Chapter 4: Genuine Consent - Mistake, Misprepresentation and Unconscionable Contracts

Question 1

What is the cornerstone of the law of contract?

Answer 1

Consent.

However, consent must be freely given, it must be genuine.

If the consent of one of the parties has been affected, during the ore-contractual negotiations, by:
. A mistake or
. A misrepresentation or
. It has been extracted under duress or
. By the use of undue influence or
. Unconscionable conduct
The court may not enforce the (apparent) agreement.

Question 2

What happens when there has been a mistake?

Answer 2

As a general rule, a person is bound by an agreement in which there exists an element of mistake unless he or she can show that the mistake is a common mistake or unilateral mistake.

Question 3

What are the types of mistake?

Answer 3

Mistakes of fact:
. Common mistake
. Mutual mistake
. Unilateral mistake

Question 4

What is a common, mutual and unilateral mistake?

Answer 4

Common - parties make the same mistake
Mutual - parties are both mistake, but mistake is not the same
Unilateral - one party is mistaken about the terms of the contract or identity of the other party, this mistake is known to the other party

Question 5

What is misrepresentation?

Answer 5

A representation is a statement of fact intended to induce a party to make a contract.

If representation is untrue, that is, where it is a misrepresentation, there are remedies available to a party, however they vary according to the nature of the misrepresentation.

Question 6

What is the difference between a mistake and misrepresentation?

Answer 6

A mistake is regarded as invalidating a contract, the notion that the parties have not really agreed.

With Misrepresentation, the parties have agreed but one of them has been motivated to agree by a statement as to some existing fact or past event that is not true.

Question 7

What are the different types of misrepresentation?

Answer 7

. Innocent
. Fraudulent
. Negligent

Question 8

With regard to representations, what is vital to distinguish?

Answer 8

It is vital to distinguish simple representations from representations which are terms of the contract.

Question 9

What are simple representations?

Answer 9

They merely induce or persuade a person to enter into a contract, they are not terms.

However, of the party making the statement promises the truth of that statement in the sense of making it part of the contractual bargain, then it is a term of the contract and action can be taken for a breach.

In such case, the innocent party has the right of suing damages.

Question 10

What happens if a representation term is a condition?

Answer 10

It is a term of importance which goes to the basis of the contract.

An innocent party can repudiate the contract and hold themselves discharged from further performance.

Question 11

What happens if a representation term is a warranty?

Answer 11

Warranty - a term of lesser significance.

The innocent part is limited to suing for damages.

Question 12

When does fraudulent representation exist?

Answer 12

“When it is shown that a false representation has been made
. Knowingly or
. Without belief in its truth or
. Recklessly, careless whether it be true or false”.

Question 13

What are the 6 elements which needs to be established in order for an action for fraud to succeed and to seeks remedies?

Answer 13

1. The representation must be one of fact (not just opinion)
2. The representation must be untrue
3. The party who makes such representation must know that what they are stating is false, or have no belief in its truth, or not care whether it is true or false
4. The party who makes the representation must intend for the other party to act upon such representation
5. The representation must, in fact, have been acted upon by the other party
6. The person claiming must have suffered damage

Question 14

Explain the following element for an act of fraud to succeed: 1. statement of fact

Answer 14

Must not be a mere expression of opinion.

However, a statement of opinion can be held to involve misrepresentation when the person making it really did not hold that opinion or a reasonable person could have held that opinion.

Question 15

Explain the following element for an act of fraud to succeed: 2. Falsity

Answer 15

The representation has to be false to their knowledge.

Even if the representation is true but becomes false to the knowledge of the representer before the contract is concluded, they must tell the other party. If the contract is concluded with disclosing the falsity of the representation to the other party, they are just as liable as if the representation had been false from the beginning.

Question 16

Explain the following element for an act of fraud to succeed: 3. Known to be false, or without belief in its truth, or recklessly careless whether it be true or false

Answer 16

The representer is liable if they make a false statement when they have no knowledge whether it is true or false, and also when they do not trouble to verify the truth of what is said.

If they genuinely believed the statement to be true, there is no fraud.

