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    6&7. Mistake

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    Thaqib Za'im

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    CHAPTER FOURTEEN Mistake [1401] Introduction If both parties to an agreement enter into it under some nisunderstanding or misapprehension, in certain circumstances, the law will permit them to allege that the contract is defective on the ground that if they had known the true facts, they would never have entered into the agreement.' This is the most basic question that arises on the topic of mistake. Both parties to an agreement or only one party to it may make a mistake. The law allows @ very narrow scope for the doctrine of mistake ‘o operate. The reason is that once the parties are apparently or ostensibly in agreement on the same terms and upon the same subject matter, they ought to be held to their bargain; they must rely on the stipulations of the contract for protection from the effect of facts unknown to them. The effect of an operative mistake is that ‘heagreement is void. A void agreement is not enforceable by law. [14.02] Mistake made by both parties Section 21 of the Contracts Act 1950 provides that ‘when both the Parties to an agreement are under a mistake as to a matter of fact ‘sential to the agreement, the agreement is void.’ The law will not enforce a void agreement.? The basis for rendering agreements void. \nder section 21 and thus unenforceable is that there has been no {tee consent between the parties.? Under section 21, a mistake renders an agreement void if: | i QC Gust, Anson s Law of Contract, 26 ed, at p 252 (ett Act 1950, (Act 136), 5208). 5 bid, S146), 495 > a = = ~ 1. Itis made by both parties; 2. As toa matter of fact; and 3. The said fact is ustrations (a), (b) and (¢) to section 21 provide exampley. + Aagroes sell B a specific caso of goods supposed to ben fom England to Kel us outta, before the day of the ship conesig the ago ad Ben est avay end he ae Neither pany was aware of the fats. The agreement is ye + Aagresto buy from Ba certain hore. tums ot thatthe ey dead athe time of the bargin, though ster party vas ae et fact. The agreement is void. e essential to the agreement, + A being ented to an estate forthe life of 8, agrees to slito cp was dada the time of the agreement, but both partes were anaes of the fact. The agreement is void.* Both parties For section 21 to apply, both parties to the agreement must be under a mistake of fact, In Ho Weng On v Bindev Sdn Bhd,’ the plaintiffs purchased from the defendant developer one unit of a double-storey semi-detached house to be built in a project at Bukit Istana, Kuantan. Unknoyn to the defendant, its agents or employees had a year earlier, sold the said unit to another party. The plaintiffs sued the defendant for specific performance of the contract. The defendant contended that the agreement was void on the ground of common mistake as both parties were mistaken as o the availability of the said property for sale at the time of contract. The High Court rejected the said argument. The court held that only the defendant made the mistake. The plaintiffs did not. Firstly, section 21 employs the words ‘Where BOTH the parties...”. Hence, it is very clear that in the present case, it cannot be said that BOTH the ene Jwere mistaken forthe simple reason that the only party who had the exc jowledge that the property had already been sold to a thitd party _ the defendant developer. The plaintiff purchasers must be taken to em knowledge of this fact for if they had, they would not have puichase Property in the first place, et 4 Strickland Turner (1852) 7 Bx. 208; 1: ROM 3 (2007) 7 MLy 607. i taeaae 496 — —f (14.09) cout further distinguished ilustraion (a) to section 21 from the Ts of the preset case forthe following reason. ° ‘he words ‘BEFORE THE DAY’ refer to afew days before the agreement hie istration was entered into. Ifthe property in our present case had teen sol only afew days before the pro forma (agreement) was signed, then rrbaps, and I caution to say, perhaps, the defendant might have mistaken, However, the property in question was actually sold to one Lai Chooi Peng snore than a year befor. ‘est, the phrase ‘..NEITHER PARTY was aware of the fact.” refers to a sination where both parties had no knowledge of the fact that the subject tmtter in question is no longer available for sale. Contrast this with the facts four ease ~ the defendant vendor should have known that the property had already been sold to a third party, even more so when the sale had taken place roc than a year ago. The plaintiff purchasers would not have known. Only the defendant could have known this but its agents or employees never conveyed this fct to the plaintiffs before the pro forma (agreement) was signed. ‘The court held that the mistake was clearly the direct result of the deftndant’s own wrongdoing. The defendant alone was mistaken, rot the plaintiffs. Thus, the agreement was a valid contract and not void for mistake. The court awarded the plaintiffs RM4,000 as