C. Mistaken Assumptions

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 526-555

Contenidos

• 1) Introduction.
• 2) At Common Law.
• 3) In Equity.
• 4) Rejection of the Equitable Doctrine by the English Court of Appeal.
• 5) Unilateral Mistake in Assumptions.

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1) Introduction

The law of "mistaken assumptions" enables courts to treat as unenforceable agreements that have been entered into on the basis of erroneous assumptions concerning the context of the agreement in question where enforcement of the agreement would inflict an injustice on one of the parties. In a mistaken assumptions case, the parties reach agreement on the terms of their contract but share an error with respect to some important contextual circumstance that has motivated one or both of the parties to enter the agreement. The parties might not appreciate, for example, that goods that are the subject matter of a sale had been destroyed by fire prior to the entering into of the agreement. In determining whether an agreement should be considered unenforceable by reason of the mistaken assumption that infects its creation, courts must engage in a delicate exercise of balancing the competing values of contractual stability and the provision of relief in cases of severe injustice.

Doctrines that have the effect of enabling the parties to escape from their liabilities under an agreement entered on the basis of a mistaken assumption developed at both common law and equity. As we shall see, the relationship between common law and equitable doctrines has been and, in England particularly, continues to be a source of controversy. After examining the development of common law and equitable doctrines concerning contracts entered into on the basis of a shared or "common" mistaken assumption, we will consider whether relief from a transaction might appropriately be awarded in a case of a "unilateral"

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mistaken assumption where one of the parties suffers from such a mistake, but the other does not.

2) At Common Law

Much controversy surrounds the common law doctrine rendering contracts void on the basis that the agreement in question has been entered into by the parties on the basis of a common and mistaken assumption concerning a material fact. Nonetheless, it is clear that relief in this form is available in two classes of cases. The first, referred to as res extincta, holds agreements for the sale of goods void in circumstances where the parties are unaware that the goods had ceased to exist at the time of contracting. The most frequently cited illustration of this proposition is Couturier v. Hastie,¹⁰⁰a case holding void a contract for the sale of a cargo of corn that, unbeknownst to the parties, had ceased to exist at the time of contracting. This common law doctrine was enshrined by Sir MACKENZIE Chalmers¹⁰¹in the English sale of goods legislation.¹⁰²Relief would not be available, however, if the seller had explicitly or implicitly warranted the existence of the goods.¹⁰³The second category, cases of res sua, are those in which a purchaser later discovers that at the time of contracting he or she already owned the subject matter of the sale. Such agreements are also void at common law. Interestingly, the authority most frequently cited for this proposition is in fact a decision of a court of equity. In Cooper v. Phibbs,¹⁰⁴a lease of a fishery was set aside on the ground that the lessee, at the time of entering the lease, was already entitled to an equitable life estate in the property. As we shall see, the precise significance to be attached to the equitable nature of this authority has been a matter of some controversy. Nonetheless, it appears to be well accepted that, in a case of res sua, the contract is void at common law.

Beyond these two categories, the scope of the common law doctrine has been and, indeed, remains rather unclear. Certainly, however, com-

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mon law courts have held agreements void in a range of circumstances beyond those of res extincta and res sua. The difficulty lies, however, in articulating the basis on which other types of circumstances will ground a holding that the agreement is void for mistake. The various versions of the requirements articulating the test for operative mistake may be characterized as being either "narrow" or "broad." Though the narrow versions of the test appear more restrictive or difficult to apply than the broader and seemingly more flexible versions of the test, it may well be that the precise nature of the test will not be dispositive of the outcomes in particular cases. The narrow conception of the common law doctrine is applicable only where, by way of extension of the doctrine of res extincta, it can be said that the "subject matter" of the agreement "ceases to exist" because of a mistake. In Strickland v. Turner,¹⁰⁵for example, it was held that the purchase of an annuity where the annuitant was in fact already dead at the time of sale was void. This result can be explained on the basis that the subject matter of the agreement - an annuity on the life of a living person - had ceased to exist at the time of contracting. A similar explanation can be offered for the decision in Scott v. Coulson,¹⁰⁶a case in which the sale of a life insurance policy on the life of one A.T. Death was held void when it was discovered that, by the time of contracting, Death had in fact died. The value of the policy was thus very different from what the parties had initially assumed. If one defines the subject matter of the agreement to be "a life insurance policy on the life of a living person," the agreement could be held void on the basis that that subject matter did not exist at the time of contract.¹⁰⁷Similarly, in the much-taught American case of Sherwood v. Walker,¹⁰⁸the sale of a cow, Rose 2d of Abalone, which, although assumed by the parties to be barren, was with calf at the time of contracting, could be held to be void on the basis that the subject matter of the agreement, a barren cow, did not exist at the time of entering the agreement. In reply, of course, it would be argued that the subject matter of the contract is a cow or, indeed, Rose 2d herself. As these decisions illustrate, the "non-existence of the subject matter" test is a highly manipulable one. One can artfully characterize the subject matter of the contract in such a way as to either deny relief or make it

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available. The test thus offers little guidance as to when the common law doctrine will apply.

Other judges tend to articulate a broader test in terms that stress the "basic" or "fundamental" nature of the mistake in question. Thus, in Scott v. Coulson itself, Vaughan Williams L.J. explained the result on the basis that "both parties entered into this contract on the basis of a common affirmative belief that the insured was alive; but as it turned out that this was a common mistake, the contract was one which cannot be enforced. This is so at law ... , if the basis which both parties recognize as the basis is not true."¹⁰⁹Romer L.J. reasoned that the defendant "must be taken to have known that the basis on which the contract had been entered into, and the common belief on which both parties had acted, did not exist. That was a circumstance which went to the root of the matter, and rendered it improper to insist upon the completion of the contract."¹¹⁰Although Romer L.J.’s reference to the fact that the basis for the agreement did not exist shows traces of the non-existence of the subject-matter test, the emphasis placed on the mistake being required to be one with respect to a matter that forms the basis of the agreement appears somewhat broader than the subject-matter test.

A similar approach was taken by Blackburn J. in Lord Kennedy v. Panama, New Zealand and Australian Royal Mail Co. (Ltd.),¹¹¹a case involving a purchase of shares on the basis of a prospectus that falsely stated that the company had secured an attractive agreement with the government of New Zealand to provide mail services. Blackburn J. articulated the test for holding the agreement void for mistake in the following terms: "the difficulty in every case is to determine that 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 effect the substance of the whole consideration."¹¹²Applying this test to the circumstances of the case, Blackburn J. concluded that although the mistake had formed a material part of the motive for applying for the shares, the mistake did not prevent the shares from "being in substance those [the plaintiff] applied for."¹¹³These broader tests in terms of fundamental error may be supported on the basis that they are more flexible in the sense that they avoid the verbal manipulations inherent

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in the narrower tests. On the other hand, they may be thought to suffer from an unattractive degree of generality or vagueness.

On the basis of such authorities, then, the doctrine of mistaken assumptions at common law had obviously remained in a rather unsatisfactory state. There appears to have been no clear consensus as to the nature of the test to be applied. Moreover, the reasoning in the cases does not provide a convincing explanation for either the granting or the withholding of relief. The difference between Strickland v. Turner and Lord Kennedy’s case appears to be that the purchaser in the latter case assumed the risk that the description of the company’s business in the prospectus might not be perfectly accurate, whereas the purchaser in the former case did not assume the risk that the annuity being purchased might be valueless. The one fact that appears to be common to the actual cases granting relief is that the mistaken assumption has led to a drastic miscalculation of the value being acquired by one of the parties to the agreement. However, considerations such as these, while no doubt present in the minds...