England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th November 2001

Mr Justice :TOULSON

Introduction

1. This case raises the vexed subject of mistake as a vitiating factor in the law of contract. There are many different ways in which a party may enter into a contract (or what outwardly appears to be a contract) under some form of mistake. It may be mistaken about the contracting parties, the terms, the subject matter or the surrounding circumstances. A mistake may be shared by both parties or may be unilateral. If it is unilateral, the other party may or may not be aware of the first party's misunderstanding. A party's mistake may be due to innocent or careless or deliberate misinformation provided by the other party, or a third party, or it may be due to none of these things. It might be expected that the courts would have developed a consistent and clearly defined set of principles for dealing with the various types of mistake which may commonly be made, but this is not so. In the famous case of Bell v Lever Brothers Ltd [1932] AC 161 Lord Atkin said at page 217 that:

"The rules of law dealing with the effect of mistake on contract appear to be established with reasonable clearness",

but counsel have taken me through all the leading cases since Bell v Lever Brothers Ltd and both were agreed that nobody could repeat Lord Atkin's claim today. So the greater part of the argument was spent in debating the law applicable to facts which are not complicated.

Facts

2. The story concerns two vessels, the "Cape Providence" and the "Great Peace". In September 1999 the "Cape Providence" was on her way from Brazil to China with a cargo of iron ore when she suffered serious structural damage in the South Indian Ocean. The defendants learned that the vessel was in difficulties and offered their salvage services, which were accepted. To find a tug they approached a firm of London brokers, Marint. The individuals involved at Marint were Mr Graeme Little and Mr Andrew Holder. A tug was found, but it was going to take five or six days for the tug to reach the "Cape Providence" from Singapore. There was serious concern that in the meantime the vessel might go down with the loss of her crew. So Mr Little was asked by the defendants' representative, Captain Lambrides, to try to find a merchant vessel in the vicinity of the "Cape Providence" which would be willing to assist, if necessary, with the evacuation of the crew.
3. Mr Little contacted Ocean Routes, a respected organisation which provides weather forecasting services to the shipping industry and receives reports about vessels at sea. Ocean Routes gave Mr Little the names of four vessels reported to be in the area. He was told that the "Great Peace" was the nearest to the "Cape Providence" and should be close to a rendezvous position within about twelve hours. Mr Little noted the names of the four vessels and the estimated position of the "Great Peace". Unfortunately the position which he was given was wrong.
4. At 20.30, British summer time, on Friday 24 September 1999 Mr Little telephoned a contact number for the "Great Peace's" managers, Worlder Shipping Limited of Hong Kong. The call was answered by Mr Pierre Lee. By Hong Kong time it was 03.30 on Saturday 25 September.
5. Mr Lee was a businessman with no seafaring experience. He had never personally negotiated the fixture of a vessel, because his company always used brokers. But it was the middle of the night and Mr Little explained that the situation was an emergency because of the potential danger to the crew. Mr Little said in his witness statement (which was admitted in evidence without cross-examination) that they did not discuss the exact position of either vessel. Mr Little simply advised Mr Lee that he believed from information received from Ocean Routes that the "Great Peace" was the closest vessel to the "Cape Providence". Mr Lee was not able to promise help there and then, because the "Great Peace" was under charter, carrying a cargo of soya beans from New Orleans to China, and the charterers would need to be consulted, but he asked Mr Little to send him details by fax.
6. Immediately after the conversation Mr Little faxed Mr Lee as follows:

Further to our telcon at 20.22 hours BST 24 September, we are working on behalf of the owners of a cape size bulk carrier which has suffered serious structural damage in the southern Indian Ocean. Her position at 10.27 hours BST today was 29 40S/80 20E. She is proceeding at 5 knots on course 050 degrees direction Sunda Strait. Owners have mobilised a tug from Singapore which should reach the casualty in the next 5/6 days. We understand from Ocean Routes that your vessel "Great Peace" is in close proximity to the casualty and have been asked by hirers to check whether it would be possible to charter the "Great Peace"on a daily hire basis to escort the casualty until arrival of the tug.

Would appreciate greatly if you can check soonest with charterers whether they can agree to the request, bearing in mind that the casualty is in serious danger.

7. The words "We understand from Ocean Routes that your vessel "Great Peace" is in close proximity to the casualty" are the foundation of the defendants' case that the parties proceeded on a fundamental mutual mistake.
8. Shortly after midnight, BST, Mr Lee phoned Mr Holder (who had taken over from Mr Little) and put forward an offer for the chartering of the "Great Peace". During the conversation all the terms necessary for a contract were discussed. The contract was to be on the basis of a Bimco Towhire form of agreement. (This was somewhat odd because the "Great Peace" was a bulk carrier and was not going to be towing the "Cape Providence", but the circumstances were unusual and the Bimco Towhire agreement was the form of contract with which Mr Holder was familiar.) The hire was to be for a minimum of 5 days. The purpose of the charter was to be to escort and stand-by the "Cape Providence" for the purpose of saving life. Delivery was to be at the "Great Peace's" location at the time of the agreement and the hire would commence as soon as she was fixed and diverted (it being the mutual, and correct, assumption of Mr Lee and Mr Holder that there would be no practical difference between the vessel's position at the time of the agreement and at the time of deviation, since it was contemplated that there would have to be some alteration of course in order to effect a rendezvous and that the alteration of course would happen as soon as instructions could be given on the conclusion of the agreement). I accept the evidence of Mr Holder that during his conversation he asked Mr Lee for the position and speed of the "Great Peace", and that Mr Lee replied that he would check these matters with the master when he knew if the defendants were interested in the terms of the offer.
9. Captain Lambrides decided not to accept the offer at once, but at 06.40 BST he gave instructions to Mr Holder to fix the vessel at a gross rate of US $16,500 per day (which Mr Holder knew would be acceptable to Mr Lee from their earlier conversation).
10. Mr Holder thereupon called Mr Lee. They each gave evidence about this conversation. They were both frank witnesses and there was no difference of substance between them.
11. They went through and confirmed the terms of the fixture. I am satisfied that an agreement to fix the vessel was concluded during that conversation. Mr Holder candidly accepted in evidence that he did not at any stage of the conversation say that the agreement was subject to any outstanding matters, nor did he make any further enquiry during the conversation about the precise position of the "Great Peace".
12. Afterwards Mr Holder sent a fax to Mr Lee thanking him for his assistance with the fixture of the "Great Peace" for the services of escort/stand-by to the "Cape Providence"; saying that he would complete the recap of the main fixture term shortly; giving details of the ""Cape Providence"'s" latest position, course and speed in order to enable the vessels to rendezvous; and concluding:

Please instruct your master to contact the master of "Cape Providence" and alter course to rendezvous with the vessel as soon as possible.

