Block 2- Session 12.pdf

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...

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)