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Court of Appeal
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd
[ 2002 ] EWCA Civ 1407
2002 June 17 , 18 ; Lord Phillips of Worth Matravers MR, May Oct 14 and Laws LJJ
Contract Ñ Mistake Ñ Common mistake Ñ Contract for hire of vessel for Þve days to escort and stand by stricken vessel Ñ Common mistake as to proximity of vessels Ñ Services provided by closer vessel Ñ Repudiation of contract Ñ Whether contract void at law Ñ Whether voidable in equity Judicial precedent Ñ Court of Appeal decisions Ñ How far binding Ñ Decision of Court of Appeal irreconcilable with earlier House of Lords decision Ñ Whether subsequent Court of Appeal entitled to disregard it ShipsÕ names Ñ Cape Providence Ñ Great Peace
The defendants oered salvage services to a vessel which had suered serious structural damage in the South Indian Ocean. The oer having been accepted, the defendants approached London brokers for a tug, but the tug found was Þve to six days sailingtime away. Fearingfor the safety of the crew, the defendants sought a merchant vessel in the vicinity to assist. The defendants were given the names of four vessels reported to be in the area, the nearest beingthe claimantÕs vessel, which was believed to be about 35 miles away from the damaged vessel. Negotiations between the defendants and the claimants resulted in a hire contract for a minimum of Þve days to escort and stand by the damaged vessel for the purpose of saving life. The agreement contained a cancellation clause giving a right to cancel on payment of Þve daysÕ hire. When it was discovered that the vessels were in fact 410 miles apart, not 35 miles as previously understood, the defendants did not immediately cancel the contract but sought a nearer vessel to assist. A few hours later such assistance was obtained. The defendants then cancelled the contract with the claimants and refused to make any payment for the hire of their vessel. The claimants brought an action claimingUS$ 82 , 500 as moneys payable under the contract or as damages for wrongful repudiation. The defendants disputed the claim on the ground that the purported contract had been concluded by reason of a fundamental mistake of fact in that both parties had proceeded on the fundamental assumption that the two vessels were in close proximity when they were not, and that therefore the contract was either void at law or voidable and the defendants were entitled to rescission in equity. The judge gave judgment for the claimants. On appeal by the defendantsÑ Held, ( 1 ) that common (or mutual) mistake was a common mistaken assumption of fact which rendered the service that would be provided if the contract were performed in accordance with its terms essentially dierent from the performance that the parties contemplated, with the result that the contract was not merely liable to be set aside but was void at common law; that the avoidance of a contract on the ground of common mistake resulted not from an implied term but from a rule of law under which, if it transpired that one or both of the parties had agreed to do somethingwhich it was impossible to perform, no obligation arose out of that agreement; that the test for common mistake was narrow, and if a contract were to be avoided for common mistake there had to be a common assumption as to the existence of a state of aairs, no warranty by either party that that state of aairs existed and the non-existence of the state of aairs had not to be attributable to the fault of either party; and that, where it was possible to perform the letter of the contract but it was alleged that there was a common mistake in relation to a fundamental assumption which rendered performance of the essence of the
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[2003] QB[2003] QB Great Peace Shipping Ltd v Tsavliris Salvage Ltd (CA)Great Peace Shipping Ltd v Tsavliris Salvage Ltd (CA)
obligation impossible, it was necessary to construe the contract in the light of all the material circumstances in order to determine whether the contract could be avoided for common mistake ( post, paras 32 , 73 , 74 , 76 , 82 , 84 , 86 , 90 Ð 92 , 94 ). Cooper v Phibbs ( 1867 ) LR 2 HL 149 , HL(I) and Bell v Lever Bros Ltd [ 1932 ] AC 161 , HL(E) applied. ( 2 ) That there was no equitable jurisdiction to grant rescission for common mistake in circumstances that fell short of those in which the common law held a contract void; that it was not possible to distinguish between a mistake or common misapprehension which was fundamental in equity and one which had a quality which made the thingcontracted for essentially dierent from the thingthat it was believed to be at common law; and that, accordingly, since the doctrine of equitable rescission was irreconcilable with the leadingcommon law authority of the House of Lords, the court was free to disregard its earlier decision ( post, paras 118 , 126 , 131 , 132 , 154 , 156 , 157 , 160 ). Dicta of Lord Wright in Noble v Southern Railway Co [ 1940 ] AC 583 , 598 , HL(E) applied. Solle v Butcher [ 1950 ] 1 KB 671 , CA not followed. ( 3 ) Dismissingthe appeal, that the issue in relation to common mistake turned on whether the mistake as to the distance between the two vessels had the eect that the services that the claimantsÕ vessel was in a position to provide were essentially dierent from what the parties had agreed; that the fact that the defendants did not cancel the agreement with the claimants until they knew whether they could get a nearer vessel to assist indicated that the mistake did not have that eect; that the claimantsÕ vessel would have arrived in time to provide several days of escort service and the defendants would have wished the contract to be performed but for the adventitious arrival of a vessel prepared to perform the same services; and that, accordingly, performance of the contractual adventure had not been impossible and, havingentered into a bindingcontract which they were expressly entitled to cancel subject to the obligation to pay the agreed fee, the defendants were liable to pay the cancellation fee ( post, paras 94 , 165 , 166 , 167 ). Per curiam. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater ßexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the eect of the common law doctrine of frustration, so there is scope for legislation to give greater ßexibility to our law of mistake than the common law allows ( post, para 161 ). Decision of Toulson J a±rmed.
