Associated Japanese Bank (International) v Credit du Nord SA [1989]

Associated Japanese Bank (International) v Credit du Nord SA [1989]

Associated Japanese Bank (International) v Credit du Nord SA [1989] 1 WLR 255 is a significant case in contract law that deals with the concept of common mistake rendering a contract void. The key point established by the case is that if there is a common mistake as to the existence of the subject matter of a contract, it renders the contract void.

Bennett sold four packaging machines to Associated Japanese Bank (AJB) and simultaneously obtained a lease-back of the machines to raise temporary funds. AJB, in turn, paid a fee to Credit du Nord (CDN) to guarantee the lease payments from Bennett. However, when Bennett went bankrupt, it was discovered that the machines did not actually exist. AJB then brought a claim to enforce the guarantee provided by CDN.

In the High Court, Steyn J delivered the judgment, ruling that the claim failed because the contract was void due to a common mistake regarding the existence of the machines. Steyn J outlined the right approach to mistake in contract law. Before considering mistake, one must determine whether the contract, by implied or express condition precedent, specifies who bears the risk of a relevant mistake. If the contract is silent on this matter, then one can consider mistake, first in common law and then in equity.

Steyn J emphasised that a party cannot rely on a common mistake if the mistake consists of a belief held without any reasonable grounds for such belief, citing McRae. The principles of common mistake were elucidated, stating that the mistake must render the subject matter of the contract essentially and radically different from what the parties believed to exist, as established in Bell v Lever Bros [1931]. Steyn J advocated for a narrow doctrine of common law mistake, supplemented by the more flexible doctrine of mistake in equity, as seen in Solle v Butcher [1950].

Applying these principles to the case at hand, Steyn J noted that a guarantee with real security over four machines is fundamentally different from one without. The parties had mistakenly assumed that the machines existed, and this mistake was deemed sufficiently fundamental to render the contract void. Additionally, there was an express or implied condition precedent that the guarantee related to existing machines.

It is worth noting that the wider equitable doctrine of common mistake from Solle v Butcher [1950] was later rejected in Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002]. This case underscores the importance of a common understanding between parties regarding the existence of the subject matter for a contract to be valid.
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