Contract - Vitiating Factors (6) Flashcards
What are vitiating factors?
Vitiating Factors: Vitiating factors are circumstances which can terminate or invalidate a contract.
What is misrepresentation?
Misrepresentation: A contract may be voidable where a party has made a pre-contract ‘misrepresentation’ which induces the other party. There are four steps.
(1) Type of Statement: Firstly, it must be determined whether the pre-contract statement formed part of the contract (a ‘term’), a simple inducement (a ‘representation’), or mere sales puff.
(2) Misrepresentation: If the statement was a representation, it must constitute a ‘misrepresentation’. If it was a term, it can be actionable as a usual breach of contract. Puff is not actionable.
(3) Type of Misrepresentation: It is then important to determine the type of misrepresentation, as this will affect remedies available.
(4) Remedies: It is important to determine the remedies available to the misled party, and any bars on them.
What are preliminary statements?
Types of Preliminary Statements: Preliminary statements may be terms, representations, or mere sales puff.
(1) Term: A contract term, giving rise to breach of action. Usually goes to the ‘heart of contract’.
(2) Representation: A representation, which may be actionable as a misrepresentation (below).
(3) Sales Puff: Extravagant sales talk that is not meant to be believed, and is not actionable.
Determining Term and Representation
Determining Term and Representation: A number of factors will indicate whether a statement was either a term or a representation. The guidelines are not equally weighted.
(1) Primary Test: The common intention of parties is the primary test, but if this is not clear, then the following factors must be applied.
(2) Skill and Knowledge: If an expert makes a statement to a non-expert, it is likely to be a term. If a non-expert makes a statement to an expert, it is likely to be a representation.
(3) Written in Contract: If a verbal statement was repeated in the written contract, it is definitely a term. If not, it may be a representation.
(4) Importance to Recipient: If a recipient made clear that a statement was of ‘vital importance’, it will almost certainly be a term.
(5) Need to Verify: If a statement maker invited a party to verify the statement, it may be a representation. If they assured them they did not need to, it is more likely to be a term.
(6) Lapse of Time: The longer the span of time between statement and contract, the more likely a representation.
What is actionable misrepresentation?
Actionable Misrepresentation: To be actionable, a representation must be an: a) an untrue statement: b) of fact; c) made by one party to the other; d) to induce them into the contract.
(1) Untrue Statement: Representation was untrue, whether made orally, in writing or by conduct (Spice Girls v Aprilia).
Silence: Generally, there is no obligation to disclose material facts, so silence does not amount to misrepresentation through conduct, unless there is a:
Fiduciary relation between parties;
Contract of utmost good faith (such as insurance);
There has been a half-truth (silence distorts truth);
I.e. there has been ‘one lady owner’, but no mention of many male owners.
A disclosed fact has changed and not been corrected before the contract.
(2) Fact: The representation must be regarding an objective fact, not an opinion or future intention.
Exception: If the opinion is not held, or the intention not true, then these are actionable, as the other party is misled into believing the maker is relying on facts which do not exist.
(3) Made by Contracting One Party to Other: The statement maker must be the other contracting party. If they are not, the only remedy is negligent misstatement or deceit in tort.
(4) Inducement: The statement must induce the other party into the contract, though not solely (Edgington v Fitzmaurice).
No Reliance: Where a false statement was not relied on, there is no action (Attwood v Small).
>If the recipient appointed an expert to verify the representation and relied solely on that report, there is no action.
What are the different types of misrepresentation and damages?
Types of Misrepresentation: Misrepresentations may be fraudulent, negligent, or innocent. The remedies differ according to culpability.
Fraudulent
Fraudulent: Fraudulent misrepresentations are made: a) with knowledge of falsity; or b) without belief in its truth; or c) recklessly without care as to whether it is true or false.
(1) Burden of Proof: Proof of fraud is required by the claimant, which is difficult to establish.
(2) Damages: Damages extend to all consequential loss, irrespective of remoteness. They derive from the tort of deceit. Effectively aims to place the claimant back in their pre-contract position.
