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4 TOPIC - VITIATING FACTORS IN CONTRACT Readings: Objectives To provide an introduction to the factors which may vitiate a contract, in particular, misrepresentation, mistake, duress, undue influence and illegality. Vitiating Factors A vitiating factor is a factor that makes a contract invalid. That is to say, it is a factor that makes a contract fundamentally defective and not legally binding. Vitiating factors include: A. Misrepresentation B. Duress C. Undue Influence D. Mistake E. Illegality Arjunan & Majid, Business Law in Hong Kong, chap. 15-17. A. MISREPRESENTATION If a representee is induced to enter into contract by a misleading statement, the representee may claim certain relief if actionable misrepresentation established. Meaning of misrepresentation: A misrepresentation is a false statement of a material fact made by one contracting party to another before or at the time contract is made which is designed to and does induce that party to enter into a contract. A statement that is incorporated into a contract becomes a term of the contract. If it is false, the other party can sue on the falsity. An actionable misrepresentation, on the other hand, is a misleading statement which does not become a part of the contract. It is made before the contract is made and is made to induce or cause the other party to enter into the contract and normally does not become a part of the contract. Because a misrepresentation is not a part of the contract, the innocent party cannot sue for breach of the contract. However, as we shall see, the party misled may have other remedies. A party alleging misrepresentation must establish: (a) (b) (c) (d) (e) that the representation was of a fact; that the representation was false; that the misrepresentation was of a material fact that it was addressed to the party misled (before or at the time the contract was made); that it was intended to induce and did induce the contract. We will turn now to each of these requirements. 67 1. It must be a representation of a fact The representation must be one of a fact. A fact is something that is objectively verifiable. An expression of opinion is a statement of belief based upon grounds incapable of actual proof. It is not therefore a representation of fact. Bisset v. Wilkinson [1927] AC 177 Facts: The defendant wanted to sell some land to the plaintiff. The land had never been used for sheep farming, but the plaintiff wanted to buy land for sheep farming. He asked the defendant, who he knew had never raised sheep, how may sheep the land could hold. The defendant said that it could support 2,000 sheep. Relying on this statement, the plaintiff bought the land. His statement turned out to be untrue and the plaintiff wanted to rescind the contract on the ground of misrepresentation. Held: The defendant's statement that the farm would carry 2000 sheep was an expression of opinion. And it was an opinion expressed by some who, to the knowledge of the plaintiff, had neither the experience nor the expertise, to give an informed opinion. An erroneous opinion, though it might have been relied upon and induced the contract, could not amount to misrepresentation unless fraud was established. 2. It must be untrue The representation of the material fact must be untrue.: Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd. [1992] BCLC 1104 Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd. [1992] BCLC 1104 Facts: The plaintiff was considering purchasing shares in a company. The defendant was a middleman. To persuade the plaintiff to complete the purchase, the defendant falsely told the plaintiff that there were other potential buyers for the shares. The false statement was obviously meant to induce the plaintiff to purchase the shares. The false statement did induce the plaintiff to buy the shares. The plaintiff bought shares worth several million pounds in the belief that the shares were in demand. The plaintiff, however, lost more than 11 million pounds and discovered that the defendant's statement was false as there were no interested buyers for the shares at all. Held: The defendants false statement that there were other parties interested in the shares was meant to and did induce the contract. As the false statement was knowingly made, this was a fraudulent misrepresentation. The essence of an actionable misrepresentation is that a falsehood induced the representee into a contract.. This basis of the cause of action is negated by the representees knowing that a particular representation is false. If, knowing the falsehood, the representee still goes ahead and contracts, then he cannot complain and has no remedy. Cooper v Tamms [1988] 1 E.G.L.R. 257 Facts: The plaintiffs were husband and wife. Prior to their marriage they wanted to purchase a flat owned by the defendant. After viewing the flat, they obtained from a surveyor, a limited report (based on external observation) which stated that there were signs of dampness and slight wet rot. Noting that damp proofing work had previously been carried out on the flat, the report advised the firm which had done that work be contacted if a guarantee still existed; otherwise, a specialist firm 68 should be called in to inspect and prescribe treatment. The plaintiffs were in possession of this report by 21 October 1983. On being informed of the dampness and the damp rot, the defendant reduced the asking price to cover some of the expenditure the plaintiffs would incur in carrying out repairs. The defendant did this through her solicitors letter dated 4 November 1983. This letter from the defendants solicitors was accompanied by a document in which the defendant informed the plaintiffs that there had been a damp problem in the flat but which also said that there was no rising damp, dry or other rot. After the contract had been completed, an inspection by specialists revealed extensive wet rot and some dry rot. The plaintiffs sued claiming they had entered into the contract in reliance on the defendants misrepresentation that the flat was free of, inter alia, dry or other rot. Held: The plaintiffs claim in misrepresentation could not succeed. Whatever the representation by the defendant, the plaintiffs knew before it was made, that the flat was subject to damp and damp rot. They knew this from their own surveyors report that they