4. Vitiating Elements

Question 1

Vitiating factors

Answer 1

Such factors can vitiate, ie invalidate, the contract

1. Misrepresentation
2. Mistake
3. Unfair contract terms
4. Duress and undue influence
5. Illegality

Question 2

Misrepresentation

Answer 2

Where a false statement of fact made by one party induces the other party to enter into the contract and the statement does not form part of the contract

In order to be an actionable misrepresentation, the following elements must be present:

1. Unambiguous
2. False
3. Statement of fact
4. No silence
5. Addressed to the claimant
6. Induces the claimant to enter into the contract with the representer

Question 3

Misrepresentation:

2. False

Answer 3

The representation must be false

Question 4

Misrepresentation:

3. Statement of fact

Answer 4

The representation must be of a fact. Misrepresentation can be by conduct, as long as directed towards the claimant

NOT statements of fact:
1. Mere puff/sales talk
2. Statements of opinion - exception: if the representor has some special knowledge or skill, their opinion is likely to be fact

Question 5

Misrepresentation:

4. No silence

Answer 5

Silence cannot give rise to a misrepresentation

Exceptions where silence may amount to misrepresentation:
1. Where there is a fiduciary relationship between the parties (e.g. solicitor/client, trustee/beneficiary)
2. Half-truths: statements which are technically true but misleading, or where the truth is weak
3.. Continuing representation: True but circumstances change which makes it false
4. Contracts of utmost good faith: duty to disclose all material facts in contracts of utmost faith

Question 6

Misrepresentation:

5. Addressed to the claimant

Answer 6

The misrepresentation must be addressed to the claimant - this can be by conduct

Question 7

Misrepresentation:

6. Induces the claimant to enter into the contract with the representor

Answer 7

Claimant must have relied on the statement when entering into the contract and think that it is true when doing so - does not have to be the only reason

Question 8

Types of misrepresentation

Answer 8

Derived from common law and statute - distinction determines remedy available

1. Fraudulent misrepresentation
2. Negligent misstatement
3. Negligent misrepresentation
4. Innocent misrepresentation

Question 9

Types of misrepresentation

1. Fraudulent misrepresentation

Answer 9

Misrepresentation is only fraudulent if made:

• with knowledge that it is false; or
• without belief in its truth; or
• recklessly, not caring whether it is true or false.

The motive of the representor is irrelevant

Burden of proof on claimant

Question 10

Types of misrepresentation

2. Negligent misstatement

Common law - does not need to be a contractual relationship

Answer 10

Hedley Byrne v Heller & Partners [1964] AC 465

There must be a ‘special relationship’ between the parties

As an action in negligence, this relationship does not need to be a contractual relationship and, indeed, there is no precise outline of when such a relationship arises

It would exist where one party has specific knowledge which they could reasonably foresee that the other party would rely upon

Question 11

Types of misrepresentation

3. Negligent misrepresentation

s2(1) Misrepresentation Act 1967 - needs to be a contractual relationship

Answer 11

The statutory action for misrepresentation does, of course, rely on there being a contractual relationship but otherwise has advantages for the injured party

Act provides a course of action for negligent misrepresentation where the offending statement was not made fraudulently - Misrepresentor to be liable to pay damages where, although the belief in the truth of the statement was honestly held, it was not held on reasonable grounds

Onus will be on the person who made the statement to prove that they ‘had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true’

Question 12

Types of misrepresentation

4. Innocent misrepresentation

Answer 12

All misrepresentations which were not fraudulent but is now confined to those misrepresentations which are entirely without fault - If the misrepresentor can establish that they had reasonable grounds to believe their statement was true

Question 13

Remedies for misrepresentation: Rescission

Answer 13

A party can therefore decide whether or not they want to bring the contract to an end. If they chose to do so, this would be by means of rescission.

Rescission is an equitable remedy - i.e. discretionary

Bars to rescission:
1. Affirmation - express or implied

2. Lapse of time - relevance of not just the delay but also the action taken by the injured party
3. Impossibility - if a party has in some way altered or used the goods or property that they have bought, they will not be able to rescind the contract
4. Unfair to deprive - it might be impossible to return the parties to their original position and so rescission cannot take place, if a party has in some way altered or used the goods or property that they have bought, they will not be able to rescind the contract
5. Equitable - court may decide that most equitable approach is to award damages instead of rescission. It must have ‘regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party

Question 14

Types of misrepresentation

1. Fraudulent misrepresentation

Remedies

Answer 14

Rescission:
- Yes - equitable remedy

Damages: Yes, tort of deceit

Question 15

Types of misrepresentation

2. Negligent misstatement

Remedies

Answer 15

Rescission: Yes
Damages: Yes, negligence

Question 16

Types of misrepresentation

3. Negligent misrepresentation

Remedies

Answer 16

Rescission: Yes

Damages: Yes, s2(1) of the Misrepresentation Act 1967. NB: measured in the same way as fraudulent misrepresentation

