq.) and it is difficultto believe that the problems involved in mistake are socomplex that they require more than one legal doctrineto unravel them.


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8.9. Perhaps the most important point is that theremedies presently available for mistake are drastic andinflexible. In a comparative study, "Effects of Mistakein Contracts" (1964) 13 I.C.L.Q. 798, Dr Sabbath showedthat the remedies for mistake are a great deal moreflexible in certain civil law systems, and pointed out,at pp. 808-9 that, by comparison,

"... the whole English system appears to betoo rigid. It is also imprecise, since therelationship between common law and equityin contractual mistake is not well settled."The conclusion of his study was that, while logically thequestion "what is operative mistake" and the question"what are the remedies for mistake" are distinct, inpractice the remedies available for mistake will affectits ambit. He sums the position up at p.828 in thisway,

"The principles upon which the courts interveneand the circumstances in which they do so areto a certain extent dependent upon the effectsof mistake^. As shown above, the scope ofoperative error remained restricted as far asits effects were too rigid and it evolved whenits effects progressed."This passage provides a useful perspective upon thedifficulties encountered with the law of mistake in NewZealand. If, as we believe, the remedies available incases of mistake are too inflexible, the courts will bereluctant to commit themselves to a clear policy indefining mistake. It may occasionally be necessary toshelter behind an ambiguous or meaningless definitionwhere the court can see that, if it holds there is amistake, the consequences on the parties would be unfair.It may also be tempted on occasion to adopt irrelevantconsiderations as a ground for refusing relief or, wherethere is earlier opposed authority, to refer to irrelevantcriteria in order to distinguish the earlier case andallow relief. These tendencies which, we think, areplainly discernible, must contribute to the generallyunsatisfactory state of legal doctrine.


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10. The case for statutory reform of the law does notrest with the considerations referred to in paragraphs5 to 9 above. Indeed it is fair to say that it is hardto point to any particular case in which injusticeappears to have been done simply because the court hasfound itself constrained by unsatisfactory doctrine.The rules are sufficiently nebulous for courts to achievewhat appears to be a just conclusion upon the need forrelief, but there are undoubtedly cases in which thecourts have felt themselves inhibited from reaching ajust result by the inflexibility of the nature of reliefavailable under the present rules. (Bell v. LeverBrothers Ltd. [1932] A.C. 161, discussed infra para. 27,is an example.) The case for statutory reform alsoincludes the weighing of more subtle considerations. Inthe first place, the difficulty of reconciling the largenumber of precedents entails that the preparation requiredof counsel before a mistake case is tried involves,unnecessary work and expense and requires on the part ofthe court an elaborate chain of reasoning fraught withsubtle distinctions. It is not without interest thatthe case of a vendor who agreed to sell a section of landhe did not own required the review of at least 39 earlierdecisions and itself occupies 20 pages of the Law Reports(Waring v. S.J. Brentnall Ltd. [1975] NZLR 401 ).Secondly, the same difficulty entails that seeminglycertain rules, each containing unqualified assertions,require reconciliation. Unless that is done, the law'sown credibility will, in the long run, be at stake.

C. OBJECTIVES OF REFORM

11. If the foregoing analysis is correct, reform mustachieve a great deal more than a redefinition of mistake.It must place the emphasis upon the remedies rather thanupon the tachnical definitions of mistake. Whether or


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not a particular mistake ought to result in relief beinggiven must depend in large measure, as it does now, uponthe judge's own sense of justice and caution. What arenow borderline cases, however, should be dealt with byrefinements of remedy rather than refinements ofdefinition. With this in mind, we see three broadobjects of reform:

(a) the establishment of certain principles todetermine whether or not the court hasjurisdiction to entertain a case ofmistake;

(b) the establishment of a much, wider rangeof remedies than is currently available;and

(c) the amalgamation of the present fragmenteddoctrines, some based upon mistake andothers based upon different legal devices,into a single body of law dealing with"mistake".