13. As requested, Mr Lee faxed instructions to the master of the "Great Peace" to alter course towards the "Cape Providence". He sent a copy of the fax to Mr Holder.
14. The terms of Mr Holder's fax and the conduct of Mr Lee in instructing the master to alter course are strong confirmatory evidence of their mutual understanding that a contract had been concluded.
15. Mr Holder sent a recap fax to Mr Lee at 08.09 BST, by which time he knew that the master had been given instructions to alter course. It is common ground between Mr Lee and Mr Holder that all the essential elements of the terms set out in the recap fax had been discussed and agreed in their earlier conversation. At 09.50 BST Mr Lee sent a fax to Marint confirming the terms set out in Mr Holder's recap fax (with one minor correction).
16. Mr Holder's recap fax had included the words "Bimco Towhire agreement to apply subject to details…." The defendants' pleaded case was that no contract was concluded between the parties, because the words "subject details" signified that the parties were still at the negotiating stage.
17. This argument is unsustainable on the evidence. Firstly, I have already found that before the recap fax was sent Mr Holder and Mr Lee arrived at an oral agreement, which was subject to no such reservation. Secondly, Mr Holder frankly accepted in his evidence that no matters remained to be negotiated at the time when the recap fax was sent and that the provision of any further details was a purely administrative matter.
18. At the end of the recap fax (and after the words "end recap"), Mr Holder added a request for information about the "Great Peace's" speed, course and ETA.
19. At 08.17 BST Mr Lee gave Mr Holder contact details of the "Great Peace", which Mr Holder passed on to Captain Lambrides. A few minutes later, at 08.29 BST, the master of the "Great Peace" sent a message to Worlder that he had contacted the "Cape Providence" to find her latest position and was altering course "right now".
20. Meanwhile, at 08.25 BST Captain Lambrides called Mr Holder to say that the vessels were 410 miles away from each other. This was not something known to Mr Holder or Mr Lee, so the likely inference is that the master of the "Cape Providence" must have reported the positions of the vessels to the defendants after his conversation with the master of the "Great Peace".
21. If the information previously given to Marint by Ocean Routes had been accurate, the vessels should have been only about 35 miles apart when the contract was concluded. Captain Lamibrides told Mr Holder that he was looking to cancel the "Great Peace", but not yet, because he first wanted to know if there was a nearer available vessel which could provide assistance to the crew of the "Cape Providence".
22. Mr Holder made a number of unsuccessful enquiries, about which he reported to the defendants, at 09.24 BST, recommending that the "Great Peace" should be allowed to continue her voyage towards the "Cape Providence".
23. About the same time as that message was being sent, the "Cape Providence" was passed by a vessel called the "Nordfarer". By chance the charterers of the "Nordfarer" were also the charterers of the "Cape Providence" and so had an interest in assisting her. At 10.10 BST the defendants told Mr Holder that they had contracted with the owners of the "Nordfarer" directly and instructed him to cancel the "Great Peace".
24. At 10.25 BST Mr Holder told Mr Lee that the Great Peace was no longer required, i.e. she was cancelled. They discussed possible financial terms.
25. At 11.00 BST Mr Lee sent a fax to Mr Holder, confirming the cancellation and saying that he would do his best to persuade the owners of the Great Peace to accept 2 days' daily hire in place of the minimum 5 days due under the contract. After speaking to the defendants, Mr Holder told Mr Lee that the defendants were not prepared to pay any sum. So the claimants issued proceedings.
26. The claim is for $82,500, representing 5 days' loss of hire at a daily rate of $16,500. This sum is not disputed as a figure.

Issues

27. The pleaded grounds of defence (other than a denial that a contract was concluded) are that:

i) any purported agreement between the parties was void in law for fundamental mistake in that both parties proceeded on the fundamental assumption of fact that the "Great Peace" was "in close proximity" to the "Cape Providence" when she was not; and/or

ii) any agreement was voidable by reason of mistake, and the defendants are entitled to relief in equity by way of rescission.

Mistake and common law

28. The position at law is governed by the decision of the House of Lords in Bell v Lever Brothers Ltd.
29. The cornerstone of Lord Atkin's classic exposition of the law is the principle which he stated, at p224 that:

"It is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contracts – i.e. agree in the same terms on the same subject-matter – they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them".

30. Whether such agreement exists is ordinarily to be determined on an objective basis, i.e. by considering how a reasonable person would have understood matters. So Blackburn J said in Smith v Hughes (1871) 6LR 6QB 597,607:

"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."

31. However, there may be cases in which an apparent agreement is ambiguous and illusory, and it is sometimes said that in such cases mistake goes to "negative" consent (i.e. to disprove the existence of an agreement). An example is Raffles v Wichelhaus (1864) 2 H&C 906 where the parties entered into a supposed contract for the sale of a cargo of cotton to arrive "ex Peerless from Bombay." There were, however, two vessels of that name sailing from Bombay at different dates and the description of the goods pointed equally to either cargo. It was held that it was open to the defendant to show which vessel he intended, the implication being that if the parties were referring to different vessels there would be no contract.
32. So the starting point is to determine whether there has been an agreement between the parties and upon what terms.
33. Where there is sufficient agreement between the parties to satisfy the requirements for the creation of a contract, it is nevertheless possible that its legal effect may be vitiated by some mistake. It is sometimes said that in such cases the mistake goes to "nullify" consent and render the agreement void, ie empty of legal effect.
34. Lord Atkin illustrated mistakes which negative consent and nullify consent, at p217:

"Thus a mistaken belief by A that he is contracting with B, whereas in fact he is contracting with C, will negative consent where it is clear that the intention of A was to contract only with B. So the agreement of A and B to purchase a specific article is void if in fact the article had perished before the date of sale. In this case, though the parties in fact were agreed about the subject matter, yet a consent to transfer or take delivery of something not existent is deemed useless, the consent is nullified."

35. Lord Atkin divided mistakes which might affect the existence of validity of a contract into three categories: mistakes as to the identifity of the contracting parties; mistakes as to the existence of the subject matter of the contract at the date of the contract; and mistakes as to the quality of the subject matter of the contract.
36. In the present case there was no dispute about the contracting parties, but there is said by the defendants to have been a mistake as to the subject matter or its quality.
37. In his argument on behalf of Lever Brothers Ltd, Sir John Simon, at p166-167, noted that cases on the avoidance of contracts on the ground of mistake had been classified under various heads including mutual mistake and implied condition, but (limiting himself to cases where a consensus had been reached) he submitted that one principle applied to them all, which he formulated as follows:

"Wherever it is to be inferred from the terms of the contract or from its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption which is not true, the contract [can be set aside – i.e. it] is avoided ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact."

38. The words in square brackets appear in the report of the argument at p167 but were omitted by Lord Atkin in his restatement of the proposition at p225. Lord Atkin added:

"I think few would demur to this statement, but its value depends upon the meaning of "a contractual assumption", and also upon on the true meaning to be attached to "basis,"a metaphor which may mislead."

39. In his analysis of the effect of a mistake as to the existence or quality of the subject matter of the contract, Lord Atkin approached matters in two ways. He began by considering how mistakes might be regarded as nullifying the parties' consent.
40. In relation to mistakes as to the existence of the subject matter of the contract, I have quoted the example he gave of a contract for the purchase and sale of a specific article which had perished before the date of the contract. He also took the example of a contract for the sale of property already in the ownership of the supposed buyer. As to this he said, at p218:

"Corresponding to mistakes as to the existence of the subject matter is mistake as to title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis."

41. In this context he referred to Cooper v Phibbs (1867) LR 2 HL149, to which I will return. Lord Atkin then moved from cases in which the parties' promises were empty of content either because the subject matter did not exist, or because what the parties were supposedly contracting to do was legally nonsensical, to consider cases involving mistake as to the quality of the subject matter. As to this class of case he said:

"Mistake as to quality of the thing contracted for raises more difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be. Of course it may appear that the parties contracted that the article should possess the quality which one or other or both mistakenly believed it to possess. But in such a case there is a contract and the enquiry is a different one, being whether the contract as to quality amounts to a condition or a warranty, a different branch of the law."

42. In stating the law in that way, Lord Atkin drew on earlier authorities, particularly Kennedy v Panama Royal Mail Co (1867) LR 2QB 580 and Smith v Hughes. To illustrate the principle, he gave the following examples in which a mistake as to the quality of the subject matter would not affect the enforceability of the contract, at p224:

"A buys B's horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known as the fact is that the horse is unsound. If B has made no representation as to soundness and has not contracted that the horse is sound, A is bound and cannot recover back the price.