(3) Example: Salesman told purchaser that they would be leaving town, but instead intended to and did open a rival business in the area. Damages were awarded for loss of profit between the profit they did make and would have made at a similar business (East v Maurer).
Negligent
Negligent: Negligent misrepresentations are made with an honest belief in truth, but on unreasonable grounds (s2(1) Misrepresentation Act 1967).
(1) Burden of Proof: The statement maker must prove the belief was made on reasonable grounds. The claimant need only establish misrepresentation and loss.
(2) Damages: Damages are assessed in the same way as above, meaning all consequential losses are recoverable, irrespective of remoteness. As such, fraudulent misrepresentation is rarely pursued, as negligence is easier.
(3) Example: Statement maker had relied on the Lloyd’s Register, rather than the ship’s log, to represent the capacity of a ship. This was held to be unreasonable, even though it had been honest (Howard Marine v Ogden).
Innocent
Innocent: If a misrepresentation was held on reasonable grounds, then no damages are recoverable.
(1) Burden of Proof: Burden of proof is on the defendant, which can be difficult to establish.
(2) Rescission: As with the above types, rescission may be available in respect of an innocent misrepresentation.
What is rescission?
Rescission: Any type of misrepresentation can make a contract voidable, giving a claimant the choice to affirm or rescind the contract. It is not automatically void. It is awardable in addition to damages.
(1) Effect: The benefits of contract are mutually restored, placing the parties as far as consideration goes into their pre-contract positions. It engenders a ‘rewind’ effect.
(2) Court Approach: Rescission is an equitable remedy, so is awarded discretionally. The right to rescission is lost, or ‘barred’, in four situations (below).
What are bars to rescission?
Bars to Rescission: Rescission is barred in four situations.
(1) Affirmation: Innocent party on discovering misrepresentation treats the contract as continuing, or does nothing (in a way that suggests affirmation). Once affirmed, the contract cannot be rescinded.
(2) Undue Delay: Innocent party attempted to rescind a long time after it was reasonable to have discovered the misrepresentation, even if their discovery was later than this (Leaf v International Galleries).
Exception: If fraudulent, then time runs from the actual date of discovery.
(3) Innocent Purchaser: An innocent third-party purchased the subject matter of the contract prior to rescission, making it inequitable to rescind.
Time of Rescission: If the claimant attempted to rescind prior to third-party purchase, such as by calling the police immediately, then they will be favoured before the innocent third-party (Car v Caldwell).
(4) Impossible Restitution: The contract is impossible to substantially restore, usually due to necessity of trust, or substantial change in form.
Change in Form: A sale of a business is difficult to rescind, as they usually change significantly under new management (i.e. new board).
Necessity of Trust: A misrepresentation which induced termination of a service contract is impractical to rescind, due to the necessity of trust in an employment relationship (Crystal Palace v Iain Dowie).
What is duress and undue influence (overview)?
Duress and Undue Influence: If a party has been illegitimately coerced or pressured into a contract, it is not ‘freely agreed’, meaning the contract is voidable by rescission.
No Damages: Unlike misrepresentation, innocent parties cannot seek damages.
What is duress?
Duress: Duress is violence, or illegitimate threats and pressure, which coerce an innocent party into entering or varying a contract. The burden of proof is on the claimant.
(1) Violence: Violence, and threat of violence, to enter or vary a contract are prima facie duress, even if not a sole reason (Barton v Armstrong).
(2) Illegitimate Pressure: Illegitimate and improper threats and pressure, such as a threat to breach the contract, are duress. Legitimate pressure, such as threatening to seek new suppliers, is permitted.
Demanding Higher Payment: Demanding higher payment for no reason is duress (Atlas Express v Kafco). If conferring a practical benefit without fraud or duress, it is okay (Williams v Roffey).
Establishing Economic Duress
Establishing Economic Duress: To establish economic duress, there must be pressure which: a) is illegitimate; b) has the practical effect of compelling, or removing alternatives for, the claimant; and c) is a significant cause in entering or varying the contract (Carillion v Felix).
