26 Jun 2017

Law of Contract June 26, 2017

How a contract may be Discharged at Law

How a Contract May Be Discharged

There are four ways in which a contract may be discharged as follows:

Performance (i.e. fulfilling and complying with all the contract terms)

Agreement (i.e. the parties agree to discharge the contract – be careful, as both parties must usually give consideration for the agreement to discharge to be legally binding)

Breach (i.e. not complying with/fulfilling the contractual term(s) as required by virtue of the contract) To read up a similar post to this, click here

Frustration (i.e. the contract becoming impossible but due to no fault of any party – but please see below)

1. Performance

General rule: all the terms of the contract must be precisely completed to discharge liability.

There are however several exceptions to this rule:

(i) Divisible contracts

An entire contract requires complete performance by either or both parties, usually there is an express provision saying that the contract is entire and no part of the contract may be severed.

A divisible contract is where there are several amounts of consideration and upon performance of one stage the party is entitled to payment of that amount. Therefore with a divisible contract it is arguable that performance of certain elements within the contract entitles that party to part payment. A simple example of this would be where there is payment for the delivery of goods and installation where there are completely separate amounts “payable on delivery" and “payable on completion of installation". It is not always this simple though!

See the following contrasting cases:

C contracted to construct two houses and stables for £565. C carried out work to the value of about £333, but did not complete the works and refused to finish the work. The other party ended up completing the buildings because of C’s refusal. C could not sue for £333, as he had failed to fulfill all the terms of the contract and the contract was indivisible.

Sumpter V Hedges [1898]

A shipwright agreed to undertake repairs to a ship, but there was no agreement on what was payable when. The shipwright refused to do any works whatsoever until he received some of the monies due. It was held that the shipwright was not bound to complete the repairs before claiming some payment.

Why is this? – Although there is no real difference as such between this case and the last one, you could say that it is a commercial reality/custom that some payment would be made at the start to buy materials.

Roberts V Havelock (1832)

ii) Acceptance of partial performance

If a party accepts partial performance he must pay a “reasonable price" for that partial performance. This acceptance of the partial performance however must be freely agreed, so there must not have been force, duress, etc. Effectively there must have been a new agreement that partial payment would be made.

A ship could not deliver goods in Hamburg port (as required under the contract) due to no fault of either party. The party awaiting delivery of the goods agreed with the ship owners that delivery could take place at another port. A contract was implied from the agreement to deliver elsewhere and therefore the ship owners were entitled to payment.

Christy V Row [1808]

iii) Completion prevented by promisee

If a party is prevented by the other party from performing all terms under the contract, then a quantum meruit action in quasi-contract may be brought (i.e. a reasonable price is paid for the work actually done even though it would not normally amount to fulfilling all the terms).

Here C had contracted with a published to write a book. However the publisher later decided it would not publish the book. The writer was entitled to reasonable payment on a quantum meruit basis.

Planche V Colburn [1831]

iv) Substantial performance

Where there has been substantial performance and there have only been minor defects usually the contract price is payable less a sum for the defects.

In this case there were only minor building defects.

Dakin V Lee [1916]

v) Tender of Performance

This occurs if the first party needs the other party’s help to complete the contract, but the other party refuses.

Here the other party refused to accept delivery, but it was held that attempted delivery amounted to substantial performance. [This is similar to the “performance prevented by the other party" situation].

Startup V M'Donald [1843]

Is Time Of The Essence In A Contract?

Section 41 Law of Property Act 1925 confirms time is generally not of the essence and therefore delay only entitles a party to damages unless:-

i) express provision stating that ‘time is of the essence’ (i.e. the contract contains an express time).

ii) Notice has been given by either or both parties to the other while the contract is being carried out (e.g. “I give you notice that time is now of the essence", etc.)

iii) Due to the circumstances in which the contract is made or from the subject matter of the contract time is of the essence (e.g. shares which fluctuate very quickly are being bought).

2. Agreement

Bilateral Discharge (i.e. discharge by both parties)

How can contracts be terminated?

Accord and Satisfaction – each agrees to release the other from their liabilities under the contract

Rescission and Satisfaction – the parties rescind the first contract and replace it with a new contract (the parties could alternatively vary the contract).

Variation of the original contract – Note: to be binding there should be consideration or the parties should enter into a deed.

Waiver (e.g. a party agrees expressly or by conduct they will not enforce their legal rights)

Unilateral Discharge

1. Release the other party from performance – this should be by deed or in return for consideration

2. ‘Accord and satisfaction’ is also possible (e.g. the part payment of a debt).

