BUSINESS LAW – LECTURE 3

MISTAKE

IN Bell v. Lever Bros. Ltd. [1932] AC 161, 217 (Check Library), Lord Atkin said: "If mistake operates at all, it operates so as to negative or in some cases to nullify consent." Mistake negatives consent where it prevents the parties from reaching agreement, e.g. because they intend to contract about different things. It nullifies consent where the parties reach an agreement which is based on a fundamental mistaken assumption, e.g. if a contract is made to paint a portrait of someone who, unknown to either party, has just died. At law, the effect of mistake is to make a contract void; but this rule is confined within very narrow limits. It is thought to be in the interests of commercial convenience that, in general, apparent contracts should be enforced. In equity, mistake has a wider scope, but its effect is less drastic. Certain special rules apply to documents mistakenly signed.

MISTAKE NULLIFYING CONSENT

Fundamental Mistake at Common Law

Consent may be nullified if both parties make a fundamental mistake of fact. Associated Japanese Bank (International) Ltd v. Credit du Nord SA [1989] 1 WLR 255 (CHECK LIBRARY. In such cases, the extreme injustice of holding one of the parties to the contract outweighs the general principle that apparent contracts should be enforced. The following types of mistake can be "fundamental" for this purpose.

(1) Mistake as to the existence of the subject-matter

Consent is nullified where both parties are mistaken as to the existence of the subject-matter.

Galloway v. Galloway (1914) 30 TLR 531

A separation deed between a man and a woman, who mistakenly thought that they were married to each other, was void, because it purported to deal with a marriage which did not exist.

(2) Mistake as to the identity of the subject-matter

Such a mistake usually arises where one party intends to deal with one thing and the other with a different thing. Here consent is negatived, and not nullified. Consent could, however, be nullified if both parties thought that they were dealing with one thing when they were in fact dealing with another. (Diamond v British Columbia Thoroughbred Breeders’ Society (1966) 52 DLR (2d) 146) Mistake as to a fundamental quality may sometimes be regarded as affecting the identity of the subject-matter.

(3) Mistake as to the possibility of performing the contract

Consent may be nullified if both parties believe that the contract is capable of being performed when this is not the case.

(a) PHYSICAL IMPOSSIBILITY.

Sheikh Bros. Ltd. v. Ochsner [1957] AC 455

A contract was made for the exploitation of sisal, growing on land belonging to A. The contract provided that B was to cut and process the sisal and to deliver an average of 50 tons of sisal fibre per month to A. It was held that the contract was void because the land was not capable of producing 50 tons of fibre per month.

(b) LEGAL IMPOSSIBILITY. A contract may be void if it provides for something to be done which cannot, as a matter of law, be done. For example, a person cannot acquire property which he already owns, and Lords Atkin and Wright have said that, if he purports to do so in the mistaken belief that the property belongs to the other contracting party, the contract is void. (Bell v Lever Brothers)

(b) COMMERCIAL IMPOSSIBILITY.

Griffith v. Brymer (1903) 19 TLS 434

A contract was made for the hire of a room on June 26, 1902, the day fixed for the coronation of King Edward VII, for the purpose of viewing the coronation procession. The contract was held void16 because, when it was made, the decision to postpone the coronation had (unknown to the parties) already been taken. Performance may have been physically and legally possible, but its commercial object was defeated.

(4) Mistake as to quality

Where the subject-matter of the contract lacks some quality which it is believed to have, the first question is whether the quality forms part of the contractual description of the thing. If it does and "the article does not answer the description of that which is sold," the contract is valid and the party who gave the description is in breach. If there is no contractual misdescription, mistake as to quality generally does not nullify consent.

Harrison & Jones v. Bunten & Lancaster [1953] 1 QB 646

A contract was made for the sale of " 'Sree' brand Calcutta kapok." It was held that the contract was valid even though both parties believed such kapok to be pure, when in fact it was impure, and therefore of no use to the buyer.

Leaf v. International Galleries [1950] 2 KB 86

The defendant sold the plaintiff a picture which they represented to have been painted by Constable. The plaintiff later tried to sell it and discovered it was not by constable. He sought recission and repayment of the purchase price.

Held: This remedy had been lost because it had not been exercised within a reasonable time as five years had passed.

The cases and examples concerning mistakes as to quality cannot be perfectly reconciled; but there is a principle which runs through them. A thing has many qualities. A car may be black, old, fast and so forth. For any particular purpose one or more of these qualities may be uppermost in the minds of the persons dealing with the thing. Some particular quality may be so important to them that they actually use it to identify the thing. If the thing lacks that quality, it is suggested that the parties have made a fundamental mistake, even though they have not mistaken one thing for another, or made a mistake as to the existence of the thing. The matter may be tested by imagining that one can ask the parties, immediately after they made the contract, what its subject-matter was. If, in spite of the mistake, they would give the right answer the contract is valid at law.

(5) Mistake as to quantity

Mistake as to quantity has generally been dealt with in equity; but it seems that it can also invalidate a contract at law. Cox v. Prentice (1815) 3 M & S 344

A silver bar was sold under a mistake as to its weight. The buyer (who was the party prejudiced by the mistake) obtained a verdict for damages for the difference in value between the weight of the bar as it was, and as it was believed to be. The court added that the plaintiff could have recovered back the price he paid for the bar, which may suggest that he had the option of treating the contract as void or valid.

MISREPRESENTATION'

MEANING OF "REPRESENTATION"

The general rule is that no relief will be given for a misrepresentation as such unless it is a statement of existing fact. There may, therefore, be no remedy if the statement falls into one of the following categories

a. Mere Puffs

These are statements which are so vague that they have no effect at law or in equity. To describe lane as “fertile and improvable” is mere sales talk which affords no ground for relief. Dimmock v Hallett (1866) LR 2 Ch App 21. But there is a liability for more precise claims, eg. that use of carbolic smoke-ball will give immunity from influenza. Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256. The distinction is between indiscriminate praise, and specific promises or assertions of veritable facts

b. Statements of Fact and of Opinion or Belief

Even where a statement is not so vague as to be a mere puff, it may nevertheless have no legal effect because is is not a positive assertion that the fact stated is true, but only a statement of the maker’s opinion or belief.

Bissett v Wilkinson

Assertions that a piece of land had the capacity to support 2,000 sheep have been held to be of this character as, the party making the statement had (as the other party knew) no personal knowledge of the facts on which it was based: it was understood that he could only state his belief.

c. Representations as to the Future

A representation as to the future does not, of itself, give rise to any cause of action unless it is binding as a contract. Thus if A induces B to lend him money by representing that he will not borrow from anybody else, and then does borrow elsewhere, he is not liable to B unless the representation is made part of the contract of loan or amounts to a collateral contract.

A person who promises to do something may simply be making a statement as to his future conduct; if so, he does not misrepresent a fact merely because he fails to do what he said he would do. But he may also be making a statement of

his present intention; if so, he does misrepresent a fact if, when he made the statement, he had no such intention. The courts tend to construe such statements in the second of these two ways in order to protect the interests of persons deceived by them."

Edgington v. Fitzmaurice (1885) 29 Ch D 459

The directors of a company induced the plaintiff to lend money to the company by representing that the money would be used to improve the company's buildings and to expand its business. In fact the directors intended to use the money to pay off the company's existing debts. They were held liable in deceit. Bowen LJ. said: "There must be a misstatement of an existing fact; but the state of a man's mind is as much a fact as the state of his digestion. ... A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact."

d. Statements of Fact and Law

At common law, there is no civil remedy for misrepresentation of law, as opposed to one of fact. In equity, too, a money claim cannot be based on a misrepresentation of law; and the same is probably true of claims for damages under the Misrepresentation Act 1967.

Misrepresentation and the Availability of Remedies

Where a representation does not have contractual force, it will only give rise to remedies if it is unambiguous and material and if the representee has relied on it.

1. Unambiguous

A statement may be intended by the representor to bear a meaning which is true, but be so obscure that the representee understands it in another sense, in which it is untrue. In such a case the representor is not liable if his interpretation is the correct one McInervy v Lloyd’s Bank Ltd [1974] 1 Lloyd’s Rep. 246 (Check Library)

2. Material

A misrepresentation generally has no effect unless it is material. It must be one which would affect the judgment of a reasonable person in deciding whether, or on what terms, to enter into the contract; or one that would induce him to enter into the contract without making such inquiries as he would otherwise make.

Lonrho PLC v. Fayed (2) [1992] 1 WLR 1

A representation as to the identity of the purchaser may be material where the vendor is willing to sell to X but not to Y. In such a case the vendor can rescind if the purchaser knows that the representation is material, even though he does not know why it is so regarded by the vendor. A misrepresentation may be material although the representor in good faith thinks that it is not material.

3. Reliance

The person to whom the misrepresentation was made must have relied on it. He therefore cannot rescind, or claim damages, for misrepresentation if the representation did not come to his notice, if he knew the truth, if he took a deliberate risk as to the truth of the matter stated, if he would have entered into the transaction even though he had known the truth,68 or if he relied on his own information.

Smith v. Eric S. Bush [1990] 1 AC 831

The plaintiffs in that case had bought a house with the aid of a mortgage, relying on a valuation which had been negligently conducted by a surveyor engaged by the lender. Their claim in negligence against the surveyor succeeded in spite of the fact that they might have discovered the truth if they had conducted their own independent survey for it was neither reasonable to expect them to take this step, nor likely that they would do so, since the house in question was one of modest value. But the House of Lords indicated that the position might be different on the purchase of commercial or industrial premises, or even of residential property of high value. The .principle appears to be that failure to make use of an opportunity to discover the truth may defeat claim for negligent misrepresentation where, but only where, it is reasonable to expect the representee to make use of the opportunity An express warning to the representee not to rely on the representation could also negative liability in negligence, just as it has been held to prevent a misrepresentation from being included in the resulting contract as one of its terms.

ILLEGALITY

St. John Shipping Corp. v. Joseph Rank Ltd. [1957] 1 QB 267

1.1 Types of Illegality

1.1.1 Contracts Involving the Commission of a Legal Wrong

(1) Contracts amounting to a legal wrong

(2) Contracts to commit a crime

Bostel Bros Ltd v Hurlock [1949] 1 KB 74

(3) Contracts to commit a civil wrong

Clay v. Yates (1856) 1 H&N

(4) Use of subject-matter for unlawful purpose

Langton v. Hughes (1813) 1 M & S 593

(5) Unlawful method of performance

St. John Shipping Corp. v. Joseph Rank Ltd

(6) Contracts to indemnify against liability for unlawful acts

Cointat v. Myham & Sons [1913] 2 KB 220

Osman v. J. Ralph Moss Ltd. [1970] 1 Lloyd’s Rep. 313

Brown & Jenkinson Co Ltd v Percy Dalton (London) Ltd. [1957] 2 QB 621.

The Nogar Marin [1988] 1 Lloyd’s Rep 412.

Gray v. Barr [1971] 2 QB 544

Tinline v. White Cross Insurance [1921] 3 KB 327

(7) Promises to pay money on the commission of an unlawful act

Beresford v. Royal Exchange Assurance [1938] AC 586

(8) Effect of changes in the law

St. John Shipping Corp. v. Joseph Rank Ltd.

1.1.2 Contracts Contrary to Public Policy: in General

Fender v St John Mildmay [1938] AC 1 13

(1) Agreements by married persons to marry

Spiers v. Hunt [1908] 1 KB 720

Fender v. St. John Mildmay

(2) Contracts interfering with the course of justice

(3) Trading with the enemy

Sovfracht (V/O) v Van Udens Scheepvaart en Agentuur Maatschappij (NV Gebr) [1943] AC 203

(4) Contracts restricting personal liberty

Norwood v. Millar's Timber and Trading Co. [1917] 3 KB 305

Denny v. Denny [1919] 1 KB 583 .

(5) Contracts in Restraint of Trade

Contracts which prevent or regulate business competition were at one time regarded as invariably void; and persons who made them were even threatened with imprisonment. But it came to be recognised that this inflexible attitude might defeat its own ends. A master might be reluctant to employ and train apprentices if he could not to some extent restrain them from competing with him after the end of their apprenticeship. And a trader might be unable to sell the business he had built up if he could not bind himself not to compete with the purchaser. The courts therefore began to uphold contracts in restraint of trade. Since then, the law has changed in that restraints are no longer prima facie valid; they are prima facie void, but can be justified if they are reasonable and not contrary to the public interest.

Mason v. Provident Clothing SS Supply Co. [1913] A.C. 724 (Check Library)

Eastham v, Newcastle United Football Club Limited

The defendant club employed the plaintiff as a professional footballer subject to the "retain and transfer" system. Under that system, a player who was "retained"93 by one club could not be employed by another; nor could he be transferred to another club without the consent of both clubs. The defendant club could not claim that this system protected either of the two traditional interests. But Wilberforce J. said that "it would be wrong to pass straight to the conclusion that no ... interest. . . exists." He considered other possible interests, such as the danger that, but for the "retain and transfer" system, all the best players might go to the richest clubs. He found that such consequences would not in fact follow if the system were abandoned; that there was thus no interest to be protected; and that the system was invalid.

A restraint is only valid if it goes no further than is reasonably necessary for the protection of the covenantee's interest. Reasonableness is determined by looking at the relationship between that interest and the covenant.

See Charlesworth’s, Business Law, 132-141

Mason v. Provident Clothing [1913] AC 724

Wyatt v. Kreglinger [1933] I KB 793

Nordenfelt Case [1894] AC 535

Bridge v. Deacons [1984] AC 705

PRIVITY

Only a party to a contract can sue on a contract.

Tweddle v Atkinson 1861

In this case the plaintiff had married Mr Guy's daughter. The plaintiff's father and Mr Guy, had agreed together that that they would each pay a sum of money to the plaintiff. Mr Guy died before the money was paid, and the plaintiff sued his executors. The action was dismissed - the plaintiff was not a party to the contract, which was made between the two fathers

FRUSTRATION

Under the doctrine of frustration a contract may be discharged if after its formation events occur making its performance impossible or illegal, and in certain analogous situations. At one time most contractual duties were regarded as absolute, in the sense that supervening events provided no excuse for non-performance.

Paradine v. Jane (1647) Aleyn 26 a tenant was sued for rent and pleaded that he had for about two years of his tenancy been dispossessed by act of the King's enemies. This plea was held bad. "When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract."

The doctrine probably never applied where the contract called for personal performance by a party who died or was permanently incapacitated; and another early exception to it was recognised in cases of supervening illegality. In Taylor v. Caldwell (1863) 3 B&S 826 Blackburn J. relied on the first of these exceptions (and on other analogous cases) as bases for formulating the general rule of discharge which has become known as the doctrine of frustration. The defendants in that case had contracted to allow the plaintiffs to use the Surrey Gardens and Music Hall "for the purpose of giving four grand concerts" on four designated days in the summer of 1861; the defendants were also to provide various side-shows and other entertainments in the gardens. The plaintiffs agreed to pay £100 on the evening of each of the designated days and to provide "all the necessary artistes." Six days before the first concert was to have been given, the hall was destroyed by an accidental fire, so that "it became impossible to give the concerts." It was held that the defendants were not liable in damages for the plaintiffs' wasted advertising and other expenses. The contract had been discharged because, in the words of Blackburn J., "the parties must from the beginning have known that it could not be fulfilled unless . . . some particular specified thing continued to exist," and in these circumstances it was "not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without the fault of the contractor."

The courts have refused to extend the doctrine beyond this point; for to do so might enable a party to claim relief merely because circumstances had changed so as to turn the contract, for him, into a very bad bargain.

National Carriers Ltd. v. Panalpina (Northern) Ltd. [1981] AC 675 (Check Library).

REMEDIES

A breach of contract is a civil wrong. In most cases, however, a breach of contract will involve only civil liability; with remedies will be with remedies available in civil proceedings. In such proceedings, the injured party may claim either specific relief, or damages or restitution.

Damages

Damages are compensatory

Damages are awarded to compensate the plaintiff.

(a) Loss TO Plaintiff the Criterion

In general, damages are based on loss to the plaintiff and not on gain to the defendant.

In a Scottish case (Teacher v Calder (1889) 1 F(HL) 39) a financier broke a contract to invest £15,000 in the business of a timber merchant and instead invested the same sum in a distillery. It was held that the timber merchant's damages were based on the loss to his business and not on the much larger profits which the financier had derived from the distillery.

Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 (CHECK IN LIBRARY)

(b) What Constitutes Loss

For the present purpose, loss includes any harm to the person or property of the plaintiff, and any other injury to his economic position. It may contemplate in limited circumstances injury to feelings. The question to what extent harm to the person includes injury to feelings is discussed later. In determining whether the victim has suffered loss, his overall position is taken into account.

The Baleares [1990] 2 Lloyd’s Rep. 130 (Check Library)

The court will similarly take the plaintiff's overall position into account in determining the basis on which damages are to be assessed: it will not generally order the defendant to pay an amount which will actually make the plaintiffs position better than it would have been, if the contract had been performed.

Pillips v. Ward [1956] 1 WLR 471 where a surveyor in breach of contract failed to draw his client's attention to the fact that the roof timbers of a house, which the latter was about to buy, were rotten. It was held that the client was not entitled to damages based on the cost of making the defects good. Such an award would put him into a better position than that in which he would have been if the contract had not been broken; for it would enable him to have a new roof with new timbers, which would be less expensive to maintain than an old roof with sound timbers. Hence the plaintiff was only entitled to recover the difference between the price that he paid and the value of the house when he bought it; or the difference between the price actually paid and that which would have been paid if the surveyor had made his report with due care. But where costs are actually incurred in remedying a breach, the principle that a plaintiffs overall position should not be made better, than it would have been if there had been no breach, is not an inflexible one.

Harbutt's "Plasticine" Ltd. v. Wayne Tank & Pump Co. Ltd. [1970] 1 QB 447 the plaintiff's factory was burnt down as a result of the defendant's breach of contract. It was held that the plaintiff could recover the cost of rebuilding the factory without making any allowance for the fact that he would then have a new (and therefore more valuable) factory. The case can be explained on the ground that the plaintiff had no reasonable alternative but to rebuild, or that he did so in order to mitigate his loss.

(c) Breach Having No Adverse Effect

A further consequence of the compensatory principle is that the plaintiff cannot recover substantial damages if the breach has not adversely affected his position.

Ford v. White [1964] 1 WLR 885 where the plaintiffs bought a house and adjoining plot for £6,350 after being advised by their solicitors that they could build on the plot. The solicitors had negligently and in breach of contract overlooked a covenant against building on the plot. The property subject to the covenant was in fact worth £6,350 but it would have been worth an extra £1,250 if there had been no covenant. It was held that the solicitors were not liable for this sum.52 The plaintiffs would not have bought at all, had they been told of the covenant (so that they did not lose the chance of a good bargain); nor had they paid more for the property than it was actually worth.

