Doctrine of Common Mistake and Risk Allocation in Commercial Leases: Triple Seven Msn 27251 Ltd & Anor v Azman Air Services Ltd [2018] EWHC 1348 (Comm)

Introduction

The case of Triple Seven Msn 27251 Ltd & Anor v. Azman Air Services Ltd ([2018] EWHC 1348 (Comm)) addresses critical issues surrounding contractual obligations and the applicability of the doctrine of common mistake within commercial lease agreements. The dispute arose when Azman Air Services Ltd ("Azman") failed to accept delivery of two Boeing 777-200 ER aircraft leased by Triple Seven Msn 27251 Ltd ("Triple Seven") and its associate, following the exclusion of Azman from participating in the 2016 Hajj airlift by the General Authority of Civil Aviation of Saudi Arabia ("GACA"). The central legal issue revolved around whether the lease agreements were void due to a common mistake regarding Azman's participation in the Hajj airlift.

The parties involved were:

Claimants: Triple Seven Msn 27251 Ltd and another associated entity, owners and lessors of two Boeing aircraft.
Defendant: Azman Air Services Ltd, lessee of the aircraft.

Summary of the Judgment

The High Court examined whether the lease agreements between Triple Seven and Azman were rendered void at common law due to a mutual mistake regarding Azman's ability to participate in the 2016 Hajj airlift. Azman contended that both parties shared the assumption that GACA would approve its participation, a foundation upon which the leases were based. However, GACA had already excluded Azman from the airlift before the lease agreements were executed.

The court analyzed whether this shared mistaken assumption was fundamental enough to void the contracts. It considered the duration of the leases, the financial projections based on Hajj operations, and the contractual clauses allocating risk. Ultimately, the court concluded that the mistake was not sufficiently fundamental to render the leases void, primarily because:

The leases spanned five years, and excluding the first year's significant revenue did not undermine the entire contract.
Legal provisions within the lease agreements allocated the risk of obtaining necessary approvals to Azman.
Azman's post-contractual conduct did not demonstrate a fundamental difference in the contract's performance.

As a result, the court determined that Triple Seven was entitled to damages for Azman's breach of the lease agreements.

Analysis

Precedents Cited

The judgment extensively referenced key cases that delineate the parameters of the doctrine of common mistake:

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407; [2003] QB 679:
Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255: Established foundational elements of common mistake.
Steyn, J in Associated Japanese Bank (International) Ltd v Credit du Nord SA: Elaborated on common mistake and its impact on contractual agreements.
William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016: Differentiated between frustration and common mistake.
Fulton Shipping Inc of Panama v Globalia Business Travel SAU [2017] UKSC 43; Provided guidance on assessing contractual losses.
Bell v Lever Brothers Ltd [1932] AC 161: Addressed the fundamental basis for voiding contracts under common mistake.
Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] EWHC 2928 (Comm); [2018] 1 Lloyd's Rep 177: Discussed the allocation of risk in contracts.

These precedents collectively shaped the court's approach to determining whether a common mistake could render a contract void, particularly emphasizing the need for the mistake to be fundamental and not allocated to one party within the contract.

Legal Reasoning

The court meticulously dissected the elements required for a contract to be voided due to common mistake, as outlined by the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd. These elements include a shared mistaken assumption of a fundamental state of affairs, absence of warranties, non-attribution to either party, and the mistake rendering contract performance either impossible or fundamentally different.

In applying these criteria, the court evaluated:

The Nature of the Mistake: The court found that the mistake concerning GACA's approval was significant concerning the 2016 Hajj airlift but not sufficiently to void the entire five-year lease.
Risk Allocation: Contractual clauses explicitly allocated the risk of obtaining necessary approvals to Azman, negating the application of common mistake.
Contractual Provisions: Clauses 8.3.1(a) and 20.1.1(f) were pivotal in determining that Azman bore the risk of not obtaining GACA's approval, thereby upholding the validity of the contracts.

The court emphasized that while the initial assumption was critical, the long-term viability of the leases, backed by substantial projected profits beyond the Hajj operations, meant that the mistake did not fundamentally undermine the contracts.

Impact

This judgment reinforces the significance of clear contractual provisions concerning risk allocation, particularly in complex commercial leases. It underscores that:

Contractual Clauses Matter: Proper drafting that allocates risks can protect parties from claims based on common mistake.
Doctrine of Common Mistake is Limited: Only mistakes that are fundamental and unduly affect the contract's essence can render it void.
Importance of Comprehensive Contracts: Businesses should ensure that contracts anticipate potential uncertainties and allocate risks accordingly to mitigate legal disputes.

Future cases involving common mistake will likely reference this judgment when assessing the fundamental nature of mistakes and the effectiveness of contractual risk allocations.

Complex Concepts Simplified

Doctrine of Common Mistake

The doctrine of common mistake occurs when both parties to a contract share a fundamental misunderstanding about a critical fact at the time the contract is formed. For a contract to be voided under this doctrine:

The mistake must be about a fundamental aspect, not a peripheral detail.
Neither party should be at fault for the mistake.
The mistake must make the contract impossible or essentially different from what was agreed upon.
The contract must not have already addressed the potential mistake through its terms.

Risk Allocation in Contracts

Contracts often include specific clauses that allocate risk between the parties, determining who bears responsibility if certain events occur. In this case:

Clause 8.3.1(a): Azman's obligations are absolute, regardless of unforeseen circumstances.
Clause 20.1.1(f): Azman's failure to obtain necessary approvals is an event of default, allowing the lessor to terminate the lease.

These clauses effectively transferred the risk of not obtaining GACA's approval to Azman, limiting the applicability of common mistake.

Repudiatory Breach

A repudiatory breach is a serious violation of contract terms that allows the non-breaching party to terminate the contract and seek damages. Here, Azman's failure to take delivery and pay rent constituted such a breach, entitling Triple Seven to terminate the leases and claim damages.

Conclusion

The High Court's decision in Triple Seven Msn 27251 Ltd & Anor v Azman Air Services Ltd elucidates the boundaries of the common mistake doctrine within commercial lease agreements. By affirming the significance of clearly allocated contractual risk provisions, the judgment underscores the necessity for meticulous contract drafting. It reaffirms that unless a shared mistake fundamentally alters the essence of a contract, such agreements remain enforceable. This case serves as a pivotal reference for future disputes involving common mistakes and contractual risk allocations, providing clarity and reinforcing the sanctity of well-structured commercial contracts.