3. Breach

A breach = a failure to perform one or more terms of a contract.

A serious breach entitles the other party to treat the contract as discharged. How?

Either party may expressly or from conduct at a point before performance is required state he does not intend to fulfill his obligations under the contract (= an anticipatory breach); or

He may in fact breach the contract that amounts to a substantial breach.

Anticipatory Breach

What is the other party entitled to do once he is informed of an anticipatory breach?

He may either accept the breach (thereby bringing the contract to an end entitling the party to claim a remedy); or

Affirm the contract (thereby allowing the contract to continue – perhaps waiving the breach).

Note that a party who does nothing may be impliedly waiving their right to a remedy, especially if nothing is done for a long time – Panchaud Freres SA v Establishments General Grain Co [1970].

Always remember that estoppel may also be brought in here.

An innocent party is not required to wait until the breach to bring an action – Hochster v De La Tour [1853].

If the innocent party affirms the contract after an anticipatory breach, he still has to complete his own part of the bargain under the contract.

This case said that it is necessary to see if there has been “an absolute refusal to perform the contract". If so, consider whether the innocent party entitled not to perform his part of the contract.

Lord Selborne Stated In Mersey Steel V Naylor Benzon (1884)

Remember to apply the rules on the effect of a breach i.e. a breach of a warranty is treated as less serious than a breach of condition and the remedies are accordingly very different.

Frustration

Frustration covers situations where the contract has become impossible to perform or it has lost its commercial purpose, but neither party caused the frustration.

Two alternative tests exist for frustration:

(1) The Implied Term Test

Caldwell contracted to allow Taylor to use a hall for concerts. However in the meantime a fire destroyed the hall. It was held that the claim for breach of contract fails, as the fire caused the purpose to be fulfilled through no fault of either party. Here the contract depended upon the existence of an object and as the object no longer existed there was frustration.

Taylor V Caldwell [1863]

This case suggested that where the parties would have agreed that upon the occurrence of the matter in question the parties would consider the contract at an end.

Lord Loreburn In FA Tamplin V Anglo-Mexican Petroleum [1916]

(2) The Radical Change In The Obligation Test.

The 'radical change in the obligation' test in this case was:-

1. Look at the contract in light of the contract and surrounding circumstances when it is first entered into.

2. Look at the new circumstances and consider what would happen if the contractual terms were applied to these new circumstances.

3. Compare the two contractual obligations and see if there is a radical or fundamental change.

Lords Reid And Radcliffe In Davis Contractors V Fareham UDC [1956]

Lord Wilberforce said the test to be applied (out of the two) is the one that is fairest to the particular circumstances of the case in question.

National Carriers V Panalpina [1981]

2. Examples of frustrated contracts

i) Destruction of the specific subject matter of the contract

The destruction of the specific object required for performance of the contract frustrates it where without the object the contract cannot take place.

Taylor V Caldwell [1863]

ii) Personal Incapacity of one of the parties

A drummer was contracted to work every day, but due to illness could only work four nights a week. The drummer’s contract had been frustrated, because the commercial purpose could no longer be fulfilled, as it was necessary to employ another drummer.

Condor V The Baron Knights [1966]

iii) Non–occurrence of an event

An event may frustrate the contract if it is not caused by either party and could not be anticipated beforehand (e.g. a fire/lightning/flooding, etc.).

A room was hired to view the coronation of Edward VII, but it was postponed. Both parties knew the whole purpose of the contract was to watch the coronation and as it was not held the contract was frustrated.

Krell V Henry [1903]

Here Herne Bay contracted to hire a boat to take passenger to see a naval event which was to occur because of the coronation. However the coronation did not take place. The contract had not been frustrated, as there were two purposes for the contract and one was still possible i.e. to transport passengers around and this was still possible albeit a lot more unprofitably.

Herne Bay Steamboat Co V Hutton [1903]

iv) Government interference

Here Kerr agreed to build a reservoir and started 2 years of work, but due to a wartime statute had to stop work for what turned out to be 6 years in total (although due to uncertainty of war the amount of time work would have to be halted for was not known at the time). There was frustration, as the nature of the contract had completely changed.

Metropolitan Water Board V Dick Kerr [1918]

v) Subsequent illegality

This case concerned the supply of wheat. Due to wartime the government later passed legislation acquiring all rights in wheat. If the supplier had supplied the wheat it would have been illegal, therefore frustration had taken place.

