Associated Japanese Bank (International) Ltd v Crédit du Nord S.A.
| Jurisdiction | England & Wales |
| Date | 1988 |
| Year | 1988 |
| Court | Queen's Bench Division |
Guarantee - Implied term - Sale and leaseback of machines - Guarantee of obligations under lease - Machines reasonably believed by lessors and guarantors to exist - Machines not in existence - Whether implied condition precedent of guarantee that lease related to existing machines - Whether liability under guarantee - Contract - Mistake - Common mistake - Sale and leaseback of machines - Guarantee of obligations under lease - Machines reasonably believed by lessors and guarantors to exist - Machines not in existence - Whether subject matter of guarantee essentially different from what reasonably believed to be - Whether guarantee void for mistake at common law
On the basis, inter alia, of representations by B. that he owned four industrial machines and in the reasonable belief that the machines existed, the plaintiffs entered into agreements for the purchase from and lease back to B. of the machines and the defendants separately agreed with the plaintiffs to guarantee B.'s obligations under the leaseback agreement. After paying one instalment of rent under the lease B. defaulted and was subsequently adjudged bankrupt. It was discovered that the machines did not exist.
On the plaintiffs' claim against the defendants under the guarantee agreement for, inter alia, the entire amount of unpaid rent in respect of the machines: —
Held, (1) that on a true construction of the guarantee agreement in the factual context it was an express condition precedent of that agreement that the lease related to existing machines, alternatively that such a condition precedent was to be implied because reasonable men would regard it as so obvious that it went without saying that the lease so related; and that, therefore, since the machines did not exist, the defendants were not liable under the guarantee (post, pp. 263D–F, G–264A).
(2) That the machines were the principal security of the defendants as guarantors, and hence the fact that they did not exist was of fundamental importance to the guarantee contract, and the subject matter of the guarantee was by reason of their non-existence essentially different from that which both the plaintiffs and the defendants reasonably believed it to be, and accordingly the guarantee contract was void ab initio for common mistake at common law (post, pp. 266F, 268D–F, 269E–G).
Per curiam. A party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief (post, p. 268H).
The following cases are referred to in the judgment:
Bell v. Lever Brothers Ltd. [
Davis Contractors Ltd. v. Fareham Urban District Council [
Grist v. Bailey [
Kennedy v. Panama, New Zealand, and Australian Royal Mail Co. Ltd. (
London General Omnibus Co. Ltd. v. Holloway [
McRae v. Commonwealth Disposals Commission (
Magee v. Pennine Insurance Co. Ltd. [
Moorcock, The (
National Carriers Ltd. v. Panalpina (Northern) Ltd. [
Sheikh Bros. Ltd. v. Ochsner [
Shirlaw v. Southern Foundries (1926) Ltd. [
Solle v. Butcher [
Taylor v. Caldwell (
The following additional cases, supplied by courtesy of counsel, were cited in argument:
Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd. [
Bank of Baroda v. Panessar [
Bank of India v. Trans Continental Commodity Merchants Ltd. [
Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [
Cochrane v. Willis (
Cooper v. National Provincial Bank Ltd. [
Couturier v. Hastie (
Eshelby v. Federated European Bank Ltd. [
Evans v. Bremridge (
Financings Ltd. v. Baldock [
General Produce Co. v. United Bank Ltd. [
Greer v. Kettle [
Hamilton v. Watson (
Lee v. Jones (
Lep Air Services Ltd. v. Rolloswin Investments Ltd. [
Lombard North Central Plc. v. Butterworth [
Maritime National Fish Ltd. v. Ocean Trawlers Ltd. [
Neste Oy v. Lloyds Bank Plc. [
North British Insurance Co. v. Lloyd (
Royal Bank of Canada v. Salvatori [
Scott v. Coulson [
Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [
TC.B. Ltd. v. Gray (Note) [
Action
By a writ dated 23 July 1984 and points of claim dated 7 August 1984 as subsequently amended, the plaintiffs, Associated Japanese Bank (International) Ltd., claimed, inter alia, a sum said to be due to the plaintiffs from the defendants, Credit du Nord S.A., pursuant to the terms of a guarantee in writing dated 29 February 1984, and interest thereon. The plaintiffs alleged, inter alia, that the guarantee, and other agreements associated with it, concerned four industrial packaging machines which a Mr. Jack Bennett had represented were owned by a company through which Mr. Bennett traded personally. Mr. Bennett was adjudicated bankrupt on 27 July 1984. His trustee in bankruptcy was given leave to be added as a second defendant and appeared through counsel at the trial until the fourth day of the hearing, when he withdrew from the action on a settlement of other claims made by the plaintiffs.
The facts are stated in the judgment.
Michael Crystal QC and Richard Adkins for the plaintiffs.
Anthony Thompson QC and Mark Barnes for the defendants.
13 April. STEYN J. read the following judgment. Throughout the law of contract two themes regularly recur — respect for the sanctity of contract and the need to give effect to the reasonable expectations of honest men. Usually, these themes work in the same direction. Occasionally, they point to opposite solutions. The law regarding common mistake going to the root of a contract is a case where tension arises between the two themes. That is illustrated by the circumstances of this extraordinary case.
In broad but necessarily imprecise terms the shape of this case is as follows. In February 1984 Mr. Jack Bennett concluded a sale and leaseback transaction with the plaintiffs in respect of four machines, which were described by serial numbers. In other words, Mr. Bennett sold the machines to the plaintiffs, and the plaintiffs then leased the machines to Mr. Bennett. The plaintiffs had been unwilling to enter into the transaction unless the lessee's obligations were guaranteed by an acceptable guarantor. The defendants proved to be acceptable guarantors, and for a guarantee fee the defendants guaranteed the obligations of the lessee under the lease agreement. The plaintiffs paid a sum in excess of £1m. to Mr. Bennett. Out of the proceeds of the sale Mr. Bennett paid the first quarterly rental. But in May 1984 he was arrested. The second quarterly rental was never paid. And it was discovered that the machines, which were the subject matter of the sale and lease, did not exist. Mr. Bennett had committed a fraud upon both the plaintiffs and the defendants. Pursuant to the terms of the lease, the plaintiffs claimed the total outstanding balance from Mr. Bennett. In July 1984 Mr. Bennett was adjudged bankrupt. The plaintiffs sued the defendants on the guarantee. In the alternative, the plaintiffs asserted proprietary or tracing claims against the defendants on the ground that various sums paid to the defendants by Mr. Bennett were part of the proceeds of the purchase price paid by the plaintiffs to Mr. Bennett. The trustee in bankruptcy was given leave to be added as a second defendant and appeared through counsel at the trial. On the fourth day of the hearing the parties arrived at a settlement of the proprietary or tracing claims. Counsel for the trustee accordingly withdrew.
The central remaining question to be resolved is whether the plaintiffs are entitled under the guarantee to judgment in the sum of £1,021,000 together with interest. The principal issues to which most of counsel's submissions were directed related to the questions (a) whether the guarantors were excused from liability by the non-fulfilment of an express or implied condition precedent of the guarantee, viz. the existence of the machines, or (b) whether the guarantee was void ab initio by reason of a common mistake affecting the guarantee, viz. the existence of the machines.
The commercial backgroundBefore I turn to the sequence of events which led to the present dispute, a brief sketch of the commercial background should be given. The principal transaction was a sale and a leaseback of equipment. That is a...
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