Chapter 4- Improperly Obtained Consensus

Question 0

What is the remedy used to set aside a voidable contract?

Answer 0

The remedy is rescission coupled with restitution (known as restitutio in integrum) and is available as both an action and a defence. An innocent party may also elect to uphold the contract.

Question 1

What happens when consensus is improperly obtained?

Answer 1

Where the person enters into a contract on the strength of a misrepresentation made to him, or as a result of duress or undue influence by the other party, the agreement is nevertheless valid because there is no lack of consensus. However, since the consensus was improperly obtained, the contract is voidable at the instance of the innocent party.

Question 2

What other remedy may an innocent party seek against a party who induces a contract by improper means?

Answer 2

The conduct of a party who induces a contract by improper means frequently constitutes a delict, in which case, the innocent party may recover damages in respect of any financial loss suffered as a result of the delict, irrespective of whether he or she elects to affirm or rescind the contract. Despite the contractual context, the damages are Delictual in character and are assessed according to the party’s negative interest.

Question 3

What are the recognised grounds for setting aside a contract?

Answer 3

Our law recognises the following grounds for setting aside a contract:

1) Misrepresentation;
2) Duress;
3) Undue influence;
4) Commercial bribery.

Question 5

Are there any further grounds for setting aside a contract where consent has been improperly obtained?

Answer 5

It seems likely but it is not yet certain that further grounds will be recognised in future, in circumstances where a party’s consent has been improperly obtained.

Question 6

What constitutes a misrepresentation?

Answer 6

A misrepresentation is a false statement of past or present fact, not law or opinion, made by one party to another before or at the time of the contract concerning some matter or circumstance relating to it.

Although it usually take the form of an express,verbal statement, a misrepresentation may also be implied by conduct. In many cases, such as when rust patches are concealed by seller of the car, the implication of the seller’s conduct is obvious, but in others, the process of extracting the representation from acts and conduct in question is rather more complicated or subtle.
- In some circumstances where there is a duty to speak, even silence may constitute a misrepresentation.

Question 7

How are misrepresentations classified?

Answer 7

Misrepresentations are classified as being fraudulent, negligent or innocent.

Question 8

What is a fraudulent misrepresentation?

Answer 8

It is a misrepresentation made:

• Knowingly, or
• Without belief in its truth, or
• Recklessly, careless whether it should prove to be true or false.

More concisely, it’s one made without an honest belief in it’s truth.

Question 9

What constitutes a negligent misrepresentation?

Answer 9

It is a misrepresentation made honestly but carelessly.

Question 10

What is an innocent misrepresentation?

Answer 10

It is one made without fraud or negligence.

Question 11

Why should misrepresentations be distinguished from other Pre-contractual misstatements?

Answer 11

They should be distinguished from other misstatements that may be made in the course of negotiating a contract, for the remedies available to the party differ considerably according to the type of misstatement in question. If, as may happen, the categories of misstatement overlap, the party misled is entitled in principle to a choice of remedies.

Question 12

What other Pre-contractual misstatements should misrepresentations be distinguished from?

Answer 12

They should be distinguished from:

• 1) Warranties or contractual terms (a term of the contract);
• 2) Opinions, forecasts and statements of law;
• 3) Puffs (general laudation or simple commendatio);
• 4) Dicta et promissa

Question 13

What is the test used to distinguish representations from warranties?

Answer 13

The classic test focuses on the intention of the parties: did they intend the statement to form part of their contract?

Question 14

What are Dicta et promissa?

Answer 14

They are material statements made by a seller to a buyer during negotiations, bearing on the quality of the thing sold but going beyond puffery. They are limited to the contract of sale.

Question 15

What happens if a dictum et promissa turns out to be unfounded?

Answer 15

The purchaser has at his disposal the ancient aedilitian remedies: that is, he may cancel the contract with the actio redhibitoria, or sue for a reduction in the purchase price with the actio quanti minoris.

Question 16

What is the distinction between misrepresentation and mistake?

Answer 16

Misrepresentation and mistake are distinct legal concepts in the law of contract and give rise to distinct remedies.

• Mistake presupposes an absence of consensus and renders the contract void ab initio, whereas;
• A contract induced by a misrepresentation is valid but voidable.

Question 17

When will a party be entitled to the right rescind a contract (restitutio in integrum)?

Answer 17

Irrespective of whether the misrepresentation was made fraudulently, negligently or innocently, a party is entitled to restitutio in integrum (rescission and restitution) if the misrepresentation:

1) Was made by the other party-
Misrepresentation must’ve been made by the other party to the contract, or by someone for whose acts he is responsible.

2) With the intention of inducing the contract (inducement)-
Misrepresentation must’ve induced represented to enter into contract, i.e. must be causal connection between making of misrepresentation and conclusion of contract.

3) Intention to induce-
Often said that misrepresentation should be made with the intention of inducing the other party to enter into the contract.

4) Was material (materiality)-
Well established rule that misrepresentation must be material in order to afford a right to rescind. I.e. the misrepresentation should be of such a nature that it would have the natural and probable effect of inducing a reasonable person to enter into the contract.

