MISTAKE The doctrine of mistake essentially deals with the question of: WHICH PARTY (IF ANY) SHOULD BEAR THE RISK OF THE MISTAKE MATERIALISING? GENERAL RULE: Under common law parties to a contract cannot avoid their contractual obligations by claiming that they contracted under the influence of mistake. There are 2 categories of cases under mistake: 1. Where parties are in agreement but make a false assumption on a matter. 2. Where parties are not in agreement and intend to contract on different terms. Within these categories two theoretical approaches have been applied by the common law: 1. Constructionist Theory: problems solved by applying rules of contract law and the construction of terms. 2. Civilian Theory: looks at whether the mistake relates to the substance or root of the contract. Bell v Lever Brothers is illustrative of the first category, where the parties are said to be in agreement, and where the mistake is alleged to be related to the quality of the subject matter. Both judgements (Lord Atkin and Lord Warrington) utilise the Constructionist and Civilian theoretical approaches. Bell v Lever Brothers House of Lords  AC 161- Appeal from the Court of Appeal FACTS: Lever Brother appointed Bell as Managing Director of Niger Co. Ltd, a company which it held a 99% share in. Bell was appointed to the position for a term of 5 years at £8000 pa. After 3 years Niger Co. Ltd amalgamated with another company and it became necessary to terminate the course of Bell’s employment. Bell and Lever Brothers agreed upon a £30 000 compensatory payment. Following payment it was discovered that Bell while under employment had committed breaches of duty, which he had forgotten at the time of termination, that would have entitled Lever Brothers to terminate without compensation. In the first Instance: Lever Brothers sought to recover the £30 000 payment, arguing that the compensation agreement was void for fundamental mistake. The mistake related to a fundamental quality of the subject matter of the contract of service. The House of Lords held that the compensation agreement related to a subject matter which was not fundamental and that therefore the compensation agreement was not void for mistake. Lord Atkin Rules of law governing mistake in contract are established with reasonable clarity. He notes that the general rule is as follows: If mistake operates at all it operates so as to negative or in some cases nullify consent. The parties may be mistaken in the identity of the contracting parties, or in the existence of subject matter of the contract at the date of the contract , or in the quality of the subject matter of the contract. Mistake As To Quality Of Subject Matter. - Most difficult to determine Rule: 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. In other words: A mistake will not render a contract void unless it is: a) A mistake based on an assumption of both parties (Constructionist Theory) AND b) A mistake to the extent that its absence from the agreement, will impact upon the quality of the agreement and render it essentially different from what it ought to be. (Civilian Theory) a) Civilian Theory Issue: Is an Agreement to terminate a broken contract different from an agreement to terminate an unbroken contract, assuming that the breach has given the one party the right to declare the contract at an end? Principle: On the whole I have come to the conclusion that it would be wrong to decide that and agreement to terminate a definite specified contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise. Reasoning: The contract released is the identical contract in both cases and the party paying gets exactly what he bargains for. Examples A buys B’s horse, thinking that the horse is sound, and pays for as much. He would not have bought the horse knowing that it was unsound, but if B has made no representation, nor contracted upon the horse soundness, A cannot recover the price paid. So long as no representation or warranty has been made no recovery is available. Held that no mistake can be found in the agreement, as no condition could be implied which would go to the root or substance of the agreement. The mistake does not represent a departure from the substance of the original agreement, and therefore cannot be upheld. Why this decision? Policy: They can be supported on the ground that it is of paramount importance that contracts should be observed and that if parties honesty comply with essentials of the formation of contracts, that is, agree on the same terms and on the same subject matter, they are bound, and must rely on the stipulations of the contract for protection of the facts unknown to them b) Constructionist Theory Legal Issue: Is there an implied stipulation in the contract that both parties understand the facts of the contract? Does the alleged mutual mistake arise out of a condition? A condition derives its efficacy from the consent of the parties, express or implied. Principle: 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. 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. Held, that the identity of the subject matter (the termination agreement) was not destroyed by the mutual mistake. A condition cannot be implied which would alter the state of facts to give rise to a condition warranting mistake. Why this decision? Policy: Nothing is more dangerous than to allow oneself that liberty to construct for parties contracts which they have not in terms made by importing implication which would appear to make t make the contract more businesslike or more just. The implications to be made are to be no more than are necessary for giving business like efficacy to the transaction. Common Standard for determination of mutual mistake and implied conditions proposed in the principle: Does the state of new facts destroy the identity of the subject matter as it was in the original state of facts? Lord Blanesborough and Thankerton agreed. Lord Warrington of Clyffe: (dissenting) Looks at the extent of the mistake, adopting Civilian theoretical approach. Issue: Was there an assumption of such a fundamental character as to be crucial to formation of the contract, or was it merely common error as to a material element, which does not effect the substance of the consideration? Held, The assumption was crucial to the contract. It was not a term of the service agreement, but one that was fundamental to the bargain (upon which agreement was to be determined and compensation paid. It was a fundamental breach, and therefore can be determined as a mistake as to quality. Viscount Hailsham agreed. Appeal Allowed. What does this case illustrate? Firstly this case gives an illustration of how the Constructionist and Civilian theoretical approaches can be applied to the doctrine of mistake under common law. Secondly it indicates the unlikelihood of recovery under this area of the law. As noted in the TB it will very rarely be sufficient to argue mistake as t the quality of subject matter and succeed under common law.