4.
Void and voidable contracts
a)
Misrepresentation
(1)
Spice Girls Ltd v Aprilia World Service BV [2002] EMLR 27 (Court of Appeal)
Facts:
In 1998, the Spice Girls (as Spice Girls Ltd – SGL) made a contract with Aprilia for the promotion of
Aprilia’s new motor scooters – to be known as “Spice Sonic Scooters”. On 4 May 1998, the five Spice Girls
(including Geri Halliwell) participated in a commercial advertising shoot and contracted with Aprilia in
relation to the use of that material for a period up to March 1999. The band had known on 25 April 1998 that
Geri Halliwell intended to leave in September 1998.
Morritt V-C
51. At the outset it is necessary to reiterate certain well-established principles. First, though the
representation must be one of fact representations as to the future or of opinion frequently contain
implied representations with regard to the present or to the knowledge of the representor. (…) Second,
a representation once made is likely to have continuing effect. So if made for the purpose of an intended
transaction it will continue until the transaction is completed or abandoned or the representation ceases to be
operative on the mind of the representee. (…) Third, if at a time when it is continuing, the representor
discovers that the representation was false when made or has become false since he should correct it.
(...) Fourth, the meaning and effect of a statement or of conduct must be ascertained in the light of the
circumstances pertaining at the time. Those circumstances will include the course of the negotiations and any
earlier representations.
54. First, shortly after the conclusion of the heads of agreement on 4th March 1998 SGL supplied the logos,
images and designs depicting each of the Spice Girls which were to be used by Aprilia in the promotion of
the scooters. It must have been quite obvious from all such material and the judge's finding quoted in
paragraph 19 above that the same five girls were required for all of them.
55. Second, the events of 9th March 1998 were such as to bring to the attention of four of the other five
directors of SGL the fact that Ms Halliwell had declared her intention to leave in September 1998. It follows
that the representation implicit in the approval and use of the promotional material was false when made, or
to the extent it was made before 9th March, became false on 9th March 1998. The fact that the other Spice
Girls mistakenly as it turned out did not take Ms Halliwell seriously is immaterial. (…)
59. Sixth, it is clear that far from correcting the previous misrepresentations SGL continued and affirmed
them. There was the draft agreement originally issued on 24th March and reissued on 30th April. No doubt
the phrase "currently comprising" points primarily to the present and in that limited sense was true. But to
our minds, in the context of the surrounding circumstances, it was concerned with an agreement which
would continue into the future, in much the same sense as the conduct of SGL in approving the promotional
material or of the Spice Girls in participating in the commercial shoot, in each case, for future use.
60. Seventh, as the judge held, participation in the commercial shoot necessarily carried the same
implication and was likewise false. It did nothing to correct the previous misrepresentations, indeed it gave
them additional force.
(2)
Misrepresentation Act 1967, s 2
Damages for misrepresentation
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(1) Where a person has entered into a contract after a misrepresentation has been made to him by another
party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation
would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that
person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless
he proves that he had reasonable ground to believe and did believe up to the time the contract was
made the facts represented were true.
(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than
fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, f it is
claimed, in any proceedings arising out of the contract, that the contract ought to be or has been escinded, the
court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion
that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that
would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the
other party.
(3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable
to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2)
shall be taken into account in assessing his liability under the said subsection (1).
b)
Duress and Undue Influence
(1)
DSND Subsea Ltd v Petroleum Geo-Services ASA (judgment of 28 July 2000, unreported)
Dyson J
The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that
there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c)
which is a significant cause inducing the claimant to enter into the contract (…). In determining
whether there has been illegitimate pressure, the court takes into account a range of factors. These include
whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the
pressure has acted in good or bad faith; whether the victim had any realistic practical alternative but to
submit to the pressure; whether the victim protested at the time; and whether he affirmed and sought to rely
on the contract. These are all relevant factors. Illegitimate pressure must be distinguished from the rough and
tumble of the pressures of normal commercial bargaining.
(2)
Lloyds Bank Ltd v Bundy [1975] QB 326 (Court of Appeal)
Lord Denning MR
Broadchalke is one of the most pleasing villages in England. Old Herbert Bundy, the defendant, was a
farmer there. His home was at Yew Tree Farm. It went back for 300 years. His family had been there for
generations. It was his only asset. But he did a very foolish thing. He mortgaged it to the bank. Up to the
very hilt. Not to borrow money for himself, but for the sake of his son. Now the bank have come down on
him. They have foreclosed. They want to get him out of Yew Tree Farm and to sell it. They have brought
this action against him for possession. Going out means ruin for him. He was granted legal aid. His lawyers
put in a defence. They said that, when he executed the charge to the bank he did not know what he was
doing: or at any rate that the circumstances were such that he ought not to be bound by it. At the trial his
plight was plain. The judge was sorry for him. He said he was a "poor old gentleman." He was so obviously
incapacitated that the judge admitted his proof in evidence. He had a heart attack in the witness-box. Yet the
judge felt he could do nothing for him. There is nothing, he said, "which takes this out of the vast range of
commercial transactions." He ordered Herbert Bundy to give up possession of Yew Tree Farm to the bank.
