The impact of misrepresentation, mistake, duress, and undue influence on the validity of a contract
A contract may be defined as a legally binding agreement made by 2 or more parties. It has also been defined as a promise or set of promises a breach of which the law provides a remedy and the performance of which the law recognizes as an obligation.
Examples of contracts are insurance contracts, lease agreement, mortgage amongst others.
A contract comes into existence when an offer by one party is unequivocally accepted by another and both parties have the requisite capacity. Some consideration must pass and the parties must have intended their dealings to give rise to a legally binding agreement. The purpose of the agreement must be legal and any necessary formalities must have been complied with.
These are circumstances which interfere with the enforceability of a contract. They have a negative effect on contracts. They may render a contract void or avoidable. A void contract is unenforceable while avoidable contract is enforceable unless avoided.
These factors include: –
1. Misrepresentation
2. Mistake
3. Duress
4. Undue influence
MISREPRESENTATION
This is a false representation. It is a false statement made by a party to induce another to enter
into a contractual relationship.
It renders the contract avoidable at the option of the innocent party.
However for the innocent party to avoid the contract, it must be proved that: –
1. The statement in question was false in a natural particular i.e. it was untrue in whatever
it referred to.
2. The statement was more than a mere puff or sales talk. Whether a statement is a puff
or a misrepresentation depends on what a reasonable person could deem it to be.
3. The statement was
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one of fact not opinion. As a general rule opinion does not amount to
misrepresentation. It was so held in Edington v. Fitzmaurice. However an opinion may
amount to misrepresentation if: –
a. The maker does not honestly hold that opinion
b. The opinion purports to be based on certain facts within the maker’s knowledge but
whose truthfulness he does not verify.
4. The false statement was intended to be relied upon by the recipient.
5. The false statement was in fact made by the other party to the contract. As a general rule,
omission, silence or non-disclosure does not amount to misrepresentation. However it
may: –
a. In contracts of utmost good faith
b. In confidential relationships
c. Where disclosure is a statutory requirement
d. Where the statement made is half true
e. If the statement was true when made but turns false due to changes in
circumstances before the contract is concluded but the maker does not disclose its falsity as was the case in With v. O’flanagan.
6. The false statement influenced the party’s decision to enter into the contract. The party must show that the false statement was made before or when the contract was concluded. However the false statement need not have been the only factor the party has considered.
In Andrews v. Mockford; where the plaintiff had relied on untrue statement in a company’s prospectus, issued by the defendants it was held that the defendants were liable in damages for the statements as the plaintiff had relied on them.
7. The false statement was innocently, fraudulently or negligently made.
MISTAKES
There are two types of mistakes
– Mistake of law
– Mistake of fact
As a general rule a mistake of law does not affect a contract however, a mistake
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of foreign law may affect a contract. Mistakes of facts affected contractual relationships. A mistake is said to be misapprehension of a fact or factual situation. It is an erroneous assumption. Mistake of fact that effect contracts are generally referred to as operative mistakes and the law recognizes various types of operative mistakes:
a) Common
b) Mutual
c) Unilateral
d) Mistakenly signed documents
e) Mistake as to quality of subject matter
COMMON MISTAKE
This is a mistake as to the existence or ownership of the subject matter. Both parties make the same mistakes. Each party understands the others intention but both are mistaken about some underlying fundamental fact. Common mistake rendered void in two circumstances:
Cases of Res Exinta: These are circumstances in which parties about the subject matter. This circumstance is contained in sec 8 of the sale of goods Act which provides where there is a contract for the sale of specific goods which without the seller’s knowledge have perished the contract is void.
In Couturier V. Hastle the parties entered into a contract for the sale of a large quantity of corn which at the time was supposed to be on transit to Britain from Greece but unknown to the parties the ship captain had sold the corn in Tunisia due to overheating and fermentation.
It was held that the buyer was not liable to pay the price as the contract was void for common mistake as the subject matter did not exist.
MUTUAL MISTAKE
This is a mistake to the subject matter of contract. It arises when parties misunderstand each other or at cross purposes. No agreement arises between them for lack of consensus ad idem. However, not very misunderstanding constitutes a mutual
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mistake; it depends on what a reasonable person would deem the circumstances to be.
In Raffle V. Wichelhause the parties enter in into a contract for the sell of cotton to be shipped to the U.K. on board the peerless from the port of Bombay. Unknown to the parties there were two ships by the name peerless at the port of Bombay. One sailed in October and the other in December.
While the buyer meant the October ship the seller referred to the December one. The cotton was shipped by the December vessel and the buyer refused to take delivery. It was held that he was not bound as the contract was void for mutual mistake.
DURESS
At common law duress means actual violence or threats thereof. It exists where a contractual relationship is procured by actual violence on the person or threats thereof.
The party is compelled or coerced to contract. For the most part, duress consists of threats. Duress was developed by the common law with a very narrow scope. It renders a contract voidable at the option of the innocent party.
For the contract to be avoided, the innocent party must prove that:-
• The threat was intended to cause fear, injury or loss of life
• The threat was directed to his person or body as opposed to his property. It was so held in Altee v. Backhouse. A threat directed at the body of a member of the party’s household amounts to duress
• The threat was illegal e.g. a threat to sue, prosecute or cause imprisonment for no reasonable cause. A threat to enforce once legal rights does not amount to duress. It was so held in
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Hassan Ali Issa v. Jeraj Produce Shop where the defendant had alleged that the cheque had been written under duress in that the plaintiff had threatened to sue if repair and storage charges were not paid. It was held that the threat did not amount to duress.
In Friedberg Seelay v. Klass the defendants gained access to the plaintiff’s house and threatened not to leave unless she sold her jewels to them.
