Учебный год 22-23 / Mistake, Fraud and Duties to Inform in European Contract Law (The Common Core of European Private Law)-1

the case where there is agreement on the terms but on a wrong assumption by one or both parties as to the facts or surrounding circumstances of their transaction: cases, therefore, where the mistake may ‘nullify’ (rather than ‘negative’) the consent.3 Towards the end of this paper there will also be a brief discussion of one form of mistake which negatives consent -- mistake of identity.

The starting point is clear: even in the period when mistake was at its most developed, under Lord Denning, there has been some reluctance to allow a party to escape a contract on the basis of his own mistake. This is not to say that English law has difficulties with the very notion of mistake: in the case of payments made under a mistake, the courts have been rather more open to admitting remedies.4 Or where a gratuitous transaction, such as a deed of gift, is entered into under a mistake the courts have more easily found a remedy.5 But when the claim is that the mistake is sufficient to avoid a contract, that is a different matter. Judicial instinct seems to rise against the claim. If both parties in fact assented to the contract, why should one party now be allowed to revoke his assent? That would injure the other party (the defendant, let us assume) -- who either did not share the mistake (so why should he lose the benefit of the bargain, just because the claimant now shows that he misunderstood something about the subject matter of the contract, or the circumstances surrounding the transaction?) or shared the mistake but does not want to complain (so why should the claimant be able to do so, and deprive the defendant of the bargain?). English law does not generally see mistake as part of a unified theory of (defects of) consent;6 and the judges tend to start from the position that if one party has, by providing consideration, bought into a bargain he should not easily be deprived of the benefit of it.7 The other party’s consent might have been vitiated by the mistake; but it takes more than that to justify his avoiding the consequences of having given his consent. There is a balance to be struck: the claimant’s mistake against the security of the defendant’s bargain. If the defendant caused the claimant’s mistake, then the scales tip in favour of the claimant: the defendant can no

3General Introduction to this volume, Part I, section 1. Amongst the principal English textbook writers the language of ‘negativing’ and ‘nullifying’ consent is used only by G. H. Treitel, The Law of Contract (11th edn, London, 2003), p. 286 taken from Lord

Atkin’s judgment in Bell v. Lever Brothers Ltd [1932] AC 161, p. 217.

4 R. Goff and G. Jones, The Law of Restitution (6th edn, G. Jones, London, 2002), chapter 4. 5 Gibbon v. Mitchell [1990] 1 WLR 1304 at p. 1309; Goff and Jones, Law of Restitution,

§§ 4-020--4-022.

6 General Introduction, p. 3.

longer insist on the bargain being protected.8 But then we are in a different chapter of the English contract books: misrepresentation. Amongst English textbook writers the failure to make the link between mistake and misrepresentation -- a consequence of the failure to see mistake and the other vitiating factors as a coherent theory -- has tended to isolate mistake. If the defendant did not cause the mistake, then he is entitled to insist on his bargain. The strongest version of this theory is found in one of the cases from the first life of mistake, Smith v. Hughes,9 in which the court was clear that a party could insist on the contract even where at the time of its formation he knew that the other party was labouring under a mistake as to the subject matter of the contract, just as long as he did nothing to cause it and made no contractual promise that the facts were as the claimant mistakenly believed them to be. This strong view has so far survived through the development of mistake, although it might not survive forever.10 It is closely linked to the reluctance in English law to impose duties of disclosure and information. A legal system that allows a party to avoid a contract by reason of his mistake can more easily also admit that, where the other party did not cause the mistake but could have disabused him of it, then he should have done so -- there was a duty to inform. But a system, such as English law, that is reluctant to allow mistake to vitiate the contract, and even allows a party to remain silent when he knows the other party is making a mistake, is naturally reluctant to embark on the development of a general duty to inform.

The first life of mistake: the nineteenth century

It is well-documented11 that the rise of the doctrine of mistake in the English law of contract begins in the nineteenth century under the influence of the civil law, both ancient and modern. The early cases, so far as they involved an issue which can be recognised now as within the general principles of mistake,12 tended to reason not from a doctrine of mistake, but from the construction of the terms of the agreement. There

8 J. Cartwright, Misrepresentation (London, 2002), § 1.02.

9 (1871) LR 6 QB 597. 10 Cartwright, Misrepresentation, § 3.76.

11A. W. B. Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247; D. Ibbetson, A Historical Introduction to the Law of Obligations (Oxford, 1999), chapter 12.