Now there is an appeal to this court. The ground is that the circumstances were so exceptional that Herbert
Bundy should not be held bound. (…)
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Gathering all together, I would suggest that through all these instances there runs a single thread.
They rest on "inequality of bargaining power." By virtue of it, the English law gives relief to one who,
without independent advice, enters into a contract upon terms which are very unfair or transfers
property for a consideration which is grossly inadequate, when his bargaining power is grievously
impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with
undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the
word "undue" I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who
stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress
he is bringing to the other. I have also avoided any reference to the will of the one being "dominated" or
"overcome" by the other. One who is in extreme need may knowingly consent to a most improvident
bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every
transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I
hope this principle will be found to reconcile the cases.
(3)
National Westminster Bank Plc v Morgan [1985] AC 686 (House of Lords)
Lord Scarman
Lord Denning M.R. believed that the doctrine of undue influence could be subsumed under a general
principle that English courts will grant relief where there has been "inequality of bargaining power" (p. 339).
He deliberately avoided reference to the will of one party being dominated or overcome by another. The
majority of the court did not follow him; they based their decision on the orthodox view of the
doctrine as expounded in Allcard v. Skinner, 36 Ch.D. 145. The opinion of the Master of the Rolls,
therefore, was not the ground of the court's decision, which was to be found in the view of the
majority, for whom Sir Eric Sachs delivered the leading judgment.
Nor has counsel for the respondent sought to rely on Lord Denning M.R.'s general principle: and, in my
view, he was right not to do so. The doctrine of undue influence has been sufficiently developed not to need
the support of a principle which by its formulation in the language of the law of contract is not appropriate to
cover transactions of gift where there is no bargain. The fact of an unequal bargain will, of course, be a
relevant feature in some cases of undue influence. But it can never become an appropriate basis of
principle of an equitable doctrine which is concerned with transactions "not to be reasonably
accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which
ordinary men act" (Lindley L.J. in Allcard v. Skinner, at p. 185). and even in the field of contract I
question whether there is any need in the modern law to erect a general principle of relief against
inequality of bargaining power. Parliament has undertaken the task - and it is essentially a legislative task of enacting such restrictions upon freedom of contract as are in its judgment necessary to relieve against the
mischief: for example, the hire-purchase and consumer protection legislation, of which the Supply of Goods
(Implied Terms) Act 1973, Consumer Credit Act 1974, Consumer Safety Act 1978, Supply of Goods and
Services Act 1982 and Insurance Companies Act 1982 are examples. I doubt whether the courts should
assume the burden of formulating further restrictions.
(4)
Royal Bank of Scotland Plc v. Etridge (No 2) [2002] 2 AC 773 (House of Lords)
Lord Nicholls of Birkenhead
Undue influence
6 (…) Undue influence is one of the grounds of relief developed by the courts of equity as a court of
conscience. The objective is to ensure that the influence of one person over another is not abused. In
everyday life people constantly seek to influence the decisions of others. They seek to persuade those with
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whom they are dealing to enter into transactions, whether great or small. The law has set limits to the means
properly employable for this purpose. To this end the common law developed a principle of duress.
Originally this was narrow in its scope, restricted to the more blatant forms of physical coercion, such as
personal violence.
7 Here, as elsewhere in the law, equity supplemented the common law. Equity extended the reach of the law
to other unacceptable forms of persuasion. (…) If the intention was produced by an unacceptable means, the
law will not permit the transaction to stand. The means used is regarded as an exercise of improper or
"undue" influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be
treated as the expression of a person's free will. It is impossible to be more precise or definitive. The
circumstances in which one person acquires influence over another, and the manner in which influence may
be exercised, vary too widely to permit of any more specific criterion.
8 Equity identified broadly two forms of unacceptable conduct. The first comprises overt acts of improper
pressure or coercion such as unlawful threats. Today there is much overlap with the principle of duress as
this principle has subsequently developed. The second form arises out of a relationship between two persons
where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person
then takes unfair advantage. (…)
10 The law has long recognised the need to prevent abuse of influence in these "relationship" cases despite
the absence of evidence of overt acts of persuasive conduct. The types of relationship, such as parent and
child, in which this principle falls to be applied cannot be listed exhaustively. Relationships are infinitely
various. Sir Guenter Treitel QC has rightly noted that the question is whether one party has reposed
sufficient trust and confidence in the other, rather than whether the relationship between the parties belongs
to a particular type (…).
