A misprediction is not a mistake: settlement not set aside despite change in law

Elston and his trustees in bankruptcy were parties to an Income Payments Agreement (IPA) under which sums were paid out from Elston’s pension funds to his trustees as contributions to his bankruptcy debts.   The IPA was made under s310A Insolvency Act 1986, so that its provisions were capable of enforcement by the court as if they were provisions of an income payments order (IPO) under s310.  The IPA was entered into in light of Raithatha v Williamson,¹ a 2012 decision in which the High Court held that undrawn pension rights were income for the purposes of s310 and could therefore be the subject of an IPO. 

A month after the IPA was entered into, the High Court in Horton v Henry² declined to follow Raithatha and instead held that undrawn pension rights did not fall to be assessed as part of a bankrupt person’s income for the purposes of s310. In light of this change in law, Elston brought a claim of unjust enrichment against the trustees, seeking restitution of the sums paid out from his pension funds.  He argued that the IPA had been concluded under a mistake of law and should be set aside and the payments made under the Agreement repaid. 

A change in law may give rise to a mistake

The law can be changed retrospectively by a later judicial declaration (Kleinwort Benson v Lincoln County Council).³  In light of this ruling, the court commented that “[i]t is a peculiarity of subsequent changes in the law that what is, on any sensible view, not a mistake at all but a future revision of the law, has the potential of rendering past decisions taking a contrary view (or persons’ understanding of such decisions) in effect mistakes capable of having private law consequences”.

Against this backdrop, the court reiterated that, absent misrepresentation or fraud, a contract can only be set aside for common mistake of the parties to the contract.  As set out in Great Peace Shipping, there are five elements to be satisfied in order to set aside on grounds of common mistake:⁴

1. there must be a common assumption as to the existence of a state of affairs;
2. there must be no warranty by either party that such state of affairs exists;
3. the non-existence of the state of affairs must not be attributable to the fault of either party;
4. the non-existence of the state of affairs must render performance of the contract impossible; and
5. the state of affairs may be: (a) the existence (or a vital attribute) of the consideration to be provided; or (b) circumstances which must subsist if performance is to be possible.

The doctrine of mistake applies to compromise agreements 

The IPA was found to be a compromise agreement: it settled a pre-existing dispute in that it headed off an application for an IPO that would otherwise have been made by the trustees.  The court observed that the rules of mistake apply to compromise agreements as they do to other contracts.⁵  However, compromise agreements are different from other contracts in that the parties reach a compromise not from a common perspective, but from a divergent one.  Compromise agreements involve each party reaching a view not on what the facts are or what the law is, but on how the court will determine the factual and/or legal questions.  

Ultimately, the court concluded that where it is asserted that a compromise agreement should be set aside for mistake of law, the following two-stage process must be undertaken:

• The true meaning and effect of the agreement must be examined.  This may include considering the status of any judicial decision relied on by the parties.  If this results in a construction of the contract whereby one of the parties is found to have assumed the risk of the law changing in the future, then that is the end of the inquiry, as “[t]he answer to the effect of a mistake will be found in the risk allocation adopted by the parties to the compromise agreement”.
• If, on the other hand, the risk is not allocated in the contract, the court must go on to ask whether the retrospective change in law gives rise to a common mistake of law (as defined in Great Peace Shipping) or whether one or both of the parties simply made a misprediction about the course of future legal events.    

A misprediction is not a mistake

The court observed that “a mistake will more likely arise where a well-established and unquestioned rule of law is dramatically overturned than where a single decision on a new and difficult point is overruled”.  The latter will be a case of misprediction.  In drawing this distinction, the court endorsed the view that parties to a compromise should not be treated as ignorant of the fact that the common law develops.⁶

The court found that there was no “common assumption” between the parties as to the court’s jurisdiction to make an IPO in respect of Elston’s undrawn pension rights.  Both parties were aware that Raithatha was a first instance decision on a novel point of law.  It was open to Elston to contend that the court had no such jurisdiction and to refuse to enter into the IPA as a result.  Instead, he and the trustees each made their own “prediction” of the likely outcome were an application to court to be made and entered into the IPA on this basis.  Therefore, the primary requirement for setting aside a contract on grounds of mistake did not exist in this case.⁷

Comment

In grappling with the consequences of Kleinwort Benson, the court in this case made clear that developments in the common law will only give rise to a mistake in contract – with all the private law consequences that follow – in very limited circumstances.  “Closed transactions” are protected by the court and will likely only be reopened on the basis of a mistake of law where the parties have expressly provided for this.  Without such a provision, the parties are taken to have understood that the common law evolves over time, and their agreement will stand regardless of any future changes in law.

Footnotes:

1. [2012] 1 WLR 3559.
2. [2016] EWCA Civ 989.
3. [1999] 2 AC 349.
4. Great Peace Shipping [2002] EWCA Civ 1407 at [76].
5. Brennan v Bolt Burden [2004] EWCA Civ 1017.
6. Brennan v Bolt Burden [2004] EWCA Civ 1017 at [31] (Bodey J).
7. While the first instance decision was affirmed on this ground alone, the court also found that the IPA was not “impossible to perform” by reason of the misprediction.

Further information

For more information please contact Amy Edwards, amy.edwards@allenovery.com.