Bell v. Lever Brothers Ltd.

Bell v. Lever Brothers Ltd.

 [1931] UKHL 2, [1931] All ER 1

(Mutual mistake as to the quality of thing contracted for and as to the fundamental assumption going to the root of the contract)

FACTS:

Lever entered into two agreements with B and S, first being service contracts by which they were inducted on board of directors of Niger Company (a subsidiary of Lever) and second being compensation contract by which Lever, in consideration of their retiring within the service period, promised to pay compensation. When Lever later came to know of the secret transactions by B and S while they were in service (which would have given L right to dismiss them without any compensation), it sought recovery of money paid.

ISSUES:

1) Was the compensation agreement void by reason of mutual mistake?

2) Was the compensation agreement voidable on account of concealment by B and S of their misconduct while they were in service?

HELD:

The jury found that at the time of their entering into compensation contracts, they did not have in their mind breaches of duty committed by them, such that they did not actively conceal it and were not guilty of any fraud.

“Mistake as to the quality of thing contracted for doesn’t affect assent unless it is the mistake of both parties and is as to the existence of some quality which makes the thing essentially different from the thing as it was believed to be.”

In present case, mutual mistake related not to the subject matter but as to the quality of the service contract. Now, an agreement to terminate a rescindable contract is not different in kind from an agreement to terminate a valid contract. The contract released is the identical contract in both cases and the party paying for release gets exactly what it bargained for. It seems immaterial that he could have got the same result otherwise.

The mistake was not to the existence of the agreement which required termination—for they did exist—but as to the possibility of terminating them by other means. The variation of the possibility (that the service contracts would have been terminated without any compensation) as against contemplated by the parties (that they were to be dispensed with only by paying compensation in return) was the mistake only as to the quality of the subject matter of contract which didn’t affect its identity or substance (which was terminating the services of B and S).

B and S were under no legal obligation to reveal their secret transactions to Lever. Hence, their concealment didn’t render the contract voidable. Neither did they induce Lever to pay them compensation (howsoever innocently) nor did they actively conceal it from them.

As regards Mistake as to the false and fundamental assumption, a contract is void where parties contract under a false assumption, going to the root of the contract, and which both of them must be taken to have had in mind at the time they entered into it as the basis of their agreement (or as an essential or integral element of the subject matter).

In present case however, no sufficient evidence was there to indicate that both parties regarded indefeasibility of services of B and S as the essential and integral element in the subject matter of bargain. As lord Atkin puts it, “it would be wrong to decide that an agreement to terminate a definite specified contract is void if it turns out that the contract had already been broken and could have been terminated otherwise.”

 

EXTRA NOTES:

As per Lord Atkin, a mistaken belief by A that he is contracting with B, when in reality he is contracting with C, will negative consent where the clear intention of A was to contract only with B. (Mistake of Identity)

Agreement of A to purchase specific item from B is void if in fact the item has perished before the date of sale, unknown to both parties. Though both parties were ad idem as regards to the subject matter of the contract yet transaction of something non-existent is deemed useless, the consent is nullified. (Mistake as to the existence of subject matter)

QUESTION(S):

Q. If A is induced to take shares in an issue of capital by a statement in the prospectus of a company that the new capital was required to carry out a contract with NZ government; and unknown to both parties, NZ govt. refuses to ratify it for it was with an unauthorized agent, can A return the shares and recover back purchase price by claiming mutual mistake?

A. Shares which had been received were not, because of difference in value, different in substance from those which the company contracted to deliver. In this case, mistake is as to the quality of the contract which doesn’t affect the fundamental fact essential to the formation of contract (which was transaction as to shares).

Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)