Chiaki@ Mountcrest University College

MISTAKE

Introduction

‘Mistake’ has a narrower meaning in contract law than it does in its ordinary English meaning.
Parties will not be easily discharged from their contractual undertakings because they have
entered into the contract under a misunderstanding.

An operative mistake (a mistake so fundamental that the court will void the contract) will only
be found where there has been a mistake of fact which either prevents the formation of a
contract, i.e. the parties cannot be said to have reached agreement because of the mistake; or
which renders the agreed contract something other than that which was intended. The effect of
an operative mistake is to render the contract void (rather than voidable), i.e. the contract will
be declared a nullity from its beginning, or to use the legal Latin term, the contract is ‘void ab
initio’. It is, therefore, an exception to the general rule of contract that parties are bound by the
terms of their agreement and must rely on the contract for protection from the effect of facts
unknown to them.

The doctrine of mistake will operate only where the mistake existed at the date of the contract
formation. Where an event subsequent to the formation of the contract causes a party to regard
himself as mistaken to have entered the contract, the doctrine does not apply: Amalgamated
Investment and Property Co v John Walker & Sons [1977] 1 WLR 164. A subsequent event
may provide an argument that the contract is frustrated.

Agreement affected in two ways

Where there is mistake as to a material fact at the time of reaching agreement, the mistake will
fall into one of the following classes:

1. a) Where agreement has been reached on the basis of a mistake common to both
parties.
2. b) Where there was a mere appearance of agreement because of a i) mutual, or ii)
unilateral mistake.

As can be seen from the above there are therefore three categories of mistake.

Common mistake

Common mistake occurs where both parties to an agreement are suffering from the same
misapprehension. Where this kind of mistake occurs, offer and acceptance correspond, i.e.
there has been agreement between the parties. It is necessary to consider whether the underlying
common mistake is sufficiently fundamental to affect the validity of the contract. An example

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of common mistake would be where X agrees to sell certain goods to Y, and at the time of the
agreement, the goods have perished unbeknown to both parties.

Mutual mistake

Mutual mistake occurs where both parties are mistaken but they are mistaken about different
things. In other words, they have negotiated at cross-purposes, e.g. A agrees to sell a horse to
B. A intended to sell his white horse, but B thought he was agreeing to buy A’s grey horse.
Needless to say, the colour of the horse was not mentioned during the formation of the contract.

Unilateral mistake

Unilateral mistake occurs where only one party is mistaken and the other party knows, or is
deemed to know, of the mistake. An example would be where C mistakenly offers to sell an
item to D at a lower price than C really intended. D, who knows that C has wrongly stated the
price, accepts the offer.

Where mutual or unilateral mistake has occurred, the acceptance does not correspond with the
offer, and there is consequently no real agreement reached.

Examples of mistake

The circumstances in which operative mistake can occur are as follows:

1. a) Common mistake as to the existence of the subject-matter of the contract

2. b) Common mistake as to the quality of the subject matter
3. c) Mutual mistake as to the identity of the subject-matter of the contract
4. d) Unilateral mistake by the offeror in expressing his intention; the mistake being
known to the offeree
5. e) Unilateral mistake as to the nature of a document signed or sealed
6. f) Unilateral mistake as to a person’s identity.

Common mistake as to the existence of the subject-matter

Common mistake embraces the twin principles of res extincta and res sua. If, at the time of the
contract and unbeknown to the parties, the subject-matter of the contract is not in existence (res
extincta), there can be no contract. If, at the time of the contract and unbeknown to the parties,
the subject-matter of the contract already belongs to the person attempting to purchase it (res
sua), there can be no contract.

In Couturier v Hastie (1856) 5 HL Cas 673, there was a contract for the sale of a cargo of corn
in transit in the Mediterranean. Unbeknown to buyer and seller, the ship’s captain had been
forced to sell his cargo as it had fermented in the hold. The House of Lords reasoned that the
outcome depended on a true construction of the contract as to whether the buyer had agreed to

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buy specific goods or whether, as argued by the seller, he had agreed to buy a piece of the
adventure. The case was decided on the former basis: that the contract required that something
in existence should be bought and sold, and since there was no such thing in existence at the
time of the contract, there could be no contract. The situation is now covered by s6, Sale of
Goods Act 1979, which states that ‘where there is a contract for the sale of specific goods, and
the goods without the knowledge of the seller have perished at the time when the contract was
made, the contract is void.’

