Introduction to Law - Villa College Lecture Notes PDF

INTRODUCTION TO LAW WEEK 8 – LECTURE 7 Vitiating Factor Slides by: Shahudhaan Zahid 1  Vitiating Factors Even where a contract meets the requirements of offer and acceptance, consideration and intent to create legal relati...

INTRODUCTION TO LAW WEEK 8 – LECTURE 7 Vitiating Factor Slides by: Shahudhaan Zahid 1  Vitiating Factors Even where a contract meets the requirements of offer and acceptance, consideration and intent to create legal relations, it may still not be binding if, at the time the contract was made, certain factors were present which mean there was no genuine consent. These are known as vitiating factors (because they vitiate, or invalidate, consent). Slides by: Shahudhaan Zahid 2  Vitiating Factors The vitiating factors which the law recognizes as undermining a contract are: a) misrepresentation; b) Mistake; c) Illegality; d) Duress and Undue influence. Slides by: Shahudhaan Zahid 3  Vitiating Factors The presence of a vitiating factor usually makes a contract either void or voidable, depending on which vitiating factor is present. Where a contract is declared void, the effect is that there was never a contract in the first place, so neither party can enforce the agreement. If a contract is voidable a contract comes into existence and the innocent party can choose whether or not to end the contract. Slides by: Shahudhaan Zahid 4 Misrepresentation Slides by: Shahudhaan Zahid 5  Misrepresentation A misrepresentation is an untrue statement of fact by one party which has induced the other to enter into the contract. For a misrepresentation to be actionable, it has to fulfil three requirements: 1. There must be an untrue statement; 2. It must be a statement of fact, not mere opinion; and 3. It must have induced the innocent party to enter the contract. Slides by: Shahudhaan Zahid 6  An untrue statement An untrue statement of fact must have been made by the contracting party (or by their agent within the scope of their authority), or the other contracting party must have known of the untrue statement. Silence does not usually amount to misrepresentation. However, there are, five types of situation where the law imposes a duty to disclose information. To remain silent about a material fact in any of these circumstances can therefore amount to misrepresentation. a) Contracts requiring utmost good faith b) Subsequent falsity c) Partial revelation d) Fiduciary relationship e) Voluntary assumption of responsibility Slides by: Shahudhaan Zahid 7  An untrue statement Contracts requiring utmost good faith Where a contract requires utmost good faith, such as contract for insurance, failure to disclose a matter regarding which utmost good faith is required allows the innocent party to rescind the contract, though damages are not available. Subsequent falsity A misrepresentation may occur where a statement was true when it was made, but owing to a change of circumstances has become incorrect by the time it is acted upon. Keeping silent about the change can amount to misrepresentation: With v O’Flanagan (1936). Slides by: Shahudhaan Zahid 8  An untrue statement Partial revelation If one party makes a statement which is itself true, but which misrepresents the whole situation because of what is left unsaid, the statement may amount to misrepresentation: Dimmock v Haller (1866). Fiduciary relationship Sometimes it is the existing relationship between the parties, rather than the type of contract concerned, which gives rise to a duty to disclose important facts about a contract. Slides by: Shahudhaan Zahid 9  An untrue statement Voluntary assumption of responsibility One contracting party can occasionally incur liability for remaining silent when he or she has accepted for the other party. Slides by: Shahudhaan Zahid 10  A statement of fact The statement must be one of fact; merely delivering an opinion will not create an actionable misrepresentation: Bisset v Wilkinson (1927). Mere ‘sales talk’ used to recommend a product to a potential customer will not amount to a statement of existing fact. Slides by: Shahudhaan Zahid 11  Inducement The misrepresentation will only be actionable under contract law if it is at least one of the reasons for which the claimant entered into the contract: Redgrave v Hurd (1881). Slides by: Shahudhaan Zahid 12  Remedies for Misrepresentation The effect of a misrepresentation is generally to make a contract voidable, rather than void, so the contract continues to exist unless and until the innocent party chooses to have it set aside by means of recission. Recission Recission is an equitable remedy, which sets the contract aside and puts the parties back in the position they were in before the contract was made. Damages Where a party is induced to enter a contract by misrepresentation, they have a right to damages