CHAPTER 5

Defeating Contractual Liability

Where a contract has been fully and properly formed, a party may escape liability for breach of contract, or be excused from their contractual obligations if, at the time that the contract was entered into, there were circumstances that introduced an inequality. As contractual obligations are freely entered into (as opposed to obligations under tort which are imposed by law) there must be a meeting of minds. If there was no meeting of minds as to the terms of the contract by virtue of mistake or misrepresentation by one of the parties and the contract can be set aside. ­Additionally, if a person entered into a contract under duress it cannot be said that they freely assumed their contractual obligations and therefore also the contract can be set aside. Here we consider mistake, misrepresentation, and duress under English Law, the law of the United States, and in the civil law code. Common to all of the systems considered here is that a contract which is illegal or contrary to public policy will be voided as a matter of course. This latter point, discussed in Chapter 3, was a point of commonality between the Anglo-American and civilian traditions.

Defeating Contractual Liability in English Law

Mistake

This segment is concerned with situations where one or both parties have entered into a contract under a mistaken belief and where they would not have done so had they known the true circumstances. In such occurrences the court can find that the contract is defective. Mistake is one of the most difficult areas of contract law in the common law jurisdiction as the principles have never been settled and judicial attitudes to the area have changed considerably.1 It was first recognized in the 19th century under the influence of Roman and French Law which applied a much wider concept of mistake. The doctrine is today interpreted in a much narrower scope in common law than in many civil law jurisdictions.2 Indeed, the concept of mistake has a longer vintage in the civilian traditions and mistake by one or both of the parties could be invoked by one of the parties to avoid their obligations under that contract.

There are several issues with the law relating to mistake in contracts making the area difficult to navigate. In contract law, there are two different types of mistake and it is important to distinguish between the two as different rules apply. A unilateral mistake is where a mistake is made by only one of the parties whereas a common mistake or a mutual mistake is a mistake shared by both parties. A second issue relates to the divide between the common law and equity which allowed equity to set aside contracts on the grounds of mistake where they had not met the thresholds set by the common law (see Chapter 8, Equitable Remedies). Then, mistake may take many forms: from the initial agreement (preventing the formation of the contract), when transferring the agreement from oral to written, or one induced by a false statement or failing to understand the contract.3 The courts can have regard to a wide range of factors including the seriousness of the mistake and whether or not the other party knew of the mistake. Finally, mistake can have different remedies; it can be void (as if it never existed) or voidable (the injured party has the option to set aside the contract).

Unilateral Mistake

In order for the contract to be set aside on the grounds of mistake, that mistake must satisfy restrictive (if sometimes contradictory) rules. In general, you will not be discharged from your contractual liability on the basis that you entered into a contract under some basic misunderstanding or made a bad bargain. The law takes an objective approach to the contractual agreement and in the interest of market security, people will primarily be held to their bargains. The intention of the parties to enter into a contract can be found not only in their subjective intentions, but also inferred objectively from their conduct. The “objective test” for establishing the intention of the parties was set forth by Blackburn J in Smith v. Hughes as:

If one of the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other … 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 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.4

There are circumstances where the contract may seem to be valid but when viewed under this objective test is held to be void. The first of these circumstances is where there is a mistake as to identity of one of the parties. For example, A intends to sell goods to B but later discovers that the party is actually C. In these cases C will usually turn out to be a rogue fraudulently misrepresenting himself as B who has paid for the goods with a bad cheque. Before A can avoid the contract C will usually have sold the goods onto D who (as long as he is a bona fide purchaser and not in cahoots with C) will be an innocent party. In these cases, there are two innocent parties both claiming ownership of the goods. A will try to regain the property by claiming that there was no contract with C on the grounds of mistaken identity and as such title did not pass to C who then could not pass to D. If this argument is accepted the goods will be returned to A and D will not be the owner of the goods. D however will argue that there was a valid contract between A and C which is voidable for fraud and if the contract has not been avoided by A by the time D purchases the goods then D will acquire good title.5