Burden of proof and presumptions
18 The evidential presumption discussed above is to be distinguished sharply from a different form of
presumption which arises in some cases. The law has adopted a sternly protective attitude towards certain
types of relationship in which one party acquires influence over another who is vulnerable and dependent
and where, moreover, substantial gifts by the influenced or vulnerable person are not normally to be
expected. Examples of relationships within this special class are parent and child, guardian and ward, trustee
and beneficiary, solicitor and client, and medical adviser and patient. In these cases the law presumes,
irrebuttably, that one party had influence over the other. The complainant need not prove he actually reposed
trust and confidence in the other party. It is sufficient for him to prove the existence of the type of
relationship.
19 It is now well established that husband and wife is not one of the relationships to which this latter
principle applies. In Yerkey v Jones (1939) 63 CLR 649, 675 Dixon J explained the reason. The Court of
Chancery was not blind to the opportunities of obtaining and unfairly using influence over a wife which a
husband often possesses. But there is nothing unusual or strange in a wife, from motives of affection or for
other reasons, conferring substantial financial benefits on her husband. Although there is no presumption, the
court will nevertheless note, as a matter of fact, the opportunities for abuse which flow from a wife's
confidence in her husband. The court will take this into account with all the other evidence in the case.
Where there is evidence that a husband has taken unfair advantage of his influence over his wife, or her
confidence in him, "it is not difficult for the wife to establish her title to relief": see In re Lloyds Bank Ltd;
Bomze and Lederman v Bomze [1931] 1 Ch 289, 302, per Maugham J .
Independent advice
20 Proof that the complainant received advice from a third party before entering into the impugned
transaction is one of the matters a court takes into account when weighing all the evidence.
21 As already noted, there are two prerequisites to the evidential shift in the burden of proof from the
complainant to the other party. First, that the complainant reposed trust and confidence in the other party, or
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the other party acquired ascendancy over the complainant. Second, that the transaction is not readily
explicable by the relationship of the parties. (…)
30 I return to husband and wife cases. I do not think that, in the ordinary course, a guarantee of the character
I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on
the basis that it has been procured by the exercise of undue influence by the husband. Wives frequently enter
into such transactions. There are good and sufficient reasons why they are willing to do so, despite the risks
involved for them and their families. They may be enthusiastic. They may not. They may be less optimistic
than their husbands about the prospects of the husbands' businesses. They may be anxious, perhaps
exceedingly so. But this is a far cry from saying that such transactions as a class are to be regarded as prima
facie evidence of the exercise of undue influence by husbands. (…)
The steps a bank should take
53 My Lords, it is plainly neither desirable nor practicable that banks should be required to attempt to
discover for themselves whether a wife's consent is being procured by the exercise of undue influence of her
husband. This is not a step the banks should be expected to take. Nor, further, is it desirable or practicable
that banks should be expected to insist on confirmation from a solicitor that the solicitor has satisfied himself
that the wife's consent has not been procured by undue influence. As already noted, the circumstances in
which banks are put on inquiry are extremely wide. They embrace every case where a wife is entering into a
suretyship transaction in respect of her husband's debts. Many, if not most, wives would be understandably
outraged by having to respond to the sort of questioning which would be appropriate before a responsible
solicitor could give such a confirmation. In any event, solicitors are not equipped to carry out such an
exercise in any really worthwhile way, and they will usually lack the necessary materials. Moreover, the
legal costs involved, which would inevitably fall on the husband who is seeking financial assistance from the
bank, would be substantial. To require such an intrusive, inconclusive and expensive exercise in every case
would be an altogether disproportionate response to the need to protect those cases, presumably a small
minority, where a wife is being wronged.
54 The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had
brought home to her, in a meaningful way, the practical implications of the proposed transaction. This does
not wholly eliminate the risk of undue influence or misrepresentation. But it does mean that a wife enters
into a transaction with her eyes open so far as the basic elements of the transaction are concerned.
c)
Mistake
(1)
Sale of Goods Act 1979, s 21
Sale by person not the owner
(1) Subject to this Act, where goods are sold by a person who is not their owner, and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the
seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to
sell. (…)
(2)
Phillips v Brooks Ltd [1919] 2 KB 243 (High Court)
Summary as given by Lord Nicholls of Birkenhead in Shogun Finance v Hudson (see below, 5)
19 (… I)n Phillips v Brooks Ltd [1919] 2 KB 243 Horridge J held that the jeweller contracted to sell the ring
to the crook in the shop who represented he was Sir George Bullough. The jeweller had heard of Sir George
Bullough and checked he lived at the address given. The jeweller gave evidence he had no intention of
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making any contract with any person other than Sir George Bullough. Horridge J rightly analysed what that
meant by adopting a passage from the judgment of Morton CJ in the Massachusetts case of Edmunds v
Merchants' Despatch Transportation Co (1883) 135 Mass 283, 283-284: "The fact that the seller was induced
to sell by fraud of the buyer made the sale voidable, not void. He could not have supposed that he was
selling to any other person; his intention was to sell to the person present, and identified by sight and
hearing; it does not defeat the sale because the buyer assumed a false name or practised any other deceit to
induce the vendor to sell." (Emphasis added.)