The followingcases are referred to in the judgment of the court:
Associated Japanese Bank (International) Ltd v Crdit du Nord SA [ 1989 ] 1 WLR 255 ; [ 1988 ] 3 All ER 902 Beauchamp (Earl) v Winn ( 1873 ) LR 6 HL 223 , HL(E) Bell v Lever Bros Ltd [ 1931 ] 1 KB 557 , Wright J and CA; [ 1932 ] AC 161 , HL(E) Bingham v Bingham ( 1748 ) 1 Ves Sen 126 Blakeley v Muller & Co ( 1903 ) 19 TLR 186 , DC Clarion Ltd v National Provident Institution [ 2000 ] 1 WLR 1888 ; [ 2000 ] 2 All ER 265 Clark v Lindsay ( 1903 ) 19 TLR 202 , DC Clarke v Southern Railway ( 1927 ) 96 LJKB 572 , CA Cooper v Phibbs ( 1867 ) LR 2 HL 149 , HL(I) Couturier v Hastie ( 1856 ) 5 HL Cas 673 , HL(E) Davis Contractors Ltd v Fareham Urban District Council [ 1956 ] AC 696 ; [ 1956 ] 3 WLR 37 ; [ 1956 ] 2 All ER 145 , HL(E) Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [ 1943 ] AC 32 ; [ 1942 ] 2 All ER 122 , HL(E) Gri±th v Brymer ( 1903 ) 19 TLR 434
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Baldry v Marshall [ 1925 ] 1 KB 260 , CA G v G (Minors: Custody Appeal) [ 1985 ] 1 WLR 647 ; [ 1985 ] 2 All ER 225 , HL(E) Grayan Building Services Ltd, In re [ 1995 ] Ch 241 ; [ 1995 ] 3 WLR 1 , CA Lonrho plc v Fayed (No 2 ) [ 1992 ] 1 WLR 1 ; [ 1991 ] 4 All ER 961 Mitchell (George) (Chesterhall) Ltd v Finney Lock Seeds Ltd [ 1983 ] 2 AC 803 ; [ 1983 ] 3 WLR 163 ; [ 1983 ] 2 All ER 737 , HL(E) Photo Production Ltd v Securicor Transport Ltd [ 1980 ] AC 827 ; [ 1980 ] 2 WLR 283 ; [ 1980 ] 1 All ER 556 , HL(E) Westdeutsche Landesbank Girozentrale v Islington London Borough Council [ 1994 ] 1 WLR 938 ; [ 1994 ] 4 All ER 890 , CA
APPEAL from Toulson J By a claim form Þled on 20 June 2000 the claimants, Great Peace Shipping Ltd, claimed from the defendants, Tsavliris Salvage (International) Ltd, US$ 82 , 500 in respect of the wrongful cancellation of the contract entered into on or about 25 September 1999 between ( 1 ) Worlder ShippingLtd as managers for and on behalf of the claimants and ( 2 ) the defendants on their own account or through their agent Marint (Oshore Services) UK or, in the alternative, damages for breach of the contract. Toulson J on 9 November 2001 gave judgment for the claimants in the amount claimed with interest of $ 14 , 013. 60. By an appellantÕs notice the defendants appealed on the grounds, inter alia, ( 1 ) that by approachingthe case on the basis of an analysis of the rights and obligations created by the agreement, the approach described by Lord Atkin in Bell v Lever Bros Ltd [ 1932 ] AC 161 , 224 as ÔÔthe alternative mode of expressingthe result of a mutual mistakeÕÕ, and rejectingan independent ÔÔdoctrineÕÕ of mistake, the judge erred in law; ( 2 ) that the judge erred in Þndingthat the Great Peace was not so far away from the Cape Providence as to defeat the contractual purpose; ( 3 ) that the judge ought to have found that the Great Peace was so far away that the contractual purpose was defeated, applyingthe test objectively to the facts, in that, because the contractual purpose of the hiringwas to stand by and escort the Cape Providence until the arrival of the tugfor the purpose of savinglife, it had been turned into somethingessentially or materially dierent from that for which the parties bargained; ( 4 ) that the judge ought to have found that because the Great Peace was not ÔÔin close proximityÕÕ to the casualty, she lacked a material quality essential to the fulÞlment of the contractual purpose and accordingly, he ought to have found the contract to be void, applyingLord AtkinÕs test in Bell v Lever Bros Ltd, at p 218 ; ( 5 ) that, alternatively, the judge ought to have found that the purpose for which the Great Peace was hired and the surroundingcircumstances involved the necessary implication of a term that the Great Peace on the makingof the contract was a reasonable distance away from the casualty and/or capable of reachingher within a reasonable time; such a term would operate as a condition precedent to the defendantsÕ primary obligation to pay the hire; ( 6 ) that the judge ought to have found that such a distance was about 30 or 40 miles or a few hours steaming; ( 7 ) that the judge wrongly rejected the implication of such a term; ( 8 ) that the approach of the judge was wrong or too restrictive in that he, in eect, found a condition precedent to the performance of a partyÕs contractual obligations would only be implied in circumstances where a basic assumption underlyingthe contract turned out to be a mistake going to the whole consideration; ( 9 ) that the judge wrongly