had had in hand by 21 October 1983 while the contract was completed after that date. If a party is aware that a representation is false, there is no misrepresentation even if that misrepresentation is acted upon. Where a representation is true when made but subsequently becomes untrue, the representor must disclose the truth; otherwise he commits misrepresentation With v .With v OFlanagan (1936) 1 Ch. 575 Facts: The plaintiffs contracted to purchase Dr. OFlanagans medical practice. OFlanagan had stated that it produced an income of approximately2,000 pounds per year. At the time that statement was made it was correct. However, in the four months between the statement and the signing of the contract, OFlanagan, because of illness, did not operate it and left it in the hands of a number of locum tenentes. As a result, the practice had become virtually worthless. When they discovered this fact, the plaintiffs sought rescission and repayment of the purchase money on the grounds that the contract had been induced by misrepresentation. OFlanagans estate defended the action on the grounds that the statement had been correct at the time that it was made. Held: The plaintiffs were entitled to rescind and to recover the purchase price. When a epresentation is made to induce a contract, it is not sufficient that the statement be true only at the time that it is made. If circumstances change prior to the contract being executed, the representor has to advise the representee of those changes. (3) The misrepresentation must be of a material fact To obtain relief, the representee must establish that the representation was material, i.e. played a role in inducing the contract. Smith v Chadwick [1884] 9 App Cas 187 Facts: The plaintiff was a steel manufacturer. The defendants were accountants and promoters of a company called the Blochairn Iron Company (the company). The defendants issued a prospectus inviting members of the public to subscribe to the shares of the proposed company. Relying on the prospectus, the plaintiff purchased 100 shares for 5,000. He duly paid the price and lost all his investment when the proposed company failed. The prospectus contained four erroneous statements. One of these was the assertion, untrue to the knowledge of the defendants, that a Mr Grieves was a director of the proposed company. A person might have been induced to subscribe 69 for shares in the company by this statement because he believed that Mr Grieves would not lend his name to a company without ascertaining that it was a solid one. The plaintiff, however, did not so testify. Instead, on cross-examination, he said that he had never heard of Mr Grieves and confirmed (by nodding his head) that seeing Mr Grievess name in the prospectus did not really operate in his decision to subscribe to the shares. Held: The statement about Mr Grieves was false but not material to the plaintiff who had not heard of Mr Grieves. On this point (as well as others), the plaintiffs action in deceit failed. (4) The representation must have been addressed to the party misled (before or at the time the contract was made); To succeed in an action for misrepresentation, the representee must show that the representation was addressed to him or her. Only the following parties may sue for an actionable misrepresentation: 1(a) 2(b) 3 (c) Parties to whom the representation is directly made and their principals; Parties to whom the representor intended the representation to be transmitted Swift v Winterbotham & Goddard (1873) LR 8 QB 244; Parties who are members of a class at which the representation was directed in which case any member of the public may be a representee if he can bring himself within the class in question (Richardson v Silvester (1873) LR 9 QB 34); and Swift v Winterbotham & Goddard (1873) LR 8 QB 244 Facts: The plaintiff was approached by an agent of Sir W Russel with a large order for iron on credit. The plaintiff, being a customer of Shefeld and Hallamshire Bank (S Bank), requested the manager of S Bank to write to the manager of the Gloucestrshire Banking Company (G Bank) to ascertain whether Sir Russel was creditworthy. The manager of S Bank wrote a letter addressed to the manager of G Bank requesting information whether Russel was good for credit to the extent of 50,000. Goddard, the second defendant was the manager of G Bank. He wrote a letter, which he signed as manager, asserting that Russel was a good credit risk. The plaintiff, in consequence of this letter, supplied Russel with goods. Russel never paid for the goods because he was insolvent. The statement made by Goddard was false to his knowledge. Although G Bank had not given Goddard express authority to write the letter, the writing of such a letter was an act within the scope of the Goddards general authority as manager. The defendants were sued jointly for the false representation with respect to the solvency of Sir Russel. The defendant Winterbothan was sued as the public ofcer of G Bank and Goddard as the manager who uttered the misrepresentation. Held: The manager had knowingly and falsely represented Sir Russel to be solvent when he was not. This was a fraudulent misrepresentation. The letters between the two banks showed that the Goddards representation was made not merely on his own behalf but as an agent of G Bank. The defence that the representation was made to S Bank and not to the plaintiff was without merit. This was so because it must have been within the contemplation of G Bank that the inquiry as to Russels credit worthiness might have been made on behalf of a customer and that the false representation might be communicated to such a customer. Richardson v Silvester (1873) LR 9 QB 34 Facts: In or about March 1872, the defendant placed in a public newspaper, called the Cambrian News, an advertisement that he wanted an immediate tenant for a specied property comprising a farm, mansion house and mill. Relying on the advertisement and 70 wishing to rent the property, the plaintiff was induced to incur considerable costs and expenses in going to and inspecting the property, and in having it valued. However, it subsequently emerged that the defendant knew at the time he placed the advertisement that he had no power to let the property and the property was not to be let. The defendant seemed to have caused the advertisement to be issued to serve some