Mistake

The law much choose between a narrow doctrine of mistake which favours certainty and a more liberal regime which favours flexibility - Justin Santiago

The doctrine of mistake allows an invalidation of an agreement based on an incorrect understanding by one or more parties to a contract resulting in the contract being void ab initio (from the beginning) and therefore no obligations can arise. Because of such drastic consequences, the courts have naturally confined mistake especially mistake as to the quality of the subject matter of a contract to very narrow limits in order for it to be operative.

The courts have also attempted to apply equitable principles in an attempt to nullify contracts based on a mistake if it resulted in unfairness to one of the parties. However this has led to uncertainty in the law and the courts appear to have gone back to a narrow interpretation of mistake in order to bring back certainty to the law.

In the House of Lords case Bell v. Lever Brothers Ltd. it was established that common mistake can void a contract only if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible. This is in line with the doctrine of the freedom of contract and the principle of caveat emptor that the courts are not prepared to grant relief based on bad bargain alone. The reasoning behind such a strict approach was that parties should not be allowed to escape from what merely was a bad bargain.

This reasoning has also led to similiar decision such as in Leaf v International Galleries a mistake as to the artist of a painting could not amount to quality making the thing essentially different. In Harrison and Jones v Burton and Lancaster a commercially inferior mixture of pure kapok and brush cotton and not solely pure kapok was not deemed to be essentially different. In Oscar Chess Ltd v Williams, a 1948 model of a car was not essentially different from a 1939 model. In Smith v Hughes the law even went to the point that even if one party knows that the other party is mistaken as to the quality the contract was still binding.

The Court of Appeal in Solle v Butcher purported to use equity to make a contract voidable if it would be "unconscientious for the other party to avail himself of the legal advantage which he had obtained.ties themselves and for innocent third parties. In Associated Japanese Bank v Credit du Nord, Steyn J stated that ‘Equity will give relief against common mistakes in cases where the common law will not, and it provides more flexible remedies, including the power the set aside the contract. In equity the contract may be voidable on the grounds of a fundamental mistake provided there was absence of blameworthy behaviour of either party at the time of contracting and if could be unconscionable for a party to insist on strict contractual rights because of the mistake.’

However Solle v Butcher left it unclear the precise parameters of the equiteable jurisdiction. The fundamental mistake of equity was not very much different from the mistake that was sufficiently fundamental to render its identity different under common law. It was also too obscure as to what amounted to unconscionable behaviour Also the significant difference in applying equity is that the effect of mistake in equity rendered a contract voidable and not void whereas in law the contract was rendered void. This created confusion with regard to third party rights.

The case of Great Peace Shipping Ltd v Tsavliris Salvage is notable for purporting to overrule Solle v Butcher and denying the existence of an equitable jurisdiction to set aside contracts made under a fundamental common mistake. The courts in Great Peace returned certainty to the law relating to mistake as to quality which requires very stringent tests before a court will relieve such mistakes. This follows the purposive approach to contract law which the courts have taken and which seeks to enforce a contract rather than terminate it. This has lent certainty to the law. The less stringent tests required under equity which found favour with those who wanted a measure of flexibility have now been largely discarded. Rather than create confusion and to make certain the level of protection granted to third parties the courts have chosen not to use equity in cases involving mistake

The question whether the equitable jurisdiction to set contracts aside for unilateral mistakes has survived Great Peace has not been decided in the English courts, although its continued existence has been assumed: Huyton SA v Distribuidora Internacional de Productos Agricolas SA de CV and Harrison v Halliwell Landau.

It can be assumed that Great Peace has taken the law back to post Lever Bros but pre Solle v Butcher. In short mistake will no longer be flexible and parties should be on the alert when contracting.