damages, being the difference between the current market value of the property and the contract price. Fact The Explanation to section 21 provides that ‘an erroneous opinion 450 the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact” For instance, A agrees to buy from B a specific picture that A and B emroneously believes to be a genuine Lat but which in fact was Tainted by an amateur artist Hussain. Inthe above situation, both A and B believes that the sale is of a picture painted by Lat, when in fact it was painted by Hussain. It 's 0 case of a bilateral mistake, a mistake made by both parties. Both parties make a mistake as to the quality of the subject matter ofthe contract. Under the Explanation to section 21, a mistake by Patties as to the quality or value of the subject matter is not a mistake of fact. The contract remains valid. 497 [14.03] Mosraxe Essential The circumstances under which the aw regards a fact as essential the agreement are not clear under the Act. All the three illustration, to section 21 only envisage situations where the subject matter wag no longer in existence at the time of the agreement. Itappears from the illustrations that only a mistake s to the existence of the subject matter of the agreement is a matter of fact essential to the agreement under section 21. However in Sheikh Bros Ltd y Ochsner‘ the Privy Council extended the scope of mistake under section 21 to cover the circumstance where both parties made a mistake as to the possibility of performing the agreement. Thus, a mistake of fact made by both parties to the agreement may occur in the following circumstances: (1). Mistake as to the existence of the subject matter of the agreement; (2) Mistake as to the identity of the subject matter; (3) Mistake as to the quality of the subject matter; and (4) Mistake as to the possibility of performing the agreement. [14.03] Mistake as to the existence of the subject matter Section 21 clearly covers this area as shown by the three illustrations. When unknown to both parties the subject matter of the agreement had ceased to exist or has never been in existence at all af the time of the agreement, the agreement is void. The existence of the subject matter is the underlying assumption of the agreement. It was a matter of fact essential or fundamental to the agreement. The belief that the subject matter of the agreement exists was a common mistake made by both parties to the agreement. Ina common mistake, there is ‘a meeting of the minds’ or consent between the parties but there was nothing for them to agree on. Their erroneous belief or mistake about the existence of the subject matter mullifies their consent,’ ie it makes their consent a nullity. The agreement is void. 6 [1957] AC 136; (1957] 2 WLR 254, PC (Easter Africa). 7 7 Belly Lever Bras(1932] AC 161, atp 217, HL: “If mistake operates at all, it oP ‘80 as to negative or in some cases to nullify consent.” ates 498 04) ish case of Galloway v Galloway,’ A and B, being under inthe sna and common assumption that they were legally married ier, wanted to separate and entered into a separation deed, ivetth ey were not legally married, Here, the agreement, ie the on deed, is a nullity because A and B had proceeded on elie, supposition or assumption that the subject matter of the in ation deed, their marriage, was in existence. the mista Jn fact, separa sep alltiree illustrations of section 21, the buyer had received nothing frtis money and the total failure of consideration entitles him to recover in full any money already paid to the seller. [1404] Mistake as to the identity of the subject matter such mistakes usually arises where one party intends to deal with one thing and the other with a different one. A intends to offer his Proton Saga 1.3 Sedan for sale to B but B believes that 4’s offer relates to the Proton Saga 1.5 Aeroback also owned by A. Here there is a mutual mistake as to the identity of the subject nater, Both parties are so much at cross-purposes that they do not Teach agreement. In mutual mistake, there is apparent consent but themisake negatives such consent? and in fact there never was any agreement at all between the parties, ile ilustations to section 21 of the Act do not provide for this ‘situation, After the Contracts Enactment 1899 came into force in Malaysia, an English decision shows that such an agreement is void. Inte Australian case of Falck v Williams,” the defendant and the rae Were negotiating about two charter parties: one to carry i om Sydney to Barcelona, and another to carry copra from Fiji {conf The plaintiff's agent sent a coded telegram intending a the copra charter, but the telegram was ambiguous and Cunt ean Understood it to refer to the shale charter. The Privy ‘Theld that there was no contract, — (W914)30 TER 33, s @lNs0TER Sy ye ae Sion, ‘ros 1932) AC 161 at p217, HL: ‘I'mistake operates a al, it oper Urania are icone 499 [14.05] ‘he fact that for more than @ hundred years, there has been gy reported Malaysian decision on the validity of such agresmen ints toa silent acknowledgement that it would be