purpose of his own. Held: The advertisement was issued with some indirect motive and the farm was not to be let. This made the advertisement a false representation. It was a false statement knowingly published in order to be read and acted upon by a class of persons who would like to be tenants of the property. The natural consequence would be that a person from this class would, upon reading the advertisement, incur expense in looking at the farm. The plaintiff was such a person and this is what the plaintiff did. Even if the representation was published to the public generally, the plaintiff was a member of the public who did read and act on it and thereby incur expense. Though not specically addressed to him, the representation was made to the plaintiff. Parties to whom the representor did not make or intend any communication cannot sue in actionable misrepresentation: Peek v Gurney (1873) LR 6 HL 377; [186173] All ER 11. Peek v Gurney [186173] All ER 11 Facts :The directors of a company issued a prospectus in which they made false statements. The prospectus was directed and members of the public who applied to the company for shares and had the shares allotted to them. The plaintiff read the prospectus and relying on it, purchased shares not from the company but from the open market three to ve months later. Shortly thereafter the company was wound up and the plaintiff lost about 100,000. He sued the directors on the grounds that he had been induced to purchase the shares by the misrepresentation in the prospectus. The prospectus (including the false statements in it) was issued to induce members of the public to subscribe to the company for the shares and not to induce them to buy in the market shares already issued. The plaintiff, being a purchaser on the open market, was not among the class at whom the prospectus was aimed. In other words, the prospectus was addressed to members of the public to induce them to enter into a contract with the company; it was not meant to induce a member of the public (such as the plaintiff) to enter into a contract with other members of the public. Consequently, he could not recover. Held: The misrepresentation must necessarily be made before or at the time of contracting to avoid being disregarded as a post-contractual statement. A representation made after the formation of the contract cannot be said to be meant to induce or to induce the contract. (5) It must have been intended to induce contract and must have induced the contract The representor must have intended that statement be relied upon by representee and the representee must in fact have relied on the representation to enter into the contract: Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd. [1992] BCLC 1104. 71 If a statement or piece of information makes no difference to the other partys decision to enter into the contract, then it was not relied on. If the statement was not believed, or was checked independently, then it was not relied on. Attwood v Small 7 E.R. 684; [1835-42] All ER 258 Facts: The respondents entered into a contract to purchase a mine, the earnings and capabilities of which had been exaggerated by the appellant vendor in the course or negotiations. Not satisfied with the vendors claims, the respondents engaged their own agents to examine the property and the vendors accounts. The agents reported that the vendors statements were substantially correct and the sale was then completed. Six months later, the purchasers discovered that the statements had been untrue and they tried to rescind. Their action failed. The purchasers had not relied upon the vendors statements but on their own independent investigations. As a result, the statements did not act as operative misrepresentations because they had not induced the contract. Held: Types of Misrepresentation at common law An actionable misrepresentation may be: (i) (ii) (iii) Fraudulent Innocent Negligent Taking each in turn (i) Fraudulent misrepresentation A fraudulent misrepresentation is a false statement made: (a) knowingly or (b) without belief in its truth, or (c) recklessly, careless whether it be true of false. The innocent party seeking to establish fraudulent misrepresentation must prove: That the person making the statement knew that what he said was false or was careless about whether it is true or false; and, That the statement was made with the intention to deceive The intention to deceive is very difficult to prove. The test is subjective and requires the court to decide what was in the mind of the person who made the misrepresentation. Note: If fraud is proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made. Derry v Peek (1889) 14 App. Cas. 337; [1886-90] All ER 1 Facts: The defendants were directors of a tramway company who issued a prospectus inviting members of the public to subscribe to the companys shares. The prospectus stated that instead of horses, the company was entitled to use steam and other mechanical power to run its trams. In reality, the 72 special legislation which enabled the company to run the trams provided that steam could only be used with the consent of the Board of Trade. Although the company had applied for the necessary consents, these had not been obtained by the time the prospectus was issued. The directors honestly believed that getting the consents was a mere formality. On the faith of the representation, the plaintiff, Sir Henry Peek, subscribed for shares, and when the company was subsequently wound up because the consents were never received, he sued the directors claiming damages for fraudulent misrepresentation. Held: The House of Lords held that the directors were not liable because they had honestly believed the statements were true and that was enough to defeat an action against them for fraud. The lack of reasonable grounds for their belief was not, in itself, fraud though it would aid in determining whether the belief had been genuinely held. As the document had been issued negligently but not fraudulently, the plaintiff was unable to recover damages. Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1992) BCLC 1104 Facts: The plaintiff was interested in buying the shares of a public listed company. The defendant, a middle man, falsely represented to the plaintiff that there were other bidders for the shares. This induced the plaintiff to buy the shares. The plaintiffs suffered a huge loss because of their purchase. They sued. Held: The defendants had made a fraudulent misrepresentation which induced the plaintiff to buy the shares. The plaintiffs were entitled to damages. (ii) Negligent misrepresentation A misrepresentation is negligent where the person making it had no reasonable grounds for believing that his statement was true. Negligent misrepresentation is easier to establish than fraudulent misrepresentation for 2 reasons. The first is that the test is objective. The court scrutinises the information available to the misrepresentor and is not concerned with what is in his mind. The second is that section 3(1) of the Misrepresentation Ordinance imposes upon the misrepresentor, the burden of proving that he had reasonable grounds for making the statement , rather than forcing the representee to prove that there were no reasonable grounds. Yili Concepts (HK) Ltd v Lee Wai Chuen & Anor [2000] HKCU 748 (HCA12911/97)(29 September 2000) Facts: The plaintiffs was negotiating the purchase of the defendants property. Both the defendant and his agent stated that the property was 1,200 square feet in area. Relying on this statement, the plaintiff signed a provisional sales agreement and paid a deposit of $200,000. The plaintiff subsequently discovered that the property was much smaller and instituted legal proceedings to rescind the provisional sales agreement and for damages. Held: The defendants failed to prove that they believed the property to be 1,200 square feet in area or that they had reasonable grounds for that belief. The plaintiffs application to rescind was allowed under s 3(1) of the Misrepresentation Ordinance. He recovered his deposit of $200,000. Any other expenses arising from the contract e.g. stamp duty were recoverable from the defendant (iii) Innocent misrepresentation An innocent misrepresentation is a statement that the representor honestly believes to be true and has reasonable grounds for that belief. The test for establish innocent misrepresentation is partly subjective (what did the representor actually believe) and partly objective (what information was there on which to base this belief) Example I buy a second hand car believing it to be a year 2000 model. I believe this because the vehicle registration card (wrongly) shows the year of manufacture of the car as 2000. Early 73 this year, I sell it to Peter as a year 2000 car. Peter subsequently discovers that the car was actually manufactured in 1997. I have committed an innocent misrepresentation. Remedies for Misrepresentation The effect of misrepresentation is to render the contract voidable. A voidable contract continues to be in force until the innocent party avoids it. This means that the innocent party has the choice of avoiding the contract upon discovering the misrepresentation. The innocent party also has the option of treating the contract as subsisting or continuing. The termination of the contract on the grounds of misrepresentation is termed rescission. The victim of a fraudulent or negligent misrepresentation is also entitled to claim damages in addition to or in lieu of rescission. The position in relation to the remedies for fraudulent and negligent misrepresentation (and innocent misrepresentation) can be summarised as follows: (a) For fraudulent misrepresentation (i) rescind the contract; and/or (ii) recover damages, if any Under s 3(1) of the Misrepresentation Ordinance, the plaintiff only has to prove the misrepresentation. Thereafter, the defendant must disprove fraud and negligence; if he does not, the misrepresentation is treated as fraudulent. Yili Concepts (HK) Ltd v Lee Wai Chuen & Anor [2000] HKCU 748 (HCA12911/97)(29 September 2000) FFacts: The plaintiffs was negotiating the purchase of the defendants property. Both the defendant and his agent stated that the property was 1,200 square feet in area. Relying on this statement, the plaintiff signed a provisional sales agreement and paid a deposit of $200,000. The plaintiff subsequently discovered that the property was much smaller and instituted legal proceedings to rescind the provisional sales agreement and for damages. Held: There was no evidence to establish a case in fraudulent misrepresentation. However, the defendants failed to prove that they believed the property to be 1,200 square feet in area or that they had reasonable grounds for that belief. The plaintiffs application to rescind was allowed under s 3(1) of the Misrepresentation Ordinance. He recovered his deposit of $200,000. Any other expenses arising from the contract e.g. stamp duty were recoverable from the defendant The reasoning for the decision in Yili Concepts (HK) Ltd v Lee Wai Chuen & Anor [2000] HKCU 748 (HCA12911/97)(29 September 2000) is difficult to understand. Under s 3(1) of the Misrepresentation Ordinance, it is not for the plaintiff to adduce evidence to establish a fraudulent misrepresentation. All that the plaintiff has to do is establish that the defendant made a misrepresentation. Thereafter, it is up to the defendant to show that he his misrepresentation was not fraudulent and that he believed the truth of what he said and had reasonable grounds for that belief. The courts finding that there was no evidence to establish fraudulent misrepresentation seems therefore to be at odds with s 3(1). However, the finding that the defendant had failed to disprove negligent misrepresentation (by failing to prove honest belief and reasonable grounds for that belief) accords with s 3(1) of the Misrepresentation Ordinance. (b) For negligent misrepresentation (i) rescind the contract; and/or (ii) recover damages, if any Under s 3(2) of the Misrepresentation Ordinance, the Court may order damages in lieu of rescission. See Yili Concepts (HK) Ltd v Lee Wai Chuen & Anor [2000] 74 (c) For innocent misrepresentation (i) rescind the contract; damages not recoverable, only indemnity available. However, the Court may order damages in lieu of rescission: s 3(2) of the Misrepresentation Ordinance. Effect of Rescission When a contract is rescinded, it is as if the contract never existed. The result is that the parties are restored to the position they were in before the contract was made. Money and goods which have passed under the contract restored. are The Latin for the restoration of the parties to their precontractual position is restitutio in integrum. Note: The party wishing to rescind must promptly communicate this decision to other party. See Leaf v International Galleries (1950) 2 K.B. 86; [1950] 1 All ER 693 Loss of Right to Rescind The right to rescind may be lost in some circumstances. Circumstances in which rescission will not be available include the following. (1) where injured party, fully aware of default and of right to rescind, affirms contract A contract may be affirmed by: (a) express statements, written/oral; or, (b) an act from which this intention may be inferred. The purchaser of goods has the right to rescind a contract. When the goods are delivered, he accepts delivery and sells them to another. By selling the goods, he has affirmed the contract. See Sanitus International Limited v Tayopa Trading and Construction Co. Ltd.