Lloyd's Maritime and Commercial Law Quarterly
MISTAKE IN CONTRACT
Associated Japanese Bank (International) Ltd. v. Credit du Nord S. A.
Cases in which a contract is alleged to be void or voidable for common mistake1 appear rarely in the law reports. In consequence, there has been some obscurity of the rules relating to mistake, in particular as to when, if at all, a common mistake operates to vitiate a contract at common law. In Associated Japanese Bank (International) Ltd. v. Credit du Nord S.A.,2 however, Steyn, J., has recently considered at some length—although by way of obiter dictum—the rules of common mistake; has forcefully reaffirmed the doctrine of mistake at common law; and has set out some useful guidelines as to how to approach a case in which a common mistake is alleged.
In the case, one Bennett had entered into a sale and leaseback transaction with Associated Japanese Bank (“AJB”) relating to four machines identified by serial numbers; Credit du Nord (“CdN”) entered into a contract with AJB guaranteeing Bennett’s obligations under the lease. This contract of guarantee was the subject-matter of the action. The alleged common mistake was that both AJB and CdN believed that the four machines existed, whereas in fact they did not and Bennett had committed a fraud on AJB and CdN. Bennett was adjudged bankrupt. AJB claimed against CdN under the guarantee in respect of the outstanding balance owed by Bennett to AJB. Two principal issues were considered. (1) Was CdN excused from liability because the contract of guarantee contained, expressly or impliedly, a condition precedent that the machines existed? If not, (2) was the contract of guarantee void ab initio at common law or voidable in equity by reason of a common mistake as to the existence of the machines?
Steyn, J., held: that, on the proper construction of the documents, there was an express condition precedent that the machines existed; alternatively, that such a condition was implied.3 He nevertheless went on to consider, obiter, the issue of common mistake, and held that the guarantee was void ab initio at common law.
In relation to the common law, his Lordship considered that the landmark decision was Bell v. Lever Bros.,4 in which the House of Lords held valid a contract to pay golden handshakes of £30,000 and £20,000 respectively to two employees to terminate their service contracts, in spite of the fact that it was later discovered that the employees had committed breaches of duty and so could have been dismissed without payment.5 The statement of principle which
1. That is, where both parties make the same mistake. The textbooks and cases are not unanimous in their terminology.
2. [1988] N.L.J. L.R. 109.
3. Under the test in Shirlaw v. Southern Foundries (1926) Ltd. [1939] 2 K.B. 206, 227, per MacKinnon, L.J.
4. [1932] A.C. 161. The only other case which he considered to be significant was Kennedy v. Panama, New Zealand and Australian Royal Mail Co. Ltd. (1867) L.R. 2 Q.B. 580, in which Blackburn, J., “gave the lead” in developing the rules of common mistake.
5. This was a common mistake because the jury found that the employees did not have their breaches of duty in mind when they entered the contract: see [1932] A.C. at 186.
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