A will only succeed where he can show that he had no intention of dealing with C and that C knew of the mistake. Thus, the question becomes one of whether A is mistaken as to C’s identity or attributes. In Cundy v. Lindsay, Lindsay received a large order for handkerchiefs from a rogue trader named Alfred Blenkarn who had business in the same street as a reputable trader Blenkiron & Co.6 Thinking that they were dealing with the latter, Lindsay sent the handkerchiefs. Before the fraud was discovered (and Alfred was later convicted of obtaining goods by deception) he had sold 250 handkerchiefs onto Cundy, an innocent purchaser, Lindsay sued for their return.7 The House of Lords determined that there was no contract in the first place as it was clear that they had intended to deal with the reputable firm of Blenkiron & Co, the identity was of the utmost importance to them and clearly there had been a mistake in this respect. It was stated:

Of Blenkarn they knew nothing, and of him they never thought. With him they never intended to deal. Their minds never, even for an instant of time rested upon him, and as between him and them there was no consensus of mind which could lead to any agreement or any contract whatever. As between him and them there was merely one side to a contract, where, in order to produce a contract, two sides would be required.8

This view protects the original injured party but places the loss on the innocent third party. In order to succeed the mistake must be one of identity and it must be crucial to the party entering the contract at the time of the agreement. In Kings Norton Metal Co v. Edridge, Merrit & Co, Kings received an order from a company called “Hallam & Co,” an impressive looking company boasting a large factory and overseas departments.9 The goods were sent but no payment was ever received. It later transpired that the company was a front for a rogue trader named Wallis who had, before the fraud was discovered, sold the goods onto Edridge. Kings sued Edridge for the return of the goods. The Court of Appeal held that this was not void, but voidable for fraud as Kings had intended to contract with the author of the letter and Wallis and Hallam & Co were in fact the same person, therefore there was no mistake as to identity. Here, they were mistaken as to the attributes of the person and not the person himself.

The distinction is somewhat spurious with Lord Denning describing it as a “distinction without a difference”10 and it is a precarious position that the rights of an innocent third party should depend on such a tenuous distinction.11

The issue becomes more complex when the parties are dealing with each other face to face. Where they are dealing with each other by correspondence it is easier to imagine how the mistake as to the identity of the person could occur. Thus, it is more difficult to show that you did not intend to contract with the person physically present. In ­Phillips v. Brooks Ltd a man named North went in person to the Phillips’ shop and bought some jewelry using a cheque and stated, “You see who I am, I am Sir George Bullock” and gave an address in St James’ Square.12 Phillips checked the address and allowed him to take the jewelry before the cheque had cleared. North then sold the ring to a pawnbroker who was unaware that it had been obtained by fraud. Phillips then sued the pawnbrokers for the return of the ring. He argued that he intended to contract with Sir Bullough and not the man in his shop. The High Court rejected this argument and found that there was no mistake as to identity and although he “believed the person to whom he was handing the ring was Sir George Bullough, he in fact contracted to sell and deliver it to the person who came into his shop.”13 The presumption therefore is that the seller intends to contract with the person physically present and not the person who he is purporting to be.

However, following Phillips, there were some cases which confused the law in this area. For example, in Ingram v. Little, the plaintiff sisters were joint owners of a car.14 A man by the name of Hutchinson made them an offer and wanted to pay by cheque, at which point the sisters said that they would not accept a cheque. Hutchinson then replied that he was “PGM Hutchinson of Stansted House” and that he had business interests in Guildford. They checked the address in the directory and it was present, as a result of this representation they accepted the cheque. The cheque was invalid but by this time the rogue Hutchinson had sold the car onto Little. The Court of Appeal decided that the contract was void due to mistake as to identity and no title passed. The majority accepted that the sisters intended to contract with PGM Hutchinson, however, it has been argued that in coming to this conclusion the court allowed its sympathy for the sisters to cloud its judgment.15

This is further bolstered by the later decision of Lewis v. Averay where a car was sold to a man claiming to be Richard Green, the famous film and television actor who signed his cheque RA Green.16 He wanted to take the car away immediately and so Lewis requested some form of identity before allowing him to leave. He was presented with an admission pass to Pinewood Studios in the name of Richard A Green which bore this man’s photograph. Lewis allowed him to leave with the car and it later transpired that the cheque had been stolen and the rogue was not who he claimed to be. He had, by this stage, sold the car to Avery and Lewis sued Averay for the return of the car. The Court of Appeal did not allow Lewis to succeed as he intended to deal with the man who came to see the car. The contract was voidable for fraud which right was lost when the good faith purchaser acquired it.

