Defective Contracts

Contract law requires the courts to strike a delicate balance between certainty and fairness. In relation to ‘defective’ contracts (i.e. those made under duress, undue influence or following misrepresentation), however, they are in danger of getting the balance wrong.

This essay will explore the balance that the courts need to achieve in order to make contract law work. Amongst other things the courts must be able to balance fairness and certainty. This is not an easy balance to achieve especially in relation to defective contracts. The difficulty in achieving this balance will be demonstrated through case law in the area of defective contracts. In particular, this essay will explore the areas of misrepresentation, duress and undue influence to assess whether or not a balance between fairness and certainty has been achieved. This essay will look at both the issues of fairness and certainty in relation to each area, concluding that most often the court will choose to enact fairness and sometimes at the detriment of certainty. Although it will be recognised that as far as possible the courts will attempt to achieve certainty, although it is very difficult as in order for the court to be fair in any given circumstance they have to be flexible. It will be seen that flexibility is not conducive with certainty and for the courts to be flexible they must to some degree be uncertain.

Duress is concerned with situations in which an agreement which appears to be valid on its face is challenged because it is alleged that it is the product of improper pressure of some kind. This can take the form of threats of physical coercion or “economic” threats, which place pressure on the other party.

Most of the difficulties that arise within this concept arise in relation to economic duress. One of the problems with economic duress lies in establishing the boundaries of acceptable behaviour of this kind, since economic pressure clearly has a legitimate place within business dealings. Therefore this raises the difficulty striking the balance between fairness and certainty. The courts justification for intervening in circumstances involving duress is one of fairness in so far as that there is either no true agreement between the parties or simply because a person who has been led to make a contract which otherwise hey would not have done as a result of the exertion of illegitimate pressure should be allowed to escape from it.

Cases on duress refer often to the claimant’s will being “overborne”. This can however, often been seen as an inaccurate description of what has occurred. The Claimant has not been forced to act as an automaton and the decision has often been taken as a matter of choice. Therefore a better analysis is that the threat which has led to that choice is regarded by the courts as illegitimate, and justifies allowing the party threatened to escape from the contract . In an attempt to balance the position of the parties economic duress seeks to analysis not the effect on the claimant but rather the wrongfulness of the behaviour of the defendant. The effect of this is a failure to achieve a balance between certainty and fairness; this is demonstrated by Lord Cross in Barton v Armstrong:

“Their Lordships think that the same rule should apply in cases of duress and that if Armstrong ‘s threats were “a” reason for Barton’s executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong had uttered no threats to influence him to do so….”

This produces uncertainty as a suggestion that Barton would have entered into the contract anyway does not support the notion that duress is when a claimant is coerced into a contract although the outcome would seem fair as despite the assertion that the contract would have been entered into in any event, the parties were not on equal footing.

The above analysis suggests that it is simply to prove duress, although this in reality is not the case. Those seeking to establish duress must demonstrate that the defendant’s threats were “illegitimate” and that his behaviour was affected by these threats. The suggestion in the quotation above is that duress is available where the contract still would have been made even in absence of the threats. This would make sense if the rules relating to duress were being applied to punish the defendant, or to discourage others from using threats in the future but does not support the notion of certainty or fairness in contract.

Duress arises only in circumstances where there has been some illegitimate act which involves a breach of the law. The courts have not supported the notion that it can involve a legal act:

“.. an extension [of the categories of duress] capable of covering the present case, involving “lawful act duress” in a commercial context in pursuit of a bona fide claim, would be a radical one with far-reaching implications. It would introduce a substantial element of uncertainty in the commercial bargaining process ”

Therefore to some degree certainty is provided. However the court did not accept, that the fact that what was threatened was perfectly lawful, and would not have involved the defendant in any breach of contract, was in itself fatal to a claim. It thought that it was possible, in appropriate circumstances, for a threat to commit an entirely lawful act to amount to duress. It cited the opinion of Professor Birks in support of this notion, that it ought not to be the case that “those with devise outrageous but technically lawful means of compulsion must always escape restitution. ”

Undue Influence causing further difficulties in the attempt to seek balance between fairness and certainty. Undue Influence operations to release parties from contracts that they have entered into, not as a result of improper threats, but as a result of being “influenced” by the other party, whether intentionally or not . As Stone quite rightly points out the difficulties that arise with this area are in fact ones of certainty:

