Common Mistake – A ‘Radical Difference’ Test
Where a contract has, on balance, been formed on the basis of common mistake, it could be treated as void. A ‘common mistake’ arises where a mistake is shared by both contractual parties and renders the contract void from the start. It reflects that fact that both parties shared a misapprehension about an issue or intention, fundamentally undermining the essence of the contract.
For example, the parties enter into a contract to ship goods at a specific cost, but both parties contracted with the mistaken impression that the cost of fuel was significantly lower than the reality.
This recent ruling1 sets out clearly the proper test for common mistake. It’s a reminder to all businesses to be clear on all facts surrounding new contracts and what the parties’ intentions are.
What’s the background?
A family-owned luxury goods company (R) had been incorporated in the UK by Eric Lobb, who subsequently incorporated a further company (A) in France to develop the family business further. In 1972, A sold a majority stake to French fashion giant the Hermès Group – a sale that included trademark rights.
The dispute concerned trademark issues; the claim centering on a 2008 agreement between A and R. R sought a declaration that the agreement was void for common mistake as there was a “fundamentally mistaken and commonly held belief as to the ownership rights” in the trademarks.
The claim failed on the basis that R had no prospect of success. The ‘mistake’ as to beneficial ownership of the marks did not render the 2008 agreement impossible of performance; or render its subject matter essentially and radically different from that which the parties believed existed.
The appeal also failed but the High Court went on to further consider the test for common mistake. The judge clarified that for there to be a common mistake such as to void the contract:
A common assumption by both parties as to the existence of a state of affairs
Neither party has warranted that assumed state of exists affairs
The non-existence of the assumed state of affairs must not be either party’s fault
The non-existence of the state of affairs must render contractual performance impossible.
The fourth element can be framed either as a test of impossibility of performance; or as a test of essential and radical difference in the contract subject matter (though there is no material difference between the two). To put into context, if the subject matter of the contract is essentially and radically different from what it was believed to be, one might also expect the contract to be impossible of performance. It is a stringent test.
In this present case, the judge considered the rights and obligations within the 2008 agreement. He found it impossible to see how the subject matter was rendered essentially and radically different to what the parties believed it to be.
What does this mean?
Any business seeking to rely on common mistake to avoid a contract needs to know that a stringent test is to be applied. There must, for instance, be a radical difference between the subject matter the parties believed to exist – and the subject matter of the contract. Alternatively, the contract is simply impossible to perform.
As with all contract disputes and concerns, take specialist legal advice from experienced commercial solicitors.
1John Lobb SAS v John Lobb Limited [2022] EWHC 2306
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