Statutory Provisions

Principles of International Commercial Contracts or UNIDROIT Principle

Article 3.4 - (Definition of mistake) Mistake is an erroneous assumption relating to facts or to

law existing when the contract was concluded.

Comment

1. Mistake of fact and mistake of law

This article equates a mistake relating to facts with a mistake relating to law. Identical legal
treatment of the two types of mistake seems justified in view of the increasing complexity of
modern legal systems. For cross-border trade the difficulties caused by this complexity are
exacerbated by the fact that an individual transaction may be affected by foreign and therefore
unfamiliar legal systems.

Leading Case Laws

Mutual Mistake
Where the mistake is mutual that is shared by both parties, there is consensus ad idem. This
mistake does not render the contract void. However, it can be declared void when  that mutual
mistake  is fundamental to the identity of the contract.

The leading case on this topic is Bell v Lever Brothers Ltd1.

Facts of the case

Lever Brothers Ltd was a company which traded in West Africa, through a 99% owned
subsidiary called the Niger Company. The Niger trade was in trouble. Lord Leverhulme, the
owner of Lever Bros, hired D'Arcy Cooper (a Quaker and senior partner of his Uncle's
accountant firm, Cooper Brothers) to be the chairman and manage the crisis. Cooper negotiated a
loan from Barclays Bank, which insisted that a professional management run the Niger
subsidiary. So, Cooper hired his friend, Ernest Hyslop Bell, a senior Barclays manager in 1923
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1932 a.c. 161
as chairman of the subsidiary. Mr. Snelling, a tax consultant that had successfully got Lever Bros
a big tax refund in 1921, was appointed as vice chairman. They did well, and turned a profit. The
company was then merged with a former competitor (African and Eastern Trade Corporation) to
form the United Africa Company in 1929.

Bell had wanted to run the new United Africa Company, because he was too old at 54 to have a
job in the City, and he had left his Barclays position. At lunch in the Savoy Grill he agreed with
Cooper that he would get a big compensation package (£30,000) and retire. A similar "golden
parachute" of £20,000 was given to Mr Snelling. However, shortly after, it was revealed that Bell
and Snelling had been part of a regional cocoa cartel, and used information on future price
reductions to sell cocoa from their personal accounts. Lever Brothers Ltd therefore brought a
claim for rescission of the compensation package on grounds of mistake of fact.

Judgement

At the trial action, the jury found that there was no evidence of fraud on part of the defendants,
and that they entered into the compensation agreements they had not directed their minds to
previous breaches of duty. The case was therefore one of mutual mistake, as both the parties had
mistaken assumption. Wright, J. held that this assumption that the state of facts existed which
entitled to recover the money paid. The decision was unanimously affirmed by the Court of
Appeal. In the House of Lords, however an appeal was allowed by a majority of three to two.
Lord Balensburg, one of the majority, based his opinion largely on the question on amendments
of pleadings and stated that he would allow the appeal as mutual mistake has not originally be
pleaded. The other two majority opinions, those of Lord Atkin and Lord Thankerton, both rested
on the ground that the mistake was not fundamentally sufficient to avoid the contract although
they reached this conclusion by different paths.

Mistake arising out of mistake of law

The doctrine of Ignorantia juris non excusat or ignorantia legis neminem excusat (ignorance of
law is no excuse), finds statutory recognition in Section 21 of the ICA, which therefore, lays
down that the contract cannot be avoided even when it is caused by mistake of law.

