The Notion of Mistake

In the law of contract, the notion of mistake is arguably the most uncertain and difficult area. While it might appear that if one has concluded a contract by mistake, the contract ought to be vitiated because but for the mistake the contract would not have been entered into, this is not necessarily the case in law in normal circumstances. As Baggallay LJ in Tamplin v James forcefully observed, if a defendant is to evade contractual obligations by simply saying that he has made a mistake (and therefore made a bad bargain), then the performance of a contract could seldom be enforced upon the unwilling and unscrupulous. Mistake should not be the excuse to avoid transactions which turn out to be distasteful.

Indeed, Mistake in the legal context does not mean anything that produces an unwanted or unintended result, as any ordinary man would construe. Mistake in law is much narrower in definition and is much more complex than one would imagine and can generally be categorised into three types: common mistake, mutual mistake and unilateral mistake. In common mistake cases, the parties contract with each other, sharing the same mistaken assumption, without which the contract will be impossible to perform. The parties do initially have a contract but the contract may subsequently be set aside at the option of either party. Mutual mistake and unilateral mistake, on the other hand, might sometimes be viewed together as a separate category, namely “offer and acceptance mistake” or “agreement mistake” because both have the effect of negativing the consent necessary in a contract and thus preventing a contract coming into existence in the first place.

This essay will first discuss the law relating to mutual mistake and unilateral mistake as to terms of the contract, so as to provide some guiding principles for the following detailed discussion of unilateral mistake as to identity, evaluating how the law has emerged and been developed and to what extent, if at all, this process has been influenced by competing calls for certainty and for fairness.

A mutual mistake occurs where the parties are, without either realising it, at cross-purposes, so that there has been no real correspondence of offer and acceptance. However, that the parties have differing subjective understanding as to the meaning of certain terms of a contract does not of itself invalidate the agreement. The court will resolve the meaning of the terms in question by “an objective appraisal of facts”, that is, an analytical process devoid of enquiry into either party’s subjective motives, “expectations and unexpressed mental reservations”. Since the classic mutual mistake case of Raffles v Wichelhaus, it is generally supposed that if there had been a mutual mistake, as in the case, caused by a misleading latent ambiguity as to the name of the ship, then effectively both parties did not agree to the same thing in the same sense, and no contract would have been concluded between them.

However, such a mistake, made by whichever party, must be reasonable, in addition to being genuine. Thus in cases such as Scott v Littledale (1858), Tamplin v James and Scrivens Brothers v Hindley, the courts were of the view that, in essence, either party to a contract could not avoid it on the ground that a mistake had occurred if the mistake was caused or contributed to by his own fault.

In addition, under Smith v Hughes one party will not be allowed to take advantage of the other’s known misunderstanding. The Queen’s Bench in this case made the distinction between a mistake as to the quality of the goods and one as to the terms of the offer. The former is, with the mistaken party correctly understanding the nature of the offer, merely a “collateral mistake” which would not prevent an agreement being reached, even if the other party, knowing of the mistake, did nothing to correct or inform the mistaken party of it. Indeed, Cockburn CJ held that “the passive acquiescence of the seller in the self-deception of the buyer” would not entitle the latter to deny that the contract was binding. This is arguably a reflection of the market-individualist axiom, that a contractor cannot escape from what is a bad bargain for him relying on the ground that it was the seller’s responsibility to warn them of their mistake.

Thus only in the second class of case where the mistaken party has misunderstood the actual terms of the contract would the apparent agreement be nullified – applying the established principles relating to contract formation, there would simply have been no correspondence of offer and acceptance. In such a case the party noticing the mistake is obliged to inform the other party of the true nature of the terms of the contract. In Hartog v Colin and Shields, where it was held that the claimants must have realised that a material mistake had been made in the defendant’s presenting of the offer, the claimants lost the claim. Indeed, It is noted that, however, that proof of actual knowledge of the mistake is unnecessary but it suffices to show that the mistake “could reasonably have been known by the promisee at the time when he accepted it”.

Even within the notoriously uncertain doctrine of mistake, mistake as to the identity of a contracting party has been described as an especially “vexed area”, with its case law difficult to reconcile and perplexing and therefore lacking in predictability in any particular case.