Where the circumstances are such that the seller is deemed to have warranted the existence of
the goods, the seller is probably liable to the buyer for breach of contract if the goods are not
in existence (McRae v Commonwealth Disposals Commission (1951) 84 CLR 377).

On the face of it, the cases are somewhat difficult to reconcile. However, the general view is
that the essential factor is to construe the contract to assess which of the parties, if any, agreed
to accept the risk of non-existence of the subject-matter. The decision in Couturier v Hastie
was that the buyer had not assumed the risk that the subject-matter may not exist. It is also
likely that the seller in that case had not assumed the risk and therefore could not have been
sued by the buyer for non-delivery of the goods. The concept is explained in the judgment of
Steyn J in Associated Japanese Bank v Credit du Nord [1989] 1 WLR 255, in which he stated:

‘One must first determine whether the contract itself, by express or implied condition precedent
or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many
pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent
on the point is there scope for invoking mistake. It is only in these rare circumstances, where
neither party has accepted the risk, that the contract can truly be declared void’.

The decision in the McRae case reflects the view that, on proper construction of the contract,
the Commonwealth Disposals Commission had assumed the risk of the non- existence of the
subject-matter by giving clear directions as to where it (a ship) was to be found and, as such,
was liable for breach of that undertaking.

Common mistake as to a fact or quality fundamental to the agreement

In the absence of contractual misdescription, the general proposition is that mistake as to

quality does not nullify consent. This is the case even if the mistake as to quality affects the
utility of the goods to the buyer, or, alternatively, affects the value of the goods in question so
that the seller obtains less than the value of the goods or the buyer pays more (Harrison &
Jones v Bunten & Lancaster [1953] 1 QB 646, Scott v Littledale (1858) 8 E & B 815).

The question is thus raised as to whether a mistake as to the quality of the subject- matter can
ever make a contract void. The leading case on this issue is that of Bell v Lever Brothers [1932]
AC 161. In that case, Lord Atkin suggested that where the parties have made a contract based
on a common misapprehension relating to a fundamental quality of the subject-matter of the

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contract, the test should be: ‘Does the state of the new facts destroy the identity of the subject-
matter as it was in the original state of the facts?’

In Bell v Lever Brothers, B was under a contract of service with Lever Brothers as chairman of
a subsidiary company in Africa. Lever Brothers entered into a contract with B by which it was
agreed that B should resign from his post before the expiry of the contract of employment and
that, in return, he would be paid a specified sum as compensation. After Lever Brothers had
paid the agreed sum to B they discovered that B had previously engaged in private trading
contrary to the terms of the contract of service. Had they known of this before the completion
of the compensation agreement, they could have treated the contract of service as repudiated
and there would have been no need to negotiate the compensation agreement. But B had always
been under the impression that his private trading activities were not such as to entitle Lever
Brothers to have the service contract set aside, and that the contract could be prematurely
terminated only by agreement. Lever Brothers claimed the return of the compensation on the
grounds that the compensation agreement was not binding because of the mistake of the parties.
HELD by the House of Lords: the common mistake that the service contract was not
determinable except by agreement merely related to the quality of the subject-matter and was
not sufficiently fundamental to constitute an assumption without which the parties would not
have entered the compensation agreement. An agreement to terminate a broken contract is not
fundamentally different from an agreement to terminate an unbroken contract. The mistake
was not operative, and the compensation agreement was binding.

Although a common mistake was not found to exist on these facts, the judgments of both Lord
Atkin and Lord Thankerton in the case itself outlined the circumstances in which common
mistake might arise. According to Lord Atkin, ‘a mistake will not affect assent unless it is the
mistake of both parties and is as to the existence of some quality essentially different from the
thing as it was believed to be.’ According to Lord Thankerton, the mistake must ‘relate to
something which both must necessarily have accepted in their minds as an essential element of
the subject matter’. In the case itself he expressed the view that there was nothing to show that
Bell regarded the validity of the service contract as vital; only Lever Brothers did so.

The narrow view taken in the case of Bell v Lever Brothers seemed to suggest that a mistake
as to quality would very rarely, if ever, make a contract void. Obiter statements regarding
mistake as to quality were made in the three subsequent cases discussed below.

