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What does it take to void an aircraft lease for common mistake?

 

Peter McCullough

What is meant by common mistake?

The general rule under English law is that a contract is likely to be deemed void if, at the time it was concluded, both parties wrongly assumed a particular state of affairs which for some reason did not in fact exist.

It is also generally accepted that a common mistake cannot occur when one party has made a warranty that a state of affairs exists, with the result that performance of the contract becomes impossible.

The key elements to a common mistake are that the contract becomes impossible to perform, and also the subject matter of the contract becomes “essentially and radically different from the subject matter which the parties believed to exist”.

This rule was examined by the English High Court in the case of Triple Seven MSN 27251 Ltd and Anor v. Azman Air Services Ltd [2018] EWHC 1348.

 

The facts

In June 2016, the airline (Azman Air Services) entered into separate leases for two Boeing 777’s belonging to a lessor (Triple Seven Ltd). The aircraft were to be used to perform pilgrimage flights to Saudi Arabia from West Africa over a 5-year period. Shortly after the leases were signed however the airline was informed by the Saudi regulator that it would not be licensed to operate these services, even though the Nigerian equivalent had given its approval. The airline therefore refused to accept delivery of the aircraft as a result of the Saudi regulator’s decision, relying on what it said was a ‘common mistake’. Specifically, the airline alleged that both parties believed (or at least understood) that the airline would be approved to operate the pilgrimage flights, and this was the sole purpose for the aircraft agreements. The airline failed to make any rent payments when they became due under the lease. The lessor did not accept that there had been a common mistake and proceeded to bring a claim for damages against the airline having unilaterally terminated the aircraft leases.

 

The decision

The court considered the key elements of common mistake set out above and applied them to the facts of this case. It was decided that the parties had entered the leases on the assumption that a) the Nigerian regulator had given its approval; b) the Saudi regulator may/may not do likewise; c) the airline was expecting to receive Saudi approval; d) the Saudi regulator had not made its decision at the time the leases were signed.

It was held by the court that whilst there were certain shared mistaken assumptions, they were not sufficiently fundamental, and did not make the leases essentially and radically different from the parties original understanding, nor would they render the agreements impossible to perform. It is worth noting that the Saudi regulator’s failure to approve the proposed services only applied to the first year of the operation. Approval may have been granted for the subsequent periods during the 5-year lease period.

The Judge (Mr Peter Eggers QC) stated that the 2016 pilgrimage was just one such event within the 5-year lease period; the airline could have made significant profit from the remainder of the period; whilst revenue earned from the 2016 pilgrimage was important it was not sufficiently important to the performance of the agreements as a whole, and also there was nothing to suggest that the knock-back for the 2016 pilgrimage by the Saudi regulator would necessarily apply in subsequent years.

The Judge was also persuaded that under the leases there was an allocation of risk (that the Saudi regulator would not provide its approval) to the airline. The leases provided that the airline’s obligations were “absolute and unconditional, irrespective of any contingency or circumstance whatsoever”.

The Judge therefore found for the lessor, awarding them in excess of USD $22million in damages for breach of contract.

 

Practice points

  • Make allowance for any risks which are specific to the performance of the contract when negotiating with your opposite party.
  • Draft appropriately. Make sure that the contract provides for, and apportions the risk that an expected set of circumstances (which are crucial to the performance of the contract) do not occur.
  • Don’t waste time attempting to argue common mistake if the contract imposes absolute or unequivocal obligations.

 

Contact

To discuss any issues raised by this article, or any other issues relating to an aviation commercial dispute then please contact me - [email protected]

*Disclaimer - the views expressed in this article are those of the writer, and not necessarily those of the firm. 

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