(1) Court Considerations: To distinguish illegitimate pressure from general business, the court will consider:
Whether there had been an actual or threatened breach of contract;
Whether the pressuring party had acted in good or bad faith;
Whether the victim had realistic practical alternatives other than submission;
Whether the victim protests at the time of pressure; and
Whether the victim affirmed and relied on the contract or variation.
Rescission
Rescission: Once established, a contract will remain valid until the victim rescinds it or affirms it (Opel v Mitras).
(1) Rescission: The victim must make the other party aware that it is rescinding.
(2) Variations: If duress only relates to a variation, the variation alone can be rescinded.
(3) Bars to Rescission: Rescission is barred in the normal circumstances.
Innocent Purchasers: Innocent purchaser has obtained the matter lost through duress.
Affirmation: Innocent party affirmed the contract after duress. Generally, if they pay more money under duress once the contract has been fulfilled, this is affirmation.
Undue Delay: Undue delay in rescission will bar rescission.
Impossible Restoration: Impossibility to restore goods or property under the contract.
What is undue influence?
Undue Influence: Undue influence is influence which goes beyond that regarded as acceptable, subjected on an innocent party to enter into a contract. Such contracts are voidable.
(1) Actual Undue Influence: Innocent party can prove that they were actually subject to undue influence. This can be difficult to establish (Daniel v Drew).
(2) Presumed Undue Influence: Undue influence can be presumed, due to a relationship of trust and confidence and a transaction that calls for explanation.
Presumption of Undue Influence
Presumption of Undue Influence: Undue influence will be presumed where there is: a) a relationship of trust and confidence; and b) a transaction that calls for explanation (RBS v Etridge).
(1) Relationship of Trust and Confidence: Relationships of trust and confidence may be irrebuttably or rebuttably presumed.
Irrebuttably Presumed: Fiduciary relationships, i.e. doctor-patient, solicitor-client, parent-child, etc.
Not Presumed: Generally married couples, and boss-worker. Innocent parties must prove the relationship was one of trust and confidence on the facts (Tate v Williamson).
(2) Transaction Calling for Explanation: Transactions will ‘call for an explanation’ if not readily explicable with relation to the relationship of parties.
Calls for Explanation: Means not explained by the relation. A loan for a couple to go on holiday together does not ‘call for explanation’, it is usual (CIBC v Pitt).
(3) Rebutting Overall Presumption: This overall presumption can be rebutted with evidence to the contrary, such as if the innocent party sought independent advice before entering the contract.
What is undue influence by third party?
Undue Influence by Third-Party: Undue influence often arises where a third-party (such as a husband) influences a contracting party (such as his wife) to enter a contract on their behalf.
(1) Innocent Parties: There are two innocent parties here - the contracting parties.
(2) Rescinding Contract: The unduly influenced party can rescind the contract provided the other party to contract had actual or constructive notice of the third-party’s undue influence (Barclays v O’Brien).
Constructive Notice
Constructive Notice: The other party will have constructive notice if: a) it ought to have been put on inquiry of the risk of undue influence; and b) did not take reasonable steps to ensure the influenced party was aware of the implications of the arrangement.
(1) Inquiry: Where a wife acts as surety for her husband’s debts, a bank is put on inquiry by default (RBS v Etridge).
Joint Sureties: If both husband and wife enter the contract jointly, there is no inquiry, unless the bank is aware the loan is made for the husband alone (CIBC Mortgages v Pitt).
Non-Spouses: A bank will also be put on inquiry where a surety and actual debtor share a non-commercial relationship (RBS).
(2) Reasonable Steps: Banks must take reasonable steps to ensure influencee is informed in a private meeting of: a) the extent of liability; b) the risk imposed; and c) the urgent suggestion or insistence to seek independent legal advice.
In Practice: In practice, banks will simply require the wife to take independent legal advice, and provide them written confirmation from their solicitor.