for any loss suffered. Slides by: Shahudhaan Zahid 13 Mistake Slides by: Shahudhaan Zahid 14  Mistake There are two types of mistake, common mistake and cross-purpose mistake. The following rules apply to both: Objective principle: When deciding whether or not there has been a mistake sufficient to make the contract void, the courts will look at the facts objectively: Smith v Hughes (1871). The mistake must precede the contract: In order to make a contract void, a mistake must be made before the contract is completed: Amalgamated Investment & Property Co v John Walker & Sons (1977). Mistake must induce the contract: A mistake can only negate consent if it induced the mistaken party to enter into the contract. Mistake of fact or law Slides by: Shahudhaan Zahid 15  Common Mistake In this situation, both parties make the same mistake. A contract will not be void for common mistake if the mistake is due to the fault of one of the parties. In addition, if the contract allocates the risk of the mistake occurring on one of the parties then the doctrine of mistake will not apply. Only if the contract is silent on the point is there scope for invoking mistake: McRae v Commonwealth Disposals Commission (1951). Slides by: Shahudhaan Zahid 16  Common Mistake Fundamental mistake A shared mistake will only render a contract void if it amounts to a fundamental mistake. A mistake is fundamental if it renders the performance of the contract essentially and radically different from what the parties had supposed it to be: Bell v Lever Brothers (1932). There are two specific situations where the courts will find a fundamental mistake: where the parties have made a mistake about the existence of the subject matter, and where they have made a mistake as to title (Cooper v Phibbs (1867)). In exceptional circumstances a mistake as to quality may also be sufficient: Nicholson and Venn v Smith-Marriot (1947). Slides by: Shahudhaan Zahid 17  Cross-purpose mistake Cross-purpose mistake occurs where each party has a different view of the situation. Two types of cross-purpose mistake are possible: Mutual mistake, where each party makes a mistake but they are different mistakes; and Unilateral mistakes, where only one party is mistaken. The other either knows of the mistake or ought to know of it. Where this type of mistakes occurs, the parties have not reached an agreement, and the contract is not formed. It is rare for a cross-purpose mistake to make a contract void at common law. The courts will simply decide whether a reasonable onlooker would have understood the contract to mean what one party thought it meant, or what the other party thought it meant. Slides by: Shahudhaan Zahid 18  Cross-purpose mistake Occasionally, even viewed objectively it will be impossible to find a contract. There are three situations where a cross-purposes mistake can make a contract void: The mistake was negligently induced by the other party; The parties are at such cross-purposes that a reasonable observer would not be able to say what they have agreed; and One party knew of the other’s mistake (a unilateral mistake) regarding their identity or the terms of the contract, and the mistake was fundamental. Slides by: Shahudhaan Zahid 19 Illegality Slides by: Shahudhaan Zahid 20  Illegality An agreement may be unenforceable because it is illegal. Contracts may be illegal at the time of their formation or because of the way they have been performed. Slides by: Shahudhaan Zahid 21  Illegality Illegal at time of formation Contracts may be illegal when entered into because they cannot be performed in accordance with their terms without the commission of an illegal act. Illegal mode of performance A contract may be perfectly legal when it is made, but may be carried out in a illegal manner. Illegality and remoteness A person may enter into a contract with the intention of using it to achieve an illegal purpose, but if that illegal purpose is remote from the contract itself, the contract will not be tainted by that illegality and will still be valid. Slides by: Shahudhaan Zahid 22  Violation of legal rules and public policy A contract is illegal when it violates a legal rule. In addition, a contract is regarded as being illegal where it involves conduct which the law disapproves of as contrary to the interests of the public, even though that conduct is not actually unlawful. In both cases the transaction is treated as an illegal contract and the courts will not enforce it. Slides by: Shahudhaan Zahid 23  The contract violates a legal rule The contract may constitute a crime or a tort. The violation may be of a statutory rule or of common law. Breach of common law There are number of factors which may make a contract illegal at common law, the most important being where there is a contract to commit a crime or tort. Breach of legislation Some types