“one of the main difficulties with undue influence , as with duress, is to find the limits of legitimate persuasion. If it was impermissible to seek to persuade, cajole, or otherwise encourage people to enter agreements, then sales representatives would all be out of a job”

In the case of Bank of Credit and Commerce International SA v Aboody to the effect that there are two main categories of undue influence, the second of which must be divided into two further separate sub- categories. The categories were actual undue influence was then sub-divided into influence arising from relationships (such as solicitor/client, doctor/patient) which will always give rise to a resumption of developed in such a way that undue influence should be presumed (Class 2B). These divisions have subsequently been used in many cases. The House of Lords has now taken the view , however, that, while there is a distinction between “actual” and “presumed” influence, it should not operate quite as suggested by the categorisation adopted in O’Brien, and that, in particular, the concept of Class 2B influence is open to misinterpretation.

The rules are therefore complicated and certainty is not akin to undue influence. On the other hand it is suggested that fairness is. It is suggested that the courts approach to the issues of duress and undue influence simply reflects a general reluctance to enforce transactions which are so unfair as to be regarded as “unconscionable”? In Lloyds Bank Ltd v Bundy Lord Denning based his decision in favour of Mr Bundy on a broader principle than that adopted by the other members of the Court of Appeal. He identified this as “inequality of bargaining power”. By virtue of this, he claimed:

“English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressure brought to bear on him by or for the benefit of the other”.

The English law relating to both duress and undue influence is concerned primarily with procedural fairness. If the doctrine of unconscionability were to develop it would require it to focus more on the nature of the contract rather than the events that formed it. Either way certainty is not an present and fairness is of utmost importance in this area. It is suggested that Lord Dennings approach above, goes too far and that does not reflect the commercial reality, and indeed does not support the commercial reality.

This said this doctrine has not developed to a great degree on the basis that if this broad principle was allowed to develop than uncertainty may result. It is not easy to determine whether a particular contract is fair or at least not easily by just looking over its provisions . Transactions often operate as part of a long term relations which may mean that some exchanges could appear on their face unfair, where in fact there are wholly fair taken in the context of previous and future dealings. If we consider that if such a doctrine was allowed develop it would be difficult to obtain a uniform application of standards of fairness between different judges and different courts. Where substantive unfairness is addressed it is generally in relation to clauses or contracts of a particular type, with the decision being taken within a limiting statutory framework.

Finally this essay will consider the area of misrepresentation. The law relating to misrepresentation is concerned with the situation in which a false statement leads a contracting party to enter into a contract, which would otherwise not have been undertaken. It provides in certain circumstances for the party whose action has been affected to escape from the contract or claim damages. There are a number of possible actions. The contract may be rescinded under the common law. Damages may be recovered under the Misrepresentation Act 1967. The tort actions for deceit, or negligent misstatement, may provide alternative bases for the recovery of damages.

The basic requirements that are necessary in order for there to be a contractual remedy for misrepresentation are that a false statement has been made by one of the contracting parties to the other, and that it is a statement of fact, not opinion or law and that the statement induced the other party to enter into the contract. Emphasis here will be on the concept that misrepresentation inducing the contract. The misrepresentation need not be the sole reason why the contract has been entered into. In Edgington v Fitzmaurice , the plaintiff was influence not only by the prospectus, but also by his own mistaken belief that he would have a charge on the assets of the company. His action based on misrepresentation was nevertheless successful. Provide that the misstatement was “actively present to his mind when he decided to advance the money”, then it was material. The test is, according to Bowen LJ:

“… what was the state of the plaintiff’s mind, and if his mind was disturbed by the misstatement of the defendants, and such disturbance was in part the cause of what he did the mere fact of his also making a mistake himself could make no difference ”

This does not seem to be entirely fair on the defendant nor does it support notions of certainty. In further support of this notion it does not seem to matter that the party deceived has spurned a chance to discover the truth. In Redgrave v Hurd false statements were made by the plaintiff about the income of his practice as a solicitor, on the strength of which the defendant had entered into a contract to buy the plaintiff’s house and practice. He had been given the chance to examine documents which would have revealed the true position, but had declined to do so. This did not prevent his claim based on misrepresentation. It is difficult to see how this promotes fairness in favour of the defendant, as the defendant had offered the claimant an opportunity to ascertain the truth, this does not support the notion of “buyer beware” found in property transactions. This does not achieve certainty either as it is difficult to know when the line should be drawn in this respect.

