Illegal Contract - Part II PDF

Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 Session 16 Illegal Contract – Part II Contents Introduction 16.1 Effects of illegality 16.2 Exceptions 16.3 Severance of illegal parts Introduction A contract may be illegal by statute or at common law....

Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 Session 16 Illegal Contract – Part II Contents Introduction 16.1 Effects of illegality 16.2 Exceptions 16.3 Severance of illegal parts Introduction A contract may be illegal by statute or at common law. In addition, certain contracts have been declared by the courts over the years to be contrary to public policy or morality. 16.1 Effects of illegality The effect of illegality is to render such a contract void so that it is bereft of any legal consequences. The parties to such a contract cannot sue under it for specific performance or for recovery of damage for non-performance. These consequences would apply only or for recovery of damages for nonperformance. These consequences would apply only or for recovery of damages for non-performance. These consequences would apply only to an illegal contract and not to a contract which is merely void or unenforceable because although there are many similarities between these two types of contracts, there are other important differences as well. The principles relating to effects of illegality contain two Latin maxims. They are exturpi causa non oritur action which lays down the principle that no action can be founded upon a tainted transaction and in pari delicto potior est condition defendants, which mean that where guilt is equal the defendants’ position is superior. As the first maxim lays down the rule that no action can be founded upon a tainted transaction, the aid of the law cannot be sought for the enforcement of such transaction. As example of such claim by a landlord as plaintiff to recover an illegal payment or depose promise to him by a tenant in 68 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 consideration of the tenancy. A plaintiff making such a claim would be barred by the operation of this maxim. If the tenant has already paid the prohibited rent, he cannot recover it on the basis of the second maxim. The first maxim would be applicable when a party to an illegal contract seeks to enforce that contract by claiming by the defendant to an illegal contract. Although there are no exceptions to the operation of the first maxim, certain exceptions to the operation of the second maxim are available. This is because the first maxim lays down a very important principle which cannot relaxed in the public interest whereas in the case of the in pari delicto rule, the court compares the conduct of each party to the contract and grant relief when it is in the interest of justice or public policy to do so. Activity 16.1 1. List the main effects of illegality. 16.2 Exceptions Modern Roman Dutch law has permitted recovery deposit the above maxims in the following exceptional situations. Where the contract is subsequently unperformed. - De Sampayo J in Siyathu vs. Banda (1916) 1NLR 59 held that the law is that where the intended fraud is not accomplished, the maxim in pari delicto potior est condition defendant has no application and the party who has delivered the property may lawfully reclaim it before the alleged purpose is carried out. Where the defendant would be unjustly enriched at the plaintiff’s expense - In Moamadu Marikkar VS Ibrahim Nain (1915) 1NLR 13 the plaintiff intending to defraud a third party by whom he expected to be sued in respect of certain land executed a deed of conveyance to transfer the property without consideration. The contemplated fraud was not affected as no action was instituted by the third party. The plaintiff who sued to recover the land succeeded on the basis 69 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 that since no fraud was affected, it was unnecessary to punish the plaintiff’s intention by giving away his land to the defendant. The third exception to the in pari delicto rule operates where the plaintiff’s guilt cannot be established or his guilt even if established, is not equal to the guilt of the defendant. The fourth exception is where a party seeks to vindicate his rights to something which although dealt with in the illegal agreement, in Jajbhay V. Cassim (1939, A.D. 537) the judge held that, in that case the plaintiff had Marely delivered temporary possession of a property to the defendant and not full right of occupation and that therefore the defendant cannot retain possession of the property against the plaintiff when the right of occupation given to him by the plaintiff is terminated. The rationale behind this view is that the plaintiff should not lose that which he did not intend to part with. Another exception to the operation of this rule is when consideration of justice or public policy require that the plaintiff to an illegal contract should be given relief. The circumstances of each would be considered before this exception to the in pari delicto rule is applied. Instances where a defendant’s failure to honour obligation under a contract while claiming right under it and instances where punishment has been meted out to the plaintiff by the criminal law and should not be increased have resulted in the invocation of this exception by the courts. Yet another exception to the rule is where the plaintiff comes within the category of persons whom it is the policy of the law to protect. For example, the protection given to tenants under the Rent Restriction legislation would place tenants in this category. Another exception to the in pari delicto rule is where the transaction comes within the section 3 of the Money Lending Ordinance. If the lawful part of an agreement can be severed from the unlawful part, effect will be given to the lawful part. - The exceptions to the in pari delicto rule discussed above are not exhausive and courts would consider the circumstance of each case in determining whether there is an exception to the rule. 70 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 Activity 16.2 1. Identify the exceptions for illegality. 16.3 Severance of illegal parts The doctrine of severability would appear to have been borrowed by our law from English law, for the Roman law accorded it no recognition. If only part of a contract is illegal, the whole contract will not be void if the illegal part can be served from the rest of the contract. Thus, in Allison V Spiekermann Ailion ( 1 All ER 497), the lessee of a flat which he occupied as a protected tenant, agreed to assign the reminder of his lease to spiekermann and his wife. The rent was 850 Pounds per annum and the purchasers agreed to pay 3750 Pounds of certain furniture which was worth much less the purchase price for the furniture thus contained a premium prohibit by the Rent Act 1968. Held the illegal element i.e., the premium was severable. Consequently, the less was valid and the spiker Manns were enlisted to specific performance, but without payment of the illegal premium represented by the excess purchase price of the furniture. If however the whole purpose of the contract is an illegal one the court will not make a new contract for the parties by attempting to cut out those portions which are illegal and enforce the rest. In Napier V. National Business Agency Ltd (CA 1951) Napier was employed as secretary and accountant at a salary of £13 per week with £6 a week expenses. Both parties knew his expenses were less than £1 a week. Held the contract was to evade tax and was illegal. It was impossible server the part dealing with salary from the part dealing with expenses, so that the whole was unenforceable. 