The In-House Lawyer

Where one party has made a mistake as to the terms of a contract, the contract will not be binding and can be set aside. The rationale is that the parties have not in fact reached agreement. Three types of mistake have been recognised by the courts: 


1. common mistake, where both parties are mistaken as to a key element of the subject-matter of the contract;

2. mutual mistake, where this a genuine misunderstanding and as a result the contract is too ambiguous to enforced (see IHL162, p44, for more details on this type of mistake); 

3. unilateral mistake, where only one party makes a mistake but the counterparty knows, or is taken to have known, of the mistake.


This month’s briefing will consider two recent cases where the courts have considered whether a contract (or deed) should be set aside for a mistake. 


Statoil asa v Louis Dreyfus Energy Services LP [2008]


What is the situation where the mistake is not as to a term of the agreement, but instead concerns a fact on which a party bases its decision to enter into the contract? 


The parties in Statoil entered into a settlement agreement to compromise a dispute as to demurrage payable under a contract. That dispute concerned the number of days to take into account given the effect of a hurricane. During negotiations, the claimant calculated its claim to demurrage in the mistaken belief that the vessel concerned had completed the discharge of its cargo some 11 days earlier than was in fact the case. The consequence was that the claimant underestimated its demurrage claim by over $435,000.


The defendant realised that the claimant had made a mistake, but decided to keep quiet about it. A settlement agreement was therefore entered into for the lower sum. The claimant subsequently realised its mistake, and sought to rescind the settlement agreement for unilateral mistake. 


Decision


Aikens J upheld the settlement agreement. In doing so, he decided that it was not a term of the contract that the cargo had been discharged on a certain date. The settlement was simply for payment of a fixed sum to compromise a dispute.


This was fatal to the claim. Neither in law nor in equity, it was held, could the courts set aside a contract because one party has made a mistake about a fact on which it bases its decision to enter into the contract. In reaching that decision, Aikens J specifically rejected the conclusion of the High Court in Huyton SA v Distribuidora Internacional De Productos Agricolas SA [2002] that there was in fact a wider equitable jurisdiction to do so.


However, the claim was ultimately successful because the claimant established that the parties had subsequently agreed to enter into a second settlement agreement taking account of the true date that discharge of the cargo had been completed. 


andrew fender (administrator of FG Collier & Son Ltd) v National Westminster Bank plC [2008]


Two related companies, FG Collier & Son Ltd and UK Marble Ltd, each had banking facilities with National Westminster Bank (NatWest). The security for the loan to UK Marble included a guarantee provided by FG Collier and also a charge granted by FG Collier over a property. That charge secured FG Collier’s own indebtedness, in addition to that of UK Marble.


UK Marble repaid its loan to NatWest, and asked for the guarantee issued by FG Collier to be released. The individuals at NatWest dealing with the request were unaware that FG Collier was itself a customer of the bank and continued to have its own substantial liabilities to the bank. They therefore released both the guarantee and the charge, executing a deed of release in relation to the latter.


FG Collier subsequently entered administration. The administrator wished to sell the property that had been subject to the charge, and asked NatWest for the title deeds to permit sale. At this point, the bank realised its mistake, and asked for the deed of release to be set aside.


The administrator applied to the court for directions as to whether or not the deed of release would be valid. If it was valid, NatWest would be an unsecured creditor. If it was not, it could enforce its security against the outstanding loans owed to it by FG Collier.


Opposing arguments


NatWest argued that, in executing the deed of release, its employees believed that they were simply giving effect to the discharge of the liabilities of UK Marble. There was no intention to make a gift of the bank’s interest in the property as mortgagee. The employees had proceeded on the basis that NatWest no longer had any such interest, because the indebtedness had been wholly discharged. This was a mistake. 


NatWest argued that, in equity, it should be relieved of the consequences of that mistake, and the deed of release should be rescinded.


The administrator, on the other hand, contended that no sufficient mistake had been made. NatWest’s intention had been to release the charge over the property, and this had been achieved. There had been no mistake as to the effect of the transaction.


This was important, the administrator argued, because a line of authorities had established that the mistake relied upon necessarily had to be about the effect of the transaction, and not simply about the consequences of the transaction, or the advantages to be gained from it. As the judge in Andrew Fender recognised, distinguishing between ‘effect’ on the one hand, and ‘consequences’ or ‘advantages’ on the other, will not necessarily be straightforward.


Decision


In relation to the equitable claim, the court decided that the mistake concerned the effect of the transaction. The bank was not seeking to ‘repent of an unwise commercial decision or because of second thoughts’. Turning the status of NatWest from a secured to an unsecured creditor was an unintended effect, dependent on the underlying and mistaken belief that the bank was not a creditor at all. 


However, the court also decided the case on the wider basis that, at common law, money paid under a mistake of either fact or law is recoverable in all cases, provided that the mistake caused the receipt of an unintended benefit. That, it was said, was the consequence of the decision in Kleinwort Benson Ltd v Lincoln City Council [1998]. In that case, the House of Lords permitted recovery of sums paid on the basis of settled law that was subsequently overturned. Therefore, if a party pays another on the basis of settled law and that law is subsequently overturned, the paying party may seek recovery of the sums paid over, even though this may be many years after the event.


Comments


Courts tend, unsurprisingly, to be reluctant to set aside – or rectify – written contracts or deeds, particularly between commercial parties. However, there are numerous decided cases that demonstrate that the courts will intervene when contracts have truly been entered into on the basis of mistake, depending on the type of mistake that has been and its effect. Such mistakes occur regularly, being inevitable, for example, when contracts are negotiated and concluded at pace and under pressure. The two cases described in this briefing demonstrate, however, the difficulty in identifying those mistakes that will lead to a contract being set aside (or rectified) and those that will not. In Statoil the court declined to set aside a settlement agreement executed when one party held a mistaken belief that a ship had completed discharge of cargo earlier than was in fact the case. In Andrew Fender a deed releasing security was set aside because it was executed in the mistaken belief that indebtedness had been extinguished.

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