Restitution/Compromise Agreement/Mistake

January 30th, 2020 by James Goudie KC

In Elston v King (2020) EWHC 55 (Ch) the Court considered the situation where a party seeks to set aside a compromise agreement on grounds of common mistake where the compromise was based on a view of the law that was later overturned.  Marcus Smith J said:-

“11. The question of “mistake” is a slippery one when it comes to legal analysis. …”

“15. … Where payments have been made pursuant to a valid contact, a claim in unjust enrichment to recover such payments will fail, unless the contract pursuant to which those payments were made is set aside….

16. This matters because the test for setting aside a contract on grounds of common mistake is different from the test for recovering a payment made by reason of mistake. For instance, … absent misrepresentation or fraud, a contract can only be set aside by reason of the common mistake of the parties to the contract, whereas in a purely restitutionary claim, it is the payer’s state of mind that matters.

(2) Setting aside contracts for common mistake: the general rules

17. Great Peace Shipping concerned a mistake of fact, not a mistake of law, but nevertheless constitutes the starting point for any analysis as to when a contract may be set aside on grounds of common mistake. Five elements must be satisfied.

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

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

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

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

(5) 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 venture is to be possible.

(3) Compromise agreements …

18. Compromise agreements – by which I mean an agreement whereby a pre-existing dispute between parties is settled by agreement – are contracts like any other. The difference between a compromise agreement and other contracts is that – unlike with other contracts – the parties reach a consensus ad idem in relation to a matter on which they disagree. The nature of that disagreement will, of course, vary from case-to-case, but oftentimes, the parties’ individual expectations, and so the compromise, will be informed by their individual assessment of what a court might do were the matter to be litigated. Inevitably, this involves reaching a view not on what the facts are or what the law is, but on how the court (often a particular court) will determine certain factual and/or legal questions.

19. It is the overtness of such disagreements which as a matter of fact, if not as a matter of law, renders compromises different to other contracts. Not only is there a public interest in the finality of litigation but, more importantly for present purposes, the parties will be approaching the compromise not from a common perspective but actually from a divergent one. It is precisely this divergence which the compromise resolves, not by determining it (that is for the court, which ex hypothesi is not involved as an arbiter of the divergence, if there is a compromise) but by reaching an accommodation which both sides find acceptable.”

Marcus Smith J then considered Brennan v Bolt Burden (2004) EWCA Civ 1017, and the difference between “mistakes” and “mispredictions”, and continued:-

“27. The difference between a mistake and misprediction – particularly where the alleged mistake co-exists with an element of doubt – can be extremely difficult and is, no doubt, very fact-sensitive. But the distinction is an important one, for it is only in cases of mistake that restitution is permitted and (although the authorities I have cited are cases in restitution) vitiation of a contract for common mistake can occur.

28. The distinction between a mistake and a misprediction is particularly acute where “mistakes” of law are concerned. Taking the definition of mistake from the decision of the Court of Appeal in Great Peace Shipping as “a common assumption as to the existence of a state of affairs” that is wrong, it is clear (as the Court of Appeal appreciated only too well in Brennan v. Bolt Burdon) that “mistakes” arising by virtue of a subsequent decision of a court, reversing a decision below, can only be mistakes by virtue of the retrospective “declaratory” theory of the common law espoused in Kleinwort Benson. But that does not mean to say that whenever there is a reversal of an earlier decision, there is a mistake. There will be some decisions – perhaps many – which make new law but which are susceptible of one, if not more, levels of appeal. In such a case … the parties to a compromise cannot be unaware of the fact that the law may very well develop in a different direction to that articulated by the judge at first instance.”

“30. In cases where it is asserted that a compromise agreement should be set aside on grounds of this sort of mistake of law, it seems to me that the following process must be undertaken:

(1) The compromise agreement must be construed so as to understand its true meaning and effect, including as to any implied terms which may or may not exist. Naturally, that will involve examining the “factual matrix”, which in such cases will involve particular consideration of the nature of the dispute that the parties thought they were settling. To the extent that that dispute turns on points of law, it will be necessary to consider quite carefully the points at issue, including the status of any judicial decision being relied upon by the parties. To take a crude example, there is all the difference in the world between an agreement where the parties are considering a first instance decision determining a novel point of law (at one extreme) and an established rule of law, asserted and re-asserted by many courts, including the highest courts (at the other extreme).

It may be that such an assessment results in a construction of the contract where it is found that one or other party has assumed the risk of the law changing in the future, whether by way of an express or an implied term. If so, then the inquiry is at an end. The answer to the effect of a mistake will be found in the risk allocation adopted by the parties to the compromise agreement.

(2) In those cases where the contract does not provide the answer, it will be necessary to consider the nature of the change in law relied upon by the party seeking to set aside the compromise agreement, and ask “Does this retrospective change in the law give rise to a common mistake, or did one or both of the parties simply make a misprediction about the course of future legal events?” Reverting to my crude example in the preceding sub-paragraph, a mistake will more likely arise where a well-established and unquestioned rule of law is dramatically overturned than where a single decision on a new and difficult point is overruled. The latter case, particularly if, , the parties to a compromise should not be treated as ignorant of the fact that the common law develops (a view I entirely agree with), is a case of misprediction.”

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