Re Shipton, Anderson and Harrison Brothers [1915]

vi) Delay

A long and unexpected delay may frustrate a contract – Jackson v Union Marine Insurance [1873]

3. Limits on The Doctrine

Note the following general principles regarding limitations of the doctrine:-

i) Express provision overrides the common law/equity

ii) Increase in costs/loss of profit/more difficulty in performing a contract is not sufficient – it must be impossible to carry out the contract, rather than merely more difficult

The House of Lords held that unforeseen events that make a contract more onerous than previously anticipated did not frustrate it if it was still possible to complete it.

- This only really restates that the fact that a contract becomes more difficult to complete than previously anticipated does not mean there is frustration.

Davis Contractors V Fareham UDC [1956]

iii) The frustrating event must not have been self-induced.

- For example in Maritime National Fish v Ocean Trawlers [1935] the charterer chose a charting licence for one contract over another. Although they could have argued illegality, the fact that there would have been illegality through their own fault. They really should not have entered into the contract in the first place!

4. Effects of the doctrine

Law Reform (Frustrated Contracts) Act 1943 provides that losses may be divided between the parties as the court sees fit where frustration discharges a contract.

Section 1(2) provides three rules:

Money paid prior to the frustrating event is recoverable, and

Money payable prior to the frustrating event is not longer payable

If the party who would have been due money incurred losses prior to performing the contract, the court may award that party such expenses up to the limit of the money paid/payable before the frustrating event.

A pop concert was due at a stadium, but it was later declared unsafe and could not legally be used. No alternative venue was available and the concert could not take place. Both parties had incurred costs - the pop concert promoters had paid the defendants $412,500 for the venue and naturally wanted to recover these monies relying on s1(2) of the 1943 Act.

The stadium owners counterclaimed for breach of contract by the promoters in failing to secure the permit for the concert. The fact the stadium was declared unsafe was the frustrating event, not the lack of the permit and the counterclaim was dismissed. In addition no deduction was given.

Walton Harvey Ltd V Gamerco V ICM/Fair Warning (Agency) Ltd [1995]

(ii) Valuable benefit

Section 1(3) provides: “If one party has, by reason of anything done by the other party in performance of the contract, obtained a valuable benefit (other than money) before the frustrating event, he may be ordered to pay a sum in respect of it, if the court considers it just, having regard to all the circumstances of the case."

Hunt had a contract with the Libyan government to search for oil in Libya. BP financed him in return for a share in profits. When oil was found the government claimed all rights in it, therefore only the Libyan government had any title to the oil. BP had spent $87 million in the search for the oil. BP was awarded $35 million recognising the partial performance of the contract which had given a valuable benefit to the other party.

BP Exploration V Hunt [1982]

You will see from the cases above that the powers are discretionary and the courts will try and achieve fairness between the parties where there has been frustration.

iii) Section 2(5) of the Act provides that the Act does not apply to:

- Contracts with express (or implied) provisions which to deal with the frustrating event;

- Most charterparties;

- Contracts governing the transportation of goods by sea;

- Insurance contracts;

- Contracts for the sale of certain perishable goods, which perish before the buyer assumes the risk of the goods (This is probably because the seller is most likely at fault and can recover the monies on insurance).

Source: Law Teacher

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Law of Contract June 26, 2017

The Doctrine of Privity of Contract

What Is Privity of Contract?

In the law of contract, privity of contract means that it is only parties to a contract that can benefit or be subjected to obligations under such contract. Thus, as a general rule no individual can suffer burden or enjoy benefits in contract to which he isn’t a party. This principle is in line with other fundamental principles of the law of contract such as: freedom of contract, personal liberty of contracting parties, choice of parties etc. This principle was firmly established in the case of Dunlop Pneumatic Tyre Co vs. Selfridge Ltd (1915) AC 79.

In this case, the plaintiff had an agreement with a dealer that he shouldn’t sell their product below a certain price. They also made the dealer promise to extract this same promise from other people they sold to. The dealer subsequently sold to the defendant and made him promise not to sell below the ascertained price. They even agreed that for every good sold below the ascertained price, 5 pounds would be paid to the plaintiff. However, the defendant sold below the price and also didn’t pay the 5 pounds. Thus, the plaintiff sued to enforce the agreement between the dealer and the defendant. The court held that the even though the defendant breached the agreement between it and the dealer, the plaintiff was not a party to the contract and it did not furnish consideration for the promise.

It should however be noted that to every general rule there is an exception. The principle of privity of contract is not exempt. The exceptions to privity of contract are:

Covenants running with the land
Contracts of charter parties
Interference with contractual rights
Contracts of insurance
Statutory exceptions
Banker’s commercial credit.
The operation of the concept of trust.

