Contract is formed on the objective test. At common law very difficult to make a contract void for common mistake. Equity has special rules (but voidable only).
Two main requirements for an operative common mistake at law:
1. The mistake must be shared; and
2. The mistake must be fundamental.
Common mistake rendering contract void
Absence of consideration (contract void) vs failure of consideration (contract not necessarily void)
Common law mistake requires ‘total failure of consideration’. If the consideration for a payment fails totally it may be recovered by the payer, because it would unjustly enrich the payee to retain the payment in the circumstances.
Common law courts could not readily order the repayment of money where the consideration only partially failed. Could not be treated as void in these cases.
Non-existence of subject matter of contract
Easiest scenario; shared mistake and is fundamental.
Couturier v Hastie - (gave rise to SOGA rule) - Before contract was made, corn had started to ferment, and had been sold on.
Court of Exchequer Chamber emphasised that the case turned on the construction of the contract.
House of Lords unanimously supported the Exchequer Chamber judgment. Lord Cransworth LC emphasized that the whole question turned on the construction of the contract, and gave as the true construction that the contract showed that the parties contemplated ‘an existing something to be sold and bought’ and that if that something was sold and bought, then the benefit of the insurance should go with it.
Did not use term void or suggest that the contract was void. Holding was that it could not be enforced against the buyer.
Rejected a construction that the contract was for an adventure; ie the true subject matter is not the goods but the chance of their existence.
Can’t be more fundamental.
SOGA s 9: “ When there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void. “
Might expect same treatment of contract where subject matter never existed. HC in McRae clarified that this is not so.
McRae v Commonwealth Disposal Commission - different approach in that it all turned on the construction of the contract.
D purported to sell a non-existent wreck of a tanker to P.
In the leading judgment, Dixon and Fullagar JJ (with whom McTiernan J agreed) analysed Couturier and concluded that the question whether a contract is void for common mistake is primarily one of construction of the contract to ascertain ‘whether the contract was subject to an implied condition precedent that the goods were in existence. Prima facie, one would think, there would be no such implied condition precedent, the position being simply that the vendor promised that the goods were in existence.
Concluded impossible to imply such a term. ‘It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations.’
Seller made that assumption, but the buyers simply accepted the seller’s assurance that there is a tanker.
The only proper construction is that it included a promise by the Commission that there was a tanker in the position specified. The Commission contracted that the tanker was there.
Pointed out that meaning of Couturier was that since the contract was construed as one for the sale of specific goods, there was a total failure of consideration so far as the buyer was concerned, with the result that he was not liable for the price.
Buyer recovered damages.
Note: HC gave an alternative ground for not being able to rely on mistake; it arose from fault of its own servants (Commission’s) in recklessly, and without reasonable grounds, asserting the existence of the tanker at the specified locality. It seems there is a general principle prohibiting reliance on common mistake where there is an element of fault.
Svanosio v McNamara - D sells to land to P; P believes they are buying hotel on land as well, and that it is wholly on the land. Both parties under this mistaken assumption; part of hotel is on Crown land.
Could have sued for damages and said there was an implied undertaking that the whole of the hotel was on land subject to the sale, but they didn’t want to because they simply wanted the transaction set aside (at law or in equity) so they could recover their money.
Clearly a mistake as to the subject matter of the contract and its existence, but HC held valid contract.
Case illustrates the difficulty in arguing that a partial absence of subject matter has the effect of rendering the contract void where both parties believed the entire subject matter existed.
Dixon CJ and Fullagar J approved passage of Denning in Solle where he said that once parties have objectively agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground.
Dixon CJ and Fullagar J - equity couldn’t be used here because there’s a common mistake and it’s hard to see that there’d been any unconscionable behaviour on the part of the seller. Don’t deny that equitable mistake can be granted to set aside contract in this kind of situation, but on facts they’re not willing to do so.
Fact that it was sale of land seems to weigh heavily- there is a rule specific to land sales.
Mistakes as to acquiring an interest in property that already belongs to the buyer (res sua)
Cooper v Phibbs - basis for this group of authorities. Lease is taken out on land the tenant already owns (unbeknown to lessor and lessee). Held that such a transaction could be set aside in equity.
Person trying to lease the land hasn’t got title, and in this situation (according to Bell and McNarama too) contracts can be set aside.
Atkin LJ obiter in Bell says void at law, voidable in equity. In McNamara HC seems to treat these cases in equity.