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held, in eect, that there was no independent doctrine of mistake in equity; ( 10 ) that the judge wrongly rejected the statement of the position in equity enunciated in Solle v Butcher [ 1950 ] 1 KB 671 , 693 by DenningLJ as over- broad, which led the judge wrongly to state that Grist v Bailey [ 1967 ] Ch 532 and Laurence v Lexcourt Holdings Ltd [ 1978 ] 1 WLR 1128 were wrongly decided; ( 11 ) that the judge wrongly preferred the statement of principle in SnellÕs Equity, 30 th ed ( 2000 ), para 1 - 14 , which too narrowly conÞned the operation of mistake in equity, focusingon the behaviour of the defendant, contrary to the decision of the House of Lords in Cooper v Phibbs ( 1867 ) LR 2 HL 149 ; ( 12 ) that the judge ought to have accepted the principle enunciated by DenningLJ as correct, i e that equity would grant relief if the parties were under a common misapprehension either as to the facts or as to their respective rights, provided that misapprehension was fundamental and that the party seekingto set it aside was not himself at fault; ( 13 ) that the judge was wrong to hold, in eect, that the word ÔÔfundamentalÕÕ did not denote any discernible dierence in the test applied at common law and that applied by a court of equity; ( 14 ) that the judge ought to have held that relief in equity was granted on a broader basis than it would be at common law; ( 15 ) that the judge ought to have held that equity would grant relief where (a) the common misapprehension was one that was material, in the sense in which that term was used with regard to a misrepresentation, i e a mistake which would aect the judgment of a reasonable person in deciding whether to enter into the contract, or (b) the judgment of a reasonable person would be aected as to whether he entered into the contract or not, and as a result of the mistake he would suer hardship and/or the other party would enjoy a windfall; ( 16 ) that, alternatively, he ought to have held that in equity there was a discretion to grant relief where the mistake was material and there was no fault on the part of the disadvantaged party; and ( 17 ) that the judge was wrongto hold, in the alternative, that he would not exercise any discretion in favour of the defendants. By a respondentÕs notice Þled on 7 December 2001 the claimants wished the court to uphold Toulson JÕs judgment on the additional grounds that if, which was not the case, the judge was wrong to hold that there was not any right to rescind a contract in equity on grounds of common mistake where the contract was otherwise valid and enforceable on ordinary principles of contract law, and should have held, followingDenningLJ in Solle v Butcher [ 1950 ] 1 KB 671 , 693 that equity would grant such relief if the parties acted under a ÔÔfundamentalÕÕ common misapprehension either as to the facts or as to their respective rights, provided that the party seeking to rescind was not himself at fault, the judge should have held that ( 1 ) the mistake alleged and relied upon by the defendants was not su±ciently ÔÔfundamentalÕÕ within the meaningof the test DenningLJ purported to lay down in Solle v Butcher to entitle the defendants to the relief sought and/or ( 2 ) in any event, there was no scope for relief in equity because the defendants had assumed the risk of the alleged mistake under the terms of the contract. The facts are stated in the judgment of the court.
John Reeder QC and Rachel Toney for the defendants. A contract may be void at common law, or voidable in equity, for mutual mistake. The mistake must be capable of vitiatingthe contract. At common law the test is whether the eect of the mistake is substantially to deprive the agreement of the
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Solle v Butcher [ 1950 ] 1 KB 671 , 692 Ð 693 ; Magee v Pennine Insurance Co Ltd [ 1969 ] 2 QB 507 and Grist v Bailey [ 1967 ] Ch 532. [Reference was also made to Laurence v Harcourt Holdings Ltd [ 1978 ] 1 WLR 1128 and William Sindall plc v Cambridgeshire County Council [ 1994 ] 1 WLR 1016 , 1035 .] The mistake does not have to render contractual performance worthless or substantially deprive the complainant of the whole beneÞt of the contract: it is su±cient if it aects some material or fundamental assumption upon which the contract was concluded. In the instant case there was total failure of consideration or no consideration which substantially deprived one party of the beneÞt of the contract and gave rise to an operative mistake at common law. The mistake as to time rendered the contract essentially dierent from that which was bargained for, and thus the contract was void at common law or, alternatively, voidable in equity and should be set aside. Huw Davies for the claimants. The law on mutual mistake is set out in Bell v Lever Bros Ltd [ 1932 ] AC 161. Lord DenningMR went further in Solle v Butcher [ 1950 ] 1 KB 671 than he was entitled to do. Equity does not provide a means of redress beyond that available at common law. The ambit of the doctrine of common mistake at common law is narrow, particularly where the mistake is as to the quality of the subject matter of the contract: see Bell v Lever Bros Ltd [ 1932 ] AC 161 ; Lord Kennedy v Panama, New Zealand and Australian Royal Mail Co Ltd ( 1867 ) LR 2 QB 580 and Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [ 1953 ] 2 QB
