Elston v King & Anor

The Respondents were pressing the Appellant to sign the Income Payments Agreement. There was nothing improper in this, as the Judge found, but the time of the Appellant’s discharge from bankruptcy was approaching, and the need to either have an income payments agreement concluded with the Appellant or an income payments order made by the court clearly weighed on the Respondents’ minds. (Footnote: ¹²)

The Respondents urged the Appellant to take legal advice, and made clear that he was not obliged to agree to an income payments agreement (albeit that an application for an income payments order would likely follow a refusal to agree). (Footnote: ¹³)

The Appellant’s state of mind is described by the Judge in the following terms:

“23.

When the trustees intimated a claim on his pensions he had the opportunity to take legal advice. He decided not to do so for various reasons. He could not see how he would fund the litigation if he wanted to contest [the Respondents’] application. He thought seeking legal advice was pointless because having read the Raithatha case himself and various articles online he thought any solicitor he saw would advise him that the court could make such an order. His discharge was only a few weeks away and he did not want to do anything to disrupt that happening. He had found his earlier litigation experience bruising and did not want to be in a fight.

24.

He could have taken legal advice and explored funding options but he chose not to do so. Had he done so, he may have argued that he shouldn’t acquiesce to [the Respondents’] demand. He may have been able to argue that Raithatha was controversial. He may have sought to distinguish that case from his on the grounds that the size of his pension pot was much smaller.

25.

Having read the case and various articles on-line, he had questions in his mind about the demand from [the Respondents]. On the balance of probabilities, I find he had doubts about whether the court would make an order, not whether it could. He had it in mind that he might challenge it in the future. He said: “I had it in mind I might have the potential to revisit it when in a position to do so” and

“to see whether the legal basis was correct or not”.”

The position of the Respondents was that (according to the First Respondent, who gave evidence) “he thought Raithatha was good law…[He] was aware that the law was not conclusively settled.” (Footnote: ¹⁴)

I have found the Income Payments Agreement to be a contract. (Footnote: 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. (Footnote: ¹⁶) Thus, the relevance of the mistake alleged by the Appellant is that it is potentially a reason for setting aside the Income Payments Agreement which, if set aside, will result in the recovery of payments made under the contract, as having been made without basis – the ostensible basis for the payments, the agreement, having fallen away.

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, as I shall come to describe, 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.

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. (Footnote: ¹⁷) Five elements must be satisfied:²¹ (1) There must be a common assumption as to the existence of a state of affairs.

Compromise agreements – by which I mean an agreement whereby a pre-existing dispute between parties is settled by agreement – are contracts like any other. (Footnote: ¹⁸) 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.

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 (Footnote: ¹⁹) 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.

The difficulties thrown up by compromise agreements – particularly where the compromise is based upon a view of the law that is later overturned – is most clearly seen in Brennan v. Bolt Burden, (Footnote: ²⁰) where the Court of Appeal had to consider the operation of the doctrine of common mistake in the context of a compromise agreement concluded in circumstances where the law had changed:

The Court of Appeal in Brennan v. Bolt Burdon were plainly concerned that the effect of Kleinwort Benson, in holding that the law could be changed retrospectively by a later judicial declaration of the law, would be to create a form of common mistake of the most artificial sort (in that the “mistake” only arose by way of subsequent judicial decision and did not subsist at the time of the agreement) that could create the prospect of wide-ranging attacks on contracts in general, but on compromise agreements in particular.

Without in any way seeking to undermine the holding in Kleinwort Benson that there was no difference between mistakes of law and mistakes of fact and the “declaratory” theory of the common law espoused by the House of Lords, the Court of Appeal sought to identify mechanisms whereby the ability of a party to a compromise agreement to cause that agreement to be re-opened might be restrained. All three members of the Court of Appeal identified different mechanisms for this. Thus:

Although Mr Morgan, QC, counsel for the Respondents, teetered on inviting me to consider such a public policy argument, I discouraged such an invitation, for essentially two reasons.

First, and this is no criticism whatsoever, neither party had, in their (very helpful) written submissions, said very much about a public policy exception. That, I strongly suspect, is because there is a distinct lack of such material. It seemed to me that – if the public policy point were to be addressed at all – this is a matter for a higher tribunal.

Secondly, I am not sure that, when a settlement agreement is fully and properly construed, taking account of the entire factual matrix, including express and implied allocations of risk and the difference between mistake and misprediction (a distinction alluded to by Bodey J, and which I shall expand upon), there is very much room for a public policy exception to operate in the context of compromise agreements. It seems to me that questions of mistake of law in the context of compromise agreements can be dealt with within the framework of the existing rules.

The difference between “mistakes” and “mispredictions” is one that their Lordships in Kleinwort Benson were well-alive to, and it is a distinction that has been considered in a number of cases concerned with unjust enrichment where the “unjust” factor is mistake: Marine Trade SA v. Pioneer Freight Futures; (Footnote: ³²) BP Oil International Limited

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. (Footnote: ³⁵)

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. (Footnote: ³⁶) 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, as Bodey J stated,⁴¹ 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.

