Lever Bros Ltd v Bell [1932] AC 161, [1931] UKHL 2

Facts

Lever Brothers Ltd (Appellants) held a controlling interest in the Niger Company. Mr Bell and Mr Snelling (Respondents) were appointed as chairman and vice-chairman, respectively, of the Niger Company under five-year service contracts. As part of a corporate restructuring, Lever Brothers decided to terminate these appointments prematurely. They entered into compensation agreements with Bell and Snelling, paying them £30,000 and £20,000 respectively, in consideration for the early termination of their service contracts.

Subsequent to these payments, Lever Brothers discovered that both Bell and Snelling had, during their employment, committed serious breaches of their duties as directors. They had secretly engaged in personal trading in cocoa futures, which constituted a conflict of interest. These breaches would have entitled Lever Brothers to terminate their employment summarily, without any compensation. Upon this discovery, Lever Brothers brought an action to have the compensation agreements set aside and to recover the £50,000, arguing that the agreements were void for common mistake.

Issues

The central legal issue before the House of Lords was whether the compensation agreements were voidable at common law due to a common mistake of fact. Specifically, the court had to determine:

1. Whether the shared, mistaken assumption by both parties that the service contracts were not already terminable without compensation was a mistake of fact.
2. If so, whether this mistake was sufficiently fundamental to the contract’s subject matter as to nullify the parties’ consent and render the contract void ab initio.

Judgment

By a narrow 3-2 majority, the House of Lords held that the contract was valid and not void for mistake. The appeal by Lever Brothers was dismissed.

Majority Opinion (Lord Atkin)

Lord Atkin, delivering the leading judgment for the majority, established a very high threshold for the doctrine of common mistake. He argued that for a mistake to invalidate a contract, it must be fundamental to the identity of the subject matter, rather than merely relating to its attributes or quality. He reasoned that the subject matter of the compensation agreement was the termination of the service contracts. These contracts, despite being terminable for cause, were real and existing contracts. The mistake was about a quality of the contract (its security from termination), not its existence or identity.

Lord Atkin articulated the definitive test for what constitutes an operative common mistake:

A mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.

He provided several analogies to illustrate this point, such as the purchase of an unsound horse believed to be sound, or a painting thought to be by an old master which is in fact a copy. In such cases, the contract stands unless there is a specific warranty or misrepresentation. He concluded that the mistake in this case did not meet this high standard. Lever Brothers received exactly what they bargained for: the termination of the existing employment relationship with Bell and Snelling.

It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A. buys B.’s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known as the fact is that the horse is unsound. If B. has made no representation as to soundness and has not contracted that the horse is sound, A. is bound and cannot recover back the price… The contract released is the identical contract in both cases, and the party paying for the release gets exactly what he bargains for.

Dissenting Opinion (Lord Warrington of Clyffe)

Lord Warrington, in dissent, argued that the mistake was indeed fundamental. He believed that the parties contracted on the fundamental assumption that the service agreements were valid and binding for their unexpired term, and that compensation was therefore legally necessary. The reality—that the contracts were voidable at will by Lever Brothers—meant that the subject matter was entirely different from what was contemplated. In his view, the state of the contracts as being indisputably binding was an ‘essential and integral element’ of the subject matter, and the mistake as to this element was sufficient to void the contract.

Implications

The decision in Bell v Lever Brothers Ltd is a landmark case in English contract law that significantly narrowed the scope of the doctrine of common mistake. It established the strict ‘essential difference’ test, prioritising contractual certainty over allowing parties to escape from what turn out to be bad bargains. The House of Lords drew a firm line between a mistake as to the subject matter itself (which may render a contract void) and a mistake as to its quality, value, or attributes (which generally will not). This ruling has had a profound and lasting impact, reinforcing the principle of caveat emptor (‘let the buyer beware’) in contractual negotiations. The case remains the foundational authority on common mistake at common law, and its stringent test was famously reaffirmed by the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002], which rejected a more lenient equitable doctrine that had developed in the interim.

Verdict: Appeal dismissed.

Source: Lever Bros Ltd v Bell [1932] AC 161, [1931] UKHL 2