Five Vitiating Factors That Undermine a Contract

There are five vitiating factors that undermine a contract: Misrepresentation, Mistake, Duress, Undue Influence and Illegality.

Consider each, giving examples from cases with which you are familiar.

INTRODUCTION

A contract can be defined as ‘a promise or set of promises which the law will enforce’ (Pollock Principles of Contract (13th Edn) 1).The agreement will create rights and obligations that may be enforced in the courts. However there are situations where the parties have reached agreement but the question arises whether the existence or non-existence of some fact, or the occurrence or non-occurrence of some event, destroys the basis upon which that agreement was reached so that the agreement is discharged or in some other way vitiated. There are five vitiating factors, misrepresentation, mistake, duress, undue influence, and illegality.

1. MISREPRESENATTION

A misrepresentation is a false statement of fact or law which induces the other party to enter in to the agreement. Generally speaking such statements have to be made before the contract is entered in to. Thus the requirements of an action for misrepresntaion are that it must purport to be statement of fact or law, it must have induced the other party to enter the contract and it must have been a false statement.

Statements of opinion or of intention are not misrepresentations, as long as the opinion or intention is genuinely held at the time.

Silence will not constitute a misrepresentation unless:

• It turns a statement that has been made in to a half truth
• It concealed a relevant change of circumstances
• The contract was one which was Ubermaie Fidei
• The relationship between the parties is fiduciary

A misrepresentation must induce the contract but the representees reliance does not have to be reasonable. It will not be actionable therefore if the representee was unaware of the misrepresentation at the time of the contract, the representee relied on his own judgement rather than the statement of the representor, the representee was unaware of the untruth of the statement (however it is not enough that the representee had an opportunity to discover the truth of the statement.

Remedies available will depend on the nature of the misrepresentation. Misrepresentations may be fraudulent, negligent at common law, negligent under the Misrepresentation Act 1967 or wholly innocent.

A fraudulent misrepresentation is one that is made with the knowledge of the falsity or with reckless disregard as to its truth. The remedies are rescission of the contract where this is available and/or damages as for the tort of deceit. All losses flowing from the misrepresentation are recoverable, without the limitation of remoteness.

A negligent misrepresentation at common law arises where there is a special relationship between the parties giving rise to a duty of care. The remedy is damages based on the tortuous measure of negligence.

A negligent misrepresentation under sec 2 (1) MA 1967 arises where the representee can not prove that he had reasonable grounds for believing that the statement was true. The remedies are rescission where this is an option and/or damages on the same measure as for fraudulent misrepresentation.

An innocent misrepresentation arises where the representor can prove that he had reasonable grounds for believing that the statement was true and the remedies are rescission if available and/or damages in lieu of recession at the courts discretion (sec2 (2) MA 1967)

The right to rescind a contract in cases of misrepresentation may be lost through affirmation, delay, impossibility (restitutio integrum) or the intervention of third party rights.

Liability for misrepresentation can be excluded from a contract as long as it satisfies the test of reasonableness.

2. MISTAKE

Mistakes can be split in to those mistakes which nullify the agreement (common mistake) and those which negate the agreement (mutual mistake).

At common law, a common mistake will nullify the agreement where the mistake is to the existence of the subject matter (res extincta), a party buys property which he already owns( res sua) or if there has been a mistake as to the quality which renders the contract impossible to perform or if it is rendered radically different.

Mutual mistake where the parties are at across purposes but neither is ware of this prevents the contract from arising as there is no consensus ad idem.

Unilateral mistake where one party is aware of the others mistake will render a contract void, if it relates to the terms of the contract.

Unilateral mistake as to identity will render a contract void if the identity was of fundamental importance to the parties and the other party was aware of the mistake and the importance of it.

In relation to contracts made in person the courts are not easily convince that a mistake as to identity should render the contract void as parties are expected to make reasonable enquiries as to identity.

Equity no longer provided the remedy of rescission for mistakes which are not effective at common law to render the contract void, but any intervene via refusal of a grant of specific performance or rectification.

A person who mistakenly signs a contract may plead non-est factum, and have the contract set aside if he proves that the there was a radical difference in what was signed and what he thought he was signing and he was not careless in signing the document.