[1989] HKEC 56, HC, (A3206 of 1987) (3rd May 1989) Sanitus International Limited v Tayopa Trading and Construction Co. Ltd.[1989] HKEC 56, HC, (A3206 of 1987) (3rd May 1989) Facts: The defendant ordered from the plaintiff 603 slabs of marble (the goods) to be imported from Italy. The defendant then entered into a contract of sub-sale with a mainland company, Wai Tai Enterprises Third Company (Wai Tai) in Shenzhen in the Peoples Republic of China. The goods, packed in 25 wooden crates, arrived in Hong Kong and were stored in Adige (HK) Ltds open air storage godown in Lau Fau Shun. On two occasions, the defendant tried to open the crates to inspect the goods but was prevented from doing so by the plaintiff. The defendants representative then arranged for the goods to be collected. On collecting the goods, the defendants representative asked for the crates to be opened to inspect the individual slabs but this was refused. He indicated to the plaintiff that he was taking the goods subject to a later examination by the sub-buyer. The defendants representative signed a pre-prepared cargo receipt that read: received the above mentioned goods in good order and condition. The defendants representative did not qualify his signature on the receipt in any way. Nor was there any further communication from the defendant to the plaintiff to the effect that the goods had been accepted conditionally. 75 On 15 April, the defendant collected the goods from Adiges godown and transported them and handed them over to Wai Tai, the sub-buyer. On examining the goods, Wai Tai found that some 50 out of the 603 slabs were defective in being cracked, chipped, having drill holes and being unpolished. By reason of the defects, Wai Tai rejected all the goods on 17 April. The defendant accepted Wai Tais rejection of the goods because it knew the slabs were to be used for a continuous facade at the entrance of a building under construction and the defects rendered the goods unsuitable for this purpose. On 1st May, the defendant purported to notify the plaintiff that the goods were totally defective and purported to reject them. The plaintiff sued for the price of the goods sold and delivered. One of the issues in the litigation was whether the defendant had accepted the goods and made itself liable for the price. Held: By the defendants representative signing and delivering the cargo receipt to the plaintiff without any qualification and by failing thereafter to resile from the terms of the cargo receipt, the defendant intimated to the plaintiff that had accepted the goods. The defendants delivery of the goods to Wai Tai was an act inconsistent with the ownership of the plaintiff owners after it had had a reasonable opportunity of examining the goods to ascertain that they were in conformity with the contract. It had accepted the goods. In purporting to reject the goods only on 1st May, the defendant had retained the goods after a lapse of a reasonable time without intimating its rejection to the plaintiff seller and had accepted the goods. (2) lapse of time Leaf v International Galleries (1950) 2 K.B. 86; [1950] 1 All ER 693 Leaf v International Galleries (1950) 2 K.B. 86; [1950] 1 All ER 693 Facts: The plaintiff was induced to buy a painting which had been innocently represented to him as being by John Constable. Five years later, he discovered that this was not the case and he then sought to rescind. Held: Rescission was not available. Denning L.J. held that the goods had been accepted in terms of s. 11 of the Sale of Goods Act 1893 (U.K.) and, accordingly the plaintiff could not reject them at common law. Because he could not reject them at common law, his right to rescind in equity was also debarred. He had an ample opportunity to examine the painting in the first few days after he had bought it, he had not done so and it was unfair now, five years later, to allow him to rescind. 76 B. DURESS A contract is a voluntary agreement. If a person is forced to enter a contract, it is not voluntary. Duress means forcing a party to enter a contract against his/her will. Duress at common law means coercion or force or threat of force which vitiates the contract at the instance of the victim. The force or threat of force may be directed at the promisor or his family. The contract so made is only voidable i.e. it is valid and enforceable until steps are taken to rescind it. (a) Physical Duress At common law, physical duress was confined to violence or threats of violence at a person or a member of his family Barton v Armstrong [1975] 2 All ER 465 Facts: Armstrong, the chairman of a company, threatened to kill Barton, the managing director, if the latter did not pay him a sum of money and buy his shares. Barton, acting for the company, carried out Armstrongs request. Barton subsequently sought an order to set aside the agreement on the ground of duress. Held: The agreement was voidable for duress and would be set aside. (b) Economic Duress New form of duress that of economic duress is now recognized. The basis of economic duress is coercion of the will of one party to a contract by the other, so that the consent, induced by pressure which is not legitimate, is vitiated. Mere hard bargaining cannot amount to economic pressure to sustain a claim of economic duress, though when bargaining stops and economic pressure begins, is sometimes a difficult question and one which has to be decided having regard to all the circumstances of the case. The following case illustrates the doctrine. North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170 