The first of these is the case of Nicholson & Venn v Smith Marriott (1947) 177 LT 189. Here
the defendants put up for auction a number of table napkins, ‘with the crest of Charles I and
the authentic property of that monarch’. On the basis of that description the lot was bought for
£787 10s, but the napkins were in fact Georgian and, as such, were worth only £105. The buyer
was able to recover damages for breach of contract, but Hallett J also said that the contract
might have been treated by the buyer as void for mistake. The basis for this statement appears
to be that if both parties believed they were buying and selling Carolean table linen and the
linen did not possess the quality of being Carolean, then this would be a sufficiently
fundamental fact in the minds of both parties such as to make the contract void.

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The second case is that of Leaf v International Galleries [1950] 2 KB 86. Although the case
was brought on the grounds of misrepresentation, the issue of mistake was raised in an obiter
dicta by Evershed MR, who explained why such a mistake as to quality would not render the
contract void in these circumstances. Essentially, his arguments were based on the fact that the
plaintiff in this case contracted to buy a painting of Salisbury Cathedral and this was exactly
what he got. The fact that it was not painted by Constable, as both parties believed (although
the law reports are inconclusive on this issue), did not, in his view, go to the substance of the
subject- matter but merely affected the value of the painting.

However, it has been suggested by Treitel that, as the painting lacked the quality of being
painted by Constable (an assumption which was clearly in the minds of both parties) this should
have been a sufficiently fundamental fact such as to make the painting something different
from what the parties believed it to be and, as such, to render the contract void on the grounds
of a mistake as to quality.

Then, in Associated Japanese Bank (International) Ltd v Credit du Nord (see earlier) the
effect of mistake as to quality was subject to detailed examination by Steyn J. His Lordship
observed that the decision in Bell v Lever Brothers had been interpreted as virtually excluding
the possibility of a mistake as to quality being operative at common law. The facts of the case
involved a rogue, Jack Bennett, who had entered into a sale and leaseback transaction with the
plaintiff bank. The agreement between these parties was that the bank would purchase four
precision engineering machines for £1m and then lease them back to Jack Bennett. The bank
wished to have the leaseback arrangement guaranteed and the defendant bank agreed to take
on the role of guarantor. The whole arrangement was a fraud on Jack Bennett’s part as the
machines never existed, and as soon as he received the £1m he disappeared. Obviously, he
made no payments under the leaseback agreement, so the plaintiffs sought to enforce the
guarantee against the defendants. Steyn J held that as a matter of construction it was either an
express or implied condition precedent of the guarantee that the machines existed and on this
basis, he decided that the action must fail. As the guarantee had not come into force Credit du
Nord could not be liable under it. However, he went on to consider whether the contract had
been silent on the issue whether the doctrine of common mistake could be applied. On the issue
of common mistake, Steyn J considered that the question to be asked was whether the subject-
matter of the guarantee was essentially different from what it was reasonably believed to be:

‘For both parties the guarantee of obligations under a lease with non- existent machines was
essentially different from a guarantee of a lease with four machines which both parties at the
time of the contract believed to exist.’

He therefore concluded, obiter, that he would have been prepared to hold that the contract of
guarantee was void for common mistake.

Finally, the narrow limits of the doctrine of common mistake were made clear by the Court of
Appeal in Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407.
Here Tsavliris were commissioned to salvage a ship, ‘Cape Providence’. Tsavliris contacted

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an information service to enquire which ships were sufficiently close to Cape Providence to
assist with the salvage expedition. They were informed that ‘Great Peace’ was only 35 miles
away. Tsavliris chartered Great Peace from its owners for five days. Unknown to both parties
Great Peace was actually 410 miles away from Cape Providence. When Tsavliris discovered
this, they engaged a nearer ship and later refused to pay for the five days of hire of Great Peace.
The owners of Great Peace sued to recover this sum. Tsavliris alleged that the contract was
void for common mistake. The Court of Appeal concluded that the distance between the two
ships did not mean that the services to be provided were ‘essentially different’ to what the
parties had agreed. Great Peace could have arrived in time and therefore performance of the
intended service was not impossible, and the contract was not void for common mistake.

The post-Great Peace case law has tended to apply Great Peace strictly to the extent that this
type of mistake has all but disappeared (see for example Champion Investments Ltd v Ahmed
[2004] EWHC 1956 (QB)).