The seminal case of Shogun Finance Ltd v. Hudson in the House of Lords further dealt with this issue.17 Here, the rogue armed with the driving license of a Mr. Patel negotiated for the purchase of a car on credit. The credit company was supplied with a copy of this license together with Mr. Patel’s details and having checked his credit history instructed the dealership to proceed with the sale. The real Mr. Patel was entirely unaware of this transaction and having driven away in this new car the rogue sold it to Mr. Hudson. The credit company sought to recover the car or its value from Mr. Hudson who argued that he acquired good title to the car. The House of Lords (upholding earlier decisions) found that this could fall under the same category as face to face contracts and resulted in Mr. Hudson, an innocent party, suffering the entire loss.

Where the mistake relates to the subject matter of the contract, rather than the identity of the person, this generally involves circumstances where the parties are at cross purposes and have not come to a genuine agreement. As noted earlier, it is not the parties’ subjective intentions that will be considered, but, for the sake of commercial certainty, the objective inference from their conduct.18 In Raffles v. Wichelhaus the defendant agreed to purchase 125 bales of Surat cotton to arrive “ex Peerless from ­Bombay.”19 There were two ships both called Peerless and both sailed from ­Bombay. The defendant meant the one that sailed in October and the plaintiff meant the one that sailed in December. The defendant refused to accept the goods and it was accepted by the court that he was not liable due to the ambiguity in the agreement. Once it emerged that there were two ships of the same name leaving the same port travelling to the same destination it was impossible to say whether a genuine agreement had been reached.

Common Mistake

Where the issue is that of common mistake (where both parties are operating under the same misunderstanding) and if that mistake makes it impossible to perform or devoid or purpose, it may be voided. Thus in Couturier v Hastie there was a contract to sell corn which was thought to be on the way to London.20 Unbeknownst to either party the corn had already been sold and the House of Lords decided that the purchaser was not liable to pay. It is not conceptually difficult to understand the reasoning here, as the goods did not exist at the time that the contract was entered into. Different considerations arise where the mistake is to the quality of the subject matter rather than its existence. The leading case in this area is Bell v. Lever Bros.21 Here Lever Bros employed the plaintiff who was chairman of one of their derivative companies. They wished to terminate the contract of employment and offered to pay compensation for early termination which was accepted. Following this Lever Bros discovered breaches of duty which would have allowed them to dismiss without compensation. Bell had forgotten about the breaches at the time the contract for compensation was entered into (so there was no unilateral mistake) and Lever Bros sought to have the compensation returned for common mistake. Initially it was found that the contracts were void for this reason; however; the House of Lords found them valid and binding as the parties got exactly what they were bargaining for at the time the contract was entered into.

The matter is considered further in Great Peace Shipping Ltd v. Tsavliris Salvage (International) Ltd.22 In this case a ship was damaged at sea and the defendants entered into a contract with the plaintiff to hire a ship for five days to escort the damaged vessel. At the time the contract was entered into the defendants believed that the Great Peace was 35 miles away but in fact it was 400 miles away. Upon this discovery they searched for a closer ship to help which they found within a short space of time. They cancelled the contract and the plaintiff sought payment. The court of appeal acknowledged that there was a common mistake (they both thought that the ships were closer) but was this sufficient to render the contract void? It found not. It determined that the fact that they waited until after a substitute was found to cancel was of high importance in that they would still have required the services of Great Peace had an alternative not been discovered.23