These exceptions would be further explained below.

Exceptions to Privity of Contract

1. Covenants running with the land: These are covenants which restrict the use of land. They are obligations entered into voluntarily by a user of the land which binds subsequent use of the land. The rule was established in the locus classicus of Tulk vs. Moxhay (1848) 2 Ch. 774.

In this case, the plaintiff owned some plots of land and sold the garden in the centre to a certain Elms. He made him agree not to build on it but preserve it in its existing condition. After a series of conveyances, the land was sold to the defendant. The defendant, although knowing about the restrictive covenant, proposed to build on it. Thus, the plaintiff sought an injunction against the building of the purposed structure. The action succeed on the ground that the defendant had prior knowledge of the covenant.

In order for a restrictive covenant to be enforced, it has to be to the knowledge of the defendant. Also, it the original vendor needs to have other land in the vicinity which would benefit from the restrictive covenant.

2. Contracts of charter-party: This is a situation in which a ship is hired out to a During the subsistence of the hire/charter party, the ownership of the ship changes. Thus, if the new owner decides to interfere with the rights of the hirer, can the hirer sue to prevent the new owner from interfering in his rights even though the new owner wasn’t a party to the initial contract?

In the case of Lord Strathcona Steamship co vs. Dominion Coal Co (1924) AC 128, a ship was chattered to the respondent for a period of ten years with another option of eight years after the first period. The ownership for the ship changed hands until it got to the appellant who was aware of the charter. However, the appellant attempted to interfere with the charter rights of the respondent. The respondent then sought an injunction restraining the appellant. The injunction was granted in the court of first instance. On appeal to the Privy Council, the injunction was upheld.

3. Interference with contractual rights: It is a legal wrong to persuade or influence a party who had voluntarily entered into a contract to breach such contract. For example, A influences B not to perform a contractual obligation that he owes to C. C would have a right of action against A even though A is not a party to the contract between B and C.

In the case of Lumley vs. Gye (1853) 2 E & B. 216, the plaintiff employed an opera singer. The defendant knowingly induced the singer to refuse to perform. The plaintiff thus sued the defendant for tortious interference. The defendant was held to be liable by the court. Also in the case of British Motor Trade Association vs.. Salvador (1949) Ch. 556, A bought a car and covenanted with B that he would not resell it in a period of one year without first offering it to B. Subsequently C bought the car from A within a year’s notice. He was held to have interfered with B’s right.

4. Contracts of insurance: These are contracts between the insured and the insurer. In insurance cases, which involve third parties as beneficiaries, such beneficiaries may have a right of action against the insurance company for non-performance of their obligations even though such third parties were not parties to the original contract.

By the provision of Section 11 of the Married Women’s Property Act 1882 it is provided that when a man or woman insures his/her life for the benefit of a spouse or children, the policy shall create a trust for the people mentioned in the insurance contract. This means that parties who are mentioned in the insurance contract have a right to sue against insurance companies that default. It should however be noted that when this act was domesticated in the western region, the provision of S.11 was missing. Thus, the Act applies in Northern and Eastern state since it is a statute of general applications and its application is subsequent to local enactments.

Therefore, in Western Nigeria in such a situation, the court would have to apply the principle of trust. This was done in the case of Akene vs. British American Insurance Co (Unreported 1972) which was in the Midwest (formerly part of the Western region). In this case, the plaintiff was named as beneficiary in the insurance contract of the deceased, his father. The insurance company subsequently failed to pay the full amount of the award. In court, it argued that the plaintiff wasn’t privy to the contract. The court held applied the trust concept and held that the plaintiff was in the position of a beneficiary with the deceased as testator and the insurer in the position of a trustee. Thus, judgement was entered in the plaintiff’s favour.

Another similar provision is Section 6(3) of the Motor Vehicles(third parties) Insurance Act. It provides that in motor vehicle insurance, the insurer should be prepared to insure third parties mentioned in the contract. This was applied in the case of Sule vs. Norwich Fire Insurance Society Ltd.

In that case, the plaintiff was a driver to the Action Group which had sought an insurance contract protecting it and the driver. Subsequently there was a motor accident involving the driver and a third party. The third party obtained judgement against the driver and a specific sum was awarded. The driver then sought indemnity from the insurance company. The insurance company refused and in court argued that the plaintiff wasn’t privy to the contract between it and the Action Group. The court held that provision had already been made for the defendant due to the provision of Section 6(3) of the Motor Vehicles(Third Party) Insurance Act.