an exercigg ring such matters to court as such an agreement ig yyig If, on the contrary, the court holds such an agreement valid, one ‘wonders how isthe court to decide which one of the two, the Proiys Saga 1.3 Sedan or the Proton Saga 1.5 Aeroback, forms the subjey matter of the contract, [14.05] Mistake as to the quality of the subject matter Parties may have entered into a contract having in mind that the subject matter may have a certain quality but it later turns out that it does not. For example: + Abuys B's horse. and B think that the horse is sound and A pays the price of sound horse. A would certainly not have bought the horse he had known, as the fact is, that the horse is unsound. and B have made a mistake as to the value or quality of the horse. + Cagrees to buy from D a certain parcel of oats which both believe to bbe old oats. They are in fact new oats, and unsuitable for the purpose for which C wants them. 4 and B have made a mistake as tothe value or quality of the oats. Where the subject matter of the contract lacks some quality which it is believed to have, the questions that arise are: 1. Did the said quality of the subject matter form part of its contractual description, ic is the said quality (‘sound horse’ or ‘old oats’) a term of the contract? 2. Has one party represented that the subject matter has that quality? If the said quality is a term of the contract and the article sold did not answer that description, the contract is valid and the party who gave the description is in breach of a term of the contract. If the representation was false, the party who gave the false representation is liable for misrepresentation or fraud. Ifthe said quality is nos a term of the contract or if there was no false Tepresentation made, a mistake as to the quality of the subject matter does not nullify consent under the Act. The contract is valid. 500 $10 THE QUALITY OF THE [1405] r \ sanation to Seotion 21 clearly provides that ‘an erroneous se Bari the value of the thing which forms the subject matter jon 8s : re agreement iS not to be deemed a mistake as to a matter of ‘ df fact ypthe above examples, A and B made a mistake as to the value in the tof te borse and Cand D made a mistake as tothe value (a fe oats. Such an erroneous opinion of misapprehension Coat value (quality) of the horse of oasis not a mistake as ster of fact. Therefore, section 21 does not apply and the woacts are valid. se a upholds such contracts because the parties had apparently \ Te sbly agreed on the same subject matter of their respective oats ie horse and ozs, The Value or quality that they thought the subject matter possessed was not aterm of the contract and neither sary representation made that it has such a quality. The horse or vie hat the buyers received were not, because of the difference in ve, diferent in substance from what they had contracted to buy. The English law is similar on this point and the leading English case is Bell v Lever Bros Ltd." Lever Bros employed the appellants, Bell and Snelling, as chairman and vice-chairman respectively of their subsidiary company, Niger Company, which deals in cocoa. Niger Company was incurring losses but through the efforts of Bell and Snelling, the company started to prosper again and Bell and Snelling were instrumental in bringing about the amalgamation of Niger Company and a rival company, giving them a control over the cocoa business. After the amalgamation, Lever Bros no longer needed them in Niger Company and decided to terminate the services of Bell and Snelling under the employment contract, They entered into compensation Contracts with Bell and Snelling and agreed to pay them £30,000 ‘nd £20,000 respectively as compensation for terminating their Smployment contracts. Bell and Snelling accepted these sums and they were duly paid, toners, during their term with Niger Company, Bell and Snelling oo cntered on their own account into secret speculations in "6 which Would have justified Lever Bros to terminate their y=... Heiko ae 501 “ Mistaxe [1405] employment contracts of service without paying any compensatg Lever Bros were not aware of these breaches at the time of yr compensation contracts and neither was Bell and Snelling aware ths their speculative dealings constitute a breach of their employmen contracts, Thus it was a mistake made by both parties Later Lever Bros instituted proceedings claiming the retum of the sums paid on the ground that both parties entered into the compensation contracts upon the underlying and fundamental assumption that the employment contracts could only be terminated wwith compensation. In fact, they could terminate them without Compensation at all because Bell and Snelling had breached ther duty, Therefore their common mistake should nullify their consent to the compensation contracts. The House of Lords, by a bare majority of 3 to 2, held that the compensation contracts were valid and enforceable on the ground that the common mistake related not to the subject matter but to the qualiey of the subject matter of the compensation contracts, ie the quality of the employment contracts of service. ‘The parties had entered into compensation contracts to terminate Bell and Snelling’s employment contracts of service. Both parties thought that the employment contracts of service were unbroken when in fact they were already broken by Bell and Snelling’s breaches. The mistake was thus to the quality of the employment contracts of service and did not nullify their consent to the compensation contracts. Although decisions on such matters may appear unjust, the court supports them on the ground 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, that is, agree on 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." 