Where a document is signed the courts tend to take a strict view. Where the signature has been induced by fraud it will be voidable but the right to avoid the contract will become lost where a bona fide third party acquires rights. The only avenue then open is to argue that the mind did not accompany the signature and the party seeking to avoid the contract may plead non est factum (it is not my deed). This defense operates to protect a person in circumstances where the deed has been incorrectly read to him. For example, in Thoroughgood’s Case the plaintiff who could not read was owed rent by a tenant.24 The tenant drew up a deed which was read to him by someone posing as a bystander. Instead of merely releasing the tenant from his debt, he also signed the rights to his property over. The tenant then sold the land to a third party. Thoroughgood succeeded in his action to reclaim his property. He was not bound by the deed as it was misrepresented to him. The effect of this defense is that the contract becomes null and void and therefore it is interpreted strictly due to the hardship it may cause to innocent third parties. Saunders v. Anglia Building Society (also known as Gallie v. Lee) provides the leading authority on the scope of this doctrine.25 Mrs. Gallie was an elderly widow who gave the deeds to her house to her nephew so that he (and a business associate named Lee) could use the property to raise money for a business venture but she stipulated that she must be able to live in the property for the rest of her life. Lee drew up a document which she could not read as she had broken her glasses. He told her that it was a deed of gift to her nephew. In fact it was a deed of sale to Lee for £3000. Lee failed to pay but rather mortgaged the property for his own benefit; this as well he failed to pay.The building society sought repossession of the house and the plaintiff sought to have the contract of sale voided on the grounds of non est ­factum in that her intention was to make a gift to her nephew and not sell to Lee. The House of Lords found that this defense could not be relied upon as it was not radically different from the document that she thought she was signing; she intended it to be used to raise funds for her nephew’s business. Additionally, this defense cannot be raised where a person has acted carelessly. Here she could have simply delayed signing the document until she was able to read it (bearing in mind that the defense was created for those who could not read).26

Misrepresentation

Where one party to the contract misrepresents certain aspects or elements of the contract it may be set aside. Until 1960’s there were only two types of misrepresentation; fraudulent or innocent. Damages were only available for fraudulent misrepresentation but the contract could be avoided for both types. As the law of damages expanded so did this area of contract law and there are now four types which we will consider in turn. Before examining these we need to look at what constitutes a misrepresentation. Essentially it is a false statement which induces a person into entering the contract. This must be a false statement of fact, statements of intention or opinion do not suffice. Additionally, there is no general duty to disclose facts and as a rule silence does not constitute misrepresentation. There are however certain exceptions to this rule. First, where there is not total silence but rather partial disclosure. This occurs where what is stated is true but misleading because other facts have been withheld. In Notts Patent Brick and Tile Co v. Butler, Butler wanted to sell his property which was subject to several restrictive covenants, including its prohibition from being used as a brickyard.27 The plaintiff brick manufacturing company enquired of the solicitor as to the existence of restrictive covenants who responded that he was not aware of any but did not say that he had not inspected the relevant documents. While the response was technically true (he was not aware of the covenants) it was misleading. The purchaser here was entitled to rescind the contract and recover his deposit. Another exception is where there is a change in circumstances. This arises where the statement was true at the time it was made but due to a change, it is no longer true. If the person who made the statement knows of the change he is under a duty to disclose it or it will be seen as a misrepresentation. In With v. O’Flanagan the defendant wanted to sell his medical practice and told the plaintiff that it generated £2000 per year.28 This statement was made in January and the contract was entered into in May. In those intervening months the defendant had become unwell resulting in the business worth drastically reducing. The change in these facts should have been disclosed and the contract was rescinded. This general exclusion on disclosure does not apply to contracts uberrimae fides. These are contracts of the utmost good faith and require full disclosure of all material facts, such as contracts for insurance.

In order for the misrepresentation to become operative, it must be made by a party to the contract to the other party to the contract. This representation must be relied upon, it must induce the party to enter into the contract. If the representation played no part in the decision to enter into the contract, the contract cannot be avoided on the grounds that it was a misrepresentation.29

Rescission is available for all types of misrepresentation, however, damages will be considered first and in this context the types of misrepresentation are important.

Fraudulent Misrepresentation

The definition of fraud was set forth in Derry v. Peek by Lord Herschell as “fraud is proved when it is shown that a false misrepresentation has been made, (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.”30 Thus the test for fraud is subjective, whether the person making the statement believes it to be true or not as distinct from being negligent as to the truth of the statement. Damages are available for fraudulent misrepresentation under the tort of deceit.

