Vitiating Factors: Mistake in Equity

Leading case: Solle v Butcher [1950] Shows the impact of WWII on English contract law. In law, the contract would be good, but in equity (refers to Cooper v Phibbs (1867)) a contract is also liable to be set aside if: 1. The parties were under a common misapprehension either as to the facts or as to their relative and respective rights, provided… 2. That the misapprehension was fundamental, and… 3. That the party seeking to set it aside was not himself at fault. [p 693] à This last extra part is what sets mistake in equity apart. Lord Denning found that a contract can be rescinded, and can be rescinded on terms. This is followed in Grist v Bailey [1967].

Clarion v National Provident Institution [2002] Mistake can’t be as to the risk the parties are entering into.

In Great Peace [2002], Lord Phillips says in obiter that common law never recognised the independent doctrine of mistake in equity. Pitt v Holt [2013] says Great Peace is accepted in English law, overturned Solle v Butcher. Great Peace adds another layer of criteria to the decision in Bell v Lever Bros as to when a common mistake as to a quality of the subject matter would render a contract void.

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Equitable Relief

The court has three options of relief in its power.

1. Recission à sometimes upon terms, leaving the party to a suit for damages. This was done in Cooper v Phibbs – contract voidable Solle v Butcher – rescind contract upon terms Overturned by Great Peace? Magee v Pennine Insurance [1969] Lord Denning says: Although the acceptance by the plaintiff of the insurance company’s offer constituted a contract of compromise binding at law, the parties were acting under a common and fundamental mistake in that they thought the original policy was good and binding. Therefore the contract was voidable in equity.

2. Refuse an order for specific performance Malins v Freeman (1837) Tamplin v James (1880) Where a contract has been formed on a mistake, courts will refuse to order specific performance, i.e. refuse to order one party to specifically perform/go ahead on a contract formed in mistake. Instead, leave the party to claim damages for any losses suffered.

3. Recification (reform) Concerned with mistakes in the drafting/writing of contracts, not mistakes in formation. In the old days, court of law could not look past the written terms of the contract, but court of equity could, and could rectify/physically amend contract terms to accord with what the parties meant (“reform”).

Ex: Discussed throughout the price of the contract in US dollars. When they entered the contract, mistakenly the document records the currency in Italian lira, giving one party a much better contract than they ever intended. The court reforms/rectifies this.

FE Rose (London) Ltd v William Pim Jnr & Co [1953] In regard to rectification, court not concerned with making of the agreement contract, but with recording of the agreement. Lord Denning said rectification is concerned with not the formation of the agreement, but with the written terms of the contract according with what the parties agreed.

Chartbrook Ltd v Persimmon Ltd [2009] Many later cases that have applied Chartbrook are instances where Counsel has recognised that the possibility of receiving relief for a mistake as such are really quite minimal, or that while there is a mistake there that is of fundamental importance, the parties would prefer to preserve the agreement but effectively to have it reformed akin to a form of rescission on terms, in terms of the practical effect, to accord with what they expected or what the reasonable expectations were. Q: HL is taken up with how to interpret contracts and whether courts should interpret them in light of previous dealings between the parties.

Parole evidence rule: The wording of the document itself is to be authoritive as to the agreement between the parties, and the court won’t go behind that.

However, a claim for rectification means that the court has to look behind the wording of the document because one or both parties alleges that the document itself doesn’t reflect their agreement.

Court comes to the conclusion that a number of factors have to be shown in order to establish a claim for rectification. The decision tells us not that the parties had to have a prior oral agreement which is then mistakenly recorded, but rather: Þ Common continuing intention as to what the terms of the contract would be à this common continuing interpretation is to be judged on objective basis: detached objectivity (what would a reasonable person watching this situation unfold would come to the conclusion of what was present). It is not necessary to have had a complete antecedent agreement. Þ Outward expression of accord. Þ This common continuing intention continues up to the point at the document is executed. It must carry on up to the point at which the instrument sought to be rectified is executed. Þ By some mistake this common continuing intention is not reflected in the instrument itself. Then the court will rectify the agreement.

This case opened up a whole new field of litigation in mistake cases. The problem that exists, pointed out by McLauchlan, is that if you take this objective basis looking for the common continuing intention as it appears to an outward party, you may end up imposing on these parties to rectification of a contract that neither of them would subjectively have wanted. Courts however are very reluctant to take themselves too deeply into this area of rectification because of the large amount of discovery of documents required for the ligitation. In some of the later cases, it is actually a mistake in the formation of the contract, but because there is really no relief for that if you render the contract void, it has the effect of pushing these cases into rectification.

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Ex: In June 1992 Artemus sells to Bruce for £15,000 a book written by the famous Eighteenth Century author Dean Swift. Early in the negotiations preceding that sale Artemus told Bruce that “although he wasn’t an expert, he thought that the book was a first edition.” He had an honest belief in the truth of that statement and reasonable grounds for that belief. Artemus also makes it clear to Bruce (in a letter written just before the sale) that Bruce “must make his own inquiries as to the authenticity of the book”.

In June 1994 Bruce sells the book to Clare for £20,000 both parties assuming it to be a first edition. No express statement to that effect is made, the book merely being described as “by Dean Swift”.

In September 1995 Clare, now a pensioner, takes the book for valuation, for purposes of a new pensions assets test, to Rabalais, a local antique bookseller and a world renowned expert on Eighteenth Century authors. Rabalais examines it and tells Clare that the book is in fact a second edition, not a first, and as such is worth only £1,000.

Does either Clare or Bruce have any remedy in respect of any mistake which may have been made?

1. Rectification doesn’t apply here because it is not a written contract, so can’t fix a mistake in the recording of the contract. 2. Refusal of specific performance (when Court orders you to do something) irrelevant because the conveyances already happened. 3. Must be rescission?

