Bell v Lever Brothers Ltd [1931] UKHL 2
Citation:Bell v Lever Brothers Ltd [1931] UKHL 2
Rule of thumb:If a director or employee is given a pay-off to leave a company, and it is then discovered that they did wrongdoing in the company, does this entitle to the pay-off to be paid back? No, this does not invalidate that pay-off, and any actions for damages against the individuals would have to be raised as separate issues. Rule of thumb: Where someone fails to disclose information about their bad character before a contract is entered, this will usually not be enough to declare the contract void by essential error as a general rule, although this is a type of essential error case that can be decided either way.
Background facts:
The facts of this case were that Bell was managing director of Lever Brothers wholesalers group (would later be renamed Unilever). Bell wanted to retire and sought a compensation package for doing so which the Lever Brothers company board agreed to provide. Lever Brother later discovered that Bell had been a part of a cocoa cartel with other wholesalers and had used this information to make fraudulent profits. This was one of the reasons why Bell had made such giant profits in recent times for the Lever Brothers. Bell had of course not disclosed this to the board before or during these negotiations. Lever Brother sought the return of the compensation package from Bell, feeling this was grossly inappropriate given the subsequent trouble it turned out that he had landed the company in. Bell refused to return the retirement golden handshake package and the matter went to Court.
Parties argued:
Lever Brothers argued that they would never have given the package at the financial level agreed if they knew Bell was doing this, meaning that they made an 'essential error' over price in doing so. Bell argued that this mistake did not fundamentally affect the contract at hand - the price was clear and ascertainable - and that this did not constitute an essential error. The Court upheld the arguments of Bell. The reasons and motivations for giving someone a contract are not one of the 4 essential parts of the contract - subject, parties, price, intent. The price was clear and both parties knew exactly what it was meaning that technically there was not an essential error as such over price.
Judgment:
The Court held that Bell was entitled to hold onto his severance package in this case. If Lever Brothers wanted money from Bell they would have to raise actions on a different cause. It should be noted that this was not a decision the Court arrived at easily - Lord Warrington dissented and argued that there was an essential error over price. This did raise a nuanced point of law over the exact legal meaning of essential error based upon price. The other Judges believed that the error over price was not so fundamental as to prevent a contract being formed as there was no dubiety over price, as stated above. This case perhaps demonstrates the slight difference between the legal principles of essential error and misrepresentation. If the Lever Brothers had based their case on the principle of 'misrepresentation by silence' by Bell then this could potentially have resonated more with the majority Judges, but there was not a fundamental enough error over an ascertainable price to constitute essential error leading to the contract being null and void.
Ratio-decidendi:
'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’, Lord Atkin
'The real question therefore is whether the erroneous assumption on the part of both parties to the agreements that the service contracts were undeterminable except by agreement was of such a fundamental character as to constitute an underlying assumption without which the parties would not have made the contract they in fact made, or whether it was only a common error as to a material element but one not going to the root of the matter and not affecting the substance of the consideration. With the knowledge that I am differing from the majority of your Lordships I am unable to arrive at any conclusion except that in this case the erroneous assumption was essential to the contract which without it would not have been made. It is true that the error was not one as to the terms of the service agreements, but it was one which, having regard to the matter on which the parties were negotiating, viz., the terms on which the service agreements were to be prematurely determined and the compensation to be paid therefor, was in my opinion as fundamental to the bargain as any error one can imagine', Lord Warrington, '(an essential error argument fails when) only a common error as to a material element ... but one not going to the root of the matter', Lord Warrington, 39
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.