(d) No Punitive Action

Punitive (or exemplary) damages can be awarded in certain tort cases. Rookes v Barnard [1964] AC 1129 The purpose of such damages is not to compensate the plaintiff, nor even to strip the defendant of his profit, but to express the court's disapproval of the defendant's conduct, e.g. where he has deliberately committed a wrong (such as defamation) with a view to profit. As a general rule punitive damages cannot be awarded in a purely contractual action, since the object of such an action is not to punish the defendant but to compensate the plaintiff. Punitive damages are not available even though the breach was committed deliberately and with a view to profit.

Compensation for what?

The principle that damages are compensatory gives rise to the question: for what is it that the victim of a breach of contract is entitled to be compensated?

(a) Loss of Bargain

The object of damages for breach of contract is to put the plaintiff "so far as money can do it ... in the same situation . . .as it the contract had been performed.

East v. Maurer [1974] 1 Lloyd’s Rep 262 the plaintiff was interested in buying a hairdressing salon and was induced to buy one belonging to the defendant by the latter's fraudulent representation. It was held that the plaintiff could recover damages in respect of another such business in which he would have invested his money if the representation had been made, but not the profits which he would have made out of the defendant's business, if the representation relating to it had been true. In a contractual action, on the other hand, damages are recoverable as a matter of course for loss of the expectations created by the very contract for breach of which the action is brought. That is why damages of this kind are the distinctive feature of a contractual action.

(b) Reliance Loss

An alternative principle is to put the plaintiff into the position in which he would have been if the contract had never been made by compensating him for expenses incurred (or other loss suffered) in reliance on the contract.

McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377 for example the defendants were held liable for breach of a contract that there was a wrecked tanker lying in a specified position; and the plaintiffs recovered, inter alia, the 3,000 which it had cost them to send out a salvage expedition to look for the tanker.

(c) Restitution

A claim for restitution may not, strictly speaking, be one for "damages"; its purpose is not to compensate the plaintiff for a loss, but to deprive the defendant of a benefit.

(d) Incidental and Consequential Loss

Methods of Limiting Damages

To compensate a plaintiff fully for all loss that can, in some sense, be said to flow from a breach of contract would often lead to undesirable results. The law has therefore developed a number of rules for the purpose of limiting damages for breach of contract.

(1) Remoteness

A defendant is not liable for loss which is "too remote." The test of remoteness is whether the loss was within the reasonable contemplation of the parties; the application of this test gives rise to many problems. This is known as the Reasonable Contemplation Test . The general rules on this topic were formulated in Hadley v. Baxendale (1854) 9 Exch. 341 A shaft in the plaintiffs' mill broke and had to be sent to the makers at Greenwich to serve as a pattern for the production of a new one. The defendants agreed to carry the shaft to Greenwich but, as a result of their breach of the contract, its delivery was delayed so that there was a stoppage of several days at the mill. The plaintiffs claimed damages of £300 in respect of their loss of profits during this period. At the trial the case was left generally to the jury, who returned a verdict of £50 for the plaintiffs. The defendants successfully applied for a new trial on the ground of misdirection. Alderson B. stated the principles in accordance with which the jury should have been directed: "The damages . . . should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach." Here the stoppage was not the "natural" consequence of the delay: it could not have been contemplated by a carrier that delay in delivering the shaft would keep the mill idle. "In the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred." The plaintiffs might have had a spare shaft or been able to get one. Nor could the stoppage, though it was no doubt anticipated by the plaintiffs, have been contemplated by both parties at the time of contracting as the probable result of breach. "The only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made were that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill." The defendants were not told that any delay by them would keep the mill idle. If they had been told this, they might have attempted to limit their liability "and of this advantage it would be very unjust to deprive them."

These principles were reformulated in Victoria Laundry (Windsor) Ltd. v. New-man Industries Ltd [1949] 2 KB 528. The defendants sold a boiler to the plaintiffs, knowing that the plaintiffs wanted it for immediate use in their laundry business. The boiler was delivered some five months after the agreed date, so that the plaintiffs suffered loss of profits. Asquith LJ. said that the test of remoteness was whether the loss was "reasonably foreseeable as liable to result from the breach. This depended on the state of the defendant's knowledge. Every defendant had imputed to him knowledge of what happens in the ordinary course of things. He might also have actual knowledge of special circumstances which would enable a reasonable man to foresee extraordinary loss Here the defendants knew that the plaintiffs wanted the boiler for immediate use in their business: they were thus liable for loss of profits that would ordinarily result from such use. But they were not liable for loss of exceptionally lucrative government contracts, which the plaintiffs would have been able to make if they had received the boiler in time: they knew nothing of these contracts and could not reasonably have foreseen such loss.

The judgment in this case, and in particular the phrase "reasonably foreseeable as liable to result" gave rise to the view that the same test of "reasonable foreseeability that governs remoteness in tort applies also in contract. But this view can no longer be accepted after the decision of the House of Lords in The Heron II Koufos v C Czarnikow Ltd [1969] 1 AC 350. In that case a ship was chartered to carry sugar from Constanza to Basrah. At the time of contracting, the charterer intended to sell the sugar as soon as it reached Basrah. The shipowner did not actually know this- but he did know that there was a market for sugar at Basrah, and "if he had thought about the matter he must have realised that at least it was not unlikely that the sugar would be sold in the market at market price on arrival." The shipowner in breach of contract deviated and reached Basrah nine days late During these nine days the market price of sugar at Basrah fell; and it was held that the charterer was entitled to damages for the loss suffered by reason of the fall in the market. On the one hand, the House of Lords rejected the argument that in contracts for the carriage of goods by sea damages for delay were governed by a special rule, under which losses were too remote unless they were "reasonably certain to result."" On the other hand, the House also rejected the view that the test of remoteness m contract was "reasonable foreseeability," at least if this phrase referred to the very low degree of probability required to satisfy the test of remoteness in tort." Lord Reid said that if this test was laid down for contract in the Victoria Laundry case it was wrong. But when Asquith L J referred to loss reasonably foreseeable as liable to result" he may have had a higher degree of probability in mind; and in this sense his judgment was (subject to one qualification 3) approved by the other members of the House of Lords Various expressions are used in The Heron II to describe the degree of probability required to satisfy the test of remoteness in contract. There must be a "serious possibility" or a "real danger" or a "very substantial" probability of loss; it must be "not unlikely" or "easily foreseeable" that loss will occur. The result of the decision is that a higher degree of probability is required to satisfy the test of remoteness in contract than in tort. When used in contract cases, the word "foreseeability" refers to this higher degree of probability.

2. Loss Occurring in the Ordinary Course of Things

A defendant is (even without knowledge of special circumstances) liable if the loss occurs "in the ordinary course of things," that is, if the probability of its occurrence comes up to the standard described in The Heron II.

Mira v Aylmer Square Investments Ltd [1900] 1 EGLR 45; that a seller of poisonous cattle-food is liable for loss of the cattle to which it is fed.

3. Knowledge of Special Circumstances

In Hadley v. Baxendale it was suggested that the defendants might have been liable for the plaintiffs' loss of profits if they had known, at the time of contracting, that their delay would keep the mill idle. But mere knowledge of special circumstances is no longer regarded as sufficient. Something more must be shown; and attempts have been made in a number of later cases to define that additional requirement.

Home v. Midland Ry. (1873) LR 8 CP 131 the defendants contracted with the plaintiff to carry a consignment of shoes to London by February 3, but delivered it a day late. As a result of this delay, the plaintiff lost the opportunity of selling the shoes at an exceptionally high price. The defendants were not liable for this loss: they knew that the plaintiff would have to take the shoes back if they were not delivered by February 3, but not that he would lose an exceptional profit. Blackburn J. said that "in order that the notice [of special circumstances] may have any effect, it must be given under such circumstances as that an actual contract arises on the part of the defendant to bear the exceptional loss." But the decision can be explained on the ground that the defendants' knowledge of the special circumstances was incomplete; and later cases make it clear that there need be no express contract to bear the exceptional loss. Liability for loss caused by known special circumstances can perhaps be based on an "implied undertaking ... to bear it," but the reference seems to be to an undertaking implied in law (and not in fact), and so to mean that the defendant is liable for the exceptional loss, irrespective of any actual agreement to bear it.

4. What must be Contemplated

The view that a defendant is liable if he could contemplate the type of loss, as opposed to its degree, was put forward in H. Parsons (Livestock) Ltd. v. Uttley Ingham & Co. Ltd [1978] QB 791. The defendants were held liable for the loss of the pigs because they could have contemplated that, as a result of their breach, the pigs would become ill: it was not necessary for them to have contemplated that the pigs would suffer from the particular disease which affected them, and which turned out to be fatal. One explanation for this aspect of the case is that, where physical harm is caused, there is no need to show that its degree should have been anticipated. But Scarman LJ. added that the same principles applied in cases of financial loss, though in such cases "the factual analysis will be very different."

5. Scope of the Reasonable Contemplation Test

Causation

The statement that a plaintiff cannot recover damages because the breach “caused him no loss" is sometimes found in the cases (already mentioned) in which a state of affairs was clearly brought about by the breach, but was not disadvantageous to the plaintiff. Our present concern, however, is with cases in which there is a breach, followed by a state of affairs clearly disadvantageous to the plaintiff, but the defendant argues that the breach did not bring about that state of affairs. Monarch SS Co V Karlshamns Oljefabriker (A/B) [1949] AC 196. For example, a shipowner may be technically in breach of contract because his ship was not equipped with a proper medicine chest; but if the ship later foundered in a storm, the owners of goods on board could not claim that the breach was the cause of their loss.

Weld-Blundell v. Stephens [1920] AC 956 the plaintiff employed an accountant to investigate the affairs of a company and wrote him a letter defaming two of the company's directors. The accountant's partner negligently dropped the letter in the company's office, where it was picked up by the manager and shown to the two directors. They recovered heavy damages for libel from the plaintiff who, in turn, claimed this amount from the accountant as damages for breach of contract. The House of Lords gave two reasons for dismissing the claim. First, the plaintiffs liability for defamation existed quite apart from the breach of contract, which simply brought that liability to the directors' attention. Secondly, the loss was not caused by the breach, but by the act of the manager in showing the letter to the directors, and this act was not one which the defendant could have foreseen.

Mitigation

The plaintiff must take reasonable steps to minimise his loss; and secondly he must forbear from taking unreasonable steps that increase his loss. IThe Superhulls Cover Case (No. 2) [1990] 2 Lloyd’s Rep 431 (Check Library) .

If the plaintiff acts unreasonably in attempting to mitigate, he cannot recover extra loss which he suffers as a result.' Banco de Portugal v. Waterlow & Sons Ltd. [1932] AC 452 The defendants had contracted to print banknotes for the plaintiff bank, and in breach of contract delivered a large number of these to a criminal, who put them into circulation in Portugal. On discovering this, the bank withdrew the issue and undertook to exchange all the notes in question for others. The defendants argued that they were liable only for the cost of printing the notes: any further loss was due to the bank's own act. But the House of Lords, by a majority, held the defendants liable for the full face value of the notes as the conduct of the bank was reasonable, having regard to its commercial obligations towards the public.

Loss is sometimes said to be mitigated where some benefit in fact accrues to the plaintiff as a result of the breach.

Lavarack v. Woods of Colchester Ltd [1967] 1 QB 278. The plaintiff was wrongfully dismissed from his employment with the defendants and so freed from a provision in his contract with them that he should not, without their written consent, be engaged or interested in any other concern (except as a holder of investments quoted on a stock exchange). After his dismissal, the plaintiff (1) took employment with the X Co. at a lower salary than he had earned with the defendants; (2) acquired half the shares in the X Co.; and (3) invested money in shares in the Y Co. The shares in both companies having appreciated, it was held that the increase in the value of the X Co. shares, but not that of the Y Co. shares, must be taken into account in reducing the plaintiffs damages. The former was regarded as a disguised remuneration, while the latter was "not a direct result of his dismissal" but a "collateral benefit."

In Hussey v. Eels [1990] 2 QB 227 the plaintiffs had been induced to buy a house as their home by a misrepresentation that there had been no subsidence. More than two years later they decided to demolish the house and resold the site for one and a half time the price which they had paid, having obtained planning permission for two dwellings on the site. On the assumption that this resale yielded a profit to the plaintiffs, it was held that this was not to be taken into account: the wrong which had caused their loss had not also caused the gain as the resale was "not . .part of a continuous transaction of which the purchase . . . was the inception."

Contributory negligence

Where a plaintiff fails to perform the "duty" to mitigate, his damages are reduced because it can be said that he is at fault in failing to avoid loss. He may also be at fault in the sense of actually helping to bring about the loss or the event causing it. In the law of tort, such conduct is called "contributory negligence. The question is whether the common law doctrine of contributory negligence applied in contract at all. Usually it did not, for a contracting party is not bound to guard against breach.

Other restrictions

a. Injured Feelings and Reputation

A plaintiff can sometimes recover damages in tort for injury to his feelings, far exceeding any financial loss suffered by him. In Hurst v. Picture Theatres Ltd. [1915] 1 KB 1 the plaintiff was forcibly ejected from a cinema seat for which he had paid 6d. He recovered £150 in an action for assault and false imprisonment. In substance this was compensation for the indignity he had suffered.

In a contractual action, the right to recover such damages is restricted by the decision of the House of Lords in Addis v. Gramophone Co. Ltd. [1909] AC 488 where a company wrongfully dismissed its manager in a way that was "harsh and humiliating. He recovered damages for loss of salary and commission, but not for the injury to his feelings caused by the manner of his dismissal. Damages can be recovered for physical inconvenience. Thus in Bailey v. Bullock (1950) 66 TLR (pt 2) 791 a solicitor who negligently failed to take proceedings for the recovering of his client's house was held liable for the inconvenience (but not the indignity) that the client suffered in having to live for nearly two years with his wife's parents.

Damages Fixed by Contract

Dunlop Pneumatic Tyre Co. Ltd. v. New Garage S Motor Co. Ltd. [1915] AC 79 Lord Dunedin formulated four rules of construction:

(a) "It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach":

(b) "It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid."

(c) There is a presumption (but no more than a presumption) that a clause is penal when "a single lump sum is made payable ... on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage."

(d) "It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of breach are such as to make precise pre-estimation an impossibility. On the contrary, that is just the situation when pre- estimated damage was the true bargain between the parties.

TUTORIAL QUESTIONS

1. The National Housing Committee (“NHC”) of HappyLand sold land to Peters Home Construction Ltd. (“PHCL”), a housing developer on the basis of contract which required the developer to develop the land in accordance with the already granted planning permission for 72 houses. After the sale, PHCL obtained a new planning permission allowing an additional five houses to be built on the site. PHCL then deliberately breached the contract term requiring it to abide by the original planning permission and constructed the extra houses. Can NHC claim a part of the profits gained by PHCL for the additional houses in a claim for breach of contract?

2. John Siphoo (“JS”) contracted with Nadie Mohammed Swimming Pool Co. Ltd. (“NM”) for the construction of an enclosed swimming pool in his garden. The contract terms required that the maximum depth of the pool should be 7'6". In fact it was later discovered to be only 6'9" as a maximum, and only 6' at the diving point. JS refused to pay the balance outstanding on the contract price for the construction of the swimming pool and NM sued for the unpaid balance. JS then claimed damages for the cost of correcting the deficiency in the dept of the pool of the purchase and loss of amenity. Is JS entitled to the remedies claimed.

3. Clement Ramsingh (“CR”) contracted with Troy Ramroop (“TR”) to install and maintain certain machinery in the CR’s factory for two years, payment to be made on completion. After some of the work of installation had been completed, the factory and the machinery were accidentally destroyed by fire. CR is claming that he is entitled for work done and TR is asserting he is discharged from making any payment under the contract.

4. Chandrouti Maraj decided to take her mother, Basso Maraj, to visit the doctor for her monthly examination as she was suffering from chronic arthritis. On the way to the doctor, Chandrouti decided to stop at Ecliffe’s Supermarket to purchase a couple items. She drove into a car park next door and noticed a sign saying “Vehicles parked at Owner’s risk. There shall be no liability against the owners of the car park for loss of damage whatsoever”. She paid the attendant the required fee without getting a parking ticket or receipt. The attendant told her as she was returning in a few minutes that there was no need for the “paper work”. Chandrouti rushed into the supermarket and picked up the items she wanted, one of which was a bottle of Johnny Walker Black Whisky. While she was cashing, the Manager came up and informed her that the Whisky was not for sale as it was promised to another customer and it was the only bottle in stock. Chandrouti angrily slammed down all her groceries and stormed out saying, “You will hear from my lawyer!” In the car park, there was neither attendant nor her car (the attendant had seen a young lady and decided to follow her to secure a date). On seeing her car missing, Chandrouti collapsed in shock, hitting her head and suffering a lacerated scalp. Another person saw her lying on the ground and called for help from his Ericsson KF788. The police, in search of the vehicle, found Basso at the side of the road with a broken leg. They radioed for an ambulance and continued the pursuit until they discovered the car five miles away from the scene in perfect condition and parked carefully and the side of the road. It transpired that Basso had panicked and jumped out of the car. Chandrouti was ordered by her doctor to remain in bed for one week.

Can Chandrouti bring any action against the supermarket and / or the car park owners? Can Chandrouti recover damages for fees that she would have earned if she were able to keep a conference appearance the next day? Can Basso bring an action against the car park owners?

5. Spock Co Ltd of Trinidad & Tobago (Spock) entered a joint venture with Shatner Inc of Canada to develop a special software for processing check payments. After the software was developed Spock Ltd obtained a lucrative contract to implement and maintain the system for the Government of Trinidad and Tobago for the processing of pensioners’ checks. Spock decided to recruit trainee technicians to be sent to Canada to be trained by Shatner. Among the candidates included, Rudy Matthias, Rohan Ramlogan, Esha Roopnarine, Mona Ramlackhan and Joy Seepersad all of whom were interviewed and successful. On the day of the interview Rudy Matthias appeared very nervous and almost in a daze. He was questioned as to his state of mind and replied that he was just nervous. One of the interviewers thought he might have been intoxicated, while the others accepted his explanation. Due to his impeccable qualifications, he was successful at the interview. All five candidates signed a contract to work exclusively for Spock immediately after the interview and within 2 weeks departed for Canada to be trained for 6 months at an individual cost of CDN$50 000 per person. Further, the contract stipulated that upon leaving the employ of Spock none of the software specialist would work in the field of software application for a period of two years. On their return home, all five were happily employed until Peter Pan Ltd made its entry into the Trinidad and Tobago market selling similar software for the processing of checks. They made lucrative offers to all five employees and four submitted their resignations in anticipation of immediately joining Peter Pan Ltd. Rohan Ramlogan produced evidence that he lied when he said he was age 18 at the time of the interview, the legal age of majority, when he was in fact 17 years and 10 months. He claimed that his employment contract was null and void due to the fact that he was a minor at the time of the execution. Rudy Matthias claimed that he was drunk at the time he executed his contract and he was not aware of the terms therein. Esha Roopnarine offered to repay the amount spent on her training and claimed that this would entitle her to work for Peter Pan Ltd. It turned out that Peter Pan Ltd met with her prior to her resignation and offered her money to pay for her training with an additional amount as a bonus for joining Peter Pan Ltd. Mona Ramlackhan did not seek employment with Peter Pan Ltd but obtained a job with Macrosoft Ltd in their department dealing with children’s software.

