• 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”.