(3)
Ingram v Little [1961] 1 QB 31 (Court of Appeal)
Facts:
Elsie and Hilda Ingram were joint owners of a car, which they advertised for sale. A man, falsely calling
himself “Hutchinson”, came to look at it. He then offered ₤ 717 to the ladies for the car, which they were
willing to accept. However, he produced a cheque book to pay for the car, and it was then stated by Elsie
Ingram that under no circumstances would they accept a cheque. The man then told them he was PGM
Hutchinson, of Stanstead House, Caterham. Hilda Ingram checked in the telephone directory that there was
indeed a PGM Hutchinson residing at that address. The ladies then accepted the man’s cheque in exchange
for the car. The man, who had in the meantime had sold the car to the innocent defendant, was not PGM
Hutchinson and the cheque was dishonoured. The ladies now sought to recover the car from the defendant.
Pearce LJ
Each case must be decided on its own facts. The question in such cases is this. Has it been sufficiently
shown in the particular circumstances that, contrary to the prima facie presumption, a party was not
contracting with the physical person to whom he uttered the offer, but with another individual whom
(as the other party ought to have understood) he believed to be the physical person present. The
answer to that question is a finding of fact.
It is argued that although such a finding might properly have been reached if the cheat had pretended to be
some great man or someone known already to the vendor by dealing or by reputation, it could not be so in
this case, since the vendor had no knowledge of P. G. M. Hutchinson of Stanstead House. Had it not been for
investigation of the telephone directory, that might well be so; but here the entry represented an individual of
apparent standing and stability, a person whom the vendor was ready to trust with her car against his cheque.
His individuality was less dominating than that of a famous man would be, but that is a question of degree. It
does not, I think, preclude the judge from finding that it was with him that the vendor was intending to deal.
The court is naturally reluctant to accept the argument that there has been a mistake in such a case as this
since it creates hardship on subsequent bona fide purchasers. The plaintiffs' unguarded transaction has
caused loss to another. And, unfortunately, when the contract is void at common law, the court cannot (as
the law stands now) by its equitable powers impose terms that would produce a fairer result. However, in the
present case the subsequent purchasers, although the judge found that there was no mala fides, were no more
wise or careful than the plaintiffs. The regrettable case with which a dishonest person can accomplish such a
fraud is partially due to the unfortunate fact that registration books are not documents of title and that
registration and legal ownership are so loosely connected.
Devlin LJ
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The point on which the present case turns is the effect of deception about the identity of a contracting party.
It is a difficult point on which I have the misfortune to differ from my brethren. (…) Before (…) I consider
mistake, I shall inquire whether there is offer and acceptance in form. There is no doubt that H.'s offer was
addressed to Miss Ingram and her acceptance, apparently, addressed to him. But, it is argued, the acceptance
was in reality addressed to P. G. M. Hutchinson, who was not the offeror, and, therefore, no contract was
made. There can be no doubt upon the authorities that this argument must be settled by inquiring with whom
Miss Ingram intended to contract: was it with the person to whom she was speaking or was it with the person
whom he represented himself to be? It has been pressed upon us that this is a question of fact and that we
ought to give great weight to the answer to it provided by the trial judge. It is, I think, a mixed question of
fact and law. I am sure that any attempt to solve it as a pure question of fact would fail. If Miss Ingram had
been asked whether she intended to contract with the man in the room or with P. G. M. Hutchinson,
the question could have no meaning for her, since she believed them both to be one and the same. The
reasonable man of the law - if he stood in Miss Ingram’s shoes - could not give any better answer. (…)
(4)
Lewis v Averay [1972] 1 QB 198 (Court of Appeal)
Facts
Mr Lewis (L), a post-graduate student of chemistry, sold his car to a rogue (R), who falsely represented
himself to be the film actor Richard Greene, who played Robin Hood in the “Robin Hood” series. C wrote a
cheque for ₤ 450, which was later dishonoured. C sold the car to Averay, a music student at The Royal
College of Music, London.
Lord Denning MR
This is another case where one of two innocent persons has to suffer for the fraud of a third. It will no doubt
interest students and find its place in the textbooks. (…)
The real question in the case is whether on May 8, 1969, there was a contract of sale under which the
property in the car passed from Mr. Lewis to the rogue. If there was such a contract, then, even though it
was voidable for fraud, nevertheless Mr. Averay would get a good title to the car. But if there was no
contract of sale by Mr. Lewis to the rogue - either because there was, on the face of it, no agreement
between the parties, or because any apparent agreement was a nullity and void ab initio for mistake,
then no property would pass from Mr. Lewis to the rogue. Mr. Averay would not get a good title
because the rogue had no property to pass to him.