- The court can intervene if the mistake makes the substance essentially dierent from that contracted for: see Bell v Lever Bros Ltd [ 1932 ] AC 161. The same test applies to common mistake, mutual mistake and frustration: see Davis Contractors Ltd v Fareham Urban District Council [ 1956 ] AC 696. The test is narrow because it is of paramount importance that contracts should be observed: see Bell v Lever Bros Ltd [ 1932 ] AC 161 , 224. To determine the eect of an alleged common mistake it is essential to conduct a proper analysis of the contract and, in particular, to consider the allocation of risk between the parties: see Associated Japanese Bank (International) Ltd v Crdit du Nord SA [ 1989 ] 1 WLR 255 and William Sindall plc v Cambridgeshire County Council [ 1994 ] 1 WLR 1016. Whether or not the test of common mistake is satisÞed is a matter of fact and degree. There is no dierent or separate test for mistake in equity. Bell v Lever Bros Ltd [ 1932 ] AC 161 established certainty and clarity in relation to common mistake at common law and in equity. That case resolved the previous di±culties with the test. The consequence of a contract beingvoid could be harsh, whereas if it were voidable the court could exercise a discretion. Lord DenningMR in Solle v Butcher [ 1950 ] 1 KB 671 wrongly regarded Cooper v Phibbs LR 2 HL 149 as entitlingthe court to impose terms if it saw Þt to do so. After the fusion of law and equity in 1875 the agreement in Cooper v Phibbs LR 2 HL 149 would have been void, not voidable: see Bell v Lever Bros Ltd [ 1932 ] AC 161 , 218 and Norwich Union Fire Insurance Society Ltd v Wm H Price Ltd [ 1934 ] AC 455. Lord Denninghad relied on Torrance v Bolton ( 1872 ) LR 8 Ch 118 as authority for the proposition that a court had power to set aside a contract in equity whenever it was of the opinion that it was unconscientious for one party to avail himself of the legal advantage he had
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gained. Torrance v Bolton LR 8 Ch 118 was a case of misrepresentation and had no relevance to mutual mistake. It is not for equity to relieve a bad bargain: see Waring v S J Brentnall Ltd [ 1975 ] 2 NZLR 401 ; Riverlate Properties Ltd v Paul [ 1975 ] Ch 133 ; Multiservice Bookbinding Ltd v Marden [ 1979 ] Ch 84 and Hart v OÕConnor [ 1985 ] AC 1000. There is no need or room for equity to augment the common law with a broader test for common mistake. As to stare decisis, the Court of Appeal is bound by its previous decision unless by that decision the court wrongly interpreted or wrongly distinguished an earlier House of Lords decision. In those circumstances the Court of Appeal should follow the House of Lords, not the Court of Appeal, authority: see Holden & Co v Crown Prosecution Service [ 1990 ] 2 QB 261. The common mistake in the present case was not su±ciently fundamental to entitle the defendants to relief either at common law or in equity.
Reeder QC replied.
Cur adv vult
14 October. LORDPHILLIPS OF WORTH MATRAVERS MR handed down the followingjudgment of the court.
Introduction
1 In 1931 in Bell v Lever Bros Ltd [ 1932 ] AC 161 Lord Atkin made a speech which he must have anticipated would be treated as the deÞnitive exposition of the rules of law governing the eect of mistake on contract. In 1949 in Solle v Butcher [ 1950 ] 1 KB 671 DenningLJ identiÞed an equitable jurisdiction which permits the court to intervene where the parties have concluded an agreement that was binding in law under a common misapprehension of a fundamental nature as to the material facts or their respective rights. Over the last 50 years judges and jurists have wrestled with the problem of reconcilingthese two decisions and identifyingwith precision the principles that they lay down. 2 In the court below Toulson J used this case as a vehicle to review this di±cult area of jurisprudence. He reached the bold conclusion that the view of the jurisdiction of the court expressed by DenningLJ in Solle v Butcher was ÔÔover-broadÕÕ, by which he meant wrong. Equity neither gave a party a right to rescind a contract on grounds of common mistake nor conferred on the court a discretion to set aside a contract on such grounds. 3 Toulson J gave permission to appeal, observing: ÔÔthe appeal raises a question of general importance and the Court of Appeal might take the view that my approach to DenningLJÕs principle in Solle v Butcher was not open to me and/or wrong.ÕÕ
The facts
4 We gratefully adopt, with a degree of adaptation, Toulson JÕs clear exposition of the relevant facts, as to which there is no dispute. All the times are stated by reference to British Summer Time. 5 The story concerns two vessels, the Cape Providence and the Great Peace. In September 1999 the Cape Providence was on her way from Brazil
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10 Shortly after midnight, Mr Lee phoned Mr Holder (who had taken over from Mr Little) and put forward an oer for the charteringof the Great Peace. Duringthe conversation all the terms necessary for a contract were discussed. The contract was to be on the basis of a Bimco Towhire form of agreement. (This was somewhat odd because the Great Peace was a bulk carrier and was not going to be towing the Cape Providence, but the circumstances were unusual and the Bimco Towhire agreement was the form of contract with which Mr Holder was familiar.) The hire was to be for a minimum of Þve days. The purpose of the charter was to be to escort and stand by the Cape Providence for the purpose of savinglife. Delivery was to be at the Great PeaceÕs location at the time of the agreement and the hire would commence as soon as she was Þxed and diverted (it beingthe mutual, and correct, assumption of Mr Lee and Mr Holder that there would be no practical dierence between the vesselÕs position at the time of the agreement and at the time of deviation, since it was contemplated that there would have to be some alteration of course in order to eect a rendezvous and that the alteration of course would happen as soon as instructions could be given on the conclusion of the agreement). During the conversation Mr Holder asked Mr Lee for the position and speed of the Great Peace, and Mr Lee replied that he would check these matters with the master when he knew if the defendants were interested in the terms of the oer. 11 Captain Lambrides decided not to accept the oer at once, but at
