Associated Japanese Bank v Credit du Nord [1988]
Facts: X promised to sell his machines to the Plaintiff and lease them back. Defendant provided a guarantee that X would fulfill his obligations. However, X was fraudulent, as the machines did not exist. The Plaintiff sued the Defendant, but Steyn J ruled that the guarantee was void.
Issue for the Court: When can a common mistake invalidate a contract? Was the guarantee void due to the common mistake regarding the existence of the machines?
Held: Steyn J held that the guarantee was indeed void. The guarantee was implicitly conditioned on the existence of the machines.
Steyn J : First stage of examining this area is to see whether construction of contract provides who will bear the risk. of the relevant mistake.
o If contract silent, only then should you move on to next point.
§ This is the common law doctrine of common mistake, supplemented by Solle v Butcher in equity allowing more flexible application and voidable on terms.
· Policy issues at work here are:
o Court must work to uphold contracts rather than destroy them.
o Common law rules re: mistake to quality designed to cope with unexpected events.
o Mistake must be shared substantially by both parties and must relate to facts as known at time of contract making.
o Fourthly, contract per Bell v Lever Brothers,
§ Mistake must render subject matter of the contract essentially and radically different from the subject matter which the parties thought to exist.
· Also, parties should not be allowed to rely on mistakes with no reasonable ground to make them as a matter of policy and good sense.
· In this case, non-existence of the machines means that the contract was essentially different from that contracted for
o Indeed, the lease contracted depended on the existence of the machines.
§ While the contract actually got was a lease guaranteed by the existence of no-machines
· Non-existence of the subject matter of contract therefore of fundamental importance.
o Means contract is void ab initio.