5. Statutory Exceptions: In addition to the above mentioned exceptions, some statutes also constitute limitation to the principles of privity of contract. Such states make provisions that confer benefits or obligations on parties that are not parties to such contract. Some of the statutes are:

Bill of Exchange Act
Nigerian Insurance Laws
Married Women’s Property Act
Motor Vehicle Third Party Insurance Act

6. Banker’s Commercial Credit: Exigencies of modern transnational trade have given rise to letters of credit or what is technically described as banker’s commercial credit. A credit line is when a sum of money is kept with the bank in order for it to be used to pay a supplier once the goods have been successfully delivered. Banker’s commercial credit operates as a means of protecting international suppliers of goods. Importers usually instruct their banks to open a credit line which is later followed by a letter of credit to the supplier.

The bank through its foreign agent intimates the international supplier that a credit line has been opened in his favour. The cost of goods would then be paid to him upon confirmation that the goods have been supplied according to the terms of contract. Thus, the supplier who is not a party to the contract between the bank and the importer would enjoy a benefit under the contract. Thus he also has a right of action against the bank in case of default.

7. Trust Concept: A trust is created where A enters into a contract with B for the benefit of C. In this situation C who is not a party has a right to sue in case of default by B. This right is one of the general exceptions to privity of contract. A trust arrangement is a contract between two parties which imposes obligations on the trustee for the benefit of the beneficiary.

In the case of Lloyds vs. Harper, A guaranteed to the plaintiff that he would indemnify anybody that suffered loss as a result of transacting with B, an underwriter. Subsequently, the executors of A’s estate didn’t want to implement the guarantee that was made to the plaintiff. It was held that the plaintiff was in the position of a trustee to those that suffered loss in transacting with the underwriter. Thus, he could sue against A’s estate to enforce the trust.

Conversely, a person who is a beneficiary in a trust can sue to enforce the trust if the trustee neglects his duties. An example of this can be seen in the previously mentioned cases of Akene vs.. British American Insurance Co.

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Law of Contract June 26, 2017

Misrepresentation in Law

Misrepresentation is a statement made orally or in writing from one party to the other in order to induce the other party into entering into a contract. Like mistake, the presence of misrepresentation in the formation of a contract makes the contract void and unenforceable.

Types of Misrepresentation

Misrepresentation is basically of three types:

Fraudulent Misrepresentation
Negligent Misrepresentation
Innocent Misrepresentation.

Fraudulent Misrepresentation

As the name implies, fraudulent misrepresentation is a misrepresentation that is made fraudulently. In the case of Derry vs. Peek, it was aptly defined as:

A false statement made knowingly without belief in its truth, or made recklessly, carelessly without concern as to its truth.

In the case of Reese Silver Mining Co vs. Smith, the directors of a company issued out a prospectus stating the advantages of working a particular mine. They did this without ascertaining the truth of their assertions. When it was later discovered that their statements were untrue, they were held liable for fraudulent misrepresentation.

In the case of Sule vs. Aromire, the defendant advertised certain premises for sale. In order to prove the validity of his title, the defendant gave reference to a lawsuit which purportedly declared him the owner. In reality, the lawsuit was in respect to an adjoining property. When the plaintiff bought the property, he discovered that it validly belonged to third parties. The court held that this was a case of fraudulent misrepresentation, thus the defendant was held liable.

Negligent Misrepresentation

A negligent misrepresentation occurs when a person with a duty of care makes a false statement to his client intentionally or without caring to ascertain its truth. Thus, a misrepresentation cannot be termed as negligent unless there is a duty of care owed to the representee.

In the vase of Nocton vs. Ashburton, the plaintiff sued his solicitor because the solicitor had given him improper advice regarding the security for a mortgage. The solicitor did this because he stood to benefit from his client’s loss. The court held in this case that the misrepresentation was a negligent one, and thus the solicitor was held liable for the plaintiff’s loss.

Originally, negligent misrepresentation could only apply in cases where there was a direct contractual relationship between the representor and the representee. However, this has been extended to include person who are affected by the representation, although there is no contractual relationship with the representee. The groundwork for this was laid by Lord Denning’s dissenting judgement in the case of Candler vs. Crane, Christmas & Co. Lord Denning stated that the people upon which liability would rest include:

…accountants, surveyors, valuers and analysts, whose profession and occupation is to examine books of account and other things and to make reports on which other people, other than their clients, rely in the ordinary course of business.

Lord Denning further classified the class of persons, apart from their direct clients, to which a duty was held as:

Any third person to whom they themselves (the maker of the statement) show the statement.
Any person to whom they know their employer is going to show the accounts in order to induce them to invest some money or take some other action.