- 40 he gave instructions to Mr Holder to Þx the vessel at a gross rate of US$ 16 , 500 per day (which Mr Holder knew would be acceptable to Mr Lee from their earlier conversation). 12 Mr Holder thereupon called Mr Lee. They went through and conÞrmed the terms of the Þxture. 13 Afterwards Mr Holder sent a fax to Mr Lee thankinghim for his assistance with the Þxture of the Great Peace for the services of escort/stand- by to the Cape Providence; sayingthat he would complete the recap of the main Þxture terms shortly, giving details of the Cape ProvidenceÕs latest position, course and speed in order to enable the vessels to rendezvous, and concluding: ÔÔPlease instruct your master to contact the master of Cape Providence and to alter course to rendezvous with the vessel as soon as possible.ÕÕ 14 As requested, Mr Lee faxed instructions to the master of the Great Peace to alter course towards the Cape Providence. He sent a copy of the fax to Mr Holder. 15 At 08. 17 Mr Lee gave Mr Holder contact details of the Great Peace, which Mr Holder passed on to Captain Lambrides. A few minutes later, at
- 29 , the master of the Great Peace sent a message to Worlder that he had contacted the Cape Providence to Þnd her latest position and was altering course ÔÔright nowÕÕ. 16 Meanwhile, at 08. 25 , Captain Lambrides called Mr Holder to say that the vessels were 410 miles away from each other. This was not somethingknown to Mr Holder or Mr Lee, so the likely inference is that the master of the Cape Providence must have reported the positions of the vessels to the defendants after his conversation with the master of the Great Peace.
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17 If the information previously given to Marint by Ocean Routes had been accurate, the vessels should have been only about 35 miles apart when the contract was concluded. 18 Captain Lambrides told Mr Holder that he was lookingto cancel the Great Peace, but not yet, because he Þrst wanted to know if there was a nearer available vessel which could provide assistance to the crew of the Cape Providence. 19 Mr Holder made a number of unsuccessful inquiries, about which he reported to the defendants, at 09. 24 , recommendingthat the Great Peace should be allowed to continue her voyage towards the Cape Providence. 20 About the same time as that message was being sent, the Cape Providence was passed by a vessel called the Nordfarer. By chance the charterers of the Nordfarer were also the charterers of the Cape Providence and so had an interest in assistingher. At 10. 10 the defendants told Mr Holder that they had contracted with the owners of the Nordfarer directly and instructed him to cancel the Great Peace. 21 At 10. 25 Mr Holder told Mr Lee that the Great Peace was no longer required, i e she was cancelled. They discussed possible Þnancial terms. 22 At 11. 00 Mr Lee sent a fax to Mr Holder, conÞrmingthe cancellation and sayingthat he would do his best to persuade the owners of the Great Peace to accept two daysÕ daily hire in place of the minimum Þve days due under the contract. After speakingto the defendants, Mr Holder told Mr Lee that the defendants were not prepared to pay any sum. So the claimants issued proceedings.
The contract 23 The terms of the Þxture, as faxed by Mr Holder to Mr Lee, included the following: ÔÔ 1. Hirer: Tsavliris Salvage (International) Ltd. ÔÔ 2. Vessel owner: Worlder ShippingLtd. ÔÔ 3. Casualty vessel: Bulkcarrier Cape Providence, 146 , 019 dwt/ 76 , 324 grt, 268 m loa 43 m beam, in laden condition, full crew on board, platingcondition/frame damage. ÔÔ 4. Escorting vessel: Bulk carrier Great Peace laden, on voyage from New Orleans to China via Singapore. ÔÔ 5. Services: Escort/standby only for the purposes of savingof life at sea. Cape Providence latest position as of 07. 20 hrs Bst 25 / 9 / 99 , lat 28 Ð 20 south, long 082 Ð 20 east, heading 050 degrees, speed 5 knts, towards Sunda Straits. ÔÔ 6. Destination: Direction Sunda Straights, whilst awaiting the arrival of tugwhich departed Singapore 12. 05 hrs lt 25 / 09 / 99 , eta casualty approx 5 days. ÔÔ 7. Daily hire: $ 16 , 500 per day, pro rata includingfuel and lubes for standby/escort. ÔÔ 8. Delivery/on hire: time Great Peace alters course to rendezvous with Cape Providence this time to be advised by master of Great Peace. ÔÔ 9. Redelivery/ohire : upon arrival of the tugto convoys position, time to be advised by masters of Great Peace/Cape Providence. ÔÔ 10. Minimum: 5 days due and earned upon Great Peace altering direction, being$ 82 , 500. Any balance due upon completion of services.
