Governments around the world have taken extraordinary measures to curb the novel and mutating Covid-19 to alleviate its economic consequences. In the struggle to get a grip on the virus’s devastating effect, businesses, large and small, are taking matters into their own hands and exploring ways to mitigate losses by terminating commercial agreements which have been rendered redundant or simply no longer viable. Many seek to do so without risk or penalty. The doctrine of common mistake may, in certain circumstances, provide the answer that companies are looking for.
Common mistake – what is it and how does it differ from the doctrine of frustration (please see our previous update)?
Events, such pandemics, can occur after the formation of a contract which were not within the contemplation of the parties when they entered into it. In those circumstances where the parties have concluded a contract, the doctrine of frustration, a type of “subsequent impossibility”, may step in to address consequences beyond their control which “frustrate” the purpose of their agreement, or make it very difficult, or impossible, or even illegal, to perform. On the other hand, common mistake, an “initial impossibility”, arises where the parties share the same misapprehension about some underlying fact or law present before the date of entry into the contract, which renders their agreement impossible to perform or devoid of purpose, and one party maintains that the parties’ obligations are nullified by the mistake. In effect, there is mutual consent, but the law steps in to nullify the consent because of the mutual mistake between them.
Why does it matter?
An analysis of the two branches of impossibility, frustration and common mistake, is critical in determining one’s rights: in certain circumstances, it may be a fine, almost tenuous, dividing line between them in contract law. For instance, in Amalgamated Investment and Property Co Limited v John Walker & Sons Limited  3 all ER 509, the Defendant sold to the Claimant a building for £1,710,000 for occupation or redevelopment. The Claimant asked whether the building was designated historic or of architectural interest. The Defendant said it was not.
Unfortunately, on 22 August 1973 the Department of Environment listed the property. The contract was signed on 25 September 1973. Then the Secretary of State wrote to the Claimant that it had been listed, taking effect on that day. The value dropped. The Court of Appeal said that the listing took effect on 27 September, when the Secretary signed the listing papers. However, the contract was not frustrated. It held that the Claimant had taken on the risk that the building could be listed. This was shown by the nature of their pre-contractual enquiries. So the listing did not make the contract something radically different from that contemplated by the parties. Likewise, the case could not be treated as one of common mistake as the mistake did not exist at the time that the contract was concluded.
Looking forward ahead to Covid-19, the position will be no clearer: Covid-19’s nature is a nebulous one and it is difficult to say with any certainty when it became an existing “event” such as in Amalgamated. Nevertheless, there was, and perhaps there still remains some limited, scope for a party to argue common mistake. For instance, the Coronavirus Regulations (Health Protection (Coronavirus, Restrictions) (England) Regulations 2020/350), which came into force on 26 March 2020, make it illegal for: a wide range of shops and businesses to remain open (Regs 4, 5); a person to leave their house without a reasonable excuse (unless homeless) (Reg 6); and a person to take part in public gatherings of more than 2 people subject to exceptions (Reg 7). Thus, if say, a landlord (“A”) agreed to provide a venue for a festival to a promoter (“B”) to be held in May 2020, but unknown to A and B, one day before the conclusion of their contract, the Regulations came into force, A and/or B may have an argument to say that there was a common mistake because Reg 7 specifically prohibits the central purpose of their agreement and thus making it ostensibly impossible to perform. A similar scenario might also be said to arise following the Government’s extension of ‘lockdown’, but in either case the question is not a straightforward one to answer.
With the above in mind, the court in Great Peace Shipping Ltd v Tsavliris (International) Ltd  EWCA Civ 1407 – a case in which the Defendant chartered the Claimant’s vessel to give assistance to another ship but on the basis of wrong information about the vessel’s location, the Defendant cancelled the contract and declined to pay – identified the following elements that must be present if common mistake is to avoid a contract (by reference to the example of the contract for a venue between A and B):
- Mistake requires that A and B had a positive belief in something which is not in fact true i.e. the law’s status quo permitting gatherings. They may not have to believe precisely the same thing, but they must make “substantially” the same mistake. So, their common mistake might be said to be the availability of the venue.
- The contract for the venue must have been silent on the point in issue. If the contract apportioned risk to A concerning whether the venue would be available during a pandemic and the mistake is in relation to that warranty, common mistake would be unavailable to both A and B.
- The contract will not be void if A or B should have known the truth, since they could have prevented the mistake. With Covid-19 and the media’s 24/7 coverage, this may be a difficult hurdle to overcome. If A knew the truth – that HM Government was passing the Regulations – A will be treated as warranting that the venue is available and this will exclude the doctrine of common mistake. Indeed, A may also be guilty of, at least, negligent misstatement to B.
- Where the subject matter of the contract, say the venue itself, never existed, the contract will necessarily be one that cannot be performed. In other cases, even if performance in a literal sense is possible – the venue is de facto available – the mistake may be such that the contractual venture is impossible and the contract will again be void i.e. because the law has changed.
- Just as a contract may be frustrated if subsequent events make the contract impossible, so a contract may be void for common mistake if the mistake renders performance hopeless.
The range of circumstances to which the doctrine of common mistake will apply to Covid-19 are narrow and parties that have concluded a contract in the past week or so may find it especially difficult. There is however some scope, and if mistake can be shown, there is a general right to recover money paid (subject to causation and any defences available in the law).
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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