Worksheet 1- Mistake

Common Mistake

Bell v Lever Brothers Ltd (1932)

Case Facts
Lever Brothers Ltd controlled the Niger Company. Lever Brothers agreed to employ Bell to
act as the chairman, and Snelling to act as the vice-chairman, of the board of directors of
Niger. Bell and Snelling secretly speculated in cocoa, a commodity in which Niger dealt.
Their conduct was in breach of their contracts of employment and would have justified Lever
Brothers terminating their services. Later, Niger merged with the African and Eastern Trade
Corporation so that the services of Bell and Snelling were no longer required. In ignorance of
their breaches of duty, Lever Brothers agreed to pay £30,000 to Bell and £20,000 to Snelling
as compensation for terminating their contracts of employment. The jury found that if Lever
Brothers had known of the breaches it would have terminated the contracts of Bell and
Snelling without paying compensation. When Lever Brothers discovered the breaches it
brought an action claiming rescission of the compensation agreements on the grounds of
fraudulent misrepresentation and unilateral mistake induced by fraud but not on the ground of
‘mutual’ mistake. At trial the jury found that Bell and Snelling had not acted fraudulently.
However the trial judge held that the pleadings raised the issue of mutual mistake and that the
compensation agreements were void, having been made under a common mistake as to the
legal relations between the parties, each party believing, contrary to the truth, that the one
was entitled to claim and the other was bound to pay compensation. The Court of Appeal
held that if the issue of mutual mistake was not raised, the pleadings should be treated as
amended in order to raise it and upheld the decision of the trial judge. On appeal the House of
Lords held that the issue of mutual mistake was not raised by the pleadings and they could
not be amended to raise it. However on the basis that the issue was raised, it was held by a
majority (Viscount Haldane and Lord Warrington of Clyffe dissenting) that the compensation
agreements were not void as the mutual mistake related not to the subject matter but to the
quality of the employment contracts.

Judgements

Lord Warrington of Clyffe [dissenting on the question whether the compensation agree ments
were void for mistake]-
“ It is in my opinion clear that each party believed that the remunerative offices,
compensation for the loss of which was the subject of the negotiations, were offi ces which
could not be determined except by the consent of the holder thereof, and further believed that
the other party was under the same belief and was treating on that footing. The real question,
therefore, is whether the erroneous assumption on the part of both par ties 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. It is
true that the error was not one as to the terms of the service agreements, but it was one which,
having regard to the matter on which the parties were negotiating—namely, the terms on
which the service agreements were to be prematurely determined and the com pensation to be
paid therefor, was in my opinion as fundamental to the bargain as any error one can imagine.”

Lord Atkin-
“Was the agreement of March 19, 1929, void by reason of a mutual mistake of Mr D’Arcy
Cooper and Mr Bell? . . . My Lords, the rules of law dealing with the effect of mistake on
contract appear to be estab lished with reasonable clearness. If mistake operates at all it
operates so as to negative or in some cases to nullify consent. The parties may be mistaken in
the identity of the contracting parties, or in the existence of the subject matter of the contract
at the date of the contract, or in the quality of the subject matter of the contract. These
mistakes may be by one party, or by both, and the legal effect may depend upon the class of
mistake above mentioned. Thus a mistaken belief by A that he is contracting with B, whereas
in fact he is contracting with C, will negative consent where it is clear that the intention of A
was to contract only with B. 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 use less, the consent is nullifi ed. 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. I apprehend that if the seller with knowledge that a chattel
was destroyed purported to sell it to a pur chaser, the latter might sue for damages for
non-delivery though the former could not sue for non-acceptance, but I know of no case
where a seller has so committed himself. This is a case where mutual mistake certainly and
unilateral mistake by the seller of goods will prevent a contract from arising. Corresponding
to mistake as to the existence of the subject matter is mistake as to title in cases where,
unknown to the parties, the buyer is already the owner of that which the seller purports to sell
to him. The parties intended to effectuate a transfer of ownership: such a transfer is
impossible: the stipulation is naturali ratione inutilis.3 This is the case of Cooper v. Phibbs
LR 2 HL 149, 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. Applied to mistake as to rights generally it would
appear to be too wide. Even where the vendor has no title, though both parties think he has,
the correct view would appear to be that there is a contract: but that the vendor has either
committed a breach of a stipulation as to title, or is not able to perform his contract. The
contract is unenforceable by him but is not void. 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 quality amounts to a condition or a
warranty, a different branch of the law . . . We are now in a position to apply to the facts of
this case the law as to mistake so far as it has been stated. It is essential on this part of the
discussion to keep in mind the fi nding of the jury acquitting the defendants of fraudulent
misrepresentation or concealment in procuring the agreements in question. Grave injustice
may be done to the defendants and confusion introduced into the legal conclusion, unless it is
quite clear that in considering mistake in this case no suggestion of fraud is admissible and
cannot strictly be regarded by the judge who has to determine the legal issues raised . . . [O]n
the whole, I have come to the conclusion that it would be wrong to decide that an agreement
to terminate a defi nite specifi ed contract is void if it turns out that the agreement had already
been broken and could have been termi nated 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 has no
remedy in the absence of representation or warranty. A agrees to take on lease or to buy from
B an unfurnished dwelling-house. The house is in fact uninhabitable. 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, as 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 [counsel for Lever Bros]
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 contract 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
make 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 LJ 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 presumedly not intended, but in the cases I have suggested above, of the
sale of a horse or of a picture, it might be said that 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 they have not in terms made
by importing implications 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 effi cacy 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 . . . We therefore get
a common standard for mutual mistake, and implied condi tions 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 infi nite combinations of facts
that arise in actual experience will continue to be diffi cult, but if this case results in
establishing order into what has been a somewhat confused and diffi cult 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 . . .”

Lord Thankerton
“Turning . . . to the question of mutual error or mistake, I think that the respondents’
contention may be fairly stated as follows—namely, that in concluding the agreements of
March, 1929, all parties proceeded on the mistaken assumption that the appellants’ service
agreements were not liable to immediate termination by Lever Brothers by reason of the
appellants’ misconduct, and that such common mistake involved the actual subject matter of
the agree ments, and did not merely relate to a quality of the subject matter . . . 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 LR 2 HL 149, 170 is a good illustration. . . .
There are many other cases to the same effect, but I think that it is true to say that in all of
them it either appeared on the face of the contract that the matter as to which the mistake
existed was an essential and integral element of the subject matter of the contract, or it was an
inevitable inference from the nature of the contract that all the parties so regarded it. In the
present case the terms of the contracts throw no light on the question, and, as already
indicated, I do not find sufficient material to compel the inference that the appellants, at the
time of the contract, regarded the indefeasibility of the service agreements as an essential and
integral element in the subject matter of the bargain.”
Viscount Haldane agreed with the judgment of Lord Warrington of Clyffe. Lord Blanesburgh
stated that he was in ‘entire accord’ with the conclusions of Lord Atkin and Lord Thankerton.

Mutual Mistake
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