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30 Another type of mistake is that where the parties erroneously spell out their contract in terms which do not give eect to an antecedent agreement that they have reached. Such a mistake can result in rectiÞcation of the contract. Again, this case is not concerned with that type of mistake. 31 In the present case the parties were agreed as to the express terms of the contract. The defendants agreed that the Great Peace would deviate towards the Cape Providence and, on reachingher, escort her so as to be on hand to save the lives of her crew, should she founder. The contractual services would terminate when the salvage tug came up with the casualty. The mistake relied upon by the defendants is as to an assumption that they claim underlay the terms expressly agreed. This was that the Great Peace was within a few hours sailingof the Cape Providence. They contend that this mistake was fundamental in that it would take the Great Peace about 39 hours to reach a position where she could render the services which were the object of the contractual adventure. 32 Thus what we are here concerned with is an allegation of a common mistaken assumption of fact which renders the service that will be provided if the contract is performed in accordance with its terms somethingdierent from the performance that the parties contemplated. This is the type of mistake which fell to be considered in Bell v Lever Bros Ltd [ 1932 ] AC 161. We shall describe it as ÔÔcommon mistakeÕÕ, although it is often alternatively described as ÔÔmutual mistakeÕÕ. 33 Mr Reeder for the defendants puts his case in two alternative ways. First he submits that performance of the contract in the circumstances as they turned out to be would have been fundamentally dierent from the performance contemplated by the parties, so much so that the eect of the mistake was to deprive the agreement of the consideration underlying it. Under common law, so he submits, the eect of such a mistake is to render the contract void. Mr Reeder draws a close analogy with the test to be applied when decidingwhether a contract has been frustrated or whether there has been a fundamental breach. The foundation for this submission is Bell v Lever Bros Ltd. 34 If the facts of this case do not meet that test, Mr Reeder submits that they none the less give rise to a right of rescission in equity. He submits that such a right arises whenever the parties contract under a common mistake as to a matter that can properly be described as ÔÔfundamentalÕÕ or ÔÔmaterialÕÕ to the agreement in question. Here he draws an analogy with the test for rescission where one party, by innocent misrepresentation, induces the other to enter into a contractÑindeed that is one situation where the parties contract under a common mistake. The foundation for this submission is Solle v Butcher [ 1950 ] 1 KB 671.
Bell v Lever Bros Ltd 35 We turn without more ado to consider Bell v Lever Bros Ltd [ 1932 ] AC 161. The facts of that case can be summarised as follows. Lever Bros employed the two defendants. The two defendants committed serious breaches of their contracts of employment, which would have justiÞed their summary dismissal. In ignorance of this fact, Lever Bros entered into agreements with them under which their services were terminated on terms that they would receive substantial sums in compensation. The defendants
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themselves did not have in mind, when these agreements were concluded, that they could have been dismissed without compensation. Thus the agreements were concluded under a common mistake as to the respective rights of the parties. According to the headnote to the report, Lever Bros claimed rescission of the agreements and repayment of the compensation paid under them. 36 It is instructive to consider passages from the judgments at Þrst instance and in the Court of Appeal as well as the speeches in the House of Lords, for while there was judicial dissent as to the result, there was general agreement as to the principles of law that were applicable. 37 Wright J [ 1931 ] 1 KB 557 , 563 commented early in his judgment on the importance of upholdingthe bindingforce of contracts so far as possible, especially in commercial matters, but went on to discuss the type of mistake that would result in the settingaside of an apparently valid contract, at p 564 :
ÔÔThe mistake here invoked is of that type which has often been discussed, and has been described by various termsÑfor instance, as beingmistake of subject matter, or substance, or essence, or fundamental basis. However described, what is meant is some mistake or misapprehension as to some facts (which term here includes particular private rights, as held in Cooper v Phibbs ( 1867 ) LR 2 HL 149 ), which, by the common intention of the parties, whether expressed or more generally implied, constitute the underlyingassumption without which the parties would not have made the contract they did.ÕÕ
38 Wright J went on to cite examples of such mistakes. Some of these were situations where, unknown to the parties, the consideration to be provided by one of them had ceased to exist or was illusory, such as a contract for the sale of a speciÞc chattel which had been destroyed, or of an annuity when the annuitant had died. In such cases the contract was void and any moneys paid recoverable on the ground of total failure of consideration. Not all, however, fell into this category, as we shall show in due course. 39 Wright J cited with approval, the test applied by the Court of QueenÕs Bench in Lord Kennedy v Panama, New Zealand and Australian Royal Mail Co Ltd ( 1867 ) LR 2 QB 580 , 588 :
ÔÔthe di±culty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole consideration, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not aect the substance of the whole consideration.ÕÕ
40 Applyingthat test he held [ 1931 ] 1 KB 557 , 568 that the mistake or misapprehension was as to the substance of the whole consideration and went ÔÔto the root of the whole matterÕÕ. 41 Dealingwith the claim to rescission, he observed, at p 571 : ÔÔI am not clear that in such a case as the present, if I am right in my judgment as to there being such a common mistake as I have found, the agreement is not void, and there is thus, when the court has so declared, a simple claim at common law for money had and received.ÕÕ