71 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 Generally, where parties enter into a lawful contract and there is an ancillary provision, which is illegal but exists for the exclusive benefit of the plaintiff, the court usually will, if the justice of the case so requires and there is no public policy objection permit the plaintiff if he so wishes to enforce the contract but without the illegal ancillary provision. In Carney v. Herbert (1985) 1 AC 301 the defendant agreed to buy from the seller the latter’s shares in a Ltd. the purchase price was secured by mortgages given by N Ltd over its property. Because N Ltd was a subsidiary of A Ltd. N Ltd was thus granting security to purchase of shares in its holding company. For this reason, mortgages were illegals contravening the Companies Act. Held by the Privy Council that the mortgage, being ancillary to the main transaction of the defendants purchase of the shares, could be severed. It must be noted, however that where the consideration for a contract is illegal, the doctrine of severability doesn’t apply and whole contract cannot be enforced. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford Summary Illegal contracts have significant implications on their enforceability and the rights of the parties involved. Generally, when a contract is deemed illegal, it is considered void and unenforceable. This means that the parties cannot rely on the contract to seek legal remedies or enforce their rights. However, there are exceptions to this rule. In certain circumstances, courts may still provide relief or enforce certain aspects of an illegal contract. These exceptions include cases of unjust enrichment, where one party has been unjustly enriched at the expense of the other, divisible contracts, where the legal and illegal parts can be separated and the legal portion enforced, and situations where public interest outweighs the illegal nature of the contract. Moreover, the concept of severance allows courts to remove the illegal parts of a contract while upholding the legal aspects, provided that the contract can stand independently without the illegal elements. Understanding the effects of illegality, exceptions, and the 72 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 16: Illegal Contract-part 02 possibility of severance is crucial in navigating the complexities of illegal contracts and determining the legal consequences that arise from them. Learning Outcomes Identify the effects of illegality. Understand the exceptions for illegality. Identify the service of the illegal parts of a contract. Review Questions 1. Perera hires Pathum to perform a task that is illegal under the prevailing statute. Pathum completes the task, but later realizes that the contract is unenforceable due to illegality. Can Pathum still seek payment for his services? Discuss the effects of illegality on the contractual relationship and the potential remedies available to Pathum. 2. Saduni enters into a contract with ABC Company, which involves both legal and illegal provisions. Can the court sever the illegal parts of the contract and enforce the remaining lawful portions? What factors would the court consider in determining whether severance is appropriate? 3. Explain the effects of illegality on a contract. How does illegality render a contract void and unenforceable? Discuss the underlying legal principles and policy considerations that support this general rule. 4. Discuss the exceptions to the general rule of illegality. Explain the circumstances in which a court may still provide relief or enforce certain aspects of an illegal contract, such as cases of unjust enrichment, divisible contracts, or when public interest justifies enforcement. Provide examples to illustrate each exception. 5. Analyze the concept of severance in the context of illegal contracts. What does it mean to sever the illegal parts of a contract? Under what conditions can a court exercise its power of severance? Discuss the legal and practical implications of severance in preserving the enforceability of lawful provisions. 6. Evaluate the challenges and considerations in determining whether severance is appropriate in a given contract. What factors would a court consider when deciding whether the contract can stand independently without the illegal parts? How would the court balance the preservation of legitimate contractual obligations against discouraging illegal activities? 73 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 Session 15 Illegal Contract (Part 1) Contents Introduction 15.1 Contract rendered the illegal statute. 15.2 Contract contracting to common law. 15.3 Contracts contrary to public policy or morality 15.4 Contracts in restraint of trade Introduction A contract may be illegal by statute or at common law. In addition, certain contracts have been declared by the courts over the years to be contrary to public policy or morality. 15.1 Contract rendered illegal statute. Contract rendered illegal by statute could be either express or implied. It should be noted that contracts which are expressly or impliedly prohibit by statute and thereby made illegal, should be distinguished from contracts which are made void and unenforceable by state. Thus, a contract entered into in breach of the provisions of the Prevention of fraud Ordinance, such as informal lease would be void but would not be illegal. There are many express statutory prohibitions of contracts. In determining whether a statute has impliedly prohibited a particular type of contract, Professor Weeramantry has said that “the policy of the legislature the intention of the ordinance and the history of the legislation concerning the subject have been taken into account in deciding on the illegality or otherwise of contract. Whereas statute Marely imposes a penalty on the performance of certain acts without declaring them illegal, courts have to looks at the intention of the legislature in determining whether such contract are illegal, courts have look at the intention of the legislature in determining whether such contract 60 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 are illegal. When considering some of the provision of the opium ordinance, woodrenton J. FernandoVs. Ramanathan (1913) 16 N. L. B. 33) stated as follows. “although a contract or act may be made illegal by a statute passed for protection of revenue alone, the presumption of illegality will be greater where the statute is one embracing other important objects of public policy as well, and where it contains prohibitor lanage, besides imposing a penalty.” T.S Fernando J in Samarawickrama Vs. Subramaniam (1992) 1SLR 142 approved of this reasoning. In this case a contract concerning the hiring of private car was declared illegal because the Motor Traffic Act contained a prohibition and penalty on the hiring of cars registered as private cars. It was held that the extra license fees and penalties imposed by the Motor Traffic Act in respect of hiring cars was intended not merely as revenue provisions but as provisions of the benefits of the public. It was also stated that for the same reason a distinction was maintained between private and hiring cars. In Dep V. Nagarathnam (1911) 1 SLR 61) it was held that a contract made illegality by statute cannot be made legal by agreement between the parties. In addition, a contract which at its formation or at the time performance is illegal by statutory prohibition, cannot be made legal by a change in the law rendering legal that which was illegal. Thus, in Jafferjee V. Subbial Pilla (1958) 1 SLR 505, a contract for the sale of goods at a price exceeding the statutory maximum imposed by a price control order was held to be illegal even though the price control order which made the contract illegal at its commencement was lifted and the price charged became legal during its performance. Activity 15.1 1. List the main powers of the High Courts. 2. Identify the cases which can be heard in District Courts. 