There remains some dispute as to whether the ‘essential difference’ test and ‘impossibility’ are
now equated. The more recent case of Champion Investments Ltd v Ahmed [2004] EWHC
1956 (QB) shows support for the ‘radical difference’ test. Brennan v Bolt Burden (a firm)
[2004] EWCA Civ 1017 suggested that the test should be impossibility. In Apvodedo NV v
Collins [2008] EWHC 775 (Ch), Henderson J suggested that a test of literal impossibility might
be too strict a test. Instead ‘the true test may rather be whether the non-existence of the state of
affairs renders performance of the contract in accordance with the common assumption
impossible’ and that ‘much would depend on how the “contractual adventure” was identified...’

Note that in Brennan v Bolt Burden (a firm) the Court of Appeal held that a mistake as to law
could, in principle, render a contract void.

Mutual mistake as to the identity of the subject-matter

Where A and B have negotiated completely at cross-purposes, whereby A is offering one thing
whilst B is accepting another, it cannot be said that they were ever in agreement. Genuine
mutual consent is obviously lacking. However, the role of the court in these circumstances is
to employ an objective test and decide what a reasonable third party would believe the
agreement to be, based on the words and conduct of the parties themselves. Using this test, it
may be decided that the agreement was that which A understood it to be or that which B
understood it to be, or it may be decided that no meaning can be attributed to the agreement at
all. The result is that if, from the available evidence, a reasonable man would infer the existence
of a contract in a given sense, the court, notwithstanding a material mistake, will hold that a
contract in that sense is binding upon both parties. Blackburn J, in the case of Smith v Hughes
(1871) LR 6 QB 597, explained the attitude of the law. He stated:

‘If, whatever a man’s real intention may be, he so conducts himself that a reasonable man
would believe that he was assenting to the terms proposed by the other party, and that other

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party upon that belief enters into the contract with him, the man thus conducting himself would
be equally bound as if he had intended to agree to the other party’s terms.’

Only if no discernible meaning can be given to the agreement at all will it be void for mutual
mistake. See Statoil ASA v Louis Dreyfus Energy Services LP (The Harriette N) [2008]
EWHC 2257 (Comm) for a more recent application of this principle.

Raffles v Wichelhaus (1864) 2 H & C 906: there was a contract for the sale of 125 bales of
cotton, ‘to arrive ex Peerless from Bombay’. It happened that there were two ships named
Peerless leaving Bombay at about the same time: the buyer meant one and the seller meant the
other. HELD: the contract could be void for mistake (the decision was made as a preliminary
point which ended the case thereby).

Scriven Bros & Co v Hindley & Co [1913] 3 KB 564: at an auction, the defendant bid for two
lots thinking that both were lots of hemp, whereas in fact one of them consisted of both hemp
and tow, diminishing its value. He refused to pay for this lot and the auctioneers brought an
action for the amount bid. HELD: there was no contract. The defendant buyer was able to rely
on this mistake chiefly because of the misleading nature of the catalogue and the conduct of
one of the seller’s servants.

Unilateral mistake as to the expression of intention

Where the offeror makes a material mistake in expressing his intention, and the other party
knows, or is deemed to know, of the error, the mistake may be operative.

Hartog v Colin & Shields [1939] 3 All ER 566: the defendants entered into a contract to sell
3000 Argentinian hare skins to the plaintiffs. By mistake, they offered them for sale at 10d per
pound, instead of the 10d per piece they intended. The negotiations had proceeded on the basis
of a price per piece (there being three pieces per pound). As a result, the court found that the
defendants’ offer was not an accurate reflection of their true intention and that there was no
binding contract. The plaintiffs could not “snap up” an offer when that party was aware that
the other had made a mistake relating to the offer terms.

Note that, in this case, the defendants asked for a declaration that the contract was void for
mistake at common law and, in the alternative, for the equitable remedy of rescission. Since
the court declared the contract void, there was no need to consider the question of rescission.

See the Singaporean case Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] SLR 502 for
a recent application of this principle to the internet.

Unilateral mistake as to the nature of the document signed

The general rule is that a person is bound by the terms of any instrument which he signs or
seals even though he did not read it or did not understand its contents: L’Estrange v Graucob

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[1934] 2 KB 394. An exception to this general rule arises, under certain circumstances, where
a person signs or seals a document under a mistaken belief as to the nature of the document.
Where a person signs a document or executes a deed in such instances, he may raise the ancient
defence of non est factum (‘it is not my deed’).

In light of the case law it seems that a plea of non est factum may be available where the mistake
was due to either:

1. a) the blindness, illiteracy, or senility of the person signing; or

2. b) a trick or fraudulent misrepresentation as to the nature of the document, provided
that person took all reasonable precautions before signing.