12. We are aware, however, that the conferring of anextensive and unlimited jurisdiction on the courts underthe name "mistake" would not be an unmitigated benefit.Such a doctrine could well supersede all other heads ofrelief, becoming a universal remedy in the case ofcontract disputes. Limitations must be placed upon thejurisdiction which will prevent that from happening.Moreover, doctrines such as "offer and acceptance","fundamental terms of the contract", and "failure ofconsideration" should not be excised from the lawaltogether, since they are not concerned solely withproblems arising from mistake. We also recognise that"operative mistake" is confined to that class of mistakewhich would justify a court in setting a contract aside,and does not extend to that type of error which is lessfundamental and merely justifies a court from/withholding


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an order for specific performance. Specifically, werecommend that any legislation based upon this Reportshould not affect -(1) the power of the court "to order rectification

of a deed or other document;(2) the power of the court to intervene on the

grounds of misrepresentation; and(3) the power of the court to withhold a decree

of specific performance.It seems to us that the court's powers in these respectsdo not require statutory modification as part of thereform of the law of mistake.13. The Committee recognises that the circumstancesin which a person can disclaim his deed raises consider-ations different from those with which we are concernedin this report. It is quite possible for situationsto occur where a person would be able to obtain reliefunder the doctrine of non est factum but not underclause 5 of the draft bill. Accordingly we havespecifically provided in clause 4(2) that our proposedreform will not impinge upon the scope of the doctrine.

D. WHAT IS A "MISTAKE" AND A "MISTAKEN CONTRACT"?14. One of the most difficult problems in this area ishow to define mistake. It has been argued (Rabin, "AProposed Black-Letter Rule Concerning Mistaken Assumptionsin Bargain Transactions" (1967) 45 Tex. L.R. 1273) that aset of rules could be devised, for inclusion in a statute,which would define precisely when there would be operativemistake. Professor Corbin, however, observes,

"Cases involving mistake are difficult ofclassification because of the number and


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variety of factors to be considered. Thesefactors are found in many combinations. Thecitation of authorities for a rule stated ingeneral terms is made perilous by this fact.It is equally perilous, and it may be positivelyharmful, to construct any rule of law, unless itis so limited as to be applicable in a particularcombination of many factors. If this exactcombination does not recur, what we really haveis merely one precedent, not a rule."(3 Contracts (Rev. ed. 1960), 583)

We have found little in existing classifications ofmistake which might form the basis for a comprehensivedefinition of mistake, and to this extent are inagreement with Professor Corbin. At the same time, thedefinition of the court's jurisdiction is not a matterwhich can be left solely to the court's own discretion,since there might then be the danger, to which we havealready referred, that the law of mistake might eventuallysupplant the rest of the law of contract. In any event,the ambit of mistake is no doubt a matter on which thejudges themselves would appreciate statutory guidance.Notwithstanding the difficulties of definition, therefore,we feel bound to put forward some statutory descriptionof "mistake". This is not intended as a definition inthe full sense, in that situations may fall within itwhich, on detailed consideration, do not warrant thegranting of any relief at all. On the other hand,it does provide a definition of the outer limits ofmistake, since we recommend that no case which does notcomply with the description should be open to consider-ation under the proposed statutory reform.

15. The type of "mistake" that is generally envisagedin this area is a mistake of fact. A life insurancepolicy is sold, for example, when the parties are unawareof the fact that the life insured is dead. But errorsas to other matters to do with the contract may be equallydisastrous; for example, horse-beans may be sold onthe basis of an opinion, held by both parties, that they


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would pass as "feveroles" in another part of the world(e.g. Frederick E. Rose (London)Ltd. v. William H.Pim Jnr. & Co. Ltd. [1953] 2 Q.B. 450 ). Relief formistake has occasionally been refused, in the decidedcases, because the error has been one of "opinion","expression" of the terms of the contract, or of "law".At the same time, counter examples could also be givenwhere, on other occasions, courts have given relief forwhat on proper analysis could be said to be an errorof "opinion", "expression" or "law". We do not believethat any arbitrary restriction should be placed uponthe ambit of any proposed reform, and recommend thatthese types of mistake be included. At the same time,we recognise that such mistakes will generally be moredifficult to bring within the tests which have to besatisfied before relief can be granted.