61 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 15.2 Contracts Contrary to common law The main categories of contract illegal at common law are, transactions in things extra commercium and contracts entered into with a fraudulent object. The law does not permit transactions in things extra commercium such as seashore, public Strems, state lands and the minerals found there on and other public property. Regarding contracts entered into with a fraudulent object a special action known as Paulian action evolved in the Roman Law to set aside such transactions. The Paulian action available in our legal system is however not identical in its nature with the original remedy of the action pauliana of Roman Dutch law. However, the most important aspect of this remedy, the paulian action available in our is that this action can be brought by a creditor to obtain the revocation of acts done by the debtor in fraud of the creditors right. This remedy is more appropriately dealt with in the course on land law. 15.3 Contracts contrary to public policy or morality A Contract damaging the administration of justice. – Contracts which tend to stifle criminal prosecution, contracts to give or supress evidence in flavour of another contract to commit crime, agreements outing the jurisdiction of courts and agreements which have as their object the abuse of the processes of court would be contrary to public policy and therefore illegal. Illegal agreements to give aid litigant without good reason or agreement to share proceeds with one of the parties known as maintenance and champerty in English law are also prohibited by the Roman-Dutch Law. A contract damaging to the country’s safety. - The most important example of this class of contract is a trading contract between a Sri Lankan citizen and alien enemy in time of war. If such a contract is made during war, it is wholly illegal. If it is made in peace time and then war comes, it can give rise to no further right or obligations. But existing rights and obligation are only suspended after hostilities cease, they can be enforced. A contract to default the revenue. - In Miller vs. Karlinski ((1945) 62 TLR 85) a Contract was consider which provided that one of the parties could include in his expense account the amount of income tax he was declared illegal. Contract tending to injure the public service. - 62 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 These include agreements for the sale of public offices or for the assignment of salaries of public officials or of pension granted for public services. A contract to procure a title of honour is also illegal and void. A contract tending to promote sexual immorality. - In the case of Pearce Vs. books the defendant was a prostitute and she had hired a carriage to ply her trade. The court held that the supplier of the carriage could not succeed in an action against her for the money was he was owing as he knew of the use to which the carriage was to be put and that was an illegal contract. A contract damaging to the institution of marriage. - The sanctity of marriage is regarded by the law as a matter of public interest. Under this principal agreement intended to disrupt marriage, agreement in restraint of marriage, marriage brokerage contract, agreements relating to maintenance are some of the types of agreements which are illegal and void. With regards to marriage brokerage contracts, two different stands have taken by Roman Dutch law and English law. The Roman Dutch law looked upon a contract to pay money to a third party for bringing about a marriage as legal and enforceable whilst the modern English law looked upon such a contract as being contrary to public policy and therefore void, talking the view that marriage should not be the subject of a commercial bargain as it should be the result of free consent. This English law view has been adopted also by South African Courts. In the 1913 case of Livera Vs. Gonsalves (1912) 2 NLR 17 the English law view was approved. Activity 15.1 1. What is the illegality of a contract. 2. Identify how the contract is contrary to common law. 63 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 15.4 Contracts in restraint of trade This concept is not one belongs to Roman or Roman Dutch Law but has been adopted from English law, the doctrine that contract in restraint of trade is generally to be considered as being in conflict with public policy is entirely foreign to Roman and Roman Dutch systems of law. The doctrine as prevailing in modern Roman Dutch law has therefore been described as an unvarnished importation from English law, and the principles laid down in the English cases have been followed in South African and Sri Lanka. A contract is in restraint of trade if a person, by making use of his superior bargaining power, imposes unfair restrictions on another person’s ability to exploit his earning power. This principle in essence unties the whole doctrine of restraint of trade. Thus, a contract in restraint of trade or business. All such contracts are prima facie illegality and void. However, some types of restraint can be justified if they are reasonable so far as the parties are concerned and provided, they are not contrary to public interest. When assessing the validity of contract in restraint of trade the courts have had to balance the desire to allow complete freedom to contract with the fact that most restraints are contrary to public interest because they restrict the choice or bargaining power of the public. There are certain types of contracts in restraint of trade which may be held to be valid depending on the circumstances. Restraints imposed on ex-employees. If the restraint is to be reasonable between the parties, it must be no wider that is necessary to protect the promise’s trade secrets or business connection. Thus, a restraint imposed on an employee who has no knowledge with his employer’s secrets or influence over his customers will be illegal, as it would be an attempt to prevent competition. However, if trade secrets and business connections are illegitimate protected the fact that restraint incidentally reduces the ex-employee power to complete does not invalidate it. Restraints in a contract of sale of business The courts are more willing to uphold a restraint on the vendor of a business than one on an employee. The idea behind this is that buyers of a business would not be forth coming if they could not have protection against competition by the vendor. Who would buy a grocery shop if the vendor was left free to open a new grocer’s shop next door? Therefore, a restraint would be valid only if it is connected with the proprietary interest which has been bought. It is must no more than is necessary to protect the particular business bought by the purchaser. In 64 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 assessing the reasonableness of the restraint, the area covered the duration of the restraint, and the type of business are again important. It is possible however for a worldwide restraint to be upheld. In Norden felt Vs. Maxim Norden felt Guns and Ammunition Company ( AC 535) Node felt sold his armament manufacturing business to a company which subsequently amalgamated with another company. Node felt became managing director of the new company and his contract of employment he made two promises, 1. not to carry on an armament business in competition anywhere in the world for twenty-five years. 2. not to carry on any other business in competition with a business carried on by the company for the time being. It was held that the first promise was valid and enforceable because it was reasonable in the circumstance. Norden felt’s business was worldwide when he sold it and any restraint on him would also have had to be worldwide to be effective. Nor was restraint harmful to the public interest because it secured for England the inventions and business cannot protect all his or her business from the vendors competition. Only that which he or she has just purchased for the vendor. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford Summary Illegal contracts can arise in various ways. Firstly, a contract may be rendered illegal by statute when its terms or subject matter directly violate specific laws or statutory provisions. Such contracts are deemed unenforceable due to their contravention of the law. Secondly, a contract can be considered illegal if it violates common law principles, such as those related to fraud, duress, or unconscionability. These contracts go against fundamental legal precedents and are not enforceable. Thirdly, contracts that are contrary to public policy or morality are deemed illegal. If a contract undermines public interests or promotes illegal activities, it will 65 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 not be enforceable. Lastly, contracts that unreasonably restrain trade, limiting a person's freedom to engage in business or profession, are generally regarded as illegal and unenforceable. Understanding the nature and implications of illegal contracts is crucial to avoid legal complications and protect one's interests. Learning Outcomes Identify the illegal contracts. Understand its nature and implication. Review Questions 1. Sarath enters into a contract to sell illegal substances, which is in direct violation of a specific statute. Can Sarath seek enforcement of the contract despite its illegality? What are the legal consequences of engaging in contracts that are rendered illegal by statute? 2. James signs a contract with XYZ Corporation, containing a provision that unreasonably restricts him from engaging in any competitive activities for a period of 10 years. Can James challenge the contract on the grounds of being in restraint of trade? What factors are considered in determining whether a restraint of trade is reasonable or unreasonable? 3. Discuss the concept of illegality in contract law. Explain the different ways in which a contract can be deemed illegal, including through contravention of statutes, common law principles, public policy, or restraints of trade. Provide examples to illustrate each category. 4. Analyze the legal consequences of engaging in illegal contracts. What are the implications for parties involved in such contracts? Discuss the unenforceability, potential penalties, and remedies associated with illegal contracts. 5. Examine the role of public policy in determining the legality of contracts. How does a contract's alignment with public policy or morality affect its enforceability? Provide examples of contracts that may be deemed illegal due to public policy considerations. 6. Discuss the factors that determine whether a restraint of trade is reasonable or unreasonable. What considerations do courts take into 66 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 15: Illegal Contract-part 01 account when assessing the enforceability of contracts that limit a person's freedom to engage in trade or business? 7. Evaluate the potential consequences for individuals or businesses who engage in illegal contracts. How does engaging in illegal activities through contracts impact the legal rights, reputations, and liabilities of the parties involved? 67 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence Session 14 Duress and Undue Influence Contents Introduction 14.1 Duress. 14.2 Undue influence 14.3 Types of undue influence. 14.4 Duress and undue influence rendering contract voidable Introduction If a contract was made under duress or under unfair influence, it is voidable. It is possible for a party to enter into a contract under duress when unjustified pressure was used to compel that party to do so. When one party exerts influence over the other to induce them to enter into a contract, the courts will find that there has been undue influence. There are two types of undue influence: actual presumed. When a court determines that a contract was created under improper influence, it may annul it or change its terms to lessen the harm. 14.1 Duress Another factor that taints the establishment of a contract is duress. It describes a scenario in which one side uses coercion, threats, or other forms of wrongdoing to force the other party into giving their permission. The voluntary nature of the contract is compromised by duress, which gives the pressured party the opportunity to nullify the agreement. There are several ways that duress can appear, such as bodily harm, psychological pressure, economic coercion, or even blackmail. The crucial element is that the coerced party's freedom of choice is suppressed, and they are forced to sign the contract against their genuine preferences and interests. For there to be a finding of duress, five requirements must be met: 53 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence 1. The party who signed the deal was under pressure. This pressure was unlawful. 2. The claimant entered the contract as a result of the pressure. 3. The claimant was essentially forced to sign the contract. 4. The claimant objected at the time of the contract's formation or soon after. These circumstances will be examined one at a time. Threats or other forms of pressure must be inappropriate or illegal in character. Any type of harm that would force a reasonable person to enter into the contract against their will would qualify as this, including physical harm, financial loss, reputational damage, and other types of harm. also Absence of Reasonable Alternative: The party who was threatened or pressured must show that they were left with no choice but to sign the contract. The defence of duress may not be upheld if a fair alternative was offered and the forced person deliberately accepted the contract despite the threats. Causal Link: The threat or coercion and the coerced party's acceptance of the contract must be related in some way. The forced party may be entitled to avoid the contract if they can demonstrate that duress existed and met these requirements. They have the option to decide whether to cancel the agreement and release themselves from its terms. It is important to keep in mind that the legal definition of duress can be complicated, and that each case's particular facts and local regulations may have an impact on how it is applied. Activity 14.1 1. Identify the meaning of duress. 14.2 Undue influence. Undue influence is another vitiating element in contract law that can affect the validity of a contract. It happens when one party uses their position of trust or power to improperly or unfairly influence the other party. The weaker party's decision-making can be manipulated by this influence, resulting in an agreement that does not accurately represent their 54 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence autonomous will. A connection where one person has the power to dominate or control the other party's decisions is often the case when undue influence is present. This can happen in relationships between family members, close friends, or people who have professional or fiduciary obligations. By exerting pressure, playing games, or taking advantage of the other party's dependence or trust, the dominant party may misuse their position. Activity 14.2 1. What is undue influence. 14.3 Types of undue influence. There are two types of undue influence. They are, 1. Actual undue influence. 2. Presumed undue influence. Actual undue influence – This occurs when the claimant can demonstrate that they were coerced into making the transaction by the other party. In these situations, the influence frequently resembles hardship but falls short of it. An illustration would be if someone promised to pay someone money after threatening to denounce them for a criminal offence. This does not qualify as duress because we cannot claim that the pressure being applied is unlawful or that there is no practical alternative to complying, yet keeping the pledge could still be seen as unfair. In real life, this kind of unwanted influence is uncommon. Essential error – The Roman Dutch law in general will not grant relief from the effects of an objective contract, unless the error relating to a term of the offer, a party contracting under a non-contractual or an incidental error will not be entitled to such relief. Presumed undue influence- The burden of proving the existence of undue influence will occasionally be shifted from the claimant to the defendant by the use of an evidentiary presumption, leaving it to the 55 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence defendant to do so. The burden of proof shifts to the alleged wrongdoer to establish that the transaction was not influenced unfairly if the presumption of undue influence applies, but it does not imply that there was any such impact. This burden of evidence may be met by the alleged perpetrator, who must demonstrate that they did not exert undue influence over the other contracting party. When there is a prior relationship of confidence between two parties to a contract, as a result of which one invests faith in the other, and the contract between them is obviously unfavourable to the one who places trust in the other, undue influence may be assumed to have occurred. Fiduciary relationships are those built on trust and can come about in one of two ways. First, it can fit into one of a number of categories where a rapport based on trust is taken for granted. These relationships fall into the following categories: parent and child; religious leader and follower; guardian and ward; lawyer and client; trustee and beneficiary; and doctor and patient. A relationship of trust may still be developed based on the facts even though it does not fit into one of these categories. In theory, every connection could be said to be based on trust if the specifics of the situation support this. Depending on the specifics of the case, contracts made by married or cohabiting individuals may come under this heading or may be the result of undue influence. 