Effect
Effect: The innocent party may rescind, and the non-influenced party may pursue a debt against the influencing party.
What happens if a contract is illegal?
Illegality: Contracts will be void if illegal at the time of formation or illegal to perform. Compensation and benefits are generally irrecoverable.
Illegal Formation
Illegal Formation: Contracts may be illegally formed under statute or common law.
(1) Statute: For example, a contract to prevent or restrict UK trade (Competition Act 1998).
(2) Common Law: For example, a contract contrary to public policy or morality, such as the sanctity of marriage or court jurisdiction.
Example: A contract obliging a religious baker to bake an atheistic cake is illegal.
Restraint in Trade: Restraint in trade clauses are prima facie unlawful, unless they protect ‘legitimate business interests’ and are reasonable in geography, duration and scope (this is strict).
Illegal Performance
Illegal Performance: If performance of the contract is inherently illegal, the contract is void (Ashmore v AV Dawson).
(1) Incidental Crimes: If a crime is merely incidental to the contract, it is usually sufficient to punish the wrongdoer alone (St John v Joseph Rank).
(2) Unilateral Crimes: If only one part is aware of illegality, the other may be able to sue for breach.
What happens if a contract has occured by mistake?
Mistake: Contracts will be void if subject to an objectively ‘sufficiently fundamental’ mistake.
Effect: Contracts are void, but parties cannot seek damages.
Common Mistake
Common Mistake: Both parties made the same fundamental mistake as to the contents of the contract, it is effectively pre-contract frustration.
(1) Fundamental: Mistake renders the contract impossible or radically different (Bell v Lever Bros).
(2) Contents: Must relate to the actual contents, i.e. parties agree to exchange a car, but did not know it had already been destroyed by fire.
Exception: Mistakes as to the ‘quality’ of the contents, including brand or value, are insufficient.
(3) Both Parties: Both parties must be mistaken - if one party was at fault, or the contract contains express provisions regarding mistakes, it is not void.
Cross-Purpose Mistake
Cross-Purpose Mistake: Both parties are at such disagreement over their interpretation of the terms or existence of contract, there is no alternative but to render it void.
(1) No Alternative: It must be objectively impossible to resolve the disagreement.
(2) Example: Party A contracted to purchase ‘Ship Barry’, Party B contracted to sell ‘Ship Barry’, but there were two ships with the same name and the parties believed the contract referred to the two versions (Raffles v Wichelhaus).
Unilateral Mistake
Unilateral Mistake: One party ‘genuinely and reasonably’ made a mistake as to the identity of the other party, which they had relied on as vital importance. This is preferable if rescission is barred under misrepresentation.
(1) Vital Importance: Mistakes must relate to the fundamental identity of the other party, not merely a mistake regarding their creditworthiness or other attributes.
(2) Example: Party A pretended to be a long-term client of Party B, forging documents and never meeting them in person. Party B would only sell to that client. As rescission was barred, the contract was void for mistake (Cundy v Lindsay).
Effect: In this case, goods had been sold to a bona fide purchaser (rescission would be barred under misrepresentation). However, with mistake, contract was void (never valid), so rescission was permitted.
(3) Face to Face: If a deal was struck in a face to face situation, courts are less sympathetic, as it is obvious that identity was not that important, and it is harder to argue they did not intend to deal with that specific individual.
Example: Party A pretended to be a famous actor to Party B. Party B sold goods on the basis they were probably reliable. Mistake was blocked, as this only related to a mere attribute, rather than the actual identity of the person (Lewis v Averay).
How does mistake compare to misrepresentation?
Mistake v Misrepresentation: When looking at facts, it is important to determine misrepresentation from mistake.
(1) Face to Face: When dealing face to face, there is a strong presumption that the innocent party intended to deal with the person in front of them. Mistake is likely prohibited, but misrepresentation may be actionable.
(2) Writing: When dealing in writing, the written agreement must be construed to determine with whom the innocent party intended to contract. If it was someone other than the rogue, it is likely to be void for mistake.