Kalyampore Lime Workers Ltd. V. State of Bihar and Ors.2

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Facts of the case

The government of Bihar owned a estate known as Murli Hill is Sub-Division of Sasaram in the
District of Shahabad. In 1928, The rights of this estate were given to Kuchwar Co for a period of
20 years. In January 1933 Kuchwar Co. underwent voluntary liquidation and the
liquidators of the company purported to assign the leasehold interest of the company
to one S G Bose for Rs. 35,000 by an unregistered deed dated 30th
September, 1933. The assignee took possession of the property, on the 9th October,
1933, but was stopped from working the quarries under orders of the Government
from the 8th December, 1933, as the Government considered the assignment to be a
breach of the contract in the lease which made the lessees' interest liable to
forfeiture. The government decided to lease this property to Kalyampore lime co... Before doing
this the government forfeited the lease to Kuchwar Co and then offered THE Lime co. the lease
of the estate. Accordingly, the Lime co. The Lime Co. obtained possession on the 15th of April,
1934, and started quarrying operations on the 15th May, 1934. Meanwhile on 24th September,
1934 Kuchwar co. sued secretary of state for faulty forfeiture of the lease and demanded
injunction of the lease. The Privy Council upheld the High Court’s decision and debarred the
secretary to grant any lease to Lime Co... However, the Lime Co. did not stop quarrying on the
estate as it was not a party to the suit. Kuchwar Co. then moved to the court for contempt
proceedings against the Lime Co. The Privy Council set aside the order of the High Court in
contempt proceedings but did not grant restitution to Lime Co… After this the rights of the estate
were held by Kuchwar Co. for 10 years which expire in 1948. In 1948 the Lime Co wanted the
government to assign the lease to them, however the government assigned the lease to Dalmia
and Co. (another company).

Lime Co. filed a suit against the government and Dalmia and Co. . The case finally went to
supreme court by appeal.

Judgment

The court observed that neither party was in error as regards

the essential facts upon which the contract proceeded. It was known to both parties
that there was an assignment of the lease by the Kuchwar Company in favour of S. G.
Bose and both parties knew that under the terms of the lease an assignment by the
lessee without the consent of the lessor would make his interest liable to forfeiture. The court
further said:

“The mistake, if any, was with regard to the effect of the law of registration upon the
validity of the assignment deed. At the most, such mistake would be a mistake of law
and under section 21 of the Indian Contract Act the contract would not be void on
that ground.”

The judges observed that the plaintiff cannot get any relief merely on the ground that its officers
had taken land acquisition proceedings in ignorance of law which existed at the relevant time. In
fact if a litigant is allowed to re-open a previous case on the ground that he was ignorant of some
law it would leave to endless litigation.

Mistake as to a matter of private right not a mistake of law

Mistake in matters of private rights/ arising out of personal contracts cannot be held as mistake
of law. The leading case in this matter is Cooper v Phipps3.

Facts of the case

The complainant, Mr. Cooper, was the nephew of the owner of the salmon fishery near
Ballysadare, Ireland. He leased this salmon fishery from his Uncle. When his uncle died and the
lease came up for the time of renewal, the complainant renewed the lease for the salmon fishery
with his Aunt. However, it was later found out that in the Uncle’s will, Mr. Cooper as his
nephew, had been given life tenancy of the salmon fishery. This meant that there was no need for
the lease that existed between him and the Aunt and the dispute arose when the next rental
payment was due.

Judgment

It was held that the contract and lease that existed between the complainant and the defendant
was voidable, rather than void. This was due to the claim being in equity, as Mr. Cooper had
beneficial ownership of the salmon fishery and not legal ownership. This case concerned ‘res
sua’ and it was a mistake as to the title of the property; Mr. Cooper was already the beneficial
owner of the salmon fishery and there could not be a lease. It was held that such an agreement
would be set aside due to a common mistake by both parties as to ownership. All the three judges
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held that mistake of private right cannot be seen as mistake of law. Lord Westbury in this regard
said:

 “It is said, "" but in that maxim the word "jus" is used in the sense of denoting general law, the
ordinary law of the country. But when the word "jus" is used in the sense of denoting a private
right, that maxim has no application. Private right of ownership is a matter of fact; it may be the
result also of matter of law; but if parties contract under a mutual mistake and misapprehension
as to their relative and respective rights, the result is, that that agreement is liable to be set aside
as having proceeded upon a common mistake. Now, that was the case with these parties - the
Respondents believed themselves to be entitled to the property, the Petitioner believed that he
was a stranger to it, the mistake is discovered, and the agreement cannot stand.”

Compensation when payment made due to mistake of law

The word mistake as under section 72 of ICA means mistake of law as well as mistake of fact.
The English Common Law Rule that payment made under mistake of law is not recoverable has
no application in India. Payment made by mistake in section 72 must refer to payment which was
not legally due and could not have been enforced.