Facts: The defendants who were shipbuilders, agreed to build a tanker for the plaintiffs for the price of over US$30,000,000, payable in five instalments. After the first instalment was paid, the US dollar fell sharply and the defendants told the plaintiffs that unless an additional 10% was paid, they would not deliver the tanker on the due date. Unknown to the defendants, the plaintiffs had already made a lucrative contract to charter the tanker and so had little choice but to agree to the demand. The tanker was duly delivered. Eight months later the plaintiffs claimed the return of the 10% extra they had paid. Held: In principle the agreement to pay the additional 10% was voidable as there was economic duress. However, the plaintiffs failed because there was affirmation of the agreement by them and so lost their right to set aside the contract. Factors considered in deciding whether there is economic duress (a) the person alleged to have been coerced protested or not; (b) he had any alternative course, such as an adequate legal remedy; (c) he was independently advised; and (d) he took steps to avoid the contract. To render a contract voidable, it must be established that it was not a voluntary act. Remedies for Duress 77 The normal remedy is rescission. If rescission is impossible (because goods have been altered or used up, or a third party has obtained the goods), then the remedy lies in damages. 78 C UNDUE INFLUENCE Undue influence equitable ground for avoiding a contract Improper or overbearing influence hence undue influence to induce a contract. Undue influence usually arises because of the relationship of the parties to the contract. Two types: (a) Actual undue influence - prove that will overcome by stronger personality. (b) Presumed undue influence Where there is a special relationship between the parties undue influence is presumed to exist. Examples of this special relationship are solicitor and client, doctor and patient, trustee and beneficiary, guardian and ward, parent and child, religious adviser and disciple. In these cases, the complainant only has to show that there was a relationship of trust and confidence between him and the other party such that it must be presumed that the other party abused the relationship to procure the contract. Consequently, in this category of cases there is no need to adduce any evidence that there was in fact undue influence. Once the relationship is proved, the burden shifts to the other party to rebut the presumption, by calling evidence to the contrary. No need to prove actual influence. Williams v Bayley (1886) LR 1 HL 200 Facts: A son forged his fathers endorsements on several promissory notes and gave them to his bank. Upon discovery a meeting was held between the three parties and the bank made statements to the effect that the son had committed a very serious felony, punishable with transportation for life. The bank also made it clear that unless some arrangement was forthcoming, it will have no option but to prosecute the son. In desperation the father agreed in writing to make an equitable mortgage to the bank for the return of the promissory notes. He subsequently claimed that the agreement was voidable for undue influence exerted by the bank. Held: The agreement was invalid because the bank had exerted pressure. The fathers agreement in circumstances where the alternative was to see his son facing certain conviction, could not be said to be a voluntary act, and that there was inequality between the parties and unfair advantage was taken by the bank. Allcard v Skinner (1887) 36 ChD 145 Facts: The plaintiff, a woman of about 35 years age, was introduced by her spiritual adviser to the defendant who was the Lady Superior of The Sisters of the Poor. Three years later the plaintiff joined the sisterhood and was required to surrender all her property as she took the vow of poverty. She remained a sister for some eight years during which period she transferred property worth about 7000 to the defendant, who had used most of the proceeds from the property for the purposes of the sisterhood. Some six years after she left the sisterhood, the plaintiff claimed the return of the remaining money on the ground that the property had been procured from her by undue influence. Held: Although there was undue influence which was not rebutted, the plaintiffs claim failed because it was not brought promptly after she resigned from the sisterhood. 79 Lloyds Bank v Bundy [1974] 3 All ER 757 Facts: The defendant mortgaged his farm to the plaintiff bank in order to support his sons business venture. A new bank manager came to visit him and persuaded him to sign more documents for a higher guarantee amount. The defendant, who was accustomed to relying on the banks managers, signed as requested. The plaintiff then took steps to enforce the mortgage and the guarantee. The defendant pleaded undue influence Held: The plaintiffs claim failed. The mortgage and guarantee would be set aside. Barclays Bank v OBrien [1993] 4 All ER 417 Facts: OBriens company wanted to increase the overdraft which it had with the plaintiff bank. He agreed to use the matrimonial home as security. The home was in the joint names of himself and his wife. OBrien needed the wifes signature as well and he falsely told her that the home was to be used as security for only 60, 000 and for three weeks only. She had not taken any independent legal advice on the matter and had signed the documents without reading them. The husbands business failed and the plaintiff claimed to take possession of the home. The wife pleaded undue influence and misrepresentation by the husband. Held: The transactions would be set aside on the grounds of undue influence and misrepresentation. In the above case the House of Lords rejected the notion that there was a special equity in favor of wives providing security for their husbands. This means that as between spouses, undue influence is not presumed; it must be proved. Result of Undue Influence The contract is voidable at the option of the weaker party. The right to avoid can be lost if action to avoid is not taken within a reasonable time after the influence ceases. Remedies for Undue Influence Rescission Where rescission is impossible, damages. 