16. Mistake affects contracts, under the present law,in one of two ways which need to be distinguished ifreform is to be fully effective. In one case, thecontract becomes voidable on account of the mistake;an example would be the situation where the equitabledoctrine of mistake as to subject-matter is invoked.In the other case, it is not the mistake but the state ofaffairs about which the parties were mistaken which bringsthe contract down. For example, in cases of mistakenidentity, the contract might be regarded as void becausethere is no contract, the false offeree being unable toaccept an offer addressed to someone else. The firstclass of case may be described as "mistaken contracts",since there is a contract, but it is liable to berescinded or otherwise affected as a result of a mistake.The second may be termed "mistaken apparent contracts",since there is no contract, even though the parties mightact for some time in the mistaken belief that a contractexists. Unfortunately, it is not altogether clearwhich types of mistake give rise to a "mistaken con+--


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14.and which to a "mistaken apparent contract". Sometheorists, for instance, argue that common law mistakeas to subject-matter involves, not relief for mistake,but the failure of a fundamental term of the contractwithout the fulfilment of which the contract cannotstand (Slade, "The Myth of Mistake in the English Lawof Contract" (1954) 70 L.Q.R. 285, 407) though not alltheorists accept that view. From the point of view oflaw reform, there does not seem much merit in perpetuatingsuch a distinction in a code governing the general law ofmistake. However, the difference has to be taken intoaccount in implementing the scheme, since there is littlepoint in giving the court the power to set aside acontract, or award restitution or compensation under it,if it is not a contract at all in the eye of the law.We recommend tSiat the existence of both types of case berecognised in the legislation, but that the courts begiven the same general powers in the case of mistakenapparent contracts as they would have in the case ofmistaken contracts, as long as one or both parties haveacted upon the faith of the validity of the "contract".

17. One type of mistake, however, needs to be excludedfor reasons of general legal theory. This is a mistakeas to a party's expectations from the contract. If Aagrees to build a house for B at a fixed price, and hisexpectations of profit are frustrated as a result ofunexpected inflation, this is not a matter for reliefunder the law of mistake. If there is any remedy at all,it lies in the law of frustration. This type of errorshould therefore be specifically excluded. Of course,the frustration of expectation may come about as a resultof a state of facts existing at the time of the contract,whose existence or significance was not known when it wasentered into, in which case there might arguably be a"mistake".

18. The definition of operative mistake which most


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frequently recurs in the cases is that it is "fundamental"mistake. This in itself, of course, is too "broad to bea satisfactory description, but on further analysis itbreaks down into three elements which also are found inmost of the cases. Firstly, the mistake must relate tosome matter which is so important that it is in the mindsof the parties at the time they contract. Secondly, theparties themselves must not have allocated the risk oferror as to that matter in their contract. Thirdly, theerror must have a significant effect on the operation ofthe contract. There may be other elements entailed inthe concept of "fundamental" mistake, but these threeseem a satisfactory basis for a working description.

19. We consider that it should be essential tooperative mistake that either

(i) the mistake was made by one party, andknown to the other; or

(ii) the mistake was made by both parties; or(iii) the mistake was in respect of a particular

matter on which one party entertained onebelief, and the other party entertainedanother.

