Circumstances affecting Validity of Contract Q8

Thomas Sim E3009

Q.
'The mere fact that one of the parties to a contract acted under a mistake does not, as a general rule, affect the validity of the contract.'

Discuss the circumstances, when a mistake by one of the parties will affect the validity of the contract.

(20 marks, 2013 Q8)

Similar question was asked in

2013 D02 Q8,
2016 Q1
MIA QE 2012/3 Q1 (b) (iv),
Common and Mutual Mistake.

A.
References can be made to:

Wikipedia on Mistake (Contract Law) here.

By law teacher.net as Mistake Law here.

By lawresources.co.UK as Mistake here.

By Statutes

Section 22 of Contracts Act, 1950 - Effect of mistake as to law.

A contract is not voidable because it was caused by a mistake as to any law in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake in fact.

Illustration

A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.

Section 23 of Contracts Act, 1950 - Contract caused by mistake of one party as to matter of fact.

A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

By Common Law

Mistake by one of the parties in a contract is called 'Unilateral Mistake'. Amongst, there are two categories within unilateral mistakes:

  1. mistakes relating to the terms of the contract; and
  2. mistakes as to identity.

Mistake as to the terms of the contract

Hartog v Colin & Shields [1939] 3 All ER 566 Case summary

Smith v Hughes (1871) LR 6 Case summary

Where one party is mistaken as to the nature of the contract and the other party is aware of the mistake, or the circumstances are such that he may be taken to be aware of it, the contract is void - see Hartog v Colin & Shields (1939).

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

The defendants mistakenly offered a large quantity of hare skins at a certain price per pound whereas they meant to offer them at that price per piece. This meant that the price was roughly one third of what it should have been. The claimant accepted the offer.

The court held that the contract was void for mistake. Hare skins were generally sold per piece and given the price the claimant must have realized the mistake. For the mistake to be operative, the mistake by one party must be as to the terms of the contract itself.

[For example, Tenant agreed to rent the shop with rental of RM3,000. However, the Landlord is of the assumption that the Tenant is renting the only the first floor although the contract agreement was wrongly written as for the whole shop. The Tenant however, knew that he only rent for the upper floor, and not the ground floor, but insisted to use the ground floor as contract agreement stated so. The Landlord disagreed. Tenant asked to claim for compensation due to void of contract.

The mistake was in the terms of the contract, and generally the rental for the whole shop cannot be so low as RM3,000. Thus, mistake of this type would render the contract void. However, as the contract is void in the first place due to mistake as to term of contract, there is no compensation.]

A mere error of judgement as to the quality of the subject matter will not suffice to render the contract void for unilateral mistake.

[For example, Tenant agreed to rent the house with condition that the house is as it is during view. The Landlord however, knows that the house has neighbours who are quite sensitive to noise. Thereafter, when the tenant moved in, the neighbours warned the tenant to keep their voices down (quality). The tenant was unhappy and argue that he was not aware of the restriction, hence the contract void.
In such manner, the mistake of not knowing the condition of the neighbourhood is not a reason to void the contract. The Landlord did not know the tenant is very noisy. The tenant did not ask the Landlord if noise was an issue in the neighbourhood. As nobody knew how noisy was noisy (quality) and that the tenant did not inform before hand that he has habitual noisy behaviour. Thus, mistake by one party - the TENANT, does not render the tenancy contract void.
The case of Smith v Hughes (1871) where the oats were new oats and not suitable for horse feed was not an excuse to void the contract. The buyer was shown the oat sample, and agreed to buy it. It was not the duty of the seller to know if the oat is for whatever use of the buyer, and not able to stop him from using the oat elsewhere although he knew that the buyer could have mistaken the oat (new as old).]

Smith v Hughes (1871):
The claimant had purchased a quantity of what he thought was old oats having been shown a sample. In fact the oats were new oats. The claimant wanted the oats for horse feed and new oats were of no use to him. The seller was aware of the mistake of the claimant but said nothing. The claimant brought an action against the seller based on mistake and misrepresentation.

Held: both actions failed. The action based on misrepresentation failed as you cannot have silence as a misrepresentation. The defendant had not mislead the claimant to believe they were old oats. The action based on mistake failed as the mistake was not as to the fundamental terms of the contract but only a mistake as to quality.