Question 17

Types of misrepresentation

4. Innocent misrepresentation

Answer 17

Rescission: Yes, plus indemnity
Damages: Yes, s 2(2) Misrepresentation Act 1967. Discretionary, in lieu of rescission

Question 18

Mistake

Question 19

Effect of misrepresentation

Answer 19

Question 20

Mistake

Answer 20

A mistake will have to be considered to be ‘operative’ and therefore go to the very heart of the contract

Three types of mistake:

1. Common mistake – where both parties have made the same fundamental mistake.
2. Mutual/cross-purpose mistake – the parties are talking at cross purposes and so there is no true
   agreement between them as they believe that they are contracting for different things.
3. Unilateral mistake – one party is mistaken and the other party is aware of their mistake but still seeks to make a contract

In all cases the mistake must precede the contract and have induced it

Where a mistake is found, the contract will be void ab initio. It will therefore be rendered a complete nullity from the very beginning and so neither party will have gained rights under it

Question 21

1. Common mistake - Example

Answer 21

Grimsdale International Groceries Ltd imports fruit and vegetables from around the world. They enter into a contract to sell a consignment of bananas from the Caribbean to Better Bargains, a supermarket chain in the north of England. Unfortunately, there was a fault with the refrigeration system on the boat and so the bananas became rotten. As a result, the bananas were dumped by the ship’s captain the day before the contract was signed. Grimsdale did not become aware of the problem until after the contract was signed.

• Both parties are clearly mistaken as to the existence of the cargo and so clearly this goes to the heart of the contract between the parties.

The use of mistake can, however, be extended to situations where the mistake is not as to the existence but rather the quality of the subject matter. This would, for example, be the case where the parties were mistaken as to their legal rights as happened in Nutt v Read (1999) 32 HLR 761 where the parties were mistaken as to their ability to sell a chalet in a caravan park separately to the pitch on which it sat.
- 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.

Question 22

2. Mutual mistake - Example

Answer 22

Bill is a farmer who is looking to expand the breeds of livestock that he has on his farm. He therefore goes to a local auction and sees a lot which is described in the catalogue as ‘finest white pigs bred from sows imported from Europe’. Bill believes the pigs to be Latvian Whites which command a high price and so bids accordingly. In fact, the pigs are Lithuanian Whites which would normally sell for much less.

The auctioneer knows that Bill is looking to expand and so believes that Bill has submitted a high bid in order to secure what he wants. He therefore sells the pigs to Bill at the price that he bid.

In this situation, the parties are contracting for different goods. As a result, there is no true agreement between them and the contract would be void for mutual mistake.

Question 23

3. Unilateral mistake - Example

Answer 23

Gopal Electricals Ltd (GEL) supply computers and other electrical equipment to businesses through the UK. They take delivery of a consignment of new laptops and to encourage sales send round a message about the goods to all their existing customers. The message states that the laptops are of the highest specification and thus will run much faster than the previous model. It then goes on to indicate that the laptops will normally retail at £1,400 each, but for bulk orders they can be bought at £120 each. In fact, GEL meant the price for bulk orders to be £1,200.

The purchasing director from PP Professional Services sees the message and immediately places an order for 1,000 laptops. The order is processed by staff at GEL before they realise their mistake.

In such a situation, the court would likely find that PP Professional Services should have inferred from the circumstances that the price was a mistake and as a result the contract would be void for mistake (see Hartog v Colin and Shields [1939] 3 All ER 566 and Chwee Kin Keong v Digiland Mall Com Pte Ltd [2005] 1 SLR 502).

Question 24

3. Unilateral mistake - Criteria to be satisfied before a mistake can be found

Answer 24

Where the parties do not contract in each other’s presence, the courts will find a mistake where it is clear that the party intended to contract with a specific individual

By contrast, if it is the attributes rather than the identity of the individual that are important, the contract should be upheld

Where the parties contract with each other face to face, the mistaken party will have to satisfy the following four criteria:
- they intended to deal with someone else;
- the party they dealt with knew of this intention;
- they regarded identity as of crucial importance; and
- they took reasonable steps to check the identity of the other person.

Question 25

Mistake - non est factum

Answer 25

A party can argue that the document was not one that they intended to sign.

Saunders v Anglia Building Society [1971] AC 1004: the essence of the plea non est factum is that the person signing believed that the document he
signed had one character or one effect whereas in fact its character or effect was quite different.

Would only be used in limited circumstances given that the courts will generally uphold a contract that has been signed

Question 26

Mistaken Identity - Mistake or misrepresentation?

Answer 26

Voidable (for misrepresentation) or void (for mistake)

Face-to-face dealing:
- Strong presumption that the innocent party intends to deal with the person in front of them (ie the rogue) rather than the person he is pretending to be
- Contract is unlikely to be declared void for mistake although it might be rescinded for misrepresentation

Dealings conducted exclusively in writing:
- The written agreement must be construed to determine with whom the innocent party intended to contract.
- If it was with someone other than the rogue then the contract might be void for mistake.

Nature of the transaction:
- May indicate to the rogue that it is vital he possess a particular attribute and if he does not do so, the offer is not addressed to him.
- For example, if someone orally commissions a portrait from an unknown artist passing himself off as a famous painter, the rogue could not accept the offer: in other words there would be no contract with the rogue.