Typically, a rogue, on the strength of the false identity he fraudulently misrepresent, is allowed to take goods on credit or with a subsequently proved bad cheque and then resold them on to an innocent third party for cash almost immediately after their acquisition. Usually, by the time the owner discovers the fraud, the goods have already been transferred by the rogue into the possession of the third party. Given that the rogue usually cannot be found or, even if he has been found, turns out to be impecunious and therefore is not worth suing, the original seller would bring a claim against the third party who in all good faith bought the goods, although not directly in contract as there is no contract between them. Instead, the original owner is likely to bring an action in conversion, which, according to Atkin J, is the taking or using the goods as one’s own which constitutes an unjustifiable denial or inconsistency with the true owner’s right amounts to a conversion, for the recovery of the goods or their value, Bbmb Finance (Hong Kong) Limited. v Eda Holdings Limited. Prerequisite for this is the claim that the initial contract between him and the rogue is not valid, and so cannot confer the rogue the rights of ownership in the goods to be transferred to any third parties, under the nemo dat quod non habet rule, namely that no one can transfer a better ownership in goods than he himself has, as enshrined in section 21 of the Sale of Goods Act 1979 (subject to a limited number of exceptions).

Although the owner is entitled to a remedy against the rogue for fraudulent misrepresentation, it only renders the original contract voidable , in which case a contract will have been concluded and is in principle valid and can operate to transfer ownership in goods unless and until set aside, pursuant to s.23 of the 1979 Act, or, as in the case of motor vehicles having been bailed under a hire-purchase agreement like that in Shogun, s.27 of the Hire Purchase Act 1964, provided that the innocent purchaser buys them in good faith and without notice of the seller’s defect in title.

Consequently the seller will more probably seek to assert that the contract with the rogue was void on the ground that it had been entered into under a mistake, only then can he be entitled to recover the goods or their financial value from the third party. .

In deciding whether or not a mistake as to identity renders a contract void, a distinction needs to be drawn: contracts concluded in writing (inter absentes) and ones in face-to-face settings (inter praesentes). This distinction has been the subject of academic criticism, but it is nevertheless preserved by the majority of the House of Lords in Shogun, despite the disapproval of it by the minority of their Lordships.

Where the contract has been in writing, as Lord Cairns LC concluded in Cundy v Lindsay, the contract is presumed to be between the entities referred to in the correspondence. Nevertheless, in King’s Norton Metal Company Limited v Edridge, Merrett & Company Limited this presumption was rebutted. This was explained by the court on the basis that, using a similar distinction to that between mistakes as to quality and as to terms of the contract employed in Smith, in Cundy the mistake was one as to identity, namely that the mistaken party confused the rogue with an identifiable third party, but in King’s Norton the mistake was merely one as to attribute because the mistaken party had not heard of the alias which rogue was using and had just been concerned with whether that entity was creditworthy.

As such, the majority of the House of Lords in Shogun were of the opinion that when an agreement was reduced to writing, save when the rogue had used a pseudonym or where the identity of a party was in some way ambiguous, the identification of the parties was a matter of construction alone. No extrinsic evidence would be allowed to be led to contradict what was on paper, according to the parol evidence rule which had previously been applied in Cundy and Hector v Lyons, and which has more recently been affirmed in Dumford Trading A.G. v OAO Atlantrybflot. As a result, there would be no contract coming into existence where the written agreement unequivocally purported to be with the false identity as which the rogue in the case presented himself.

In cases where the parties deal with each other face-to-face, if one party to the contract claims that he is mistaken as to the true name or identity of the party who was in front of him, the contract will be rendered void only in exceptional circumstances. In Phillips v Brooks Limited, the law was clarified as to presume that each party to the transaction intends to deal with the party in front of him, however he identifies himself. Accordingly in such a case there would be a contract, albeit voidable, between the original owner and the rogue dealing with him inter praesentes, and the third party would gain perfect title to the goods. Nonetheless, this presumption has equally been applied inconsistently in cases, of which Ingram v Little is an exemplar. In that case, the majority judges held that the presumption was displaced since, making the same distinction in inter absentes cases, the mistake was held to be one as to identity, considering the apparent significance put on the buyer’s identity by the sellers. Yet, it must be noted that Ingram was confined in Lewis v Averay as taking on its special facts, and its correctness was seriously doubted more recently by the House of Lords in Shogun. Indeed, as Hare observes, the present law, despite the review of previous authorities in Shogun, failed to identify when the presumption could be rebutted. Albeit as “under a cloud” as ever, there is one, and perhaps the only, certain exception suggested by the court: where a rogue attempts to impersonate a member of the family of which he claims to be part, or someone with whom the defrauded party is personally acquainted. Such impersonation is, however, likely to be few, as it is unlikely to succeed unless the senses of the deceived person are impaired

As such, one can safely say that, in relation to written contracts, the court will now generally favour the original owner over the third party, tending to render the original contract void so the owner can restore his property in the goods. This is arguably a result of the adoption of a formalistic approach, in the sense of the strict application of formal rules, to sustain the certainty of the operation of contracts. The espousal of the parol evidence rule in Shogun, for instance, relates to the need for certainty in relation to written contracts. The proper construction of the written document will enable the court to identify the parties to an agreement easily, on which the certainty of contracts depends. Lord Hobhouse, in particular, was strongly in favour of the rule, endorsing it as “fundamental to the [English] mercantile law” in that it “is one of the great strengths of English commercial law and is one of the main reasons for the international success of English law in preference to laxer systems which do not provide the same certainty”.

