Bell v. Lever Brothers Ltd.
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Bell v Lever Brothers Ltd. [1931] ALL E.R. Rep. 1, [1932] A.C. 161 is a leading House of Lords decision on common mistake in contract law.
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[edit] Background
During March of 1929 the N. Company, which dealt in trade in the western African area, was merging with a rival company and wanted to get rid of two employees Mr. Bell and Mr. Snelling, who were hired as chairman and vice-chairman of the company. Chairman Francis D'Arcy Cooper on behalf of Lever Brothers made a deal with Bell and Snelling to leave the company in exchange for a sizable compensation (a "Golden handshake"). At the time of the agreement both parties believed that the employment contract had not been breached and thus the company would not have been able to terminate Bell and Snellings' employment under any other circumstances. It was later revealed that there was in fact grounds for termination at the time of the agreement as Bell and Snelling had used their positions to make a secret profit for themselves.
[edit] Facts
D'Arcy Cooper — a senior partner with his uncle's accountancy firm Cooper Brothers and staunch Quaker — became chairman of audit client Lever Brothers in the early 1920s. He was hired by Lord Leverhulme when the banks were threatening to call the loans on the company due to devastating losses incurred by the newly acquired Niger Company that crippled Lever Brothers. Cooper arranged financing from Barclays Bank under the condition that professional management would be put in place at the Niger Company. Ernest Hyslop Bell — a personal friend of D'Arcy Cooper and senior manager at Barclays — was hired in 1923 to be chairman of the Niger Company. Snelling was appointed vice-chairman. He was an independent tax consultant who had previously turned a large tax claim into a tax refund for Lever Brothers in 1921 at a time when the company was strapped for cash.
After Bell and Snelling reversed the Niger Company fortunes it was merged with its previously dominant competitor African and Eastern to form the United Africa Company. Bell had fully anticipated he would be asked to lead the newly merged company until Mr Cooper informed him otherwise which greatly upset Bell as he had left a safe job at Barclays Bank, had turned around the business to the point where it could be merged on equal terms with its main competitor and at 54 years of age was too old to get another position in the City. Over lunch at the Savoy Grill it was agreed they would get a sizeable compensation package that would allow Bell to retire.
Shortly after their resignation it was discovered that Bell and Snelling had traded on inside information obtained from the cocao cartel about impending price reductions by selling cocao forward for their personal account.
[edit] Trial at first instance
Lever brought an action claiming rescission of the compensation agreement because of mistake of fact.
At trial the jury found that Bell and Snelling's illicit dealings breached the employment contract and that if the Lever Brothers had known they would not have entered into the agreement. Furthermore, the jury found that at the time of the agreement Bell and Snelling did not have in mind their illicit acts.
Lever Brothers pursued the case vigorously as it considered the behavior of Bell and Snelling simply unacceptable.
[edit] House of Lords Ruling
On appeal, the House of Lords found that there was no mistake and the contract could not be rescinded nor was it void on mistake.
The Court identified the mistake as a common mistake:
- A mutual mistake as to some fact which, by the common intention of the parties to a contract, whether expressed or implied, constitutes the underlying assumption without which the parties would not have made the contract they did, and which, therefore, affects the substance of the whole consideration, is sufficient to render the contract void.
Effectively, the mistake must nullify or negative consent of the parties in order for the agreement to be void.
In order for the contract to be void by mutual mistake the mistake must involve the actual subject-matter of the agreement and must be of such a "fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreements".
From the facts the Court found that the mistake as not sufficiently close to the actual subject-matter of the agreement. The parties got exactly what they had bargained for.
[edit] Aftermath
The case put a high standard on the finding of common mistake. This was criticized in the later cases written by Lord Denning such as in Solle v Butcher where Denning reduced the standard in order the make the agreement voidable on common mistake. Subsequently in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (2002) the Court of Appeal overturned Denning and set the standard for common mistake in line with the original Bell v Lever Brothers standard.
Also in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324, Lord Denning remarked the following, in the context to the equivalent of an unfair prejudice action under UK company law. "Your Lordships were referred to Bell v. Lever Brothers Ltd., where Lord Blanesburgh said that a director of one company was at liberty to become a director also of a rival company. That may have been so at that time. But it is at the risk now of an application under section 210 if he subordinates the interests of the one company to those of the other."
[edit] References
- MacMillan, C. "How temptation led to mistake: an explanation of Bell v Lever Brothers, Ltd" Law Quarterly Review 2003, 119(OCT) 625-659
