Contract Law: Breach, Mutual and Unilateral Mistake

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Introduction

A contract is an agreement that outlines specifics details of an issue between different parties regarding a certain matter; it is usually a written document, although it can also be verbal and is enforceable in a court of law (Kinzie, 2004). For a contract to be considered valid, it must contain seven important elements: consideration, form, intention to create legal relations, agreement, genuine consent, and capacity to implement the contract (Turner, 2008). When a contract has been broken, a breach is said to have occurred; breach of contract in legal terms is used to describe actions that have been undertaken by one of the parties in contravention to the binding agreement as originally agreed between the parties. It is also used to describe cases where the terms of an agreement as entered between various parties are not honored according to the article of the agreement. In general, all forms of contracts reached upon between various parties are governed by the principle of pacta sunt servanda (Yovel, 2008).

One of the essential features of a valid contract that is encompassed by the seven elements discussed above is what is referred to as “vitiating elements” (Vermeesch and Lindgren, 2005); based on common law that governs contract laws, for a contract to be enforceable it must not have any vitiating elements. Vitiating elements imply the presence of any factors that might incline the court to “decide that a contract is void, voidable or unenforceable” (Vermeesch and Lindgren, 2005); it is in this context that the element of mistake can be discussed in contract law. This is because generally, the courts have over time, through precedents, summarized the major forms of vitiating elements found in contracts to be six, which are; mistake, illegality, duress, misrepresentation, undue influence, and what is referred to as non est factum (Parker and Box, 2008). In this case and for the contract in question, it is clear that there are two obvious vitiating elements; that of mistake and fraudulent misrepresentation.

The type of mistake, in this case, is what is referred to as unilateral mistake since it is only one party who was mistaken as to the terms and conditions of the contract, which we realize to have been deliberately orchestrated by the other party. As such unilateral mistake in contract law is defined as “a mistake where only one party to a contract is mistaken as to the terms or subject-matter contained therein under circumstances where it would be unconscionable or unfair for them to be held to perform the contract” (Atkinson, 1999). Additionally, there is an element of fraudulent misrepresentation since “false statement of fact (was) made during negotiations by a contracting party…that was fraudulent and caused loss (Khoury and Yamouni, 2004) Now that we have identified the pertinent issues that are central to this discussion let us now proceed and discuss the implications of these acts from the perspective of the contract law.

Implications of the Unilateral Mistake

Generally, there are two outcomes that result in the event of a unilateral mistake made by any of the parties or what would otherwise be described as a fraudulent misrepresentation; that is, the court can either void the contract or leave it as it is, i.e., valid. The determination of the outcome would depend on various factors that are explicitly outlined in Rule 54 of the Second Restatement that governs many issues that are related to contract laws. According to the Second Restatement, a contract is only voidable where the unilateral mistake is a factor if the person seeking voidability “does not bear the risk of the mistake under the rule stated in 154” (Braucher, 1998) in addition to two other factors. It is for this reason that rules 54 will be our guide in the determination of the implications of the unilateral mistake (Braucher, 1998).

In fact, a keen evaluation of Lord Denning’s ruling on this matter will clearly exemplify that this judgment was made in accordance with this rule. The two other conditions that must be certified are that “the enforcement of the contract would be unconscionable” in addition to probable reason that the victim in a way contributed directly or indirectly to the resulting mistake (Braucher, 1998). Now according to Rule 154, a party would bear the risk of the mistake according to the contract law when any of the following conditions is determined by the court to have applied.

1) “the risk is allocated to him by agreement of the parties, 2) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient and 3) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so” (Rasmusen, 2003).

Now let us go over the circumstances of the case to determine how the court would resolve the issue of the contract validity based on these principles. Foremost, there is no doubt that the court will find the enforcement of the contract to be “unconscionable” given the fraudulent circumstances under which it was based but at the same time, the court needs to determine if the plaintiff in this case who is the buyer “bears the risk” of that mistake (Graw, 2008). Based on the three-prong conditions of Rule 154, it is clear that conditions 2 and 3 outlined above can be determined to have been present at the time of the contract, which will mean the court would most likely not void the contract.