Finally there is the question as to whether or not the reliance on the statement is reasonable for it to be a material inducement to contract. This issue was considered in Museprime Properties Ltd v Adhill Properties Ltd . Property owned by the defendant was sold to the plaintiffs. There was an inaccurate statement in the auction particulars which was re-affirmed by the auctioneer, to the effect that rent reviews of three leases to which the properties were subject had not been finalised. The plaintiffs sought to rescind the contract for misrepresentation. The defendants argued, as part of their case, that the misrepresentation was not material because no material bidder would have been induced to contract. Scott J held that the materiality of the representation was not to be determined by whether a reasonable person would have been induced to contract. As long as the Claimant was in fact induced, that was enough to entitle him to recession. The reasonableness or otherwise of his behaviour was relevant only to the burden of proof: the less reasonable the inducement, the more difficult it would be for the claimant to convince the court that he had been affected by this misrepresentation.

It can be argued that this promotes fairness for the Claimant but not certainty for the Defendant. This would suggest that the Defendant must take in to account the kind of person and personality that he is dealing with when deciding which information should be disclosed and which should not. Obviously if the Claimant need only show that it is reasonable for him to rely on it no certainty is provided as each individual will be very different.

In conclusion it has been demonstrated that one of the problems with “defective contracts” lies in establishing the boundaries of acceptable behaviour. For example in duress it is clear that economic pressure clearly has a legitimate place within business dealings and similarly with misrepresentation it is clear that withholding certain information is justified in a business situation. Therefore this raises the difficulty striking the balance between fairness and certainty. The courts justification for intervening in circumstances involving duress and misrepresentation has always been one of fairness in so far as that there is either no true agreement between the parties or simply because a person who has been led to make a contract which otherwise hey would not have done as a result of the exertion of illegitimate pressure or as a result of being misled and therefore they should be allowed to escape from it. This however as has been demonstrated blurs the lines of certainty ensuring that the position of the courts is not always clear. This of course means the defendant is never aware of where legitimate business ends and “defective contracts” begin, thus not reflecting what can be demonstrated to be the commercial reality of the situation. Therefore in consideration of whether or not the law in relation to defective contracts achieves the balance between fairness and certainty the conclusion must be no, the law manages to achieve fairness, but at the detriment to certainty. In some periods the law has appeared to develop towards the doctrine of unconscionability. The English law relating to both duress and undue influence is concerned primarily with procedural fairness. If the doctrine of unconscionability were to develop it would require it to focus more on the nature of the contract rather than the events that formed it. Either way certainty is not an present and fairness is of utmost importance in this area. It is suggested that Lord Denning’s approach above, goes too far and that does not reflect the commercial reality, and indeed does not support the commercial reality. In this respect we can be grateful that the law has not extended this far. Further this does support the notion that the law has regarded for both certainty and fairness as it is not prepared to extend this doctrine because of the resultant uncertainty.

Bibliography

Cases

Barton v Armstrong [1975] AC 104
Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923; [1992] 4 ALL ER 955
CTN Cash and Carry v Gallaher [1994] 4 ALL ER 714
Edgington v Fitzmaurice (1885) 29 CH D 459
Lynch v DPP for Northern Ireland [1975] AC 653
Lloyds Bank Ltd v Bundy [1975] QB 326
Museprime Properties Ltd v Adhill Properties Ltd [1990] 2 EG 196
Redgrave v Hurd (1881) 20 Ch D 1
Royal Bank of Scotland v Etridge (No2 ) [2001] UKHL 44

Books
Atiyah P S (1986) “Essays on Contract” Oxford; Clarendon Press

Birks P, (1989) “An Introduction to the Law of Restitution” Oxford: Clarendon Press

Collins H, (1999) “Regulating Contracts”, Oxford: Oxford University Press

Mckendrick E, (2003) “Contract Law” Fifth Edition, Basingstoke: Palgrove Macmillian

Poole J, (2003) “Casebook on Contract Law”, Sixth Edition, Oxford: Oxford University Press

Tritel G, (2003) “The Law of Contract”, Eleventh Edition, London: Sweet and Maxwell

Stone Richard, (2002) “The Modern Law of Contract”, Fifth Edition Cavendish Publishing