12 Did, ap 24 KE AS TO THE POSSIBILITY OF PERFORMING THe AGREEMENT (14.06) Mistake as to the possibility of performing the 14.061 s agreement in sheikh Bros Ltd v Ochsner," a Privy Council appeal from Eastern ‘sfc, the appellant company granted a licence to , later assigned tothe respondent, fo cut and manufacture all sisal growing on 5,000 gore of and in Kenya, Under the agreement, the respondent was fp deliver to the appellant 50 tons of sisal fibre for sale per month. ‘The respondent was unable to do so as the leaf potential of the sisal was insufficient to produce so much monthly. There was a dispute setween the parties and the question arose whether the agreement was void under the Indian Contract Act 1872 by reason of a common nistake of fact. ‘The Privy Council held that having regard to the nature of the agreement, which was a kind of joint venture, it was the very basis of the agreement that the sisal area should be capable of producing an average of 50 tons a month throughout the term of the licence. There was a mistake as to a matter of fact essential to the agreement and thus the agreement was void. ; [1407] Mistake made by only one party «When only one party to the agreement makes a mistake it is called a unilateral mistake. A mistake made by one party is not an operative + mistake under the Act. The contract is valid. Section 23 of the Act provides: Acontract is not voidable merely because it was caused by one of the parties toit under a mistake as to a matter of fact. The use of the word ‘not voidable’ is ambiguous; it is not clear whether the contract is void or valid. The better view is that the Contract is valid, The said party may make a mistake as to the subject matter of the agreement or a mistake as to the other contracting party. Mistake by one party as to the subject matter For instance, A agrees to buy from B a specific picture that A SToneously believes to be a genuine Lat but which in fact was painted AC 136; (1957) 2 WLR 254, PC (Easter Affi). 503 1407) a Masta by an amateur artist Hussain. Whether B knows or is j erroneous belief, it is 2 unilateral mistake made by A on quality of the subject matter. B made no mistake about it ignorant of IY a3 tonne Thus, when only one party makes @ mistake as to the exi or quality of the subject matter of the agreement unilateral mistake and the contract remains valid. 2 Stence, itis a Itis obvious that the law cannot allow an agreement to be void on} because one party made a mistake as to the quality ofthe subee matter. If that is allowed, no trader is certain that he has made a sg ta the customer could always return the goods later, on the pretas that he has made a mistake. Similarly, the agreement is valid even though there is a unilateral mistake as to the availability or existence of the subject matter. The purchaser should not suffer because of he seller’s ineptitude or indifference. In Ho Weng On v Bindev Sdn Bhd,'* the plaintiffs purchased from the defendant developer one unit of a double-storey semi-detached house to be built in a project at Bukit Istana, Kuantan, Unknown to the defendant, its agents or employees had a year earlier, sold the said unit to another party. The plaintiffs sued the defendant for specific performance of the contract. The defendant contended that the agreement was void on the ground of common mistake as both parties were mistaken as to the availability of the said property for sale at the time of contract. The High Court rejected the said argument. The court held that only the defendant developer made the mistake. It was the only party who had the exclusive knowledge that the property had already been sold to a third party. The plaintiff purchasers must be taken to have no knowledge of this fact for if they had, they would not have purchased the property in the first place. There was a mistake made by one party as to the existence of the subject matter. The contract remains valid. Mistake as to the other contracting party akes a mistake Another situation ofa unilateral mistake is where A makes @ et a as to the other contracting party. A wants to contract ae The instead contracted with C. Again here only A made the mistal 14 [2007] 7 ML 607. 504 __—_—_l - —~= Nous LAW {1408) —— aaher contracting party C did not make any mistake. He wanted to sontract with A. In the case of such a mistake made by one party, the

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