Voidable contracts/vitiatingfactors/mistake/misrepresentation/undeu_influence/duress/unconscionable_conduct/

Chapter 2 (part 3) : Voidable contracts

What is voidable contract?

• A voidable contract is a formal agreement between two parties that may be rendered unenforceable for a number of legal reasons.
• Reasons that can make a contract voidable include failure by one or both parties to disclose a material fact; 
• -Mistake,
• -Misrepresentation
• -Undue influence
• -Duress
• -Unconscionable conduct

Mistake

• Section 21 of the Contracts Act 1950.
• Mistake is a complex area of contract law.
• As a general rule, being mistaken about some aspect of a contract will not provide a party with a right to escape contractual obligations - even if that mistake is fundamental.
• There are three categories of mistakes, such as common mistake, mutual mistake and unilateral mistake.

Common mistake – occurs when both parties make the same error relating to a fundamental fact.

It is very rare for a common mistake to give rise to remedies at common law, although in equity remedies of rescission or rectification will sometimes be available.

Mutual mistake - occurs when both parties fail to understand each other.

This has arisen rarely in practice and the legal position is unclear - often where such mistakes exists the agreement might be too vague or uncertain to be enforceable without the need to rely on mistake as a separate cause of action. It could also simply be treated as a unilateral mistake by both parties about different issues.

Unilateral mistake - The case of unilateral mistake is where only one party is mistaken.

It is rare for the common law to provide a remedy for unilateral mistake, but equity will intervene more frequently - equity does, however, require some improper conduct on the part of the unmistaken party whereby that party seeks to prevent the other becoming aware of the mistaken.

Misrepresentation

• Section 18 of the Contracts Act 1950.
• Misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract.
• The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.
• There are three types of misrepresentation: fraudulent, negligent and wholly innocent.

(A) FRAUDULENT MISREPRESENTATION

• Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false statement that is made

            (i) Knowingly, or

            (ii) Without belief in its truth, or

            (iii) Recklessly, careless as to whether it be true or false.

• Therefore, if    someone makes a statement which they honestly believe is true, then it       cannot be fraudulent. See

                        Derry v Peek (1889) 14 App Cas 337.

(B) NEGLIGENT MISREPRESENTATION

• This is a false statement made by a person who had no reasonable grounds for believing it to be true. There are two possible ways to claim: either under common law or statute.
• Success depends upon proof of a special relationship existing between the parties.
• Such a duty can arise in a purely commercial relationship where the representor has (or purports to have) some special skill or knowledge and knows (or it is reasonable for him to assume) that the representee will rely on the representation. See:

                Esso Petroleum v Mardon [1976]

(C) INNOCENT MISREPRESENTATION

• This is a false statement which the person makes honestly believing it to be true.

• The remedy is either

    (i) Rescission with an indemnity, or

    (ii) Damages in lieu of rescission under the courts discretion in s2(2) Misrepresentation Act 1967 

Undue Influence

• Section 16 of the Contracts Act 1950.
• Undue influence, where established, will render a contract voidable.
• It occurs when there is an inequality of power between the contracting parties which results in the weaker party entering into a contract with the dominant party.
• Not all such transactions will result in a remedy - but where the influence that exists between the parties can be classified as 'undue' the weaker party will have the choice of rescinding the contract.
• Undue influence may take two forms; express undue influence and presumed undue influence.

Express (actual) undue influence

• Express - or actual - undue influence arises when a gift/contract results from unfair and undue pressure by the beneficiary and not free and independent judgment. See Justice Starke, Johnson v Buttress (1936) 56 CLR 113 at 126

Presumed undue influence

• Undue influence may be presumed from the relations existing between parties. There is no exhaustive list of relations giving rise to a presumption of undue influence. It includes

•     parent and child
•     guardian and ward
•     trustee and cestui que trust
•     solicitor and client
•     physician and patient
•     cases of religious influence.

• More broadly, the presumption of undue influence arises whenever 'the relation between donor and donee is such that the latter is in a position to exercise dominion over the former by reason of the trust and confidence reposed in the latter' (Chief Justice Latham, Johnson v Buttress (1936) 56 CLR 113 at 119)
• In cases where undue influence is presumed, the donee must prove that the gift was the free/voluntary exercise independent will.
• While it is not essential to show that the donor received independent legal advice, this is the clearest and most obvious mechanism for overcoming the presumption (Chief Justice Latham, Johnson v Buttress (1936) 56 CLR 113 at 119).
•  It will be more difficult for the donee to overcome this presumption where the donor is 'illiterate or weak-minded' (Chief Justice Latham, Johnson v Buttress (1936) 56 CLR 113 at 119).

Duress

• Section 15 of the Contracts Act 1950.
• Duress relates to where a person enters an agreement as a result of threats. Where a party enters a contract because of duress they may have the contract set aside.
• The common law only recognised threats of unlawful physical violence.
• The effect of a finding of duress is that the contract is voidable.
• The innocent party may rescind the contract and claim damages.
• There are three types of duress, such as duress to the person and duress to goods.

Duress to the person

• Where a person enters a contract as a result of threats of physical violence, the contract may be set aside providing the threat was a cause of entering the contract.
• There is no need to establish that they would not have entered the contract but for the threat:

                        Barton v Armstrong [1976] AC 104

Duress to goods

• Duress to goods is not recognised as giving rise to grounds for having the contract set aside:

                        Skeate v Beale [1840] 11 Ad & El 983

• However, this decision has received widespread criticism and is out of line with restitutionary claims:

                        Maskell v Horner [1915] 3 KB 106

• It is thought that the position in relation to duress to goods is unlikely to survive if it is tested in the higher courts, particularly given the more liberal position that has taken hold in response to claims for economic duress.

Unconscionable conduct

• Section 20 of the Contracts Act.
• Unconscionable conduct is prohibited both in equity and, more recently, by statute.
• Unconscionable conduct under the unwritten law
• Section 20 of the Australian Consumer Law (ACL) states that a person (which includes a corporation) must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law from time to time.
• The purpose of this section is principally to widen the range of remedies available to the victim of unconscionable dealing.
• It also enables the ACCC to investigate unconscionable conduct and, if necessary, bring legal action on behalf of the person who has been treated unconscionably.
• Section 20 appears to refer to the doctrine of unconscionable dealing as it has been interpreted in case law.
• However, the words are perfectly general and the courts have not yet settled on what constitutes unconscionable conduct under ‘the unwritten law’ and it may go beyond the doctrine of unconscionable dealing to include other equitable doctrines (for example, equitable estoppel).