This is because the seller at the time of inspecting the proof of identity documents of the rogue buyer must have been aware that he was not an expert in detecting forgery and must have accordingly “treated his limited knowledge as sufficient” (Graw, 2008). It is on this aspect that Lord Denning observes that the seller did not “regarded his identity (that of the rogue buyer) as a matter of vital importance” (Levellaw.com, 2008) (obviously because he never took extra measures to have it verified. And because of this fault that is attributable to the plaintiff, the court would ordinarily not void the contract except for the fact that in this case, a deliberate act by the buyer to mislead the seller took place which any other ordinary person would have similarly been fooled. So to answer the question, such a mistake caused by fraud would actually make the contract voidable but not necessarily void.

Reasons why Phillips v Brooks Ltd and Ingram v Little rulings cannot be reconciled

Despite their similarity, the court’s ruling on these two cases was fundamentally different, for reasons that Lord Denning attributes to what he refers to as “distinction without a difference” (Levellaw.com, 2008). A brief overview of the facts indicates that in the case of Phillips v Brooks Ltd, the ruling made by judge Horridge did find that the ultimate buyer of the ring that was eventually sold should retain it for the following reasons. One, the court did find that a fundamental aspect of the legality of the entitlement of the good obtained by the defendant existed because the rogue buyer who had duped the original seller into selling the ring had the actually good title of the ring that was consequently obtained by the defendant in good faith and which was consistent with common law.

But to determine this, the judge had to first assess and determine the manner in which the ring passed between the original seller and the would-be rogue buyer. In this respect, the judge observed that the parties did enter into a mutual contract that was proper and valid in all respect if the element of the mistaken identity was to be put aside. Having observed that, the judge concludes that consequently the entitlement of the good must be assumed to have been passed to the rogue buyer because fraud misrepresentation does not, in fact, make a contract void bur rather voidable and states “the fact that the seller was induced to sell by the fraud of the buyer made the sale voidable, but not void” (Levellaw.com, 2008). The implication of this is that the contract would have ordinarily remained valid until the time the plaintiff moved to have it avoided. In making this ruling, judge Horridge cited two cases as relevant precedents that he relied on, that of Cundy v Lindsay 3 App Cas 459 and that of Edmunds v. Merchants’ Despatch Transportation Co (Levellaw.com, 2008).

In the second case of Ingram v Little, the circumstances are the same; a rogue buyer obtains a vehicle from the two sisters and goes on to pass it to a third party who is now the defendant. The court, in its rulings, held that “the sisters only intended to deal with Mr. Hutchinson at the address given because they were not willing to offer a sale for payment by cheque from anyone else” (Lawresources.com, 2010); which in the court’s interpretation implied that the agreement was not valid and consequently that the rogue buyer didn’t have the authority to pass the entitlement of the vehicle to the ultimate buyer. Despite this subtle difference that the court is striving to exemplify, it is clear that in both cases, the plaintiffs were selling the goods to the person before they that were “identifiable by sight and sound” (Lawresources.com, 2010) and for all purposes and intent went ahead and proceeded to complete the contract with that particular person based on the understanding between them. It is for this reason that Lord Denning muses that “In each case, there was, to all outward appearance, a contract” (Lawresources.com, 2010).

