In last week’s case of Triple 7 MSN 27251 Ltd v. Azman Air Services Ltd, Azman Air Services argued that two aircraft lease agreements were void under the English law doctrine of common mistake.
The High Court considered this question and found that common mistake is only sufficient to void a lease agreement (or any other contract) where:
- the mistaken assumption on which the parties acted was fundamental to the contract; and
- the mistake was such that 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”.
What is ‘common mistake’?
Under English law, a contract is likely to be void if at the time of its conclusion both parties to it incorrectly (and without fault) made a common assumption as to a particular state of affairs, which in fact did not exist.
Further, there cannot be a common mistake if either party has made a warranty as to the existence of the relevant state of affairs, and the fact that the assumed state of affairs does not exist must render the performance of the contract impossible.
The principal requirement for a common mistake to have arisen is that the parties jointly made a mistake as to an essential fact, as a result of which:
- it is “impossible to perform” the contract; and
- the subject matter of the contract is “essentially and radically different from the subject matter which the parties believed to exist”.
Some commentators have suggested that these two requirements are in fact the same test, a view supported by Hoffmann LJ in William Sindall Plc v. Cambridgeshire CC and by Neuberger LJ in Kyle Bay.
For anyone particularly interested, the Azman decision actually includes a helpful review of the English law of mistake to date.
The claimants were the owners of two Boeing 777-200 ER aircraft and part of the Veling group. They entered into a lease agreement for each aircraft with the Nigerian airline Azman Air Services in June 2016.
Both lease agreements were for a term of five years, to include the 2016 Hajj and Umrah pilgrimages, carrying passengers from Nigeria to the Kingdom of Saudi Arabia. Azman Air Services had received the necessary approvals to participate in the airlift from the Nigerian authorities but, at the time the lease agreements were signed, had yet to receive the equivalent approvals from the Saudi authorities.
It was expected that these approvals would be provided, but when they were not forthcoming, Azman Air Services declined to take delivery of the tendered aircraft, attempted to terminate the lease agreements, and did not pay the first rent instalment when it fell due.
The lessors of the aircraft purported to terminate the lease agreements on the grounds of the failure by Azman Air Services to accept delivery (and to make the first rental payment). When the lessors then claimed damages for breach of the lease agreement, Azman Air Services’ only substantive defence was that the lessors were not entitled to damages because the lease agreements were void for common mistake. This defence centred on its claim that both parties to each lease agreement had expected the final approvals to take part in the Hajj and Umrah airlifts to be granted. Azman Air Services did, however, accept that, if the lease agreements were not void for common mistake, it had breached the terms of the contract.
If the court agreed that the lease agreements were void by virtue of common mistake, then Azman Air Services would not have been liable to the lessors and, indeed, would have been entitled to make a counterclaim against the lessors for an amount equal to US$750,000.
The High Court found that although participation in the 2016 pilgrimage airlift was a significant factor in the parties’ decision to do the deal, the 2016 airlift would have accounted for only two or three months of the five-year lease terms, leaving “some 90-95% of the lease period to be performed”. Further, both parties would still have made a “substantial profit” from the lease. It was therefore still possible for the parties to perform the contract, and the “lease agreements were not rendered fundamentally or essentially or radically different by reason of the mistaken assumption [that the approvals from the Saudi authorities would be received]”.
Summarising, Mr Peter Eggers QC (sitting as a deputy judge) held that common mistake would render a contract void if:
- both parties shared an assumption, fundamental to the contract, which was wrong at the point in time the contract was entered into;
- the wrong assumption would cause the contract to be radically different from that which the parties believed to be the case at the point in time it was entered into; and
- the contract contained no provision dealing with (or apportioning liability for) mistaken assumptions.
In this instance, there was a mistake (a shared assumption that the Saudi approvals would be forthcoming). Indeed, the decision of Mr Eggers QC noted that Azman Air Services’ expectation that it would receive the relevant approvals was a misinterpretation of the basis on which the contracts were signed. However, he also specifically rejected the assertion by the lessors that this misinterpretation arose by virtue of fault on the part of Azman Air Services. In fact, it was noted that the airline had been “candid” in its discussions as to the lack of the approvals. However, this misinterpretation on the part of Azman Air Services was not by itself sufficient to render the lease agreements “essentially and radically different” or “impossible to perform”. Even if it had been, the lease agreements clearly allocated to Azman Air Services the risk that the relevant assumptions turned out to be false.
On this basis, it was held that the lessors were entitled to:
- damages for loss of projected profits under the lease agreements;
- reimbursement of their expenses incurred in finding alternative lessees for the aircraft; and
- reimbursement of their costs incurred in negotiating with Azman Air Services,
together with interest at LIBOR plus 10 per cent per annum. As a consequence, the lessors were found to be entitled to over US$22 million in damages for the breach of the lease agreements.
Conclusions and recommendations
It is important that parties to a lease agreement (or any other contract) where there are contingent circumstances that are key to the performance of the contract appropriately apportion the risk of these circumstances not arising as expected.
In this case, Azman Air Services’ obligations under the lease agreements were “absolute and unconditional, irrespective of any contingency or circumstance whatsoever” and, as a result, Azman Air Services clearly bore the risk of failure to obtain the approvals. This by itself was enough to defeat any defence of common mistake.
These annual pilgrimages are a significant event in the aviation leasing calendar and this dispute arose in no small part due to unfortunate timing in the administration processes of the relevant authorities. Both lessors and lessees should keep extraneous risks in mind when negotiating leases based on financial projections that include large events or are contingent upon external factors. However, parties looking for certainty in English law contracts can take some comfort from this confirmation that common mistake remains of limited application and does not provide a “get out of jail free” card for counterparties who have made bad commercial assumptions.
Click here to read the full text of the judgment.