Negligent Misstatements

This action was established in the case of Hedley Byrne & Co Ltd v. Heller & Partners Ltd.31 It requires proof of a lack of reasonable grounds for the belief in the truth of the statement and also that there was a duty of care owed. In this context, negligent misstatement requires that there be a special relationship between the parties.

Legislation

Most common law jurisdictions now have legislation to deal with misrepresentation. In the UK the Misrepresentation Act 1967 allows for ­damages to be provided in cases of negligent misrepresentation.

Duress

Duress occurs where a person is forced into entering the contract by way of threats to themselves, their property or their loved ones. In such cases the courts have determined that these contracts are voidable at the behest of the one under duress. There are two factors that the court will look at in determining whether the contract was entered into under duress and these were set out in Enimont Overseas AG v. Rojugotanker Zadar, The Olib as:

• The illegitimacy of the threat and
• The lack of a reasonable alternative to agreeing32

Legitimacy of the Threat

In Universe Tankships Inc of Monrovia v. International Transport Workers Federation and Laughton it was confirmed that the threat must be an illegitimate one.33 In this case a Liberian corporation owned a ship under a flag of convenience. When the ship docked it was blocked by the ITWF who were attempting to get better conditions for the crew. In order to have the ship released the owners paid sums of money including to the welfare fund. Once it was released they sought the return of the money as it had been paid under duress. The court found on the basis of public policy that this economic duress was illegitimate and allowed recovery.

In the absence of special circumstances the threat of any unlawful act (civil or criminal) will be illegitimate. The case of CTN Cash and Carry Ltd v. Gallaher found that in principle it is possible for duress to be based on a lawful threat, although in this particular case no duress was found to be present.34

Lack of Reasonable Alternative

This is a second requirement only where what is threatened is not a ­criminal offence. In Pao on v. Lau Yiu Long the Privy Council in ­examining duress found that there had to be a coercion of will which vitiates consent and an important factor in determining whether or not that person acted voluntarily was the availability of a reasonable alternative.35 It is suggested that what constitutes a reasonable alternative is too vague and allows the court to exercise far reaching discretion.

Defeating Contractual Liability in the United States

Mistake

Mistake is equally a ground for avoidance of contractual liability in the United States. Mere misunderstandings, where these are not manifest or known to the other party, will not defeat contractual liability. This means that subjective intention is not taken into account to determine if a valid contract was formed, rather the outward conduct of the parties in words or in deeds that by their nature would lead a reasonable person to believe that a contract had indeed been formed.36 This requirement is particularly determinative for informal (unwritten) contracts, where the conduct of the parties provides the best evidence of whether they, in fact, intended to be bound.37

Mutual mistake involves cases where both parties contract under a mistaken belief. In Sherwood v. Walker,38 both the buyer and seller of a cow believed it to be infertile. After the contract was concluded, it was discovered that the cow had been pregnant. The court here held that the contract was voidable because both parties had contracted under a mistaken belief that materially affected the bargain struck. The holding was slightly different in Wood v. Boynton, where a woman sold a stone she believed to be of little value to a jeweler for $1.00, whereas the stone after inspection turned out to a rough diamond worth $700.00; the court held that because both parties to the contract were agnostic as to the nature of the rock, there was no mutual mistake capable of defeating the imprudent bargain.39 These cases demonstrate that both parties must share a ­mistaken belief as to the nature and quality of, for example, the thing being sold, for mistake to dissolve the bargain. Shared ignorance, however, will not allow dissolution.