In my opinion, the argument of the judge makes much sense when you consider two things; one, that it would be impossible for the law to expect the third parties in such cases which ends up with the goods to be in a position to know of the circumstances that the seller could have obtained the goods. As such, it must be assumed where all conditions of proper and due diligence are done in obtaining the goods that the seller acted in good faith, as has always been the case in all such cases. Secondly, the law wrongly assumes that mistaken identity is solely undertaken by persons for purposes of swindling their contracting parties. But this can, in fact, hypothetically be shown not to be the case when it is assumed that despite the unlawful impersonation, the rogue buyer might actually present a valid cheque but lie about their identity for reasons other than the need to swindle. In such a case, the seller would never get to know about the mistaken identity since the cheque would never bounce, and neither will the law hold that such a transaction was void. It is based on these two reasons that I agree with Lord Denning’s observation that the rulings can’t be reconciled because the legal perspective has clearly shifted on what would have been essentially a similar determination of the same facts.

How the conflict was resolved by the ruling in Lewis v Avery

Having determined how the two cases discussed are similar in facts but yet different in the rulings entered, let us now review and dissect the decision in the case of Lewis v Avery entered by Lord Denning, which certainly appeared to have offered a more reliable application of the legal principles and thereby set a precedent for similar cases that are to occur in future. In making the ruling on this case, Lord Denning opens his remarks by acknowledging that there are in fact two parties to this case that are in no doubt innocent, a clear reference to the original seller of the vehicle and the ultimate buyer, which is an observation that also serves to give us the cue on the inclination of the judge in recognizing the fact that the ultimate buyer can’t be attributed blame under the current circumstances.

By stating this, what the good judge is doing in effect is to verify that the exchange of the goods between the rogue swindler and the ultimate buyer must have been valid and legal based on the law. In fact, later on in his ruling, Lord Denning gives the strongest worded observation in which he states that “it was the seller who let the rogue have the goods and thus enabled him to commit the fraud” (Levellaw.com, 2008); a statement that left no doubt that if there was anyone to blame among the two innocent parties, then it was certainly not the ultimate buyer. And there is a good reason why Lord Denning stated this when you consider that on a comparative basis, the original buyer was in a better position to verify the swindler’s identity and thereby cut the fraud in its bud rather than the ultimate buyer who is now the defendant had; in fact, he had no justification on insisting or even going to great lengths to verify on the same fact of identity.

Based on this reasoning and on In his final summation Lord Denning concludes that the contract is actually valid but voidable, assuming that the original seller realizes so in good time before the goods are passed on to the third party (Levellaw.com, 2008). And because in this case, the goods have passed to a third party whom the court has determined in all respects to be completely innocent, it would be an injustice for the court to nullify what is, in essence, a valid contract between the rogue seller and the final buyer. It is in this respect that Lord Dennings’s ruling resolves the two dissenting rulings made on the cases discussed above.

References

Atkinson, D., 1999. Breach of Contract. Web.

Braucher, R. 1998. Interpretation and Legal Effect in the Second “Restatement of Contracts. Columbia Law Review, 81.1: pp. 13-18.

Gilhams.com. 2010. The Law of Mistake in the UK. Web.

Graw, S., 2008. An Introduction to the Law of Contract. 6^th ed. New York, NY: Law Book Company.

Khoury, D. & Yamouni, R., 2004. Understanding Contract Law. 5^th ed. Sydney: Lexis Law Publishing Kinzie, M., 2004. Contract Law and Breach of Contract. Journal of Current Legal Issues, 3 (2), pp. 89-95.

Rasmusen, E. 2003. Mutual and Unilateral Mistake in Contract Law. Web.

Law.com. 2010. Contract Law. Web.

Lawofcontract.co.uk. 2011. Law of Contract. Web.

Lawresources.com. 2010. Ingram v Little. Web.

Levellaw.com. 2008. Lewis v Averay. Web.

Parker, D. & Box, G., 2008. Business Law for Business Students. New York, NY: Thomson Custom Publishing.

Turner, C. 2008, Australian Commercial Law, 27th edn. Thomson Reuters, Australia.

Vermeesch, K. & Lindgren, R., 2005. Business Law of Australia. Washington DC: Butterworths.

Yovel, J. 2008. Contract Law, Otto-graph.com. Web.

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