LPAB – Summer 2016/2017 Lecture 7 2017-18/Summer... · Lecture 7 Vitiating Circumstances • (a)...

LAW OF CONTRACT

LPAB – Summer 2016/2017

Lecture 7

Alex Kuklik

Lecture 7Vitiating Circumstances

• (a) Misrepresentation

– Text: Radan & Gooley, Chapter 14

– Balfour & Clark v Hollandia (1978) 18 SASR 241 (R&G(C) [14.2C])

– Edgington v Fitzmaurice (1885) 29 Ch D 459 (R&G(C) [14.3C])

– Smith v Land and House Property Corp (1884) 28 Ch D 7 (R&G(C) [14.4C])

– Redgrave v Hurd (1881) 20 Ch D 1 (R&G(C) [14.5C])

– Nicholas v Thompson [1924] VLR 554 (R&G(C) [14.6C])

• (b) Mistake


• (1) Common Mistake

– McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (R&G(C) [16.2C])

– Bell v Lever Brothers [1932] AC 161 (R&G(C) [16.3C])

Vitiating Factors• (2) Mutual Mistake

• (3) Unilateral Mistake

– Taylor v Johnson (1983) 151 CLR 422 (R&G(C) [16.7C])

– Cundy v Lindsay (1878) 3 App Cas 459

– Lewis v Averay [1972] 1 QB 198

• (4) Non est factum

– Ford v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658 (R&G(C) [16.8C])

• (c) Duress


– Universe Tankships Inc of Monrovia v International Transport Workers

Federation [1983] 1 AC 366 (R&G(C) [17.2C])

– Barton v Armstrong [1976] AC 104 (R&G(C) [17.3C])

– Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 (R&G(C) [17.4C])

– North Ocean Shipping Co v Hyundai [1979] QB 705 (R&G(C) [17.5C])

– *ANZ v Karam (2005) 64 NSWLR 149

Vitiating Factors

Aims and Objectives

This lecture (and the next) deals with the topic of vitiating factors. This topic relates to factors that affect the quality of the consent given to the entry into a contract. In most cases the consequence of the relevant factor is that the contract is voidable. In some situations, such as of mistake at common law, the contract will be void as from the very beginning (ab initio).

The distinction between voidable and void ab initio has particular consequences for the rights of third parties to the contract who have innocently acquired property that has in the meantime passed between the parties to the contract. This lecture deals with three vitiating factors, misrepresentation, mistake and duress.

Vitiating FactorsMisrepresentation

• Pre-contractual representations may become part of the contract of a contract that is subsequently made, or a collateral contract (as we have seen in previous lectures).

• If such statements are not contractual terms, they may be misrepresentations.

• For a pre-contractual statement to constitute a misrepresentation at common law, it must be a false statement of fact that induces the representee to enter into the contract.

• A misrepresentation may give a right to rescission (the right to rescind the contract).

• The plaintiff must show that before the contract was entered into, representor directly or indirectly made a false statement of fact which was intended to induce the representee to make the contract, and it did in fact operate to induce the representee to make the contract. However, it need not be the sole inducement.


• The misleading conduct does not prevent the contract from coming into being (void), but the basic response of the law is to say that the representee’s entry into the agreement was based on a false understanding, therefore the representee is able to treat the contract as if it never existed (right of rescission).

• If an agreement is rescinded there can be no damages. But of the agreement isn’t rescinded (election not to) and the representation is a term of the agreement, a claim in damages for breach may arise (sometimes these arguments are made in the alternative).

• If the misrepresentation was fraudulent or negligent, there may be an action in tort, and there are also statutory remedies.


• Prior to the fusion of common law and equity, both had jurisdiction over misrepresentation, and rescission was available on a much more liberal basis in equity than at law, and the common law courts could award damages for fraudulent misrepresentation, that equity usually did not. Now the differences are largely historical.

• Types of misrepresentation:

– Fraudulent (damages available in tort of deceit)

– Innocent (rescission (if available) but no damages for breach of contract)

– Negligent (damages available in tort of negligent misstatements since: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465).

• A misrepresentation may also give rise to a statutory remedy, such as under the ACL, or because allowing the representor to rely upon the misrepresentations is unconscionable of unfair.

Vitiating FactorsInnocent Misrepresentation

• Elements:

– A statement of fact.

– That is false.

– It must have been intended to induce and did actually induce the entry into the contract.