6. Jay Limited entered into an agreement with John Crow Limited for the building of a deep sea trawler. The contract provided that title to the vessel passed to the buyer during the course of construction. The issue was the construction of a clause that provided: "In circumstances of Builder's default ... the Owner without prejudice to its rights ... shall be entitled by Notice to the Builder either: ...(ii) to take possession of the Vessel in its unfinished state and complete the Vessel in accordance with this Contract and the Specifications either at the Builder's yard or elsewhere, at Owner's sole option". John Crow Limited defaulted on a deadline for completion of 50 percent of the vessel and he knew that time was of the essence. Jay Limited took possession of the unfinished vessel and completed it for a sum 75 percent in excess of the original contract price and of a size and design radically different to what was in the initial contract. Jay Limited wants to sue John Crow Limited for the extra monies spent while John Crow Limited wants to be paid for work completed. Please select either of John Crow Limited or Jay Limited and advise the party you select of its rights and liabilities.

7. In 1994, Ramlal entered into partnership with Peterson as a salaried partner. The partnership agreement contained covenants in precisely the same terms as other salaried partners in favour of both Ramlal and Peterson. By 1997, Ramlal and Peterson had fallen out. At the beginning of May 1997, Peterson dismissed Ramlal from the practice. When Ramlal had joined the partnership, he agreed that if he ceased being a partner he would not work in the field of intellectual property law which was the area the partnership trained him to be a specialist for a period of at least 10 years. Further, that he would not work for any clients of the partnership after his departure and in addition that he would not work in the United Kingdom as an attorney where the partnership was based for a period of at least 4 years. Ramlal has joined a firm next door to the partnership as an legal consultant and has set up a sign advising his services as an intellectual property legal consultant. Please advise Peterson on his rights in this matter in forcing Ramlal to abide by the terms of the original partnership agreement.

Discuss the legal issues raised.

LORD PHILLIPS, MASTER OF THE ROLLS
LORD JUSTICE MAY
and
LORD JUSTICE LAWS
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Between:

Great Peace Shipping Limited Respondent

- and -

Tsavliris (International) Limited Appellant

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

John Reeder, QC and Rachel Toney (instructed by Shaw & Croft) for the Appellant
Huw Davies (instructed by Stephenson Harwood) for the Respondent
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HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
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Crown Copyright ©

Lord Phillips MR

This is the judgment of the Court

Introduction

1. In 1932 in Bell v Lever Brothers Ltd [1932] AC 161 Lord Atkin made a speech which he must have anticipated would be treated as the definitive exposition of the rules of law governing the effect of mistake on contract. In 1950 in Solle v Butcher [1950] 1 KB 671 Denning LJ identified an equitable jurisdiction which permits the court to intervene where the parties have concluded an agreement that was binding in law under a common misapprehension of a fundamental nature as to the material facts or their respective rights. Over the last fifty years judges and jurists have wrestled with the problem of reconciling these two decisions and identifying with precision the principles that they lay down.

2. In the court below Toulson J. used this case as a vehicle to review this difficult area of jurisprudence. He reached the bold conclusion that the view of the jurisdiction of the court expressed by Denning LJ in Solle v Butcher was ‘over-broad’, by which he meant wrong. Equity neither gave a party a right to rescind a contract on grounds of common mistake nor conferred on the court a discretion to set aside a contract on such grounds.

3. Toulson J. gave permission to appeal, observing: ‘the appeal raises a question of general importance and the Court of Appeal might take the view that my approach to Lord Denning’s principle in Solle v Butcher was not open to me and/or wrong’.

The facts

4. We gratefully adopt, with a degree of adaptation, Toulson J’s clear exposition of the relevant facts, as to which there is no dispute. All the times are stated by reference to British Summer Time.

5. The story concerns two vessels, the “Cape Providence” and the “Great Peace”. In September 1999 the “Cape Providence” was on her way from Brazil to China with a cargo of iron ore when she suffered serious structural damage in the South Indian Ocean. The defendants learned that the vessel was in difficulties and offered their salvage services, which were accepted on the terms of Lloyd’s Open Form of salvage agreement. To find a tug they approached a firm of London brokers, Marint. The individuals involved at Marint were Mr Graeme Little and Mr Andrew Holder. A tug was found, but it was going to take five or six days for the tug to reach the “Cape Providence” from Singapore. There was serious concern that in the meantime the vessel might go down with the loss of her crew. So Mr Little was asked by the appellants’ representative, Captain Lambrides, to try to find a merchant vessel in the vicinity of the “Cape Providence” which would be willing to assist, if necessary, with the evacuation of the crew.

6. Mr Little contacted Ocean Routes, a respected organisation which provides weather forecasting services to the shipping industry and receives reports about vessels at sea. Ocean Routes gave Mr Little the names of four vessels reported to be in the area. He was told that the “Great Peace”, a vessel owned by the respondents, was the nearest to the “Cape Providence” and should be close to a rendezvous position within about twelve hours. Mr Little noted the name of the four vessels and the estimated position of the “Great Peace”. Unfortunately the position which he was given was wrong.

7. At 20.30 on Friday 24 September 1999 Mr Little telephoned a contact number for the “Great Peace’s” managers, Worlder Shipping Limited of Hong Kong. The call was answered by Mr Pierre Lee. By Hong King time it was 03.30 on Saturday 25 September.

8. Mr Lee was a businessman with no seafaring experience. He had never personally negotiated the fixture of a vessel, because his company always used brokers. But it was the middle of the night and Mr Little explained that the situation was an emergency because of the potential danger to the crew. They did not discuss the exact position of either vessel. Mr Little simply advised Mr Lee that he believed from information received from Ocean Routes that the “Great Peace” was the closest vessel to the “Cape Providence”. Mr Lee was not able to promise help there and then, because the “Great Peace” was under charter, carrying a cargo of soya beans from New Orleans to China, and the charterers would need to be consulted, but he asked Mr Little to send him details by fax.

9. Immediately after the conversation Mr Little faxed Mr Lee as follows:

“Further to our telcon at 22.22 hours BST 24 September, we are working on behalf of the owners of a cape size bulk carrier which has suffered serious structural damage in the southern Indian Ocean. Her position at 10.27 hours BST today was 29 40S/80 20E. She is proceeding at 5 knots on course 050 degrees direction Sunda Strait. Owners have mobilised a tug from Singapore which should reach the casualty in the next 5/6 days. We understand from Ocean Routes that your vessel “Great Peace” is in close proximity to the casualty and have been asked by hirers to check whether it would be possible to charter the “Great Peace” on a daily hire basis to escort the casualty until arrival of the tug.

We would appreciate greatly if you can check soonest with charterers whether they can agree to the request, bearing in mind that the casualty is in serious danger.”

10. Shortly after midnight, Mr Lee phoned Mr Holder (who had taken over from Mr Little) and put forward an offer for the chartering of the “Great Peace”. During the conversation all the terms necessary for a contract were discussed. The contract was to be on the basis of a Bimco Towhire form of agreement. (This was somewhat odd because the “Great Peace” was a bulk carrier and was not going to be towing the “Cape Providence”, but the circumstances were unusual and the Bimco Towhire agreement was the form of contract with which Mr Holder was familiar). The hire was to be for a minimum of 5 days. The purpose of the charter was to be to escort and stand-by the “Cape Providence” for the purpose of saving life. Delivery was to be at the “Great Peace’s” location at the time of the agreement and the hire would commence as soon as she was fixed and diverted (it being the mutual, and correct, assumption of Mr Lee and Mr Holder that there would be no practical difference between the vessel’s position at the time of the agreement and at the time of deviation, since it was contemplated that there would have to be some alteration of course in order to effect a rendezvous and that the alteration of course would happen as soon as instructions could be given on the conclusion of the agreement). During the conversation Mr Holder asked Mr Lee for the position and speed of the “Great Peace”, and Mr Lee replied that he would check these matters with the master when he knew if the appellants were interested in the terms of the offer.

11. Captain Lambrides decided not to accept the offer at once, but at 0640 he gave instructions to Mr Holder to fix the vessel at a gross rate of US$16,500 per day (which Mr Holder knew would be acceptable to Mr Lee from their earlier conversation).

12. Mr Holder thereupon called Mr Lee. They went through and confirmed the terms of the fixture.

13. Afterwards Mr Holder sent a fax to Mr Lee thanking him for his assistance with the fixture of the “Great Peace” for the services of escort/stand-by to the “Cape Providence”; saying that he would complete the recap of the main fixture terms shortly, giving details of the “Cape Providence’s” latest position, course and speed in order to enable the vessels to rendezvous; and concluding:

“Please instruct your master to contact the master of “Cape Providence” and alter course to rendezvous with the vessel as soon as possible.”

14. As requested, Mr Lee faxed instructions to the master of the “Great Peace” to alter course towards the “Cape Providence”. He sent a copy of the fax to Mr Holder.

15. At 08.17 Mr Lee gave Mr Holder contact details of the “Great Peace”, which Mr Holder passed on to Captain Lambrides. A few minutes later, at 08.29, the master of the “Great Peace” sent a message to Worlder that he had contacted the “Cape Providence” to find her latest position and was altering course “right now”.

16. Meanwhile, at 08.25, Captain Lambrides called Mr Holder to say that the vessels were 410 miles away from each other. This was not something known to Mr Holder or Mr Lee, so the likely inference is that the master of the “Cape Providence” must have reported the positions of the vessels to the appellants after his conversation with the master of the “Great Peace”.

17. If the information previously given to Marint by Ocean Routes had been accurate, the vessels should have been only about 35 miles apart when the contract was concluded.

18. Captain Lambrides told Mr Holder that he was looking to cancel the “Great Peace”, but not yet, because he first wanted to know if there was a nearer available vessel which could provide assistance to the crew of the “Cape Providence”.

19. Mr Holder made a number of unsuccessful enquiries, about which he reported to the appellants, at 0924, recommending that the “Great Peace” should be allowed to continue her voyage towards the “Cape Providence”.

20. About the same time as that message was being sent, the “Cape Providence” was passed by a vessel called the “Nordfarer”. By chance the charterers of the “Nordfarer” were also the charterers of the “Cape Providence” and so had an interest in assisting her. At 10.10 the appellants told Mr Holder that they had contracted with the owners of the “Nordfarer” directly and instructed him to cancel the “Great Peace”.

21. At 10.25 Mr Holder told Mr Lee that the “Great Peace” was no longer required, i.e. she was cancelled. They discussed possible financial terms.

22. At 11.00 Mr Lee sent a fax to Mr Holder, confirming the cancellation and saying that he would do his best to persuade the owners of the “Great Peace” to accept 2 days’ daily hire in place of the minimum 5 days due under the contract. After speaking to the appellants, Mr Holder told Mr Lee that the appellants were not prepared to pay any sum. So the respondents issued proceedings.

The contract

23. The terms of the fixture, as faxed by Mr Holder to Mr Lee, included the following:

“1. HIRER: “TSAVLIRIS” SALVAGE: (INTERNATIONAL) LTD

2. VESSEL OWNER: WORLDER SHIPPING LTD

3. CASUALTY VESSEL: BULKCARRIER ‘CAPE PROVIDENCE, 146,019 DWT/76, 324 GRT, 268 M LOA 43 M BEAM, IN LADEN CONDITION, FULL CREW ON BOARD, PLATING CONDITION/FRAME DAMAGE.

4. ESCORTING VESSEL: BULK CARRIER ‘GREAT PEACE’ LADEN, ON VOYAGE FROM NEW ORLEANS TO CHINA VIA SINGAPORE.

5. SERVICES: ESCORT/STANDBY ONLY FOR THE PURPOSES OF SAVING OF LIFE AT SEA. ‘CAPE PROVIDENCE’ LATEST POSITION AS OF 0720 HRS BST 25/9/99, LAT 28-20 SOUTH, LONG 082-20 EAST, HEADING 050 DEGREES, SPEED 5 KNTS, TOWARDS SUNDA STRAITS.

6. DESTINATION: DIRECTION SUNDA STRAIGHTS, WHILST AWAITING THE ARRIVAL OF TUG WHICH DEPARTED SINGAPORE 1205HRS L.T 25/09/99, ETA CASUALTY APPROX 5 DAYS.

7. DAILY HIRE: USD 16,500 PER DAY, PRO RATA INCLUDING FUEL AND LUBES FOR STANDBY/ESCORT

8. DELIVERY/ ON HIRE: TIME ‘GREAT PEACE’ ALTERS COURSE TO RENDEZVOUS WITH ‘CAPE PROVIDENCE’ THIS TIME TO BE ADVISED BY MASTER OF ‘GREAT PEACE’

9. REDELIVERY/OFF HIRE: UPON ARRIVAL OF THE TUG TO CONVOYS POSITION, TIME TO BE ADVISED BY MASTERS OF ‘GREAT PEACE’ / ‘CAPE PROVIDENCE’

10. MINIMUM: 5 DAYS DUE AND EARNT UPON ‘GREAT PEACE’ ALTERING DIRECTION, BEING USD 82,500. ANY BALANCE DUE UPON COMPLETION OF SERVICES

11. CANCELLATION FEE: MINIMUM ENGAGEMENT AS DUE.

12. CONTRACT: BIMCO TOWHIRE AGREEMENT TO APPLY

A. IT IS CLEARLY UNDERSTOOD THAT THERE IS TO BE NO CLAIM FOR SALVAGE BY THE VESSEL OWNER, OR THEIR MANAGERS, OR THEIR MASTER, OFFICERS OR CREW.”

The issues

24. The claimants claimed $82,500 as monies payable under the terms of the contract. Alternatively, they claimed the same sum as damages for wrongful repudiation of the contract.

25. The defendants contended that the purported contract had been concluded by reason of a fundamental mistake of fact in that both parties proceeded on the fundamental assumption that the “Great Peace” was “in close proximity” to the “Cape Providence”, when she was not. It followed either that the contract was void in law, or that the contract was voidable and the defendants were entitled to relief in equity by way of rescission.

26. In oral argument in the court below, Mr Reeder QC for the defendants defined ‘close proximity’ as meaning sufficiently close to enable the “Cape Providence” to have come up with the “Great Peace” in the space of a few hours.

27. Toulson J. rejected the defendants’ contentions and awarded the claimants the sum claimed. By this appeal the defendants reassert their defence based upon mistake.

The mistake in this case

28. A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of contract in a number of different circumstances. They may prevent the mutuality of agreement that is necessary for the formation of a contract. In order for two parties to conclude a contract binding in law each must agree with the other the terms of the contract. Whether two parties have entered into a contract in this way must be judged objectively, having regard to all the material facts. It may be that each party mistakenly believes that he has entered into such a contract in circumstances where an objective appraisal of the facts reveals that no agreement has been reached as to the terms of the contract. Such a case was Raffles v Wichelhaus (1864) 2 H&C 906. The parties believed that they had entered into a contract for the purchase and sale of a cargo of cotton to arrive ‘ex Peerless from Bombay’. That term was capable of applying equally to a cargo of cotton on two different ships, each called ‘Peerless’ and each having sailed from Bombay, one in September and one in December. The court accepted that parole evidence could be adduced to prove which shipment the parties had intended to be the subject of the contract. Had one party intended the October shipment and the other the December shipment, the agreement necessary for a binding contract would have been absent.

29. Raffles v Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal of the negotiations between the parties may disclose that they were at cross-purposes, so that no agreement was ever reached. In such a case there will be a mutual mistake in that each party will erroneously believe that the other had agreed to his terms. This case is not concerned with the kind of mistake that prevents the formation of agreement.

30. Another type of mistake is that where the parties erroneously spell out their contract in terms which do not give effect to an antecedent agreement that they have reached. Such a mistake can result in rectification of the contract. Again, this case is not concerned with that type of mistake.

31. In the present case the parties were agreed as to the express terms of the contract. The defendants agreed that the “Cape Providence” would deviate towards the “Great Peace” and, on reaching her, escort her so as to be on hand to save the lives of her crew, should she founder. The contractual services would terminate when the salvage tug came up with the casualty. The mistake relied upon by the defendants is as to an assumption that they claim underlay the terms expressly agreed. This was that the “Cape Providence” was within a few hours sailing of the “Great Peace”. They contend that this mistake was fundamental in that it would take the “Great Peace” about 39 hours to reach a position where she could render the services which were the object of the contractual adventure.

32. Thus what we are here concerned with is an allegation of a common mistaken assumption of fact which renders the service that will be provided if the contract is performed in accordance with its terms something different from the performance that the parties contemplated. This is the type of mistake which fell to be considered in Bell v Lever Brothers. We shall describe it as ‘common mistake’, although it is often alternatively described as ‘mutual mistake’.

33. Mr Reeder for the defendants puts his case in two alternative ways. First he submits that performance of the contract in the circumstances as they turned out to be would have been fundamentally different from the performance contemplated by the parties, so much so that the effect of the mistake was to deprive the agreement of the consideration underlying it. Under common law, so he submits, the effect of such a mistake is to render the contract void. Mr Reeder draws a close analogy with the test to be applied when deciding whether a contract has been frustrated or whether there has been a fundamental breach. The foundation for this submission is Bell v Lever Brothers.

34. If the facts of this case do not meet that test, Mr Reeder submits that they nonetheless give rise to a right of rescission in equity. He submits that such a right arises whenever the parties contract under a common mistake as to a matter that can properly be described as ‘fundamental’ or ‘material’ to the agreement in question. Here he draws an analogy with the test for rescission where one party, by innocent misrepresentation, induces the other to enter into a contract – indeed that is one situation where the parties contract under a common mistake. The foundation for this submission is Solle v Butcher.

