Introduction
The doctrine of mistake in the law of contract concerns situations where one or both parties enter into a contract under a misunderstanding or misapprehension about a key aspect of their agreement. If the mistake is sufficiently serious, the law may render the contract void, meaning it is treated as if it never existed. There are several categories of mistake, but this essay will focus on common mistake, where both parties make the same mistake. The leading authority in this area is the House of Lords decision in Bell v Lever Brothers Ltd [1932] AC 161. This essay will discuss the principles of common mistake as established in Bell and consider its lasting impact on the development of the law, highlighting the very narrow basis on which a contract can be voided for a common mistake.
The Decision in Bell v Lever Brothers Ltd
The facts of Bell v Lever Brothers Ltd are essential to understanding the principle it established. Lever Brothers Ltd appointed Mr Bell and Mr Snelling as chairman and vice-chairman of a subsidiary company. Their service contracts were for five years. Due to a reorganisation, Lever Brothers decided to terminate these appointments early and entered into agreements to pay them substantial compensation, totalling £50,000. After the money was paid, Lever Brothers discovered that both Bell and Snelling had committed breaches of their service contracts (by engaging in private speculation in cocoa) which would have entitled the company to terminate their employment without paying any compensation at all. Lever Brothers sought to have the compensation agreements declared void for common mistake and to recover the money.
Both parties had entered the compensation agreements under the shared, mistaken belief that the original service contracts were valid and could only be terminated with compensation. The House of Lords, in a narrow 3-2 majority decision, held that the compensation agreements were valid and not void for mistake. The court found that the mistake was not fundamental enough to nullify the contract. Lever Brothers had received exactly what it had bargained for: the agreed resignations of Bell and Snelling, which secured the business reorganisation. The fact that they could have achieved this result by other means (summary dismissal) was not seen as a mistake about the fundamental nature of the agreement itself.
The 'Essentially Different' Test
The most influential judgment was delivered by Lord Atkin, who formulated a strict test for operative common mistake. He stated that for a mistake to render a contract void, it must be a mistake of both parties and it must be a mistake as to the existence of some quality which makes the thing contracted for "essentially different from the thing as it was believed to be" (Bell v Lever Brothers Ltd, p. 218). He provided examples, such as the sale of a horse believed to be sound which is in fact terminally ill, or a painting believed to be by a famous artist which is a copy.
In the case itself, Lord Atkin reasoned that the mistake concerned a quality of the service agreements (i.e., whether they were terminable with or without cause), but this did not make the subject matter of the compensation contract (the termination of those agreements) essentially different. The identity of the subject matter was the same. This ruling established a very high threshold for a mistake to be considered legally operative. It prioritises contractual certainty, ensuring that agreements are not easily undone simply because one party later discovers a fact that would have improved its bargaining position.
The Impact of Bell v Lever Brothers Ltd
The strict approach in Bell has remained the definitive statement on common mistake at common law. For many years, it was thought that a more flexible doctrine existed in equity, following Lord Denning’s approach in Solle v Butcher [1950] 1 KB 671, which allowed a contract to be set aside on terms if there was a "fundamental" mistake. However, this separate equitable jurisdiction was definitively rejected by the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407.
In Great Peace, the court confirmed that there is no equitable doctrine of common mistake that operates more leniently than the common law test set out in Bell. The court in Great Peace clarified the requirements for common mistake, stating that there must be a common assumption as to a state of affairs, no warranty by either party that it exists, and the non-existence of the state of affairs must not be the fault of either party. Crucially, the non-existence of the state of affairs must render performance of the contract impossible or make the subject matter "essentially and radically different" from what the parties believed it to be. This formulation directly reaffirms the high bar set by Lord Atkin.
Conclusion
In conclusion, Bell v Lever Brothers Ltd remains the cornerstone of the modern English law on common mistake. It established a very narrow doctrine, requiring that a mistake must relate to the essential identity of the subject matter of the contract, rather than merely its quality or value. The decision prioritises the principle of sanctity of contract and commercial certainty over the potential unfairness that may arise when one party enters an agreement based on a false assumption. While later challenged by the development of a potential equitable doctrine, the strict test laid down by Lord Atkin was ultimately affirmed in Great Peace Shipping. The result is a clear but restrictive legal position, where the plea of common mistake will only succeed in the most exceptional of circumstances, leaving parties to bear the consequences of their bad bargains in almost all cases.
References
Bell v Lever Brothers Ltd [1932] AC 161.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, [2003] QB 679.
McKendrick, E. (2022) Contract Law: Text, Cases, and Materials. 10th edn. Oxford University Press.
Solle v Butcher [1950] 1 KB 671.
