La1106 – Exam Notes

Lecture 8

Vitiating Factors

A vitiating factor is a problem caused by a party’s conduct at the time of forming the contract, which impairs the validity of the contract even though the contract appears to be valid. As a result, the contract is void ab initio or voidable.

• 
  A contract that has ended due to breach or repudiation is terminated
  
• 
  A contract that appears to be valid but has a vitiating factor is rescinded from the beginning
  

Mistake

Definition: A self induced, erroneous belief by one or more of the parties at the time of entering into the contract.
Elements of a mistake

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  Erroneous belief
  
  • 
    Quality
    
  • 
    State of thing
    
  • 
    Identity of people
    
  • 
    Thinking something is one thing when the reality is different
    
  • 
    Parties confusion is of their own doing
    

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  Self induced
  
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  Time of contract formation
  

Common law position

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  Contract is void from the beginning
  
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  The contract is therefore legally non-existent
  
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  No rights or liabilities are recognised
  
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  Reluctance of common law to declare a contract
  
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  There is no contract, so there is no damages
  
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  Reluctance to declare a contract void for mistake – don’t want to encourage fraudulent claims
  

Equity’s position

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  Contract is voidable, i.e. may be rescinded or set aside
  
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  Contract is valid until set aside
  
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  May be set aside by declaration of one party, by a court order or by operation of law
  
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  Bars to rescission
  
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  Additional remedies available
  

In case of mistake

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  First consider whether the contract is void at common law
  
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  If not, consider whether it is voidable in Equity
  

Types of mistake

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  Common mistake
  
  • 
    Both parties are mistaken about the same thing
    
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  Mutual mistake
  
  • 
    Both parties are mistaken, but differently
    
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  Unilateral mistake
  
  • 
    Only one party is mistaken
    

Common mistake

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  Both parties are mistaken about the same thing
  
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  If the mistake is fundamental, the common law will treat the contract as void, because there was no agreement
  
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  Rare
  
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  Specific rules:
  
  • 
    Existence of subject matter
    
    • 
      When goods did not exist, or have perished or disappeared
      
    • 
      McRae v Cth Disposals Commission (1951) 84 CLR 377
      
    • 
      Sale of Goods Act
      
      • 
        Section 9
        
      • 
        Section 10
        
  • 
    Quality of subject matter
    
    • 
      At common law, for a contract to be void, the mistake must be fundamental and go to the heart of the contract
      
    • 
      The quality of the subject matter must make the contract radically different to what was agreed to
      
    • 
      Bell v Lever Brothers (1932) AC 161.
      
      • 
        It was held that the quality of the agreement was not fundamentally different to what they had agreed to
        
      • 
        The fact that they could have obtained the same result differently didn’t matter
        
    • 
      Leaf v International Galleries [1950] 2 KB 86.
      
      • 
        No fundamental mistake as to the subject matter
        
    • 
      But the contract may be voidable in Equity if it would be unconscionable otherwise
      
      • 
        Solle v Butcher [1950] 1 KB 671
        
        • 
          It was not void under common law principles
          
        • 
          It was voidable in equity, as it would be unfair if it was found valid
          
        • 
          Approved that equity can step in
          
      • 
        Svanosio v McNamara (1956) 96 CLR 186
        
        • 
          Agreed that equity can step in
          
        • 
          Because it was about land, the purchaser must do all appropriate searches as to the validity of the quality of the subject
          
        • 
          Therefore, the contract was not void under equity
          

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  Recording of agreement
  
  • 
    Contract is valid at common law
    
  • 
    But equitable remedy of rectification granted if:
    
    • 
      Contract intended to be in writing
      
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      Document did not accurately reflect the intention of the parties
      
    • 
      Both parties were mistaken
      
    • 
      Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
      
      • 
        Court decided that both parties knew what they were signing and they were aware that this is not what they had agreed to orally.
        