– Materiality (is this a separate element)?

Vitiating FactorsMisrepresentation – statement of fact

• It must be a statement of past or present fact.

• Traditionally it did not apply to a mistake of law, but this may no longer hold. And even if it does, there are qualifications.

• Advertising or ‘puffery’ cannot amount to a misrepresentation.

• Promises or assurances as to the future are not statements of fact for the purpose of misrepresentations.

Vitiating FactorsMisrepresentation – Statement of fact

Balfour & Clark v Hollandia (1978) 18 SASR 241 (R&G(C) [14.2C])

• Couple bought a house from defendant. The defendant’s agent said that in they could borrow from the group with a minimum deposit and get a two year loan. Also said that after two years they could roll-over the loan with Hindmarsh Building Society for up to 90% of the value.

• But their incomes were too low for this roll-over loan. The agent was deemed to know this.

• Two months later they complained that there had been a fraudulent misrepresentation by the agent who knew that they couldn’t afford the loan with Hindmarsh. They sought to set aside the purchase.

• Was the agent’s statement of assurance about the future or a statement about a present fact?


• Balfour & Clark v Hollandia (1978) 18 SASR 241 (R&G(C) [14.2])

Held:

• Statement by agent regarding the future availability of a roll-over loan was a statement of present fact because it misrepresented the bank’s current lending policy.

• Also held to be a statement of the agent’s current state of knowledge of the policy.

• Tense of the expression of the statement is not determinative: even though expressed in the future conditional tense - grammar is not decisive. It is really representative of a present fact.



Held:

• Statement can be as to the present existence of an intention, belief or state of knowledge on the part of the promisor.

• It is a question of substance or effect, not merely one of grammar.

• Additionally, the court found that there were important omissions in the description of the lending policy. These were vital to the decision to borrow and were false in their omission.



Held (at 252):

• If I say ‘a department store is selling goods at a 15% discount’, this is a statement of present fact.

• If I say ‘if you go to that department store they will sell you the goods at a 15% discount’, this is a statement in future tense, but still a statement of existing fact.

Vitiating FactorsMisrepresentation – statement of intention

Edgington v Fitzmaurice (1885) 29 Ch D 459 (R&G(C) [14.3])

• Fitzmaurice and others issued a prospectus for debenture subscriptions. The document referred to a recent purchase of property and stated that the company was raising capital to develop and renovate the new property. Other information in the document implied that the debenture holders would be given a charge over the property.

• Edgington invested £1500.

• The bonds created no charge over the property and the board used the money to pay existing debts rather than to develop the property (and had always intended to do so).

• Was there a misrepresentation as to present fact?

Vitiating FactorsMisrepresentation – statement of intention


• A mere suggestion as to a possible use of money is not a misrepresentation.

• But ‘the state of a man’s mind is as much a fact as the state of his digestion.” It is difficult to prove what the state of a person’s mind is at a

particular time, but if it can be ascertained, it is as much a fact as anything

else. A misrepresentation as to the state of a man’s mind is, therefore, a

misstatement of fact.’

Vitiating Factors

Misrepresentation – statement of intention


• A false statement of intention can be a misrepresentation. Here the true object of the directors was not that which they stated in the circular.

• Therefore a statement of future intention will be a statement of presently existing fact if there is no previous intention to do what the representor says it is her intention to do.

• Did it induce the plaintiff to pay? It will be material if it was actively present in his mind when he decided to pay the money. Even if he also made a mistake himself. Here it was material and it influenced him.

Vitiating FactorsMisrepresentation - opinion

Smith v Land and House Property Corp (1884) 28 Ch D 7 (R&G(C) [14.4])

• Smith listed a hotel for sale and engaged an auctioneer. It was promoted as having a ‘most desirable tenant’ paying rent of £400. It was passed in, but the LHP Corp made an offer and exchanged.

• Before completion it was revealed that the tenant was bankrupt and had been paying rent irregularly. They refused to complete on the basis that they would not have entered into the agreement had they known the truth about the tenant.

• Was the auctioneer’s statement about the tenant one of opinion or fact capable of being a misrepresentation?

Vitiating Factors• Misrepresentation - opinion


• Statement of opinion may amount to statement of fact, if the facts are known only to one party, because he impliedly states that the facts would justify the opinion.

‘But if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.’

• It is different if they both have same knowledge of the facts.