Thoroughgood’s Case (1584) 2 Co. Rep. 9a: an illiterate woman was induced to execute a
deed in the belief that it was concerned with arrears of rent. In fact, the document was a deed
releasing another from claims which the woman had against him. HELD: the deed was a nullity.

Foster v Mackinnon (1869) WR 4 CP 704: a senile gentleman was induced to sign a bill of
exchange in the belief that it was a guarantee. HELD: no liability was incurred by the signature.

Until the decision of the House of Lords in Saunders v Anglia Building Society (Gallie v Lee)
[1971] AC 1004 it was thought that the defence was available even where there had been
negligence on the part of the plaintiff, unless the instrument signed was negotiable. In this case
an elderly widow was duped into signing a document which she was told was a ‘deed of gift’
transferring her home to her nephew, Wally. She had promised that Wally could have her home
in her will and had already given him the deeds on her leasehold (with over 900 years
remaining). She did not read the document as she had broken her spectacles. It was in fact a
document that claimed to sell the home to a friend of her nephew, Lee, who mortgaged the
property with the bank as a security for loan. The mortgage was defaulted upon and the plaintiff
contended that she was not bound by the document. Lord Reid stated the following:

‘The plea of non est factum obviously applies when the person sought to be held liable did not
in fact sign the document. But at least since the sixteenth century it has also been held to apply
in certain cases so as to enable a person who in fact signed a document to say that it is not his
deed. Obviously, any such extension must be kept within narrow limits if it is not to shake the
confidence of those who habitually and rightly rely on signatures when there is no obvious
reason to doubt their validity. Originally this extension appears to have been made in favour of
those who were unable to read owing to blindness or illiteracy and who therefore had to trust
someone to tell them what they were signing. I think that it must also apply in favour of those
who are permanently or temporarily unable through no fault of their own to have without
explanation any real understanding of the purport of a particular document, whether that be
from defective education, illness or innate incapacity. But that does not excuse them from
taking such precautions as they reasonably can. The matter generally arises where an innocent
third party has relied on a signed document in ignorance of the circumstances in which it was
signed, and where he will suffer loss if the maker of the document is allowed to have it declared

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a nullity. So there must be a heavy burden of proof on the person who seeks to invoke this
remedy. He must prove all the circumstances necessary to justify its being granted to him, and
that necessarily involves him proving that he took all reasonable precautions in the
circumstances. I do not say that the remedy can never be available to a man of full capacity.
But that could only be in very exceptional circumstances; certainly not where his reason for
not scrutinising the document before signing it was that he was too busy or too lazy. In general,
I do not think that he can be heard to say that he signed in reliance on someone he trusted. But
particularly when he was led to believe that the document which he signed was not one which
affected his legal rights, there may be cases where this plea can properly be applied in favour
of a man of full capacity.’

The Court of Appeal did not accept her claim. The plea cannot be available to anyone who was
content to sign without taking the trouble to try to find out at least the general effect of the
document. Many people do frequently sign documents put before them for signature by their
solicitor or other trusted advisors without making any enquiry as to their purpose or effect. The
essence of the plea non est factum is that the person signing believed that the document he
signed had one character or one effect, whereas in fact its character or effect was quite different.
He could not have such a belief unless he had taken steps or been given information which
gave him some grounds for his belief. The amount of information he must have and the
sufficiency of the particularity of his belief must depend on the circumstances of each case.
Further, the plea cannot be available to a person whose mistake was really a mistake as to the
legal effect of the document, whether that was his own mistake or that of his advisor.

In Lloyds Bank v Waterhouse [1990] 2 FLR 97 an illiterate person signed a bank guarantee in
reliance on the bank’s negligent misrepresentations as to its nature. He did not tell the bank
that he could not read. The Court of Appeal held that he was entitled to rely on the defence of
non est factum and also to claim in respect of the negligent misrepresentations made by the
bank.

Unilateral mistake as to the identity of the person contracted with

In this type of mistake, one party mistakenly believes they are contracting with a person that
the other party is pretending to be. The question for the court is whether the assumed identity
is crucial to the mistaken party’s decision to contract or whether the mistaken party would have
entered into the contract no matter who the other party said they were.