12The language of mistake comes late into the cases because of the restriction, before the middle of the nineteenth century, on the parties giving evidence (and therefore on giving evidence as to their understandings): Ibbetson, Historical Introduction to the Law of Obligations, p. 226.

is an implied contract, or an implied condition, as to the absence of the mistake.13 The reasoning is sometimes also based on total failure of consideration: where the transaction was void as a result of the mistake, but money had been paid under it, then the money is recoverable.14 The judges who reasoned along these lines generally made little or no comparative use of the civil law. But there were other cases in which an appeal was made to Roman or French law to explain the reasoning.

Lord Blackburn was not alone in making the comparison with the civil law, but he appears to have been the judge of the period with the strongest inclination to use comparative law techniques -- and he was influenced not only by Roman law but also by French law and, in particular, by Pothier.15 When still at the Bar he wrote an authoritative treatise on the contract of sale, in which he drew heavily on French law ideas and in particular on Pothier’s treatise on sale.16 He maintained

13Simpson, ‘Innovation’, p. 268; Barr v. Gibson (1838) 3 M & W 390 at pp. 399--400, 150 ER 1196 at 1200 (contract for sale of ship which had already been lost: Parke B: the sale ‘implies a contract that the subject of the transfer did exist in the character of a ship’); Couturier v. Hastie (1856) 5 HLC 673 at p. 681, 10 ER 1065 at p. 1069 (contract for sale of corn which had already been sold in Tunis because it was not fit to bring to London: Lord Cranworth LC: ‘The contract plainly imports that there was something which was to be sold at the time of the contract, and something to be purchased’);

Pritchard v. Merchant’s and Tradesman’s Mutual Life-Assurance Society (1858) 3 CB(NS) 622 at p. 640, 140 ER 885 at p. 892 (life insurance policy renewed on date when insured had already died: Williams J: ‘the premium was paid and accepted upon an implied understanding on both sides that the party insured was then alive. Both parties were labouring under a mistake, and consequently the transaction was altogether void’).

14Strickland v. Turner (1852) 7 Ex 208 at p. 219, 155 ER 919 at p. 924 (purchase of life annuity on a date when annuitant had already died: Pollock CB: ‘the annuity became the property of Strickland, and the money the property of the vendors. The money, therefore, which was paid, was paid wholly without consideration, and may now be recovered back from the defendant . . .’); Pritchard v. Merchant’s and Tradesman’s Mutual Life-Assurance Society (1858) 3CB(NS) 622 (purchase money recoverable as paid under a mistake of fact -- i.e., a mistake as to the validity of the contract).

15For an account of the influence of Pothier on the common law generally see B. Rudden, ‘Pothier et la Common Law’ in J. Monéger (ed.), Robert-Joseph Pothier, d’hier à aujourd’hui (Paris, 2001), p. 91, who notes (at p. 97), on the evidence of the English Reports 1220--1865, that Pothier was cited more than 400 times by judges or counsel in the English courts in the first half of the nineteenth century. Using the electronic text available at www.justis.com a search of domestic (i.e., not Privy Council) cases in the Law Reports in the nineteenth century after 1865 also yields a picture of numerous citations of Pothier by counsel and a wide range of judges, but includes more citations by Lord Blackburn than any other judge (eight citations, compared with four by Pollock CB, three by Fry LJ and one or two by a range of other judges).

16C. Blackburn, A Treatise on the Effect of the Contract of Sale on the Legal Rights of Property and Possession in Goods, Wares and Merchandise (London, 1845), with cross-references to

consistently that the use of the civil law was not as an authority (in the common law sense of the word) but to illustrate and inform the legal argument.17 And, as Blackburn J, he developed the foundations of the modern law of frustration in a way which kept faith to the common law view of a contract -- that the doctrine of frustration should be founded in the contract, so that if the supervening event justified its termination this could be held to be the consequence of a condition implied into the contract -- but also claimed that this was consistent with the Roman law and French law approach:18

. . . where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.

There seems little doubt that this implication tends to further the great object of making the legal construction such as to fulfil the intention of those who entered into the contract. For in the course of affairs men in making such contracts in general would, if it were brought to their minds, say that there should be such a condition.

Accordingly, in the Civil law, such an exception is implied in every obligation of the class which they call obligatio de certo corpore. The rule is laid down in the Digest . . . The general subject is treated of by Pothier, who in his Traité des Obligations, partie 3, chap 6, art 3, §668 states . . .