Question 17

Explain the following element for an act of fraud to succeed: 4. Intended to be acted upon

Answer 17

This means, for example, intending that the other party enter into the contract of do any other act in reliance on the statement.

Question 18

Explain the following element for an act of fraud to succeed: 5. In fact acted upon

Answer 18

The misrepresentation must have induced the other party to enter into the contract.

Where the representation is believed to be true but is not relied upon by the person to whom it is made, there is not liability since the representation would not have induced them to enter into the contract.

Question 19

Explain the following element for an act of fraud to succeed: 6. Resulting in damage

Answer 19

There is no action if the false representation causes no loss or damage.

Question 20

What are the remedies for fraudulent misrepresentation?

Answer 20

A person who has been induced to enter into a contract due to fraudulent misrepresentation is in the following position:

1. They may refuse to be bound by the contract and bring an action for its rescission where such course is necessary, eg. In the case of contracts under which the defrauded party has given some benefit before the fraud was discovered.
2. They may take advantage of the contract to the extent of retaining what benefits they may have received and sue for fraud, claiming such damages or loss as they have sustained.
3. They may successfully defend any attempts to enforce the contract against them.

Question 21

What is innocent misrepresentation?

Answer 21

This is an incorrect statement of fact made without an intention to mislead or deceive, or made without realisation of its untruth.

It can also arise from a non-disclosure of facts (where such non-disclosure occurs without the intention of deceiving.

Question 22

What are the remedies for innocent misrepresentation?

Answer 22

The remedies of a person who has been deceived by an innocent misrepresentation are of an equitable character only. The injured party to a contract entered into through innocent misrepresentation has in equity the right:

(a) to rescind the contract
(b) to resist an action for specific performance of the contract (seen is Redgrave V Hurd)

There are also remedies available under the ACL for misleading conduct

Question 23

Explain the remedy of rescission.

Answer 23

This equitable remedy is available in the case of both fraudulent and innocent misrepresentation. It amounts to seeing the contract aside and restoring the parties to the position they occupied before the contract was made.

The following points are relevant to this remedy:

1. The right to rescind is lost if the party entitled to rescind affirms the contract after becoming aware of the falsity of the representation
2. The right is lost if third parties acting in good faith acquire rights in the subject matter of the contract before the right to rescind is exercised
3. It does not exist if, by realms of the changes that have occurred, it is not longer possible to restore the parties to their former position or where too much time has elapsed after the contract was made.

Question 24

What is negligent misrepresentation?

Answer 24

Providing negligent information/advice
There was a special relationship between the parties
The information sought was for a serious purpose
There was a reasonable reliance

Remedy - damage in tort of negligence, rescission possible

Question 25

What is duress?

Answer 25

Duress is actual or threatened violence to, or deprivation of liberty of a person or their immediate family or near relatives to pressure or coerce such person into entering into a contract.

A person who has been coerced into entering a contract under duress has been deprived of their free will to act and, thus, there is no true consent to the agreement.

A contract made under duress is voidable at the option of the party coerced, that is, he or she can elect not to be bound by the contract.

Question 26

What is undue influence?

Answer 26

This is the improper use of power by one person over another so that the acts of the person influenced are not, in the fullest sense of the world, their free voluntary acts.

Undue influence often rises for transfers of property for inadequate value.

Question 27

When is undue influence presumed?

Answer 27

Where the following special relationships exist:
. Parent and child
. Guardian and ward
. Trustee and beneficiary
. Solicitor and client
. Religious advisor and devotee or 
. Doctor and patient 

However, other relationships can be included, it just has to be established that a special relationship of trust and confidence has arisen. Then it can give rise to a presumption of undue influence against the person in the dominant position.

The onus of proving that undue influenced was not exercised is on the party denying it.

Question 28

What are unconscionable contracts?

Answer 28

At common law - the general rule is that the court will not grant relief to a party merely because the contract the parties have entered into operates harshly or oppressively against them.

Under statute - the Australian consumer law now provides remedies where a person has suffered loss as a result of the unconscionable conduct of another.