A leading case on unilateral mistake as to identity is Lewis v Averay [1972] 1 QB 198, in which
previous inconsistencies were considered. In this case the plaintiff put an advertisement in a
newspaper, offering to sell his car for £450. In response to the advertisement, a man (who
turned out to be a rogue) telephoned and asked if he could see the car. That evening, he came
to see the car, tested it and said that he liked it. The rogue and the plaintiff then went to the flat
of the plaintiff’s fiancée, where the rogue introduced himself as Richard Greene, making the
plaintiff and his fiancée believe that he was the well-known film actor of that name. The rogue
wrote a cheque for the agreed sum of £450, but the plaintiff was, at first, not prepared to let

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him take the car until the cheque was cleared. When the rogue pressed to be allowed to take
the car with him, the plaintiff asked: ‘Have you anything to prove that you are Mr Richard A.
Greene?’ Whereupon, the rogue produced a special pass of admission to Pinewood Studios,
bearing the name of Richard A. Greene and a photograph, which was clearly of the man
claiming to be Richard Greene. The plaintiff was satisfied that the man really was Mr Richard
Greene, the film actor. He let the rogue take the car in return for the cheque. A few days later,
the plaintiff discovered that the cheque was from a stolen book and that it was worthless. In
the meantime, the rogue sold the car to the defendant, who paid £200 for it in entire good faith.
The rogue then disappeared. The plaintiff brought action against the defendant, claiming
damages for conversion.

Lord Denning in the course of giving judgment in Lewis v Averay reviewed the inconsistencies
in two earlier cases:

‘There are two cases in our books which cannot, to my mind, be reconciled the one with the
other. One of them is Phillips v Brooks [1919] 2 KB 243, where a jeweller had a ring for sale.
The other is Ingram v Little [1961] 1 QB 31, where two ladies had a car for sale. In each case
the story is very similar to the present. A plausible rogue comes along. The rogue says that he
likes the ring, or the car, as the case may be. He asks the price. The seller names it. The rogue
says that he is prepared to buy it at that price. He pulls out a chequebook. He writes, or prepares
to write, a cheque for the price. The seller hesitates. He has never met this man before. He does
not want to hand over the ring or the car not knowing whether the cheque will be met. The
rogue notices the seller’s hesitation. He is quick with his next move. He says to the jeweller, in
Phillips v Brooks: ‘I am Sir George Bullough of 11 St James’ Square’; or to the ladies in Ingram
v Little: ‘I am P.G.M. Hutchinson of Stanstead House, Stanstead Road, Caterham’; or to Mr
Lewis in the present case: ‘I am Richard Greene, the film actor of the Robin Hood series’. Each
seller checks up the information. The jeweller looks up the directory and finds there is a Sir
George Bullough at 11 St James’ Square. The ladies check up too. They look up the telephone
directory and find there is a ‘P.G.M. Hutchinson of Stanstead House, Stanstead Road,
Caterham’. Mr Lewis checks up too. He examines the official pass to the Pinewood Studios
with this man’s photograph on it.

In each case the seller feels that this is sufficient confirmation of the man’s identity. So, he
accepts the cheque signed by the rogue and lets him have the ring, in one case, and the car and
logbook in the other two cases. The rogue goes off and sells the goods to a third person, who
buys them in entire good faith and pays the price to the rogue. The rogue disappears. The
original seller presents the cheque. It is dishonoured. Who is entitled to the goods? The original
seller or the ultimate buyer? The courts have given different answers. In Phillips v Brooks the
ultimate buyer was held to be entitled to the ring. In Ingram v Little the original seller was held
to be entitled to the car. In the present case the deputy county court judge has held the original
seller entitled. It seems to me that the material facts in each case are quite indistinguishable the
one from the other.’

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The Court of Appeal held on the essential question whether there was a contract of sale by
which property in the car passed from the plaintiff to the rogue: the fraud rendered the contract
between the plaintiff and the rogue voidable for fraudulent misrepresentation (and not void for
mistake) and, accordingly, the defendant obtained good title since he bought in good faith and
without notice of the fraud, the plaintiff having failed to avoid the contract in time.

Where a fraudulent person conceals his true identity in order to gain possession of goods
without payment, the question of title to the goods will arise if he resells them. To whom do
the goods then belong – the duped seller or the subsequent purchaser? If the ‘rogue’s’ identity
is not a fundamental feature of the contract then the rogue has in effect merely misrepresented
a fact, which may give rise to a voidable title. The resale is thus governed by s23 of the Sale of
Goods Act 1979, which provides that:

‘When the seller of goods has a voidable title thereto, but his title has not been avoided at the
time of the sale, the buyer acquires a good title to the goods, provided he buys them in good
faith and without notice of the seller’s defect in title.’