Although the Civil law is not of itself authority in an English Court, it affords great assistance in investigating the principles on which the law is grounded.

French law at pp. 112--13 (code de commerce), pp. 170--200 (a chapter on the difference between English law and the ‘civil law’ on the transfer of property without delivery, with extensive quotations from Pothier’s Contrat de vente) and 202--4.

17E.g. McLean v. Clydesdale Banking Company (1883) 9 App Cas 95 at p. 105 (an appeal from Scotland: ‘We constantly in the English Courts, upon the question what is the general law, cite Pothier, and we cite Scotch cases where they happen to be in point; and so, in a Scotch case you would cite English decisions, and cite Pothier, or any foreign jurists, provided they bore upon the point’); Westropp v. Elligott (1884) 9 App Cas 815 at p. 827 (an appeal from Ireland, and citing Pothier’s Du Contrat du Louage: ‘Though the effect of the purpose being shewn may be different in the foreign law from that which it has in English law, yet the reason and the sense of the thing is very often to be found in the writings of the great Roman and foreign jurists’).

18Taylor v. Caldwell (1863) 3 B & S 826 at pp. 833--5, 122 ER 309 at pp. 312--13.

It is therefore perhaps not surprising that, when faced with an argument about mistake in contract, Blackburn J should similarly have blended civil law concepts with the traditional common law approach. In giving the judgment of the court in Kennedy v. The Panama, New Zealand and Australian Royal Mail Co Ltd19 it was Roman law, rather than Pothier, that he used to explain how the common law’s approach to mistake is really the same as that of the civil law -- starting from the proposition that, in the absence of fraud20 or warranty, the contract can be avoided by a party making a mistake as to the subject matter only if the effect of the mistake was so serious as to constitute a failure of consideration: if the thing delivered was not at all in substance the thing that the parties had contracted about:

There is . . . a very important difference between cases where a contract may be rescinded on account of fraud, and those in which it may be rescinded on the ground that there is a difference in substance between the thing bargained for and that obtained. It is enough to shew that there was a fraudulent representation as to any part of that which induced the party to enter into the contract which he seeks to rescind; but where there has been an innocent misrepresentation or misapprehension, it does not authorize a rescission, unless it is such as to shew that there is a complete difference in substance between what was supposed to be and what was taken, so as to constitute a failure of consideration . . .

The principle is well illustrated in the civil law, as stated in the Digest, lib 18, tit 1 De Contrahenda Emptione, leges 9, 10, 11 . . . And, as we apprehend, the principle of our law is the same as that of the civil law; and the difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole consideration, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration.

Some cases were referred to on the argument, in which the question was, whether a stipulation in a contract was a condition precedent or not. Those cases are, no doubt, analogous, as the question in such cases very much depends on whether the stipulation goes to the root of the matter or not; but they are only remotely analogous; and after all, the decisions can never do more than

19(1867) LR 2 QB 580 at pp. 587--8 (contract for purchase of shares in company where the directors had -- without fraud -- made false statements relevant to the company’s business; purchaser sought to obtain a return of the price paid as money had and received).

20In this case, in 1867, it was natural to limit the reference to fraudulent misrepresentation: the common law gave no remedy for innocent misrepresentation. After Redgrave v. Hurd (1881) 20 ChD 1 (also, therefore, after the fusion of the common law and equity jurisdictions) it became clear that any misrepresentation, fraudulent or innocent, could render the contract voidable.

illustrate the principle, and the question must depend on the construction of the contract and the particular circumstances of the particular case.

It was misleading for Blackburn J to say that his doctrine of mistake was the same as the civil law,21 and it would be better to say22 that Blackburn J borrowed from Roman Law the general principle that a contract can be void for a mistake as to the substance of the consideration -- the fundamental characteristics of the subject matter of the contract. At just the same time, English textbook writers were similarly using civil law references to explain the newly discovered doctrine of ‘mistake’ in the law of contract.23 The first substantive discussion of the principles of mistake appeared in Leake’s Elements of the Law of Contracts in 1867,24 which introduced the topic by reference to Roman law, the French Code civil and Pothier but expounded the English cases25 and their familiar principles: the question is one of construction of the contract; ‘whether the agreement is made absolutely, or only conditionally upon and with reference to the state of circumstances supposed by mistake, so that upon the real state of circumstances the agreement is inoperative and void’. The second edition of Leake26 kept the same structure and ideas to explain mistake, but added in the citation of Blackburn J’s judgment in

Kennedy.