Unilateral mistake operates similarly to English law, and sometimes will focus on the knowledge of the other party to decide if the contract is voidable. The Restatement at §153 also allows for unilateral mistake to defeat a contract where a party has not been allocated the risk of mistake under the agreement and either the result of enforcement would be unconscionable, or the other side had reason to know of the mistake or caused the mistaken belief. The inquiry here often turns on whether the other party had reason to know of the mistake. In Tyra v. Cheney,40 Cheney, in a written bid for a contract on the repair of a school, forgot a term which made the bid substantially lower than it would have otherwise been. His counterparty seized upon his mistake, despite the obvious discrepancy. The court, held in this instance that mistake voided the contract, as Tyra should have known the bid was too low to be correct. However, in another case of a mistakenly low bid, the contract was not void where a contractor demonstrated that there were wide fluctuations often in the bids received (here, he would not have reason to know of the mistake).41

Misrepresentation

Under the Restatement §162, misrepresentation may occur even if the person making the representation is unaware that it is false. The misrepresentation must bear directly on a material element of the contract, and once made would induce a reasonable person to accept the bargain, or where the party who makes the misrepresentation knows that it would induce the other party to accept.42 Nondisclosure of a material issue on the part of one party equally constitutes a basis for voiding a contract, even where the party withholding information fails to correct a basic assumption made by the others, as this represents a breach of good faith and fair dealing.43 In the famous case of Stambovsky v. Ackley,44 the plaintiff bought a house without knowledge that it was widely rumored to be haunted. The seller had appeared in multiple publications claiming the house to be haunted as well. The court here allowed the buyer to avoid the sale, as the defendant had promoted the claim of haunting and this had bearing on the value of home; however, he had not disclosed this fact to the buyer. The court felt that the buyer would have no reason to inquire about whether the house was haunted, and the seller profited from this lack of understanding. Similarly, a seller who actively misrepresented that a home was free of termites on multiple occasions was not able to enforce a contract of sale.45

Duress and Undue Influence

Duress may result from the unlawful or illegitimate actions taken or threats made by a party to a contract in order to induce the acceptance of another party.46 It may also result where a person who is not a party to the contract creates the circumstances of duress; here, it may still be voidable, except where the other party did not know of the duress and acted on the contract in good faith.47 In language analogous to that found in English law, the duress must leave the victim no reasonable alternative to assenting to the contract.48 Duress can come in a variety of forms, from physical imposition (inflicting pain) to financial (threatening to ruin business reputation). A mere state of affairs that places a counter-party in a weaker position but is not due to unlawful or illegitimate action by the other party, or a third-party as described earlier, does not ground a claim for duress; thus, merely benefitting from the respectively weaker economic position of other party is not duress, when the party has not caused the imbalance.49

Undue Influence arises in situations where a party is deemed to be under the domination of the other party exercising persuasion.50 The party upon whom the influence is asserted must be in a position of subservience or dependence, and, unlike duress, the threats involved do not to be illegal or illegitimate. The case of Odorizzi v. Bloomfield School Dist.51 concerned a school teacher who sought to rescind his resignation he had tendered after he had been arrested on charges of homosexual behavior, which was then illegal in California. The defendant returned home after his arrest and booking process and having been awake for nearly 40 continuous hours to find the superintendent of his school district with others seeking his ­resignation. If he did not comply, they stated that they would embarrass him by revealing the circumstances of his arrest and stated that they needed an immediate response and he had no time to contact a lawyer, even though publication of his arrest could have had immense repercussions for his reputation and career. The court held that under these ­circumstances, the superintendent had unduly influenced the school teacher. None of the actions threatened by the superintendent were improper in themselves, but in the totality of the circumstances the schoolteacher could seek to void his resignation for oppressive conditions and statements made by his superior. Undue influence in the American and civilian systems are discussed in greater detail in Chapter 8 on Equitable Remedies.

