Contract Law- Mistake

3 Types of Mistake

• Common Mistake- The mistake is said to be shared. Both parties are mistaken, each making the same error.
• Mutual Mistake- The parties misunderstand each other. One party believing X, the other Y. No agreement on point.
• Unilateral mistake- Only one party makes a mistake but the other party either knows or should have known that the mistake has been made.

Common Mistake

Contract will only be void if it relates to:

(a) Existence of a thing or survival of a person (res extincta)

(b)Ownership of the subject matter (res sua)

(c) Mistakes as to quality

(a) Res extincta

Couturier v Hastie (1856) 5 HL Cas 673

• The contract was void from the beginning as there was an absence of the subject-matter.
• A buyer contracted for the purchase of corn which both parties believed was on ship bound to England.
• Unknown to either of the parties, the corn has fermented and had to be sold by the ship’s captain before the contract was made.

Under section 6 of the Sale of Goods Act 1893 now stipulates that a contract for the sale of goods will be void if those goods have been perished at the time of the contract ( provided that the seller is not aware that the goods have been perished)

Galloway v Galloway (1914) 30 TLR 531

• The two parties made a separation agreement.
• It was later discovered that the man’s first wife was alive.
• It was held that the separation agreement was void as it had been entered into on the basis of the common assumption that the parties were married to each other.

(b) Res Sua

Cooper v Phibbs (1867) LR 2 HL 1495

• The plaintiff agreed to take a lease on the defendants salmon fishery.
• It turned out that the plaintiff owned the fishery and not the defendant.
• Thus the lease was void.

(c) Mistake as to quality

Bell v Lever Brothers (1932) AC 161

• Bell was made redundant. Lever Brothers gave him £30,000 compensation.
• Few months later, Lever Brothers discovered that Bell had committed breaches of duty during his employment.
• Lever Brothers could have just fired him without pay and therefore they sought to recover the money on the grounds of common mistake.
• The mistake was not unilateral- the jury found that Bell’s mind had not been directed to his breaches of duty at the time the compensation agreement had been made.
• Lord Atkin stated ” 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 a 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.”

Solle v Butcher (1950) 1 KB 671

• Parties negotiated for the lease of a flat on mistaken assumption that the rent was unaffected by the Rent Restriction Acts.
• The agreed rent was £250. Later discovered that it was controlled by the acts and the rent was £140.
• Solle sued to recover the amount that he had overpaid.
• The court found that the mistake was not important enough to render the contract void at common law.

Equity

Where relief is not available in common law because of some common mistake does not mean that the Irish law will not grant relief at all. Based upon equitable principle, a court may do on of the 3 things:

1) Refuse to grant a decree of specific performance. (Baskcomb v Beckwith (1869) LR 8 Eq 100)

2) Set aside the contract. (Solle v Butcher (1950) 1 KB 671)

3) Rectify a written contract that does not accurately record the real agreement made by the parties.

Conditions for rectification

• There must have been prior completed agreement.
• The intention of the parties must have continued unaltered.
• the existence of the mistake must be clear.
• only ‘literal’ faults can be rectified.

Mutual Mistake

At common law only fundamental mistakes are operative.

Scriven Brothers v Hindley & Co. (1913) 3 KB 546

• Plaintiffs bid for two lots which they believed contained hemp at an auction.
• Auction catalogue did not disclose that the second lot contained tow and not hemp.
• The defendants made a very high bid for the tow because they believed it was hemp.
• When they discovered that it was tow they refused to pay.
• It was held that there was no binding contract because the court was not able to determine the ‘sense of the promise’

If an objective bystander, observing the conduct of the parties, can find an agreement between the parties by reference to their words and conduct, the agreement will be enforced. (Scott v Littledale(1858) 8 E&B 815)

Unilateral Mistake

Unilateral mistakes not only covers the situation where one party actually knows the other is mistaken but it also covers where one party ought to know of the other’s mistake ( would have been obvious to a reasonable man)

Hartog v Colin & Shields (1939) 3 AER 566

• Defendant offered to sell a number of Argentine hare-skins, the price to be determined at a certain sum per pound.
• The plaintiff accepted this offer
• The standard practice was to sell by the piece. The vendor was aware of this mistake, which worked out to his benefit.
• The contract was thus void.