Bell v Lever Brothers

35. We turn without more ado to consider Bell v Lever Brothers. The facts of that case can be summarised as follows. Lever Brothers employed the two defendants. The two defendants committed serious breaches of their contracts of employment, which would have justified their summary dismissal. In ignorance of this fact, Lever Brothers entered into agreements with them under which their services were terminated on terms that they would receive substantial sums in compensation. The defendants themselves did not have in mind, when these agreements were concluded, that they could have been dismissed without compensation. Thus the agreements were concluded under a common mistake as to the respective rights of the parties. According to the headnote to the report, Lever Brothers claimed rescission of the agreements and repayment of the compensation paid under them.

36. It is instructive to consider passages from the judgments at first instance and in the Court of Appeal as well as the speeches in the House of Lords, for while there was judicial dissent as to the result, there was general agreement as to the principles of law that were applicable.

37. Wright J., [1931] 1 KB 557 at p.563, commented early in his judgment on the importance of upholding the binding force of contracts so far as possible, especially in commercial matters, but went on at p.564 to discuss the type of mistake that would result in the setting aside of an apparently valid contract:

“The mistake here invoked is of that type which has often been discussed, and has been described by various terms – for instance, as being mistake of subject matter, or substance, or essence, or fundamental basis. However described, what is meant is some mistake or misapprehension as to some facts (which term here includes particular private rights, as held in Cooper v. Phibbs), which, by the common intention of the parties, whether expressed or more generally implied, constitute the underlying assumption without which the parties would not have made the contract they did.”

38. Wright J. went on to cite examples of such mistakes. Some of these were situations where, unknown to the parties, the consideration to be provided by one of them had ceased to exist or was illusory, such as a contract for the sale of a specific chattel which had been destroyed, or of an annuity when the annuitant had died. In such cases the contract was void and any monies paid recoverable on the ground of total failure of consideration. Not all, however, fell into this category, as we shall show in due course.

39. Wright J. cited with approval, the test applied by the Court of Queen’s Bench in Kennedy v, Panama, New Zealand and Australian Royal Mail Co. LR 2 QB 580 at p.588:

“The difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole consideration, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration.”

40. Applying that test at p.568 he held that the mistake or misapprehension was as to the substance of the whole consideration and ‘went to the root of the whole matter’.

41. Dealing, at p.571, with the claim to rescission, he observed:

“I am not clear that in such a case as the present, if I am right in my judgment as to there being such a common mistake as I have found, the agreement is not void, and there is thus, when the Court has so declared, a simple claim at common law for money had and received.”

He continued on the next page:

“But if the relief here is to be at equity, I think the Court, as a Court of equity, can do all that justice requires to constitute a restitutio in integrum. It can, in ordering rescission of the agreement order repayment of the moneys paid under the agreement.”

42. In upholding this judgment, Scrutton LJ, at pp.584-5 held that the principle to be applied was the same as that applicable in the case of frustration:

“In my opinion, the present law is that where at the time of making the contract the circumstances are such that the continuance of a particular state of things is in the contemplation of both parties fundamental to the continued validity of the contract, and that state of things substantially ceases to exist without fault of either party, the contract becomes void from the time of such cessation, the loss falling where it lies. This may be put either on implied contract or on destruction of the foundation or root of the contract before its term of performance has expired. The contract is valid when made, for its implied foundation then exists, but becomes void when during the term the foundation ceases to exist.

Now consider the case where the implied foundation is assumed by both parties to exist at the time of making the contract, but does not in fact exist. One may describe the result as either that the contract is void because of an implied term that its validity shall depend on the existence at the time of the contract, and during its term of performance, of a particular state of facts, or (which is only another way of putting the proposition) that there is a mutual mistake of the parties, who make the contract believing that a particular foundation to it exists, which is essential to its existence, a fundamental reason for making it. In either case the absence of the assumed foundation makes the contract void.”

43. Greer LJ, in concurring, said at p.595:

“But it is not, in my judgment, the law that the only mutual mistakes that will avoid an agreement are mistakes as to the existence or identity of the subject matter of the contract. I think a mistake as to the fundamental character of the subject matter of the contract is one which, if mutual, the law will regard as rendering the contract void.”

Later he continued:

“I agree, subject to qualification with the opinion expressed in Salmond and Winfield’s Law of Contract, 1927 ed., p.195, in those words: “Error as to the existence of the subject matter of the contract is, however, merely an illustration of the general principle of essential error – the principle, namely, that when the parties to a contract have assumed as its basis and presupposition the existence of a certain fact the law will in proper cases, by way of necessary implication, read into the contract an implied condition …..that such fact actually exists.” This statement of the law needs to be qualified by saying that the mistake must be as to some fact which affects the fundamental basis of the contract.”

44. It is easy to understand why the Court of Appeal felt that the test set out above was satisfied. The plaintiffs had, by the agreements, purchased at great price the termination of contracts which, had they been aware of the true position, they could have terminated as of right.

45. The House of Lords, by a majority, reversed this decision. Lord Blanesburgh, with the majority, based his decision on a point of pleading. He stated, however, that but for this he would have agreed with the speeches of Lord Atkin and Lord Thankerton. Lord Warrington, with whom Lord Hailsham agreed, was for dismissing the appeal. He did so, not because he differed from the majority as to the law, but on the application of the law to the facts. He said at p.208:

“The real question, therefore, is whether the erroneous assumption on the part of both parties to the agreements that the service contracts were undeterminable except by agreement was of such a fundamental character as to constitute an underlying assumption without which the parties would not have made the contract they in fact made, or whether it was only a common error as to a material element, but one not going to the root of the matter and not affecting the substance of the consideration.

With the knowledge that I am differing from the majority of your Lordships, I am unable to arrive at any conclusion except that in this case the erroneous assumption was essential to the contract which without it would not have been made.”

46. Lord Atkin, with whom Lord Thankerton agreed, considered at p.217 the circumstances in which mistake nullified consent. He held that it did so where the parties contracted under the common mistaken assumption that the subject matter of the contract existed when, in fact, this was not the case. He gave the following examples:

“So the agreement of A. and B. to purchase a specific article is void if in fact the article had perished before the date of sale. In this case, though the parties in fact were agreed about the subject-matter, yet a consent to transfer or take delivery of something not existent is deemed useless, the consent is nullified. As codified in the Sale of Goods Act the contract is expressed to be void if the seller was in ignorance of the destruction of the specific chattel….

Corresponding to mistake as to the existence of the subject-matter is mistake as to the title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis.”

47. Lord Atkin then went on to consider at p.218 the position where two parties purport to conclude an agreement under a common mistaken assumption in relation to the subject matter of the contract:

“Mistake as to quality of the thing contracted for raises more difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties, and is 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. Of course it may appear that the parties contracted that the article should possess the quality which one or other or both mistakenly believed it to possess. But in such a case there is a contract and the inquiry is a different one, being whether the contract as to the quality amounts to a condition or a warranty, a different branch of the law.”

48. After citation of authority in support of this proposition, Lord Atkin applied it to the facts of the case. This passage has been repeatedly cited by those seeking to define the effect of common mistake at common law, and it is necessary to set it out at length before embarking on that exercise:

“Is an agreement to terminate a broken contract different in kind from an agreement to terminate an un-broken contract, assuming that the breach has given the one party the right to declare the contract at an end? I feel the weight of the plaintiffs’ contention that a contract immediately determinable is a different thing from a contract for an unexpired term, and that the difference in kind can be illustrated by the immense price of release from the longer contract as compared with the shorter. And I agree that an agreement to take an assignment of a lease for five years is not the same thing as to take an assignment of a lease for three years, still less a term for a few months. But, on the whole, I have come to the conclusion that it would be wrong to decide that an agreement to terminate a definite specified contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise. The contract released is the identical contract in both cases, and the party paying for release gets exactly what he bargains for. It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A buys B’s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known, as the fact is, that the horse is unsound. If B has made no representation as to soundness and has not contracted that the horse is sound, A is bound and cannot recover back the price. A buys a picture from B; both A and B believe it to be the work of an old master, and a high price is paid. It turns out to be a modern copy. A would never have entered into the bargain if he had known the fact. A has no remedy, and the position is the same whether B knew the facts or not, so long as he made no representation or gave no warranty. A buys a roadside garage business from B abutting on a public thoroughfare: unknown to A, but known to B, it has already been decided to construct a bypass road which will divert substantially the whole of the traffic from passing A’s garage. Again A has no remedy. All these cases involve hardship on A and benefit B, and most people would say, unjustly. They can be supported on the ground that it is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contracts - i.e. agree in the same terms on the same subject-matter - they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them.

This brings the discussion to the alternative mode of expressing the result of a mutual mistake. It is said that in such a case as the present there is to be implied a stipulation in the contract that a condition of its efficacy is that the facts should be as understood by both parties - namely, that the contract could not be terminated till the end of the current term. The question of the existence of conditions, express or implied, is obviously one that affects not the formation of contract, but the investigation of the terms of the contract when made. A condition derives its efficacy from the consent of the parties, express or implied. They have agreed, but on what terms. One term may be that unless the facts are or are not of a particular nature, or unless an event has or has not happened, the contract is not to take effect. With regard to future facts such a condition is obviously contractual. Till the event occurs the parties are bound. Thus the condition (the exact terms of which need not here be investigated) that is generally accepted as underlying the principle of the frustration cases is contractual, an implied condition. Sir John Simon formulated for the assistance of your Lordships a proposition which should be recorded: “Whenever it is to be inferred from the terms of a contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided: i.e., it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact.

I think few would demur to this statement, but its value depends upon the meaning of “a contractual assumption”. And also upon the true meaning to be attached to “basis”, a metaphor which may mislead. When used expressly in contracts, for instance, in policies of insurance, which state that the truth of the statements in the proposal is to be the basis of the contract of insurance, the meaning is clear. The truth of the statements is made a condition of the contract, which failing, the contract is void unless the condition is waived. The proposition does not amount to more than this that, if the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contact is avoided if the assumption is not true. But we have not advanced far on the inquiry how to ascertain whether the contract does contain such a condition. Various words are to be found to define the state of things which made a condition. “In the contemplation of both parties fundamental to the continued validity of the contract”, “a foundation essential to its existence”, “a fundamental reason for making it”, are phrases found in the important judgment of Scrutton L.J in the present case. The first two phrases appear to me to be unexceptionable. They cover the case of a contract to serve in a particular place, the existence of which is fundamental to the service, or to procure the services of a professional vocalist, whose continued health is essential to performance. But “a fundamental reason for making a contract” may, with respect, be misleading. The reason of one party only is presumably not intended, but in the cases I have suggested above, of the sale of a horse or of a picture, it might be said the fundamental reason for making the contract was the belief of both parties that the horse was sound or the picture an old master, yet in neither case would the condition as I think exist. Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which would appear to make the contract more businesslike or more just. The implications to be made are to be no more than are “necessary” for giving business efficacy to the transaction, and it appears to me that, both as to existing facts and future facts, a condition would not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts. Thus, in Krell v. Henry [1903] 2 KB 740 (1), Vaughan Williams L.J. finds that the subject of the contract was “rooms to view the procession”: the postponement, therefore, made the rooms not rooms to view the procession. This also is the test finally chosen by Lord Sumner in Bank Line v. Capel (Arthur) & Co. [1919] AC 435 (2), agreeing with Lord Dunedin in Metropolitan Water Board v. Dick Kerr [1918] AC 119 (3), where, dealing with the criterion for determining the effect of interruption in “frustrating” a contract, he says: “An interruption may be so long as to destroy the identity of the work or service, when resumed, with the work or service when interrupted.” We therefore get a common standard for mutual mistake, and implied conditions whether as to existing or as to future facts. Does the state of the new facts destroy the identity of the subject-matter as it was in the original state of facts. To apply the principle to the infinite combinations of facts that arise in actual experience will continue to be difficult, but if this case results in establishing order into what has been a somewhat confused and difficult branch of the law it will have served a useful purpose.

I have already stated my reasons for deciding that in the present case the identity of the subject-matter was not destroyed by the mutual mistake, if any, and need not repeat them.”

49. Lord Thankerton reached the same conclusion as Lord Atkin. At p.235 he held that a common mistake would not avoid the contract unless it related to something that both the parties ‘must necessarily have accepted in their minds as an essential and integral element of the subject matter’. However, he rejected the implied term approach, holding that the frustration cases had ‘no bearing on the question of error or mistake as rendering a contract void owing to failure of consideration’.

50. It is generally accepted that the principles of the law of common mistake expounded by Lord Atkin in Bell v Lever Brothers were based on the common law. The issue raised by Mr Reeder’s submissions is whether there subsists a separate doctrine of common mistake founded in equity which enables the court to intervene in circumstances where the mistake does not render the contract void under the common law principles. The first step is to identify the nature of the common law doctrine of mistake that was identified, or established, by Bell v Lever Brothers.

51. Lord Atkin and Lord Thankerton were breaking no new ground in holding void a contract where, unknown to the parties, the subject matter of the contract no longer existed at the time that the contract was concluded. The Sale of Goods Act 1893 was a statute which set out to codify the common law. Section 6, to which Atkin J. referred, provided:

“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.”

52. Judge Chalmers, the draftsman of the Act, commented in the first edition of his book on the Act, published in 1894:

“The rule may be based on the ground of mutual mistake, or on the ground of impossibility of performance.”

53. He put at the forefront of the authorities that he cited in support Couturier v Hastie (1856) 5 H of L Cas. 673. That case involved the sale of a cargo of corn which, unknown to the parties, no longer existed at the time that the contract was concluded. Other decisions where agreements were held not to be binding were Strickland v Turner (1852) 7 Exch. 208 - the sale of an annuity upon the life of a person who, unknown to the parties, had died, and Pritchard v Merchants’ and Tradesman’s Mutual Life Assurance Society (1858) 3 CBNS 622 - an insurance policy renewed in ignorance of the fact that the assured had died.

54. A year later, in Huddersfield Banking Corporation v Lister [1895] 2 Ch. 273 at 280, Lindley LJ observed, citing Strickland v Turner:

“But I take it that an agreement founded upon a common mistake, which mistake is impliedly treated as a consideration which must exist in order to bring the agreement into operation, can be set aside, formally if necessary, or treated as set aside and as invalid without any process or proceedings to do so.”

55. Where that which is expressly identified as the subject of a contract does not exist, the contract will necessarily be one which cannot be performed. Such a situation can readily be identified. The position is very different where there is ‘a mistake as to the existence of some quality of the subject matter which makes the thing without the quality essentially different from the thing as it was believed to be’. In such a situation it may be possible to perform the letter of the contract. In support of the proposition that a contract is void in such circumstances, Lord Atkin cited two authorities, in which he said that the principles to be applied were to be found. The first was Kennedy v Panama etc. Mail Co. (1867) LR 2 QB 580. In that case the plaintiff purchased shares of a company in response to a prospectus which stated, incorrectly, that the company had entered into a contract with the Government of New Zealand for a monthly mail service. He claimed rescission of the contract, alleging (1) that the Directors of the company had made the representation fraudulently and (2) that the prospectus contained a warranty and not merely a representation. Blackburn J., delivering the decision of the Court of Queen’s Bench held that there was no fraud and that the prospectus contained an innocent misrepresentation. He went on to say at p.587:

“….where there has been an innocent misrepresentation or misapprehension, it does not authorise a rescission unless it is such as to shew that there is a complete difference in substance between what was supposed to be and what was taken, so as to constitute a failure of consideration. For example, where a horse is bought under a belief that it is sound, if the purchaser was induced to buy by a fraudulent representation as to the horse’s soundness, the contract may be rescinded. If it was induced by an honest misrepresentation as to its soundness, though it may be clear that both vendor and purchaser thought that they were dealing about a sound horse and were in error, yet the purchaser must pay the whole price, unless there was a warranty; and even if there was a warranty, he cannot return the horse and claim back the whole price, unless there was a condition to that effect in the contract: Street v Blay 2 B & Ad 456.”

56. At p.588 Blackburn J. observed that the principle of English law was the same as that of civil law, to the effect that:

“… if there be misapprehension as to the substance of the thing there is no contract; but if it be only a difference in some quality or accident, even though the misapprehension may have been the actuating motive to the purchaser, yet the contract remains binding.”

57. Summarising the conclusion of the court, he held at p.589:

“We think there was a misapprehension as to that which was a material part of the motive inducing the applicant to ask for the shares, but not preventing the shares from being in substance those he applied for.”

58. The judgment of Blackburn J. in Kennedy v Panama was also relied upon by Wright J, as we have already noted, and by Greer LJ as defining the test for a common mistake which avoids a contract.

59. Kennedy v Panama is not an easy case to interpret. What was claimed was rescission on the grounds of fraudulent misrepresentation, or alternatively a warranty, in a prospectus. Blackburn J found that there was no more than innocent misrepresentation. He referred to principles of Roman law, but it is not clear that those principles were dealing with anything more than the circumstances in which misdescription resulted in non-performance of the contract – see Buckland on Roman Law, 3^rd Ed. at p.419. We agree with the comment in Chitty on Contracts 28^th ed. Vol. 1 at 5-007 that it is not clear that Blackburn J. was intending to say that a mistake as to substance would make a contract void at English law.

60. The other case to which Lord Atkin referred was Smith v Hughes (1871) LR 6 QB 597. On no view did that difficult case deal with common mistake and we are not able to see how it supported the test formulated by Lord Atkin, as set out at paragraph 47 above. Indeed, Lord Atkin himself commented at p.222:

“In these cases I am inclined to think that the true analysis is that there is a contract, but that the one party is not able to supply the very thing whether goods or services that the other party contracted to take; and therefore the contract is unenforceable by the one if executory, while if executed the other can recover back money paid on the ground of failure of the consideration.”

61. We conclude that the two authorities to which Lord Atkin referred provided an insubstantial basis for his formulation of the test of common mistake in relation to the quality of the subject matter of a contract. Lord Atkin advanced an alternative basis for his test: the implication of a term of the same nature as that which was applied under the doctrine of frustration, as it was then understood. In so doing he adopted the analysis of Scrutton LJ in the Court of Appeal. It seems to us that this was a more solid jurisprudential basis for the test of common mistake that Lord Atkin was proposing. At the time of Bell v Lever Brothers the law of frustration and common mistake had advanced hand in hand on the foundation of a common principle. Thereafter frustration proved a more fertile ground for the development of this principle than common mistake, and consideration of the development of the law of frustration assists with the analysis of the law of common mistake.

62. The foundation of the law of frustration was Blackburn J’s famous judgment in Taylor v Caldwell (1863) 3 B.& S. 826. The parties had entered into an agreement for the hire of a music-hall for concerts on four specified nights. The hall burnt down before the first of these. Blackburn J., giving the judgment of the Court of Queen’s Bench held that performance of the contract was excused by reason of an implied term:

“…as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing, without default of the contractor…The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel.”