A buys a picture from B; both A and B believe it to be the work of an old master, and a high price is paid. It turns out to be a modern copy. A has no remedy in the absence of representation or warranty.

A agrees to take on lease or to buy from B an unfurnished dwelling house. The house is in fact uninhabitable. A would never have entered into the bargain if he had known the fact. A has no remedy, and the position is the same whether B knew the facts or not, so long as he made no representation or gave no warranty.

A buys a roadside garage business from B abutting on a public thoroughfare; unknown to A, but known to B, it has already been decided to construct a bypass road which will divert substantially the whole of the traffic from passing A's garage. Again A has no remedy."

43. Lord Atkin commented that "all these cases involve hardship on A and benefit B, as most people would say, unjustly", but he explained the result by reference to the statement of principle which I have referred to as the cornerstone of his judgment.
44. That statement of principle led him on to discuss "the alternative mode of expressing the result of a mutual mistake", involving the argument that there was to be implied a stipulation in the contract that a condition of its efficacy was that the facts should be as understood by both parties. This caused him to consider Sir John Simon's proposition that a contract was avoided if the consensus had been reached "upon the basis of a particular contractual assumption" which was not true; and the need for clarity in the use of the words "the basis of a particular contractual assumption". Lord Atkin said, at pages 225-226:

"The proposition does not amount to more than this that, if the contract expressly or impliedly contained a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is not true. But we have not advanced far on the enquiry how to ascertain whether the contract does contain such a condition. Various words are to be found to define the state of things which make a condition. "In the contemplation of both parties fundamental to the continued validity of the contract" "a foundation essential to its existence," are phrases found in the important judgment of Scrutton LJ in the present case. The first two phrases appear to me to be unexceptionable. They cover the case of a contract to serve in a particular place, the existence of which is fundamental to the service, or to procure the services of a professional vocalist, whose continued health is essential to performance. But "a fundamental reason for making a contract" may, with respect, be misleading. The reason of one party only is presumedly not intended, but in the cases I have suggested above, of the sale of a horse or a picture, it might be said that the fundamental reason for making the contract was the belief of both parties that the horse was sound or the picture an old master, yet in neither case would the condition as I think exist. Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just. The implications to be made are to be no more than are "necessary" for giving business efficacy to the transaction, and it appears to me that, both as to existing facts and future facts, a condition would not be implied unless the new state of facts makes the condition something different in kind from the contract in the original state of facts."

45. Lord Atkin concluded his analysis by saying, at pages 226-227:

"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? To apply the principle to the infinite combinations of facts that arise in actual experience will continue to be difficult, but if this case results in establishing order into what has been a somewhat confused and difficult branch of the law it will have served a useful purpose."

46. Lord Thankerton, at pages 232-236, adopted the test that an innocent mutual mistake would only affect a contract if it either appeared on the face of the contract that the matter to which the mistake existed was an essential and integral element of the subject-matter of the contract, or it was an inevitable inference from the nature of the contract that all the parties so regarded it. Although somewhat differently expressed, that test is consistent with the fuller analysis of Lord Atkin.
47. Lord Blanesburgh would not have allowed the issue of mutual mistake to have been raised on the pleadings. However, if it was open to the respondents to do so, he agreed at pages 198-199 with Lord Atkin and Lord Thankerton.
48. There has been discussion whether Lord Atkin was using different ways of articulating a single doctrine for determining the effect on the validity of a contract of a mutual mistake affecting its subject matter, or was acknowledging separate doctrines, a doctrine of mistake and a doctrine of implied terms, which would in the normal way lead to the same result. Professor Hugh Beale in his chapter on mistake in the current (28^th) edition of Chitty on Contracts says, at paras 5-013 to 5-014:

"Thus it seems that Lord Atkin viewed saying that the contract was subject to implied condition precedent and saying that it was void for mutual mistake as an alternative way of putting the same thing, though he seems to have regarded the latter as having more explanatory power as to when the contract will fail.

Thus it is submitted that the first question the court should ask is whether, under the express or implied terms of the contract, the risk of the relevant mistake is allocated to one or other of the parties. If it is not allocated to either, the question must be asked whether the contract is subject to an express condition precedent that the fact should be as the parties believed them to be. If the answer to this is negative, it may then be asked whether the matter to which the mistake relates was sufficiently fundamental that the contract should be treated as subject to an implied condition precedent, or whether it should be treated as void for mutual mistake. The last is better viewed as a separate question, but, it is submitted, cases in which it is held that the contract is not subject to an implied condition precedent yet is void for mutual mistake will be rare. "

49. Just as Sir John Simon argued that there was a single underlying principle, although different language had been used to express it in different cases, so it seems to me that Lord Atkin was laying down a single doctrine. Indeed, Lord Atkin accepted Sir John Simon's central proposition, but considered it to be potentially misleading unless more fully explained.
50. I would state the principle in this way. The effect of a mutual mistake, in cases where a consensus has been reached, depends on the proper analysis of the contract and the rights and obligations thereby created; but that analysis will necessarily be made against the background of the law generally applicable to contracts of the kind under consideration, whether it be a contract of sale of goods, a contract of insurance or a contract of some other kind.
51. Every contract must have some essential content, eg a sale of Whiteacre (which is different in essence from a lease of Whiteacre or a sale of Blackacre). The parties may explicitly define matters which they regard as vital to the existence of an enforceable bargain between them (conditions precedent). Such conditions may also be implied, but only where necessary to reflect the essential nature of the bargain. This strict approach accords with the principles, firstly, that where parties have reached agreement in the same terms on the same subject matter, they should be held to their bargain, and secondly, that terms should only be implied into an agreement if necessary to give effect to the bargain clearly intended. It is a logical corollary of this approach that, subject to the express terms of the contract, a mutual mistake would only affect its validity if it meant that the supposed contract was an empty letter (e.g. a contract to pass title in non-existent property or to pass title to a supposed buyer who already holds it) or if the true facts were such that the supposed performance of the agreement a pied de la lettre would be "essentially different" or "something different in kind from the contract in the original state of facts".
52. In any given case, therefore, the key lies in the proper analysis of the contract. This applies to all aspects of the contract. It would be wrong, for example, to say that a contract to sell non-existent property must necessarily be void, for it all depends on the proper construction of the agreement. Just as Lord Atkin observed that parties might contract that an article should possess the quality which one or other mistakenly believed it to possess, so parties might enter into a contract for the sale of property in fact non-existent, but which one promised to the other existed. That, in summary, was the conclusion of the High Court of Australia in McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, in which the defendant sold to the plaintiffs an oil tanker said to be lying on a reef off New Guinea. The plaintiffs carried out a salvage expedition, but there was no tanker and no reef at the place specified. The plaintiffs succeeded in their claim for damages. The importance of the case is that it highlights the fundamental necessity of analysis of the terms of the relevant contract. In that case it could be said with perfect accuracy that the risk of the non-existence of the wreck was with the seller. That is merely another way of expressing the effect of the contract.
53. In the present case the hire of the Great Peace was for a particular purpose specified in the recap fax, i.e. to provide escort and standby services for the saving of life at sea until the arrival of the tug which was estimated to arrive in 5 days.
54. In Bell v Lever Brothers Ltd one of the cases cited by Lord Atkin, at p226, to illustrate a new state of facts which would make the purported performance of a contract something different in kind from that for which the parties had bargained, was Krell v Henry [1903] 2 KB 740, where there was a letting of rooms on Pall Mall to view King Edward V11's coronation procession. The coronation was postponed. It was held that the purpose of the letting was an integral part of the contract. As Lord Atkin put it succinctly,

"The postponement made the rooms not rooms to view the procession".

