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Vitiating factors

Terms in this set (27)

What are vitiating factors?
Vitiating factors is where a contract is not binding, as at the time the contract was made, certain factors were present which mean that there was no genuine consent.

The vitiating factors which the law recognises as undermining a contract are mistake, misrepresentation, illegality, duress and undue influence.

Contracts are enforced by the law because they are expressions of the parties' own free will; the parties have consented to their contractual obligations. The reason why the vitiating factors undermine a contract is that they all in some way render invalid the parties' consent to their agreement. For example, if one party agrees to a contract because the other party has threatened him or her, he or she cannot be said to have exercised free will.
The presence of a vitiating factor make a contract void or voidable, what do these terms mean?
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 (it is unenforceable by either party to the contract - the contract is treated like it never existed).

If a contract is voidable, a contract comes into existence and the innocent party can choose whether or not to end the contract.
What is the first vitiating factor?
Mistake: Where one party (or both) is mistaken about some aspect of the contract being entered into, that party cannot be said to be consenting to it - they think the consent is something different.

It is only when the mistake is so fundamental to the contract that the courts will regard it as an 'operative mistake' which renders the contract void.

As always in contract law, when deciding whether or not there has been a mistake courts will look at the facts objectively. They do not ask what the parties themselves believed they were agreeing to, but what an onlooker would have thought each was agreeing.
What are the three types of mistakes?
1. Common mistake;
2. Mutual mistake;
3. Unilateral mistake.
What is a common mistake?
In this situation, both parties make the same mistake - for example, if Ann buys a painting from Ben, which both parties believe is by Picasso, but which is, in fact, a fake, they have made a common mistake.
Case example of a common mistake?
Common mistake as to the existence of the subject matter

The courts will find a fundamental mistake where there has been a mistake as to the existence of the subject matter of the contract.

Couturier v Hastie (1856): Sale of corn was made while it was in transit. Unbeknown to either party the corn was sold by the ship's captain because it had begun to deteriorate. Contract was made for a specific good and at the time it was made the subject matter of the contract no longer existed. Contract was therefore void.

Now s.6 of the Sale of Goods Act 1979: Where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void.
Common mistake as to title and common mistake as to quality
Common mistake as to title

Cooper v Phibbs (1867): C contracted to lease a salmon fishery from the d however it was later discovered that the claimant already had the rights to the fishery.Contract for the lease was set aside by mistake.


Common mistake as to quality

In most cases, a mistake as to the quality of the subject matter will not affect the validity of a contract:
Great Peace Shipping v Tsavliris Salvage (2003)
Ship damaged in the Indian Ocean engaged the d to assist in its recovery. The hired the Great Peace which both parties thought was close but it was actually 410 miles away. So claimants found a ship that was much closer and cancelled the contract for common mistake.

The ship could have arrived in time to provide some assistance so the contract was valid.
What is a mutual mistake and what is an example of a mutual mistake?
2. Mutual mistake
A mutual mistake occurs when each party are at cross-purposes, i.e. they have a different view of the situation. For example, Ann thinks she is buying Ben's Rolls-Royce, when in fact it is his Jaguar that is for sale.
Test is objective = would a reasonable person be able to say what the agreement was?

Raffles v Wichelhaus (1864): A cargo of cotton was on SS Peerless form Bombay. Unknown to the parties there were two ships with that name leaving Bombay. The seller intended the cotton to go on the second ship and the buyer expected the cotton to go on the first ship.

There was no possibility of finding a common intention between the parties. The contract was void for mistake.
What is a unilateral mistake?
Unilateral mistake occurs where only one party is mistaken. The other either knows of the mistake or ought to know of it.
What is a unilateral mistake as to the identity of the of the other party?
Unilateral mistake as to the identity of the other party to the contract

Unilateral mistake is frequently relied upon where there is a mistake as to the identity of one of the contracting parties. A genuine mistake of this nature, where the identity of the other party is of fundamental importance, will render the contract void.

Shogun Finance v Hudson (2003):

- Customer pretending he was Mr Patel completed the hire purchase of a car.
- Customer paid a 10% deposit and drove the car away.
- Shortly after he sold it to the d Mr Hudson and disappeared.
- Claimant company sued Mr Hudson for the recovery of the car.
- Contract between the claimant and the customer was void for unilateral mistake. The claimant was entitled to recover the car from Mr Hudson.
What is the face-to-face principle?
Face-to-face principle:

Where there has been face-to-face contact between the contracting parties, there is a strong presumption that each party intends to contract with the other person present.