Rather curiously, claiming to promote certainty as to the contract dealt with by the innocent third party, the court will tend to reach a diametrically different conclusion in face-to-face cases. Just as the objective test of agreement considerably reduces the scope of the doctrine of mistake and is traditionally justified in its promoting of the market-individualist ideal of certainty in commercial transactions, the presumption that a party intends to deal with the party physically before him serves to protect the same security and certainty. Indeed, if the court “unscrambles” the contract between the original owner and the rogue, in effect finding for the former, the innocent third party must return the goods or their value, and this will undermine the policy of protecting security of transactions.

However, according to Sedley LJ in the Court of Appeal in Shogun[2002] Q.B. 834, even though an outcome in favour of the innocent third party, such as that in face-to-face cases, may achieve justice, the basis on which it is arrived at is “jurisprudentially unsatisfactory”. This seems to mean that the law relating to written contract, in favour of the original owner, is unjust, or at least, in a narrow sense, unfair. It is argued that if contractual intention as to with whom to contract overly depends on rules of objective interpretation, where this was clearly not the real intention of the parties and the reality that there had been a misrepresentation as to the identity of one of the contracting parties completely and obstinately ignored, the intention thus interpreted can appear very artificial and unfair. Justifiable on grounds of contractual certainty and the tradition of an objective analysis might it be, the courts are not necessarily achieving justice on the actual facts of the case. Hare argues that contractual certainty is undoubtedly important, but it is “only one aspect of the more important and fundamental goal of justice”.

The blind formalism attached to the law results in the interests of the original owner being prioritised, who usually is the better loss-avoider and the better loss-bearer.  Usually the person selling to a fraudster is in a stronger position to carry out checks of their credentials and to protect himself against the risk of fraud than the person who subsequently buys from the fraudster, and the law should have regard to this. Lord Millett and Lord Nicholls expressed the exact same view, arguing that by parting with his goods without receiving payment, the owner, who had an opportunity uncover the fraud, ought to take the inherent risk and accordingly bear the loss. Under the present law, there might have the unintended effect of encouraging the sellers to take a casual approach to the granting of credit because it could repossess the goods from a subsequent innocent third party purchaser. After all, the innocent third party has usually “acted with complete circumspection and in entire good faith” and it is not fair to hold him to losses, through no fault of their own, which are significantly more onerous than he could have anticipated.

In conclusion, as the question has correctly stated, “the competing ideologies of contract law”, that is, market-individualism which calls for certainty in transactions, entailing a narrow doctrine of mistake and consumer-welfarism which calls for fairness, entailing a wider doctrine of mistake, are indeed in tension between each other. With the failure of the recent landmark case of Shogun to clarify the law, it might be left to Parliament to overhaul the current legal framework so as to achieve justice.

Table Of Cases:

Bbmb Finance (Hong Kong) Limited. v Eda Holdings Limited [1990] 1 W.L.R. 409

Bell v Lever Brothers Limited [1932] A.C. 161;

Centrovincial estates plc v Merchant Investors Assurance Co Limited [1983] Com. L.R. 158

Cundy v Lindsay 3 App Cas 459

Dumford Trading A.G. v OAO Atlantrybflot [2004] EWHC 1099

G. Percy Trentham Limited v Archital Luxfer Limited [1993] 1 Lloyd’s Rep. 25

Great Peace Shipping Limited v Tsavliris Salvage (International) Limited [2002] EWCA Civ 1407

Hartog v Colin and Shields [1939] 3 All ER 566

Hector v Lyons (1988) 58 P & CR 156

Ingram v Little [1961] 1 Q.B. 31

King’s Norton Metal Company Limited v Edridge, Merrett & Company Limited

Lancashire and Yorkshire Railway Co v MacNicoll (1918) 88 LJKB 601, 605

Lewis v Averay [1972] 1 Q.B. 198

Phillips v Brooks Limited [1919] 2 K.B. 243

Raffles v Wichelhaus [1864] 2 H&C 906

Scott v Littledale 8 E. & B. 815

Scrivens Brothers v Hindley [1913] 3 KB 564

Shogun Finance Limited v Hudson [2002] Q.B. 834 (CA)

Shogun Finance Limited v Hudson [2004] 1 A.C. 919 (HL)

Smith v Hughes (1870-71) L.R. 6 Q.B. 597

Tamplin v James (1880) 15 Ch D 215

Table Of Statutes:

Hire Purchase Act 1964

Sale of Goods Act 1979

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