The vital question then becomes whether or not the subsequent buyer bought in good faith and
without notice of the seller’s defective title. This means that the circumstances must be such
that he had no reason to suspect that the seller had obtained the goods by fraud. He must be a
bona fide purchaser for value of the goods: if not, he gets no title and the original seller remains
the true owner.

If, however, the identity of the ‘rogue’ is fundamental, as it was held to be in Ingram v Little,
then the rogue has entered into a contract on a mistake and the contract is void. Therefore, the
rogue can never obtain title and therefore cannot sell the goods under a valid contract under
the principle of nemo dat quod non habet (‘no one gives who possesses not’). This means that
the final recipient of the goods must return them to the duped seller; it is irrelevant whether
they are bona fide purchasers.

Is the situation different where the parties do not contract face to face, i.e. in a distance-selling
situation? The case law seems to suggest that this may be so. After all, it is more difficult to
allege that you are mistaken as to the identity of the other contracting party when they are
standing in front of you.

In Cundy v Lindsay (1878) 3 App Cas 459, Blenkarn placed an order with the respondents, on
credit, for goods to be delivered to Blenkarn, 37 Wood Street. There was a reputable firm of
Blenkiron & Co. of Wood Street. He signed his signature in such a way as to make it appear
that he was in fact ordering for Blenkiron. HELD: the respondents at all times believed that
they were dealing with Blenkiron & Co. of Wood Street and not the rogue. The contract was
void for mistake as to identity.

The court did not find a contract void in a similar distance-selling transaction in King’s Norton
Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98 (CA). The reasoning seems to

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be that the mistake made by the original seller in this latter case was one as to attributes (i.e.
the creditworthiness of the rogue), not identity.

The leading case on unilateral mistake of identity is now Shogun Finance Ltd v Hudson
[2004] 1 AC 919. In this case a fraudster visited the showrooms of a car dealer and agreed to
buy a car on hire-purchase terms. The fraudster signed a draft finance agreement in the name
of Mr Patel. As proof of identity the fraudster produced a genuine but unlawfully obtained
driving licence in the name of a Mr Patel. The car dealer sent the signed document and a copy
of the licence to the finance company, Shogun Finance Ltd. The finance company checked the
credit rating of Mr Patel and approved the sale. The fraudster paid a minimal deposit and drove
the car away with its accompanying paperwork. The fraudster immediately sold the car on to
an innocent third party, Mr Hudson. The finance company traced the car to Mr Hudson and
sued him for the return of the car, or its value. The House of Lords held that Shogun Finance
Ltd was entitled to the return of the car as the contract was void for mistake.

In Shogun v Hudson the House of Lords considered both face-to-face situations as in Lewis v
Averay, and distance-selling situations as in Cundy v Lindsay. The majority ultimately decided
that Shogun was a distance-selling situation, and decided to keep the distinction, reaffirming
the principles to be considered in each situation.

Unilateral mistake and basic principles of offer and acceptance

Imagine that, having read the chapters on offer and acceptance, and with no thoughts about
fraud or mistake, we were asked to advise on whether there would be a contract in the following
scenario:

A offers to sell a car to B. C purports to accept A’s offer.

Given that one of the first principles of contract law is that the offeror may stipulate the class
of eligible offerees, the critical question in the hypothetical is whether C is an eligible offeree.
Without filling in some context, it is a bit difficult to take this forward. However, if A is making
an offer that is open only to B (in other words, if B is the only eligible offeree), then C’s
purported acceptance is of no effect. There is no contract between A and C.

Might this help us to understand some of the mistake of identity cases? In the Shogun Finance
case, the majority Law Lords relied quite heavily on the fact that the finance company’s offer
of credit was stated (more than once) to be open only to the person named on the relevant
paperwork. The person so named was Mr Patel. Applying a simple offer and acceptance
analysis with a focus on this aspect of the facts, we have:

A (Shogun Finance) offers to sell a car on credit terms to B (Mr Patel). A’s offer is open
only to B. C (a rogue) purports to accept A’s offer.

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This leads straightforwardly to the conclusion that there is no contract between A and C.
However, it also entails that downstream good-faith purchasers from C (who has possession of
the car) are at serious financial risk; and, not surprisingly, throughout Shogun Finance, the
minority opinions evidence a concern that the law of contract should not leave innocent third-
party purchasers to the mercy of such a blunt analysis.