3. DURESS

The parties must enter in to a contract willingly if it is to be enforceable however there are situations where this may be in question. This is the case where Duress or Undue Influence may have been exerted over one of the contracting partys.

Duress was originally based on threats of physical violence, however the modern doctrine requires that the victim be subjected to pressure amounting to compulsion of the will and that the pressure was illegitimate ,taking in to account the nature and of the threat.The modern doctrine maifests itself as economic duress covers situations where there are more subliminal threats rather than overt thrests of physical violence.

A threat to commit a lawful act can sometimes amount to unlawful duress.

In relation to compulsion of the victim, cases on economic duress suggest that the court should ask:

Did the victim protest?

Was there an alternative route available to the victim?

Was the victim independently advised?

Did the victim take steps to avoid the agreement after entering in to it?

Duress renders a contract voidable as opposed to void and the psrty subject to the duress can rescind the contract unless there has been some affirmation of the contract after the duress has been lifted.

4. Undue INFLUENCE

Equity recognises that contracts may be set aside for undue influence.

Undue influence may be actual or presumed.

If undue influence is to be presumed there must be a relationship which gives rise to the presumption and something about the transaction which requires an explanation.

Undue influence will be presumed irrebuttably where certain relationships exist. Examples include solicitor/client, doctor/patient, and parent/child. A rebuttable presumption will apply in other relationships if it can be shown one party dominated the other.

Where a loan is secured by a person who is not in a commercial arrangement with the debtor, the lender is put on notice that undue influence may be presumed. The contract of security will in such a situation may be set aside if there has been any undue influence or misrepresentation by the debtor, unless the lender has made sure that the person providing the security has received independent legal advice before entering in to the contract. CCA 1974 provides protection in relation to extortionate credit agreements.

The remedy for undue influence is rescission however the remedy is lost if restitution is impossible, the contract has been affirmed, there has been delay in seeking the remedy or where third party rights may be affected.

5. ILLEGALITY

Public policy dictates that illegal contracts are unenforceable and the courts should be vigilant not to enforce any contract with an illegal purpose.

Thus contracts such as those tending to corruption in public life, promoting sexual immorality, prejudicial to the administration of justice, trading with an enemy in war time, for future separation, in restraint of marriage, marriage brokerages and contracts attempting to oust the jurisdiction of the courts will all be illegal and unenforceable.

However the scope of the term illegality is not always transparent. Contracts to commit a criminal act are always unenforceable as in the case of Bigos v Boustead (1951) where the defendant attempted to evade exchange controls. However a contract to commit a civil wrong will only be unenforceable where the commission of the tort or breach of contract is deliberate or if only one party is aware of the wrong by that party.

The case of Anderson v Daniel (1924) demonstrates that a contract may also be unenforceable if the manner of its performance involves illegality especially where it involves a breach of a statute intended to confer some protection on the public.

It therefore follows that any contract to indemnify one party against liability for unlawful acts is also unenforceable in relation to criminal liability (Osman v Ralph Moss Ltd (1970)) and liability in respect of intentional commission of torts.

Contracts which seek to excessively restraint personal liberty will be unenforceable but in some cases where such restraint of personal liberty is for the partys on well being such contracts are held to be enforceable.

Perhaps the most important area in practice is contracts which are in restraint of trade these will often manifest themselves as controls over employees, controls over a seller of a business and solus agreements and other agreements for exclusivity. These are prima facie unenforceable but may be enforced if they are shown to protect a legitimate interest and the terms are reasonable in relation to length, scope and geographical area. Such clauses must not be contrary to public interest The leading case is Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co (1894).

The effect of illegality is unclear but will depend on the intention of the parties as only an innocent party may be able to enforce after consideration of whether the contract is illegal per se or only in the manner of its performance. Withdrawal will result in restitution of any property transferred under the illegal contract provided withdrawal takes place before the unlawful act is carried out and it is voluntary. Where the parties are not pari delicto (equally at fault) restitution may be ordered only for the innocent party. The courts can sever only that part of the contract that is illegal and allow the rest of the contract to stand (blue pencil test).