It has long been established that a party has a muchgreater chance of getting relief if he establishesthat the error is "mutual", that is to say, that bothparties to the contract believe erroneously that a certainstate of facts exists, than if he can prove only a"unilateral mistake", that is to say, that while he ismistaken the other party either knows the facts, orelse the existence of those facts is a matter ofindifference to him. (In adopting this terminology, weare aware that we are departing from the usage coined byCheshire and Fifoot's Law of Contract, which willprobably be more familiar to New Zealand lawyers.) Forexample, if an insurance policy is sold, and both parties


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believe the life insured is fit and well when he is in ,fact dead, there is a "mutual" error, for which reliefis likely to be given. But if the buyer of the policyknows that the life insured is dead, or has no beliefone way or the other, then the error is "unilateral",and the seller will have much more difficulty inpersuading a court to allow him relief, though in someinstances he may succeed. This is logical, because inthe first case it will be clear that the price has beenfixed upon an erroneious basis, and the buyer unjustlyenriched as a result of the parties' mi-stake, whereas inthe second case the buyer's unjust enrichment will bemuch less clear. A distinction along these lines seemsto us to be a justifiable basis for discriminatingbetween deserving and undeserving claims of mistake.Some refinement, however, is required. Sometimes theparties have different beliefs in their minds about thesame subject. In Raffles v. Wichelhaus (1864) 2 H. &C. 906; 159 E.R. 375, for example, a contract referredto the ship "Peerless" from Bombay, which seemed clearenough, except that there were two ships of that descrip-tion, and the parties had different ships in their minds.This type of mistake should be covered. So too shouldthe situation where one party knows of the other's mistakeand remains silent. It has been recognised in recenttimes that he should not be entitled to have the errorrelegated to the status of a "unilateral" error wherehe knew that the other party was mistaken. (See Mageev. Pennine Insurance Co. Ltd., supra, at 514 per LordDenning M.R.; cf. Atiyah and Bennion, "Mistake in theConstruction of Contracts" (1961) 24 M.L.R. 421, 422-3.)At least such a person ought reasonably to be exposed tothe risk of an investigation under the proposed reformof the law of mistake, even if in the end the courtdecides that relief should not be granted against him.

20. The Committee has devoted a good deal of time tothe consideration of the question whether or not the


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classes of mistakes for which relief should be availableshould include mistakes made by one party which, in allthe circumstances, ought reasonably to have been apparentto the other parties, but where the evidence falls shortof establishing actual knowledge of the-mistake. TheCommittee has concluded that this notion should not beadopted. This conclusion is based upon the generalproposition that the law of contract is concerned withthe enforcement of agreements independently of thequestion whether such agreements were prudently orimprudently made. On this basis, the appropriateenquiry under the law of contract is, we think, anenquiry as to whether or not the parties were in agree-ment. Where only one of the parties has been mistaken,we do not think that relief should be available to himunless the evidence is sufficient to show that the otherparties knew of his mistake. That is not to say thatthe courts will be precluded from granting relief by aself-serving protestation of igno ran ceof the mistake.21. The Committee has also given a great deal ofattention to the question whether relief should be avail-able where the mistake relates to the interpretation ofthe terms of the contract. Here the Committee sees aneed to proceed with great caution. It would be goingmuch too far, we think, to enable a party who has failedin a dispute over the interpretation of the contract toobtain relief from his promise on the grounds that he hadentered into' the contract in the mistaken belief that hethought the words which by common consent had been adoptedby the contracting parties meant something different fromthe meaning ascribed to them by applying the ordinaryprocesses of the construction of contracts. This aspectof the matter has given us a good deal of concern. Someof us have in practice been concerned,in cases where, in-the drafting of complex contracts, there has been acommunication by one side to the other, making it clear


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that the particular words incorporated in the contractare understood to carry a particular sense. If theother parties know of that understanding on the part ofone of the parties, but that understanding does not prevailin a court of construction of the written document, itdoes seem rather hard to deny relief. The Committeenotes that in such cases, the remedy of rectificationwill be available if it can be shown that the parties didin fact reach an agreement which has not been correctlyrecorded in the document they have signed. I At presentwe do not think that the door should be opened to theassertion that a party should be relieved from his contractmerely because he may have interpreted the words in asense different from that adopted by a court of construction.If he can show that the meaning he had ascribed to the wordswas also adopted by the other parties to the contract, thenhis proper remedy is to have the contract rectified. Ifhe cannot show that, then we think the security of thecontractual relationship requires that he should be held tothe interpretation of the contract as settled by theappropriate process of construction. These considerationsdo not, of course, apply to the interpretation of adocument other than the contract in question, and on thatground we have made it clear in clause 2(2) of the draftbill that a mistake as to the interpretation of suchextraneous documents is a mistake of law.

