Charterparty Entered Into Under A Mistake - Right Time, Wrong Place

June 2003

(Sea Venture Volume 21)

Could a charterer treat a charterparty as void when owners and charterers were both mistaken as to the position of the vessel when the fixture was entered into? In a landmark judgment on the effect of mutual mistake on contracts, the Court of Appeal confirmed the shipowner's right to uphold the charterparty. 

In an important Court of Appeal judgment, the Court has clarified when a contract can be set aside for a mistake and has taken the bold step of overturning an earlier decision by Lord Denning. The latest case, Great Peace Shipping v Tsavliris Salvage (International) Ltd , concerned a charterparty to provide stand-by assistance which was entered into whilst both parties were under a misapprehension as to the whereabouts of the "Great Peace". However, the issue of a "mistake" in concluding a contract is relevant to all shipping and commercial contracts. 

The Disputed Contract

In September 1999, the "Cape Providence" got into difficulties in the South Indian Ocean. Salvage services were offered by Tsavliris, who contacted brokers. The nearest tug turned out to be several days away, so the brokers contacted Ocean Routes to try to find a vessel in the vicinity. 

The brokers were told that the nearest vessel was the "Great Peace", and that it should be near a rendezvous position within about 12 hours. Unfortunately, the position the brokers had been given was incorrect.The brokers contacted the managers of "Great Peace", and sent a fax enquiring whether the salvors could charter the "Great Peace" on a daily basis. The fax stated: 'We understand from Ocean Routes that your vessel "Great Peace" is in close proximity to the casualty.' 

A charterparty was entered into at a rate of $16,500 per day for a minimum of 5 days, and the "Great Peace" altered course towards the "Cape Providence". Only a few minutes later, the salvors' representative notified the brokers that the vessels had turned out to be 410 miles apart; if the information given by Ocean Routes had been correct, they would have been about 35 miles apart when the contract was concluded. Accordingly, salvors wanted to cancel the contract but not until they had established that there was an available vessel which was nearer to the "Cape Providence". About 90 minutes later, the salvors, via the brokers, cancelled the contract. The owners of "Great Peace" issued proceedings for the contractual cancellation fee, which was 5 days' hire. 

The salvors argued that the contract had been concluded by reason of a fundamental mistake of fact, namely that "Great Peace" was within a few hours sailing of the "Cape Providence". They argued that where the performance of a contract as it turned out would have been fundamentally different from the performance contemplated by the parties, so much so that the effect was to deprive the agreement of the consideration underlying it, the effect of the mistake was to make the contract void at common law. They relied upon the 1932 decision of the House of Lords in Bell v Lever Brothers. Alternatively, it was argued that an equitable right to rescind a contract arises whenever the parties enter into a contract under a common mistake as to a matter that can properly be called "fundamental" or "material" to the agreement in question. For this, the salvors relied upon the Court of Appeal decision in Solle v Butcher (1950). 

In the High Court earlier this year, Mr Justice Toulson upheld the owners' claim. The judge put particular emphasis on the need for certainty in agreeing commercial contracts, and the undesirability of setting them aside. The salvors appealed to the Court of Appeal. 

Bell v Lever Brothers 

In Bell v Lever Brothers the House of Lords identified circumstances in which a contract would be held void for mutual mistake. A contract is void if the parties contract upon the mistaken assumption that the subject-matter exists. It may also be void if there is a mutual mistake as to the quality of the subject-matter. Lord Atkin stated: "In such a case a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing different from the thing as it was believed to be." He went on to lay down a general principle: 

"Whenever it is to be inferred from the terms of a contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided: i.e., it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact." 

Lord Atkin posed the question: "Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts?" 

In the present case, the Master of the Rolls delivering the judgment of the Court said: "The avoidance of contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement." 

In ascertaining whether the rule applies, the first step is to establish exactly what the parties had agreed to do: "It is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the 'contractual adventure' which go beyond the terms that are expressly spelt out, in others it will not." 

The Court identified five elements which must be present. 

(a) There must be a common assumption as to the existence of a state of affairs. 

(b) There must be no warranty by either party that that state of affairs exists. 

(c) The non-existence of the state of affairs must not be attributable to the fault of either party. 

(d) The non-existence of the state of affairs must render performance of the contract impossible. 

(e) The state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible. 

In the present case the issue in relation to common mistake turned on the question of whether the mistake as to the distance apart of the two vessels had the effect that the services that the "Great Peace" was in a position to provide were something essentially different from that to which the parties had agreed. 

The answer the Court gave was that the mistake did not have that effect. In particular, the Court pointed to the fact that the salvors did not wish to cancel the contract until they knew they could get a nearer vessel to assist. This reaction was a telling indication that the fact that the vessels were further apart than had been believed did not mean that it was impossible to perform the contractual adventure. The salvors would still have wished the contract to be performed had it not been for the arrival on the scene of another vessel prepared to perform the same services. 

Accordingly, the contract was not void for mutual mistake at common law. 

Right of Rescission? 

Could the salvors nonetheless rely upon an equitable right of rescission? The Court of Appeal reviewed the law as laid down by Lord Denning in Solle v Butcher, where he stated: 

"A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault." 

In the Great Peace, the Court of Appeal rejected this view: "If coherence is to be restored to this area of our law, it can only be by declaring that there is no jurisdiction to grant rescission on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law." 

So the salvors' appeal failed on both counts, and the Court held that the shipowners were entitled to recover the cancellation fee payable under the contract. The decision in this case has clarified the law in relation to mistake, and Solle v Butcher has been laid to rest. But the subject of mistake may yet be reconsidered elsewhere. Where a common fundamental mistake has induced a contract, an equitable jurisdiction to grant rescission on terms would give greater flexibility than a doctrine which holds the contract void. As the Court noted: "There is scope for legislation to give greater flexibility to our law of mistake than common law allows."

With thanks to Angus Johnson and Michael Bundock, Stephenson Harwood¹, for preparing this article² .

1.Stephenson Harwood acted for the successful owners in this case 

2.An earlier version of this article appeared in Lloyd's List on 16 October 2002.