As I listened to the argument in this case, I felt it wrong that an innocent purchaser (who knew
nothing of what passed between the seller and the rogue) should have his title depend on such
refinements. After all, he has acted with complete circumspection and in entire good faith: whereas it
was the seller who let the rogue have the goods and thus enabled him to commit the fraud. I do not,
therefore, accept the theory that a mistake as to identity renders a contract void. I think the true
principle is (…): When two parties have come to a contract - or rather what appears, on the face of it,
to be a contract – the fact that one party is mistaken as to the identity of the other does not mean that
there is no contract, or that the contract is a nullity and void from the beginning. It only means that
the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he
does so before third parties have in good faith acquired rights under it.
In this case Mr. Lewis made a contract of sale with the very man, the rogue, who came to the flat. I say that
he "made a contract" because in this regard we do not look into his intentions, or into his mind to
know what he was thinking or into the mind of the rogue. We look to the outward appearances. (…
The contract) was, of course, induced by fraud. The rogue made false representations as to his identity. But
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it was still a contract, though voidable for fraud. It was a contract under which this property passed to the
rogue, and in due course passed from the rogue to Mr. Averay, before the contract was avoided. Though I
very much regret that either of these good and reliable gentlemen should suffer, in my judgment it is Mr.
Lewis who should do so. I think the appeal should be allowed and judgment entered for the defendant.
(5)
Shogun Finance Ltd v Hudson [2004] 1 AC 919 (House of Lords)
Facts:
A car dealer agreed a price for the sale of a motor vehicle on hire-purchase to a fraudster (R) who produced
the stolen driving licence of one Mr Patel as proof of his identity. The dealer faxed to the claimant hirepurchase company (= Shogun Finance) a copy of the licence and a draft hire-purchase agreement that the
fraudster had signed, forging the signature on the licence. Having completed a satisfactory credit check of
the person named on the licence the claimant approved the sale. R paid the agreed 10% deposit to the dealer
partly in cash and partly by way of a cheque, which was subsequently dishonoured, and was allowed to take
the vehicle. The defendant (= Hudson) purchased it in good faith from the fraudster the following day.
Lord Nicholls of Birkenhead
1 My Lords, this appeal raises a difficult problem about the effect of fraudulent misrepresentation on the
formation of a contract. If a crook (C) fraudulently represents to the owner of goods (O) that he is another
identifiable person (X) and on that basis O parts with goods to C by way of sale, is there in law a contract
between O and C? Does the answer to this question differ according to whether O and C communicated faceto-face, or by correspondence, or over the telephone, or by e-mail? The law on cases involving this type of
fraudulent conduct, euphemistically described as cases of "mistaken identity", is notoriously unsatisfactory.
The reported decisions are few in number and they are not reconcilable. In the present case Sedley LJ said
the law has tied itself into a Gordian knot. Brooke LJ said the law is in a "sorry condition" which only
Parliament or your Lordships' House can remedy.
2 Two features are usually present when cases of this type come before the court. The first feature is that a
seller of goods is concerned with the creditworthiness of the proposed buyer. The seller wants to be sure he
will be paid for the goods he is handing over. Here the common law seems to have drawn a distinction
between two kinds of fraudulent misrepresentation. The common law distinguished between a case (1)
where a crook fraudulently asserts he is creditworthy and a case (2) where a crook fraudulently asserts he is
someone else known to be creditworthy. One might suppose there is no difference of substance between
these two cases. These are merely two ways a crook may assert a spurious creditworthiness. But,
historically, the law seems to have been otherwise. In case (1), when the seller parts with his goods he does
so pursuant to a voidable contract. This is said to be a case of mistake as to a person's attributes. In case (2),
in some circumstances but not all, the seller has been held to part with his goods pursuant to a void contract,
that is, no contract at all. This is said to be a case of mistake as to a person's identity.
3 The second feature usually present in cases of this type is that the crook then sells the goods to an innocent
third party. This feature explains why the distinction between a voidable and a void contract matters. Having
fraudulently acquired the goods from their owner, the crook then sells them to an unsuspecting third party.