The vendor's intention is treated as being to sell to the person present, and identified by sight and hearing. This presumption applies even where the buyer assumed a false name, or practised any other deceit to induce the vendor to sell.

Lewis v Averay (1972):

Lewis advertised to sell his car. A rogue came to purchase it under actor name Richard Green. Lewis accepted cheque for £450 as rogue showed a fake studio card. Rogue sold the car for £200 to Averay. Lewis attempted to recover car on the grounds contract was void for mistake. Not a mistake because there was no operative mistake in the contract. Lewis had contracted to sell the car to the man in front of him.
What is misrepresentation?
A misrepresentation is an untrue statement of fact by one party which has induced the other party to enter into the contract.

A contract made after a misrepresentation is voidable.
What are the three requirements for a misrepresentation to be actionable?
1. There must be an untrue statement;

2. It must be statement of fact, not mere opinion;

3. It must have induced the innocent party to enter the contract.

(The misrepresentation does not need to be the only reason why the innocent party entered the contract.)
What is an untrue statement?
- Must have been made by the other contracting party,
- or the other contracting party must have known of the untrue statement.

Spice Girls Ltd v Aprilia World Service BV (2002):

Motor scooter company entered into negotiations with Spice Girls Ltd under which SG LTD agreed that the 5 members would promote the scooters in return for sponsorship. Before the agreement was signed Geri informed the group she intended to leave in 6 months time. Agreements was signed and Geri eft three weeks later. Aprilia withdrew their sponsorship and when sued by SG LTD the counterclaimed for damages of misrepresentation. As they knew Geri was leaving it amounted to misrepresentation by conduct.

An untrue statement of fact must have been made by the other contracting party, or the other contracting party must have known of the untrue statement. The statement may be in any form - spoken, written or by conduct.
Spice Girls Ltd v Aprilia World Service BV (2002)
What happens if a statement is true when it is made but before the contract it is made it becomes false?
- If a statement is true when it is made but before the contract is completed it becomes false, the party who made the original statement must disclose the new position and if he does not he will be liable for misrepresentation:

- With v O'Flanagan (1936) - In Jan 1934 negotiations were entered for the sale of a medical practice with the doctor seling the practice correctly saying it had an income of £2000 a year.

- However the doctor became ill and by the time practice was sold in May income had fallen drastically which was not disclosed to the purchaser.

- The failure to tell the purchaser the fall in income was a misrepresentation.
What does it mean that 'a statement must be a fact' to amount to misrepresentation?
The statement must be one of fact; merely delivering an opinion will not create an actionable misrepresentation.

Bissett v Wilkinson (1927):

Seller of the land told the prospective purchaser that he believed the land would support 2000 sheep but the land had never been used for sheep. Statement was an expression of opinion and not a statement of fact.

There are some cases in which what looks like a statement of opinion will be considered by the courts to be a statement of fact. An example is where one party falsely states their opinion. For example, Ann wants to sell a clock to Ben, and says she thinks the clock is 200 years old, when in fact she knows it was made the week before. Her state of mind is a fact, and she is lying about it; therefore she making a misrepresentation of fact.
What does inducement mean in terms of misrepresentation?
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.

So if the claimant was not aware that the statement had been made, or knew it was untrue, or it did not affect the decision to enter into the contract, the misrepresentation will not be actionable.

Redgrave v Hurd (1881) - A claimant may be successful in his claim for misrepresentation if he relied on a statement that he earlier could have discovered was false:

- A solicitor wished to sell his share of practice to his prospective partner provided income information and said his figures could be checked from a bundle of documents.

- The statement was a misrepresentation and failure to examine documents did not alter the effects of misrepresentation.

The untrue statement must have been made before or at the time of making the contract because otherwise, it cannot have induced the contract to be made.
Example of where inducement cannot be taken into account?
Where the innocent party does not rely on the other's statement, and instead conducts their own investigation, or simply relies on their own judgment the party making the misrepresentation will not be liable.