Mistakes as to quality
Here performance is still possible question of how far the contract deviates from the parties’ common purpose.
Mistakes as to quality will not void the contract. Mistakes of substance or essence will.
In England the narrow common law doctrine is tempered by the broader doctrine of mistake in equity.
In Australia common mistake is equally narrow, but equity retains a role under the guise of unconscionability.
Bell v Lever Bros - D ended contract and paid compensation money. Both parties were under belief compensation money was required. Could D argue compensation contract payments were void for mistake?
HoL by majority said mistake may have been common, but not fundamental. The parties’ erroneous assumption that the service agreements were not terminable (except by consent) did not involve the actual subject matter of the contract but a mere quality thereof or motive therefor, and so were not of a sufficiently fundamental character.
Not a mistake like earlier cases, relating to the existence of a thing, but here was about the quality of service agreements (were they valid or not) and this was not fundamental.
Per Lord Atkin, test is ‘Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts?’ Everything hinges on construction of contract, and identification of the subject matter.
Per Lord Thankerton: to be a fundamental mistake as to quality, both parties have to regard the validity of the service as vital. Bell did not.
Case does accept that a contract can be void at law if the common mistake as to quality is fundamental.
Examples of mistake not sufficiently serious to merit relief
Purchase of an unsound horse believed to be sound
Picture believed to be by a master turning out to be a copy
Uninhabitable furnished house
Taylor v Johnson - HC accepted Lord Atkin’s speech in Bell as authority for the proposition that the formation of the contracts is to be determined objectively, with the consequence that, until the objective approach is displaced, there is a contract which remains binding unless and until it is set aside for fraud, failure of an agreed condition precedent or on some equitable ground.
Solle v Butcher - Denning LJ thought common law mistake was too narrow. Landlord and tenant enter into a lease believing the property free from rent controls. Per Bell, the mistake is not sufficiently fundamental; valid at law.
Denning thinks it is still voidable in equity (equitable common mistake, not equitable unilateral mistake as in Taylor). Equity will make a contract voidable provided that:
3. Provided party seeking to set it aside is not at fault.
Denning’s formulation of the equitable doctrine of common mistake in Solle has been recognised or accepted in several other English cases (Magee, Associated Japanese Bank, William Sindall). Has also been applied in Australia (Clasic International v Lagos).
But three points:
1. Many of the subsequent English cases involved Lord Denning.
2. Difficult to reconcile these cases with Bell, unless it is assumed that that the case was solely concerned with the issue of voidness (obiter from several speeches suggests otherwise).
3. Although Australian law accepts that there are cases in which rescission may be obtained on the ground of common mistake in relation to a fundamental matter, it is not clear that the formulation of Lord Denning in Solle is an accurate statement of the legal requirements.
Great Peace Shipping v Tsavliris
Equitable jurisdiction that Denning asserted was a significant extension of any jurisdiction exercised up to that point and one that was not readily reconcilable with Bell.
Terms of his judgment also left unclear the parameters of the jurisdiction. The mistake had to be ‘fundamental’ but how far did this extend beyond Lord Atkin’s test of a mistake ‘as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be?’
The majority decision in Solle was based on the assumption of a jurisdiction founded in equity to order rescission of a contract binding in law (which was a conclusion not open to them if Bell had established that common mistake had no effect on a contract unless it was so significant as to render the contract void).
Only possible to reconcile Solle with Bell by postulating that there are two categories of mistake, one that renders a contract void at law and one that renders it voidable in equity.
Conclusion: there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law.
Solle approved by HC in guarded terms in Svanosio but much more strongly in Taylor (per Mason ACJ, Murphy and Deane JJ).
Note that Taylor was a unilateral mistake case and they only approved parts of it.
QCA (Jerard and Atkinson JJA) in Australia Estates applied Great Peace Shipping (they mention Heydon J’s criticisms of Solle in a NSW case). However, it needs to be noted that this was a case of unilateral mistake and not common mistake, and therefore was not the appropriate case to be examining Great Peace Shipping in the first place.
QCA in Australia Estates v Cairns City Council adopted the approach of Great Peace Shipping in holding that 5 elements were required for common law to grant a remedy for common mistake:
1. there must be a common assumption as to the existence of a state of affairs
2. there must be no warranty by either party that the state of affairs exists
3. the non-existence of the state of affairs must not be attributable to the fault of either party
4. the non-existence of the state of affairs must render performance of the contract impossible
5. the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contract is to be possible.
