An Erroneous Belief at Contracting

In contract law, mistakes in law are a group of rules in English contract law, which happen to share the same title. A mistake is an erroneous belief at contracting that certain facts are true. It can be argued as a defense by a party seeking to avoid liability under the contract and if raised successfully can lead the contract in issue being found void ab initio or voidable, or alternatively an equitable rectify may be provided by the courts. Besides that, a mistake of fact can be used proven to wipe out, rescind, or reform a contract if the law making by the judge for a mistake to be sufficiently serious, then a contract entered into the grounds of the mistake may be void. In additionally, a mistake is an incorrect intellect by other one or more parties to the contract. A mistake can affect a contract only if the mistaken fact was substance, or significance to the contract. In common law has distinguished four different categories of mistake in the contract law like “mutual mistake”, “common mistake”, “non est factum” and “unilateral mistake”.

To focus on the topic, unilateral mistake is where only one party to a contract is mistaken as to the time given period or subject-matter contained in a contract. This kind of mistake is more common than other several of mistake. Unilateral mistake also define as where only one party is mistaken, the other either knows of the mistake or ought to know of it [1] . It must differentiate between mechanical calculations and trading fault when looking at unilateral mistake. For mechanical calculations, a party may be able to set aside to the contract on these grounds provided that the other party does not try to take the total benefit of the mistake [2] . It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. Otherwise is ‘snatching up’, the offer (involving a bargain that one did not intend to make, betrayed by an error in arithmetic etc.). This will be seen by goal standard, or if a reasonable person would be able to know that the mistake would not make sense to the party. Unless one of the parties ‘snatched up’ the one-sided offer, courts will otherwise uphold the contract unless it was resolute that the non-mistaken party was conscious of the mistake. An example is in Lewis v Averay [3] where Lord Denning MR held that the contract can only be avoided when the plaintiff can show at the time of the contract the plaintiff believed the other party’s identity was of vital significant. A mere mistaken belief as to the credibility of the other party is insufficient. The purpose of this essay is to explain and justify Lord Denning Mr took the view that these two cases Phillips v Brooks Ltd [4] and Ingram v Little [5] could not be reconciled and also clarify how the apparent conflict between these two cases was resolved by the decision in Lewis v Averay [6] .

A contract will not be void for common mistake if the mistake is due to the fault of one of the parties. In addition, if the contract allocates the risk of the mistake occurring on one of the parties then the doctrine of mistake will not apply. Only if the contract is silent on the point, is there scope for invoking mistake. For example, a contract may contain a warranty for the existence of a state of affairs. If the parties have made a mistake and the state of affairs does not actually exist, there is a breach of contract (the parties having allocated the risk to the party providing the guarantee), and the legal doctrine of mistake does not apply [7] . This question raises the issue of a unilateral mistake as to the identity of the contracting party. The law draws a fine distinction between where a person intended to contract with someone else (where the mistake renders the contract void) and a mistake which is merely as to a person’s attributes rather than as to their identity. A mistake as to be a person’s attributes, such as thinking that they are creditworthy when they are not, will leave the contract intact. In determining this issue, it is significant to note that the contract is made face-to-face; the courts are likely to conclude that the parties intended to contract with the person in front of them and the only mistake was a mistake as to attributes. On the other hand, we are told that Lewis entered the contract because she was embarrassed and this may have been because he thought he was in the presence of a famous film actor who worked in the Pinewood Studio and have a pass with an official stamp on it. If the court accepts that Mr. Lewis made a unilateral mistake as to identity, then the contract will be void for mistake or voidable for fraud and the third party, Averay, will not have gained good title. Besides that, under face-to-face principle, where there has been face-to-face contact between the contracting parties, there is a strong presumption that each party intends to contract with the other person present. The vendor’s intention is treated as being to sell to the person present and identified by sight and hearing and the only mistake was a mistake as to attributes. Thus, in this situation it is much harder for the seller to require a contract is void for mistake to identity. In additional, if the business is in face-to-face situation, the mistake made by the person as to the identity will cause the contract to be voidable, it couldn’t be set aside if there is a third party exist [8] . Conversely, when a party is guilty of an error in business judgment, there is no mercy.

Initially, there are some similar cases according with the Lewis v Averay [9] . The first leading case on this subject is the Shogun Finance v Hudson [10] , but note that its facts are slightly different from the present case [11] . In Shogun Finance v Hudson [12] the contract was not made face-to-face and the contract was put down in writing. The court decided on the facts that no contract had been made with the fraudster and the car had to be returned to Shogun Finance. The outcome in the present case is likely to be different. Here, a court would probably conclude that the contract was made face-to-face and therefore between the two people present. The fraudster could as a result pass on a good title to Humbuskers, and Humbuskers will not be required to return the violin to Faridah. This conclusion is strengthened by the fact that the case of Phillips V Brooks Ltd [13] and Ingram v Little [14] which reached a different conclusion was overruled by Shogun Finance.