UNDUE INFLUENCE
It is said to exist where a party dominates the other persons will thereby inhibiting its exercise of an independent judgment on the contract.
One party thus exercises overwhelming influence over the other. Undue influence was developed by equity with a fairly wide scope. It renders a contract voidable at the option of the innocent party. Undue influence renders a contract voidable in the following circumstances;
1. Where parties have a special relationship
E.g. parent-child, advocate-client, doctor-patient, trustee-beneficiary, religious leader-disciple; undue influence is presumed in favor of the weaker party. It is the duty of the stronger party to show that the weaker party made an independent decision on the contract. e.g. he had an advocate of his own.
In Ottoman Bank Co. Ltd. v. Mawani, the plaintiff bank extended a loan to a business owned by thedefendant’s father and the defendant guaranteed the amount. The fathers business was unable to pay the loan and the bank sued so to enforce the guarantee, Evidence that the defendant was still under the control of the father. He worked in the fathers firm and had no independent source of income. It was held that he wasn’t liable on the guarantee as it was voidable at his option for the
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father’s undue influence.
2. When parties have no special relationship
The party pleading undue influence must prove it by evidence. The circumstances must be such that the party did not make an independent judgement on the transaction, as was the case in Williams v. Bayley, where the defendant entered into a contract promising to pay monies withdrawn from a bank by the son. The banker had made it clear that if no arrangement was arrived at, the defendant’s son would be prosecuted for the offence. When sued, the defendant pleaded the banker’s undue influence. It was held that he was not liable as the contract was voidable at his option.
3. Unconscionable bargains
These are unfair bargains. They are transactions entered into in circumstances in which one party takes advantage of its position to procure the deal. Such transactions are voidable at the option of the innocent party. The concept of unconscionable bargains was developed by equity courts as an extension of the doctrine of undue influence and was explained by Lord Dening in David C. Builder ltd. v. Rees.
In Lloyds Bank Co. Ltd v. Bundy, the plaintiff bank extended a loan to a business owned by the defendant’s son. The defendant guaranteed the loan to the tune of £1,000 but the bank required further guarantee. He extended it to £6,000. His lawyer informed him that it would be unwise to extend the guarantee further. The defendant owned a house with £10,000. An official of the plaintiff bank visited the defendant and procured a further guarantee of up to £11,000. The sons business collapsed and the bank sought to enforce the guarantee against the father who pleaded that it
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was unconscionable. It was held that the guarantee was voidable at the option of the defendant as it was unfair.
B. The circumstances in which the protection afforded to members by separate legal personality and the “veil of incorporation” will be removed by the courts.
VEIL OF INCORPORATION
It’s a legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations. This protection is not ironclad or impenetrable. Where a court determines that a company’s business was not conducted in accordance with the provisions of corporate legislation (or that it was just a façade for illegal activities) it may hold the shareholders personally liable for the company’s obligations under the legal concept of lifting the corporate veil.
There are common law and judicial exceptions.
The decision in Salomon v Salomon established that when a registered company is incorporated it becomes a legal person distinct and separate from its members and managers. It becomes a body corporate with an independent legal existence. This is referred to as the veil of incorporation.
As a general rule the law does not go behind the veil to the individual members. However, in exceptional circumstances the law ignores the separate legal personality of the company in favor of the realities behind the facade. These circumstances are collectively referred to as lifting the veil of incorporation. They are exceptions or modifications to the rule in Salomon’s case. Such instances may arise under statutory provisions or case law.
The instances in which the veil of incorporation will be lifted under express statutory provisions:
(a) Reduction of number of members
This section provides that
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a company’s member is personally liable for the company’s debts incurred after the six months during which the company’s membership had fallen below the statutory minimum, provided he was cognizant of the fact that the membership had so fallen.
Liability under the section may arise on the death of a member if the death reduces the membership below the statutory minimum for the particular company and:
(i) No transferee is registered as a new member, and
(ii) The personal representative of the deceased member does not elect to be registered as a member, within the prescribed six months.
(b) Non-publication/ Mis-description of a company’s name
Company’s officers and other agents are obliged to write its name on its seal, letters, business documents and negotiable instruments.
This is to be done primarily for the benefit of third parties. Any officer or agent of the company who does not comply with the aforesaid statutory requirements shall be liable to a fine and shall further be personally liable to the holder of any bill of exchange, promissory note, cheque or order for goods which did not bear the company’s correct name, unless the amount due thereon is duly paid by the company.
Liability under this section is illustrated by Nasau Steam Press v Tyler & Others (7) and Penrose v Martyr (8). In the latter case the plaintiff told the court that she was
NOT aware that the company was limited till after the bills were accepted. She had, therefore, been misled as to the legal status of the company. It should, however, be noted that the section does not require that the third party suing the company’s officer should have been misled by the officer’s
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failure to write the company’s name correctly.
(c) Group accounts
A company which has subsidiaries is obliged to lay before the company in general meeting accounts or statements dealing with the state of affairs and profit or loss of the company and the subsidiaries at the time when the company’s own balance sheet and profit and loss account are laid before the company’s general meeting “as the accounts of an actual company”.
These provisions constitute what is regarded in a loose sense as an instance of “lifting the veil” because a member (the holding company) is obliged to incorporate into its balance sheet the assets and liabilities of the company of which it is a member (the subsidiary company) as if they were its own assets and liabilities.
(g) Fraudulent Trading
In the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court, on the application of the official receiver or the liquidator or any creditor or contributory of the company may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
References
Arenson, Joseph T.. The doctrine of undue influence in Anglo American law. Leiden: J. J. Groen, 1953. Print.
Blum, Brian A.. Contracts. 5th ed. Austin: Wolters Kluwer Law & Business, Aspen Publishers, 2011. Print.
Bourne, Nicholas. Bourne
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