55. In the present case the contractual specification of the services to be provided by the Great Peace involved the necessary implication that the Great Peace was capable of providing the services specified. If, to take an extreme case, the Great Peace had been 5 days' sailing away from the "Cape Providence", there would have been a failure of that implied condition precedent.
56. Was the Great Peace so far away from the "Cape Providence" at the time of the contract as to defeat the contractual purpose – or in other words to turn it into something essentially different from that for which the parties bargained? This is a question of fact and degree, but in my view the answer is no. If it had been thought really necessary, the "Cape Providence" could have altered course so that both vessels were heading toward each other. At a closing speed of 19 knots, it would have taken them about 22 hours to meet. A telling point is the reaction of the defendants on learning the true positions of the vessels. They did not want to cancel the agreement until they knew if they could find a nearer vessel to assist. Evidently the defendants did not regard the contract as devoid of purpose, or they would have cancelled at once.
57. As to the defendants' pleaded case that the parties proceeded on the fundamental assumption of fact that "Great Peace" was "in close proximity" to the vessel in distress when she was not, it is not necessary for me to repeat the passages which I have already cited from Lord Atkins's speech in which he considered the meaning of phrases such as "a contractual assumption".
58. In answer to my enquiry whether any contractual term could be said to arise from the critical words of Mr Little's fax to Mr Lee ("We understand from Ocean Routes that your vessel "Great Peace" is in close proximity to the casualty…"), Mr Reeder QC initially said that it would be difficult to formulate what was meant by "close proximity" with sufficient precision to be capable of forming a contractual term. After reflection, he submitted that it was possible to imply a term into the contract that the Great Peace would be able to come up with the "Cape Providence" within a reasonable time of her delivery; otherwise the agreement was to be void ab initio. When pressed as to the meaning of a "reasonable time", he said that it would be a matter of a few hours.
59. I do not consider that it is possible to build any contractual stipulation on that sentence in Mr Little's fax for two reasons. The first is the vagueness of the term. The second is more fundamental. Mr Lee made no representation about the position of the Great Peace. I have found that during one conversation (after the fax on which the defendants rely) Mr Lee was asked by Mr Holder for the position and speed of the Great Peace, and that he replied that he would check with the master when he knew if the defendants were interested in the terms he had offered. The defendants did not pursue the matter at that stage, presumably because they were content to rely on what they had been told by Ocean Routes. They had been given an exact (although incorrect) position by Ocean Routes, but they did not report those details to Mr Lee and ask for confirmation. Mr Lee was merely told by Mr Little, in their original conversation, that Mr Little had been told by Ocean Routes that the Great Peace was the closest vessel to the "Cape Providence", and then, in the fax which followed the telephone conversation, that Mr Little understood that the Great Peace was in close proximity to the casualty.
60. For Mr Lee to be phoned by a stranger in the middle of the night must have been somewhat unusual. The information which he was given explained the reason for the unexpected call and what it was that the defendants wanted, i.e. to see if the owners of the Great Peace would be prepared to put her at the defendants' disposal. I think that it would be wrong in the circumstances to elevate the facts reported as coming from Ocean Routes into terms of the subsequent contract between the parties.
61. If the defendants had wished for a contractual stipulation from the claimants as to the position of the Great Peace, they could have asked for it.
62. For those reasons I reject the defence that the contract was void at law.

Mistake and equity

63. In support of the defendants' assertion that they are entitled to relief in equity by way of rescission, it was originally pleaded that the fact that the Great Peace was not in close proximity to the "Cape Providence" was known, or should have been known, to the claimant through Mr Lee, before he purported to accept the main terms of the agreement. This allegation was not pursued, and the matter has been argued on the basis that neither party was to blame in taking what was reported by Ocean Routes at face value.
64. Mr Reeder based the defendants' claim for rescission on the judgment of Lord Denning (then Denning LJ) in the well known case of Solle v Butcher [1950] 1 KB 671. The plaintiff, a surveyor, had rented a flat with a garage from the defendant for £250 a year. The flat without the garage had previously been let for £140 a year, but the defendant had carried out substantial structural alterations before letting the flat and garage to the plaintiff. The plaintiff had advised the defendant that he was free to let the demised premises at a market rent unaffected by any statutory restrictions under the Rent Restriction Acts. After entering into possession, the plaintiff changed his tune and sued to recover the difference between the contractual rent and the previous rent of £140 a year, which he contended was the maximum lawfully chargeable. The Court of Appeal held that the statutory restrictions applied but (by a majority) that the lease should be set aside.
65. The report of the arguments contains no reference to Bell v Lever Brothers Ltd being cited, and Lord Denning alone referred to it in his judgment. Bucknill LJ held that there had been a common mistake of fact on a fundamental matter, ie whether there had been a change of identity of the demised premises, and that on that ground the lease was to be set aside under the principle laid down in Cooper v Phibbs. Jenkins LJ, dissenting, considered that it was not a mistake as to subject matter, but merely a mistake of law as to the effect of certain statutes.
66. Lord Denning said, at p695, that he thought that there was a good deal to be said for the view that the lease was induced by misrepresentation, but he did not consider it necessary to come to a firm conclusion on that point. (The other two members of the court rejected the case based on misrepresentation.) He decided the case on the ground of mistake, but on an approach much broader than that of Bucknill LJ.
67. Lord Denning began at p690 by identifying two kinds of mistake;

"first, mistake which renders the contract void, that is, a nullity from the beginning which is the kind of mistake which was dealt with by the courts of common law; and, secondly, mistake which renders the contract not void, but voidable, that is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake which was dealt with by the courts of equity."

68. As to the latter, he stated the following principle at p693;

"A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault."

69. This doctrine, by which Lord Denning sought to outflank Bell v Lever Brothers Ltd, has caused much uncertainty. The subject is ripe for consideration by the House of Lords or perhaps for review by the Law Commission with a view to clarifying legislation.
70. In support of the doctrine, Lord Denning relied strongly on the decision in Cooper v Phibbs, saying at pages 693-694 that

"In cases ……. of mistaken rights, the House of Lords in 1867 in the great case of Cooper v Phibbs affirmed the doctrine there acted on as correct. In that case an uncle had told his nephew, not intending to misrepresent anything, but in fact in error, that he (the uncle) was entitled to a fishery; and the nephew, after the uncle's death, acting in the belief of the truth of what the uncle had told him, entered into an agreement to rent the fishery from the uncle's daughters, whereas it actually belonged to the nephew himself. The mistake there as to the title to the fishery did not render the tenancy a nullity. If it had done, the contract would have been void at law from the beginning and equity would have had to follow the law. There would have been no contract to set aside and no terms to impose. The House of Lords, however, held that the mistake was only such as to make it voidable, or, in Lord Westbury's words, "liable to be set aside" on such terms as the court thought fit to impose; and it was so set aside."