63. Taylor v Caldwell was a case in which the subject matter of the contract was destroyed, so that performance of the letter of the contract was rendered impossible. The principle of frustration thus established, its ambit of operation was then extended. Claims for frustration were advanced, not where a supervening event had made it impossible to perform the letter of the contract, but where performance of the letter of the contract had become something radically different from that which the parties contemplated when it was concluded.

64. The first such case was Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. There a voyage charterparty from Liverpool to San Francisco was delayed for over six months as a result of the vessel stranding before loading her cargo. The charter was held to have been frustrated upon the jury finding that a voyage undertaken after the ship had been repaired would have been a different adventure from that to which the parties had agreed.

65. Particularly instructive in the present context are the ‘coronation cases’. Many rooms were leased, or seats in stands sold, along the route planned for the coronation procession of King Edward VII. He fell ill and the coronation was cancelled. Spectators who had contracted before he fell ill claimed that their contracts were frustrated. In at least one case, a spectator who had contracted in ignorance of his illness claimed that his contract was void for mistake. These claims succeeded. In Hobson v Pattenden & Co (1903) 19 TLR 186, Lord Alverstone CJ provided the following statement of the test of frustration:

“…where there was a contract to do a thing, not in itself unlawful, and the parties when entering into the contract must have contemplated the occurrence of a specified event or the continued existence of a specified thing as the foundation of what was to be done, and the performance became impossible from some cause for which neither party was responsible, and the party sued had not contracted or warranted that the event or thing, the non-occurrence or non-continued existence of which had caused the contract not to be possible of performance, should take place or continue to exist, then the parties were excused from further performance of the contract.”

66. Subsequently in Clark v Lindsay (1903) 19 TLR 202, after hearing submissions from Mr Scrutton QC, Lord Alverstone CJ drew the distinction between an assumption embodied in the contract and one that was no more than the purpose leading to the conclusion of the contract:

“If the event that had affected the performance only had relation to the purpose that led to the contract, then the happening of that event which prevented the contract being carried out could not affect the rights of the parties in the same way as when it formed part of the subject matter of the contract. Looking at this contract it was impossible to say that the procession was only the object and motive that induced people to enter into this contract. It really was the happening of the event that was the substance of that which was contracted about and for.”

Thus the coronation cases are to be explained on the basis that each contract was for ‘a room with a view’.

67. In Griffith v Brymer (1903) 19 TLR 434 the same principle was applied to a situation where there was a common mistake at the time of conclusion of the contract. The parties entered into an agreement for the hire of a room to view the coronation in common ignorance of the fact that a decision had already been taken to operate on King Edward, which rendered the coronation impossible. Wright J. applied the law as stated in Clark v Lindsay:

“The agreement was made on the supposition by both parties that nothing had happened which made performance impossible. This was a missupposition of the state of facts which went to the whole root of the matter. The contract was therefore void, and the plaintiff was entitled to recover his £100.”

68. In Krell v Henry, the coronation case to which Lord Atkin referred, Vaughan Williams LJ advanced the following proposition:

“I do not think that the principle of the civil law as introduced into the English law is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject-matter of the contract or of some condition or state of things expressly specified as a condition of it. I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such a case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both parties as the foundation of the contract, there will be no breach of the contract thus limited.”

69. Cases where frustration was alleged proved a fruitful source of litigation and, by 1916, Lord Loreburn was able to advance the following proposition in Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Company Ltd [1916] 2 AC 397 at p.403:

“…when our Courts have held innocent contracting parties absolved from further performance of their promises, it has been upon the ground that there was an implied term in the contract which entitled them to be absolved. Sometimes it is put that performance has become impossible and that the party concerned did not promise to perform an impossibility. Sometimes it is put that the parties contemplated a certain state of things which fell out otherwise. In most of the cases it is said that there was an implied condition in the contract which operated to release the parties from performing it, and in all of them I think that was at bottom the principle upon which the Court proceeded. It is in my opinion the true principle, for no Court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which is not expressed was a foundation on which the parties contracted.”

70. Despite Lord Loreburn’s words, the doctrine of frustration was patently judge made law. In National Carriers v Panalpina [1981] AC 675 the House of Lords considered five different explanations for the doctrine of frustration. Lord Hailsham and Lord Roskill favoured the exposition of the doctrine given by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [[1956] AC 696 at 728 and Lord Simon advanced the following refinement of that test:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

71. Lord Simon’s formulation of the doctrine must be read subject to the proviso that the parties may make express provision for what is to happen in the event of what would otherwise be a frustrating event. Such a provision will normally preclude the application of the doctrine of frustration.

72. Initially the effect of frustration was to terminate the parties’ respective obligations from the date of the frustrating event, but to leave outstanding any accrued obligations. This harsh result was mitigated to a degree by the decision of the House of Lords in the Fibrosa case [1943] AC 32 and to a greater degree by the Law Reform (Frustrated Contracts) Act 1943.

73. What do these developments in the law of frustration have to tell us about the law of common mistake? First that the theory of the implied term is as unrealistic when considering common mistake as when considering frustration. Where a fundamental assumption upon which an agreement is founded proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding. The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement.

74. In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the ‘contractual adventure’ which go beyond the terms that are expressly spelt out, in others it will not.

75. Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake. If, on true construction of the contract, a party warrants that the subject matter of the contract exists, or that it will be possible to perform the contract, there will be no scope to hold the contract void on the ground of common mistake.

76. If one applies the passage from the judgment of Lord Alverstone CJ in Hobson v Pattenden, which we quoted above to a case of common mistake, it suggests that the following elements must be present if common mistake is to avoid a contract. (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) 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 contractual adventure is to be possible.

77. The second and third of these elements are well exemplified by the decision of the High Court of Australia in McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. The Commission invited tenders for the purchase of “an oil tanker lying on the Jourmaund Reef…said to contain oil”. The plaintiff tendered successfully for the purchase, fitted out a salvage expedition at great expense and proceeded to the reef. No tanker was to be found – it had never existed. The plaintiff claimed damages for breach of contract. The Commission argued that the contract was void because of a common mistake as to the existence of the tanker.

78. In the leading judgment Dixon and Fullagar JJ expressed doubt as to the existence of a doctrine of common mistake in contract. They considered that whether impossibility of performance discharged obligations, be the impossibility existing at the time of the contract or supervening thereafter, depended solely upon the construction of the contract. They went on, however, to consider the position if this were not correct. They observed that the common assumption that the tanker existed was one that was created by the Commission, without any reasonable grounds for believing that it was true. They held at p.408:

“…a party cannot rely on mutual mistake where the mistake consists of a belief which is, on the one hand, entertained by him without any reasonable ground, and, on the other hand, deliberately induced by him in the mind of the other party.”

79. They held at p.410 that, on its proper construction the contract included a promise by the Commission that the tanker existed in the position specified. Alternatively, they held that if the doctrine of mistake fell to be applied:

“The agreement was made on the supposition by both parties that nothing had happened which made performance impossible. This was a missupposition of the state of facts which went to the whole root of the matter. The contract was therefore void, and the plaintiff was entitled to recover his £100.”

80. This seems, if we may say so, an entirely satisfactory conclusion and one that can be reconciled with the English doctrine of mistake. That doctrine fills a gap in the contract where it transpires that it is impossible of performance without the fault of either party and the parties have not, expressly or by implication, dealt with their rights and obligations in that eventuality. In Associated Japanese Bank (International) Ltd v. Credit du Nord [1994] 1 WLR 255 at p.268 Steyn J. observed:

“Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake.”

81. In William Sindall Plc v Cambridgshire CC [1994] 1 WLR 1016 at p. 1035, Hoffman LJ commented that such allocation of risk can come about by rules of general law applicable to contract, such as ‘caveat emptor’ in the law of sale of goods or the rule that a lessor or vendor of land does not impliedly warrant that the premises are fit for any particular purpose, so that this risk is allocated by the contract to the lessee or purchaser.

82. Thus, while we do not consider that the doctrine of common mistake can be satisfactorily explained by an implied term, an allegation that a contract is void for common mistake will often raise important issues of construction. Where it is possible to perform the letter of the contract, but it is alleged that there was a common mistake in relation to a fundamental assumption which renders performance of the essence of the obligation impossible, it will be necessary, by construing the contract in the light of all the material circumstances, to decide whether this is indeed the case. In performing this exercise, the test advanced by Lord Diplock, applicable alike to both frustration and to fundamental breach, in Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at p.65 can be of assistance:

“Every synallagmatic contract contains in it the seeds of the problem: in what event will a party be relieved of this undertaking to do that which he has agreed to do but has not yet done. The contract may itself expressly define some of these events, as in the cancellation clause in a charterparty; but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts such as sale of goods, marine insurance, contracts of affreightment evidenced by bills of lading and those between parties to bills of exchange, Parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not.

The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.

This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party, the party in default cannot rely upon it as relieving himself of the performance of any further undertakings on his part, and the innocent party, although entitled to, need not treat the event as relieving him of the further performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party, each is relieved of the further performance of his own undertakings, and their rights in respect of undertakings previously performed are now regulated by the Law Reform (Frustrated Contracts) Act, 1943.”

83. This test may not, however, be adequate in the context of mistake, for there are cases where contracts have been held void for mistake, notwithstanding that the effect of the mistake was that the consideration proved to have substantially greater value than the parties had contemplated.

84. Once the court determines that unforeseen circumstances have, indeed, resulted in the contract being impossible of performance, it is next necessary to determine whether, on true construction of the contract, one or other party has undertaken responsibility for the subsistence of the assumed state of affairs. This is another way of asking whether one or other party has undertaken the risk that it may not prove possible to perform the contract, and the answer to this question may well be the same as the answer to the question of whether the impossibility of performance is attributable to the fault of one or other of the parties.

85. Circumstances where a contract is void as a result of common mistake are likely to be less common than instances of frustration. Supervening events which defeat the contractual adventure will frequently not be the responsibility of either party. Where, however, the parties agree that something shall be done which is impossible at the time of making the agreement, it is much more likely that, on true construction of the agreement, one or other will have undertaken responsibility for the mistaken state of affairs. This may well explain why cases where contracts have been found to be void in consequence of common mistake are few and far between.

86. Lord Atkin himself gave no examples of cases where a contract was rendered void because of a mistake as to quality which made ‘the thing without the quality essentially different from the thing as it was believed to be’. He gave a number of examples of mistakes which did not satisfy this test, which served to demonstrate just how narrow he considered the test to be. Indeed this is further demonstrated by the result reached on the facts of Bell v Lever Brothers itself.

87. Two cases where common mistake has been held to avoid the contract under common law call for special consideration. A case which is by no means easy to reconcile with Bell v Lever Brothers is Scott v Coulson [1903] 2 Ch 249. A contract for the sale of a life policy was entered into in circumstances in which both parties believed that the assured was alive. The price was paid and the policy assigned. The contract price was little more than the surrender value of the policy. In fact, the assured had died before the contract was concluded and the policy thus carried with it entitlement to the full sum assured. The vendors succeeded, in proceedings in the Chancery Court, in having the transaction set aside. In the Court of Appeal, Vaughan Williams LJ described the position as follows:

“If we are to take it that it was common ground that, at the date of the contract for the sale of this policy, both the parties to the contract supposed the assured to be alive, it is true that both parties entered into this contract upon the basis of a common affirmative belief that the assured was alive; but as it turned out that this was a common mistake, the contract was one which cannot be enforced. This is so at law; and the plaintiffs do not require to have recourse to equity to rescind the contract, if the basis which both parties recognised as the basis is not true.”

88. This case is often erroneously treated as being on all fours with Strickland v Turner – see for example in Bell v Lever Brothers Wright J. at p.565, Greer LJ at p.595, and Lord Warrington at pp.206-7. The two cases were, however, very different. An annuity on the life of someone deceased is self-evidently a nullity. The policy in Scott v Coulson was very far from a nullity. The only way that the case can be explained is by postulating that a life policy before decease is fundamentally different from a life policy after decease, so that the contractual consideration no longer existed, but had been replaced by something quite different – ergo the contract could not be performed. Such was the explanation given by Lord Thankerton in Bell v Lever Brothers at p.236.

89. The other case is the decision of Steyn J. in Japanese Bank v Credit du Nord [1989] 1 WLR 257. The plaintiff bank entered into an agreement with a rogue under which he purported to sell and lease back four specific machines. The defendant bank agreed with the plaintiff bank to guarantee the rogue’s payments under the lease-back agreement. The machines did not, in fact, exist. The rogue defaulted on his payments and the plaintiffs called on the guarantee. The defendants alleged (1) that on true construction of the agreement it was subject to an express condition precedent that the four machines existed; if this was not correct: (2) that the agreement was void at law for common mistake; if this was not correct the agreement was voidable in equity on the ground of mistake and had been avoided.

90. The first head of defence succeeded. Steyn J. went on, however, to consider the alternative defences founded on mistake. After reviewing the authorities on common mistake, he reached the following formulation of the law:

“The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourthly, and this is the point established by Bell v Lever Brothers Ltd [1932] A.C. 161, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in speeches in Bell v Lever Brothers Ltd.), the principle enunciated in Bell v Lever Brothers Ltd is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v Lever Brothers Ltd. Fifthly, there is a requirement which was not specifically discussed in Bell v Lever Brothers Ltd. What happens if the party, who is seeking to rely on the mistake, had no reasonable grounds for his belief? An extreme example is that of the man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk. In my judgment a party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief: cf McRae v Commonwealth Disposals Commission (1951) 84 C.L.R. 377, 408. That is not because principles such as estoppel or negligence require it, but simply because policy and good sense dictate that the positive rules regarding common mistake should be so qualified.”

91. The detailed analysis that we have carried out leads us to concur in this summary, subject to the proviso that the result in McRae can, we believe, be explained on the basis of construction, as demonstrated above. In agreeing with the analysis of Steyn J., we recognise that it is at odds with comments that Lord Denning made on more than one occasion about Bell v Lever Brothers Ltd to the effect that ‘a common mistake, even on a most fundamental matter, does not make a contract void at law’. As to this Steyn J. said at p.267:

“With the profoundest respect to the former Master of the Rolls I am constrained to say that in my view his interpretation of Bell v Lever Brothers Ltd does not do justice to the speeches of the majority.”

92. We share both the respect and the conclusion. We shall shortly consider in some detail the effect of Lord Denning’s treatment of the decision in Bell v Lever Brothers Ltd.

93. Steyn J. held that the test of common mistake was satisfied. He held, at p.269:

“For both parties the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist. The guarantee is an accessory contract. The non-existence of the subject matter of the principal contract is therefore of fundamental importance. Indeed the analogy of the classic res extincta cases, so much discussed in the authorities, is fairly close. In my judgment the stringent test of common law mistake is satisfied: the guarantee is void ab initio.”

94. Our conclusions have marched in parallel with those of Toulson J. We admire the clarity with which he has set out his conclusions, which emphasise the importance of a careful analysis of the contract and of the rights and obligations created by it as an essential precursor to consideration of the effect of an alleged mistake. We agree with him that, on the facts of the present case, the issue in relation to common mistake turns on the question of whether the mistake as to the distance apart of the two vessels had the effect that the services that the “Great Peace” was in a position to provide were something essentially different from that to which the parties had agreed. We shall defer answering that question until we have considered whether principles of equity provide a second string to the defendants’ bow.

Mistake in equity

95. In Solle v Butcher Denning LJ held that a court has an equitable power to set aside a contract that is binding in law on the ground of common mistake. Subsequently, as Lord Denning MR, in Magee v Pennine Insurance Co. [1969] 2 QB 507 at 514, he said of Bell v Lever Brothers:

“I do not propose today to go through the speeches in that case. They have given enough trouble to commentators already. I would say simply this: A common mistake, even on a most fundamental matter, does not make a contract void at law: but it makes it voidable in equity. I analysed the cases in Solle v Butcher [1950] 1 K.B. 671, and I would repeat what I said there, at p.693:

‘A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.'”

96. Neither of the other two members of the court in Magee v Pennine Insurance Co. cast doubt on Bell v Lever Brothers. Each purported to follow it, although reaching different conclusions on the facts. It is axiomatic that there is no room for rescission in equity of a contract which is void. Either Lord Denning was purporting to usurp the common law principle in Bell v Lever Brothers and replace it with a more flexible principle of equity, or the equitable remedy of rescission that he identified is one that operates in a situation where the mistake is not of such a nature as to avoid the contract. Decisions have, hitherto, proceeded on the basis that the latter is the true position. Thus, in Japanese Bank v Credit du Nord Steyn J. remarked at p.266 that it was clear that mistake in equity was not circumscribed by common law definitions. He went on to say at p.267:

“No one could fairly suggest that in this difficult area of the law there is only one correct approach or solution. But a narrow doctrine of common law mistake (as enunciated in Bell v. Lever Brothers Ltd. [1932] A.C 161), supplemented by the more flexible doctrine of mistake in equity (as developed in Solle v. Butcher [1950] 1 K.B. 671 and later cases), seems to me to be an entirely sensible and satisfactory state of the law: see Sheikh Bros. Ltd. v. Ochsner [1957] A. C 136. And there ought to be no reason to struggle to avoid its application by artificial interpretations of Bell v. Lever Brothers Ltd.

97. Toulson J. has taken a different view. He has concluded that it is not possible to differentiate between the test of mistake identified in Bell v Lever Brothers and that advanced by Lord Denning as giving rise to the equitable jurisdiction to rescind. He has examined the foundations upon which Lord Denning founded his decision in Solle v Butcher and found them defective. These are conclusions that we must review. If we agree with them the question will then arise of whether it was open to him, or is open to this Court, to rule that the doctrine of common mistake leaves no room for the intervention of equity.

98. The following issues fall to be considered in relation to the effect of common mistake in equity: (1) Prior to Bell v Lever Brothers was there established a doctrine under which equity permitted rescission of a contract on grounds of common mistake in circumstances where the contract was valid at common law? (2) Could such a doctrine stand with Bell v Lever Brothers? (3) Is this court nonetheless bound to find that such a doctrine exists having regard to Solle v Butcher and subsequent decisions?

Common mistake in equity prior to Bell v Lever Brothers

99. The doctrine of common mistake at common law which we have identified cannot be said to have been firmly established prior to Bell v Lever Brothers – see the comments of the High Court in Macrae and of the authors of Meagher on Equity: Doctrines & Remedies 3^rd Ed. at p.372. Little wonder if litigants, confronted with what appeared to them to be agreements binding in law should invoke the equitable jurisdiction of the Court of Chancery in an attempt to be released from their obligations, when they considered justice so demanded. Nor is it surprising if the Chancery Court granted the relief sought on the basis upon which it was claimed. It is not realistic to infer that when such relief was granted, the court implicitly determined that the contract was binding in law.