14.4 Duress and undue influence rendered a contract voidable. Duress and undue influence are vitiating elements in contract law that can render a contract voidable. When these elements are present, the affected party has the option to rescind the contract and seek legal remedies. Here's an explanation of how duress and undue influence can render a contract voidable: Duress: Duress refers to the use of coercion, threats, or unlawful pressure to induce someone to enter into a contract against their will. If a party enters into a contract under duress, the contract is considered voidable at the discretion of the coerced party. The affected party may choose to rescind the contract and seek legal remedies due to the unfair and involuntary nature of their consent. Duress can arise from physical harm, economic threats, or other 56 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence forms of coercive conduct that deprive a person of their freedom to negotiate or refuse a contract. Undue Influence: Undue influence occurs when one party exerts excessive influence over another, taking advantage of their trust, confidence, or vulnerability. It involves the manipulation of the decision-making process, exploiting a confidential relationship or dominating the weaker party. If a contract is entered into under undue influence, it is considered voidable. The influenced party may seek to have the contract set aside due to the imbalance of power and lack of free and voluntary consent. Undue influence often arises in situations such as fiduciary relationships, where there is a duty of loyalty and the potential for abuse of power. In both cases, duress and undue influence, the affected party may choose to affirm or ratify the contract despite the vitiating factor. If they decide to rescind the contract, they can seek remedies such as rescission, restitution, or damages to restore them to the position they were in before entering into the contract. It's important to note that the burden of proof lies with the party alleging duress or undue influence. They need to demonstrate that the vitiating element was present and had a significant impact on their consent and decision-making process. Activity 14.3 1. How Duress and undue influence rendered a contract voidable. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. 57 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford Summary The session on duress and undue influence in contract law looked at the factors that can make a contract voidable. Duress is the use of coercion or unlawful pressure to compel someone to enter into a contract, whereas undue influence is when one person takes advantage of a confidential relationship or exerts excessive control over another. Contracts signed under duress or undue influence are voidable, allowing the harmed party to cancel the agreement and seek legal redress. Understanding these principles is critical for identifying circumstances in which a party's consent has been violated and giving appropriate legal advice and remedies to safeguard the interests of the affected parties. Learning Outcomes Identify the meaning of duress and undue influence. Understand the types of duress and undue influence. Understand how duress and undue influence rendered a contract voidable. Review Questions 1. Samadhi signs a contract to sell her business to Asela under the threat of physical harm. Can Samadhi seek to have the contract voided based on duress? What elements must she prove to establish duress, and what legal remedies are available to her? 2. Janani, a wealthy individual, exercises undue influence over her elderly neighbor, James, and convinces him to sign a contract transferring ownership of his property to her at a significantly undervalued price. Can James challenge the contract based on undue influence? What factors must he establish to prove undue influence, and what remedies may be available to him? 3. Define duress and explain its significance as a vitiating factor in contract law. Discuss the elements that must be established to prove duress, and analyze the legal consequences of a contract tainted by duress. 4. Discuss the concept of undue influence as a vitiating factor in contract law. Differentiate between actual undue influence and presumed undue influence, providing examples to illustrate each type. Explain the legal implications and remedies associated with undue influence. 58 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 14: Duress and Undue Influence 5. Compare and contrast duress and undue influence as vitiating factors in contract law. Discuss the key differences in their nature, elements of proof, and legal consequences on contract validity. 6. Explore the role of vulnerability in cases involving duress and undue influence. How does the vulnerability of a party impact the assessment of whether duress or undue influence was present? Discuss the ethical considerations associated with exploiting vulnerable parties in contract negotiations. 7. Analyze the burden of proof in cases involving duress and undue influence. Who has the burden of proving these vitiating factors, and to what extent? Discuss any presumptions or standards of proof that may apply in such cases. 59 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake Session 13 Mistake Contents Introduction 13.1 Mistake preventing an agreement. 13.2 Mistake nullifying an agreement. 13.3 Mistake rendering contracts voidable. 13.4 Documents mistakenly signed. Introduction The development of business and commercial relations requires that apparent contracts be enforced. However certain types of mistakes act as a vitiating factor thus preventing the formation of an agreement or nullifying an agreement already formed. In the case of a mistake preventing an agreement, the error must relate to the term of the offer itself whereas in the case of mistake nullifying agreement, the error must relate to something forming a condition precedent to the operation of the contract. Unlike English common law, the Roman-Dutch law recognizes a third category of mistake where the contract is voidable at the instance of the mistaken party. Different terminology is often used in contract law to describe various types of mistakes when viewed from the purview of contracting parties. Mistakepreventing agreements include unilateral and mutual mistakes. Mistakes nullifying agreements involve common mistakes. 