Defeating Contractual Liability in the Civilian Tradition

In civilian tradition, even where it would appear that a contract which is valid and enforceable has been formed, one or both parties may seek to avoid the consequences of that contract on certain legal grounds. These grounds for avoidance are linked with the concepts introduced in the previous chapter of consent, cause, object/content. Where the consent of one of the parties to a contract is vitiated by mistake, deception, or duress, that party may seek to void the contract and thereby avoid their obligations under the contract. The French code divides mistake into categories: excusable or inexcusable.52 Generally, a party commits an excusable error when it does not know or have reason to know of the error that it was committing; an inexcusable error arises where the party seeking to avoidance of its obligations could reasonably have discovered the truth of the matter, or where they have assumed the risk of the mistake. Mistake caused by fraud is always excusable.53 The importance of this distinction cannot be understated, for where a party has committed an inexcusable error, they may be barred from avoiding their obligations under a contract. The civilian tradition displays a special solicitude for parties who have fallen into unfair contracts because of deceptive or misguided beliefs or violence emanating from other party, often allowing them to avoid the contract completely in circumstances where they would otherwise be unable to do so. For example, the French code allows avoidance in wider range of circumstances where a party has been a victim of fraud or duress.54 Likewise, though in a different sense, under the German code, a party may be required to pay compensation for avoidance of a contract where he knew or could have known of the reason for which the contract was invalid; if they did not or could not have known, no compensation will be due.55 Thus, the civilian tradition looks to the culpability of the party seeking to avoid a contract to determine whether avoidance is possible, and to what extent the other party should be compensated if the party does avoid the contract.

Mistake

The civilian tradition does not present a neat distinction between bilateral and unilateral mistake but focuses on the type of mistake and the ­consequences. Generally, a party to a contract cannot seek to avoid the consequences of a contract simply because the contract does not meet their expectations and their reasons for entering into a contract turn out to be misguided.56 We can contrast this with the situation where an innocent party has been lured into undertaking contractual obligations based on a mistaken understanding which was caused by the other party to the contract—for example, where the other party to the contract has negligently or actively deceived them.57 On the one hand we may feel sympathy for the party who fails to perceive its own error and enters into a contract on the mistaken premise; conversely, if we allowed individuals to avoid their contractual obligations because they do not meet expectations, this would severely impair the stability of contracts and the ability of all parties involved to rely upon them. The concept of mistake can be fairly intricate, but the consequences are certain if mistake is proven by the party seeking to invoke it: mistake vitiates consent and thereby allows the mistaken party to avoid their legal obligations under a contract. Because of the sweeping nature of this remedy, the circumstances for which a party may invoke mistake are decidedly narrow.

Types of Mistake

In the civilian tradition, mistake commonly is divided into two categories: mistake as to person, mistake as to the substance. To be an effective ground for avoidance, the mistake must reach the essence of the bargain being struck. Under the articulation of the French code, the mistake must reach to the essential qualities of the performance due under contract or the person with whom one is contracting.58 This is broadly followed in the German code.59 For example, if I enter into an agreement to buy a house which was advertised as being 3000 ft.² but is in actuality only 300 ft.², I might seek to avoid the contract on the basis of mistake. Mistake is not a ground for avoidance unique to the offeree, and might equally be invoked by the offeror, for example: if I sell a lamp at a rummage sale which I believe to be worthless, but which turns out to be an exceptionally valuable Tiffany lamp, I may seek to avoid the contract based on mistake. Thus, mistake is unique among the defects of consent for its availability to either party to a transaction.

Mistake can correspond to the cause/motive for which the contract was entered. To use the wording of the French Civil Code the mistake must concern the determinative or principal reason for which the contract was entered;60 or to phrase it another way the mistake must concern the reason but for which the party would not have entered into the contract. By contrast, the motives which may be peculiar to individual that do not reach to the essential nature of the contract are not a grounds for avoidance by reason of mistake.61 For example, if I have on important job interview and decide that having a well-fitting suit will surely secure me the job and I order a bespoke suit from a tailor, I cannot seek to avoid payment on the basis of mistake if I fail to get the job. My personal, undeclared expectations as to what effect the suit would have on the recruiter do not reach to the essence of the contract I entered into with the tailor for the bespoke suit. Note that this can be different when the expectations or assumptions form an express part of the contract.62

