Contractual Mistake and Radical Difference

It’s not unknown for the parties to a contract to later discover the terms agreed were based on a shared fundamental mistake. The question is – can the contract then be treated as void? 

The award-winning commercial lawyers at ParrisWhittaker are renowned for their successful and strategic advice to businesses on all their contract issues.

In the event of a mistake upon which a contract was based, the formal contract could be treated by both parties as void and of no effect. The parties are then free to form a new contract if they wish. However, the UK’s High Court recently issued an important ruling¹ following a contract dispute where the parties could not agree whether the contract was voidable. The ruling has important persuasive authority on the courts in The Bahamas.

Common mistake 

A common mistake – ie a mistake shared by both parties – may amount to a shared misapprehension about an issue or intention which fundamentally undermines the essence of the contract.  What this looks like in practice is not always clearcut. The proper test for common mistake has now been clarified and provides useful guidance for businesses for whom the issue may arise. 

Here, a goods company (R) was incorporated in the UK by Mr Eric Lobb in the 1970s. He later incorporated another company (A) in France to continue developing the family business. In 1976, A sold a majority stake to the Hermès Group. This sale included trademark rights. 

The present dispute centered on trademark issues, specifically a 2008 agreement between companies A and R which was purportedly based on mistake. R asked the court for a declaration that the 2008 agreement was void on the basis that there was a “fundamentally mistaken and commonly held belief as to the ownership rights” in the trademarks. 

The claim was refused. The trial judge had determined that the ‘mistake’ around 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. 

Company R appealed to the High Court and failed. However, the High Court saw fit to consider the correct legal test for ‘common mistake’ such as to void the contract. It is clearly a stringent test: 

1. There must be a common assumption shared by the contractual parties as to the existence of a state of affairs
2. Neither party has warranted that the assumed state of exists affairs exists
3. The non-existence of that assumed state of affairs must not be the fault of either party
4. The non-existence of the state of affairs must mean contractual performance is impossible 

Essentially, if the contract subject matter is essentially and radically different from what it was believed to be, the contract may well be impossible of performance.

Relating this to the facts of this particular case, the judge found it impossible to see how the contract subject matter was rendered essentially and radically different to what the parties believed it to be. The mistake was not sufficient to render the contract void from the outset.

What does this mean?

Any business seeking to rely on common mistake to state that a contract is void need to note that a stringent legal test must first be satisfied. Particularly, there must be:

• a radical difference between the subject matter the parties believed to exist – and the subject matter of the contract itself, and/or 
• the contract is simply impossible to perform (both are likely to be the case) 

What does this mean?

The case is an important reminder for businesses and lawyers to be clear on the fundamental facts before finalising contract terms. Commercial organisations should seek specialist legal advice from the experienced commercial solicitors at ParrisWhittaker. For specialist advice, contact us at +1.242.352.6112

¹John Lobb SAS v John Lobb Limited  [2022] EWHC 2306