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Shared mistake over government approval not sufficient to invalidate deal

24 July 2018

A tactic used by parties seeking to get out of a contract is arguing that there has been a mistake which renders a contract void.  In this case, although there had been a shared assumption between the parties (that the requisite government approval would be provided) which turned out to be wrong, the mistake was not sufficiently fundamental to avoid the aircraft leasing contracts.  An important factor was that the parties had already contractually allocated the risk of the approval not being given.  The contracts were therefore not void: (1) Triple Seven MSN 27251 Ltd (2) Triple Seven (CIS) Ltd v Azman Air Services Ltd [2018] EWHC 1348 (Comm), 5 June 2018

Aircraft for pilgrims

Nigerian airline Azman Air Services Ltd (Azman) wanted to lease two aircraft from companies in an aircraft lessor group (the Lessors).  Azman’s business plan included carrying pilgrims from West Africa to Saudi Arabia, and it needed approval for the 2016 Hajj pilgrimage from both Nigerian and Saudi authorities (NAHCON and GACA respectively).  NAHCON approval was granted and the parties assumed that Azman would also receive GACA approval.  However, shortly after the aircraft leases had been signed, GACA notified Azman that it did not approve.  Azman told the Lessors that it was not in a position to accept delivery of the aircraft as it was unable to participate in the 2016 Hajj.  The Lessors terminated the contracts and sued for damages.

Test for common mistake

Azman argued that the leases were void under the doctrine of common mistake.  The judge applied the following six point test:

there must have been, at the time of contracting, an assumption as to the existence of a state of affairs substantially shared between the parties; 

the assumption must have been fundamental to the contract; 

the assumption must have been wrong at the time of the conclusion of the contract; 

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 at the time of the conclusion of the contract; alternatively, the contract must be impossible to perform having regard to or in accordance with the common 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 common assumption was wrong; and 

the contract must not have made provision in the event that the common assumption was mistaken. 

All elements must be present for a contract to be void.

There was a mistake

The judge concluded that there had been a mistake as to the existence of a state of affairs which was wrong at the time of concluding the contract.  There was a shared assumption that GACA approval would be obtained, and also that GACA had not yet made its decision.  Unbeknown to the parties, the decision not to grant approval had already been made when the leases were signed and the assumptions made by the parties were therefore wrong at the time of concluding the contracts.

But contracts were not void

Although the judge found that there had been a mistake, the contracts were not void.  The mistake was not deemed to be sufficiently fundamental to the leases, it did not make the leases essentially and radically different from what was expected, and it did not make the leases impossible to perform.  The leases had five year terms and, according to a business plan submitted by Azman in evidence, it stood to make a substantial profit during the term of the leases without participating in the 2016 Hajj.  There was no evidence before the judge that Azman would fail to get approval for carrying passengers to subsequent pilgrimages.

Even if the judge had concluded that the mistake was sufficiently fundamental, the leases would not have been void as the parties had included clauses which dealt with the possibility that the common assumption was mistaken.  First, there was a provision stating that Azman’s obligations under the leases were “absolute and unconditional, irrespective of any contingency or circumstance whatsoever”.  Second, it was an event of default under the leases if Azman failed to obtain “any consent, authorisation, licence, certificate or approval of or registration with or declaration to any Government Entity required in connection with the Operative Documents, including, without limitation: … (iv) any airline licence or air transport licence required by Lessee.”  These provisions clearly placed the risk on Azman of failure to obtain GACA approval, and would have been reason enough on their own to rule out common mistake.

 

The leases were therefore not held to be void and the Lessors were awarded damages.

COMMENT 

It will often be necessary to conclude contracts in anticipation of some sort of consent being granted by a public authority.  However, making assumptions about events outside of the parties’ control is inherently risky.  Whether such a consent will be granted is unpredictable and can depend on political rather than commercial considerations.  Many clients will have found themselves on the wrong side of a decision made for political reasons, through no fault of their own.  

If making assumptions is an unavoidable part of doing business, it is essential that the parties know where they stand if those assumptions turn out to be wrong.  This can be achieved by properly allocating risk in a contract.  Where parties are potentially dealing with a range of unknown risks, it is sensible to use widely drafted provisions – such as the “absolute obligations” provision and having the failure to obtain the necessary approvals constitute an event of default – to capture all possible outcomes.  In addition, dealing with the obtaining of necessary approvals as conditions precedent could help to protect parties by ensuring that contacts only become binding on the occurrence of certain specified events. 

Where the relationship breaks down and litigation is in prospect, parties should perhaps be wary of relying on a defence of common mistake without other grounds.  Previous authorities on the doctrine have pointed out that it will only be available in very limited circumstances, and this judgment confirms that it will be limited to sufficiently fundamental mistakes where the difference between the assumed and actual states of affairs is “radical.”  As such, the argument is not likely to succeed very often in practice.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.