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great price the termination of contracts which, had they been aware of the true position, they could have terminated as of right. 45 The House of Lords [ 1932 ] AC 161 , by a majority, reversed this decision. Lord Blanesburgh, with the majority, based his decision on a point of pleading. He stated, however, that but for this he would have agreed with the speeches of Lord Atkin and Lord Thankerton. Lord Warrington of Clye, with whom Viscount Hailsham agreed, was for dismissing the appeal. He did so, not because he diered from the majority as to the law, but on the application of the law to the facts. He said, at p 208 :
ÔÔThe real question, therefore, is whether the erroneous assumption on the part of both parties to the agreements that the service contracts were undeterminable except by agreement was of such a fundamental character as to constitute an underlyingassumption without which the parties would not have made the contract they in fact made, or whether it was only a common error as to a material element, but one not going to the root of the matter and not aectingthe substance of the consideration. With the knowledge that I am diering from the majority of your Lordships, I am unable to arrive at any conclusion except that in this case the erroneous assumption was essential to the contract which without it would not have been made.ÕÕ
46 Lord Atkin, with whom Lord Thankerton agreed, considered, at pp 217 Ð 218 , the circumstances in which mistake nulliÞed consent. He held that it did so where the parties contracted under the common mistaken assumption that the subject matter of the contract existed when, in fact, this was not the case. He gave the following examples:
ÔÔSo the agreement of A and B to purchase a speciÞc article is void if in fact the article had perished before the date of sale. In this case, though the parties in fact were agreed about the subject matter, yet a consent to transfer or take delivery of somethingnot existent is deemed useless, the consent is nulliÞed. As codiÞed in the Sale of Goods Act [ 1893 ] the contract is expressed to be void if the seller was in ignorance of the destruction of the speciÞc chattel... Correspondingto mistake as to the existence of the subject matter is mistake as to the title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him. The parties intended to eectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis.ÕÕ
47 Lord Atkin then went on to consider the position where two parties purport to conclude an agreement under a common mistaken assumption in relation to the subject matter of the contract, at p 218 :
ÔÔMistake as to quality of the thingcontracted for raises more di±cult questions. In such a case a mistake will not aect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thingwithout the quality essentially dierent from the thing as it was believed to be. Of course it may appear that the parties contracted that the article should possess the quality which one or other or both mistakenly believed it to possess. But in such a case there is a contract and the inquiry is a dierent one, beingwhether the contract as
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to the quality amounts to a condition or a warranty, a dierent branch of the law.ÕÕ 48 After citation of authority in support of this proposition, Lord Atkin applied it to the facts of the case. This passage, at pp 223 Ð 227 , has been repeatedly cited by those seekingto deÞne the eect of common mistake at common law, and it is necessary to set it out at length before embarking on that exercise:
ÔÔIs an agreement to terminate a broken contract dierent in kind 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? I feel the weight of the plaintisÕ contention that a contract immediately determinable is a dierent thingfrom a contract for an unexpired term, and that the dierence in kind can be illustrated by the immense price of release from the longer contract as compared with the shorter. And I agree that an agreement to take an assignment of a lease for Þve years is not the same thingas to take an assignment of a lease for three years, still less a term for a few months. But, on the whole, I have come to the conclusion that it would be wrongto decide that an agreement to terminate a deÞnite speciÞed contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise. The contract released is the identical contract in both cases, and the party payingfor release etsg exactly what he bargains for. It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A buys BÕs horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known as the fact is that the horse is unsound. If B has made no representation as to soundness and has not contracted that the horse is sound, A is bound and cannot recover back the price. A buys a picture from B; both A and B believe it to be the work of an old master, and a high price is paid. It turns out to be a modern copy. A has no remedy in the absence of representation or warranty. A agrees to take on lease or to buy from B an unfurnished dwellinghouse. The house is in fact uninhabitable. A would never have entered into the bargain if he had known the fact. A has no remedy, and the position is the same whether B knew the facts or not, so longas he made no representation or gave no warranty. A buys a roadside garage business from B abuttingon a public thoroughfare: unknown to A, but known to B, it has already been decided to construct a bypass road which will divert substantially the whole of the tra±c from passingAÕs garage. Again A has no remedy. All these cases involve hardship on A and beneÞt B, as most people would say, unjustly. They can be supported on the ground that it is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contractsÑi e, agree in the same terms on the same subject matterÑthey are bound, and must rely on the stipulations of the contract for protection from the eect of facts unknown to them. This brings the discussion to the alternative mode of expressingthe result of a mutual mistake. It is said that in such a case as the present there is to be implied a stipulation in the contract that a
