The importance of correct and clear wording in a contract to avoid common mistake

A “common mistake” occurs when all parties to a contract share a mistake which fundamentally and directly affects the basic definition of what the parties are contracting for.

Where this occurs, the contract will be rendered void if there is sufficient evidence to show that the mistake is so fundamental it renders the meaning of the contract essentially and radically different from the actual meaning intended by the parties.

Over the years, the court has developed a test for assessing whether common mistake is present between the parties. The recent case of John Lobb SAS v John Lobb Ltd saw the High Court implement this test, providing clarity around what the courts will look for when assessing common mistake.

John Lobb SAS v John Lobb Ltd

Background:

In 2008, John Lobb Ltd (“the claimant’) and John Lobb SAS (“the defendant”) entered into an agreement as to the use of the “John Lobb” trademark (“the 2008 agreement”).

The claimant argued that the 2008 agreement was entered into based on a fundamentally mistaken yet commonly held belief as to the ownership of the trademarks. The mistaken belief was that the defendant owned the trademarks, whereas the claimant argued that the trademarks belonged to them

The claimant sought declaratory relief, where the court declares the rights of the parties without ordering any specific actions to be made, requesting the court declare that the Claimant was not bound by the terms of the 2008 agreement.

In response, the defendant made an application to strike out the claim of the claimant and requested summary judgment against the claimant (“the application”), which was initially dismissed.

The defendant appealed the initial judgment to the High Court, who allowed the defendant’s appeal and dismissed the claimant’s on the grounds that:

• The risk of the assumed state of affairs turning out to be incorrect was contractually allocated to the claimant, rendering the claim that the 2008 Agreement was voidable impossible
• The mistake claimed by the claimant did not render the 2008 agreement impossible to perform, nor did it render the subject matter of the 2008 agreement essentially and radically different from what the parties believed to exist, as argued by the claimant.

Clarity provided from John Lobb SAS v John Lobb Ltd

Within the above decision, the High Court confirmed the application of the test established in previous case law such that the following must be present for “common mistake” to be applicable:

• A common assumption as to the existence of a state of affairs
• An absence of a warranty by either party that such state of affairs exists
• The state of affairs is neither party’s fault
• The state of affairs renders the performance of the contract impossible
• The state of affairs may be fundamental to the contract’s consideration or to the circumstances necessary for performance.

The judgment of John Lobb SAS v John Lobb Ltd went even further in assessing the presence of common mistake, saying that when looking at the state of affairs intended by the parties, the test of difference is to be applied as stringently to the test of the contract being impossible to perform.

In addition to the above, if the terms can still operate under the true state of affairs (not those mistaken by the parties), and even if one party wouldn’t have accepted the terms knowing the true position, the above test cannot be met.

Therefore, the analysis of the tests for common mistake within the judgment of John Lobb SAS v John Lobb Ltd provides a vital reminder of the importance of clear wording that demonstrates the understanding of the contracting parties from the outset.