Bell v Lever Brothers Ltd
House of Lords
Citations: [1932] AC 161.
Facts
Lever Bros was a company who owned 99% of the shares in another company, Niger. Niger traded in cocoa commodities. Lever Bros contracted Bell to act as chairman of the Niger’s board of directors for £8000 a year. They then contracted Snelling to be vice-chairman for £6000 a year. Both Bell and Snelling began secretly speculating on the cocoa market using their own money. This was behaviour which breached the contract and would have justified terminating their positions on the board.
Niger later amalgamated into another company. Because of this, Lever Bros terminated Bell and Snelling’s appointments. They were not aware of the secret speculation at this time. Lever Bros then agreed to pay the men a sum of money to compensate them for the termination of their services. They would not have done this if they have been aware of the secret speculation.
Lever Bros later discovered the men’s speculation activities. They sued Bell and Snelling to rescind the compensation agreement and seek repayment of the money, on any of three grounds. The first was fraudulent misrepresentation, based on the fact that Bell and Snelling had a duty to disclose their activities. The second was fraudulent unilateral mistake, on the same basis. The third was common mistake: if there was no fraud, then both parties mistakenly believed that the contracts could only be determined by consent.
Issue(s)
- Was the compensation contract voidable for misrepresentation?
- Was the contract void for mistake?
Decision
The House of Lords held in favour of Bell and Snelling. The misrepresentation and unilateral mistake claims failed because the pair had no duty to disclose their activities to Lever Bros. There was therefore no fraud or misrepresentation involved when the pair failed to disclose their activities. The common mistake claim failed because the mistake did not relate to the subject matter of the contract. It merely related to the quality of the contracts.
This Case is Authority For…
‘Caveat emptor‘: sellers are not normally under any duty to disclose facts which might affect the buyer’s decision to contract.
Mistake as to the quality of the contractual subject matter, or over facts which provide a motive for making a contract, does not render the contract void for common or unilateral mistake. The mistake must be ‘fundamental’ or go to the ‘substance of the whole consideration’.
Other
Lord Atkin gave examples of mistakes which would void a contract:
- Believing that the subject matter of the contract exists, when it was previously destroyed or never existed;
- Where a buyer is unaware that he already owns the subject matter of the contract;
- Where a party (‘A’) believes he is contracting with someone (‘B’) other than the other party (‘C’), where it is clear that A only intended to contract with B.
By contrast, believing that the subject-matter of the contract has a particular quality does not void the contract, unless the absence of that quality renders the subject-matter ‘essentially different’ from what it was believed to be. Examples of mere mistakes as to quality include:
- Believing a horse is sound, when in fact it is ill;
- Buying a painting believing it is a Picasso, when in fact it is a forgery or the work of an unknown artist;
- Leasing a dwelling-house, unaware that it is uninhabitable.
The innocent party in these cases will have no remedy unless their belief formed a term of the contract (express or implied). If it is a term of the contract, the innocent party can sue for damages or potentially terminate the contract for repudiatory breach.
