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Contract valid despite parties’ common mistake

Contract with magnifying glass and pen Print publication

11/07/2018

The High Court has rejected a defendant’s attempt to avoid liability for damages, holding that a contract remained valid despite the parties’ common mistake as to shared assumptions at the time the contract was entered into. Walker Morris’ Managing Partner and Commercial Dispute Resolution specialist Malcolm Simpson looks at the law of mistake and reviews the recent case of Triple Seven Msn 27251 Ltd v Azman Air Services Ltd [1].

Void contract? Avoid liability

When faced with a claim, inevitably a defendant will look to avoid liability if that is at all possible. If there is no clear cut factual defence available, defendants may also wish to examine legal arguments providing potential defences to a claim.  That is what the defendant did in this case, albeit, in the particular circumstances, the legal defence raised was unsuccessful.

The parties had entered into two five-year aircraft leases, with both parties operating on the assumption that the Saudi authorities would grant approval for the defendant to participate in the 2016 Hajj airlift of pilgrims to Mecca. (In fact, at the time the contract was completed, the Saudi authorities had already decided to withhold that approval, and so the leases were completed under a common mistake as to fact.)

When, during the term of the leases, the defendant failed to accept delivery of the aircraft and defaulted on its rent, the claimant sued for damages. The defendant was unable to mount a defence by disputing the facts, so it sought to avoid liability by arguing, instead, that the contract was void by reason of the parties’ shared mistake.

High Court guidance

Concluding that a contract is void is a fairly draconian step. In practice, the courts generally prefer to uphold the contract wherever possible; and to adjust the parties’ obligations through the interpretation of its terms, or even implying terms where considered necessary.  In this case the High Court undertook a comprehensive review of the relevant authorities, and helpfully distilled six principles to determine whether a contract is void for mistake:-

  1. there must have been, at the time the contract was concluded, a shared assumption as to the existence of a state of affairs
  2. the assumption must have been fundamental to the contract
  3. the assumption must have been wrong at the time of conclusion of the contract
  4. by reason of the assumption being wrong, the contract or its performance would be essentially and radically different from what the parties believed at the time the contract was concluded. Alternatively the mistake must make the contract impossible to perform. In short, there must be a fundamental difference between the assumed and actual state of affairs
  5. the parties (or at least the party relying on the common mistake) would not have entered into the contract had they been aware that the assumption was wrong, and
  6. the contract must not have made provision for the common assumption being mistaken.

Decision goes against defendant

On the facts, the High Court found that, although there was a common mistaken assumption that the Saudi authorities would grant the 2016 Hajj airlift approval, it was not sufficient to render the contract void. One key reason was that the 2016 Hajj airlift would only have lasted for a relatively short part of the overall 5-year lease period.  Another was that the leases contained provisions which made it clear that the defendant’s obligations would be unaffected by “any contingency or circumstance whatsoever”.  Those contingency provisions in the contract were found to have covered the possibility that Saudi approval would not be granted.  The claimant was therefore entitled to damages for breach of contract.  In this case that included: the claimant’s loss of profit which it would otherwise have earned under the leases; expenses incurred with trying to find alternative leases; costs incurred negotiating the leases with the defendant; and interest at the contract rate.

Practical advice

What should you do if you face an unfavourable contractual term (possibly included erroneously)?

  • Start with the wording in the contract itself. Since the 2015 Supreme Court decision in Arnold v Britton [2], the courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad bargain’ for any party.
  • Where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense. Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy in spite of the mistake [3].
  • Consider whether there is any scope for settlement? It is rare for any contractual interpretation or mistake dispute to be clear cut. If there is little doubt as to the mistake in a contract but it is not likely or preferable for the contract to be void, it is worth taking specialist legal advice to investigate the potential to pursue a claim for rectification of the contract.
  • Alternatively, if the mistake arose, and the contract was entered into, by reason of any misrepresentation[s] made by your counterparty, the contract could potentially be set aside and financial compensation could be payable.
  • Finally, consider whether you were properly advised when the contract was completed. If the mistake arose as a result of any failure or shortcoming on the part of your professional advisers, it is possible that any losses might be recouped via a negligence claim.

For further advice or assistance, please do not hesitate to contact Malcolm Simpson or any member of Walker Morris’ Commercial Dispute Resolution Team.

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[1] [2018] EWHC 1348 (Comm)
[2] [2015] UKSC 36
[3] See Walker Morris’ earlier briefings on contractual interpretation and implying terms.

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