100. The precise circumstances in which the Court of Chancery would permit rescission of a contract were not clearly established in the latter half of the 19^th century. Thus, not until after the Judicature Act did the judgment of Sir George Jessel MR in Redgrave v Hurd (1881) 20 Ch D 1 at p.12 make it clear that equity would order rescission of a contract induced by innocent, as opposed to fraudulent, misrepresentation. In such circumstances both parties would normally be labouring under a common mistake when the contract was concluded, but a significant further step was needed if equity was to grant rescission where a contract was based on a common mistake that was not induced by one of the parties. While a number of 18^th and 19^th century cases prior to the decision in Cooper v Phibbs (1867) LR 2 HL 149 lend some support to the thesis that equity had taken that step, ‘no coherent equitable doctrine of mistake can be spelt from them’ – see the discussion in Goff & Jones on the Law of Restitution, 5^th ed. at pp.288-9 and Meagher at pp.375-6. Cooper v Phibbs was however the decision primarily relied upon by Denning LJ in Solle Butcher – he described it as ‘the great case’, and it is necessary to consider it with care. In this task we have been assisted by the analysis in ‘A Note on Cooper v Phibbs’ by Mr Paul Matthews in 105 LQR at 599 which was informed by access to the record of proceedings in the House of Lords.

101. At the heart of the case was a dispute as to title to a fishery in Ireland. The fishery, together with a cottage, was the subject of an agreement for a three year lease entered into by Phibbs, the respondent with Cooper the appellant. Phibbs was acting as agent for five sisters, who believed that they had inherited the fishery from their father. He, in the belief that he was the owner of the fishery in fee simple, had expended much money in improving it. Cooper contended that, after entering into the lease, he had discovered that the fishery had at all material times been trust property and that, in consequence of a series of events of very great complexity, he was entitled to an equitable life interest. It was ultimately not disputed, however, that the head lease of the cottage was vested in the sisters.

102. Cooper petitioned the Court of Chancery in Ireland seeking an order that the agreement be delivered up to be cancelled and that Phibbs be restrained from suing upon it. Cooper at all times made it plain that he was prepared to submit to any terms which the court might impose. The Lord Chancellor of Ireland dismissed the petition, without prejudice to the question as to ownership of the fishery, holding that no ground for the grant of relief had been made out. Cooper appealed, contending that the agreement ought to be set aside as made under mistake of fact and that he should be declared to have title to the fishery.

103. The House of Lords resolved the issue of title in favour of Cooper. Lord Cranworth dealt with the legal consequences of this in a short passage:

“The consequence was, that the present appellant, when, after the death of his uncle, he entered into the agreement to take a lease of this property, entered into an agreement to take a lease of what was, in truth, his own property - for, in truth, this fishery was bound by the covenant, and belonged to him, just as much as did the lands of Ballysadare; therefore, he says, I entered into the agreement under a common mistake, and I am entitled to be relieved from the consequence of it.

In support of that proposition he relied upon a case which was decided in the time of Lord Hardwicke, not by Lord Hardwicke himself, but by the then Master of the Rolls, Bingham v Bingham 1 Ves. Sen. 127, where that relief was expressly administered. I believe that the doctrine there acted upon was perfectly correct doctrine; but even if it had not been, that will not at all shew that this appellant is not entitled to this relief, because in this case the appellant was led into the mistake by the misinformation given to him by his uncle, who is now represented by the respondents. It is stated by him in his Cause Petition, which is verified, and to which there is no contradiction, and in all probability it seems to be the truth, that his uncle told him, not intending to misrepresent anything, but being in fact in error, that he was entitled to this fishery as his own fee simple property; and the appellant, his nephew, after his death acting on the belief of the truth of what his uncle had so told him, entered into the agreement in question. It appears to me, therefore, that it is impossible to say that he is not entitled to the relief which he asks, namely, to have the agreement delivered up and the rent repaid. That being so, he would be entitled to relief, but he is only entitled to this relief on certain terms, to which I will presently advert.”

104. Bingham v Bingham (1748) 1 Ves. Sen. seems to have been the only authority cited in support of the plea to have the agreement set aside on the ground of mistake. The short report of that case shows that it involved a bill to have the purchase money refunded in respect of the sale by the defendant to the plaintiff of an estate which it transpired was already owned by the plaintiff. The plaintiff was successful. The headnote of the short report states ‘Mistake – Equity relieves against bargains made under misconception of rights’. The reason for the decision was reported as follows:

“For though no fraud appeared, and the defendant apprehended he had a right, yet there was a plain mistake, such as the court was warranted to relieve against, and not to suffer the defendant to run away with the money in consideration of the sale of an estate, to which he had no right.”

105. Reverting to Cooper v Phibbs, Lord Westbury, who made the only other speech of substance, also dealt shortly with the law. He said at p.170:

“The result, therefore, is, that at the time of the agreement for the lease which it is the object of this Petition to set aside, the parties dealt with one another under a mutual mistake as to their respective rights. The Petitioner did not suppose that he was, what in truth he was, tenant for life of the fishery. The other parties acted upon the impression given to them by their father, that he (their father) was the owner of the fishery, and that the fishery had descended to them. In such a state of things there can be no doubt of the rule of a Court of equity with regard to the dealing with that agreement. It is said, Ignorantia juris haud excusat; but in that maxim the word ‘jus’ is used in the sense of denoting general law, the ordinary law of the country. But when the work ‘jus’ is used in the sense of denoting a private right, that maxim has no application. Private right of ownership is a matter of fact; it may be the result also of matter of law; but if the parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that that agreement is liable to be set aside as having proceeded upon a common mistake. Now, that was the case with these parties - the respondents believed themselves to be entitled to the property, the Petitioner believed that he was a stranger to it, the mistake is discovered, and the agreement cannot stand.

But then, when the appellant comes here to set aside the agreement, an obligation lies upon him so to constitute his suit as to enable a Court of Equity to deal with the whole of the subject matter, and once for all to dispose of the rights and interests of the parties in the settlement.”

106. The words ‘rights and interests’ are important. The terms under which relief was granted were designed to protect the rights of those affected by the decision. It appears to have been common ground that the monies expended by the father of the five sisters on what transpired to be trust property had given rise to a lien. The effect of this could not be addressed by the court, because not all of those interested were before the court. Equally Cooper had been enjoying the use of the cottage which belonged to the sisters and the sisters were entitled to ‘an occupation rent’ in respect of such use. In discussing the Order to be made, Lord Westbury said:

“That is the reason, therefore, why the decree is proposed to be put in the form which your Lordships have heard, namely, that although a declaration is made, in order to shew the basis upon which the opinion of the House is founded, with respect to the invalidity of the agreement, yet the House stops short of giving positive relief, except on the terms imposed on the Petitioner, to which in reality, by the prayer of his Petition, he submits, by giving an opportunity to the respondents to ascertain the full measure of their rights and interests, in order that complete justice may be done;”

107. The Order itself is a lengthy and interesting document. After reciting by way of declaration the circumstances in which Cooper came to have a life interest in the fishery, it continued:

“…and it is farther declared, that the aforesaid agreement of the 14^th October, 1863, in the said Cause Petition mentioned, was made and entered into by the parties to the same under mistake, and in ignorance of the actually existing rights and interests of such parties in the said fishery: and it is farther declared, that the same agreement is not in equity binding upon the appellant and respondents, but ought to be set aside, subject to the appellant paying to the respondents a proper occupation rent for the said excepted piece of land and cottage, and the buildings on the said land, to be ascertained by the Master in the usual manner, and subject also…”

108. The further matter to which equitable relief was made subject was that appropriate proceedings were taken to ascertain the amount that should be paid by Cooper to discharge the lien. The Order provided that, if such sum was ascertained and paid by Cooper:

“…it is ordered, that a deed be settled and approved as shall be necessary or proper for the purpose of releasing or conveying the said lands, hereditaments, and fishery, including therein the rights, interests, and works acquired and made by the said Edward Joshua Cooper, unto or for the benefit of the appellant and such other persons as shall be found to be entitled thereto…”

109. It is not easy to analyse the precise principles that led the House of Lords to set aside the agreement in this case. In an article in (1954) 70 LQR 385 Mr Christopher Slade suggested that misrepresentation was the basis of the decision, and that was certainly stated by Lord Cranworth to be one ground for granting relief. But, equally, he affirmed the ‘doctrine acted upon’ in Bingham v Bingham and Lord Westbury founded his decision fairly and squarely on common mistake – ‘the Respondents believed themselves to be entitled to the property, the Petitioner believed that he was a stranger to it, the mistake is discovered and the agreement cannot stand’.

110. The authors of Meagher suggest, at paragraph 1423 that Cooper commenced the proceedings in the belief that the agreement failed in law, claiming only ancillary relief of delivery up of the agreement and an injunction restraining Phibbs from suing on it. We think it more likely that Cooper believed that he needed the assistance of equity to escape from an agreement that a court of law would hold binding – he could hardly have been confident that in 1865 common law judges would recognise his equitable title as a ground for holding the agreement void for mistake. At all events we agree with the authors of Meagher that it is plain from the terms of the Order of the House of Lords that they approached the case on the basis that ‘in equity alone did the agreement fail’. The speeches do not expressly define the nature of the mistake as to rights that justified the intervention of equity, but the reference by Lord Cranworth to the doctrine in Bingham v Bingham and the words of Lord Westbury that we have quoted in the previous paragraph indicate that the type of mistake under consideration was one whereby a party agrees to purchase a title which he already owns. There is nothing that suggests that their Lordships were seeking to lay down a broader doctrine of mistake. It is, however , right to observe that in Earl Beauchamp v Winn (1873) LR6HL 223 at p. 233 Lord Chelmsford observed, obiter:

“The cases in which Equity interferes to set aside contracts are those in which either there has been mutual mistake or ignorance in both parties affecting the essence of the contracts, or a fact is known to one party and unknown to the other, and there is some fraud or surprise upon the ignorant party.”

The effect of Bell v Lever Brothers

111. The report of argument before the Court of Appeal indicates that counsel for the appellants grouped together common law authorities and equitable authorities, including Cooper v Phibbs, in support of the proposition that a contract was void for mistake only where the mistake was as to the existence of the subject matter of the contract. Counsel for the respondents also relied on Cooper v Phibbs, observing ‘The contract is not merely liable to be set aside. It is void’. Scrutton LJ appears to have accepted this submission. At p.585 he gave examples of mistakes as to assumed assumptions which might render a contract void:

“It may be a right to a thing, as where the thing purchased is really the property of the purchaser and not of the vendor. As Lord Westbury puts it in Cooper v Phibbs: ‘If parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that that agreement is liable to be set aside as having proceeded upon a common mistake.’ Later authorities show that the language should be ‘is void’ and any revival is made, not by electing not to set aside, but by a new contract.”

112. Lawrence LJ agreed. He held at pp.590-1:

“The locus classicus on this particular branch of contract law is the passage in Lord Westbury’s speech in Cooper v Phibbs, where, after pointing out the difference between ignorance of the general law of the country and ignorance of a private right, although the latter might also be the result of a matter of law, Lord Westbury states the rule where private rights are concerned as follows: ‘If parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that that agreement is liable to be set aside as having proceeded upon a common mistake.’ The only criticism to be made on that statement of the rule is that the word ‘void’ ought to have been substituted for the expression ‘liable to be set aside’, as what really happens in such cases is that the agreement fails to become a contract.”

113. In the House of Lords the report shows that the appellants relied on both common law authorities and Cooper v Phibbs in support of the submission that a common mistake had to be as to the existence of the subject matter of the contract if it was to render it void. The respondents do not appear to have suggested that equity might provide relief where common law would not. They relied upon frustration cases in support of the proposition that a mistake would render a contract void if it was based on a mistaken assumption that was contractual and was as to the essence of the contract.

114. Lord Blanesborough, when considering the pleadings, remarked at p.190:

“…the claim made by the heads of claim is for rescission of the agreements of settlement, relief properly consequent upon a case of voidability either for fraud or unilateral mistake induced by fraud. But if the allegation, even alternative, was that the agreements were entered into under mutual mistake of fact, then these agreements were not voidable but void ab initio, and no order on that footing is even hinted at in the relief sought.”

115. Lord Warrington, who was for dismissing the appeal, does not appear to have believed that there was a significant difference between the situation where the common law would declare a contract void and that where equity would grant rescission on the ground of common mistake. He stated at p.210:

“This case seems to me to raise a question as to the application of certain doctrines of common law, and I have therefore not thought it necessary to discuss or explain the special doctrines and practice of Courts of equity in reference to the rescission on the ground of mistake of contracts, conveyances and assignments of property and so forth, or to the refusal on the same ground to decree specific performance, though I think, in accordance with such doctrines and practice, the same result would follow.”

116. Lord Atkin at p.218 cited Cooper v Phibbs as an example of mistake as to the subject matter of the contract:

“This is the case of Cooper v Phibbs, where A agreed to take a lease of a fishery from B, though contrary to the belief of both parties at the time A was tenant for life of the fishery and B appears to have had no title at all. To such a case Lord Westbury applied the principle that if parties contract under a mutual mistake and misapprehension as to their relative and respective rights the result is that the agreement is liable to be set aside as having proceeded upon a common mistake. Applied to the context the statement is only subject to the criticism that the agreement would appear to be void rather than voidable.”

117. Lord Thankerton at p.235, when considering the type of mistaken assumption that would render a contract void in the light of a number of common law authorities, added:

“The phrase ‘underlying assumption by the parties,’ as applied to the subject matter of a contract, may be too widely interpreted so as to include something which one of the parties had not necessarily in his mind at the time of the contract: in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject-matter. In the present case, however probable it may be, we are not necessarily forced to that assumption. Cooper v Phibbs (1) is a good illustration, for both parties must necessarily have proceeded on the mistaken assumption that the lessor had the right to grant the lease and that the lessee required a lease ”

118. These passages demonstrate that the House of Lords in Bell v Lever Brothers considered that the intervention of equity, as demonstrated in Cooper v Phibbs, took place in circumstances where the common law would have ruled the contract void for mistake. We do not find it conceivable that the House of Lords overlooked an equitable right in Lever Brothers to rescind the agreement, notwithstanding that the agreement was not void for mistake at common law. The jurisprudence established no such right. Lord Atkin’s test for common mistake that avoided a contract, while narrow, broadly reflected the circumstances where equity had intervened to excuse performance of a contract assumed to be binding in law.

The effect of Solle v Butcher

119. The material facts of Solle v Butcher can shortly be summarised as follows. The defendant agreed to let a flat to the plaintiff for £250 a year. The flat had previously been let at a rent of £140. Substantial work had been done on the flat and both parties believed that this so altered the nature of the premises as to free them from relevant rent control. In this they were mistaken. The defendant would have been able to charge the plaintiff an increased rent of £250 to reflect the work done on the flat had he complied with the requisite formalities but, under the influence of the mistake, he failed to do so. In the result he could not lawfully charge a rent higher than £140. The plaintiff obtained a declaration in the county court that the rent was restricted to £140 and an order for repayment of rent overpaid. The Judge rejected the contention that the contract had been concluded under a common mistake of fact, holding that the mistake was one of law.

120. The Court of Appeal, by a majority, reversed this decision. Bucknill LJ held that the parties had concluded the agreement under a common mistake of fact, namely that the alterations had turned the premises into ‘in effect, a different flat’. He held that this common mistake was on a matter of fundamental importance and that the defendant was entitled to rescind the agreement under the principle in Cooper v Phibbs (1867) LR 2 HL 249. He remarked that he had read the judgment of Denning LJ and agreed with the terms proposed by him on which the lease should be set aside.

121. Jenkins LJ dissented. He held that the common mistake was one of law, namely whether or not the flat was subject to rent control. He held that no right to rescind could be based on an error of law.

122. Denning LJ first identified the effect of common mistake under principles of common law:

“Let me first consider mistakes which render a contract a nullity. All previous decisions on this subject must now be read in the light of Bell v Lever Bros Ltd [1932] A.C. 161, 222, 224, 225-7, 236. The correct interpretation of that case, to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until 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. Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake. A fortiori, if the other party did not know of the mistake, but shared it. The cases where goods have perished at the time of sale, or belong to the buyer, are really contracts which are not void for mistake but are void by reason of an implied condition precedent, because the contract proceeded on the basic assumption that it was possible of performance.”

123. Applying those principles he held that it was clear that there was a contract. The parties had agreed in the same terms on the same subject-matter. True it was that there was a fundamental mistake as to the rent which could be charged, but that did not render the lease a nullity. Turning to equity, he observed that the court could set aside a contract when it was unconscientious for the other party to take advantage of it. As to what was considered unconscientious, equity had shown a progressive development. A material misrepresentation would suffice, even if not fraudulent or fundamental. He continued at p.693:

“A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault”

124. For this proposition Denning LJ relied primarily on Cooper v Phibbs. Of this he said:

“In that case an uncle had told his nephew, not intending to misrepresent anything, but being in fact in error, that he (the uncle) was entitled to a fishery; and the nephew, after the uncle’s death, acting in the belief of the truth of what the uncle had told him, entered into an agreement to rent the fishery from the uncle’s daughters, whereas it actually belonged to the nephew himself. The mistake there as to the title to the fishery did not render the tenancy agreement a nullity. If it had done, the contract would have been void at law from the beginning and equity would have had to follow the law. There would have been no contract to set aside and no terms to impose. The House of Lords, however, held that the mistake was only such as to make it voidable, or, in Lord Westbury’s words “liable to be set aside” on such terms as the court thought fit to impose; and it was so set aside.

The principle so established by Cooper v. Phibbs (1867) L.R. 2 H.L. 149 has been repeatedly acted on: see, for instance, Earl Beauchamp v. Winn (1873) L.R. 6 H.L. 223, 234 and Huddersfield Banking Co. Ltd v Lister [1805] 2 Ch. 273. It is in no way impaired by Bell v. Lever Bros. Ltd. [1932] A.C. 161, which was treated in the House of Lords as a case at law depending on whether the contract was a nullity or not. If it had been considered on equitable grounds, the result might have been different. In any case, the principle of Cooper v. Phibbs has been fully restored by Norwich Union Fire Insurance Society Ltd. v. William H. Price, Ltd. [1934] A.C. 455, 462-3.”

He added at p.695:

“Cooper v. Phibbs affords ample authority for saying that, by reason of the common misapprehension, this lease can be set aside on such terms as the court thinks fit.”