13.1 Mistakes preventing agreement. Unilateral mistake This occurs when one of the parties is mistaken about some fundamental fact and the other party knows or should know this. Thus, in Hartog V Colin and Shields 3 All ER 566 and offer was accepted to sell certain Argentine hare skins at a certain price per pound. The preliminary negotiations, however, had proceeded on the clear understanding that the skis would be sold at so much per piece, not per pound and at the trial it was established 46 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake that there was a trade custom to fix the price by reference to a piece. The value of a piece being about one third of that of a pound. It was held that the buyer must be taken to have the mistake made by the seller in making their offer. In fact, there is no different between English Law and Roman Dutch law with regards to the meaning of unilateral contracts. The judicial approach to this question in the two systems is subjective in that the innocent party is allowed to prove the effect upon his mind of the error in order to avoid its consequences. The distinguishing feature of a case of unilateral contracts is that only one party is mistaken, and the mistake of that party is known or ought to be known to the other. The party which knows of the mistake in such a case knows also that there is a complete lack of agreement and therefore cannot maintain that is a contract such as there would have been if the objective test has been applied. The knowledge of the error is decisive and make it impossible to apply the objective test of intention which is the test applied where the parties misunderstand each other, and both are mistaken without either being aware of any mistake that type of mistake is termed mutual. Mutual mistake Mutual mistake occurs when two parties mean different things. Thus, each party may be mistaken as to the other intention though each is ignorant that any mistake exists. Normally this will be a mistake as to the identity of the subject matter of the contract, for example in Raffles v. Wichelhaus, (EWHC Exch J19; (1864) 2). P agreed to sell D a consignment of cotton which was to arrive ex-peerless sailing from Bombay that happened to be two sips called Peerless sailing from Bombay, one in October and one in December. P was thinking of one ship and D of the other. It was held that the buyer was not liable for refusal to accept cotton dispatched by the December ship. To prevent agreement both unilateral and mutual mistakes the mistake must relate to a term of the contract. In such an event, a contract does not come into existence as there is a lack of coincidence between offer and acceptance. Where the error does not relate to a term of the offer error has no legal consequences, for it would be an error of motive. If for example, A offers to sell B a painting as having been done by a famous artist, when in fact it has not been done by him and B accepts the offer, there would be no contract. But if A offers a particular painting for sale and B accepts the offer thinking that it has been done by a famous artist, the error although would have a material in fact on its value, would not affect the contract as it relates purely to a motive and not be a term of the offer. Since B has agreed to the offer in 47 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake accordance with the term in which it was made there is co incident between offer and acceptance and thus a contract into existence. A mistake relating to a term of the contract would involve the following: Mistake as to the person Mistake as to the nature or quality of the subject matter Mistake as to the nature of the transaction Mistake as to the quantity of the subject matter Mistake as the identity of the subject matter. 13.2 Mistake as to the person. When discussing the mistake as to the person affects a contract it would be wise to consider the position under Roman Dutch law and English law separately as a distinction existed between the two systems. In Roman Dutch law it is demonstrates that a mistake relating to the identify of a contracting party rendered the contract void only if the individually of such contracting party entered as element into the contract. However, the English law analysis of a mistake as to the identify of a person would be relevant to modern Roman Dutch law. In here after applying the objective test with regards to a mistake relating to the identity of a person and attributes of a person. A mistake is fundamental, and the consent is negative if one party is mistaken as to the identity of the other. However, a mistake by one party is mistaken as to the identity of the other will not as a general rule put the parties so seriously at cross purpose as to negative consent. Mistake as to the nature or quality of the subject matter The nature or quality of the subject matter would not necessarily constitute a term of any contract. If the thing delivered approximates fairly to the description of the goods sold the sale will be valid unless the quality of the article constitutes a term of the offer. Such a position would prevail where the difference in quality in such as to make the thing delivered an article different in kind from the one contract for. Mistake as to the nature of the transaction Error relating to the nature of the transaction in most instances would prevent the formation of agreement because the nature of the transaction would usually constitute a term of the contract. If A hands over certain item for bailment to B but B thinks that it is a gift, the error in this instance relating to a term. Also, if A sings a document thinking that it was a sale 48 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake agreement, but which fact was a document relating to the execution of a mortgage, the mistake would have related to a term. Most of the errors relating to the nature of the transaction are found in written contracts. Mistake as to the quality of the subject matter A mistake relation to the quality of the subject matter would prevent agreement as it is generally a term of the contract. Mistake as to the identity of the subject matter Since the subject matter of a contract would obviously be a term of it a mistake with regards to identify would prevent agreement. For example, if A intends to buy X but B intend to sell Y. the position would be the same if A intends to buy Y only, but B intends to sell both X and Y or as in both had the same name and A contracted with reference to one and B with reference to the other. Activity 13.1 1. Identify the types of mistakes. 13.3 Mistakes nullifying agreement. Common mistake – When a common mistake occurs, it nullifies or undermines an agreement which has in fact been reached. Usually, this type of mistake entertained by both parties related to a fundamental fact such as the existence of the subject matter of the contract. In this situation, each person would know what the others’ intention is, but each would be mistake about the same underlying and fundamental fact. In the Roman Dutch law the controversy that prevails in English law is nonexistence as the doctrine of common mistake within its scope not only cases or res extincta and res Sua but also any mistake relating to a condition precedent of contract. 49 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake Activity 13.2 1. What is a common mistake. 2. How mistake nullify an agreement. 13.4 Mistakes rendering contracts voidable. This category is peculiar to the Roman Dutch law and is unknown to the English Common law. In Roman Dutch law even if a void objective contract has been formed an error which essential and reasonable could make a contract voidable by the grant of the remedy of retitutio in Ingram. Courts intervention in such a case would be motivated by the reason that it would be inequitable to permit one party to take advantage of the other error. Reasonable error – An error in this instance would not be Justas, if it is due to negligence. In the same way, if the error is made regarding a matter which is one of common knowledge, such error being not Justas a mistaken party would not be able to avail himself of such mistake through lack of knowledge of fact readily available to him. Essential error – The Roman Dutch law in general will not grant relief from the effects of an objective contract, unless the error relating to a term of the offer, a party contracting under a noncontractual or an incidental error will not be entitled to such relief. Activity 13.3 1. How mistake rendered a contract voidable. 