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more than are ÔnecessaryÕ for giving business e±cacy to the transaction, and it appears to me that, both as to existingfacts and future facts, a condition would not be implied unless the new state of facts makes the contract somethingdierent in kind from the contract in the original state of facts. Thus, in Krell v Henry [ 1903 ] 2 KB 740 , 754 Vaughan Williams LJ Þnds that the subject of the contract was Ôrooms to view the processionÕ: the postponement, therefore, made the rooms not rooms to view the procession. This also is the test Þnally chosen by Lord Sumner in Bank Line Ltd v Arthur Capel & Co [ 1919 ] AC 435 , agreeing with Lord Dunedin in Metropolitan Water Board v Dick Kerr & Co Ltd [ 1918 ] AC 119 , 128 , where, dealingwith the criterion for determining the eect of interruption in ÔfrustratingÕ a contract, he says: ÔAn interruption may be so longas to destroy the identity of the work or service, when resumed, with the work or service when interrupted.Õ We therefore get a common standard for mutual mistake, and implied conditions whether as to existingor as to future facts. Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts? To apply the principle to the inÞnite combinations of facts that arise in actual experience will continue to be di±cult, but if this case results in establishingorder into what has been a somewhat confused and di±cult branch of the law it will have served a useful purpose. I have already stated my reasons for decidingthat in the present case the identity of the subject matter was not destroyed by the mutual mistake, if any, and need not repeat them.ÕÕ
49 Lord Thankerton reached the same conclusion as Lord Atkin. He held, at p 235 , that a common mistake would not avoid the contract unless it related to somethingthat both the parties ÔÔmust necessarily have accepted in their minds as an essential and integral element of the subject matterÕÕ. However, he rejected the implied term approach, holding, at p 237 , that the frustration cases had ÔÔno bearingon the question of error or mistake as renderinga contract void owingto failure of considerationÕÕ. 50 It is generally accepted that the principles of the law of common mistake expounded by Lord Atkin in Bell v Lever Bros Ltd [ 1932 ] AC 161 were based on the common law. The issue raised by Mr ReederÕs submissions is whether there subsists a separate doctrine of common mistake founded in equity which enables the court to intervene in circumstances where the mistake does not render the contract void under the common law principles. The Þrst step is to identify the nature of the common law doctrine of mistake that was identiÞed, or established, by Bell v Lever Bros Ltd. 51 Lord Atkin and Lord Thankerton were breakingno new ground in holdingvoid a contract where, unknown to the parties, the subject matter of the contract no longer existed at the time that the contract was concluded. The Sale of Goods Act 1893 ( 56 & 57 Vict c 71 ) was a statute which set out to codify the common law. Section 6 , to which Lord Atkin referred, provided: ÔÔWhen there is a contract for the sale of speciÞc goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void.ÕÕ 52 Judge Chalmers, the draftsman of the Act, commented in the Þrst edition of his book on the Act, The Sale of Goods Act 1893 ( 1894 ), p 17 :
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QB 2003 Ñ 24
ÔÔThe rule may be based either on the ground of mutual mistake, or on the ground of impossibility of performance.ÕÕ 53 He put at the forefront of the authorities that he cited in support Couturier v Hastie ( 1856 ) 5 HL Cas 673. That case involved the sale of a cargo of corn which, unknown to the parties, no longer existed at the time that the contract was concluded. Other decisions where agreements were held not to be bindingwere Strickland v Turner ( 1852 ) 7 Exch 208 Ñthe sale of an annuity upon the life of a person who, unknown to the parties, had diedÑand Pritchard v MerchantÕs and TradesmanÕs Mutual Life Assurance Society ( 1858 ) 3 CBNS 622 Ñan insurance policy renewed in ignorance of the fact that the assured had died. 54 A year later, in HuddersÞeld Banking Co Ltd v Henry Lister & Son Ltd [ 1895 ] 2 Ch 273 , 280 Ð 281 , Lindley LJ observed, citing Strickland v Turner:
ÔÔBut I take it that an agreement founded upon a common mistake, which mistake is impliedly treated as a consideration which must exist in order to bringthe agreement into operation, can be set aside, formally if necessary, or treated as set aside and as invalid without any process or proceedings to do so.ÕÕ
55 Where that which is expressly identiÞed as the subject of a contract does not exist, the contract will necessarily be one which cannot be performed. Such a situation can readily be identiÞed. The position is very dierent where there is ÔÔa mistake as to the existence of some quality of the subject matter which makes the thingwithout the quality essentially dierent from the thingas it was believed to beÕÕ. In such a situation it may be possible to perform the letter of the contract. In support of the proposition that a contract is void in such circumstances, Lord Atkin cited two authorities, in which he said that the principles to be applied were to be found. The Þrst was Lord Kennedy v Panama, New Zealand and Australian Royal Mail Co Ltd LR 2 QB 580. In that case the plainti purchased shares of a company in response to a prospectus which stated, incorrectly, that the company had entered into a contract with the Government of New Zealand for a monthly mail service. He claimed rescission of the contract, alleging ( 1 ) that the directors of the company had made the representation fraudulently and ( 2 ) that the prospectus contained a warranty and not merely a representation. Blackburn J, deliveringthe decision of the Court of QueenÕs Bench, held that there was no fraud and that the prospectus contained an innocent misrepresentation. He went on to say, at p 587 :
ÔÔwhere there has been an innocent misrepresentation or misapprehension, it does not authorise a rescission, unless it is such as to show that there is a complete dierence in substance between what was supposed to be and what was taken, so as to constitute a failure of consideration. For example, where a horse is bought under a belief that it is sound, if the purchaser was induced to buy by a fraudulent representation as to the horseÕs soundness, the contract may be rescinded. If it was induced by an honest misrepresentation as to its soundness, though it may be clear that both vendor and purchaser thought that they were dealingabout a sound horse and were in error, yet the purchaser
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