We need to mention the special case of errors oftranscription. These are becoming more common. Where,for example, an offer is made in dollars, the decimalpoint may be displaced. Prices may be given withreference to a mistaken unit of volume or quantity. Wedo not see these kinds of errors as errors of inter-pretation of the document, and we think that reliefshould be available in those cases upon the principlesWe have outlined in paragraph 19.


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22. This analysis encounters some difficulties wherethere are three or more parties to a contract. Forexample, if A and B sell their jointly-owned house to C,a situation might arise in which A and C are fundamentallymistaken, but the true facts are known to B, or else areof no concern to him. For instance, C might in factalready be the equitable owner of A's share, though notof B's. It seems that, in such a case, the logicaloutcome would be that C could seek relief as against A,but would not be able to obtain relief against B, unlessB knew that C was mistaken, or unless C had some othercause of action against B. The relief granted as betweenA and C, therefore, would have to be carefully framed toensure that B's rights against C were not prejudiced.We believe that, with the wide remedial powers we proposelater in this report, the comparatively rare situations inwhich such problems arise could be fairly dealt with onthat basis.

23. We also consider that it should be a bar to relieffor mistake that the contract itself puts the risk oferror on one or other of the parties. If the partieshave provided for the events that have occurred, then itseems impossible to argue that their contract has becomeinappropriate to the real situation, which they did notknow. This view of the matter makes it difficult, inour view, to support the approach of Chilwell J. inWaring v. S.J. Brentnall Ltd., supra. The case concerneda vendor who agreed to sell property of which, unbeknownto him, he was not the owner. The learned judge heldthat the mistake was a fundamental one, but it was notunconscientious for the buyer to insist on the contractsince the seller had undertaken to give a good titlewhether or not he had one at the date of sale. We findit difficult to see how such an error could be "fundamental"if the seller had undertaken to sell the property in anyevent, and it is to be hoped that the legislation we


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recommend would make that clear. Of course, in somecases it might be argued that an error is so fundamentalthat a clause purporting to allocate risk cannot apply-to it (see e.g., the criticism in 3 Corbin on Contracts(Rev. ed. 1960), para. 604 of Clare v. Lamb (1875) L.R.10 C.P. 334), but that seems to be a matter of construct-ion. On the whole, it seems wrong in principle to holdthat a mistake is "fundamental" while at the same timesaying that the contract has provided for it.

24. Finally, we believe that, in addition to theforegoing requirements, it should be shown that the errorsignificantly affects the operation of the contract and,in particular, that the exchange of values given by theparties has become disproportionate, or some particularobligation has become unduly onerous. We see the law ofmistake as essentially prgamatic, concerned with themaintenance of substantial justice in contracts ratherthan with the perpetuation of an idealistic concept of"consent". The mere fact that a contract has becomesomewhat different from what was intended ought not towarrant relief unless the contract has also become unfair.

