Bell v Lever Bros Ltd [1932] AC 161 (HL)

Facts

• Lever Bros Ltd entered into severance agreements with employees, including Mr. Bell and Mr. Snelling, providing substantial compensation for terminating their employment.
• The company later discovered that both employees had previously breached their employment contracts by engaging in private trading activities, conduct which would have justified dismissal without compensation.
• Neither Lever Bros nor the employees were aware of the breaches when entering the severance agreements.
• Lever Bros argued that both parties operated under a common mistake, rendering the redundancy agreements void since compensation would not have been necessary if the breaches had been known.
• The House of Lords examined whether the mistake about the right to dismiss without compensation was sufficiently fundamental to invalidate the agreements.

Issues

1. Whether a common mistake as to a quality or circumstance (here, the right to dismiss without compensation) is sufficient to render a contract void.
2. Whether the mistake in this case pertained to the essence of the contract or merely to a quality or characteristic.
3. Whether the doctrine of common mistake should be interpreted narrowly as in Bell v Lever Bros, or whether an equitable doctrine as suggested in later cases should apply.

Decision

• The House of Lords held that a mistake regarding the quality of the subject matter, unless it renders the contract essentially different from what was intended, does not void the contract.
• It was determined that the mistake about the right to dismiss without compensation did not go to the essence of the severance agreements.
• Consequently, the severance contracts remained valid and enforceable; the argument that they were void for common mistake failed.
• Later attempts to expand the doctrine, such as Denning LJ’s equitable principle in Solle v Butcher, were ultimately rejected in subsequent case law (notably Great Peace Shipping Ltd v Tsavliris Salvage).
• The court reaffirmed the strict requirements for a common mistake at law.

Legal Principles

• A contract is only void for common mistake where both parties are mistaken as to a matter that makes the subject matter of the contract essentially different from what they believed.
• Mistakes as to quality, even if significant, are not sufficient grounds to void a contract unless that quality is necessary for the contract’s very existence.
• There are limited categories for voiding contracts: mistake as to existence, mistake as to title, and mistake as to an essential quality of the subject matter.
• The equitable doctrine of common mistake (allowing contracts to be voidable for a broader set of shared mistakes) was not accepted by the courts, reaffirming the strict common law position of Bell v Lever Bros.
• The narrow application of common mistake maintains contractual certainty and limits avoidance to extraordinary scenarios.

Conclusion

Bell v Lever Bros Ltd establishes that only a fundamental mistake as to the very essence of a contract’s subject matter can render it void for common mistake, rejecting broader equitable doctrines and ensuring strict limits for invalidating contracts on this ground.