Risky or Uncertain Bargains

Contracts may often involve some element of risk or uncertainty, the question with regards to mistake is who should bear the consequences if things do not turn out as one of the parties expect; to remove doubt, risk can be contractually allocated to a party. For example, if I buy a sculpture of uncertain authorship, secretly believing it to be an early work by the sculptor Rodin, and upon appraisal I discover that it is a poor recreation of the work I believed it to be, I cannot seek to avoid that contract based on mistake. Similarly, a mistake as to the value of the thing being offered will not constitute a basis for avoidance due to mistake.63 However, if I buy the same sculpture for an exorbitant amount in a shop where it is attributed to Rodin, and I later find it is a fake, I can seek to avoid the contract, as the authorship was, in this case, a fundamental and determinative quality for which I made the purchase as evidenced by the amount I paid. The representation as to authorship as my motive for entering into the transaction shifts the risk of forgery to the seller who sold it on this quality. This holds for uncertain contracts as well, if a fisherman buys a high-quality, expensive fishing net believing that it will more than pay for itself by increasing the yield of his fishing expeditions, he cannot seek later to avoid that contract on the basis that it has provided no increase in the amount caught. The increased yield the fisherman expected does not bear upon the quality of the net he purchased. This results as the motive of increased fishing yields was personal to the fisher and not shared between him and the buy as a basis for entering into the transaction.64 Under the French system, agreement to a risk effecting the quality of performance under a contract will not allow avoidance. For example, if I agree to buy all the crops yielded from a farmer’s harvest for a certain year, I may not seek avoidance where an unusually cold year means that the yield is much less than expected.65

Inexcusable Mistake

As well, a failure to reasonably investigate or ascertain relevant information as to the essential qualities of an item in question may defeat any effort to avoid a contract on the basis of mistake.66 When the mistake of a party is attributable to their own fault or negligence, that party may either be unable to avoid their contractual obligations on the basis of that mistake, or alternatively may be responsible for damages caused to the other party by not keeping up their end of the bargain, but may nevertheless be able to avoid the contract itself. In the German system, the contract might still be avoided, but compensation must be made to the other party where the party knew or should have known of the grounds for invalidity.67

Common Mistake

In the French system, when parties to a contract proceed on the basis of a common mistake in understanding they are generally able to avoid their obligations under the contract, if again that mistake reaches to the essential nature of the contract or motive of the parties for entering into the contract. No distinction is made between uni- and bilateral mistakes.68 In the German system, bilateral mistake can give rise to additional grounds for seeking avoidance—among these, failure of contractual foundation (see Chapter 6).69

Fraud

Equally, fraud can constitute a ground for avoidance of a contract.70 Fraud can be conceived as an active misrepresentation by one party where this misrepresentation is intended to induce the other party to give their consent to a contract.71 Failure to disclose information of a decisive character or that is materially important can also be grounds for avoidance.72 Fraud may be perpetrated by one party to a contract or by an agent acting on their behalf such as an employee, or by a third party acting in concert with the party perpetrating the fraud. The mistake occasioned by fraudulent representations is always excusable in French law.73 Mistake as to the value of a thing, or a motive personal to the party seeking avoidance which did not form an essential quality or attribute of the person or thing which form the basis of the contract, as we saw earlier, is not an excusable error (basis upon which to avoid a contract); however, where a fraudulent representation is the cause of such a mistake as to value or forms the motive for entering into a contract, then the mistake is always excusable and may be used to avoid the contract.74

Duress

Duress involves a different set of circumstances.75 Specifically, it concerns those instances where a party to a contract gives their consent under threat of harm to befall him or one of his close relatives, his wealth or fortune, honor or good name, or their property, and the threat is unlawful.76 This latter-most requirement, that the threat be unlawful, ensures the threat of legal action does not constitute duress.77 For instance, if I accidentally injure another person and they threaten to sue me, I might agree to pay their medical bills and a small sum of money in exchange for him not taking legal action against me, which would likely be lengthy and expensive and in which he would likely prevail. In this example, I cannot later seek to have that contract set aside on the basis of duress, because the other person was legally entitled to bring an action against me in court and such a threat to do something which he or she is legally entitled to do, even if it has the effect of causing me to enter into a contract based on a fear of damage to reputation or finances, is generally permissible, unless the individual abuses their right to strike a manifestly unfair bargain.78 Instances of duress can also arise in French law where one party is in a state of dependency79 to the other. The German code similarly rejects exploitative bargains where a party has abused the naïveté, weakness of will, or predicament of another to gain a manifestly disproportionate advantage.80