13. Invalidity of contract Flashcards
Define invalidity
A contract no longer has effects when it is affected by a major flaw, which undermines its enforceability at law.
2 types of invalidity
- Voidness/nullity
- Avoidance/rescission
Voidness/nullity invalidity
a void contract is per se ineffective:
- it does not transfer the seller’s ownership to the buyer
- each contracting party and even a third party can claim that a contract is void. Voidness can be also raised of a court’s own motion
- non-performance of any party is excused
- in case of performance, each party can claim restitution, even from a possible sub-purchaser
- it may not be remedied (apart from few exceptions)
in general, contract contrary to mandatory rules
Avoidable/rescission
a voidable contract is effective until avoided; if so, it is retrospectively (ab initio) reversed
- the contract does transfer the seller’s ownership to the buyer, but, if and when it is avoided, the ownership re-vests (restore) in the seller, as though it had never passed to the buyer
- the one contracting party who is ‘innocent’ (e.g. the minor) can avoid the contract, either by bringing a court action against or by giving notice to the party who is ‘responsible’ of a ground of avoidance
- non-performance of the ‘innocent’ party is excused solely
- after avoidance, each of the party can claim restitution of any performance.
- it may be remedied by affirmation (or confirmation), when, ceased the ground of avoidance, the ‘innocent’ parties knowingly renounces her/his claim. Voluntary performance is equivalent to affirmation
in general, contract concluded by a minor
Categories of general grounds of voidness/nullity
1) DEFECTIVENESS OF THE AGREEMENT BETWEEN THE PARTIES
- it is merely apparent, lacking the parties’ actual consent;
- its subject-matter does not exist, or is not possible (not in the common law)
- it does not meet the formality requirement, if any (want of form).
2) ILLEGALITY AND IMMORALITY (illicit contracts)
- infringement of a mandatory rule, which prohibits both parties from entering into a contract;
- the agreement contravenes public policy (ordre publique), including morality (contra bonos mores).
What is apparent agreement (lacktherof, refers to first point of categories of general grounds)
- a misunderstanding between the parties excludes that an exchange of their wills took actually place, being it merely apparent (dissensus);
- the hand of a party is physically (also mentally?) forced to sign a document without its will
Lack or impossibility of subject matter
- Civil law: Contracts whose specific performance is impossible are generally not enforceable in the jurisdictions
- Common law: jurisdictions tend to enforce such contracts: if a party has undertaken to do something which is physically impossible, it is bound to pay damages for breach of contract
Art. 1163 on lack of subject matter
(1) An obligation has as its subject- matter a present or future act of performance.
(2) The latter must be possible and determined or capable of being determined.
Facts of Mc Rae v Commonwealth Disposals Commission
Facts:
- The Commonwealth Disposals Commission sold McRae a shipwreck of a tanker on the “Jourmand Reef”, near Samarai supposedly containing oil
- The McRae brothers went to Samarai and found no tanker, and that there was no such place as the Jourmand Reef
- It later became clear that the Commission officer had made a ‘reckless and irresponsible’ mistake in thinking that they had a tanker to sell (the Court found that they had relied on mere gossip)
- CDC argued there was no liability for breach of contract because it was void given the subject matter did not exist.
- Nonetheless, the High Court of Australia sentenced the seller to compensate damages for breach of contract.
Judgement the Mc Rae vs CDC case
- It is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contract - i.e. agree in the same terms on the same subject-matter - they are bound, and must rely on the sipulations of the contract for protection from the effect of facts unknown to them
- The High Court of Australia held that McRae succeeded in damages for breach of contract. They rejected the contract was void because CDC had promised the tanker did exist.
- A general ruling that can be gleaned from the court’s judgment is that in circumstances where parties have equal knowledge as to the existence of the subject matter, and it turned out to be false, then it would justify the implication of a condition precedent
- However, in a case where only one party has knowledge of the subject matter (such as the present circumstances), and the other simply relies on what the first party intimates, then there could be no condition precedent.
German BGB on lack of subject matter
The view of the common law is taking root in civil law jurisdictions
(1) A contract is not devoided of its effects for the fact that one of the parties’ performance is impossible already at the time when the contract has been concluded.
(2) The other party can claim (expectation) damages or reimboursement of expenses
Differences between mistakes in civil law and common law
- Civil law jurisdictions tend to favour an ‘intention approach’ to contract, which leaves more room for its avoidance based on a vitiating factor, particularly a mistake
- Common law jurisdictions tend to follow an ‘expression approach’ to contract, which immunizes it from ‘unilateral’ mistakes incurred by each party, unless they have been caused by a misrepresen- tation
When can mistaken party claim avoidance in civil law contracts?
The mistaken party can claim avoidance of contract in case:
- the mistake is material (or essential): it must not be based on ancillary terms, but concern a main point of the contract;
- the other party knew of the mistake, or could have known of it, had she/he acted in good faith
When can mistaken party claim avoidance in common law contracts?
- A unilateral mistake does not affect the validity of the contract, however fundamental to the mistaken party’s decision to enter into the contract.
- An equitable remedy of avoidance (rescission) of the contract is granted in case the mistake was created by a misrepresentation made by the other party, or her/his agent, or a third party whose misrepretation the other party had knowledge of.
Smith vs Hughes case
- Mr Hughes (racehorse trainer) v. Mr Smith (farmer)
- Smith brought Huges a sample of green oats, and Hughes ordered forty to fifty quarters of oats at 34 shillings a quarter.
- Upon delivery, Hughes said they were not the oats he thought they were. He had apparently wanted old oats (which are the only ones racehorses can eat), and he was getting new, green oats. In fact, Smith’s sample was of green oats.
- Hughes refused to pay and Smith sued for breach of contract, for the amount delivered and for damages for the amount for oats that were still to be delivered.
- Hughes case was dismissed, No avoidance, contract remained in place
- An objective test revealed that a reasonable person would expect the sale of good quality oats in a similar contract, since there was no express discussion of old oats. The sample gave him the chance to inspect the oats and this was an example of caveat emptor (buyer beware).