• Here, the owner knows everything and the purchaser nothing. But what does ‘most desirable tenant’ mean? It is not a guarantee that the tenant will continue to pay rentM

Vitiating Factors• Misrepresentation - opinion


• But it is an assertion that nothing has occurred in the relations between landlord and tenant which would make the tenant unsatisfactory. That is an assertion of a specific fact. Here it was a misrepresentation.

• Did it induce the purchase? Although authorities can assist, it is a question of fact to be decided in the circumstances of the particular case. Here the chairman gave evidence that it did induce him to purchase. The judge believed him and the Court, whilst it may not have been convinced, decided not to differ from the judge, who saw the witness and believed him.

Vitiating Factors• Misrepresentation - law

• Representations as to law: see Carter [18-10].

Vitiating Factors• Misrepresentation - falsity

• The representation must be false. This generally requires some positive statement or conduct by the representor. This may be as little as a nod or wink or shake of the head, but there is generally no obligation on a person to disclose facts, as parties negotiating a contract are not obliged to look after each other’s interests. (But see Balfour)

• However, legislation covering this area (e.g. ACL) has a broader approach, and silence may amount to misleading and deceptive conduct).


• However, if it is an agreement uberrimae fidei (utmost good faith) then there may be an obligation to disclose material facts:

– Entry into insurance contracts requires the insured to disclose all facts that are material to the insurer’s decision to accept the risk. This is now regulated by ss 21, 22 of the Insurance Contracts Act 1984 (Cth).

• If a statement is only partially true or a distortion of the truth, the failure to disclose the whole truth will be a misrepresentation.


– e,g, a statement from a vendor that property was ‘fully leased’ was held to be a misrepresentation in circumstances where several tenants had given notice, even if strictly true: Dimmock v Hallett (1866) LR 2 Ch App 21

• If a statement is true at the time, but becomes false due to a change in circumstances, the maker of the statement has to disclose the changed circumstances because the time at which the representation is to be evaluated is when the representee enters into the contract: Brownline v Campbell [1880] 5 App Cas 925

Vitiating FactorsMisrepresentation - inducement

• A representation must have been intended to induce and in fact induced entry into the contract.

• Whether a person has been induced is a question of fact.

• The representation must be shown to have reached and misled the mind of the person taking the decision to contract.

• The representation needs to be an operative, but not necessarily the sole inducement to enter into the contract.


Redgrave v Hurd (1881) 20 Ch D 1 (R&G(C) [14.5C])

• Redgrave, a solicitor, placed an ad for a partner ‘who would not object to purchase the advertiser’s suburban residence, suitable for a family, value £1,600. Redgrave told Hurd that the practice was making £300 – 400 per annum over the previous 3 years. When Hurd asked for accounts, they showed that it was making £200. Redgrave said that the rest of the income arose from other business that had not been included in the summary, and he gave Hurd some other books and diaries. Hurd perused these but did not look at them closely.

• After he paid a deposit and moved in, Hurd realised that the practice was worthless and that the other business didn’t bring in much money at all. He gave up possession and refused to complete.

• At trial it was held that there was a fraudulent misrepresentation, but that Hurd had not relied upon it because he had been careless in giving up his opportunity to check the books properly.


Redgrave v Hurd (1881) 20 Ch D 1 (R&G(C) [14.5C])

On appeal:

• What if the promisee fails to take up a reasonable opportunity to verify the accuracy of the representation? Does he still rely upon the representation?

• Here, Yes!

• It isn’t an answer to say that he had the means to find out that the representation was false and didn’t avail himself of them.

• There will be a misrepresentation unless it can be shown by evidence that the representee had knowledge of facts contrary to the representation, or that he clearly did not rely upon it.

• Could have discovered the truth vs did discover the truth:

– Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] EWCA Civ 386, [40].

Vitiating FactorsMisrepresentation - materiality

Nicholas v Thompson [1924] VLR 554 (R&G(C) [14.6C])

• Nicholas agreed to buy Thompson’s interest in an investment scheme involving film development process. Thompson told Nicholas that he had been offered a large amount of money for the investment, but that he had turned it down.

• After the contract was executed Nicholas found out that this statement was false and sued.

• Did the statement involve a material fact so that it was capable of inducing entry into the contract?


Nicholas v Thompson [1924] VLR 554 (R&G(C) [14.6C])

• Materiality may go to evidence of whether statement was made for purpose of inducing entry in the contract and whether it did in fact induce entry into the contract, but it is not a separate element (in cases of fraudulent misrepresentation).