The present case is an excellent case in point. So far as I understand it, the decision in Raithatha was a decision on a new point, made at first instance. Although permission to appeal was given – itself revealing – the appeal was not taken forward. Two or so years later, another first instance judge reached a different conclusion in Horton, as he was perfectly entitled to do (the decision in Raithatha was persuasive only, and clearly did not persuade). The law is redolent with first instance decisions going in different directions, awaiting an authoritative holding of the Court of Appeal. In this case, the uncertainty did not last long: the Court of Appeal decided that Horton was right and Raithatha wrong. But, to take a hypothetical example, it is impossible to suggest that the parties entering into an income payments agreement of the sort here in issue, but after Horton at first instance and before the outcome in Horton on appeal, made a mistake. They clearly will have done no such thing, but reached an agreement based upon their assessment of which way the Court of Appeal would go in deciding between two inconsistent first instance decisions.

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:

The Judge concluded that the Income Payments Agreement was a compromise agreement. At [56] of the Judgment, she said:

“There was a potential dispute between the parties in this case. [The Respondents] told [the Appellant] that following Raithatha the court could order him to make payment from his pensions. He [the First Respondent] said he wanted him to agree to such payments otherwise he would apply to the court. He made it clear that solicitors were instructed. [The Appellant] gave various reasons that led him to agree to sign the [Income Payments Agreement]. In my judgment, there was a compromise of the potential dispute which may have given rise to litigation if [the Appellant] had not acquiesced to the agreement. This is not a situation where there was no give-or-take as in the Hudderfield Banking case. In that case, there was a dispute as to fact in respect of the subject-matter of the contract. In this case, the subject-matter of the contract was the payment of income from [the Appellant’s] pensions. The trustee said he was entitled to seek [the Income Payments Agreement]. [The Appellant] raised certain issues, but for a variety of reasons he has articulated he decided to enter into the agreement. The parties decided to settle the issue between themselves and not go to court. The consideration was the forbearance of the trustee not to bring proceedings. I find that this was a compromise.”

I consider that this is a conclusion that was open to the Judge on the facts as she found them. Indeed, it is difficult to see that any alternative finding was possible. The fact is that the Appellant’s agreement to the Income Payments Agreement headed off an application that would otherwise have been made by the Respondents. The Respondents’ ability to apply to court for an income payments order was compromised.

The Appellant, relying on Huddersfield Banking Company Limited v. Henry Lister & Son Limited, (Footnote: ³⁷) sought to contend that there was insufficient “give and take” for the Income Payments Agreement to constitute a compromise agreement. In Huddersfield, a bank (the mortgagee of certain premises) had agreed – by way of a consent order – that equipment appearing to be chattels and not fixtures, might be sold by a debenture holder. There was no dispute about this between the parties, and the agreement resolved no such dispute. For this reason, Vaughan Williams J – with whom the Court of Appeal agreed – set aside the agreement: (Footnote: ³⁸)

“As regards the other matter, relied on as a ground for not giving relief, I agree that if the arrangement come to was a compromise of doubtful rights and a give-and-take arrangement, parties to it could not afterwards have the compromise set aside because upon obtaining fuller information they thought they had made a bad bargain. But having regard to the evidence, I am of opinion that this arrangement was not a compromise or give-and-take arrangement of the sort I have referred to. The arrangement was not that one side should give way as to some of the machines and the other side as to the rest of them; and that being so, I have nothing further to dispose of before I deal with the question whether the machines were included in the mortgage.”

The distinction between Huddersfield and the present case is that in this case, as the Judge found, the prospect of a hearing and finding resulting in an income payments order was avoided. The Judge was quite right to hold that the Income Payments Agreement was a compromise agreement.

Given the findings of fact made by the Judge as summarised in paragraphs 13 and 14 above, it is plain that there was no common assumption between the parties as to the jurisdiction of the court to make an income payments order. Both parties were aware that Raithatha was a first instance decision on a novel point of law. It was entirely open to the Appellant to contend – without concluding an Income Payments Agreement – that there was no jurisdiction in the court to make the order sought by the Respondents. Had he done so, I have no doubt that the Respondents would have made the application, and the outcome would have been whatever it was: it may be that the Appellant would have prevailed. But that is not what happened, because (as I find, based upon the Judge’s findings) there was no common assumption between the parties as to the court’s jurisdiction. Rather, each made an assessment – a prediction – of the likely outcome were an application to the court to be made, and they concluded the Income Payments Agreement on that basis.

It follows that the first, and primary, requirement for setting aside a contract on grounds of common mistake does not exist in the present case, and the Judge’s decision must be affirmed on that ground alone.

The requirement that the agreement be impossible to perform by reason of the mistaken common assumption stems from the decision in Great Peace Shipping itself. It is plain that the Income Payments Agreement was not impossible to perform in this literal sense.

However, there is some law to suggest that the requirement is not one of actual impossibility, albeit that it is unclear precisely how that requirement is to be framed. (Footnote: ³⁹) The Judge dealt with the point briefly in the following way:⁴⁵

“On this point, I find that [the Respondents] must succeed also. In Kyle Bay v. Underwriters…Neuberger J quoted Steyn J, who in turn was quoting from the Great Peace case thus: “…the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist…”. In this case, the [Income Payments Argeement] could still be performed and was not radically different from what the parties agreed. The substance of the agreement remained an [income payments agreement] whereby the [Appellant] agreed to allow part of his pension to be treated as his income to avoid the trustee making an application to the court. There was therefore an intelligible basis for their agreement. Whichever test is applied, whether as articulated by Maurice Kay LJ and Bodey J or by Sedley J, I find that performance of the contract was still possible and that [the Appellant’s] claim fails on this basis.”

I agree, and would also dismiss the appeal in this ground. But my primary basis for doing so – as with the Judge – was as set out above, namely that there was no mistaken common assumption at all.