Corporate Law Update

A round-up of developments in corporate law for the week ending 29 June 2018.

This week:

Contract was valid even though both parties had made a mistake

The High Court has held that two contracts were valid, even though the parties had entered into them on the basis of a shared mistake. The mistake was not sufficiently fundamental to void the contracts.

What happened?

In Triple Seven MSN 27251 Limited and another v Azman Air Services Limited, Triple Seven leased two aircraft to Azman under separate lease agreements.

The purpose of the leases was to allow Azman to transport passengers from West Africa to Saudi Arabia for the 2016 Hajj pilgrimage and for the lesser Umrah pilgrimage.

Azman obtained approval for the airlift from the relevant Nigerian authorities. However, it failed to obtain the necessary approval from the Saudi authorities.

The Nigerian authorities subsequently sent Azman a letter, informing it that the Saudi civil aviation authority had excluded Azman from participating in the 2016 airlift. However, by this time, Azman and Triple Seven had signed the leases.

Azman told Triple Seven it was unable to take part in the airlift and declined to take delivery of the aircraft. In response, Triple Seven terminated the leases and claimed damages for breach of contract.

Azman claimed that the leases were void, because it and Triple Seven had entered into them on the basis of a common mistake, and so it was not liable for breach of contract.

What is “common mistake”?

A common mistake happens where two or more persons enter into a contract on the basis of a shared intention or assumption, but the contract does not reflect that intention, or the assumption turns out to be mistaken.

The consequences of a common mistake vary. In some cases, the mistake may be so fundamental that it effectively nullifies the contract. This could be because the terms of the contract are too uncertain to enforce. Alternatively, as Azman argued here, the contract may simply be void.

Broadly, the contract will be void if the parties entered into it on the basis of a shared assumption, that assumption turns out to be untrue, and, as a result, either the contract is essentially and radically different from what they intended or the mistake renders performance of the contract impossible.

This final element is borrowed from the English law doctrine of “frustration”, under which a contract comes automatically to an end if (put simply) it is no longer possible for the parties to perform it.

A key element here is that the mistake must be so substantial that it affects the contract in some fundamental way. If not, the court will not declare the contract void.

What did the court say?

The court took the opportunity to bring together the previous cases on common mistake. The judge set out six elements that need to be met for the court to declare a contract void for mistake:

  • The parties had a shared assumption about a state of affairs.
  • That assumption was “fundamental to the contract”.
  • That assumption was also mistaken.
  • That mistake renders the contract or its performance essentially and radically different from what the parties intended, or makes the contract impossible to perform.
  • The parties would not have entered into the contract if they had known about their mistake.
  • The contract does not deal with what happens if the shared assumption is wrong.

The judge also seems to have accepted a seventh condition – that the mistake must not be attributable to either party’s fault – although he didn’t list this in the six elements above.

The court then applied these criteria and found that Triple Seven and Azman had indeed entered into the lease agreements based on a common mistake – that Azman could participate in the airlift.

However, the judge felt that the mistake was “not sufficiently fundamental” to render the lease agreements radically different or impossible to perform. In particular, he noted that the leases were for five years, and not just the period of the 2016 Hajj pilgrimage. The fact that Azman had been barred from airlifts for the 2016 Hajj did not mean it would be barred from future Hajj airlifts as well.

He therefore said that the leases were enforceable, and not void for common mistake.

Practical implications

It can be difficult to persuade a court to void a contract completely due to a mistake. Cases on both common mistake and frustration have shown how difficult it can be to demonstrate that a contract has become impossible to perform or radically different.

In February, for example, we reported on how a contract for theatrical services was not frustrated and brought to an end when nationwide protests in Greece prevented the performances from going ahead.

The court will set the bar high. In this case, the fact that the leases extended well beyond the 2016 Hajj season indicated that the parties had envisaged a longer-lasting arrangement than a single pilgrimage. This defeated Azman’s argument that the essential subject matter of the contract had been rendered radically different or impossible to perform.

It can be hard to address common mistakes when drafting a contract. The whole point underlying a mistake is that the parties did not address the issue specifically in their agreement.

Nevertheless, bringing a successful claim in mistake can be tricky, and parties can consider various steps to avoid a claim arising in the first place:

  • Record the parties’ intentions or commercial rationale somewhere in the contract. This is often done by including recitals or background at the beginning of the contract. This should help remove doubt over the assumptions on which the parties conclude their agreement.
  • If the arrangement is predicated on approvals or other actions, include conditions precedent in the contract. If a condition is not met, the parties’ obligations may never arise and the contract may effectively become defunct.
  • Set out what will happen if key steps are not fulfilled (for example, if an approval is not obtained or a service cannot be performed). By apportioning the risk in this way, the parties should avoid a claim in mistake, where ultimately the court will decide what remedy applies.

Bribery Committee launches call for evidence

We recently reported that the House of Lords had appointed a new Bribery Committee, to examine how the Bribery Act 2010 is working in practice.

The Committee has now launched its call for evidence, seeking written submissions on any issues relating to the Bribery Act.

The short paper welcomes views on any issues, but also includes a list of questions on which the Committee is particularly interested in hearing. These include:

  • Whether the Bribery Act is deterring bribery in the UK and abroad and whether it is being adequately enforced.
  • Whether the statutory guidance on the Bribery Act is sufficient, clear and well-understood.
  • Challenges businesses have encountered when seeking to implement the six principles set out in the statutory guidance, and what impact the Act has had on small and medium-sized businesses.
  • Whether the introduction of deferred prosecution agreements has been a positive development.

The deadline for submissions is 31 July 2018.

FRC announces members of Investor Advisory Group

We recently reported that the Financial Reporting Council was seeking volunteers for a new Investor Advisory Group (IAG).

The purpose of the IAG is to provide a regular forum for the FRC to engage with representatives from across the investment chain on various matters, including corporate governance, stewardship, company reporting and audit matters.

The FRC has now announced that the IAG has been formed and has provided a brief description of its role and functions.

The IAG’s members comprise representatives from six asset/investment management firms, one sovereign-wealth fund, one global bank, one ratings agency, one securities broker, three shareholder associations, one major commercial pension scheme, two local government pooled pension scheme managers, and the in-house asset manager for the Universities Superannuation Scheme.

The IAG will meet four times a year.

Court encourages electronic communications for overseas scheme participants

The High Court has endorsed the use of electronic media to encourage participation in a scheme of arrangement meeting by a company’s overseas members.

In Re Old Mutual plc, a well-known pan-African financial services group wished to demerge one of its wholly-owned subsidiaries using a scheme of arrangement.

The company had shareholders in South Africa, Zimbabwe, Namibia and Malawi. Turnout from those shareholders at the scheme meeting was low. However, the court was satisfied that this did not prejudice the scheme. Low turnout from shareholders in these countries was consistent with attendance at the company’s general meetings.

More interestingly, the court said that, when a company communicates with shareholders in other jurisdictions, it should pay careful attention to both the time it gives for notices and the mechanism by which those shareholders can effectively participate in meetings. It encouraged the use of electronic media to ensure maximum shareholder participation, particularly where there could be difficulties with using the local postal system.