Where both parties at the time of entering into the contract make the same mistake about the subject matter. The mistake must be a fundamental mistake of fact or law, which induces the parties into the contract.
1. Mistake as to the existence of the subject matter – res extincta
Couturier v Hastie (1852)
Concerned the sale of a cargo of corn. Unknown to both parties the cargo had fermented and had to disposed of before they had entered into the contract. Held the subject matter of the contract did not exist therefore the contract was void.
McRae v CDC (1951)
The defendant sold the plaintiff a wrecked oil tanker said to be ‘on jourmand reef’ in fact the oil tanker did not exist. The plaintiff did not discover this until after he had spent time and money looking for it, so he sued for theses costs. The defendants argued that there was no subject matter so they owed nothing. Held there was an implied term in the contract that the taker did exist and therefore they had breached this therefore the plaintiff could claim damages.
Associated Japanese Bank v Credit Du Nord (1988)
AJB brought machines from a client and leased them back to him under a guarantee form CDN. The client went bankrupt so AJB sued CDN on the guarantee. It turned out the machines never existed, and as they were fundamental to the guarantee there was no contract (void)
Mistake must be fundamentally shared by both parties and must render the subject matter essentially and radically different from the subject matter which the parties believed to exist.
Rules on mistake as to subject matter are designed to deal with exceptional cases and should not be used as an excuse to get out of undesirable obligations.
Sale of Goods Act 1979 s.6
Where there is a contract for the ale of specific goods and the goods without knowledge of the seller have perished at the time when the contract is made, the contract is void.
2. Mistake as to ownership of land – res sua
A agrees to buy or lease from B a plot of land which both parties believe to belong to B but in fact belong to A the contract is void as B has nothing to sell or convey.
Cooper v Phibbs (1867)
HofL set aside an agreement whereby one party had agreed to lease a fishery to the other, but unknown to either the fishery already belonged to the party taking out the lease.
3. Mistake as to quality
Common law does not treat the contract as for mistake when the subject matter is of different quality to that anticipated by both parties.
Bell v Lever Bros. (1932)
L employed B as a director of their company on a five year contract three years latter the parties agreed to terminate the contract on payment of £50000 compensation to B. L subsequently discovered that B could have been dismissed without compensation because he had committed several breaches of contract. L claimed the money back on the grounds of mistake. Held no operative mistake, the only mistake was to the quality of the subject matter of the compensation agreement.
Leaf v International Galleries
L brought a picture from IG, which they both thought to be a Constable, however it was not so L sued. Held L had no claim because the mistake was as to the quality of the subject matter.
Common Mistake in Equity
Where a mistake is not sufficiently fundamental enough to render a contract void at common law it may still be voidable in equity, though the courts may impose terms to make the decision fair.
Solle v Butcher (1949)
B agreed to lease a flat to S for 7 years at an annual rate of £250. The parties entered into the agreement under the mistaken assumption that the flat was free from rent control when S discovered that the flat was subject to rent control (mistake as to quality) and that rent payable under legislation was only £140, he sought to recover the overpaid rent. B counter claimed for rescission of the lease on the grounds of mistake. Held contract not void at common law, but in equity it was declared that the lease should be set aside and S could either leave the flat or pay the max rent under the Rent Acts.
Great Peace Shipping v Tsavliris (2002)
T had an interest in a ship the Cape Providence and was worried that it might sink so contacted a third party who identified the nearest vessel as the Great Peace. T agreed to a charter party contract to hire GP for 5 days. However it was discovered that GP was several hundred miles away from CP, so the contract was based on a common mistake. T tried to cancel the contract but GP refused and claimed 5 days hire. T argued that the mistake made the contract void at common law or voidable in equity. Held the decision in Solle v Butcher overturned, as equity no longer provides a remedy for common mistake. Where a contract is valid at common law for mistake then it should also be valid in equity. In the fixing of charter parties, which is done by professionals, certainty is important.
Thus equitable solutions are now no longer available for charter parties which leaves other areas somewhat uncertain.
There are some academics who believe that there are some occasions where equity with its ability to rescind a contract on terms can render a contract voidable where common law has not been prepared to intervene.