50 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake 13.5 Documents mistakenly signed. A person signing a document is expected to know the legal consequence of his deed and therefore cannot relay on the claim that he signed under mistake. In accordance with the rule of Justas error the court would not readily come to the aid of a person who states that he did not sufficiently attend to the terms of a contract or did not read it sufficiently carefully or attend to the terms of a contract or did not read it sufficiently carefully or altogether neglected to read the document containing the contract. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Cartwright, (2002) Misrepresentation, London: Sweet and Maxwell Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford Summary A mistake is regarded as a vitiating element in the framework of contract law that may have an impact on a contract's legality. It happens when one or both parties to a contract have an incorrect perception of an important component of the contract. Three basic categories of errors can be distinguished: common error, unilateral error, and mutual error. Mutual Mistake happens when both parties hold the same false assumptions regarding a crucial aspect of the contract. When only one party makes a significant fact mistake while the other side is aware of the error, this is known as a unilateral mistake. When two people disagree on a material fact yet are misinformed about it, this is known as a common error. 51 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 13: Mistake Learning Outcomes Identify the meaning of the mistake in contract law. Understand how a mistake nullifies a contract. Understand how a mistake rendered a contract voidable. Review Questions 1. Thomas offers to sell his antique watch to Madhawa for 10,000 Rupees. Unbeknownst to both parties, the watch is a rare collector's item worth 100,000 Rupees. If Thomas discovers the true value of the watch after the contract is formed, can he rescind the contract based on mistake? What legal principles apply? 2. Aruni agrees to lease her property to Bandara for ten years, believing that there are no zoning restrictions that would prevent Bandara from using the property for commercial purposes. However, it later turns out that commercial activities are prohibited in that area. Can Aruni seek to void the contract due to a mistake? What factors should be considered? 3. Define and differentiate between unilateral and mutual mistake as vitiating elements in the law of contract. What are the key elements required to establish each type of mistake? 4. Explain the legal consequences of a unilateral mistake in contract formation. Under what circumstances can a contract be rescinded or reformed due to a unilateral mistake? Provide examples to illustrate your answer. 5. Discuss the doctrine of common mistake in contract law. What are the requirements for a contract to be voidable based on a common mistake? How does the concept of mistake as to the terms of the contract differ from mistake as to the subject matter? 6. Analyze the role of reasonable belief and knowledge in cases involving mistake. How does the principle of objective versus subjective belief impact the determination of mistake in contract law? 7. Discuss the significance of the doctrine of "mistake as to identity" in contract law. When can a mistaken belief regarding the identity of a contracting party render a contract void or voidable? Provide examples to illustrate your answer. 52 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract Session 12 Vitiating Elements in the Formation of a Contract. Contents Introduction 12.1 Vitiating Elements in a Contract 12.2 Misrepresentation 12.3 Types of Misrepresentation Introduction The technical term for what makes a contract void or voidable is a 'vitiating element of a contract.' They are determinants of contract validity and can be identified as mistakes, duress, misrepresentation, undue influence, and illegality. They are the various factors that can have an impact on the validity of a contract after it has been formed. This session provides an overview of those elements. It is crucial for business students to understand and know about contracts and their validity. As a result, this course is primarily aimed at non-legal students; it covers the fundamentals of contract law in a straightforward manner. 12.1 Vitiating Elements in a Contract. As we covered in previous sessions, a contract will be formed if there is an offer and acceptance, consideration, legal intent, and capacity, as these are the strict formation conditions. However, the very nature of a contract is an agreement, which implies that a person's free will should be fully exercised. Whenever one person stands in front of another, gun in hand, threatening to fire unless a contract is signed, it is hardly true agreement! In fact, we'd claim the contract was signed under duress, and it's not legally binding. Therefore, these things are referred to as "vitiating factors" (because they vitiate, or invalidate, consent). Misrepresentation, mistake, duress, undue influence, and illegality are some of the vitiating factors that the law regards as undermining a contract. 39 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract Vitiating factors of a contract Undue Duress Mistake Misrepresentation illegality influence Figure 1: Vitiating factors of a contract Depending on which vitiating element is present, the presence of a vitiating factor usually makes a contract void or voidable. When a contract is declared void, it is as if there was never a contract to begin with, and neither side can enforce the agreement. If a contract is voidable, a contract is formed, and the innocent party has the option of ending the contract. Activity 12.1 1. what is the meaning of vitiating elements of a contract. 2. Identify five types of vitiating elements of a contract. 3. What is the effect of vitiating elements for a contract. 12.2 Misrepresentation A misrepresentation is a misleading statement of fact made by one party that induces the other party to enter into the contract. A misrepresentation invalidates the contract and may give rise to a right to damages depending on the type of misrepresentation. A misstatement amount to a misrepresentation only if it is a statement of fact. Such statements may be written, spoken, or made by conduct. 1. it must be a statement of fact, not an opinion – If the statement is a statement of opinion and not of fact, then it is not a misrepresentation. A statement of opinion that the good represent 40 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract good value cannot amount to a misrepresentation unless the maker of the statement export or has special knowledge. 2. it must be a statement of fact, not the intention – If a statement is a statement of intention and not of the fact that is not a misrepresentation, but a statement of intention may involve a statement of fact if it can be proved that the alleged intention never exists. 3. it must be a statement of fact, not law – A false statement as the law cannot be misrepresentation since everyone is presumed to know the law. To be actionable, a misrepresentation must fulfil three criteria: there must be an untrue statement; it must be a statement of fact, not mere opinion; and it must have led the innocent Party into signing the contract. An untrue statement of truth must have been made by the other contracting party (or by their agent acting within the limits of their authority), or the other contracting party must have known of the untrue statement. Silence does not usually amount to a misrepresentation. However, there are five situations in which the law imposes a duty to disclose information. To remain silent on a relevant truth in any of these circumstances can therefore amount to a misrepresentation. The statement must be true; simply expressing an opinion does not constitute an unlawful misrepresentation: Bisset v Wilkinson (1927) AC 177. In some situations, what appears to be a declaration of opinion is regarded by the courts to be a statement of fact. Edgington v Fitzmaurice (1885) 29 Ch D 459 is an example of one side wrongly stating their opinion (1885). Simply recommending a product to a potential consumer will not constitute a statement of existing fact. Only if the misrepresentation is one of the reasons for which the claimant entered into the contract will it be liable under contract law: Redgrave v Hurd (1881 20 Ch D 1) Activity 12.2 1. Identify the characteristics of misrepresentation. 