71. Lord Denning added that the principle established by Cooper v Phipps had been repeatedly acted upon; that it was in no way impaired by Bell v Lever Brothers Ltd, which was treated in the House of Lords as a case depending on whether the contract was a nullity; and that if that case had been considered on equitable grounds the result might have been different.
72. As Lord Denning observed, in Cooper v Phibbs the petitioner had been misled by his uncle, through whom the respondents claimed title. Lord Cranworth, who gave the first judgment, held that the nephew was entitled to the relief claimed because he was led into his mistake by misinformation given to him by his uncle, who was now represented by the respondents, albeit that the uncle had not intended to misrepresent anything. Lord Westbury approached the matter on the basis of mutual mistake.
73. Cooper v Phibbs was cited by both Lord Atkin and Lord Thankerton in relation to the principles stated by them in Bell v Lever Brothers Ltd.
74. Lord Atkin used it as an example of a case of a contract which was void because the intended transfer of ownership was impossible and the stipulation was "naturali ratione inutilis". He said at p218:

"This is the case of Cooper v Phibbs, where A agreed to take a lease of a fishery from B, though contrary to the belief of both parties at the time A was tenant for life of the fishery and B appears to have had no title at all. To such a case Lord Westbury applied the principle that if parties contract under a mutual mistake and misapprehension as to their relative and respective rights the result is that the agreement is liable to be set aside as having proceeded upon a common mistake. Applied to the context the statement is only subject to the criticism that the agreement would appear to be void rather than voidable. Applied to mistake as to rights generally it would appear to be too wide.

75. Lord Thankton said at pages 235-236;

"The phrase "underlying assumption by the parties," as applied to the subject-matter of a contract, …can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject matter…Cooper v Phibbs is a good illustration, for both parties must necessarily have proceeded on the mistaken assumption that the lessor had the right to grant the lease and that the lessee required a lease; Lord Westbury says:

"The respondents believed themselves to be entitled to the property, the petitioner believed that he was a stranger to it, the mistake is discovered, and the agreement cannot stand.""

76. I have difficulty in seeing how Lord Denning's statement that the principle established by Cooper v Phibbs (as he expounded it ) was "in no way impaired by Bell v Lever Brothers Ltd" can be reconciled with Lord Atkin's and Lord Thankerton's treatment of the case.
77. Standing back from Solle v Butcher, the striking feature of the case on the facts is that the plaintiff himself, a surveyor, had led the defendant into his mistaken belief. It would seem unjust that he should be allowed to reap a benefit from so doing. Unsurprisingly this weighed heavily with Lord Denning. He said at pages 694-695:

"……..the facts are that the plaintiff, the tenant, was a surveyor who was employed by the defendant, the landlord, not only to arrange finance for the purchase of the building and to negotiate with the rating authorities as to the new rateable values, but also to let the flats……. He advised the defendant what were the rents which could be charged. He read to the defendant an opinion of counsel relating to the matter, and told him that in his opinion he could charge £250 and that there was no previous control. He said that the flats came outside the Act and that the defendant was "clear". The defendant relied on what the plaintiff told him, and authorised the plaintiff to let at the rentals which he had suggested. The plaintiff not only let the 4 other flats to other people for a long period of years at the new rental, but also took one himself for 7 years at £250 a year. Now he turns around and says, quite unashamedly, that he wants to take advantage of the mistake to get the flat at £140 a year for 7 years instead of the £250 a year, which is not only the rent he agreed to pay but also the fair and economic rent; and it is also the rent permitted by the Acts on compliance with the necessary formalities. If the rules of equity have become so rigid that they cannot remedy such an injustice, it is time we had a new equity, to make good the omissions of the old. "

78. However, the remedy which he formulated went far beyond cases of mistake induced by misinformation supplied by the other party. That brings me to the crux of the problem. What does "fundamental" mean in the proposition that a contract can be set aside in equity if the parties were under a fundamental common misapprehension as to facts or their respective rights? In essence, it is the same debate as occupied the House of Lords when considering Sir John Simon's proposition in Bell v Lever Bros Ltd. With this question in mind, I turn to the subsequent authorities.
79. In Magee v Pennine Insurance Co Ltd [1969] 2 QB 507 the plaintiff, who could not drive, bought a car for his 18 year old son, John. He signed an insurance proposal form, stating wrongly that he held a provisional driving licence and that the car would be driven by himself and an older son, who had a licence, as well as by John. The policy was renewed from year to year. Four years later John had an accident and wrote the car off. The plaintiff made a claim under the policy which it was agreed should be settled for £385. Then the insurers discovered the truth and refused to pay. The plaintiff sued on the settlement agreement and won at first instance. The Court of Appeal by a majority allowed the insurers' appeal.
80. The three members of the Court of Appeal adopted three different approaches. Lord Denning MR disposed of the insured's attempt to rely on Bell v Lever Brothers Ltd by saying at p514:

"I do not propose today to go through the speeches in that case. They have given enough trouble to commentators already. I would say simply this:

A common mistake, even on a most fundamental matter does not make a contract void at law; but it makes it voidable in equity."

81. He repeated the principle which he had set out in Solle v Butcher and said:

"Applying that principle here, it is clear that, when the insurance company and Mr Magee made this agreement to pay £385, they were both under a common mistake which was fundamental to the whole agreement. Both thought that Mr Magee was entitled to claim under the policy of insurance, whereas he was not so entitled. That common mistake does not make the agreement to pay £385 a nullity, but it makes it liable to be set aside in equity."

82. This, said Lord Denning, brought him to a question which had caused him much difficulty, and on which he had hesitated, whether the agreement ought to be set aside in equity. He concluded that it was "not fair to hold the insurance company to an agreement which they would not have dreamt of making if they had not been under a mistake" and that the agreement should therefore be set aside.
83. Neither Winn LJ nor Fenton Atkinson LJ made reference to Solle v Butcher. Winn LJ, dissenting, considered that on the principles of Bell v Lever Brothers Ltd the judge had been right. He said at pages 515-516:

"One could pick out and read, and it would be instructive to re-read them many times, several passages from the speech of Lord Atkin, at p210, and indeed also from that of Lord Thankerton at p229; but I content my self with the point made by Lord Atkin, when he said, at p225:

" Various words are to be found to define the state of things which make a condition"; i.e. a condition non-compliance with which would avoid a contract. And he instances, quoting them, the phrases: - ""in the contemplation of both parties fundamental to the continued validity of the contract", "a foundation essential to its existence", "a fundamental reason for making it"" – all of which, as he said, were to be found in the judgment of Scrutton LJ in the same case; and Lord Atkin said, at p226:

"The first two phrases appear to me to be exceptionable." "But" – by contrast, he said – ""a fundamental reason for making a contract" may, with respect, be misleading." And he goes on to give instances of such misleading assertions or misleading definitions of what is meant by a foundation essential for the contract.

For my part, I think that here there was a misapprehension as to rights, but no misapprehension whatsoever as to the subject – matter of the contract, namely the settlement of the rights of the assured with regard to the accident that happened….."

Lord Thankerton also said, at p235:

"The phrase "underlying assumptionof the parties," as applied to the subject matter of a contract, may be too widely interpreted so as to include something which one of the parties had not necessarily in his mind at the time of the contract; in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject – matter."

I venture respectfully to contrast that sentence with any such sentence as this:-

"Which the parties both must necessarily have accepted in their minds as an essential reason, motive, justification or explanation for the making of the contract."

84. Fenton Atkinson LJ agreed that the case was governed by Bell v Lever Brothers Ltd, but he concluded at p517 –518:

"Applying the rule there laid down to the facts of this case, I think it is clear that, when the agreement relied upon by the plaintiff was made, it was made on the basis of a particular and essential contractual assumption, namely, that there was in existence a valid and enforceable policy of insurance, and that the assumption was not true."