Attwood v Small (1838)

Seller of mine made exaggerated claims about the mines potential to prospective purchasers purchaser appointed their own expert to examine and he reported mine had similar potential.

Not actionable misrepresentation as purchaser had relied on their own expert.
What are the three types of misrepresentation and how do you determine which category a misrepresentation falls into?
Which category a misrepresentation falls into depends on the state of mind of the person making the statement. The reason why the category matters is that the remedies for each type differ.

1. Fraudulent misrepresentation

If a person makes a false statement which he or she does not at the time believe to be true, this is a fraudulent misrepresentation (Derry v Peek (1889) - a false statement that is made '(i) knowingly, or (ii) without belief in its truth, or (iii) recklessly as to whether it be true or false'.


2. Negligent misrepresentation
A false statement made by a person, who believes the statement is true but has no reasonable grounds for the belief. Victim can take court action under the Misrepresentation Act 1967 or under common law.

3. Innocent misrepresentation
Made by a person who has a honest and reasonable belief in the truth. The belief must be present when the statement is made and right up until the time the contract is entered into.
How does misrepresentation render the contract and what about exclusion clauses for misrepresentation?
A misrepresentation renders the contract voidable and it may also give rise to a right of damages depending on the type of misrepresentation that has occurred.

- S3 of the Misrepresentation Act 1967 states that clauses attempting to restrict or exclude liability for misrepresentations are only valid if reasonable and it is those claiming that a term is reasonable to show this.
What are the main remedies for misrepresentation?
A. Rescission = equitable remedy designed to restore parties to pre-contractual position. Available for all 3 types of misrepresentation.
- The court can order any money that has been paid or property that has been exchanged between the parties is returned to the original party.
- Equitable remedy - up to the courts to decide whether it is fair in all circumstances to allow the contract to be rescinded.

B. Damages = aim to compensate the innocent party by putting it back in the position that it would have been had the misrepresentation not taken place.

- Therefore innocent party cannot claim for loss of profits that would have been made under the contract if the representation had not been true.

- For fraudulent and negligent misrepresentation the innocent parties can recover all losses incurred as a result of the misrepresentation. For innocent misrepresentation the innocent party can claim recission yet court can award damages instead of a recession if it is more equitable to do so.
Make card on other remidies!!!! Too sick to do it today.
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What is duress and undue influence?
Since a contract will only be binding if the parties voluntarily consent to it, it is obvious that where one party is forced to consent by threats or undue persuasion by the other, that consent should be invalid.

The law has developed two doctrines to deal with this issue: the common law of duress, and the equitable one of undue influence.

Both render a contract voidable.
What are the five requirements that need to be satisfied for the finding of 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 to enter the contract;
5. The claimant protested at the time or shortly after the contract was made.
Duress may include physical pressure but will usually include economic pressure (classified as economic duress - example, Atlas Express Ltd v Kafco (Importers and Distributors Ltd (1989)).
Two types of undue influence?
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 forms of undue influence:

- Actual undue influence: this is a more subtle form of duress and it rarely applies in practice.

- Presumed undue influence: In certain fiduciary relationships, the courts assume that one party is dominant and can influence the other. A contract made between parties in such a relationship will thus be presumed to have resulted from undue influence, unless proved otherwise.

Such fiduciary relationships include:

• Parent & child
• Solicitor & client
• Doctor & patient
• Trustee & beneficiary
In principle, any kind of relationship could be regarded as one of trust if this is justified by the circumstances of the case.

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.

Lloyds Bank v Bundy (1974)


The defendant can rebut the presumption of undue influence by showing that the claimant entered into the contract freely, and this is usually done by establishing that independent advice was taken.

Royal Bank of Scotland v Etridge (No 2) (2001):
What is illegality?
A contract is illegal where its formation, purpose or performance involves the commission of a legal wrong. The violation may be of:

• a statutory rule (e.g. contracts in violation of competition law)

• common law (e.g. contracts to commit a crime or tort; contracts damaging the country's safety or its foreign relations, contracts in restraint of trade, contracts to defraud the inland revenue);

• the public interest (e.g. contract promoting sexual immorality, contracts prejudicial to public safety, contracts to oust the jurisdiction of the courts).
What are the effects of illegality?
Under common law the general principle is that an illegal contract is void and unenforceable, but certain exceptions to this have been developed by the courts.
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