The case of Associated Japanese Bank (International) v Credit du Nord SA [1989] 1 WLR 255 offers a fascinating exploration of contract law, focusing on the implications of common mistake in contract validity. This case is an essential study for law students, illustrating the complexities involved when both parties operate under a mutual misunderstanding about a contract’s fundamental aspect—the existence of the contract’s subject matter.

  • In the case of Associated Japanese Bank (International) v Credit du Nord SA [1989] 1 WLR 255, both parties believed the machines existed but since it didn’t, the guarantee could not be imposed against D.
  • Serious and grave mistakes related to a contract’s subject matter can stop a contract from becoming valid.

Facts of the Case

  • C and D contracted for a sale and leaseback. D assured to uphold contractual obligations to the bank on behalf of a third party.
  • The third party did not provide packaging machines to C for £1 million. C could not claim action against the third party after he became bankrupt.
  • D sued the bank as they were the guarantee under these circumstances.

Issues

  • Is there an express or implied condition?
  • Was the guarantor excused of liability?
  • Was there a common mistake made?

Held by High Court

  • C’s claim is dismissed – contract of guarantee is void based on the test from Bell v Lever Brothers [1931] UKHL 2.

Steyn J

Mistake

  • Lord Atkin held in Bell v Lever Brothers [1931] UKHL 2 that “a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be”.
  • “For both parties, the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist. The guarantee is an accessory contract. The non-existence of the subject matter of the principal contract is therefore of fundamental importance. Indeed the analogy of the classic res extincta cases, so much discussed in the authorities, is fairly close. In my judgment the stringent test of common law mistake is satisfied: the guarantee is void ab initio”.

Significance of the Case on the Development of the Law

The Associated Japanese Bank v Credit du Nord case significantly impacted the development of the law regarding common mistakes in contracts:

  1. Bell v Lever Brothers [1932]: This case is foundational in understanding common mistake, establishing that a mistake must go to the essence of the contract to render it void. Associated Japanese Bank v Credit du Nord builds on this by clarifying that the non-existence of the contract’s subject matter is such a fundamental mistake that it voids the contract.
  2. Solle v Butcher [1950]: Although dealing with equitable relief in the face of mistake, this case was discussed in Associated Japanese Bank v Credit du Nord to contrast the strict common law approach with the more flexible equitable considerations. This dialogue between the cases shows the evolving nature of legal doctrines around mistake.
  3. Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002]: This later case referenced Associated Japanese Bank v Credit du Nord while setting limits on the application of mistake, particularly narrowing the scope of what constitutes a common mistake significant enough to void a contract.

Exam Questions and Answers

Below you will find answers to questions that are most commonly asked based on this case.

How does the principle set out in this case apply to digital contracts, especially in scenarios where digital goods are involved?

In the context of digital contracts, the principles from Associated Japanese Bank v Credit du Nord apply when digital goods purported to be part of the contract do not exist. For instance, if a contract is formed based on the provision of a digital asset that is later found to be nonexistent, this can be grounds for the contract to be declared void due to a common mistake. The UK courts would likely consider whether the nonexistence of the digital asset rendered the contract “essentially and radically different” from what was agreed, similar to the non-existent machinery in the cited case. An example would be a contract for the sale of a specific number of cryptocurrency tokens which, unbeknownst to both parties, do not exist.

What are the implications of this case for international contracts where jurisdictional differences in the perception of ‘fundamental mistake’ might exist?

For international contracts, the implications of Associated Japanese Bank v Credit du Nord hinge on differing legal interpretations of ‘fundamental mistake’ across jurisdictions. In some countries, the non-existence of the contract’s subject might not automatically void the agreement if the risk of non-existence was assumed by one party. When drafting international contracts, parties must consider explicit clauses regarding who bears the risk of mistakes and include jurisdiction-specific legal advice to anticipate how such mistakes are treated in relevant legal systems. For instance, under U.S. contract law, parties might need to prove additional elements like unconscionability or fraudulent misrepresentation to void the contract, not just the nonexistence of the subject matter.

Could a better understanding or different handling of risk allocation in the contract have changed the outcome of the case?

Yes, a better understanding or different handling of risk allocation could have potentially changed the outcome in Associated Japanese Bank v Credit du Nord. If the contract had explicitly stated which party bore the risk for the existence of the machinery, the court might have found the contract enforceable despite the common mistake. For example, if the bank had accepted the risk that the machinery might not exist, they could not claim the contract void due to mistake. Thus, precise risk allocation clauses are crucial, especially in contracts involving high uncertainty or valuable assets, to ensure all parties are aware of and have agreed to the risks associated with the transaction.

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