125. Denning LJ held that the lease should be set aside because there had been ‘a common misapprehension, which was fundamental’. The terms on which the lease was set aside were such as, in effect, to give the tenant the option of substituting the lease for one at the full rent which the law permitted.

126. Toulson J. described this decision by Lord Denning as one which ‘sought to outflank Bell v Lever Brothers’. We think that this was fair comment. It was not realistic to treat the House of Lords in Bell v Lever Brothers as oblivious to principles of equity, nor to suggest that ‘if it had been considered on equitable grounds the result might have been different’. For the reasons that we have given, we do not consider that Cooper v Phibbs demonstrated or established an equitable jurisdiction to grant rescission for common mistake in circumstances that fell short of those in which the common law held a contract void. Insofar as this was in doubt, the House of Lords in Bell v Lever Brothers delimited the ambit of operation of Cooper v Phibbs by holding, rightly or wrongly, that on the facts of that case the agreement in question was void at law and by holding that, on the facts in Bell v Lever Brothers, the mistake had not had the effect of rendering the contract void.

127. It was not correct to state that Cooper v Phibbs, as interpreted by Denning LJ, was ‘in no way impaired by Bell v Lever Brothers’, nor to make the inconsistent statement that the principle of Cooper v Phibbs, as interpreted by Denning LJ, had been ‘fully restored’ by Norwich Union Fire Insurance v Price [1934] AC 455. That was a decision of the Privy Council, on appeal from the Supreme Court of New South Wales. Insurers had paid the insured value on a cargo of lemons under a mistake, shared by the assured, that they had been destroyed by a peril insured against. In fact they had been sold in transit because they were ripening. The Privy Council allowed the insurers appeal against the refusal of the Supreme Court to allow them to recover the insurance monies on the ground that they had been paid under a mistake of fact. At pp.462-3 of their advice they observed:

“The mistake was as vital as that in Cooper v Phibbs in respect of which Lord Westbury used these words: ‘If parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that that agreement is liable to be set aside as having proceeded upon a common mistake.’ At common law such a contract (or simulacrum of a contract) is more correctly described as void, there being in truth no intention to contract. Their Lordships find nothing tending to contradict or overrule these established principles in Bell v Lever Bros Ltd.”

128. This passage reinforces the approach of the House of Lords in Bell v Lever Brothers of equating the test of common mistake in Cooper v Phibbs with one that renders a contract void at common law.

129. Nor was it accurate to state that Cooper v Phibbs afforded ample authority for saying that the lease could be set aside ‘on such terms as the court thinks fit’. As we have demonstrated, the terms imposed by the House of Lords in Cooper v Phibbs were no more than necessary to give effect to the rights and interests of those involved.

130. In Bell v Lever Brothers the House of Lords equated the circumstances which rendered a contract void for common mistake with those which discharged the obligations of the parties under the doctrine of frustration. Denning LJ rightly concluded that the facts of Solle v Butcher did not amount to such circumstances. The equitable jurisdiction that he then asserted was a significant extension of any jurisdiction exercised up to that point and one that was not readily reconcilable with the result in Bell v Lever Brothers.

131. If the result in Solle v Butcher extended beyond any previous decision the scope of the equitable jurisdiction to rescind a contract for common mistake, the terms of Denning LJ’s judgment left unclear the precise 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 some quality which makes the thing without the quality essentially different from the thing as it was believed to be’? The difficulty in answering this question was one of the factors that led Toulson J. to conclude that there was no equitable jurisdiction to rescind on the ground of common mistake a contract that was valid in law. Was it open to him after half a century and is it open to this Court to find that the equitable jurisdiction that Denning LJ identified in Solle v Butcher was a chimera? Principles of both equity and common law have been developed by the judges and that is not a process which ceased with the Judicature Act. Does the doctrine of precedent require, or even permit, this court to hold that the jurisdiction that Denning LJ purported to exercise in Solle v Butcher does not exist because that decision was in conflict with that of the House of Lords in Bell v Lever Brothers?

132. That question first requires consideration of the judgment of Bucknill LJ in Solle v Butcher. He did not purport to agree with the statements of principle in the judgment of Denning LJ, which he had read in draft. He simply stated that he was applying the principle in Cooper v Phibbs to an agreement concluded under a mistake as to a matter of fundamental importance. Nonetheless, he expressly concurred in ordering rescission on terms. At p.689, at the end of his judgment, he observed that the defendant had ‘established his point that the lease should be rescinded on the ground of common mistake, on a suitable undertaking being given by him as regards a new lease to the plaintiff’. This was not a finding that was open to him if Bell v Lever Brothers had established that common mistake had no effect on a contract unless it was so significant as to render the contract void. It follows that the majority decision in Solle v Butcher was based on the assumption of a jurisdiction founded in equity to order rescission of a contract binding in law.

133. We turn to consider the decisions on common mistake in the years that have followed Solle v Butcher.

134. In Rose v Pim [1953] 2 QB 450 the parties entered into a contract for the purchase and sale of ‘horsebeans’ under the common, mistaken, belief that these were a specific type of bean known as ‘feveroles’. The plaintiffs sought, unsuccessfully, rectification of the agreement after it had been performed. In the course of his judgment, Denning LJ repeated the analysis that he had made of the law of common mistake in Solle v Butcher. He expressed the view at p.461 that, had the buyers reacted before they had accepted the goods, they could have rescinded the agreement on the ground of common mistake.

135. In Grist v Bailey [1967] 1 Ch. 532, Goff J. followed Solle v Butcher in granting rescission of a contract for the sale of freehold land. Both parties had believed that the land was encumbered by a statutory tenancy, when this was not the case. The effect of this mistake was that the land was worth over double the agreed price. The Judge first considered Bell v Lever Brothers, and held that the agreement did not satisfy the criteria necessary to establish that it was void for common mistake. He then considered Solle v Butcher and concluded at pp.538-9 that it established that the jurisdiction to grant rescission for common mistake was wider than the jurisdiction to hold a contract void at law. He concluded that the facts satisfied the requirement that the mistake should be ‘fundamental’ and ordered rescission on terms that the vendor enter into a fresh contract to sell the land, if so required by the purchaser, at ‘a proper vacant possession price’.

136. The next case of common mistake came before a division of the Court of Appeal presided over by Lord Denning as Master of the Rolls. In Magee v Pennine Insurance Co, Ltd. [1969] 2 QB 507 motor insurers entered into a compromise agreement under which they agreed to pay their assured £385 in respect of damage sustained as the result of a collision. They then discovered facts that would have entitled them to repudiate the policy. They denied liability under the compromise agreement, relying on, among other matters, Solle v Butcher.

137. We have already cited in paragraph 95 above Lord Denning’s short summary of the law. He went on at p.514 to apply it:

“This brings me to a question which has caused me much difficulty. Is this a case in which we ought to set the agreement aside in equity? I have hesitated on this point, but I cannot shut my eyes to the fact that Mr Magee had no valid claim on the insurance policy: and, if he had no claim on the policy, it is not equitable that he should have a good claim on the agreement to pay £385, seeing that it was made under a fundamental mistake. It is not fair to hold the insurance company to an agreement which they would not have dreamt of making if they had not been under a mistake. I would, therefore, uphold the appeal and give judgment for the insurance company.”

138. As Toulson J. pointed out, this passage suggests that the exercise of the jurisdiction to order rescission for fundamental mistake is discretionary, depending on consideration of what is ‘fair’.

139. Winn LJ dissented on the basis that the relevant test was that laid down in Bell v Lever Brothers, a test which, on the facts of the case, was not satisfied. Fenton Atkinson LJ at p.517 stated that on the issue of mistake he agreed with Lord Denning. He then, however, went on to say:

“…applying in this case the proposition which was accepted by all of their Lordships in Bell v Lever Brothers Ltd [1932] A.C. 161, set out in Chitty on Contracts, 23^rd ed. (1968), para. 207, in these terms:

‘Whenever it is to be inferred from the terms of a contract or its surrounding circumstances that the consensus has been reached on the basis of a particular contractual assumption and that assumption is not true, the contract is avoided.’

And to that has to be added the additional rider: ‘The assumption must have been fundamental to the continued validity of the contract or a foundation essential to its existence’. Applying the rule there laid down to the facts of this case, I think it is clear that, when the agreement relied upon by the plaintiff was made, it was made on the basis of a particular and essential contractual assumption, namely that there was in existence a valid and enforceable policy of insurance, and that assumption was not true. In my view it is the right and equitable result of this case that the insurers should be entitled to avoid that agreement on the ground of mutual mistake in a fundamental and vital matter.”

140. This passage is not entirely clear. The language raises a doubt as to whether the Lord Justice was holding the contract void or voidable. We doubt whether he was intending to contradict Lord Denning by holding that the mistake rendered the contract void in law, but do not consider that his judgment can be treated as an endorsement of the full reasoning of Denning LJ in Solle v Butcher.

141. In Laurence v Lexcourt Holdings [1978] 1 WLR 1128 the purchasers sought rescission of a 15 year lease of business premises. Unknown to either, planning permission restricted their use as offices to a period of no more than two years. Mr Brian Dillon QC, sitting as a Deputy Judge of the Chancery Division, found that there had been a misrepresentation by the lessors which entitled the lessees to rescind the agreement. Dealing with an alternative plea of common mistake, he followed Solle v Butcher and Grist v Bailey in holding that the lease could be rescinded on the ground that it had been concluded under a mistake which was fundamental.

142. The next case in sequence is Japanese Bank v Credit du Nord, to which we have already made reference. At p.266 Steyn J. had this to say about the relationship of common law and equity:

“It seems to me that the better view is that the majority in Bell v Lever Brothers Ltd [1932] A.C. 161 had in mind only mistake at common law. That appears to be indicated by the shape of the argument, the proposed amendment (see p.191) placed before the House of Lords, and the speeches of Lord Atkin and Lord Thankerton. But, if I am wrong on this point, it is nevertheless clear that mistake at common law was in the forefront of the analysis in the speeches of the majority. The law has not stood still in relation to mistake in equity. Today, it is clear that mistake in equity is not circumscribed by common law definitions. A contract affected by mistake in equity is not void but may be set aside on terms: Solle v Butcher [1950] 1 K.B. 671; Magee v Pennine Insurance Co. Ltd [1969] 2 Q.B. 506 and Grist v Bailey [1967] Ch. 532. It does not follow, however, that Bell v Lever Brothers Ltd is no longer an authoritative statement of mistake at common law. On the contrary, in my view the principles enunciated in that case clearly still govern mistake as common law.”

143. At the end of his judgment at p.270, he added:

“Having concluded that the guarantee is void ab initio at common law, it is strictly unnecessary to examine the question of equitable mistake. Equity will give relief against common mistake in cases where the common law will not, and it provides more flexible remedies including the power to set aside the contract on terms. It is not necessary to repeat my findings of fact save to record again the fundamental nature of the common mistake, and that the defendants were not at fault in any way. If I had not decided in favour of the defendants on construction and common law mistake, I would have held that the guarantee must be set aside on equitable principles.”

144. The results in two of the cases to which we have referred were questioned by Hoffman LJ in William Sindall PLC v Cambridgeshire CC [1994] 1 WLR 1016 at 1035. In that case the purchasers of land for development sought to rescind the agreement on grounds which included common mistake. The mistake relied on was common ignorance of the fact that a sewer ran under the land, which would impede any development. Hoffman LJ held that an express provision that the contract was subject to easements left no room for rescission on the grounds of mistake. He also observed that in Grist v Bailey and Laurence v Lexcourt Holdings the judges did not advert to the question of the contractual allocation of risk and suggested that the results might have been different had they done so.

145. Hoffman LJ did not, however, question the existence of a jurisdiction to order rescission on the ground of common mistake. Evans LJ at p.1042 addressed this question. He commented:

“Logically, there remains the question whether the contract, notwithstanding that on its true construction it covers the situation which has arisen, and that it cannot be set aside for misrepresentation, nevertheless may be rescinded on the ground of equitable mistake, as defined by Denning L.J. in Solle v Butcher [1950] 1 K.B. 671. It must be assumed, I think, that there is a category of mistake which is ‘fundamental’ so as to permit the equitable remedy of rescission, which is wider than the kind of ‘serious and radical’ mistake which means that the agreement is void and of no effect in law: see Chitty on Contracts, 26^th ed. (1989), vol. 1, para. 401; Treitel, The Law of Contract, 8^th ed. (1991), p.276; and Cheshire, Fifoot and Furmston’s Law of Contract, 11^th ed. (1991), p.245. The difference may be that the common law rule is limited to mistakes with regard to the subject matter of the contract, whilst equity can have regard to a wider and perhaps unlimited category of ‘fundamental’ mistake.”

146. We were referred to an unreported decision of the Court of Appeal, which provides a recent application of the doctrine of common mistake by this court. In Nutt v Reed (21^st October 1999), the court was concerned with two linked agreements, one for the sale of a chalet and the other for the right to pitch the chalet on a plot of land. In fact, the chalet was affixed to the land, so that it could not be sold independently of it. At first instance the contract for the sale of the chalet was held void for mistake. This was not challenged on appeal. The Judge did not hold that the pitch agreement was void in law, but rescinded it on the application of the owners of the plot, applying Solle v Butcher. Chadwick LJ held that the Judge might have taken the view that the second agreement also was void in law. There was, however, no appeal on that point. In the circumstances Chadwick LJ held that ‘the Judge was right to reach the conclusion that he had power, in equity, to set aside the second agreement’. Later he said:

“He made his decision as to the terms of rescission on the basis of the arguments put before him; and, on the basis of those arguments, reached what seems to me to be the only conclusion that he could reach - namely that the agreement for the use of pitch 23 should be rescinded on the grounds that it had been entered into on the basis of a fundamental mistake; and that it would be wrong to refuse to rescind it simply because it gave rise to an assured tenancy - see Solle v Butcher.”

147. The other two members of the court agreed that the appeal should be dismissed.

148. Toulson J drew attention to Chadwick LJ’s remark that the proceedings had been beset by muddle and confusion and observed that it was perhaps not surprising that the case had not been reported. It is, nonetheless, a further example of a decision of this court which proceeded on the basis that Solle v Butcher was good law.

149. The most recent decision to which we were referred was that of Rimer J. in Clarion Ltd v National Provident Institution [2000] 1 WLR 1888. The relevant issue was whether a complex agreement in relation to the switching between funds of blocks of investments should be rescinded for unilateral mistake of one party as to how it would operate, that mistake being known to the other. All that one need note is that both parties proceeded on the basis that equity’s role was to be identified from the judgment of Denning LJ in Solle v Butcher. And that, proceeding on that premise, the Judge held that the case for rescission was not made out. He did, however, observe at p.1898 that this was an area of the law where there had been little merging of the stream of common law and equity and commended the discussion of the relevant law of Steyn J. in Japanese Bank v Credit du Nord.

150. After the conclusion of argument an unreported decision of the Court of Appeal has come to our attention. In West Sussex Properties Ltd v Chichester District Council (28^th June 2000) the trial Judge had granted to the respondents an order rescinding an agreement revising, in purported pursuance to a rent review clause, the rent of property leased by the appellants to the respondents. The calculation of the new rent was based on a common mistake as to material facts of what had occurred nearly 30 years before the agreement was concluded. In the result the revised annual ground rent agreed exceeded by over £33,000 that which should have been agreed, had the mistake not been made. As we understand the position, rescission was ordered on terms that the rent payable from the date of review would be that which should have been agreed, and the rent overpaid was ordered to be repaid under principles of restitution.

151. The Court of Appeal upheld the decision. In the leading judgment, Morritt LJ recorded that, in the court below, junior counsel had challenged Denning LJ’s judgment in Solle v Butcher but that, before the Court of Appeal, leading counsel had accepted that Solle v Butcher was good law, unless and until overruled by the House of Lords. The Court of Appeal proceeded on the basis that this concession was properly made and held that, while not void in law, the agreement had been properly rescinded on the ground of common mistake.

152. In the course of his judgment, Sir Christopher Staughton remarked at paragraph 42:

“It is a matter of some satisfaction, in my view, that we can and do regard ourselves as bound by the decision in Solle v Butcher (1950) 1 KB 671. That decision has now stood for over 50 years. Despite scholarly criticism it remains unchallenged in a higher court; indeed there have been remarkably few reported cases where it has been considered during that long period. As this case shows, it can on occasion be the passport to a just result.”

Summary

153. A number of cases, albeit a small number, in the course of the last 50 years have purported to follow Solle v Butcher, yet none of them defines the test of mistake that gives rise to the equitable jurisdiction to rescind in a manner that distinguishes this from the test of a mistake that renders a contract void in law, as identified in Bell v Lever Brothers. This is, perhaps, not surprising, for Lord Denning, the author of the test in Solle v Butcher, set Bell v Lever Brothers at nought. It is possible to reconcile Solle v Butcher and Magee v Pennine Insurance with Bell v Lever Brothers only 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. Although later cases have proceeded on this basis, it is not possible to identify that proposition in the judgment of any of the three Lords Justices, Denning, Bucknill or Fenton Atkinson, who participated in the majority decisions in the former two cases. Nor, over 50 years, has it proved possible to define satisfactorily two different qualities of mistake, one operating in law and one in equity.

154. In Solle v Butcher Denning LJ identified the requirement of a common misapprehension that was ‘fundamental’, and that adjective has been used to describe the mistake in those cases which have followed Solle v Butcher. We do not find it possible to distinguish, by a process of definition, a mistake which is ‘fundamental’ from Lord Atkin’s mistake as to quality which ‘makes the thing contracted for essentially different from the thing that it was believed to be’.

155. A common factor in Solle v Butcher and the cases which have followed it can be identified. The effect of the mistake has been to make the contract a particularly bad bargain for one of the parties. Is there a principle of equity which justifies the court in rescinding a contract where a common mistake has produced this result?

“Equity is… a body of rules or principles which form an appendage to the general rules of law, or a gloss upon them. In origin at least, it represents the attempt of the English legal system to meet a problem which confronts all legal systems reaching a certain stage of development. In order to ensure the smooth running of society it is necessary to formulate general rules which work well enough in the majority of cases. Sooner or later, however, cases arise in which, in some unforeseen set of facts, the general rules produce substantial unfairness…” (Snell’s Equity, 30^th edn. Paragraph 1-03)

156. Thus the premise of equity’s intrusion into the effects of the common law is that the common law rule in question is seen in the particular case to work injustice, and for some reason the common law cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and misrepresentation, and undue influence, are all catered for under other existing and uncontentious equitable rules. We are only concerned with the question whether relief might be given for common mistake in circumstances wider than those stipulated in Bell v Lever Brothers. But that, surely, is a question as to where the common law should draw the line; not whether, given the common law rule, it needs to be mitigated by application of some other doctrine. The common law has drawn the line in Bell v Lever Brothers. The effect of Solle v Butcher is not to supplement or mitigate the common law; it is to say that Bell v Lever Brothers was wrongly decided.