E. WHAT RELIEF SHOULD BE AVAILABLE?25. We believe that, once it has been established thata case is one in which the court has jurisdiction to act,and, upon the merits of the case, some relief ought to begiven, it is desirable to allow the courts a widediscretion to make such order as best meets the needs ofthat particular case. We have already advocated thispolicy in relation to remedies for breach and misrepre-sentation. A similar approach which we also recommendedappears to be operating successfully under the IllegalContracts Act 1970. It is equally applicable here. Themere fact that a contract is legally binding ought not toprevent the court from setting it aside if that is thebest way of meeting the remedial problems. Conversely,the fact that a contract is technically a nullity oughtnot to prevent a court from validating it if the justice


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of the case so requires. As has already been pointedout, we believe that many of the difficulties in thepresent law have sprung from the fact that the remediesin the common law are insufficiently flexible. In anyproposed reform of the law of mistake, artifical orarbitrary limitations ought not to be placed on the courts'remedial powers.

26. If the contract or apparent contract is set aside,the same consequences should follow as occur when acontract is frustrated. These are set out in theFrustrated Contracts Act 1944, and it seems to us thatthey could be adapted with little difficulty to thepresent situation. Basically, their objective is toensure that all benefits conferred in pursuance of thecontract are either returned (in the case of money) orpaid for (in the case of services), subject to a rightto set-off any expenditure or other detriment which hasbeen incurred under the contract.27. If the contract or apparent contract is validated,the court should have power to make a monetary award inthe form of restitution or compensation. This would, inour view, be a most useful adjunct to the courts' presentpowers. An example where it might have been helpful isBell v. Lever Brothers Ltd. [1932] A.C. 161. In thatcase, Lever Brothers attacked a retirement settlement theyhad made with a former director and employee, Bell. Theydid not know that his employment contract was liable tobe terminated in any event as a result of previous breachesof contract, and claimed that they had on that accountmade the settlement under mistake. If this contentionwere correct, Bell's position would be seriouslyprejudiced. When he made the settlement, he was in astrong position to make a good bargain, because he washighly regarded for building up the business, and hisgraceful retirement facilitated a takeover which was


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pending at the time. Even if his pecadilloes had beenknown, he could still have made a good settlement. Atthe time of the action for rescission, however, thetakeover was long completed and the company regardedBell in a much less favourable light. The House ofLords, by a bare majority, refused to set aside thecontract for mistake. It seems not unreasonable toassume that the learned lords in the majority wereinfluenced by the adverse consequences to Bell ifrescission was ordered. Had they been given the powerto affirm the contract, but make some money award toLever Brothers, based upon an estimation of what theywould have had to pay if the true facts had been knownwhen the settlement was made, such a solution would haveappeared very'attractive. As it was, the common lawdid not permit that expedient. Nor could it; have beenadopted under the more modern cases purporting to apply"equitable principle", unless the remedy could in someway be enforced through an order for rescission (see e.g.the elaborate arrangements made in Solle v. Butcher supra.)

28. We are concerned that, in the present law, reliefmay be refused solely on the grounds of delay when theinitial unjust enrichment still remains with the oppositeparty. For example, in Leaf v. International Galleries[1950] 2 K.B. 86, a painting by an unknown painter wassold under the belief that it was a Constable. Thepurchaser sought rescission within the limitation period,but this was refused, one of the reasons being that therehad been too great a delay between the date of sale andthe date of the attempted rescission. If indeed therewas a claim to relief for mistake immediately after thesale (which is no doubt debatable), the seller got andretained an unjust enrichment by charging too much forthe painting. He still retained that enrichment whenthe buyer attempted to rescind, and it is difficult tosee how the mere fact of delay affected the justice of


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the case. While the reforms we propose would meet thisproblem too, we consider that a court should not beprevented from setting aside the contract, even afterlapse of time, or some act on the part of the mistakenparty which indicates that he no longer seeks rescission,if in all the circumstances at the date of trial, thatseems the fairest course to both parties.