Why might rescission be considered? Problem question from mid-90s. Afterwards Great Peace has put new light on rescission. Lord Denning in Solle v Butcher ratio is that equity had a remedy for mistake to rescind contract, sometimes under terms. Said Lord Phillips in Great Peace is wrong. Mistake makes a contract void, rescinding a contract is when it is voidable. Great Peace wrongly decided because mistake in equity exists. The only future for mistake in contract law is finding a contract with mistake to be voidable. Void is too harsh, can do at equity but not at law. An operative mistake renders the contract void. If A – B contract is void (no transfer of proprietary interest), then B doesn’t own the book and therefore there is no B – C contract. B needs title or right to give title in order to sell. Difference in quality of subject matter in A – B. Great Peace upholds Lord Atkins’ criteria and adds that you have to see where responsibility for the quality is allocated. Doesn’t make book substantially different, still the same book. Quality must be the defining point. A – B had no fraudulent misrepresentation, and no negligence. Not warranting that this is a first edition, careful to take out of misrepresentation. Great Peace criteria: The contract must be impossible to perform. This is all obiter dicta and speculation.

In Smith v Hughes, Blackburn J said that the mistaken party will have a remedy if the other party gave a warranty in the contract about the subject matter, or if the mistake was induced by the other party’s misrepresentation.

Examples given by Lord Atkin pp. 535-536 of mistakes as to the quality of the subject matter of the contract which would not suffice, in his opinion, to entitle a party to set aside the contract. In the case of the sale of a picture which both parties mistakenly believe to be ‘the work of an old master’, in his view the buyer in such case has no remedy in the absence of a misrepresentation or a contractual warranty as to the provenance of the picture. à Leaf v International Galleries Ltd [1950]

Cases

Solle v Butcher [1950] 1 KB 671

Beckenham Cricket Club has a large house beside it. A big electromagnetic mine was dropped on Maywood House, it exploded and had many damages. Right to lease out flats to builder Butcher. Solle was the estate agent in charge of renting out, and Butcher reconditioned the property. Renting out has great demand, and it was easy to rent out. Rent Restriction Act says must charge the same rent as what was on 1 Sept 1939 unless you serve certain notices. Solle tells Butcher he got legal advice à Since Butcher refurbished, it was as if the houses were new to the market, i.e. they don’t need to serve notices. Solle takes the nicest flat for himself and pays £250 (market rent). However, this is 2x what was paid in 1939. Solle and Butcher have a disagreement after a few years, Solle sues for overcharging rent. è At that time, misrepresentation as to the law could not render a contract voidable so parties were pushed to mistake. Butcher loses in county court, but Lord Denning in appeal says: At common law, the rule is set in Bell v Lever Bros. Q: Whether the Act applied to the flat or not. A: Solle has license to stay in the property until new notice is served. If he doesn’t wish to stay, must vacate/leave the property. Once notice is served, then the market rent can be charged.

Cooper v Phibbs (1867) LR 2 HL 149

A nephew leased a fishery from his uncle. His uncle died. When the lease came up for renewal the nephew renewed the lease from his aunt. It later transpired that the uncle had given the nephew a life tenancy in his will. The lease was held to be voidable for mistake as the nephew was already had a beneficial ownership right in the fishery. This is an instance of res sua. Normally where a contract is found to have been entered under a common mistake the contract will be rendered void as oppose to voidable. The lease was held to be voidable rather than void as the claim was based in equity as it related to beneficial ownership as oppose to legal ownership.

Grist v Bailey [1967] Ch 532

Clarion v National Provident Institution [2002] 2 All ER 265

Pitt v Holt; Futter v Futter [2013] UKSC 26

Malins v Freeman (1837) 2 Keen 25, 48 ER 537

Tamplin v James (1880) 15 Ch D 215

Decided after the enactment of the Judicature Acts in the 19th century.

FE Rose (London) Ltd v William Pim Jnr & Co [1953] 2 QB 450

Both parties convince themselves that horse beans are feveroles, but in fact they are not. When one of the parties figured out they purchased something they didn’t want, the went and sought the rectification of this contract.

Chartbrook Ltd v Persimmon Ltd [2009] UKHL 38

Dealt with the building of property. Both parties are experienced commercial parties, the contract is very length. Parties had agreement to develop property on Wandsworth High Street that has both residential + commercial functions. Came up with a mechanism to calculate consideration for the residential properties, determine price. Calculations considered two factors, Additional Residence Payment and Total Residential Land Value. Contract doesn’t contain an absolute price but a formula by which they would calculate this. Purpose of the structure of the contract was to allow the development to defer payment and pay it from the proceeds from the disposal of the properties developed. Defendant P à calculated £89k Plaintiff C à calculated £4.5m

Magee v Pennine Insurance [1969] 2 All ER 891

The plaintiff signed a proposal form filled in by his son for the insurance of a motor car. There were a number of misstatements in the proposal, in particular it was misstated that the plaintiff held a driving license. The proposal was accepted by the defendant insurance company. The car was accidentally damaged and the plaintiff made a claim in respect of it. The insurance company offered £385in settlement of the claim which the plaintiff accepted. The insurance company then discovered the misstatements and refused to pay. CA held that on its true construction, the insurance company’s letter was an offer of compromise and not merely an offer to quantify the claim. Judgement given for the defendant insurance company. The contract was set aside because in the circumstances it was not equitable to hold the insurance company to it.

The effect of mistake in equity: Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters [2006] EWHC 607 Graves v Graves [2007] EWCA Civ 660

Equitable relief – rescission: Grist v Bailey [1966] 2 All ER 875

Equitable relief – rectification: Cases that have applied Chartbrook v Persimmons.