21F. de Zulueta, The Roman Law of Sale (Oxford, 1945), pp. 26--7; Associated Japanese Bank (International) Ltd v. Crédit du Nord SA [1989] 1 WLR 255 at p. 268.

22Ibbetson, Historical Introduction to Law of Obligations pp. 227--8. It should be noted that, by the time of these developments in England, French law had developed beyond the Roman Law principles and even beyond Pothier’s own view of mistake as to the subject matter of the contract, by enacting in the Code civil of 1804, arts. 1110 and 1117, that a mistake as to the substance mˆeme de la chose can give rise to nullité but does not automatically make the contract nul; nullité only follows upon an action en nullité (although there is a question whether this was an intentional shift beyond Pothier: J. Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991), p. 188). Roman Law and Pothier however remained the principal points of comparison for English law, no doubt because of their currency amongst the English judiciary.

23Simpson, ‘Innovation’ p. 267; Ibbetson, Historical Introduction to Law of Obligations p. 227.

24Chapter 1 (‘The Formation of Contracts’), section VI, § 1 (‘Mistake’). Benjamin’s first edition of his treatise on sale in 1868 explicitly drew on the civil law, as even its title made clear: A Treatise on the Law of Sale of Personal Property with References to the American Decisions and to the French Code and Civil Law. Without, however, cross-referring on this point to French or Roman law, it stated a limited doctrine of mistake and just cited the common law cases such as Strickland v. Turner: pp. 38--9, 303.

25Including Barr v. Gibson, Couturier v. Hastie, Strickland v. Turner and Prichard v. Merchant’s and Tradesman’s Mutual Life-Assurance Society, above, fns. 13 and 14.

26Pages 344--5.

The second life of mistake: the twentieth century

There were two landmark cases in the law of mistake in the twentieth century. The first was the decision of the House of Lords in Bell v. Lever Brothers Ltd;27 the second the decision of the Court of Appeal -- and, in particular, the judgment of Denning LJ -- in Solle v. Butcher.28

Bell is a difficult case to interpret,29 but it is clear from the case that we can now speak of a doctrine of mistake in the English law of contract. Even if the parties both assented to the same terms, the contract will still be void if one party made a sufficient mistake of the other’s identity; or if both parties made the same mistake about the existence of the subject matter or a sufficiently serious mistake about its quality.30 Interesting for our purposes is the continuity of this decision with the cases of the nineteenth century. Lord Atkin relied31 on two key decisions of Blackburn J as the ‘authoritative expositions of the law’: Kennedy v. Panama32 and Smith v. Hughes.33 And he presented the law of mistake in a way which follows naturally from the common law view of the earlier cases: the first question is always to examine the terms of the agreement itself and see whether one party has contracted to bear the risk of the mistake.34

Looking back to how mistake was developed in the second half of the nineteenth century we can see that there was always an inevitable tension. The ‘will theory’ of contract, based on a subjective meeting of the minds of the parties, competed with the objective theory of contract formation.35 For a contractual theory based on the subjective intentions of the parties, a mistake is the principal obstacle to a valid contract:36

27 [1932] AC 161. 28 [1950] 1 KB 671.

29The question was whether contracts to terminate two employees’ contracts of employment with severance payments were void because neither the employer nor (as the jury found) the employees had it in their minds that the employees had committed prior breaches of duty which would have justified the employer dismissing them without payment. The House was divided on the outcome (the majority held the termination contract valid, not void); and gave differing reasons. But it appears that the real difference -- and the difficulty of interpretation of the case -- was only in their Lordships’ analysis of the facts and therefore the application of the law to the facts: in effect, they disagreed about what mistake the parties made. See J. Cartwright, ‘Solle v. Butcher and the Doctrine of Mistake in Contract’ (1987) 103 LQR 594 at p. 599; Lord Wright, Legal Essays and Addresses (Cambridge, 1939), p. 262; Associated Japanese Bank (International) Ltd v. Crédit du Nord SA [1989] 1 WLR 255 at p. 267.

30Lord Atkin at p. 217.

31At pp. 219, 221. See also Lord Warrington at p. 208 and Lord Thankerton at p. 233.

32 Above, fn. 19. 33 Above, fn. 9. 34 At pp. 217, 218.

35Ibbetson, Historical Introduction to the Law of Obligations, ch. 12.

