High Court decision underlines high threshold to find a contract void for common mistake

In a recent decision, the High Court found that two five-year aircraft lease agreements were not void on the grounds of common mistake, where it was understood that the aircraft would be used to undertake airlifts for the Hajj and Umrah pilgrimages and the required regulatory approval was not obtained: Triple Seven MSN 27251 Ltd v Azman Air Services Ltd [2018] EWHC 1348 (Comm).

At the time of the contract the parties had shared a mistaken common assumption about the possibility of obtaining approval, when in fact approval had already been refused. However, the court found that the mistaken assumption was not sufficiently fundamental. It did not render the lease agreements “essentially and radically different” from what the parties had understood, nor impossible to perform, and therefore the agreements were not void due to the common mistake. In any event, the lease agreements allocated the risk of not obtaining approval, which meant the doctrine of common mistake could not apply.

Although this is a first instance decision where the court applied existing principles, it is a helpful reminder of the high threshold for establishing that a contract is void due to a shared mistaken assumption underlying it.

Ramyaa Veerabathran, an associate in our dispute resolution team, considers the decision further below.

Background

On 20 June 2016, the parties entered into two five-year leases in respect of two Boeing 777 airliners owned by the claimant, Triple Seven. The defendant airline, Azman, planned to use the aircraft to transport passengers from West Africa to Saudi Arabia for the Hajj and Umrah pilgrimages. Some hours after signing the lease agreements, Azman received a letter, sent on 15 June, informing it that the Saudi Arabian regulatory authority (GACA) had excluded it from participation in the Hajj airlift.

Azman refused to accept delivery of the aircraft, and Triple Seven claimed damages for breach of the lease agreements. By the time of the trial, the only substantive defence advanced by Azman was that the lease agreements were void at common law on the grounds of common mistake.

Decision

On the facts, the court found that the parties had entered into the leases on the assumptions that: (i) the Nigerian regulatory authority had approved Azman’s participation in the 2016 Hajj airlift, (ii) GACA might or might not provide its approval, (iii) Azman expected to obtain GACA’s approval, and (iv) GACA’s decision had not yet been made.

In fact, at the time the leases were concluded, GACA had already decided not to allow Azman to participate in the 2016 Hajj airlift, although Azman did not discover this until later. The third and fourth listed assumptions were therefore invalid at the time the contracts were made. The court accordingly found that there was a common mistake as to an existing state of affairs at the time of formation of the contracts.

The court considered the leading cases on the pre-requisites for a contract to be held void on the grounds of common mistake, and distilled the following six principles:

  • At the time the contract was made, the parties must have substantially shared an assumption as to the existence of a certain state of affairs.
  • That shared assumption must have been fundamental to the contract.
  • That shared assumption must have been wrong at the time the contract was made.
  • By reason of the assumption being wrong, the contract or its performance would be essentially and radically different from what the parties believed to be the case, or impossible to perform, having regard to the shared assumption. In other words, there must be a fundamental difference between the assumed and actual states of affairs.
  • The parties, or at least the party relying on the common mistake, would not have entered into the contract had the parties been aware that the shared assumption was wrong.
  • The contract must not have made provision in the event that the common assumption was mistaken.

Applying these principles to the facts before it, the court held that the shared mistaken assumptions were not sufficiently fundamental and did not render the lease agreements essentially and radically different from the parties’ original understanding, nor did they render the agreements impossible to perform. The judge cited a number of factors in support of this conclusion, including:

  • The 2016 Hajj airlift represented a relatively short proportion of the overall term of the leases.
  • Azman would have still earned a substantial profit during the remainder of the term of the leases if it was successful in obtaining approvals for the subsequent Hajj airlifts.
  • The revenue for the 2016 Hajj airlift was important, but not sufficiently important so as to be fundamental to the performance of the agreements as a whole.
  • There was no evidence that Azman’s failure to obtain GACA’s approval for the 2016 Hajj airlift meant that such approval was likely to be denied in the remaining years of the lease agreements.

The court accepted that neither party was likely to have entered into the lease agreements had they been aware of the true position. However, the fact that the parties were induced to enter into the contracts by their shared mistaken assumption was a necessary, but not sufficient condition to render those contracts void for common mistake.

Even if the court had concluded that the shared mistaken assumption was sufficiently fundamental, and rendered the contracts radically different from the parties’ original understanding, or impossible to perform, it would nevertheless have decided that the leases were not void for common mistake. This was because they allocated the risk of the failure to obtain GACA’s approval to Azman. The lease agreements provided that Azman’s obligations were “absolute and unconditional, irrespective of any contingency or circumstance whatsoever …”. Such a contingency must have included the failure to obtain GACA’s approval, which both parties recognised was a possibility.

Accordingly, Triple Seven were awarded damages for breach of contract in the sum of approximately US$ 22 million.

Ramyaa Veerabathran
Ramyaa Veerabathran
Associate
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+44 20 7466 2070

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