Requirements for a contract to be found voidable for common mistake

1. 
   There must be a common misapprehension;
   
2. 
   Misapprehension must be of a fundamental nature;
   
3. 
   The party seeking to have the contract set aside must not be at fault;
   
4. 
   It must be unconscionable to allow the other party to benefit as a result of the mistake; and
   
5. 
   There must be no possibility of any third party’s rights being unjustly prejudiced
   

Great Peace Shipping v Tsavliris Salvage Ltd [2003] QB 679.

• 
  Challenged these requirements
  
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  New set of requirements listed
  

Requirements under Great Peace Shipping

1. 
   Common assumption as to the existence of a state of affairs;
   
2. 
   No warranty by either party that the state of affairs exists;
   
3. 
   Non-existence of the state of affairs not attributable to the fault of either party;
   
4. 
   Non-existence of the state of affairs render performance of the contract impossible;
   
5. 
   State of affairs may be the existence, or a virtual attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is possible.
   

• 
  This case determined that Solle v Butcher had been determined wrong
  
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  Equity cannot step in and void for common mistake
  
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  Law on this is undetermined
  
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  Some cases follow Great Peace Shipping, some follow Solle
  

Mutual mistake

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  Parties are at cross purposes – no agreement
  
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  Void at common law
  
  • 
    Raffles v Wichelhaus (1864) 169 ER 75
    
  • 
    Scriven Bros & Co v Hindley & Co [1913] 3 KB 564
    

Unilateral

• 
  Only one party is mistaken
  
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  Contract is valid at common law
  
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  But contract may be voidable in equity if the party who is not mistaken knew or should have known that the former was mistaken
  
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  Special rules:
  
  • 
    Mistake as to terms
    
    • 
      Taylor v Johnson (1983) 151 CLR 422, 432
      
      • 
        The party who did not make the mistake deliberately sets out to ensure that the first party does not become aware of the existence
        
      • 
        Under common law the contract is not voidable
        
      • 
        Equity intervened due to the unconscionable conduct of the buying party
        
  • 
    Mistake as to identity
    
    • 
      Face to face
      
      • 
        If one party is assuming a false identity, then it is assumed that the mistaken party is wanting to be dealing with whoever is present
        
      • 
        Can be rebutted if mistaken party can prove that:
        
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          The offer was intended only for a specific person and that that person’s identity was of vital importance
          
        • 
          They took reasonable steps to ensure that that specific person was the person being dealt with
          
        • 
          The person who accepted the offer was aware, or should have been aware, that the offeror intended to deal with someone else
          
      • 
        Lewis v Averay [1972] 1 QB 198
        
        • 
          At common law, the contract is not void
          
        • 
          The contract could be voidable in equity, but only if the title of the goods has not passed on onto an innocent third party
          
        • 
          An innocent third party should not bear the burden
          
      • 
        Papas v Bianca Investments Pty Ltd [2002] SASC 190
        
    • 
      Not face to face
      
      • 
        A contracts with B, but mistakenly thinks B is C
        
      • 
        Often happens because B deliberately misleads A into thinking they are
        
      • 
        Cundy v Lindsay (1878) 3 AC 459
        
        • 
          Held the contract was void
          
        • 
          The action succeeded
          
        • 
          Case has been criticised – tough outcome for completely innocent third party
          
      • 
        Shogun Finance v Hudson [2004] 1 AC 919
        
  • 
    Mistakenly signed document
    
    • 
      Only be successful if the document was radically different from what they believed they signed
      
    • 
      The mistaken party could not read it
      
    • 
      The mistaken party was not careles
      
    • 
      Petelin v Cullen (1975) 132 CLR 355
      
      • 
        Contract was void
        
      • 
        Motion successful
        
      • 
        Carelessness was not particularly relevant in this case as the mistaken party had been deliberately mislead – unconscionable conduct
        

Mistake of law – Mistake of fact

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  Distinction is no longer relevant to establish mistake
  
• 
  David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353.
  
  • 
    Whether the payment is a mistake of fact or a mistake of law, a restitutionary claim is available