29. We also think the court should have power tomodify the parties' contractual obligations where thisis necessary to meet remedial problems which have arisen.It is true that legal doctrine has hitherto been wary ofsuch a suggestion, since it involves imposing upon theparties obligations which they have not voluntarilyassumed. However, objections based upon this argumentare to a certain extent artificial, since even theenforcement of a contract with compensation to one of theparties involves the other party, strictly speaking, inobligations he did not agree to. In terms of legaltheory, the parties surrender their legal "autonomy"when they agree to work together under their contract.If that contract is quite inappropriate to the true stateof affairs, and there is no other way of extracting themfairly from their predicament, then a new set ofobligations should be supplied in its place. Otherwise,the court would have to grant some less satisfactoryremedy which would leave one of the parties (there is noway of telling in advance which it would be) in a positionof diasdvantage. He is unlikely to be mollified by beingtold that the court has thereby preserved his "autonomyof will". It seems to us that there is ample precedentfor such a course in the Illegal Contracts Act 1970.

F. EFFECT ON THIRD PARTIES30. In widening the courts' powers to deal with theeffects of mistake as between the parties, it is not


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proposed that the rights of a third party who hasacquired property by virtue of that contract should bedetrimentally affected. Indeed, his position is some-what improved, in that we recommend that he should beentitled to apply, along with the parties to thecontract, for relief where there has been a mistake.Thus, in cases such as Ingram v. Little [1961] supra,where it was held that a mistake as to identity vitiateda contract of sale and thus destroyed a bona fidepurchaser's claim of title, the purchaser might under ourreform apply for the exercise of the court's discretionin his favour. On the other hand, if the third partyhas notice of the infirmity of a transaction, or if he isa volunteer, then there is no reason why relief should notbe awarded against him as it would be against the partyto the contract through whom he claims.

G. DRAFT LEGISLATION31. For the foregoing reasons we recommend thatlegislation be enacted in accordance with the draftBill annexed.

For the Committee

( L t Q__ ChairmanU T May 1976MEMBERS;Mr C.I. Patterson (Chairman)Mr B.J. CameronProfessor B. CooteMr D.F. DugdaleProfessor E.P. EllingerMr J.R. FoxMr J.S. HenryMr . liesMr J.H. WallaceMr A.E. Wright (Secretary)


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CONTRACTUAL MISTAKES

DRAFT BILLA BILL INTITULED

An Act to reform the law relating to the effect ofmistakes on contracts

1. Short Title - This Act may be cited as theContractual Mistakes Act 1976.

2. Interpretation - (1) In this Act, unlessthe context otherwise requires, -

"Court" means the Supreme Court or a Magistrate'sCourt that has jurisdiction under section 8 ofthis Act:

"Mistake" -(a) Means a mistake, whether of law or of fact;

and(b) Includes -

(i) An erroneous opinion; and(ii) An erroneous calculation; and

(iii) An error in the manner in which adocument is expressed; but

(c) Does not include any matter of expectationwhich concerns, or is dependent on, an eventoccurring or failing to occur after a part-icular contract is entered into.

(2) For the purposes of this Act, and withoutlimiting the meaning of the term "mistake of law", amistake in the interpretation of a document is a mistakeof law.

(3) There is a contract for the purposes of thisAct where a contract would have come into existence but


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for circumstances of the kind described in section5(1)(a) of this Act.

3. Act to bind the Crown - This Act shall bindthe Crown.

4. Act to be a Code - (1) Except as otherwiseexpressly provided in this Act, this Act shall haveeffect in place of the rules of the common law and ofequity governing the circumstances in which relief maybe granted, on the grounds of mistake, to a party to acontract or to a person claiming through or under anysuch party.

(2) Nothing in this Act shall affect -(a) the doctrine of non est factum:(b) The law relating to the rectification of

contracts:(c) The law relating to undue influence, fraud,breach of fiduciary duty, or misrepresent-

ation^ whether fraudulent or innocent:(d) The provisions of the Illegal Contracts Act

1970 or of sections 94A and 94B of theJudicature Act 1908.

(3) Nothing in this Act shall deprive a Court ofthe power to exercise its discretion to withhold a decreeof specific performance in any case.