80 C MISTAKE Mistake is one of the vitiating factors in contract law. However, not every mistake vitiates a contract. Only mistakes that go to the root of the formation of a contract vitiate a contract. Mistakes of law do not vitiate a contract; only mistakes of fact do that. The following are the types of mistake which will vitiate a contact. (a) Mistake as to the subject matter of the contract; (b) Mistake as to the identity of one of the parties to the contract; (c) Mistake as to the nature of the contract signed. Taking each in turn (a) Mistake as to the subject matter of the contract The mistake as to the subject matter of the contract may relate to (i) the identity of the subject matter; or, (ii) the existence of the subject matter. (i) Identity of the subject matter The parties are not thinking of the same subject matter. There is no census ad idem or meeting of minds about the subject matter. The contract is prevented from coming into existence. Jan Albert (HK) Ltd v Shu Kong Garment Factory [1990] 1 HKLR 317 Facts: The plaintiff negotiated for the supply of goods classified as underwear. S insisted on classifying the goods as outwear. The goods could only be exported as underwear due to quota restrictions. S claimed relief on the basis of mistake of fact as to quota classification. Held: There was no mistake. The subject matter specified in the contract was precisely what the parties had agreed upon. Therefore the contract was not void. S was liable for breaching contract to supply goods classified as underwear. (ii) The existence of the subject matter If the subject matter of the contract has been destroyed before the contract is made, there can be no contract. Couturier v Hastie (1856) 5 HL Cas 673 Facts: A contract was made by the parties for the sale of a cargo of corn, supposedly in transit from Salonica to the United Kingdom, but unknown to both parties, the cargo had become fermented and the master of the ship had already disposed of it by sale to a third party. The seller claimed the price of the cargo. Held: The buyer was not liable for the price as the there was nothing to be sold under the contract. Pritchard v Merchants and Tradesmens Mutual Life Assurance Society (1858) 3 CBNS 622 Facts: A life insurance policy had lapsed. The beneficiary under the policy paid the insurers a renewal premium, which revived the policy. However, the assured, unknown to the parties, had already died before the date of payment. The beneficiary claimed under the policy. Held: The claim failed, as the premium was paid and accepted on the basis that the assured was still alive at the date of payment of the premium. 81 Note, however, that if there is a promise or guarantee that the subject matter exists, then that party might be liable to pay damages even if it does not exist. Mcrae v Commonwealth Disposals Commission (1950) 84 CLR 377 Facts: The defendants called for tenders for the purchase of an oil tanker said to be lying off a place called Jourmaund Reef, 100 miles north of Samarai. The plaintiffs tender was successful, but there was no such tanker or a place called Jourmaund Reef. The plaintiff had already expended considerable sums of money in fitting out a salvage operation before discovering these facts. The plaintiff claimed damages. Held: The plaintiff succeeds, as the defendant had implicitly warranted the existence of the tanker. (b) Mistake as to the identity of one of the parties to a contract One of the parties is mistaken as to the identity of one of the parties to a contract. This type of mistake will only affect a contract if the identity is material to the contract. It is possible that during negotiations one party fraudulently pretends to be somebody else, to deceive the other party. The innocent party is not aware of the pretension and contracts with the rogue. For innocent party to succeed he should be able to prove the following: 1. that his intention was to deal with someone other than the person with whom he transacted; 2. that the other party knew of this intention; 3. that he had taken reasonable steps to verify the identity of the other party; 4. that the identity of the other party was important to him in the transaction. In practice, however, requirements (iii) and (iv) would be difficult to establish. In ordinary everyday transactions, say like selling a car, it would be difficult to satisfy the court as to why the true identity of the buyer is so important to the seller. Moreover, if the innocent party had actually taken reasonable steps to verify the true identity of the other party, he is unlikely to be deceived. Ingram v Little [1961] 1 QB 31 Facts: A rogue, falsely calling himself as Hutchinson went to the plaintiffs house to buy their car. The plaintiffs agreed on a sale price but called it off when he proposed to pay by cheque. He then told the plaintiffs that he was P G M Hutchinson, having a business in Guildford and that he was staying at Stanstead House in Caterham. One of the plaintiffs quickly went out and verified from a telephone directory that there indeed was a P G M Hutchinson listed as living at the address given by him. They then thought it was safe to accept the cheque and completed the transaction and parted with the car. The rogue subsequently sold the car to the defendant, who took it in good faith. The plaintiffs sought to recover the car or alternatively, damages from the defendant on the basis that there was no contract between the plaintiffs and the rogue. Held: The plaintiffs succeeded. The court held that the offer to sell the car was made solely to P G M Hutchinson and the rogue could not accept it and therefore there was no contract between the plaintiffs and the rogue. Lewis v Averay [1972] 1 QB 198 82 Facts: A rogue, posing as Richard Greene, a famous film star, offered to buy the plaintiffs car for the advertised price. The plaintiff accepted the offer and the rogue gave a cheque in payment signed as R A Green. The plaintiff, fearing that the cheque might be worthless, refused to hand over the car immediately. The rogue then produced a special pass for entry to Pinewood Studios with an official stamp. The plaintiff was satisfied with this and parted with the car and the log book. The cheque was in fact stolen and worthless. The rogue, now passing as Lewis, sold the car to the defendant, who took it in good faith. Held: The plaintiff failed. In this case, the court disagreed with the rationale in Ingram v