The rights of this innocent third party may depend upon the nice distinction between a voidable contract and
a void contract. In case (1), where the crook fraudulently misrepresents his own financial standing, the loss
falls on the unfortunate owner of the goods who was tricked into parting with them to the crook. (…)
4 This outcome is to be contrasted with case (2), where the crook asserts he is someone else. In such a case
the loss sometimes, but not always, falls upon the unfortunate third party who also was a victim of the
crook's trickery. The third party paid for the goods in all honesty, but he must return them to their original
owner or pay their value. Thus in Cundy v Lindsay (1878) 3 App Cas 459 Cundy had to pay the linen
manufacturers Lindsay & Co for the 250 dozen cambric handkerchiefs the crook acquired from Lindsay by
fraudulently representing he was the respectable business firm of Blenkiron. (…)
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35 I consider the latter course [i.e. the course adopted in Philips v Brooks and in Lewis v Averay, A.O.] is
the right one, for a combination of reasons. It is in line with the direction in which, under the more
recent decisions, the law has now been moving for some time. It accords better with basic principle
regarding the effect of fraud on the formation of a contract. It seems preferable as a matter of legal
policy. As between two innocent persons the loss is more appropriately borne by the person who takes
the risks inherent in parting with his goods without receiving payment. This approach fits comfortably
with the intention of Parliament in enacting the limited statutory exceptions to the proprietary
principle of nemo dat quod non habet. Thus, by section 23 of the 1979 Act Parliament protected an
innocent buyer from a seller with a voidable title. The classic instance of a person with a voidable title is a
person who acquired the goods by fraud (…). Further, this course is supported by writers of the distinction
of Sir Jack Beatson: see Anson's Law of Contract, 28th ed (2002), p 332. It is consistent with the approach
adopted elsewhere in the common law world, notably in the United States of America in the Uniform
Commercial Code, 14th ed (1995), section 2-403. And this course makes practical sense. In a case such
as the present the owner of goods has no interest in the identity of the buyer. He is interested only in
creditworthiness. (…)
Lord Hobhouse of Woodborough
55 (B)efore I leave this case, I should shortly summarise why the argument of the appellant's (0 the
defendant’s) counsel was so mistaken. The first reason was that they (…) misrepresented the role of the
dealer, wrongly treating him as the contracting agent of the finance company which he was not. They never
analysed the terms of the written document and had no regard at all to the offer and acceptance clause
it contained which, if there was any contract between a "debtor" and the finance company, governed
their relationship and which expressly set out the only way in which such a contract could come into
existence. They made submissions which contradicted the express written contract and were therefore
contrary to principle and long established English mercantile law. They submitted that Cundy v Lindsay 3
App Cas 459 was wrongly decided and should be overruled, substituting for it a general rule which, in
disregard of the document or documents which constitute the agreement (if any), makes everything depend
upon a factual inquiry into extraneous facts not known to both of the parties thus depriving documentary
contracts of their certainty. They sought to convert a direct documentary contract with the finance company
into a face-to- face oral contract made through the dealer as the contracting agent of the finance company,
notwithstanding that the dealer was never such an agent of the finance company. Finally they sought, having
bypassed the written contract, to rely upon authorities on oral contracts for the sale of goods, made face-toface and where the title to the goods had passed to the "buyer", notwithstanding that this was a documentary
consumer credit transaction not a sale and, on any view, no title had ever passed to R. In the result they have
invited a review of those authorities by reference to the particular facts of each of them. They have sought to
draw your Lordships into a discussion of the evidential tools, e g, rebuttable presumptions of fact and the socalled face-to-face "principle", used by judges in those cases to assist them in making factual decisions (…),
notwithstanding that the present case concerns the construction of a written contract. They forget that the,
presently relevant, fundamental principles of law to be applied -- consensus ad idem, the
correspondence of the contractual offer and the contractual acceptance, the legal significance of the
use of a written contract--are clear and are not in dispute. Inevitably over the course of time there
have been decisions on the facts of individual "mistaken identity" cases which seem now to be
inconsistent; the further learned, but ultimately unproductive, discussion of them will warm academic
hearts. But what matters is the principles of law. They are clear and sound and need no revision. To
cast doubt upon them can only be a disservice to English law. Similarly, to attempt to use this appeal
to advocate, on the basis of continental legal systems which are open to cogent criticism, the
abandonment of the soundly based nemo dat quod non habet rule (statutorily adopted) would be not
only improper but even more damaging.
Lord Millett
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Introduction to English Law
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85 Under German law, too, the innocent third party obtains a good title, though this is a consequence of the
law of property rather than the law of contract. Article 932 of the German Civil Code provides that a
purchaser acting in good faith acquires title where he obtains possession from a seller who has no title. The
purchaser is not in good faith if he knew, or by reason of gross negligence did not know, that the goods did
not belong to the seller. Thus, under German law, whether or not A obtained title from B, he is able to pass a
good title to D.
86 German law reaches this conclusion by admitting a far wider exception to the nemo dat quod non habet
rule than we accept, and this enables it to dispense with the need to decide the contractual effect of mistaken
identity (and the meaning of "identity" in this context) or to conduct a fruitless inquiry into the identity of the
intended counterparty. Our inability to admit such an exception compels us to adopt a different analysis, but
it would be unfortunate if our conclusion proved to be different. Quite apart from anything else, it would
make the contemplated harmonisation of the general principles of European contract law very difficult to
achieve.
87 Where does this leave the authorities? Most of those which are concerned with face-to-face transactions
can stand with the exception of the decision of the majority of the Court of Appeal in Ingram v Little [1961]
1 QB 31, which is inconsistent with Lewis v Averay [1972] 1 QB 198 and should be overruled.
Lord Philipps of Worth Matravers
178 These considerations lead me to conclude that the correct approach in the present case is to treat the
agreement as one concluded in writing and to approach the identification of the parties to that
agreement as turning upon its construction. The particulars given in the agreement are only capable
of applying to Mr Patel. It was the intention of the rogue that they should identify Mr Patel as the
hirer. The hirer was so identified by Shogun. Before deciding to enter into the agreement they checked that
Mr Patel existed and that he was worthy of credit. On that basis they decided to contract with him and with
no one else. Mr Patel was the hirer under the agreement. As the agreement was concluded without his
authority, it was a nullity. The rogue took no title under it and was in no position to convey any title to Mr
Hudson.