Actual existence known:
- If the person/entity who the rogue is pretending to be actually exists and is known to the mistaken party (eg a registered company) it suggests the offer is not addressed to the rogue. So again there could be no contract with the rogue: it would be void

Question 27

Duress

Answer 27

Duress arises where illegitimate pressure is put on one of the parties to the contract and this is one of the factors which compels them to enter into the contract

Contract voidable - party can choose to terminate the contract

1. Duress against the person
2. Economic duress

Question 28

Duress

1. Duress against the person

Answer 28

Where threats are made against an individual in a manner that would impel them to enter the contract

Tests:
1. An illegitimate means of persuasion was used.
2. The illegitimate means were one of the reasons why the contract was entered into.
3. The evidence given by the person on whom the pressure was exerted is honest and accepted.

Question 29

Duress

2. Economic duress

Answer 29

Where a party has used economic pressure to force the other party to enter into a contract.

DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530:
- There must be pressure
a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim,
(b) which is illegitimate, and
(c) which is a significant cause inducing the claimant to enter into the contract.

Illegitimate pressure:
- whether there has been an actual or threatened breach of contract;
- whether the person allegedly exerting the pressure has acted in good or bad faith;
- whether the victim had any realistic practical alternative but to submit to the pressure;
- whether the victim protested at the time; and
- whether he affirmed and sought to rely on the contract.

Question 30

Undue Influence

Answer 30

Again, this involves some form of improper pressure being exerted on a party to encourage it to enter into a contract

The threshold for proving undue influence is lower than for duress and does not have to involve any illegitimate pressure

Contract = voidable

However, unlike duress, undue influence is an equitable doctrine and the court therefore has some discretion as to whether to award such a remedy.

Types of undue influence:
1. Actual - has been proved on the facts
2. Presumed - will be presumed where there is a fiduciary relationship – or a relationship of trust and confidence – between the parties and a transaction occurs that calls for explanation

Question 31

Undue Influence: Actual

Answer 31

The claimant would have to positively demonstrate that the other party had exerted undue influence over them to enter into the contract.

Question 32

Undue Influence: Presumed

Answer 32

Based on the nature of the relationship between the parties:

1. Relationships which by their very nature raise the presumption of undue influence. E.g. solicitor/client, doctor/patient, parent/child.
2. A relationship under which the complainant generally reposed trust and confidence in the wrongdoer.

Question 33

Undue Influence: Third parties/Royal Bank of Scotland v Etridge (No 2)

Answer 33

If the creditor had actual or constructive notice of the debtor’s impropriety, it will be tainted with it and any security contract obtained as a result will be voidable and capable of being set aside.

A creditor will have constructive notice if:

1. it ought to have been put ‘on inquiry’; A creditor will be put on inquiry in all cases where the relationship between the debtor and surety is non-commercial and the loan is not for their joint benefit
   AND
2. it did not take reasonable steps to ensure that the surety was aware of the implications of what she, or he, was signing: The creditor could have a private meeting with the surety to explain the risks and advise the surety to take independent advice

Solicitor’s advice; Core minimum:

1. The nature of documents and the practical consequences for the spouse of signing them
2. The seriousness of the risk and the amounts involved
3. That the spouse has a choice and can refuse to sign
4. The solicitor should check if the spouse wishes to proceed

Question 34

Undue Influence: Professional Conduct

Royal Bank of Scotland v Etridge (No 2)

Answer 34

One solicitor could therefore act for more than one party, although where the solicitor was already acting for the couple the bank should ask the spouse whether they wanted another solicitor.

Question 35

Illegality

Answer 35

Contracts may be illegal either at the time of formation (eg because they involve the commission of a crime) or because of the way they have been performed

A contract is illegal where its formation, purpose or performance involves the commission of a legal wrong eg breach of a statutory provision or violation of public policy

General rule: Illegal contracts are void and courts will not allow recovery of benefits conferred in the performance of an illegal contract

Question 36

Contracts which are illegal at common law

Answer 36

Courts consider the following types of agreement to be illegal outright:

• to commit a crime or a civil wrong;
• to defraud the Inland Revenue;
• which tend to encourage corruption in public life;
• which oust the jurisdiction of the courts—so, for example, a contract where a wife agreed financial arrangements following a divorce in return for not applying to court for maintenance was not upheld by the court in Bennett v Bennett [1952] 1 KB 249
• which are otherwise prejudicial to the proper administration of justice—for example, agreements to give evidence in a certain way at trial.

Question 37

Contracts which are illegal as a result of statute

Answer 37

Contracts can be illegal as a result of infringing a statute.

E.g the Competition Act 1998 renders unenforceable contracts that have the effect of restricting, preventing or distorting trade within the UK.

Question 38

Illegality - Restraint of trade

Answer 38

Where one party to the contract restricts the ability of the other party to continue to trade after the contract has been signed.

Most often seen where a party sells a business or as part of an employment contract.