36R. J. Pothier, Le traité des obligations (Paris, 1761), para. 17.

L’erreur est le plus grand vice des conventions: car les conventions sont formées par le consentement des parties; et il ne peut pas y avoir de consentement, lorsque les parties ont erré sur l’objet de leur convention.

But this is too bold: even a system committed to assessing the existence of a contract by reference to a subjective assessment of the parties’ intentions must draw the line somewhere -- some mistakes will not suffice to invalidate the contract, otherwise the non-mistaken party’s bargain is too insecure. Different systems may strike the balance in different ways, but nonetheless a balance has to be struck.37

The nineteenth-century judges never quite settled the question of whether mistake was an independent doctrine or just part of the analysis of the parties’ agreement. This was an era when the parties’ agreement was everything:38 and so if there was a defect in the agreement which justified its avoidance, it was natural to present the solution as being embodied in the agreement itself. The parties’ agreement must have been based on certain implicit assumptions: if those assumptions were not correct, then the agreement is avoided -- but because the parties must have intended it to be so. As we have seen, the earlier cases had tended to find implied conditions in order to resolve issues of mistake. At the time of Bell v. Lever Brothers this was still a form in which an argument of mistake could be presented. In the case of one party’s mistake about the other party’s identity, it is natural to ask whether the one party intended to deal with (and only with) the person he mistakenly thought the other party to be -- and, if so, to hold that the contract is void for lack of agreement.39 But when the question is as to the existence or quality of the subject matter, it is not so clear whether the parties’ ‘intentions’ -- and therefore a term of the contract giving effect to those intentions -- can so easily solve the matter. Sir John Simon KC, counsel for Lever Brothers, drew the analogy between mistake, frustration and implied terms, and suggested that all three were based on the intentions of the

37For a discussion of French law (which starts from a subjective theory of contract formation) and English law (which does not), see J. Cartwright, ‘Defects of Consent and Security of Contract: French and English Law Compared’ in P. Birks and

A. Pretto (eds.), Themes in Comparative Law in Honour of Bernard Rudden (Oxford, 2002), p. 153.

38In addition to the doctrines of mistake and frustration, see Lloyd v. Guibert (1865) LR 1 QB 115 at pp. 120--1 (proper law of the contract attributed to the ‘presumed intention’ of the parties); The Moorcock (1889) 14 PD 64 at p. 68 (implied terms based on the ‘presumed intention’ of the parties).

39Bell v. Lever Brothers [1932] AC 161 at p. 217 (Lord Atkin). Mistake of identity is discussed further below.

the new state of facts makes the contract something different in kind from the contract in the original state of facts . . . We therefore get a common standard for mutual mistake, and implied conditions whether as to existing or as to future facts. Does the state of the new facts destroy the identity of the subject-matter as it was in the original state of facts?

This analysis pulls together three areas of the law of contract: mistake, frustration and implied terms. Lord Atkin’s view was that it is possible to define by reference to the parties’ ‘intention’ the circumstances in which a contract will be void for mistake, discharged for frustration, or subject to unexpressed (implied) terms. But he made clear that a test is still required to decide what it was that the parties intended. And in devising the test, we move away from the language of intention to a doctrine of mistake -- just as frustration began its life in the nineteenth century on the theory that it was the (real) intention of the parties that the contract should terminate,42 but during the twentieth century the courts began to admit that this ‘intention’ was a fiction, better replaced by a substantive test for the doctrine of frustration.43 The test of the

42Taylor v. Caldwell, above, fn. 18. In 1931, when Bell v. Lever Brothers was decided, it was still common to speak of the basis of frustration as being the ‘foundation’ of the contract or an ‘implied term’: W. A. MacFarlane and G. W. Wrangham (eds.), Chitty’s Treatise on the Law of Contracts (18th edn, London, 1930), pp. 828--32.

43Davis Contractors Ltd v. Fareham UDC [1956] AC 696 at pp. 728--9 (Lord Radcliffe): ‘there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves . . . By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. And the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.’ Similarly, the old idea of basing the proper law of the contract on the ‘presumed intention’ of the parties (above, n. 38) was replaced by an objective test: L. Collins (ed.), Dicey & Morris: The Conflict of Laws (13th edn, London, 2000), § 32--004. And it became clear that it was not sufficient to claim that implied terms were necessarily based on the intentions of the parties: Lister v. Romford Ice & Cold Storage Co Ltd [1957] AC 555 at pp. 576, 587, 594.