Khan v Mohammed [1982] FijiLawRp 25; [1982] 28 FLR 94 (29 August 1982)

[1982] 28 FLR 94

 

IN THE SUPREME COURT OF FIJI

FARID KHAN

v

ALI MOHAMMED & 2 OTHERS

 

[SUPREME COURT – ROONEY, J. 29 August 1982]

 

Civil Jurisdiction

 

Contract Mistake: Mutual mistake – fundamental error – contract unenforceable
 
D. C. Maharaj for Plaintiff
I. Khan for Defendant
 
The parties were formerly in partnership, the plaintiff by agreement withdrew from the partnership.
 
By agreement dated 10 November,1981 it was accepted that up to the 11 September 1981, the date of dissolution, each partner had achieved an operating profit of $14,300 inclusive of his initial capital contribution viz. $2,000. Further it was agreed the plaintiff would receive $8,300 upon the execution of the agreement and the balance of $6,000 would be paid in instalments.
 
The agreement was entered into in good faith. However, it transpired that in calculating the nature of work in hand an error had been made. The total profit to the partnership to 10 September, 1981 amounted to only $14,065.86: therefore the plaintiffs share was considerably less than the agreement had provided. The money was not paid, the plaintiff sued for it. The defendants pleaded that the agreement was unenforceable as it was signed under a mistaken view of fact. First and second defendants counterclaimed for a refund of the excess money paid under the agreement and asked for a declaration that the agreement was unenforceable.
 
As between the parties the learned Judge said the most important question upon which there had to be agreement vas the division of the assumed profit. It was upon this basis that the dissolution was agreed upon, and upon a mutual mistake.
 
Held: The fact that these accounts did not represent the true position was a fundamental error going to the root of the contract. The parties therefore could not be bound by what had been agreed upon.
 
Declaration that the agreement dated 10 November 1981 was unenforceable. Plaintiffs claim and defendants' counterclaim dismissed.
 
Case Referred to:
 

Bell v. Lever Brothers Limited  (1932) A.C. 161.
 
ROONEY, Mr Justice.

JUDGMENT

 
On the 3^rd April, 1981 the plaintiff and the defendants became partners in an enterprise called the Modern Land Development Company. A few months later the plaintiff decided to withdraw from the partnership. His partners agreed to this with effect from 11^thSeptember, 1981.
 
By an agreement dated the 10^th November 1981 it was accepted that up to the date of dissolution each partner had achieved an operating profit of $14,300 inclusive of his initial capital contribution of $2,000. It was also agreed that the plaintiff would receive $8,300 upon the execution of the agreement and that the balance of $6,000 would be paid into equal instalments of $ 3,000 each before the 31^st January, 1982 and the 31^st January, 1983 respectively.
 
It is accepted that the plaintiff and his former partners entered into this agreement in good faith. However, in the case of one partner. Mohammed Sultan Khan, who was the field engineer, he had reason enough to believe at the time the agreement was executed that the profits as stated therein might not in fact be achieved. Khan was made the third defendant in this action, but, the process was not served upon him.
 
In the event it transpired that in calculating the value of the work in hand Khan had made a gross mathematical error and when this was finally detected, it showed that the profit earned up to the 11^th September, 1981 amounted to only $14,065.86 and that the plaintiffs share in that profit was considerably less than the amount he had received on the signing of the dissolution agreement.
 
The defendants did not pay the money due under the agreement and the plaintiff instituted these proceedings against them. The defendants pleaded that the agreement dated the 10^th November, 1981 is unenforceable and ineffective as it was signed under a mistaken belief of fact that the profit recited therein was correctly estimated. The first and second defendants counterclaim for a refund of the excess amount paid to the plaintiff under the aforesaid agreement and they also ask for a declaration that the agreement is unenforceable.
 
The original action was for $3,000 but, this was amended to $6,000 to take into account the second instalment due to the plaintiff which was likewise not paid. At the commencement of the hearing further amendments to the pleadings were made by both sides which adjusted the figures in the defence and counterclaim. The plaintiff added a plea of estoppel by way of reply and defence to the counterclaim.
 
This is a case in which there is no dispute as to the facts. The agreement was signed by the partners in the mistaken belief that the partnership account had been correctly drawn up. Mr. Maharaj for the plaintiff was obliged to concede that the mistake occurred, but, he submitted that this should not rebound to the benefit of the defendants. The plaintiff was quite innocent of the true position and Mr. Maharaj submitted that it would be unfair to him if the agreement was set aside. The plaintiff accepted the payment made and promised as consideration for his retirement from the partnership.
 
Since the decision of the House of Lords in Bell v. Lever Brothers Limited  (1932) A.C. 161 this difficult branch of the law has remained to some degree unsettled. Their Lordships decision was not unanimous and Lord Blanesburg based his opinion largely on the fact that mutual mistake had not been originally pleaded. The remaining Law Lords differed on the question as to whether the mistake in that particular case was sufficiently fundamental to avoid the contract.
 
It was the view of Lord Warrington of Clyffe that the error in Bell v. Lever Brothers Limited was one which, having regard to the matter on which the patties were negotiating was fundamental to the bargain (p. 208). Lord Atkin considered the law at p. 217 et. seq. He concluded at 226:
 

“We therefore get a common standard for mutual mistake, and implied conditions whether as to existing or as to future facts. Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts? To apply the principle to the infinite combinations of facts that arise in actual experience will continue to be difficult, but if this case results in establishing order into what has been a somewhat confused and difficult branch of the law it will have served a useful purpose.”
 
Lord Thankerton remarked at 235:
 

"The phrase ‘underlying assumption by the parties,’ as applied to the subject matter of a contract, may be too widely interpreted so as to include something which one of the parties had not necessarily in his mind at the time of the contract; in my opinion it can only properly relate to something which both must necessarily have accepted in their minds as an essential and integral element of the subject matter."
 
The particular difficulty with which I am faced in this case is that neither the plaintiff nor the defendants had any reason to believe that the accounts upon which the agreement was based might be different than they had assumed them to be. On the other hand, one of the partners who was not joined in these proceedings had by his own error and lack of care induced the mistake in the minds of the other partners.
 
However, it cannot be denied that the most important question upon which agreement had to be reached, if the dissolution of the partnership was to be effected to the mutual satisfaction of all concerned, was the division of the assumed profits.
 
The parties had before them an account subscribed to by a reputable firm of accountants who had worked them out on the basis of the figures and estimates supplied by Mohammed Sultan Khan. The fact that these accounts did not represent the true position was a fundamental error going to the root of the contract. I do not see how in such circumstances any of the parties can be held bound by what was agreed upon at that time.
 
The plaintiffs action based upon that agreement must be dismissed. I grant to the defendants a declaration that the agreement dated the 10^th November, 1981 is unenforceable. The defendants are not entitled to judgment on their counterclaim for the overpayment as the amount claimed has not been proved to be correct.
 
The effect of this judgment is to put the parties back in the position that they were in on the 10^th September, 1981 when the partnership was dissolved. They will now have either to agree between themselves the mutual division of capital and income or find some acceptable means of resolving the problem.
 
There can be no estoppel arising in favour of the plaintiff arising from an agreement which has now been declared unenforceable, because it was concluded as a result of a fundamental mistake.
 
The defendants are awarded the costs of this action.
 
Plaintiff’s claim dismissed. Counterclaim dismissed.
 

Rooney, J.
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