Sri Sri Shiba Prasad Singh vs. Maharaja Srish Chandra Nandi.

Facts of the case

Sri Sri Shiba Prasad Singh(appellant) is the owner of Jharia estate. In 1898 his predecessor
granted a mining lease of a part of that estate to the predecessor of Maharaja Srish Chandra
Nandi (respondent). The lease agreement required payment of royalty to the leasor. In 1898
when the lease was granted the only railway available for transport of coal from this district was
the East Indian Railway, but it was contemplated that the Bengal Nagpur Railway might be
extended so as also to serve this district. The lessor contended that once the higher rate of royalty
had come into operation, it was permanent and not affected by a subsequent rise in the rate of
freight. On this view there had been no overpayment and royalties were still payable at the
higher rate. The lessee on the other hand maintained that on a true construction of the lease the
higher rate of royalty was only payable on coal dispatched by rail at a freight more than 2 annas
below the freight at the date when the lease was entered into. On this view the higher rate of
freight ceased to operate on April 1, 1921. By continuing to pay at the higher rate from that date
until September 30, 1923, he had paid Rs. 63,680 more than was due, and he was entitled to
retain future royalties up to this amount and thereafter to pay at the lower rates. The lessee acted
on this view of his rights. He made no further payment of royalties until August 20, 1925, and
from that date onwards he continued to pay royalty at the lower rates.

Judgement

Section 72 of the Indian Contract Act, 1872. makes no distinction between mistakes of fact and
mistakes of law. Payment "by mistake" must refer to a payment which was not legally due and
which could not have been enforced: the "mistake" is thinking that the money paid was due when
in fact it was not due. Once it is established that the payment in question was not due, it is
irrelevant to consider whether or not there was a contract between the parties under which some
other sum was due. It is not that every sum paid under mistake is recoverable no matter what the
circumstances may be. There may in a particular case be circumstances which disentitle a
plaintiff by estoppel or otherwise.

Where, therefore, money is paid under a mistaken belief that it was not legally due, it is
sufficient to bring the case within Section 72. If a mistake of law has led to the formation of a
contract, Section 21 enacts that that contract is not for that reason voidable. If money is paid
under that contract, it cannot be said that that money was paid under a mistake of law: it was paid
because it was due under a valid contract, and if it had not been paid, payment could have been
enforced.

Payment made by party laboring under mistake of law is recoverable. The voluntary nature of
payment would not affect liability of payee to refund it.

P.S. Machado vs. K. Venkatarama Gopala Iyer4

Facts of the case

A notification was issued by government fixing the rates of transport charges for country crafts
and other sailing vessels also introducing a system by which route agents were nominated by the
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AIR 1963 Mad 231
Government who were sole authority to secure for the intending shippers shipping space. These
route agents collected transport charges for the cargo offered for transport by the shippers. A was
nominated as route agent between Kochi and Tuticorin including all intermediate ports in
between. Under the rules the rates could only be increased by the government. B entered into a
contract with the government for supply of salt. He transported through country crafts engaged
by A as route agent. In the mean-time increased rates of transport were recommended by the
freight advisory committee to the Controller of Indian Shipping. But even before the order of the
controller could be obtained sanctioning the increased rates, A instructed his agents to demand
from all shippers, freight charges at increased rates, A instructed his agents to demand from all
shippers, freight charges at the rate recommended by Advisory Committee. One of such
consignors, B, had to pay at the increased rate demanded as he had under the terms of a contract
entered into with the Cochin Government to deliver salt within a specified period. B paid at the
increased rates under protest. The Controller of Indian Shipping, however, ultimately refused to
sanction the increased rate. B then instituted the suit out of which this appeal arises for recovery
of the excess charges collected from him.

Judgment

Excess payments made by the B to the A at the time of the carriage of his goods were under a
mistake of law or under coercion and the payment not being the foundation for the contract of
carriage can be recovered back by the B.

The judges upheld right to recover excess payment. Payment made by party laboring under
mistake of law is recoverable. The voluntary nature of payment would not affect liability of
payee to refund it.