Great Peace confirmed: High Court decides that test for common mistake is settled
The High Court has clarified the test to void a contract for common mistake in John Lobb S.A.S v John Lobb Ltd, confirming that the four part test laid down by the Court of Appeal in Great Peace Shipping Ltd v Ttsavliris Salvage (International) Ltd remains the relevant test.
The dispute concerned the use and ownership of trademarks. John Lobb Ltd is a family-owned company incorporated in England in 1972. John Lobb S.A.S was incorporated by Eric Lobb in France in 1946 for the purpose of developing the John Lobb business there. In 1976 Eric Lobb sold the majority of the share in John Lobb S.A.S to the Hermès Group. The sale included the rights in a trademark registered in France by Eric Lobb which protected John Lobb S.A.S products.
Since 1976 there has been collaboration between John Lobb S.A.S and John Lobb Ltd, which was regularised in a written agreement in 1992. The agreement was known as the Radlett Agreement and had a term of 15 years. Negotiations commenced between the parties in late 2005 concerning the nature and terms of the relationship between the parties which was to follow the Radlett Agreement. In March 2008 a new agreement was entered into between John Lobb Ltd, its shareholders and John Lobb S.A.S (the 2008 Agreement). This agreement was the subject matter of the dispute.
In May 2020 John Lobb Ltd brought a claim against John Lobb S.A.S seeking a declaration that it was not bound by the 2008 Agreement as it was void ab initio on the basis of common mistake. John Lobb Ltd sought to claim that were was "a fundamentally mistaken and commonly held belief as to the ownership rights in the John Lobb Marks". John Lobb Ltd's case was that it only entered into the 2008 Agreement because it relied on statements made by John Lobb S.A.S's lawyers following a meeting in 2006. John Lobb Ltd claimed that John Lobb S.A.S's lawyers' letter contained material statements of fact about rights in the trademark and that the letter contained fundamental errors of fact. John Lobb Ltd argued that the belief held by both parties about the ownership of the rights in the trademark was mistaken and that John Lobb Ltd is entitled to beneficial ownership of all the registered trademarks other than those that are registered in France. John Lobb S.A.S asserted that they hold legal and beneficial ownership of the entirety of the trademark portfolio. John Lobb S.A.S relied on the recitals of the 2008 Agreement which states in terms that this is so and the terms of the contract are clearly based upon this premise ("the Assumed State of Affairs").
In August 2020 John Lobb S.A.S applied for (i) an order striking out what were then the Particulars of Claim, pursuant to CPR 3.4(2)(a), on the basis that the Particulars of Claim disclosed no reasonable grounds for bringing the claim, or alternatively (ii) summary judgment against John Lobb Ltd on the whole of the claim pursuant to CPR 24.2(a)(i), on the basis that John Lobb Ltd had no real prospect of succeeding and that there was no other compelling reason why the case should be disposed of at a trial. The application was refused on the basis that the case was unsuitable for summary judgement and a strike-out order was not appropriate. John Lobb S.A.S appealed this decision.
On appeal the judge granted summary judgment, holding that John Lobb Ltd had no prospect of succeeding in its claim to avoid the 2008 Agreement on the basis of common mistake. The judge reached this conclusion on the basis that, on analysis of the 2008 Agreement, John Lobb Ltd was unable to demonstrate that the mistake as to the Assumed State of Affairs, which the parties must be assumed to have made for the purposes of the application, either (i) rendered the performance of the 2008 Agreement impossible, or (ii) rendered the subject matter of the 2008 Agreement essentially and radically different from the subject matter which the parties believed to exist. John Lobb S.A.S was entitled to summary judgment on this basis.
Applying the test in Great Peace
In reaching his decision the judge referred to the test in Great Peace and whilst he stated that the words of Lord Phillips in Great Peace should not be taken as statute, he applied the test in that judgment when considering the required elements of a claim based upon common mistake. The required elements from Great Peace are:
- there must be a common assumption as to the existence of a state of affairs;
- there must be no warranty by either party that that state of affairs exists;
- the non-existence of the state of affairs must not be attributable to the fault of either party;
- the non-existence of the state of affairs must render performance of the contract impossible; and
- the state of affairs may be the existence, or a vital attribute, of the consideration to be provided
At first instance the judge held that John Lobb Ltd could not establish that John Lobb S.A.S's case in relation to the second and fourth elements were bound to fail.
The reasoning of the first instance judge in relation to the second element was that he did not see it possible to construe the 2008 Agreement "as containing a warranty by the claimant that the defendant is the legal and beneficial owner of the Mark" (i.e. a warranty that the Assumed State of Affairs actually existed). Additionally, the judge did not think it possible for the 2008 Agreement to be taken as allocating the risk in the event that the Assumed State of Affairs turned out to be incorrect. The first instance judge considered that the common understanding was clear from the 2008 Agreement but noted that the agreement "does not go on to specify what is to happen if that understanding proves to be wrong". He believed there to be a "marked difference" between the description of the second element in Great Peace and in Chitty where the relevant question is framed as whether, under the express or implied terms of the contract either party is treated as taking the risk of the situation being as it really is. On appeal the judge found no such difference, seeing it as quite clear that Lord Phillips in Great Peace did not mean to say that the question was confined to whether a warranty, in the technical sense of the word, had been given as to the existence of the Assumed State of Affairs. The appeal judge found the risk of the Assumed State of Affairs turning out to be wrong was allocated to John Lobb Ltd, with the result that the claim that the 2008 Agreement was void from the outset on the basis of common mistake cannot succeed. Accordingly, the second element of the test from Great Peace was not satisfied.
With regards to the fourth element the first instance judge referred to a marked difference between the description of the fourth element in Great Peace and the description in Chitty where the fourth element is described in the alternative to impossibility of performance, by reference to the contractual adventure being essentially different to that which was anticipated. The judge on appeal found no such marked difference. The appeal judge believed the test could be framed in two ways, neither of which had a material difference: (i) as a test of impossibility of performance; or (ii) as a test of essential and radical difference in the subject matter of the relevant contract. The judge found the first instance judge to have formulated the wrong test with regards to the fourth element and concluded that John Lobb Ltd could not satisfy the fourth element of the test. The judge found it clear that the mistake as to the Assumed State of Affairs did not render the 2008 Agreement impossible of performance or render the subject matter of the 2008 Agreement essentially and radically different from the subject matter which the parties believed to exist.
This judgment provides helpful clarification that the test in Great Peace remains the one that a judge will consider when deciding whether a contract is void for common mistake. It provides confirmation that if the party claiming common mistake fails to satisfy the test their claim can be dismissed at the interim stage.