Equity—Mistake—Unilateral mistake

Queen’s Bench Division, Commercial Court, Aikens J, 29 Sep 2008

There is no equitable jurisdiction to grant rescission of a contract where one party has made a unilateral mistake as to a fact or state of affairs which was the basis upon which the terms of the contract were agreed, but that assumption does not become a term of the contract.

Philippa Hopkins (instructed by Ince & Co) for the claimant.
Michael Holmes (instructed by ReedSmith) for the defendant.

In July 2006, the claimants chartered an LPG carrier for a single voyage. The claimant then negotiated as seller with the defendant as buyer regarding the sale of a cargo of LPG to be carried by the vessel. Disputes subsequently arose concerning the amount of demurrage payable by the defendant.
Initially, in January 2007, the parties agreed a sum by way of “settlement”, but the claimant later tried to resile from the settlement, on the ground that it was made on the basis of a mistake as to the appropriate amount of demurrage actually due. It was accepted by the defendant that the claimant had erred in calculating the sum, because the claimant’s representative had thought that the vessel had completed discharge on 13 October when she had not completed discharge until 24 October. The defendant also admitted that it had realised that the claimant had made the mistake, but had decided to keep quiet about it prior to the settlement agreement. A further issue arose on the facts as to whether or not, if the January 2007 agreement was valid, it had still been superseded by a later oral agreement in a telephone conversation in March 2007.

The claimant accepted that the parties had agreed the settlement amount in January 2007 regarding the demurrage due in respect of the contract. It argued, however, that that contract was not binding since (i) the unilateral mistake of its representative had the consequence that there was no binding contract, or that it was void for mistake at common law; or (ii) that in equity the contract was voidable and the court should accordingly declare the contract rescinded.

Mr Justice Aikens:

The general rule at common law was that if one party had made a mistake as to the terms of the contract and that mistake was known to the other party, then the contract was not binding. The reasoning was that although the parties appeared to have agreed terms, it was clear that they were not in agreement. Therefore the normal rule of looking only at the objective agreement of the parties was displaced and the court would admit evidence to show what each side subjectively intended to agree by way of terms. If it was clear from such evidence that there was not consensus, then there could be no contract. Some of the cases spoke of such a contract being “void”, but it was clearer to say that there was never a contract at all.
However, if one party had made a mistake about a fact on which he bases his decision to enter into the contract, but that fact did not form a term of the contract itself, then, even if the other party knew that the first was mistaken as to that fact, the contract would be binding: Smith v Hughes [1861-73] All ER Rep 632.

The settlement agreement of January 2007 was a contract of compromise. It was not a term of that contract that the compromise was reached on the understanding that the discharge was completed in October 2006. The common law rule on the circumstances when a unilateral mistake would mean a prima facie agreement was not binding was well settled. It only applied when there was a unilateral mistake as to a contract term. There was no such mistake in the instant case.

His lordship turned to the claimant’s argument that if there was a unilateral mistake by one party as to a fundamental assumption he had made, which mistake was known to the other party as being the basis for concluding the contract, then even if that assumption did not become a term of the contract, the unilateral mistake would give rise to a jurisdiction of the court, in equity to grant rescission of the contract.

The claimant relied particularly on statements by Mr Justice Andrew Smith in Huyton SA v Distribuidora Internacional De Products Agricolas SA De CV [2003] 2 Lloyd’s Rep 780.

Equitable jurisdiction

His lordship considered Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1988] 3 All ER 902, The Lloydiana [1983] 2 Lloyd’s Rep 313 and Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd), The Great Peace [2002] All ER (D) 184 (Oct). His lordship respectfully disagreed with Andrew Smith J’s conclusion that there was an equitable jurisdiction as alleged. None of the cases cited was authority for its existence.

The Great Peace decision strongly suggested that there was no such jurisdiction in the case of a unilateral mistake. If there was no such jurisdiction in the case of a common mistake, there was no logical rationale for an equitable jurisdiction in the case of a unilateral mistake, at least where there had been no misrepresentation by the other party.

Even if his lordship was wrong in that respect, any such equitable jurisdiction would not be exercised in the claimant’s favour in the instant case. The mistake was entirely the result of the claimant’s own carelessness and it would not be just and equitable to grant recission.
His lordship went on to hold on the facts, however, that agreement for a greater sum had been reached in a telephone conversation of March 2007. The claimant was accordingly entitled to the balance of the demurrage as sought.