85. Fenton Atkinson LJ did not elaborate upon his reasons for concluding that the validity of the underlying policy was a "contractual assumption". If he meant no more than an assumption which induced the contract, that, with respect, would not justify the conclusion that the settlement agreement was invalid on the principles of Bell v Lever Brothers Ltd, for the reasons stated by Winn LJ.
86. In Grist v Bailey [1967] Ch 532 the plaintiff contracted to purchase from the defendant a freehold property "subject to the existing tenancy thereof" for £850. Both parties believed that the property was subject to a statutory tenancy, but this was not so. When the defendant discovered the true position, she refused to complete the contract. The value of the property with vacant possession was said to be about £2,250. Goff J said, at p537, that if Bell v Lever Brothers Ltd was exhaustive it was fatal to the defendant's case. However, he ordered rescission of the agreement, relying on the principle stated by Lord Denning in Solle v Butcher. As to the authority of that principle, he said at p539:

"I cannot dismiss what Denning LJ said in Solle v Butcher as a mere dictum. It was in my judgment the basis of the decision and is binding on me; and, as I have said, I think Bucknill LJ took the same view."

87. I respectfully disagree with the view that Bucknill LJ's judgment provided support for the broad statement of principle set out by Lord Denning.
88. On the question whether the mistake was fundamental, Goff J held that it must have been so, in view of the evidence about the value of the property with vacant possession. There was no attempt to define the meaning of a fundamental mistake.
89. The correctness of Grist v Bailey was doubted by Hoffmann LJ in William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016 because it failed to take proper account of the contractual allocation of risk, which includes not only any express terms of the contract, but the general rules applicable to contracts of the kind in question. I can see no difference, in principle, between the situation in Grist v Bailey and the examples given by Lord Atkin at p224, such as the agreement for the sale of a painting which is thought (but not warranted) to be by an old master, but turns out to be a copy.
90. In Laurence v Lexcourt Holdings Ltd [1978] 1 WLR 1128 premises were let for use as offices for a term of 15 years. Neither party was aware at the time of the agreement that only part of the premises had planning permission for business use and that planning permission for use of the entire premises as offices would only have been obtainable for a relatively short period, since the local planning authority had approved a development plan under which the property was required for road improvements. The lessees entered into the agreement without legal advice. In the words of the judge, Mr Brian Dillon QC:

"They were in such a hurry to get possession that they failed to take what any solicitor would call the obvious precaution of making the usual searches and enquiries of the local authority before they committed themselves to the agreement".

91. The judge held that the lessees were entitled to rescission of the agreement on two grounds, misrepresentation and common mistake. As to the first, he held that it was a misrepresentation for the lessors to describe the premises as offices and to offer them for a 15 year letting as offices. In holding that the lessees were entitled to rescission on the grounds of common mistake, he relied on the judgment of Lord Denning in Solle v Butcher and on Grist v Bailey.
92. On the question whether the mistake was fundamental, the judge said that he could see no difference in terms of importance between a mistake concerning whether a tenancy of the premises was a protected tenancy under the Rent Acts and a mistake as to the planning position; and he thought it was "fundamental" to people who were taking land for a term as long as 15 years with a view to their use as offices that planning permission should be available for more than a mere 2 or 3 years.
93. As to whether the lessees were "at fault" within the meaning of the principle laid down by Lord Denning, the judge cited, at p1138, the following observation of Goff J in Grist v Bailey:

"Denning LJ did not develop that at all and it is not, I think, with respect, absolutely clear what it comprehends. Clearly, there must be some degree of blameworthiness beyond the mere fault of having made a mistake, but the question is, how much, or in what way? I think each case must depend on its own facts."

94. The judge held that the lessees' failure to search did not disentitle them from obtaining rescission of the agreement under Solle v Butcher, because, although the defendants were "imprudent" in proceeding without making the usual searches and enquiries, they did not owe any duty of care to the lessors to make those searches.
95. This was a negation of the caveat emptor principle, for the imprudence to which the judge referred was in truth the taking of a risk which any lessee or buyer runs if he takes a lease or buys property without any contractual stipulation about its fitness for any particular purpose. In William Sindall Plc v Cambridgeshire County Council Hoffmann LJ expressed the same doubt about the correctness of this decision as he did of Grist v Bailey.
96. In Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1WLR 255 an engineering company raised money from the plaintiff bank by the supposed sale and leaseback of 4 textile compression packaging machines, which did not exist. The engineering company's payment obligations under the lease were guaranteed by the defendant bank. The plaintiff bank sued the defendant bank on the guarantee. Both banks were both dupes of the engineering company's fraud. Steyn J held that it was a condition precedent of the guarantee that the lease related to existing machines, and on that basis the plaintiff's claim failed. In his reserved judgment he considered the law regarding mistake at common law and in equity. After reviewing Bell v Lever Brothers Ltd, Solle v Butcher and other authorities, he said at p268:

"It might be useful if I now summarised what appears to me to be a satisfactory way of approaching this subject. Logically, before one can turn to the rules as to mistake, whether in common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake. That brings me to the relationship between common law mistake and mistake in equity. Where common law mistake has been pleaded, the court must first consider this plea. If the contract is held to be void, no question of mistake in equity arises. But, if the contract is held to be valid, a plea of mistake in equity may still have to be considered; see Grist v Bailey [1967] 532 and the analysis in Anson's Law of Contract, 26^th Ed (1984) p290. "

