Common Mistakes: Agreements Made Under Mistaken Assumptions

Question 1

Bell v Lever Brothers Ltd,
(Establishes Common Law Common Mistake Test (CLCM))

Answer 1

Establishes the common law common mistake (CLCM) that will render the contract void ab initio.
- The test to establish a common law common mistake, known as the Essentially Different Test, or the Difference in Kind Test:
The mistake must be the mistake of both parties (common), and the mistake is to the existence of some quality which makes the thing without the quality essentially different from the thing it was believed to be.
- Different way of putting it: the inquiry is whether the thing actually contracted for is different in kind from what the parties assumed they were contracting for.
- At the end of the day you must ask if the contract can still be performed. Focus on the substance matter/essential terms (money & art) and don’t focus on their quality (bad art & money).
The test is laid out, the effect is that the contract is void ab initio

Question 2

What are 2 straightforward ways in which the CLCM test applies?

Answer 2

NOTE: Generally, there are two circumstances where it is conventionally straight forward to satisfy the CLCM test:
1) res extincta – extinct subject matter. Ex I sell you a horse, but it’s already dead.
res sua – mistakes as to title. Ex I sell you a house I never had title to. Nemo dat.

Question 3

McRae v Commonwealth Disposals Commission, 1951
(Res Extincta/Limitation to CLCM/Implied Promise)

Answer 3

A very narrow but important proposition, which places an additional limit on the doctrine of common law common mistake.
Limitation to CLCM: if one of the parties has either expressly or impliedly promised that the thing they are mistaken about is in fact true or takes responsibility for the mistake in some other way, then the doctrine of CLCM does not apply. This is because one of the parties has taken responsibility for the thing being true. This means that the other party can sue for breach of contract.
Also, even if Common Wealth Disposals wasn’t at fault, the risk of the mistake must not have been allocated to one of the parties solely. Any risk to one party of mistake needs to be reflected in consideration.

Question 4

Solle v Butcher, 1950
(Affirms Narrowness of CLCM/Establishes ECM)

Answer 4

• Endorses the case from Bell v Lever Brothers: CLCM will only apply if the parties are mistaken as to the terms of the agreement or the subject of the agreement if the mistake renders the agreement essentially different from that which they thought they were doing.
• Creates the equitable common mistake principle — A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault
• The Test for the Equitable Common Mistake (ECM):
  o It will be unconscientious for the contract to stand in equity, and therefore may be set aside (**and the court can also get creative with the remedy) if:
  - (1) the parties were under a common misapprehension either as to the facts or the relative rights;
  - (2) provided that this misapprehension was fundamental; and
  - (3) the party who seeks to set aside the contract is not at fault
  (4) there is no innocent 3rd party.

Question 5

Great Peace Shipping v Tsavliris Salvage, 2002
Modernizes CLCM Test from Bell v Lever Brothers Ltd)

Answer 5

• Modernizes the Bell and Lever test to establish CLCM from Bell v. Lever Brothers through five principles:
  o (1) there must be a common assumption as to the state of affairs that you contract.
  o (2) there must be no warranty (an implied promise/term) by either party that the state of affairs exists (ex: McCrae case – warranty was the implied promise that the boat exists)
  - No warranty like condition or term. Just means implied promise McCrae
  - this will evolve into a broader idea of has the risk or falsity been allocated to one of the parties? (it’s an extension of the idea of an implied warranty)
  - If you impliedly promise the boat is 35 miles away, then you can’t have a mistake, or more broadly, as we will see in the next few cases, if the contract allocates the risk to me that I might be wrong about the proximity of the boat, that will still prevent me from suing.
  o (3) the non-existence of the state of affairs must not be attributable to the fault of either party (means attributable to the fault of the person arguing for a mistake)
  o (4) the non-existence of the state of affairs must render performance of the contract impossible
  - * this is the Essentially Different (Different in Kind) test from Bell v. Lever Brothers. Rephrases the original test to ask: Has the subject matter of the contract become essentially different form what it was meant to be?
  
  • Possibility of performance
    o (5) the mistake that we’re dealing with can relate either to a vital part of the consideration or background circumstances surrounding the performance of the contract that were thought to exist when the contract was formed.

Question 6

Miller Paving Ltd v Gottardo Construction Ltd., 2007
(Preserves ECM, Threshold of Risk Allocation and Fault)

Answer 6

• Threshold matters to consider prior to CLCM and ECM tests, they apply equally to both doctrines
  o (1) Risk allocation
  - As we saw in McCrae, if the thing that you impliedly promised/warranted is true, then you can’t have a mistake. This is now expanding into a broader concept of risk allocation.
  - — If the risk that the thing is false has been allocated in the contract to either of the parties, then you can’t have either type of mistake.
  - When a risk has been allocated to Party A that they could be wrong about the false assumption, then there can be neither CLCM nor ECM as a threshold matter.
  - The text of the contract and industry custom can allocate the risk impliedly to a party.
  o (2) Fault
  - — if the party who is seeking to argue mistake is at fault for the mistake, then you can’t have either type of mistake.
  In any event that it is Party A’s fault for the mistake, then there can be neither CLCM nor ECM

Question 7

Lee v 1435375 Ontario Ltd., 2013
(Expands Risk Allocation and Fault)

Answer 7

• Doctrine of caveat emptor: general legal principle of buyer beware
  
  • look at how easy the thing is to verify, how important the thing is?
  • If something is important to you as a buyer, you should look into it beforehand. Consider how hard/onerous it is to look into the thing. Easy burdens should be pursued, but tougher burdens not so much.
    ○ i.e. look into zoning before buying a property which is not difficult, no judgment required you are simply just seeing how the zoning is classified.
  • A failure to look into things that are important = fault.
  • In buyer beware, risk allocation is placed onto the purchaser.
    Takes an expansive view on the ideas of risk allocation and fault (expanding to include omission of CLCM and ECM)– has the effect of shrinking the operation of both types of mistakes.
    General legal principle of buyer beware means that the risk is allocated to the purchaser to satisfy themselves as to the facts that are important to them.
• This case took very expansive views on the ideas of risk allocation and fault. This has the effect of shrinking the operation of both types of mistake.
  à expanding the thresholds of fault and risk à narrows the operation of CLCM and ECM