of contract are expressly declared void by statute, most notably contracts which discriminate and contracts in restraint of trade. Slides by: Shahudhaan Zahid 24  The contracts is against public policy Public policy is notoriously difficult to define, but essentially it assumes that there are some interests which are shared by the most of society, which promote the smooth running of the type of society we have, and which should therefore be protected. There are range of contracts which are considered to be illegal because they are against the interests of public policy. The main categories of contract are: Contracts promoting sexual immorality; Contracts prejudicial to the status of marriage; Contracts prejudicial to public safety; Contracts prejudicial to the administration of justice; Contracts to oust the jurisdiction of the courts; Contracts tending to encourage corruption in public life. Slides by: Shahudhaan Zahid 25  The effect of illegal contract The effect of an illegal contract will depend on whether it is illegal because of either a statute or the common law. Where the contract is illegal because of a statute, in some cases the statute provides for consequences of any illegality. Under common law the general principle is that an illegal contract is void and unenforceable. The precise effects of an illegal contract depend on whether the contract is illegal at the time of its formation or is illegal owing to the way in which it is performed. Slides by: Shahudhaan Zahid 26 Duress and Undue Influence Slides by: Shahudhaan Zahid 27  Duress and undue influence Where one party is forced to consent by threats or undue pressure by the other, that consent should be invalid. The law has developed two doctrines to deal with this issue: Duress; and Undue influence. Both render a contract voidable. Slides by: Shahudhaan Zahid 28  Duress Five conditions need to be satisfied in order for there to be a finding of duress: 1. Pressure was exerted on the contracting party. 2. This pressure was illegitimate. 3. The pressure induced the claimant to enter the contract. 4. The claimant had no real choice but to enter the contract. 5. The claimant protested at the time or shortly after the contract was made. Slides by: Shahudhaan Zahid 29  Duress Pressure was exerted on the contracting party Pressure must have been exerted on the innocent contracting party, which amounted to a compulsion of the will. To constitute economic duress, economic pressure must go a great deal further than the ordinary pressure of the market. Pressure exerted was illegitimate Illegitimate pressure must have been exerted on the contracting party. A threat to do an unlawful act (which includes breaking a contract) will always be illegitimate, but a threat to do a lawful act will only be illegitimate if the threat is unreasonable, which will depend on the circumstances: Atlas Express Ltd v Kafco (Importers and Distributors) Ltd (1989). Slides by: Shahudhaan Zahid 30  Duress The pressure induced the claimant to enter the contract Duress must be one of the reasons for entering (or modifying) a contract, but it does not have to be the only or even the main reason. Claimant had no real choice but to enter the contract Economic duress will be present where there is compulsion of the will to the extent that the party under threat has no practical alternative but to comply. Claimant protested at the time or shortly after the contract was made Slides by: Shahudhaan Zahid 31  Undue Influence Undue influence is an equitable doctrine, which applies where one party uses their influence over the other to persuade them to make a contract. There are two types of under influence: Actual; and Presumed. Slides by: Shahudhaan Zahid 32  Actual undue influence This arise where the claimant can prove that they entered the transaction as a result of undue influence from the other party. Slides by: Shahudhaan Zahid 33  Presumed under influence In certain circumstances an evidentiary presumption will be applied that shifts the burden of proof from the claimant to the defendant, so that it is up to the defendant to disapprove the existence of undue influence. Undue influence may be presumed where there is a pre-existing relationship of confidence between the two parties to a contract, as a result of which one places trust in the other, and the contract between them is manifestly disadvantageous to the party who places trust in the other. Such a relationship may arise in two ways. First, it may fall into one of several categories in which a relationship is automatically presumed to exist. Secondly, a relationship of trust may be established on the facts. Where a party seeks to rely on the existence of presumed undue influence, the transaction must be suspicious and the call for an explanation, such as an exceptionally large gift. Slides by: Shahudhaan Zahid 34