This principle was solidified by the courts in the latter case of Hedley Byrne & Co Ltd vs. Heller & Partners Ltd, in this case, the plaintiff was an advertising agent to Easipower Ltd and wanted to find out if Easipower Ltd was credit worthy. In order to find out, they asked their bank — National Provincial — to help them investigate. In the course of investigation National Provincial contacted Heller and Partners, the bankers for Easipower Ltd, for confirmation. Heller & Partners stated “in confidence and without liability on our part” that Easipower was credit worthy. As a result, the plaintiff went into an advertising contract with Easipower Ltd and ended up losing money. Thus, they sued Heller & Partners.

The court held that Heller & Partners was liable for fraudulent misrepresentation. They were however let off the hook due to the exclusion clause “without liability on our part” in their reply.

Innocent Misrepresentation

Innocent misrepresentation can simply be understood as a false statement which the user made not knowing that it was false and he was also not negligent in ascertaining its truth. A good example of an innocent misrepresentation is in the case of Derry vs. Peek.

In this case, a company was statutorily incorporated by the British Parliament to construct tramways by means of animal power (horses). However, if the consent of the Board of Trade was obtained, they could make use of steam power. The directors of the company believed that the Board of Trade would approve their request since in the earlier processes to be followed, they didn’t meet any objections. They represented this to the plaintiff, which induced him to purchase shares in the company.

Subsequently, the Board of Trade didn’t give its assent and thus the company had to be closed down. The plaintiff thus sued for fraudulent misrepresentation. The court held that it would not be applicable in this case because the representor honestly believed in what they represented. It could also not be negligent because by following the due process and meeting no objection, they had tried their best to ascertain the veracity of their assertions. The defendants were thus held not liable for misrepresentation.

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Law of Contract June 26, 2017

The Doctrine of Mistake at Law

Introduction to the Doctrine of Mistake

There is always a consensus ad idem (meeting of the minds) between parties that enter into a contract. What this means is that both parties to a contract are thinking of the same thing when they enter into a contract. Thus, when a party enters into a contract on a mistaken assumption of some fundamental facts, the consensus ad idem is lost. This then justifies the contract being voided for mistake.

To a layman, any obvious misunderstanding of the contract by either party could be categorized as a mistake. However this is not the case. Mistake in the law of contract only applies to fundamental facts that go to the root of the contract.

The effect of mistake in a contract was well espoused by Lord Atkin in the case of Bell & anor vs. Lever Brothers Ltd All ER 51. In this case, Lord Atkin stated:

“If mistake operates at all, it operates so as to negate or in some cases, nullify consent”.

From the above, if consent is nullified in a contract, its effect is to render the contract ineffective. Thus, the effect of a mistake in a contract would be to render that contract void.

Categories of Mistake

Under the common law, it is generally accepted to be of three types:

Common Mistake
Mutual Mistake
Unilateral Mistake

In contrast to the above classifications, some other authors have classified it into mistake at common law and mistake at equity. Others still classify it into mistake in common law and equity, with mistake in common law being further divided into mutual and unilateral mistake. These various views of mistake can still be seen as different ways of looking at the same thing. However, the categorization that will be adopted is the one by Cheshire and Fifoot which classifies it into common mistake, mutual mistake and unilateral mistake. Mistake in equity would also be separately discussed.

Some Preliminary Considerations in the Doctrine of Mistake

Before one delves further to fully discuss the doctrine of mistake in the law of contract, there are some preliminary issues that should be ironed out in order to make the understanding of the doctrine clearer. These issues would be highlighted below:

An Objective Test: What this means is that before the court would determine whether or not there is a mistake, an objective test would be carried out. This objective test is to see what a reasonable man would think the parties were contracting about. The court doesn’t concern itself with the subjective views of the various parties to the contract. Rather, it is concerned with the objective view of a reasonable man.
Mistake Must Precede the Contract: For the act of mistake to be valid, it has to be one that precedes the formation of the contract. Any mistake that is alleged to be after the formation of the contract would be held to be of no effect by the courts.
Mistake Must Induce the Contract: Mistake is only valid in nullifying a contract if it induces the contract. A person cannot claim that he was mistaken as to particular facts if he has just a suspicion of the state of affairs. It must be expressly evident to an objective man that the reason for entering into the contract was because of the alleged mistake.
Mistake of Fact and Mistake of Law: A mistake as to the facts of a case can operate to avoid a contract. On the other hand, a mistake of law cannot operate to void a contract. This is due to the principle of law expressed in the Latin maxim Ignorantia Juris non excusat.