Question 18

What types of fraud inducing a contract are recognised?

Answer 18

Two types of fraud inducing a contract are recognised:

1) Dolus dans locum in contractui-
But for the fraud, the contract wouldn’t have been contracted at all.

2) Dolus incidens in contractum-
If there would still have been a contract, but on different terms.

Although this point hasn’t yet been settled, Dolus incidens probably gives a right only to damages, and not to rescission of the contract and this is likely also to apply to an ‘incidental’ misrepresentation made without fraud.

Question 19

When may a representee use misrepresentation as a defence?

Answer 19

Whenever a representee may rescind a contract for misrepresentation, he may also use the misrepresentation as a defence to an action on the contract brought against him by the representor.

The process of pleading misrepresentation as a defence is generally considered to be a form of rescission, since representee must allege and prove same facts that are necessary for remedy of rescission.

Question 20

When will a representee be able to claim Delictual damages in regard to a fraudulent misrepresentation made to him by the representor?

Answer 20

1) Fraudulent misrepresentation-
Deliberate deception that causes another financial harm is a delict in our law, and is actionable under actio legis Aquiliae. Thus representee who has been tricked into entering into prejudicial contract in principle to damages sounding in delict. The 5 essential elements for the cause of action are as follows:
1) A representation;
2) Which is, to knowledge of representor, false;
3) Which representor intended representee to act upon;
4) Which induced representee to act; and
5) That the representee suffered damage as a result.

Question 21

What constitutes duress?

Answer 21

Duress or metus is improper pressure that amounts to intimidation. It involves coercion of the will in that a party is forced to choose between entering into a contract or suffering some harm. A party who consents to a Contract under under such circumstances does so through fear inspired by an illegitimate threat. The consent given is real, but improperly obtained. Thus the contract is valid but may be set aside at the election of the threatened party, provided certain requirements are met.

There is uncertainty as to what these requirements are.

• The threat must be unlawful or contra bonos mores, and must have induced the contract.
• According to some authorities, the fear induced by the threat must reasonable fear of some imminent or inevitable harm to the person or property of the person threatened or to his immediate family.
• In the case of a threat directed at property (duress of goods), the courts have required an unequivocal protest at the time of entry into the transaction.

In addition to rescission and restitution, the threatened party may recover damages in delict for any loss caused through entry into the contract.

Question 22

When will a representee be able to claim Delictual damages in regard to a negligent misrepresentation made to him by the representor?

Answer 22

In Bayer SA (Pty) Ltd v Frost, the AD held that there was no good reason why general action for negligent misstatements recognised in Trust Bank case shouldn’t be applied in Pre-contractual sphere to a negligent misrepresentation inducing a contract. This was subject of course to all requirements of Aquilian action being satisfied, with particular emphasis being placed on elements of wrongfulness and causation affording the courts the necessary means of controlling the scope of the new form of liability.

Question 23

What constitutes undue influence?

Answer 23

It is also a form of improper pressure brought to bear upon a person to induce a contract. However, here the pressure is more subtle in that it involves undermining the will of the other party without any threat of harm. The pressure usually emanates from a close or fiduciary relationship in which one party abuses a superior position to influence the other.

Question 24

How can a party set aside a contract on the ground of undue influence?

Answer 24

To set aside a contract on the ground of undue influence, a party must establish:

1) That the other party obtained an influence over him;
2) That this influence weakened the party’s powers of resistance and rendered his will compliant; and
3) That the other party used this influence in an unscrupulous manner to induce an agreement that
- was prejudicial to him; and
- Which he wouldn’t have concluded with normal freedom of will.

Some authority also requires prejudice, but this is disputed.

Question 25

What is unconscionable exploitation of another’s emergency?

Answer 25

It is akin to undue influence, both of which have been described as abuse of circumstances and render the contract voidable. In suitable cases, Delictual damages may also be claimed.

Question 26

What is commercial bribery?

Answer 26

Commercial bribery is now recognised as a further distinct ground for rescinding a contract.

Question 34

When may a representee claim damages for any financial loss that he or she has suffered as a result of misrepresentation?

Answer 34

Whether the contract is set aside or upheld, the representee may claim damages, but here it makes a difference whether the misrepresentation was made fraudulently, negligently or innocently.

• Since Roman times, it has been recognised that fraud is a delict, and that fraudulent misrepresentation accordingly gives rise to a claim for Delictual damages.
• Only very recently was it decided that the same applies to a negligent misrepresentation. These damages, being Delictual in character, are measured according to the plaintiff’s negative interest, and include compensation for consequential losses.
• In case of innocent misrepresentation, there can be no claim for Delictual damages, since the misrepresentation was made without fault; nor a claim for contractual damages, since there is no breach of contract (unless the representation was warranted to be true).
• Where the innocent misrepresentation amounts to a dictum et promissum, however, the purchaser may claim a reduction of the price under the actio quanti minoris- a limited form of relief because it doesn’t compensate for consequential losses caused by a misrepresentation.