Mistake as to Identity

Mistakes as to identity are generally induced by fraud in that one of the parties is claiming to be someone who they are not. This is like the buyer is not exactly the correct buyer. For example, Ali sold the house to Abu, who was not actually Abu. Abu did not come, it was his older brother Abang.

There is thus an overlap with misrepresentation. A claim based in mistake is more favourable to one based in misrepresentation as the affect of a finding of mistake is that the contract is void as oppose to voidable.
This is important where a rogue has acquired goods and sold them on to a third party. If the contract is void the rogue will never receive title to goods and will not be able to pass title when selling the goods. However, if the contract is voidable the contract exists and title passes. If the goods are sold before the innocent party rescinds the contract, the purchaser acquires good title to the goods. In determining whether a contract will be held void for mistake the courts draw a distinction between contracts made inter absentes (at a distance) and contracts made inter praesentes (face to face transactions).

Inter absentes (at a distance): Ali never saw Abu, and thought that it was Abang the correct buyer.

Where the parties are not physically present when the contract is made, eg where the contract is made through dealings through the post, telephone or over the internet, the courts will only make a finding of mistake if the claimant can demonstrate an identifiable person or business with whom they intended to deal with. A mistake as to their attributes will not suffice:

Cundy v Lindsey (1878) 3 App Cas 459

A rogue, Blenkarn, hired a room at 37 Wood street, Cheapside. This was in the same street that a highly reputable firm called Blenkiron & Son traded.

The rogue ordered a quantity of handkerchiefs from claimant disguising the signature to appear as Blenkiron. The goods were dispatched to Blenkiron & co 37, Wood street but payment failed.
Blenkarn sold a quantity the handkerchiefs on to the defendant who purchased them in good faith and sold them on in the course of their trade. The claimants brought an action based in the tort of conversion to recover the value of the handkerchiefs. The success of the action depended upon the contract between the Blenkarn and the claimant being void for mistake.

If the contract was void, title in the goods would not pass to the rogue so he would have no title to pass onto the defendants. Ownership of the goods would remain with the claimant.

Held: The contract was void for unilateral mistake as the claimant was able to demonstrate an identifiable existing business with whom they intended to contract with.

[In the case of Ali selling his house to Abu (disguise as Abang), the contract is void for mistake as Ali mistakened Abu as Abang. As the contract is void, Ali still claims ownership to the house as title in the house has not passed to Abu.]

Inter praesentes (Ali thought Abu is Abang, as they quite look a like)

Where the parties contract in a face to face transaction the law raises a presumption that the parties intend to deal with the person in front of them:

Phillips v Brooks [1919] 2 KB 243 Case summary

A rogue purchased some items from the claimant's jewellers shop claiming to be Sir George Bullogh. He paid by cheque and persuaded the jewellers to allow him to take a ring immediately as he claimed it was his wive's birthday the following day. He gave the address of Sir George Bullogh and the jewellers checked the name matched the address in a directory. The rogue then pawned the ring at the defendant pawn brokers in the name of Mr. Firth and received £350. He then disappeared without a trace. The claimant brought an action based on unilateral mistake as to identity.

Held: The contract was not void for mistake. Where the parties transact face to face the law presumes they intend to deal with the person in front of them not the person they claim to be. The jewellers were unable to demonstrate that they would only have sold the ring to Sir George Bullogh.

Lewis v Avery [1971] 3 WLR 603 Case summary

[Ali sold the house to Abu, thinking that he is Abang. Later on, Ali regretted as he wanted to sell to Abang at a higher price. He argued that the mistake renders the contract void.

Ali sold the house to Abu having negotiated face to face (inter praesentes) present together. Hence, the law cannot accept the argument that Ali could have not recognized Abu as the correct buyer. Event if it was dark and dim, Ali would have to make judgment according to his willingness to come to a contract. Ali being a willing seller, could have sold to another person in place of Abu without Abang in consideration. Therefore, this is mistake of identity (of the person) and not the form (quality or form of the goods), and cannot be accepted as to void the contract.]

Ref:
Mistake, e-Lawresources, available at
http://www.e-lawresources.co.uk/Mistake.php
[Own account]