However, in England, this position of the law has been reviewed. This was done in the case of Kleinworth Benson Ltd vs. Lincoln City Council. In this case, the plaintiff bank paid money to the defendant city authorities under a transaction that it believed was legal. Subsequently, it was discovered that this transaction was one that had been made void by law. Thus, the plaintiff sued to recover its money. The House of Lords was unanimous in holding that the age long distinction between mistake of law and mistake of fact was no longer relevant. If there is a mistake, whether it be of fact or of law it would operate to make the contract void. Thus, in the instant case, the remedy of restitution was allowed in order for the plaintiff to recover its funds.

It is however worthy of note that the decision given above is not binding on courts in Nigeria. This is due to the fact that decisions made by courts of foreign jurisdictions after 1^stOctober 1960 are only of persuasive effect in the Nigerian Courts.

Common Mistake

This occurs when both parties to the contract are mistaken about the same state of affairs. This state of affairs could either be a mistake of subject matter or of title. For example, if A buys a car from B while unknown to them, the car had been destroyed, it is a common mistake.

Common mistake is generally of the following classification:

Mistake as to the existence of the Subject matter (res extincta): This is embodied in the example given above, where the car was destroyed. Thus, mistake as to the existence of the subject mattes occurs when both parties contract under the mistaken belief that the subject matter existed, when in fact, it did not.

In the case of Couturier vs. Hastie both parties entered into a contract for the sale of a cargo of corn. Unknown to both parties, during the voyage the corn got fermented and it was subsequently sold off by the captain of the ship. When the seller sued for the contract price, the court held that this was a case of res extincta, as a result, the contract was voided.

Also, in the case of Galloway vs. Galloway, both parties entered into a marriage settlement contract. Subsequently, it was discovered that their marriage was void ab initio (it never existed in the eyes of the law). The court held that since there was never a marriage, there can’t be a marriage settlement.

Mistake as to Title (res sua): This occurs in a situation in which parties to the contract are mistaken as to the title of the goods being sold. It usually occurs when the buyer of the goods is also the owner of such property unknown to him. In the case of Cooper vs. Phibbs, X agreed to take lease of a fishery from Y, unknown to both parties, the fishery already belonged to X. It was held that in this situation, the agreement of lease was void for mistake.

Also, in the case of Abraham vs. Chief Amodu Tijani Oluwa, the defendant attached a writ of fi.fa to a land that he believed belonged to his judgment debtor. The plaintiff wasn’t sure of his title and as a result, he bought the land. Subsequently, he confirmed that the land was really his own. He thus sought a refund of the price he paid. The court held that the initial sale was void due to the fact that there was a mistake as to title.

Mutual Mistake

Mutual mistake occurs in a situation in which both parties make the error. However, unlike common mistake, it occurs when both parties are mistaken about different things. For example, in a situation in which A agrees to sell his jeep to B. If A intended to sell his Lexus but B thought it was a Toyota, there is a no required consensus ad idem between the parties. As a result, the contract is void for mutual mistake.

It should however be noted that mutual mistake would only be applicable if the error made was a reasonable one.

Unilateral Mistake

This occurs when one party is mistaken concerning the facts of the contract and the other party is aware of this and exploits it to his own advantage. If this is discovered it would render the contract void. Most cases of unilateral mistake concern mistake of identity and mistake concerning the terms of the contract.

Mistake of Identity

This occurs when the mistaken party goes into the contract due to a misconception concerning the identity of the other party. In order for a plea of mistaken identity to succeed, the following conditions must be fulfilled:

That the mistaken party intended to contract with a person different from the person with whom he contracted with.
That the person who contracted with him knew or ought reasonably to have known that he intended to contract with a different person.
That at the time of the contract, the plaintiff regarded the identity of the other party as being crucial to his entering into the contract.
There was no opportunity for the plaintiff to truly verify the identity of the party with whom he contracted.

In the case of Cundy vs. Lindsay the respondent was defrauded into selling goods on credit to an impostor who was representing another person that he intended to deal with. Unfortunately, before the vice was discovered, the impostor sold the goods to a third party. When the owner discovered that he had been duped, he brought an action to retrieve the goods from the third party. The court held that due to the unilateral mistake, the property in the goods had not yet passed to the impostor, hence he could not transfer same to the third Party. Therefore, the goods were returned to the plaintiff.

