Common mistake and the allocation of risk

One key purpose of a contract is to allow enforcement and performance of what has been agreed between the two parties. But what if, at the time the agreement was reached, there was a fundamental mistake believed and shared by both parties; will this common mistake render the contract void, and will it allow a party to walk away from its obligations to perform?

Historically, the courts have sought to formulate a series of tests as to when a mistake will lead to a void contract.   In earlier cases, the courts have held that common mistake does not void the contract unless it renders it impossible to perform. 

A recent common mistake case 

The recent decision in John Lobb SAS v John Lobb Limited [2022] EWHC 2306 (Ch) has focussed attention on the significance of any contractual allocation of risk in looking at the consequences of common mistake.  Where the risk of the mistake is contractually allocated, then the agreement will not be void as a result of that mistake.

The subject of this dispute between John Lobb Limited (JLL) and John Lobb SAS (JL France) stems from the ownership of “John Lobb” trade marks. JL France was sold to Hermes back in 1976, which sale included rights to certain John Lobb trade marks registered in France.   

JL France and JLL then entered into a contractual relationship in 1992 to collaborate, and to govern their rights to manufacture and sell footwear under the John Lobb name. In 2008, they entered into a new agreement to follow on from that earlier collaboration agreement.

Subsequently, JLL argued that the 2008 agreement was void as it did not accurately reflect the true position on ownership of the trade marks. During the negotiations leading to the conclusion of the 2008 agreement, JL France’s lawyers stated incorrectly that JL France was the beneficial owner of all John Lobb trade marks, and this was reflected in the agreement. JLL argued that the parties entered into the 2008 agreement based on this fundamentally mistaken and commonly held belief as to the ownership rights in the trade marks, and that the agreement was void as a result.  

The High Court appeal

On appeal, the High Court judge ruled that JLL could not avoid the 2008 agreement.  He found that the mistake did not render the contract’s performance impossible or make the subject matter essentially or radically different from what the parties had believed to be the case. 

The court also found that the contract contained an allocation of risk in relation to the assumed state of affairs turning out to be wrong, and in this case the party bearing that risk was JLL.

In specific terms, not only did the 2008 contract have an express clause saying that JL France was the trade marks’ owner but also included a recital which provided the assumption that JL France owned the trade marks and licensed them to JLL.   The combination of these provisions served to allocate the risk of the assumed state of affairs as to the trade marks ownership being wrong for JLL to bear. 

What did we learn from this case?

This case highlights the significance of the allocation of risk and who bears that risk in relation to a mistake.  The judgment highlighted that one reason why it is rare that common mistake can be used successfully is because the contract, or general legal principles, will normally provide for that allocation of risk.  

A takeaway from this case is the vital importance of making sure that any stated facts in the recitals and background of an agreement are correct.  Do you actually need to include the facts?  Should there be a mechanism for rectifying the commercial arrangements if there is a mistake?  

How Moore Barlow can help

Well drafted contracts are essential in helping to provide commercial certainty, protect your interests and maintain the value in your business.

We will work with you to fully understand the legal risks and your specific requirements involved in your commercial transaction, both in terms of the day-to-day running of your business as well as those events you hope will never happen but nonetheless must be planned for.  

get in touch with our commercial and technology law team to discuss your requirements.