Lord Walker of Gestinthorpe
188 I return to the question, which is of central importance to this appeal, whether (as Lord Nicholls and
Lord Millett propose) the face-to-face principle should be applied much more generally. It may be that it
should apply to an oral contract alleged to have been made on the telephone, where the parties are
identified by hearing, although not by sight. An alleged oral contract made by telephone might be a
case where the presumption applied, but was rebuttable. But to extend the principle to cases where the
only contract was by written communication sent by post or by e-mail would be going far beyond
identification by sight and hearing. Where there is an alleged contract reached by correspondence,
offer and acceptance must be found, if they are to be found at all, in the terms of the documents. (…)
191 However, the present appeal is, as my noble and learned friend, Lord Hobhouse, has demonstrated,
easier to resolve. Shogun Finance had no doubt never heard of the real Mr Patel before the day on which the
written contract was signed by the rogue, forging Mr Patel's signature. But by the time it accepted the written
offer it had, by efficient information technology, confirmed that Mr Patel existed and had learned a good
deal of relevant information about him, including his creditworthiness. The form of contract made quite
clear that Shogun Finance's intention was to accept an offer made by the real Mr Patel, and no one
else. The appellant's attempt to analyse the matter as a face-to-face contract (effected through the agency of
the car salesman) was accepted by Sedley LJ but in my view it must fail, for the reasons stated by Lord
Hobhouse.
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(6)
Sale of Goods Act 1979, s 6
Goods which have perished
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 is made, the contract is void.
(7)
Saunders v Anglia Building Society [1971] AC 1004 (House of Lords)
Lord Reid
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 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. (…)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. (…) 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.
(8)
Bell v Lever Bros Ltd [1932] AC 161 (House of Lords)
Facts
Lever Bros (L) employed the two defendants. They committed serious breaches of their contract of
employment which would have justified their summary dismissal. In ignorance of this fact, L entered into
agreements with them under which their services were terminated on terms that they would receive
substantial sums in compensation. The defendants themselves did not have in mind, when those 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. L claimed rescission of the
agreements and repayment of the compensation paid under them.
Lord Atkin
My Lords, the rules of law dealing with the effect of mistake on contract appear to be established with
reasonable clearness. If mistake operates at all it operates so as to negative or in some cases to nullify
consent. The parties may be mistaken in the identity of the contracting parties, or in the existence of the
subject-matter of the contract at the date of the contract, or in the quality of the subject-matter of the
contract. These mistakes may be by one party, or by both, and the legal effect may depend upon the class of
mistake above mentioned. Thus a mistaken belief by A that he is contracting with B, whereas in fact he
is contracting with C, will negative consent where it is clear that the intention of A was to contract
only with B. So the agreement of A and B to purchase a specific article is void if in fact the article had
perished before the date of sale.
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Mistake as to quality of the thing contracted for raises more difficult questions. In such a case a
mistake will not affect consent unless it is the mistake of both parties, and is as to the existence of some
quality which makes the thing without the quality essentially different 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 different one, being whether the contract as to quality amounts to a condition or a warranty, a
different branch of the law.
But, on the whole, I have come to the conclusion that it would be wrong to decide that an agreement to
terminate a definite specified 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 paying for release gets 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 B's 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. (…) All these cases involve hardship on A and benefit 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 contracts - i.e., agree in the same terms on the same subject-matter - they are bound, and must rely on the
stipulations of the contract for protection from the effect of facts unknown to them.
(9)
Solle v. Butcher [1950] 1 KB 671 (Court of Appeal)
Lord Denning MR
It is quite plain that the parties were under a mistake. They thought that the flat was not tied down to a
controlled rent, whereas in fact it was. In order to see whether the lease can be avoided for this mistake
it is necessary to remember that mistake is of two kinds: first, mistake which renders the contract
void, that is, a nullity from the beginning, which is the kind of mistake which was dealt with by the
courts of common law; and, secondly, mistake which renders the contract not void, but voidable, that
is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake which was
dealt with by the courts of equity. Much of the difficulty which has attended this subject has arisen
because, before the fusion of law and equity, the courts of common law, in order to do justice in the case in
hand, extended this doctrine of mistake beyond its proper limits and held contracts to be void which were
really only voidable, a process which was capable of being attended with much injustice to third persons
who had bought goods or otherwise committed themselves on the faith that there was a contract. (…) Since
the fusion of law and equity, there is no reason to continue this process, and it will be found that only those
contracts are now held void in which the mistake was such as to prevent the formation of any contract at all.