41 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract 12.3 Types of Misrepresentation Misrepresentation is divided into three categories fraudulent misrepresentation, negligent misrepresentation, and innocent misrepresentation. The category into which a misrepresentation falls is determined by the state of mind of the individual making the statement. 12.3.1. Fraudulent misrepresentation This occurs when someone makes a false statement that they do not at the time believe to be true. Our law on fraudulent misrepresentation including contracts is based on Roman-Dutch Law. However, there is a fundamental similarity between the English and Roman-Dutch approaches to the question of fraud. The fact in Derry v. Peek (1889) 14 App Cas 337 ) were as follows. A company has a power conferred by a special act of parliament to run terms by animal power and with board of trade consent by steam or mechanical power. The company invited application for shares from the public and stated in the prospectus that they had power to run trams stem power. They had assumed that Board of Trade permission would grant but ultimately it was not to be. Therefore, the directors were sued for fraud. The Court formulated the definition of fraud stated above and held that the directors were liable since they honestly believe their statement to be true. In Sri Lanka a fraudulent intention is a necessary actual intention. The court would adopt an objective approach and conclude that if a man conducts himself in a way as to lead to the reasonable inference that he had a particular intention that intention would be attributed to him. A contract induced by fraud is voidable, not void. A person who has been induced to enter into a contract as a result of a fraudulent misrepresentation of another has the under-mentioned remedies available to him. He could, sees up fraud as a defence to an action for specific performance or damages. requests the court to rescind the contract. sues for damages for deceit. in suing for damages for fraudulent misrepresentation the aggrieved party is not suing for breach of contract as it is a non-contractual misrepresentation. Since fraud is a tort, he is suing for the tort of deceit. Thus, in suing for damages he could recover all losses sustained as a direct result of fraud. He could even claim consequential damages, but he cannot claim for losses that are merely accidental or produced by causes independent of the fraud. This action is based on the delictual principles of action doli. therefore, 42 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract although a person suing in the contract can have only a bargain or its equivalent money or in money and kind, a person suing for damages in delict in these circumstances can recover the loss that he has sustained due to another wrongful conduct. 12.3.2 Negligent misrepresentation This means when your present information about a subject without having sufficient grounds to believe it to be true, as opposed to lying outright (i.e., saying something you know to be false). The concept of negligence misrepresentation is unknown to Roman-Dutch law is an English law concept. It has found his entry to the Sri Lankan law from English common law. At one particular time in legal history, there was no distinction made between negligence misrepresentation and wholly innocent misrepresentation. If a misrepresentation was not fraudulent it was treated as innocent for which damages were not obtainable the only remedy available was the equitable remedy rescission. However, in English law due to two developments one in common law and one by statutes path was cleared for an alteration of the status quo by making a distinction between wholly innocent misrepresentation and negligence misrepresentation. As a result, now there is a remedy in damage for negligent misrepresentation. In England, the misrepresentation act 1967 distinguishes between negligence a wholly innocent misrepresentation and gives a remedy in damage for the former. Section 2(1) of the Act provides, “where a person has entered into a contract innocent Misrepresentation is defined as a false statement made by someone with a justifiable basis to believe it to be true. In the real world, however, this is frequently the best course of action because the other two types of misrepresentation (negligent and fraudulent) are much harder to prove. A misrepresentation typically has the effect of rendering a contract voidable, rather than void, so the contract remains in force up until and unless the innocent party decides to have it cancelled. When a contract is entirely executory, the innocent party may simply decide not to fulfil their obligation; the misrepresentation prevents the other party from forcing the innocent party to fulfil their obligation. Damages may be available in some circumstances, either in place of or (in some cases) in addition to rescission. 43 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract Activity 12.3 1. Investigate the remedies available to a party who entered into a contract based on a false misrepresentation. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Cartwright, (2002) Misrepresentation, London: Sweet and Maxwell Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford. Summary Even if a contract meets the requirements of offer and acceptance, consideration, and intent to create legal relations, it may still be unenforceable if certain factors were present at the time the contract was made, indicating that there was no genuine consent. These are referred to as vitiating factors (because they vitiate, or invalidate, consent). Misrepresentation, mistake, duress, undue influence, and illegality are the vitiating factors recognized by the law as undermining a contract. Learning Outcomes After completing this session, you will be able to. Understand the difference between void and voidable contracts. Understand and analyse the vitiating elements in the formation of a contract. Understand and identify the difference between different vitiating factors. 44 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙΙ – OSU4404 Session 12: Vitiating Elements in the Formation of a Contract Distinguishing features of misrepresentation and mistake. Review Questions 1. Shiromi sells her car to Joseph, claiming that it has only been driven for 30,000 miles. However, it later comes to light that the odometer was tampered with, and the actual mileage is closer to 100,000 miles. Can Joseph rescind the contract based on misrepresentation? What legal remedies are available to him? 2. Ananda, a salesperson, tells Madhavi that a certain product is capable of generating substantial profits within a short period. Relying on this information, Madhavi purchases a large quantity of the product but later discovers that the salesperson's claims were exaggerated. Can Madhavi seek redress for misrepresentation? What elements must she establish to prove her case? 3. Explain the concept of misrepresentation as a vitiating element in the formation of a contract. What are the essential elements required to establish misrepresentation? 4. Differentiate between innocent, negligent, and fraudulent misrepresentation. Discuss the key characteristics of each type and the legal consequences associated with them. 5. How does misrepresentation affect the validity and enforceability of a contract? Discuss the remedies available to an innocent party who has been misled by misrepresentation. 6. In what situations might a statement of opinion or future intention amount to misrepresentation? Explain the legal principles that determine whether such statements can be considered actionable misrepresentations. 7. Discuss the importance of the principle of reliance in cases of misrepresentation. How does the concept of reasonable reliance factor into establishing a claim of misrepresentation? 45 Copyright © 2023, The Open University of Sri Lanka (OUSL)