Little, holding that the plaintiff did not rebut the presumption that he had made the contract with the rogue when he allowed him to take the car away. Operative mistake might be more readily established when the parties are not in face-to-face negotiations. Cundy v Lindsay (1873) 3 APP Cas 459 Facts: A rogue named Blenkarn offered to buy goods from the plaintiffs by pretending to be Blenkiron & Co, a reputable business on the same street as the rogue. He signed the letter in such a way that it could be read as Blenkiron. The plaintiffs dispatched the goods and the rogue sold them to the defendant, who took them in good faith. The plaintiffs sued the defendants in conversion. Held: The plaintiff succeeded. In this case the court was of the view that the offer by the plaintiffs was only to Blenkiron & Co and so it could not be accepted by Blenkarn. Hence, there was no contract between the plaintiffs and Blenkarn. (c) Mistake as to the nature of the contract signed This is quite difficult to prove because the courts expect that people will not sign documents they do not understand. The person mistaken must show: His signature was induced by fraud The document he signed was fundamentally different from that thought to be signed; and, He did not act negligently If an action is brought against a person who signs in these circumstances, he could successfully plead the defence of non est factum - that the act of signing is not his deed. The defence was initially meant to protect the illiterate and the blind, but later turned out to be more used by others. Saunders v Anglia Building Society [1970] 3 All ER 961; [1971] AC 1004 Facts: The plaintiff, a widow aged 78, gave the deeds of her house to her nephew to enable him to raise money. She made it clear to him that she wanted to occupy the house till she died. She knew that the defendant, a friend of the nephew was going to arrange the loan. The defendant dishonestly arranged for the leasehold of the house to be transferred to himself. He then took the document to the plaintiff for her signature. The plaintiff was unable to read because she had broken her glasses. However, upon inquiry she was told by the defendant that the document was a deed of gift to her nephew. She therefore signed the document. The defendant subsequently mortgaged the property to a building society for obtaining a loan for himself but failed to pay the instalments due. The plaintiff sued the defendant and the building society for a declaration that the transfer was void by invoking non est factum. Held: The House of Lords, affirming the Court of Appeal, rejected the claim. The transfer to the defendant was not radically different from what the plaintiff actually had in mind. The court emphasised that what mattered was the plaintiffs objective, namely to enable the transferee to use the property as security to raise money for her nephew an objective which could have 83 been achieved if the defendant was honest. Lloyds Bank Plc v Waterhouse [1991] Family Law 21 Facts: The defendant, who was illiterate, signed a guarantee for his son. Before doing so he inquired from the bank what he was required to sign and was told that it was a limited guarantee, while in fact it was unlimited. The bank later claimed to enforce the guarantee against the defendant, who pleaded non est factum. Held: The claim failed. The bank had clearly misled the defendant who had taken the trouble to ensure what he was signing by inquiring of the bank. Cheung Pik Wan v Tong Sau Ping [1968] HKLR 921; Stott, p. 73 Facts: The plaintiff was illiterate and did not speak Cantonese. She was the owner of a flat. The defendant persuaded the plaintiff to give him the title deeds to the flat and to sign a power of attorney. The plaintiff thought that she was signing a guarantee for the return of the title deeds. The defendant transferred the flat to X. Held: The plaintiff, being illiterate, had been deceived and had not been negligent in executing the power of attorney. Both the power of attorney and the assignment were void. Remedies for Mistake Since mistakes such as those described above make a contract void, any money or property should be returned to the original owners. Property which has passed on to a third party may be recovered. 84 85 E. ILLEGALITY The following contracts are illegal at common law usually because they are recognized as being morally wrong: contracts to commit a crime or a tort; contracts that are sexually immoral - Lee Hoi Ping v Chan Suen alias Chan Sin [1980] HKLR 95 contracts that corrupt public life (e.g. bribery); contracts of trade with an enemy in wartime; and contracts which are prejudicial to the administration of justice - Richarvey Ltd v. Victor Fung [1980] HKLR 797 Results of Illegality at Common law If a contract is illegal at common law, it will be void. The court will not assist in recovering goods, property or money. Remedies for Illegality at Common law For a contract with an illegal purpose, there is no remedy. The courts will not assist either party in recovering property and money. The contract is effectively unenforceable. 2. Contracts Illegal by Statute Contracts to carry out activities that are prohibited by an ordinance are contracts that are illegal by statute. They may be divided into contracts where the purpose of the activities is illegal or where the activity is carried out in an illegal way. Yim Wai-tsang v Lee Yuk-har [1973] HKLR 1 Johnson Stokes & Master v. Boucher [1989] 1 HKLR 219 Results of Illegality by Statute Sometimes, the ordinance specifies the consequences of the illegality - e.g. it may state that the resulting contract is unenforceable or void. If the ordinance does not specify the consequences, the court will have to decide whether or not to enforce the contract. Remedies for Illegality by Statute If the contract is declared void or unenforceable, the parties will not be able to recover goods, property or money. 3. Contracts contrary to Public policy If a contract involves conduct that is not actually illegal but is undesirable, it will be described as contrary to public policy. These contracts are void. These include: contracts to oust the jurisdiction of the court; contracts prejudicial to the state of marriage; and contracts in restraint of trade. \MAJID\AF 2504 T4 86 ... View Full Document

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