97. The first part of that passage was cited by Hoffmann LJ in Williams Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016, 1035. The passage is most valuable in emphasising the primacy of the contract, but, with great deference, I would express the position slightly differently. At common law, the effect of a mistake must depend on the proper construction of the contract, which in almost every case will leave certain things unstated. Its proper interpretation will depend, therefore, on a combination of the particular words used and the general principles appertaining to contracts of the relevant kind, e.g. sale of goods. In William Sindall Plc v Cambridgeshire County Council Hoffmann LJ emphasised that it is the unspoken as well as the spoken terms of a contract which affect where the risk lies.
98. In the case of the textile packaging machines the judge found that their existence was a condition precedent of the guarantee. If he had found otherwise, i.e. that the guarantee was not intended to be conditional upon the existence of the machines, then I find it hard to see how the defendant bank would have been entitled to refuse performance of the guarantee on an independent doctrine of mistake. (The existence of the physical subject matter to which the guarantee related did not have to be a condition precedent of the guarantee. It is quite possible to envisage circumstances in which there might have been no such condition precedent, e.g. if the guarantor had been in some way associated with the engineering company.) But this is merely to repeat my understanding that to speak of a mistake vitiating a contract is an alternative mode of analysing the effects of a mistake according to the true interpretation of the contract. Whichever way one looks at the case, the critical factor was the conclusion that the existence of the machines was a condition precedent of the guarantee under consideration.
99. Before leaving that case, it is right to observe that Steyn J accepted, at pages 266 and 268, that mistake in equity was not circumscribed by common law definitions, and he indicated that if it had been necessary to decide the point he would have held that the guarantee should be set aside on equitable principles, but these passages were obiter and he did not find it necessary to examine the position in equity in any detail.
100. In William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016 the county council sold building land to developers under a form of contract incorporating the National Conditions of Sale (20^th Ed) The terms of the contract stipulated that the purchaser was deemed to buy with full notice and subject to all easements affecting the property, but without any obligation on the part of the vendor to define them. The purchasers made standard enquiries before contract. After completion a private foul sewer was found under the site, which affected its development potential. By this time the property market had collapsed and the site was worth only half of what had been paid for it. The purchasers brought an action for a declaration that the contract had been rescinded. They succeeded at first instance on grounds of misrepresentation and common mistake, but the decision was reversed on appeal.
101. Hoffmann LJ, at pages 1022-1023, observed that undisclosed defects in title, such as easements, are a common hazard in conveyencing and that the transaction traditionally provides in detail for what is to happen if they appear. He summarised the ordinary position under a contract for the sale of land. Having rejected the developers' various allegations of misrepresentation, he turned to their claim for rescission of the contract for a common mistake as to the existence of a sewer. He regarded the matter as controlled by the proper interpretation of the contract. He cited part of the judgment of Steyn J to which I have referred, emphasising the need to take into account not only the express terms of the contract, but also rules of general law applicable to the contract, which, for example, provide that, in the absence of express warranty, the law is caveat emptor. This rule, he said, would allocate the risk of an unknown defect in goods to the buyer, even though it was not mentioned in the contract. Similarly, the rule in Hill v Harris [1965] 2 QB 601 that a lessor or vendor does not impliedly warrant that the premises are fit for any particular purpose, meant that the contract allocated the risk of the premises being unfit for such purpose. The contractual stipulation that the sale was subject to all easements, other than those of which the vendor knew or had the means of knowledge, was fatal to the claim for rescission.
102. Evans LJ agreed with Hoffmann LJ on the interpretation and effect of the contract. Referring to Lord Denning's statement of principle in Solle v Butcher, he observed at p1039 that the question arose whether a mistake could be "fundamental" within Lord Denning's formula, and yet the land not "essentially and radically different" from what it was supposed to be within the principle of Bell v Lever Brothers Ltd. He assumed, at p 1042, that there was a category of mistake which was "fundamental", so as to permit the equitable remedy of rescission, and which was wider than the kind of mistake which made the contract of no effect. The difference, he suggested, might be that the common law rule was limited to mistakes with regard to the subject matter of the contract, whilst equity could have regard to "a wider and perhaps unlimited category of "fundamental" mistake." However, these remarks were obiter, since he was satisfied that no claim for rescission could arise because of the proper contractual analysis.
103. In Nutt v Reed Court of Appeal (unreported), 21^st Oct 1999, a caravan site owner purported to enter into two agreements with prospective occupiers of a chalet on the site, the first for the sale to them of the chalet for £850, and the second for the right to pitch the chalet on the site in return for a "pitch fee" of £70 per month. The parties entered into the purported sale agreement on the implied, but erroneous, premise that it was possible for title in the structure to pass, independently of the land to which it was affixed. A few months later the site owner gave notice to terminate the pitch agreement. The occupiers remained on the land. Proceedings were then brought against them claiming possession of the site, an injunction requiring them to remove the structure from the site and damages for trespass. The occupiers served a defence and counterclaim in which they asserted that the sale agreement was void for mutual mistake and that, by occupying the chalet and paying the sum of £70 per month, they had become assured tenants under the relevant Housing Act. The site owner responded by arguing that, if there was a fundamental mutual mistake, the entire transaction was void, including both the sale agreement and the pitch agreement.
104. The trial judge found that the sale agreement was void, and there was no appeal against that part of the judgment. He also held that he had power in equity under Solle v Butcher to order rescission of the pitch agreement, and did so on terms that the occupiers should recover the purchase price paid for the chalet (to which they were in any event entitled on the judge's finding that the sale agreement was void) and payment for improvements which they had carried out. The occupiers appealed, not against those terms, but against the making of an order for rescission. It is not clear from the judgment on what basis the appeal was advanced.
105. In a short judgment with which the other members of the court agreed, Chadwick LJ held that the judge was right to reach the conclusion that he had power in equity to set aside the second agreement for mutual mistake. He observed that the judge might have taken the view that it was void in law; but he had not, and there was no appeal on that point. That would indeed appear to have been the correct approach, for the two agreements were not only closely connected but the flaw in the sale agreement had a knock-on effect on the pitch agreement. The sale agreement was an empty bargain because it was founded on the premise that title in the chalet was capable of being passed independently of the site. Conversely, the pitch agreement, which merely permitted the occupiers to stand the chalet on the site, was founded on the premise that the chalet was theirs to be able to stand on the site in return for a monthly fee.
106. Logically, if the agreement was void, it could not be rescinded on terms or otherwise – although, if the judge had held the entire transaction to be void, I do not see why the occupiers should not have been entitled to claim fair compensation for improvements carried out by them, applying the modern law of restitution, part of which is concerned with the adjustment of relations between supposed parties to a void contract. However, no point was taken by either party that the second agreement should have been declared void, rather than rescinded, or as to the imposition of terms. The essence of the occupiers' case in the Court of Appeal was that they wanted the pitch agreement to be allowed to stand as an assured tenancy of the chalet, an idea which was unsurprisingly rejected, since it bore no resemblance to the contractual relationship intended by the parties when they entered into their misconceived arrangements. As Chadwick LJ explained, the proceedings seemed to have been beset by muddle and confusion, and it is perhaps not surprising that the case has not been reported.
107. In Clarion Ltd v National Provident Institution [2000] WLR 1888 a dispute arose between Clarion, an investment management company, and the defendant life office about a facility under which Clarion was allowed to switch blocks of investments from one fund to another on favourable terms. Clarion claimed that there was an oral contract obliging NPI to allow the facility to continue until determined by 12 months' notice. Among the defences raised by NPI was a claim for rescission of the alleged agreement in equity on grounds of mistake. For the purpose of determining the validity of this plea, it was agreed that it should be assumed, firstly, that there was an oral contract as claimed by Clarion; secondly, that the person who negotiated the contract on behalf of NPI was mistaken as to how the block switching arrangement would be used by Clarion and as to its likely effect; and thirdly, that Clarion was aware, at the time of the negotiation of the agreement, of his mistaken understanding as to how the arrangement would be used by it and what its likely effect was. There was no allegation by NPI of misrepresentation or that the contract was void at common law.
108. Rimer J held that on the assumed facts NPI's argument that the contract should be rescinded in equity was unsustainable. He observed that NPI's mistake was not as to the terms of the contract or as to its subject matter. The only mistake was as to the commercial advantage which the contract gave to Clarion. He was prepared to assume that, had NPI been aware of that advantage, it would not have entered into the contract, but that was not a basis for a rescission. He said at pages 1905-1906:-

"The thrust of NPI's complaint is simply that it made a bad bargain from which it now wants to be released. It is, however, of the essence of business transactions that each party is bargaining in his own interests and for his own benefit and that each has to look after his own interest and that in most cases neither owes any duty of care or disclosure to the other. It is inherent in such a system that there will be those who will make bad bargains, but that is the risk that in my view each bargaining party must be assumed to be willing to take and which the law must be regarded as having allocated to him."

109. From that review of the authorities it is evident that they do not speak with a single or certain voice.
110. Professor Beale has summarised the position in his chapter in Chitty on Contracts, at paras 5-092 to 5-094 , as follows:

"Even if it is accepted that there is an equitable jurisdiction to set aside a contract on terms on the ground of a mutual mistake, there remains doubt how the jurisdiction is to be exercised. First, it was suggested above that the common law doctrine will not apply if the risk is one which the contract expressly or by implication puts on one of the parties. Given the general importance of upholding agreements and the agreed allocation of risk, it would be surprising if relief were given in equity in these circumstances. However, the only explicit limitation upon the equitable doctrine is that the party seeking relief should not be at fault and it has to be said that relief has sometimes been given when the normal allocation of risk would suggest that it should be denied."

(He then refers to Grist v Bailey.)

"Secondly, it seems that there must be some difference between common law and equity in the seriousness of the mistake which is necessary for the doctrine to operate, or it is hard to see why the contract in Solle v Butcher was not void at common law. However, it is not easy to see the difference between a mistake rendering the thing contracted for essentially different from what it was believed to be (the test at common law) and a fundamental mistake (the test in equity)….