Let me first consider mistakes which render a contract a nullity. All previous decisions on this subject must
now be read in the light of Bell v. Lever Bros. Ld. (…) Applying these principles, it is clear that here there
was a contract.
Let me next consider mistakes which render a contract voidable, that is, liable to be set aside on some
equitable ground. Whilst presupposing that a contract was good at law, or at any rate not void, the court of
equity would often relieve a party from the consequences of his own mistake, so long as it could do so
without injustice to third parties. The court, it was said, had power to set aside the contract whenever it was
of opinion that it was unconscientious for the other party to avail himself of the legal advantage which he
had obtained. The court had, of course, to define what it considered to be unconscientious, but in this
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respect equity has shown a progressive development. It is now clear that a contract will be set aside if the
mistake of the one party has beer induced by a material misrepresentation of the other, even though it was
not fraudulent or fundamental; or if one party, knowing that the other is mistaken about the terms of an offer,
or the identity of the person by whom it is made, lets him remain under his delusion and concludes a
contract on the mistaken terms instead of pointing out the mistake. A contract is also liable in equity to be
set aside if the parties were under a common misapprehension either as to facts or as to their relative
and respective rights, provided that the misapprehension was fundamental and that the party seeking
to set it aside was not himself at fault.
(10)
Associated Japanese Bank v Crédit du Nord [1989] 1 WLR 257 (High Court)
Steyn J
No one could fairly suggest that in this difficult area of the law there is only one correct approach or
solution. But a narrow doctrine of common law mistake (as enunciated in Bell v. Lever Brothers Ltd.
[1932] A.C 161), supplemented by the more flexible doctrine of mistake in equity (as developed in Solle
v. Butcher [1950] 1 K.B. 671 and later cases), seems to me to be an entirely sensible and satisfactory
state of the law.
(11)
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd („The Great Peace“) [2002] 4
All ER 689 (Court of Appeal)
Facts:
The “Cape Providence” suffered serious damage when on her way from Brazil to China. There was concern
that the vessel might go down with the loss of her crew. The defendants (D) agreed to provide salvage
services. Through a broker D tried to find a merchant vessel in the vicinity of the “Cape Providence”. By a
respected organisation which provides shipping forecasts, the brokers were informed that the “Great Peace”,
a ship owned by the claimant (C) was able to reach the position in 12 hours. In fact the “Great Peace” was
much further away; it would have taken both ships 39 hours to meet. Shortly after the contract had been
concluded, the “Cape Providence” was assisted by another ship which happened to pass by. D cancelled the
contract, C claims a cancellation fee.
Lord Phillips of Worth Matravers MR
1. In 1932 in Bell v Lever Brothers Ltd [1932] AC 161 Lord Atkin made a speech which he must have
anticipated would be treated as the definitive exposition of the rules of law governing the effect of
mistake on contract. In 1950 in Solle v Butcher [1950] 1 KB 671 Denning LJ identified 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 fifty years judges and jurists have wrestled with the problem
of reconciling these two decisions and identifying with precision the principles that they lay down.
35. We turn without more ado to consider Bell v Lever Brothers. (...)
91. (...) In agreeing with the analysis of Steyn J. [in case 6, above], we recognise that it is at odds with
comments that Lord Denning made on more than one occasion about Bell v Lever Brothers Ltd to the effect
that 'a common mistake, even on a most fundamental matter, does not make a contract void at law'. As to
this Steyn J. said at p.267: "With the profoundest respect to the former Master of the Rolls I am
constrained to say that in my view his interpretation of Bell v Lever Brothers Ltd does not do justice
to the speeches of the majority."
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92. We share both the respect and the conclusion. (...)
95. In Solle v Butcher Denning LJ held that a court has an equitable power to set aside a contract that is
binding in law on the ground of common mistake.
156. Thus the premise of equity's intrusion into the effects of the common law is that the common law
rule in question is seen in the particular case to work injustice, and for some reason the common law
cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and
misrepresentation, and undue influence, are all catered for under other existing and uncontentious
equitable rules. We are only concerned with the question whether relief might be given for common
mistake in circumstances wider than those stipulated in Bell v Lever Brothers. But that, surely, is a
question as to where the common law should draw the line; not whether, given the common law rule,
it needs to be mitigated by application of some other doctrine. The common law has drawn the line in
Bell v Lever Brothers. The effect of Solle v Butcher is not to supplement or mitigate the common law;
it is to say that Bell v Lever Brothers was wrongly decided.
161. We can understand why the decision in Bell v Lever Brothers Ltd did not find favour with Lord
Denning. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has
induced a contract gives greater flexibility 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 effect
of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to
our law of mistake than the common law allows.
166. The parties entered into a binding contract for the hire of the "Great Peace". (…). They became liable in
consequence to pay the cancellation fee. There is no injustice in this result.
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Introduction to English Law
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Lehrstuhl Zivilrecht VIII
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Introduction to English Law