Contractual allocation of risk and common mistake

John Lobb SAS v John Lobb Limited [2022] EWHC 2306 (Ch)

The question

How do the courts examine allocation of risk when deciding when a contract is void for common mistake?

The key takeaway

Common mistake is usually of limited application and does not enable a counterparty to walk away from the contract just because they have made a bad commercial assumption. Avoiding a contract on the basis of common mistake will not succeed where the contract provides for who will bear the risk of the mistake. 

The background

John Lobb is a decades old luxury British made-to-measure footwear seller. In 1976 the French branch of the business was sold to French fashion house, Hermès, along with the rights to certain trade marks registered in France. The French business operates as John Lobb SAS (JLSAS) and also sells footwear. Since 1976 the two businesses have collaborated, and this was regularised via an agreement entered into by the parties in 1992 that governed their rights to manufacture and sell footwear under the John Lobb name. The agreement lasted 15 years and negotiations to renew the agreement began in 2005. The agreement at the centre of this dispute was made in 2008.

According to the 2008 agreement, JLSAS was the legal and beneficial owner of the trade marks the subject of the dispute. From around 2016, John Lobb sought to challenge the validity of the 2008 agreement by asserting that it was void from the outset on the basis of common mistake as the 2008 agreement did not accurately reflect the true position on ownership of the trade marks. John Lobb alleged that they were the beneficial owner of the relevant trade marks and issued a claim in 2020 seeking a declaration that they were not bound by the 2008 agreement. 

John Lobb’s case was that, during the negotiations in 2006, JLSAS’s lawyers made statements in a letter containing fundamental errors of fact regarding the ownership of the relevant trade marks, which were then reflected in the 2008 agreement. Therefore, the parties entered into the 2008 agreement on the basis of a fundamentally mistaken and commonly held belief as to the ownership rights in the trade marks. 

The decision

The court found that John Lobb had no prospect of succeeding in its claim to avoid the 2008 agreement on the basis of common mistake because, on analysis of the 2008 agreement, John Lobb could not demonstrate that the mistake as to the ownership of the trade marks rendered either:

• performance of the 2008 agreement impossible, or
• its subject matter essentially or radically different from what the parties believed to exist.

On considering the construction of the terms of the 2008 agreement, the court found that the ownership rights were expressly set out in the 2008 agreement in a clause and a recital which assumed that JLSAS owned the trade marks and licensed them to John Lobb. These assumptions might have been left unexpressed in the 2008 agreement (but they were not), and John Lobb was being required to agree, expressly in terms, that JLSAS owned the trade marks. Therefore, the combined operation of the recital and clause impliedly allocated the risk of the assumed state of affairs concerning ownership of the marks turning out to be wrong to John Lobb. Indeed, the first part of the clause constituted a condition precedent to the 2008 agreement pursuant to which John Lobb bore the risk.

Why is this important?

The case highlights contractual allocation of risk and how common mistake is excluded if the contract provides by express or implied conditions precedent or warranty for who bears the risk of the mistake.

As the court pointed out in its judgment, “one of the reasons why the doctrine of common mistake is only rarely invoked successfully is because the relevant contract usually contains, or general principles of law usually supply, an allocation of risk to one of the parties to the contract, in relation to the risk of an assumed state of affairs turning out to be wrong”. 

This case is also important as the High Court has clarified the test for common mistake. For further analysis on the restated position on establishing common mistake and the elements of the requisite test, see RPC’s article.

Any practical tips?

Remember the importance of Recitals of stated facts and background – ensure that they are accurate and reflect the true position! Before entering into an agreement, conduct appropriate due diligence and confirm the underlying factual position. Also consider who should bear the risk of the factual position and ensure that this is properly reflected in the commercial provisions; including (if appropriate) a contractual mechanism to rectify the commercial deal if the stated position is not the case or materially changes. 

Winter 2022