If relief is to be given more readily in equity than at common law, and particularly if the normal allocation of risks is not to be a determining factor, it is hard to resist the conclusion that Solle v Butcher and the cases following it represent a shift in policy towards granting relief where the outcome of a contract may be considered unfair but there was no procedural impropriety (such as misrepresentation, duress, undue inference or unconscionable behaviour) when the contract was made. This shift does not seem consistent with recent decisions in other areas. It seems that the relationship between law and equity in this area has not yet been finally settled."

111. Looking at the cases decided in this area in the half century since Solle v Butcher, three things stand out. The first is the lack of any clear analysis which provides satisfactory answers to the problems identified by Professor Beale. The second is the small number of cases in which judges have decided that a contract should be rescinded under the principle stated by Lord Denning in Solle v Butcher. The third is the unsatisfactory nature of those few cases. In Solle v Butcher and Magee v Pennine Insurance Co Ltd the three judges of the Court of Appeal in each case arrived at their conclusions in three different ways, Lord Denning alone relying on the broad principle which he stated in the former case. Grist v Bailey and Laurence v Lexcourt Holdings Ltd are not good advertisements for the doctrine and were, in my respectful opinion, wrongly decided. Nutt v Reed was an odd case in which the better view (adverted to by the Court of Appeal, but not argued) would appear to have been that both contracts were void. On the other side, the reasoning of Hoffmann LJ and Rimer J in William Sindall Plc v Cambridgeshire County Council and Clarion Ltd v National Provident Institution, in which claims for rescission on the ground of common mistake failed, seems with respect to be far more convincing and consistent with general principles of contract law.
112. Leaving aside cases where one party's mistake is the product of fraud, misrepresentation or unconscionable dealing by the other, or where one party is aware that the other is proceeding under a mistake as to the terms of the bargain purportedly being made, the law on the question of rescission of a contract on grounds of mistake is open to any of three choices.
113. Firstly, there might be a rule entitling a party to rescission in accordance with the principle stated by Lord Denning, subject to the imposition of such terms as the court considers fit. In Cooper v Phibbs, on which Lord Denning strongly relied, the House of Lords regarded the claim for rescission as a matter of right, subject only to the additional principle that, in Lord Westbury's words at p170:

"when the Appellant comes here to set aside the agreement, an obligation lies upon him so to constitute his suit as to enable a Court of Equity to deal with the whole of the subject-matter, and once for all to dispose of all the rights and interests of the parties in the settlement."

114. If it is a matter of right, then the law defining the circumstances in which the right arises must be clear. So I return to the question whether a "fundamental" mistake in equity has a broader meaning – and, if so, what – than a mistake rendering the contract essentially different from that which the parties intended. The question was debated in argument in the present case, and the debate did not yield a satisfactory answer. Mr Reeder's first answer was to adopt a causation approach, i.e. that a mistake was fundamental if it was an important inducing factor but for which a party would not have entered into the agreement.
115. On that approach, in the hypothetical examples given by Lord Atkin, such as the sale of the horse believed but not warranted to be sound, or the sale of a picture believed but not warranted to be by an old master, the party which turned out to have made a bad bargain would be entitled as of right to rescission. That would revolutionise the law of sale of goods. Lord Atkin's stricture that:

"Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just"

must apply with equal force to allowing an extra-contractual right of rescission in cases where such implications are not to be imported. In this regard I would respectfully adopt the observations of Rimer J in Clarion Ltd v National Provident Institution.

116. Mr Reeder's alternative suggestion was that the fundamental nature of a mistake could be assessed by considering not only its importance as an inducing factor but the magnitude of the hardship which would be suffered by the party claiming rescission or, conversely the size of the windfall which would be gained by the other. However, if it is wrong in principle to allow rescission of what turns out by mistake to have been a bad bargain, because it is not the function of the court to relieve contracting parties of bad bargains (absent fraud, misrepresentation or the like), it cannot properly be the function of the law to relieve a party from such a bargain if it turns out to have been not merely bad, but very bad.
117. If a "fundamental" mistake means no more than a mistake which would result in the contract being void at common law, it follows, of course, that there is no room for such a contract to be rescinded, because a court cannot set aside that which is void. This was precisely Lord Atkin's point in relation to Cooper v Phibbs. It may be that it was once historically believed that a contract purporting to create an estate in land could only be set aside by a court of equity, but it is now plain that it can be declared void at law.
118. The point is controversial, but I do not believe that there is in truth any right to rescind in equity on grounds of common mistake a contract which is valid and enforceable on ordinary principles of contract law. If I am wrong, I remain at a loss as to what is the test for determining the nature of the "fundamental mistake" necessary to give birth to such a right.
119. Secondly, it might be held that the court has a discretion to set aside a contract entered into under a fundamental mutual mistake, if the court considers that the general justice of the case merits it. If it is a matter of discretion rather than right, it might be, as Evans LJ tentatively suggested in William Sindall Plc v Cambridgeshire County Council, that "equity can have regard to a wider and perhaps unlimited category of "fundamental" mistake". In other words, "fundamental" would cover anything which the court regarded as very important on the facts of the particular case. I suspect that this was in truth the form of doctrine which its author intended, for in Magee v Pennine Insurance Co.Ltd he regarded the court as having a difficult choice whether it should or should not set aside the settlement agreement (concluding that it should, because it would be "not fair" for the insurance company to be held to an agreement which it would not have made if it had not been under a mistake).
120. Bluntly, the difficulty about this form of the doctrine is that it puts palm tree justice in place of party autonomy.
121. Thirdly, it could be held that Lord Denning's view about the jurisdiction of the court to set aside a valid contract on grounds of mutual mistake, in the absence of fraud, misrepresentation or unconscionable behaviour by the other party, was over-broad.
122. Despite the great respect due to Lord Denning, I would respectively adopt as correct the following statement of principle in Snell's Equity, 30^th ed (2000), para 1-14:

"It is no part of the role of the court to dissolve or vary contracts thought to be harsh on the basis of so-called equitable principles. Its role is to prevent the defendant from insisting on his strict legal rights when, owing to his behaviour, it would be unconscionable or inequitable to allow him to do."

123. If I am wrong, and there is a broad discretion in equity to set aside for common mistake a contract which is valid on ordinary principles of contract law, I would decline to exercise that discretion in this case.
124. Mr Reeder submitted that to enforce the contract would be to inflict hardship on the defendants and produce an undeserved windfall for the claimants. He said that this could avoided by setting aside the contract and directing that the claimants should be paid on a quantum merit.
125. If it were part of the function of the courts to try to make sure that contracts did not produce unexpected windfalls or undeserved losses, there would be much to be said for that argument, but that is not their function. The parties agreed that the Great Peace would be chartered for a minimum period of 5 days, and the claimants have done nothing to deserve being deprived of their rights under the contract. They did not misinform the defendants as to the position of the Great Peace. The defendants obtained their information from a third party. It was important to the defendants, but not to the claimants. In entering into commercial bargains, parties frequently base their decisions on information obtained from others. A source reasonably believed to be reliable may turn out to be unreliable. When it happens, it is bad luck, but it is part of the ordinary risks of commercial life. Among the risks and uncertainties involved in a salvage operation, the risk of the information provided by Ocean Routes turning out to be wrong was probably very slim, but the unexpected can happen, as it did in this case.
126. The fixing of charter parties is done mainly by professionals and it is an area in which certainty is important. For the court to set aside the present charter party because the information supplied to the defendants by Ocean Routes turned out to be incorrect would be tantamount to making the correctness of that information a condition precedent of the agreement. There is in my judgment no justification for doing so.