Mistake Concerning the Terms of the Contract

This occurs where one party is mistaken regarding the terms of the contract and the other party, knowing this, intends to exploit it to his own advantage. In the case of Hartog vs. Colin & Shields the defendant was a trader of animal skins. He mistakenly sold the products at a price per pound instead of per piece; this made the price of the products unduly cheap. The plaintiff, on seeing this opportunity, readily accepted the contract. When the defendant discovered his error, he refused to supply the products. As a result, the plaintiff brought an action to enforce the contract.

The court held that this was a case of unilateral mistake and a result, the contract was not enforceable.

It should be noted that a contract would be valid despite the error of the other party had no idea that it was an error. In the case of Centrovincial Estate Plc vs. Merchant Investors Assurance Company Ltd, a landlord offered to renew his tenant’s lease at a rate of £65,000 per annum instead of £126,000. The tenant, oblivious of this error, accepted the contract. When the landlord discovered his error, he wanted to rescind the contract. The court held that this was not a case of unilateral mistake since the other party was not aware of the error.

The Rationale for Equitable Remedies

As can be seen from cases like Cundy vs. Lindsay, the common law doesn’t pay much attention to the interest of third parties in a contract. If it can just be proved that there was a mistake, the contract would be made void. Due to this rigidity and harshness, equity has stepped up to provide some remedies in order to ameliorate the plight of the parties. These equitable remedies in cases of mistake include:

Rescission
Rectification
Refusal of Specific Performance

In order for any of these equitable remedies to be granted, the stipulations by Lord Denning in the case of Solle vs. Butcher have to be met:

Where the mistake is common or mutual, it must be fundamental in nature and neither flimsy nor minor.
Where it is a unilateral mistake, it must have been induced by the other party, or he had constructive knowledge of the mistake.
It must be inequitable for the party seeking to enforce his strict rights under the law to have the law enforced in his favour.

Rescission

The remedy of rescission is used in order to set aside a contract entered into on the basis of a mistake. The court, in this case effectively releases the parties from any obligations regarding that contract, making it unenforceable. In the case of Cooper vs. Phibbs ¸the court rescinded contract when it was discovered that the mistaken party bought what already belonged to him.

However, there are some limitations to the applicability of the right of rescission:

Lapse of Time: The equitable remedy of rescission would not be applicable if there has been a lapse of a reasonable period of time after the agreement of the contract. This is embodied in the equitable maxim: “delay defeats equity”. The test of what is a reasonable time depends on the circumstance of each individual case.
Third Party Rights: The equitable remedy of rescission would not be applicable if the goods have been acquired for value by an innocent third party before the application for rescission.
Impossibility of Restoration: The equitable remedy of rescission would not apply where restitutio in integrum cannot be achieved due to the destruction, consumption or modification of the subject matter.

Rectification

The equitable remedy of rectification is used when the written contract doesn’t convey the real intention of the parties to the contract. Iin this case, the court would order a modification of the written document in order to make sure that it reflects the real intention of the parties.

In the case of Joscelyne vs. Nissen, a father agreed to let his daughter take over his car hire business on the condition that she would take care of certain household expenses. However, due to a mistake, the written agreement did not place these responsibilities on the daughter. The court ordered a rectification of the agreement in order to make it reflect the true intention of the parties.

In order for this remedy to apply, the following requirements have to be met:

There was a prior agreement between the parties before the written agreement.
The intention of the parties must remain unchanged from the time of the prior agreement till the time of the written agreement in contention.
The written agreement must be different from what the parties originally intended.
The evidence for mistake must be clear and unambiguous.

Refusal of Specific Performance

The court would refuse to order the specific performance of a contract when it can be proved that the person applying for it is acting to exploit the mistake of the other party.

In the case of Abdul Yusuf vs. Nigeria Tobacco Company, the defendant made a typographical error in drafting the contract of the plaintiff in transporting some of its goods. Due to this mistake, the price to be paid was unduly high. The defendant requested the plaintiff and other drivers to return their contracts for correction. The plaintiff refused and sought to have the contract enforced. The court refused to grant the equitable remedy of specific performance based on the fact that it would be inequitable to do so since the plaintiff was trying to exploit the defendant’s mistake.

It should however be noted that in a scenario in which the terms of the contract are clear and unambiguous, the contract would be enforced. In the case of Tamplin vs. James, the defendant bid for and bought an inn auctioned by the plaintiff on the belief that since the plaintiff owned an adjacent garden he would also sell it with the inn. However, during the auction, the plan of the inn to be sold was clearly displayed and it did not include the garden in question. The court held that in this situation, the terms were clear and unambiguous. As a result, the contract had to be enforced.

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26 Jun 2017