Errors as to identity

In order to succeed in avoiding the contract the mistaken party must show that:

1. The other party’s identity mattered to the contract.
2. The mistake was one of identity and not of attribute.

• Cundy v Lindsay (1878) 3 APP CAS 459
• King’s Norton Metal Co. v Edtridge, Merrett & Co. (1897) 14 Tlr 98
• Phillips v Brooks Ltd (1919) 2 KB 243

Non est factum- it is not my deed

Generally, when someone signs a document, he is bound by it, even if he hasn’t read it or understood it. However, there are some circumstances under which a person who has signed a contract will not be bound by it. The contract will be void if a party signs the contract because he has been induced by a false statement.

Lewis v Clay (1897) 67 LJ QB 224

• The plaintiff pretended to the defendant that he needed him to witness some deeds.
• He had placed blotting paper with holes cut into it over the “deeds”, allegedly to keep their contents private.
• The defendant signed .
• The “deeds” turned out to be promissory notes, obliging the defendant to pay the plaintiff £11,000.
• The defendants plea of non est factum was easily supported.

Saunders v Anglia Building society (1970) 3 AER 961

• Elderly woman signed a document which she believed had the effect of gifting her house to her nephew.
• She did not read the document because her glasses were broken.
• The document dealt with the sale of her house to a man called Lee.
• The court held that the widow could not pray the doctrine of non est factum in aid.
• Even if she was an elderly woman with limited education she should still have checked what she was signing.

Company Law- Separate Legal Personality

Separate Legal Personality

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The Rule in Salomon v Salomon & Company Limited (1897) A.C.22

• Company which is registered according to the Companies Acts 1963-2012 has a distinct legal personality.
• In Limited Liability companies shareholders are not liable for the debts of the company to its creditors ( only have to pay the remaining unpaid shares that were issued to him according to to the terms of the articles and memorandum of association)

Facts of the case

• Mr Salomon was a sole trader who owned a boot manufacturing and leather business. His sons worked in the business and pressed him to give them a stake. Mr Salomon incorporated a newly formed limited company.The company purchased Salomon’s business for £39,000. His wife and five eldest children became subscribers and two eldest sons also directors.
• The consideration was made up of 20,000 fully paid shares of £1, a cash payment of approx. £9,000, a loan from Mr Salomon to the company of £10,000 secured by floating charge.
• The company went into liquidation.
•  The question was whether Mr Salomon’s secured debt of £10,000 should be paid by the company in priority to debts amounting to £7,500 owning to company’s unsecured creditors.
• Liquidators argued that unsecured creditors should have priority over the debenture issued to Mr Salomon. Liquidators said that the incorporation of business by Mr Salomon was a mere scheme to enable him to carry on business in the name of the company with limited liability, contrary to the true intent and meaning of Companies Act.
• However, House of Lords held that the creditors had to respect the principles of incorporation and that the company could not be treated as an agent of the controller. The company was separate and distinct from those within it and legally had to be treated separately.
• Lord McNaghten- ” The company is at law a different person altogether from the subscribers to the Memorandum; and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or a trustee for them. Nor are the subscribers, as members, liable in any shape or form, except to the extent provided by the Act.”

Application of the principle 

Quigley Meats Ltd v Hurley (2011) IEHC 192

• The Plaintiff (Quigley’s) supplied Hurley’s with meat produce for their bar and restaurant called ” An Seanachie Bar”.
• The plaintiff were of the impression that they were dealing with the defendant personally. However, payments for the produce were always made to Quigley Meats Ltd from a company account ” The Seanachie Cottages Ltd”.
• Defendants got into financial difficulty and stopped paying the plaintiff for the produce.
• Quigley Meats Ltd took legal action against Hurley for unpaid bills.
• The court initially found for the Quigley’s ordering the defendants to pay the debt of €26,719.
• The defendants appealed arguing that they could not be found personally liable as the debt was for their company to pay.
• High Court agreed with the defendants on the grounds that when they did pay the Quigleys they had paid with cheques which had the company’s name printed on them. Therefore they ought to have known that they were dealing with a limited liability company and not individuals.

Lee v Lee’s Air Farming Ltd (1961) AC 12

• The fact that the deceased could control the company “did not alter the fact that the company and he were 2 separate distinct persons”

Macura v Northern Assurance (1925) AC 619

• Damage to a company’s property was not recoverable under an insurance policy because the policy was in the name of the company’s controller and not that of the company.
• The company owned the property.