One way of trying to protect downstream purchasers is by changing the frame of analysis.
Instead of framing the issue in terms of offer and acceptance, we might ask whether the original
seller or the downstream purchaser is in a better position to bear the loss. Where either one of
these parties is a business contractor dealing ‘in the trade’, and the other is not a business
contractor, it is tempting to allocate the risk to the former. In Shogun Finance, this means that
Shogun Finance rather than Mr Hudson should take the risk (this being the minority view); and
in Ingram v Little, it means that the downstream Blackpool car dealer, rather than the elderly
Bournemouth ladies who sold their car to a rogue, should bear the risk (which is what the
majority of the Court of Appeal controversially held).

That said, we might try to finesse the blunt offer and acceptance approach in a way that does
give a degree of protection to downstream purchasers. As we have seen, in Lewis v Averay, the
Court of Appeal suggests that where parties are dealing in one another’s presence (face-to-
face), there is a rebuttable presumption that the seller intends to deal with the person standing
in front of him. Restating this, we have:

In face-to-face dealings, an offer by A to sell a car will normally be interpreted as being

open to the person physically present (whoever that person actually is). It is for A to plead
special circumstances to displace this interpretation.

Given this presumption, good-faith downstream purchasers will be protected where the original
transaction was face-to-face and where the seller had no special reason for wanting to restrict
the offer to a particular offeree. Of course, this does nothing to assist good-faith downstream
purchasers such as Mr Hudson, where the original transaction is not face-to-face; and nor does
it assist in cases like Ingram v Little, where the court is easily persuaded that the offerors
wanted to restrict their offer to a particular offeree (after all, if the rogue in Ingram v Little had
wanted to pay cash for the car, it is hard to believe that the Bournemouth ladies would have
declined to sell to him).

Mistake in equity

In a series of cases through the 1950s, 60s and 70s, the Court of Appeal elaborated an equitable
doctrine of common mistake (the seminal case is Solle v Butcher [1950] 1 KB 671). Stated
simply, the equitable doctrine set a less demanding threshold for a fundamental mistake than
that established for common law mistake in Bell v Lever Brothers; and, where the equitable
test was satisfied, the contract was treated as voidable. This gave the courts considerable
flexibility to adjust contracts where they were predicated on a serious misunderstanding.
However, there was a persistent question about the coherence of the law when the common

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law and equity operated with different tests for operative common mistakes. In Associated
Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255, Steyn J (as he
then was) attempted to respond to this undercurrent of concern by emphasising that the tests
engaged different forms of relief: where the common law test was satisfied, the contract was
void; where the equitable test was satisfied, the contract was merely voidable. Even so, the
questions were not laid to rest and, when Great Peace Shipping v Tsavliris Salvage [2002] 4
All ER 689 came to the Court of Appeal, the opportunity was seized on to declare that there is
just one test for an operative common mistake, namely the test laid down in Bell v Lever
Brothers.

Where does this leave the law? One view is that, after Great Peace Shipping, the equitable
doctrine of common mistake has been erased from the law. However, for three reasons, this
might not be correct. First, there is the question of whether the Court of Appeal in Great Peace
Shipping had the authority to overrule a string of its own previous decisions. As a matter of
precedent principle and practice, we should perhaps not jump to the conclusion that the
equitable doctrine is no longer good law until the Supreme Court has confirmed that this is so.
Secondly, it is far from clear that Great Peace Shipping is any kind of authority on common
mistake. In his judgment, at para 162, Lord Phillips MR says: ‘It was unquestionably a common
assumption of both parties when the contract was concluded that the two vessels were in
sufficiently close proximity to enable the “Great Peace” to carry out the service that she was
engaged to perform.’ However, why should this be a material assumption for the owners of the
vessel? Clearly this was a matter of great importance to the prospective salvors; but, for the
owners, it was simply a matter of hiring out a vessel. If this is correct, we have misclassified
the mistake in Great Peace Shipping – it should be treated as a dispute involving a unilateral
mistake. Thirdly, even if the equitable doctrine as per the Solle v Butcher case is erased, the
underlying drivers of the jurisprudence (ideas of fair dealing and the like) will be less easily
eliminated. It seems reasonable to conclude that, in this corner of contracts, the law is less than
clear.

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