Nevertheless, the distinction between a mistake as to identity and a mistake as to attributes has led to acute difficulties where the contracting parties meet face-to-face. The difficulties begin with the case of Phillips V Brooks Ltd [15] . A man called North entered the plaintiff’s shop and asked to see some pearls and rings. He selected a ring and produced a cheque book to pay it, saying that he was Sir George Bullough and gave Phillips address then let North take the ring away for a cheque, which was later told by the banker the cheque is dishonoured. North pledged the ring to the defendant, from whom the plaintiff sought to recover it or its value [16] . An illustration of this is Ingram v Little [17] where an unknown person representing himself to be a P.Hutchinson. After checked the name and address was existed. The rogue sold the car to the defendant. Eventually the owner of the asset falls to the plaintiff since the original contract is meant to be void where the seller intends to deal with the person was given by name instead of the man who represented himself to be the person. So, the reason of the anomalies and materially indistinguishable involved a fundamental mistake by one party regarding the identity of the other in both of the cases are face-to-face contract but the decision made by the judge is different because of the contract is still valid unless the party has set aside and the original purchaser checked out of the identity of buyer since the steps to verify. In that ways, the first one is before fraudulent representation and the second one is after fraudulent representation, so the two cases could not be reconciled. Another sides have other cases like Cundy v Lindsay [18] demonstrates this principle; here, a firm contracted by post to sell handkerchiefs to a rogue, masquerading as a legitimate company, Blenkiron & Co. The contract was held to be void for mistake: Lindsay & Co were able to recover the goods from a third party who had purchased them from the rogue. This can be contrasted with the case of King’s Norton Metal Co v Edridge Merrett & Co [19] , where a similar situation occurred. The court rejected the claim stating that the contract was valid as the plaintiff had intended to make the contract face-to-face. The mistake had been merely about the creditworthiness of the rogue rather than as to his identity. Here however, the company name that the rogue used did not exist; as in Cundy v Lindsay [20] , Kings Norton Metal Co could not claim they relied upon the false company name to contract. Therefore the contract was merely voidable for fraud, and the third party obtained good title to the goods. Fine distinctions between mistake as to identity and its attributes “do no good to the law”. This is a distinction without a difference.

In the case of Lewis v Averay [21] , Mr Lewis’ car was for sale. A rogue, who represented himself as the famous actor Richard Greene, offered to buy the car for the agreed price of $450. He proffered a cheque for this amount but Mr Lewis was reluctant to hand over the car until the cheque is cleared. The rogue purported to establish his identity by showing a special admission pass from Pinewood Studios. This satisfied Mr Lewis who handed over the car and log books in return for the cheque. After a few days, the banker told Mr. Lewis the cheque was worthless. The rogue sold the car to Mr Averay, an innocent purchaser then the rogue could not be found. In giving judgment for the defendant the Court of Appeal held that there was nothing to displace the prima facie presumption that the plaintiff intended to deal with the party in front of him and they confined Ingram to its ‘special facts’. The ‘special facts’ would appear to be that in Ingram no contract was concluded until the plaintiff had ascertained the rogue’s identity, thus the mistake was as to identity. On other sides, in Lewis a contract had been concluded and the identity of the rogue was only crucial to the method of payment; thus the mistake of the rogue was one as to his attributes, namely his creditworthiness [22] . The Court of Appeal also found that there was a contract, Lord Denning said that: “It is wrong that the rights of an innocent purchaser should depend on whether the original seller was mistaken as to identity of attribute” and Phillimore LJ also said that: “That is liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights”. The mistake as to the identity of the rogue did not prevent the formation of a valid contract. But it did render it voidable. The second reason for the decision in Lewis v Averay [23] was given by Megaw LJ, who based his judgment on the fact that the identity of the buyer was not a fundamental significant to Mr. Lewis; the only matter of significant was that he assumed a famous film actor would be creditworthy. This was not enough evidence to make the contract void for mistake. Here, the judgments of Denning MR and Phillimore LJ constitute the ratio, whereas the different reasoning of Megaw LJ does not. This is very important to note when the decision by the judges is the same but the rationale for those decision is quite different. Depending on the extent of the difference between the judges this may mean that there is no true ratio in the case and each of the judgments is merely persuasive. If a subsequent set of facts is before the courts which are indistinguishable from the facts in the original case then there is a precedent for the outcome even if the reasoning is not consistent. But if the subsequent case draws on similar principles but with different facts then the original case is not a binding precedent. Even though the decision was unanimous, the reasons for the decision are not consistent and each reason does not constitute a separate ratio. There can only be one ratio for a case and unless this is found in unanimity or a clear majority it does not exist.

In this case, with the 2:1 reasoning, the reasoning of Lord Denning is the ratio that is followed by the courts in later decision. The Court held that the appeal be allowed. The contract between Mr Lewis and the rogue was voidable, but could not be avoided once the car had been on sold to a bona fide purchaser for value without notice. Furthermore, have three ways to define the reason. The first is the effect of the presumption that a contracting party intends to contract with the person in front of him and that presumption will only be displaced upon “special facts”. The second is that the courts have sought to protect third party rights and such a policy would be frustrated by holding that the contract was void on the ground of mistake. The third and final reason is the strength of the objective approach which, as we have seen in this case is applied by the courts in determining whether or not a contract has been concluded [24] .

In conclusion, regardless of the difficulty arising from there being conflicting reasons given by the judges, as an English decision, this case is not a binding precedent in NSW. It is, however of great persuasive value and in the absence of any cases considering the same question; it can be considered the law in NSW. However, it is not only necessary to look at what Australian cases have considered this issue but it is necessary to look also at its development in the English Courts. A more recent decision is Shogun Finance v Hudson [25] in which many of these issues were considered in great detail. So in considering the law in NSW must look at the different reasons in the Lewis case as well as the more recent English decisions that consider Lewis. Then look at the comments that have been made by the Australian Courts about this line of cases.