157. Our conclusion is that it is impossible to reconcile Solle v Butcher with Bell v Lever Brothers. The jurisdiction asserted in the former case has not developed. It has been a fertile source of academic debate, but in practice it has given rise to a handful of cases that have merely emphasised the confusion of this area of our jurisprudence. In paragraphs 110 to 121 of his judgment, Toulson J. has demonstrated the extent of that confusion. If coherence is to be restored to this area of our law, it can only be by declaring that 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. That is the conclusion of Toulson J. Do the principles of case precedent permit us to endorse it? What is the correct approach where this court concludes that a decision of the Court of Appeal cannot stand with an earlier decision of the House of Lords? There are two decisions which bear on this question.

158. Noble v Southern Railway Company [1940] AC 583 involved a claim under the Workmen’s Compensation Act 1925 in respect of a railway employee killed by a passing train. The Court of Appeal dismissed the claim, holding itself bound to follow a previous decision of the Court of Appeal that was on all fours – Clarke’s case (20) BWCC 309 – notwithstanding that this was in conflict with an earlier decision of the House of Lords – McFerrin’s case [1926 ] AC 377. Lord Wright made the following comment on this situation at p.598:

“I can understand the difficulty in which both the county court judge and the Court of Appeal were placed in the present case. What a court should do when faced with a decision of the Court of Appeal manifestly inconsistent with the decisions of this House is a problem of some difficulty in the doctrine of precedent. I incline to think it should apply the law laid down by the House and refuse to follow the erroneous decision.”

159. Lord Lane CJ, when delivering the judgment of the Court of Appeal, invoked this statement of opinion in Holden & Co v Crown Prosecution Service [1990] 2 QB 261. At issue was the scope of the jurisdiction of the court to order a solicitor to pay personally costs thrown away in criminal proceedings. The court was faced with reasoning on the point in a previous decision of the Court of Appeal which was at odds with an earlier decision of the House of Lords. Lord Lane, having referred to the opinion of Lord Wright, went on to hold that the court regarded itself as free to disregard the previous decision of the Court of Appeal.

160. We have been in some doubt as to whether this line of authority goes far enough to permit us to hold that Solle v Butcher is not good law. We are very conscious that we are not only scrutinising the reasoning of Lord Denning in Solle v Butcher and in Magee v Pennine Insurance Co, but are also faced with a number of later decisions in which Lord Denning’s approach has been approved and followed. Further, a Division of this Court has made it clear in West Sussex Properties Ltd v Chichester DC that they felt bound by Solle’s case. However, it is to be noticed that while junior counsel in the court below in West Sussex had sought to challenge the correctness of Solle, in the Court of Appeal leading counsel accepted that it was good law unless and until overturned by their Lordships’ House. In this case we have heard full argument, which has provided what we believe has been the first opportunity in this court for a full and mature consideration of the relation between Bell v Lever Brothers Ltd and Solle v Butcher. In the light of that consideration we can see no way that Solle v Butcher can stand with Bell v Lever Brothers. In these circumstances we can see no option but so to hold.

161. We can understand why the decision in Bell v Lever Brothers Ltd did not find favour with Lord Denning. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater flexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.

The result in this case

162. We revert to the question that we left unanswered at paragraph 94. It was unquestionably a common assumption of both parties when the contract was concluded that the two vessels were in sufficiently close proximity to enable the “Great Peace” to carry out the service that she was engaged to perform. Was the distance between the two vessels so great as to confound that assumption and to render the contractual adventure impossible of performance? If so, the appellants would have an arguable case that the contract was void under the principle in Bell v Lever Brothers Ltd.

163. Toulson J addressed this issue in the following paragraph:

“Was the “Great Peace” so far away from the “Cape Providence” at the time of the contract as to defeat the contractual purpose - or in other words to turn it into something essentially different from that for which the parties bargained? This is a question of fact and degree, but in my view the answer is no. If it had been thought really necessary, the “Cape Providence” could have altered course so that both vessels were heading toward each other. At a closing speed of 19 knots, it would have taken them about 22 hours to meet. A telling point is the reaction of the defendants on learning the true positions of the vessels. They did not want to cancel the agreement until they knew if they could find a nearer vessel to assist. Evidently the defendants did not regard the contract as devoid of purpose, or they would have cancelled at once.”

164. Mr Reeder has attacked this paragraph on a number of grounds. He has submitted that the suggestion that the “Cape Providence” should have turned and steamed towards the “Great Peace” is unreal. We agree. The appellants were sending a tug from Singapore in an attempt to salve the “Cape Providence”. The “Great Peace” was engaged by the appellants to act as a stand-by vessel to save human life, should this prove necessary, as an ancillary aspect of the salvage service. The suggestion that the “Cape Providence” should have turned and steamed away from the salvage tug which was on its way towards her in order to reduce the interval before the “Great Peace” was in attendance is unrealistic.

165. Next Mr Reeder submitted that it was not legitimate for the Judge to have regard to the fact that the appellants did not want to cancel the agreement with the “Great Peace” until they knew whether they could get a nearer vessel to assist. We do not agree. This reaction was a telling indication that the fact that the vessels were considerably further apart than the appellants had believed did not mean that the services that the “Great Peace” was in a position to provide were essentially different from those which the parties had envisaged when the contract was concluded. The “Great Peace” would arrive in time to provide several days of escort service. The appellants would have wished the contract to be performed but for the adventitious arrival on the scene of a vessel prepared to perform the same services. The fact that the vessels were further apart than both parties had appreciated did not mean that it was impossible to perform the contractual adventure.

166. The parties entered into a binding contract for the hire of the “Great Peace”. That contract gave the appellants an express right to cancel the contract subject to the obligation to pay the ‘cancellation fee’ of 5 days hire. When they engaged the “Nordfarer” they cancelled the “Great Peace”. They became liable in consequence to pay the cancellation fee. There is no injustice in this result.

167. For the reasons that we have given, we would dismiss this appeal.

Order: Appeal dismissed with costs to be assessed on an indemnity basis.

Agreed sum of £45,000 to be paid on account of costs.

Counsel to prepare agreed minute of order.

Neutral Citation Number: [2002] EWCA Civ 1790
	Case No: A1/2002/0407, 0564 & 0564A

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
SITTING AT CARDIFF
ON APPEAL FROM QBD CARDIFF DISTRICT REGISTRY
(His Hon. Judge Moseley Q.C.)

Royal Courts of Justice
Strand, London, WC2A 2LL

6th December 2002

B e f o r e :

LORD JUSTICE WARD
LORD JUSTICE CLARKE
and
SIR ANTHONY EVANS
____________________

Between:

MORRIS	Appellant
- and -
JONES & OTHERS	Respondent

____________________

Geraint Jones Q.C. (instructed by Edwards Geldard) for the Appellant
Theodore Huckle (instructed by Rausa Mumford) for the Respondent
Hearing dates : 10th July 2002
____________________

HTML VERSION OF JUDGMENT : APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)
____________________

Crown Copyright ©

Sir Anthony Evans :

1. This appeal is from the judgment dated 13^th February 2002 of His Honour Judge Hywel Moseley Q.C. sitting as a judge of the Technology and Construction Court at Cardiff.

2. His judgment was in favour of the claimant, Dr. Stephen Morris, against the second, third and fourth defendants, that is, Mr Thomas McCormack, the Estate of his late wife Mrs Valerie McCormack and their son, Stephen McCormack, in the sum of £39,722.69 plus interest, together with his costs of the claim based on misrepresentation. The claimant, however, was ordered to pay those defendants' costs of a claim based on the Defective Premises Act 1972, which the claimant abandoned shortly before the trial.

3. The facts in summary were as follows. On 27^th March 1997 the claimant completed the purchase from Mr and Mrs McCormack of a 999 year leasehold interest in Flat 1, Conway Court, 18 Penhill Road, Cardiff. Flat 1 includes the ground floor and basement of the building. They were freehold owners of the whole building, which they bought in 1994, but they sold similar long leases of flats on the second and third floors to other purchasers before 1997.

4. It is clear from the judge's findings that both the purchase of the building and its subsequent renovation and the sale of leasehold interests in the flats were all handled by the fourth defendant, Stephen McCormack, on his parents' behalf. The findings include:-

"… his father, Mr Thomas McCormack, had no involvement in any of the events described below other than as his son's principal and as the client for whom the solicitor acted on the instructions of the son … In April 1994 Mr [Stephen] McCormack's parents were registered as the freehold owners of Conway Court … Apart from providing the finance, Mr McCormack's parents took no active part in any subsequent transactions. Everything was done for them by their son acting as their agent."

It should be emphasised, therefore, that although the parents have been held vicariously liable for what the judge found was a false and fraudulent misrepresentation made by Mr Stephen McCormack as to the history of Flat 1 when the leasehold interest was sold to the claimant in 1997, there is no suggestion that they were personally involved in making the misrepresentation in any way.

5. He, Mr Stephen McCormack, lived in Flat 1 from 1994, when renovation works were complete, until early 1997 when he moved to London. On behalf of his parents, he put the flat on the market in October 1996, and in January 1997 the claimant became interested in buying the leasehold interest. His solicitors were sent copies of replies which had been sent to a previously interested purchaser in October 1996. In response to Enquiry No. 17:-

"1. Defects

Please give details of any of the following matters which may have affected the property at any time to the Vendor's knowledge.

…

17.6 Damp …"

the reply was as follows:-

"…

Other than the works covered by the guarantee referred to [in the] reply to enquiry 4.3 None to the Vendor's knowledge but caveat emptor must apply and the purchasers should rely entirely upon their own inspection and survey."

The reply to enquiry 4.3 was:-

"Copy Remtox Chemicals Ltd. guarantee herewith."

6. The guarantee dated 15^th April 1994 was signed on behalf of Property Care Dampproofing, a Remtox Approved Contractor, and was in respect of:-

"Reoccurrence of rising dampness …"

7. Before completing the purchase, the claimant also received three survey reports, as described in detail in paragraph 17 of the judgment. First, a free survey of the property which Mr Stephen McCormack requested and obtained under the terms of the Cardiff Bay Barrage Act 1993. (The Barrage was under construction but not complete, and so the level of ground water in the area was not then affected by it). Second, a survey report from Ferrier & Co., chartered building surveyors, who were retained by him to report on the condition of the property. Third, a report by Colleys Professional Services, surveyors and valuers, to the Halifax Building Society.

8. There was then a telephone conversation between the claimant and Mr Stephen McCormack on about 3^rd March 1997, about which the judge made findings in paragraph 17(4). He accepted the claimant's evidence that he asked what work had been carried out in the basement, and Mr McCormack replied that it had been "tanked" and promised to send copies of documents which described the works carried out. He then received a copy of Property Care documents dated 23^rd March 1994. These documents included a quotation by them which was the subject of much discussion at the trial and of detailed findings in paragraphs 8 and 9 of the judgment.

9. The second, third and fourth defendants, who are the appellants, do not challenge the judge's finding that the reply to Enquiry No. 17 was false to the knowledge of Mr Stephen McCormack, who caused it to be made, and that therefore it founds a claim for damages for deceit and for fraudulent, or non-innocent, misrepresentation under the Misrepresentation Act 1967, upon proof by the claimant that the misrepresentation was "material" and that he relied upon it and/or was induced by it to enter into the contract to purchase the property.

10. The appellants' case, and their main submission in the appeal, is that the claimant failed to establish these further facts and that the judge was wrong to find that he had done so. They say that, notwithstanding the misrepresentation, the claim should have failed. Their second, alternative, submission is that the judge erred in assessing the damages for which the appellants are liable in the sum of £39,722.

Liability – materiality, reliance and inducement.

11. The claimant suffered loss by reason of entering into the contract to purchase the long lease of the flat for £88,000, because it was found to suffer from excessive dampness in the basement area and its value was reduced by the need for extensive repairs. "Materiality" in this context means relevant to his decision to enter into the contract, and for his damages claim to succeed he must prove that he relied upon the misrepresentation, and was induced by it to enter into the contract when he did. That was on 27^th March 1997. By that date, he had received further survey reports, as indicated above, and was aware that the basement walls had been "tanked" in 1994, apart from the work to cure rising dampness carried out by Property Care. He did not say in evidence, Mr Huckle for the appellants submitted, that he relied or continued to rely upon the reply to Enquiry No. 17 when he entered into the contract. Therefore, he submits, the judge's findings that the misrepresentation as material and that it induced the claimant to enter into the purchase contract were unsupported by the evidence, and were wrong.

12. The reply to Enquiry No. 17 was false because there had been, in 1994, to Mr Stephen McCormack's knowledge, "defects" due to "damp" in the basement area in addition to the rising dampness which was covered by the Remtox guarantee. The condition of the property at that time and the renovation that was carried out were examined in great detail at the trial, and the judge's findings were set out in paragraphs 2-10 of the judgment. In summary, the findings were these:-

(1) a survey report from MRM Partnership, consulting engineers, was sent to Mr Stephen McCormack on 3^rd December 1993. "In my judgment, it is abundantly clear that after receiving that report Mr McCormack knew that the basement was suffering from problems associated with the ingress of damp. Indeed he would have seen the condition for himself". (Paragraph 3). The significance of this report is that it referred to water entry through the external walls of the basement which were below ground level. One area of concern was that there was no indication of the presence of any tanking.

(2) The meaning of "tanking" was an issue at the trial. The judge found that "Tanking is simply a generic description of work undertaken to prevent the ingress of dampness through external underground walls. It can take various forms, some more effective than others. Painting the walls with bitumen paint is one of the least effective and long-lasting methods but it is still properly described as tanking". (Paragraph 19).

(3) Mr Stephen McCormack consulted an architect friend, Mr Brian Jones, who was named as the first defendant in this action but the claim against him was not pursued. After considering the evidence as to Mr Jones' involvement (he was a witness at the trial), the judge concluded:-

"In my judgment it is more likely that Mr Jones' initial suggestion was some form of tanking, that that was rejected on grounds of cost by Mr McCormack, but that Mr Williams [a builder they had approached] of his own initiative and in the knowledge based on his experience that the condition of the basement required some form of tanking, installed his own system." (Paragraph 5).

(4) Mr Williams submitted a tender which included, on his own initiative, "tanking to all external walls" specified in conjunction with "DPC [damp proof course] provide DPC by specialist to all internal walls". Mr Williams also tendered for a type of tanking which involved dry lining the walls by facing them with wallboards: what Property Care later called "dot and dab as a relining for decorative purposes". (See below).

(5) The DPC was installed by Property Care. Their letter dated 23^rd March 1994 recommended constructing a new 100mm thermal block around the walls rather than dot and dab drylining and applying a tanking compound. (Paragraph 8).

(6) "Nevertheless Mr Williams proceeded to tank the walls in accordance with his system, painting them with Vandex [a mistaken reference to Synthapruf], a proprietary form of bituminous water barrier". (Paragraph 9).

(7) There were, however, continuing problems with damp, which Mr Jones reported in a letter dated 8^th September 1994 which Mr Stephen McCormack saw. "In my judgment, it is abundantly clear from that document that the basement was still suffering extensively from dampness and I further infer … that Mr McCormack was fully aware of that". (Paragraph 10).

13. It followed from these findings that Mr Stephen McCormack knew, in 1996/7, that there were problems in 1994 caused by water ingress into the basement, apart from and in addition to the rising dampness which was covered by the Remtox guarantee. The reply to Enquiry No. 17, therefore, was false, to his knowledge. The fact that he had no problem with damp or water ingress during the time he lived there, from 1994 to 1996, did not alter this fact.

14. The next question, therefore, raised by the appellants' contention that materiality was not proved, was whether the false representation was remedied by what the claimant learned later, from the three survey reports he saw (paragraph 7 above). These revealed that the basement walls were tanked and lined, but there was no evidence of dampness except at ground level in the hallway area of the basement (in the "free survey" report). Ferrier & Co. stated that "the dry lining prevented accurate testing for damp penetration" and that further inquiries should be made. Colleys Professional Services recommended that "all guarantees and documents … be clearly examined and confirmed as satisfactory". These reports caused the claimant to telephone Mr Stephen McCormack on 3^rd March 1997, when he received the reply quoted above (paragraph 8). He did know that there was tanking in the basement, but not why it had been carried out. He was not told what work was done, apart from that covered by the Remtox guarantee, in order to deal with the dampness problem which existed in 1994.

15. Mr Huckle's submission was that the claimant knew, from the survey reports that he received or were available to him, that there were problems with dampness in the basement area; he knew that some form of tanking work, as well as DPC work covered by the guarantee, had been carried out at some earlier date; he was generally aware of problems caused by ground water levels in the Cardiff Bay area; and therefore, that he was put on enquiry as to why the tanking work had been done, as he would have been if a correct answer had been given to Query 17. Therefore, the incorrect answer no longer affected his decision to buy the property, when he made it. The real problem, he submitted, was that the work done by Mr Williams was sub-standard (this became known at the trial, apparently, as the workmanship issue) and that this was or should have been apparent to the claimant from what he knew.

16. I agree with the judge that this argument is unconvincing. Having received the reports, the claimant telephoned Mr Stephen McCormack, partly in order to ask him about dampness and what work had been carried out in the basement. Nothing he said "corrected the misrepresentation that there had been no dampness in the past other than that which had been covered by the guarantee". (Paragraph 18).

17. As regards reliance, the judge acknowledged that "initially [the claimant] said that he had not considered the replies but he then altered that evidence and said that he had considered them with his solicitor … in conjunction with the other information that became available to him … and that the replies formed part of the body of information on which he relied in deciding to exchange". (Paragraph 16).

18. The judge was entitled to accept that evidence, and he was correct in law in holding that there was sufficient evidence of inducement and reliance notwithstanding that the misrepresentation was only part of the information which caused the claimant to act as he did (Smith v Chadwick [1884] 9, App. Cas. 187; Edgington v Fitzmaurice [1885] 29 Ch.D. 459).

19. For these reasons, in my judgment, the appeal against the judge's finding that the claimant is entitled to damages for deceit and fraudulent misrepresentation must fail.

Damages.

20. Counsel were agreed as to the measure of damages, which the judge expressed as follows:-

"Prima facie that is the difference between the price paid for the flat and its value calculated at the date of purchase …" (Paragraph 22)."

21. A valuer was appointed jointly by the parties shortly before the trial. He regarded the agreed purchase price, which was £88,000, as a fair reflection of the open market value of the property in sound condition at the time of its purchase (par