5. Grounds for granting relief - (1) A Courtmay in the course of any proceedings or on applicationmade for the purpose grant relief under section 6 of thisAct to any party to a contract -

(a) If in entering into that contract:(i) That party was to the knowledge of the

other party or of one or more of the


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parties to the contract (not being aparty or parties having substantiallythe same interest under the contract asthe party seeking relief) relying on amistake; or

(ii) All the parties to the contract wererelying on the same mistake; or

(iii) That party and at least one other party(not being a party having substantiallythe same interest under the contract asthe party seeking relief) were eachrelying on a different mistake about thesame matter of fact or of law; and

(b) The mistake resulted at the time of thecontract in a substantially unequal exchangeof values or in the conferment of a benefit,or in the imposition or inclusion of anobligation, which was in all the circumstancesdisproportionate to the consideration therefor;and

(c) Where the contract expressly or by implicationmakes provision for the risk of'mistakes, theparty seeking relief is not obliged by a termof the contract to assume the risk that hisbelief about the matter in question might bemistaken.

(2) For the purposes of an application for reliefunder section 6 of this Act in respect of any contract, amistake, in relation to that contract, does not include amistake in its interpretation.

6. Nature of relief - (1) Where by virtue ofthe provisions of section 5 of this Act the Court haspower to grant relief to any party to a contract, it maygrant relief not only to that party but also to anyperson claiming through or under that party.


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(2) The Court shall have a discretion to makesuch order as it thinks just and in particular, but notin limitation, it may do one or more of the followingthings:

(a) Declare the contract to be valid andsubsisting in whole or in part or for anyparticular purpose:

(b) Cancel the contract:(c) Grant relief by way of variation of the

contract:(d) Grant relief by way of restitution or

compensation.(3) An application for relief under this section

may be made by -(a) Any person to whom the Court may grant that

relief; or(b) Any other person where it is material for

that person to know whether relief under thissection will be granted.

(4) The Court may by any order made under thissection vest any property that was the subject of thecontract, or the whole or part of the consideration forthe contract, in any party to the proceedings or maydirect any such party to transfer or assign any suchproperty to any other party to the proceedings.

(5) Any order made under this section, or anyprovision of any such order, may be made upon and subjectto such terms and conditions as the Court thinks fit.

7. Rights of third persons not affected - (1)Nothing in any order made under this Act shallinvalidate -

(a) Any disposition of property by a party to a


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mistaken contract for valuable consider-ation; or

(b) Any disposition of property made by orthrough a person who became entitled to theproperty under a disposition to whichparagraph (a) of this subsection applies -

if the person to whom the disposition was made was not aparty to the mistaken contract and had not at the time ofthe disposition notice that the property was the subjectof, or the whole or part of the consideration for, amistaken contract and otherwise acts in good faith.

(2) In this section -the term "disposition" has the meaningassigned to it by Section 2 of theInsolvency Act 1967;the term "Mistaken Contract" means acontract entered into in the circum-stances described in Section 5(1)(a) ofthis Act.

8. Jurisdiction of Magistrates' Courts - (1) AMagistrate's Court shall have jurisdiction to exercise anyof the powers conferred by section 5 or section 6 of thisAct in any casfe where -

(a) The occasion for the exercise of the powerarises in the course of any civil proceedings(other than an application made for thepurpose of obtaining relief under section 6 ofthis Act) properly before the Court; or

(b) The value of the consideration for the promiseor act of any party to the contract is notmore than $3,000; or '

(c) The parties agree, in accordance with section37 of the Magistrates' Courts Act 1947, that


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a Magistrate's Court shall have jurisdictionto hear and determine the application.

(2) For the purposes of section 43 of the Magis-trates1 Courts Act 1947, an application made to aMagistrate's Court for the purpose of obtaining reliefunder section 6 of this Act shall be deemed to be anaction.

9. Application of Act - This Act shall not apply-to contracts entered into before the commencement of thisAct.

132.181.2.68 data library4 law reports concomlaw 274530

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