• Here it was material, because it operated on the mind of the representee.


• There is some authority that materiality may be an element in the case of innocent misrepresentation: *Macquarie Generation v Peabody Resources Ltd [2000] NSWSCA 361, [70]. Although this has been described as ‘slender.’ (See (R&G [14.53]))

• In any event, it is relevant to the concept of inducement, because unless the representation is about a material fact, it nay be difficult to prove as a matter of fact that it induced the representee to enter into the contract.

Vitiating FactorsMistake

– Mistake can mean a number of things in contract, but specifically, there are certain circumstances as to a fundamental matter, that may constitute and ‘operative mistake’ such as to render the contract void or avoidable.

– Only small portion of mistakes will be operative and have an effect in contract law.

Vitiating Factors• Common Mistake

– If the parties have reached agreement but have made the same mistake as to a fundamental fact, they have made a common mistake.

• e,g, two parties contract in relation to goods that were destroyed before the contract was entered into.

• Mutual mistake

– If parties are at cross-purposes in that they are mistaken as to a fundamental part of the contract. That is, if the parties are both mistaken, but their mistakes may differ. Therefore consensus ad idem is only apparent, because they parties mean different things.

• i.e. offer and acceptance are for different things - Parties contract for a horse called ‘Pharlap’, but there are two such horses and the parties mean different ones.

Vitiating Factors• Unilateral mistake

– One party is mistaken and the other party is aware of the mistake and in some way responsible for it. It must be fundamental.

• Non est factum

– Party signs a document that is substantially different to what she thinks it is.

Vitiating Factors

• For mistake to affect the validity of a contract it must be an operative mistake.

Effect:

• Common law

– At common law, prior to fusion, mistake was a very narrow doctrine and the effect of mistake was to make the contract void ab initio (never existed). But in Australia cases where a contract was held to be void on the basis of common or mutual mistake are rare. (There is also an argument that rescission was allowed at common law in some circumstances).

Vitiating Factors

• For mistake to affect the validity of a contract it must be an operative mistake.

Effect:

• Equity

– In equity, if not void:

• There may be a right of rescission (the contract may be voidable).

• Specific performance may be refused

• rectification is also possible if the mistake relates to the recording of the terms of the contract.

Vitiating FactorsCommon Mistake

• If the parties have reached an agreement (offer, acceptance e.t.c.) but the parties have made the same mistake as to the same fundamental fact, there may be a common mistake.

• There can be a common mistake as to:

– Absence of the subject matter of the contract. In essence this is a total failure of consideration.

– Quality or nature of the subject matter of the agreement.


• Is contract void because of a common mistake of the parties?

• If the parties have reached agreement but have made the same mistake as to a fundamental fact, they have made a common mistake. The validity of the contract depends upon the type of mistake made.

• If the subject matter of the contract has been destroyed (prior to agreement), the contract will be void ab initio. (If the subject matter is destroyed after entry into the agreement, that may be frustration – which we deal with later):

– See Sale of Goods Act 1923 (NSW), s 11.

– See *Couturier v Hastie (1856) 5 HLC 673.

• But if the subject matter of the contract never existedM.


McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (R&G(C) [16.2C])

• After WWII. Disposals Commission invited tender: ‘for the purchase of an oil tanker lying on Jourmaund Reef’ in which there was supposedly oil. McRae successfully bid on the tender and entered into an agreement to buy the tanker for £285. McRae then went to considerable expense to locate the tanker, but it was not found at that location. McRae sued for misrepresentation and breach of contract. Commission argued that there was a common mistake.

Held

• Whether a contract is void for common mistake is primarily a question of construction of the contract to ascertain whether the contract was subject to an ‘implied condition precedent that the goods were in existence.’



• Here there was no such implication (as ascertained from the contract and the surrounding circumstances) and therefore no common mistake.

• The Commission made an assumption about existence of the tanker, but McRae did not make such an assumption, but relied on Commission’s statement. Knew nothing except what they were told.

‘The parties did not proceed on a common assumption as to the existence of the tanker, so as to justify that the correctness of the assumption was intended to be a condition precedent to the creation of the contractual obligations.’



• McRae simply relied upon the assurance that there was a tanker, which the Commission made.

• Conduct of the Commission was such that it was implied that it had promised that

the tanker existed. Any mistake was induced by the servants of the Commission, who recklessly asserted that the tanker was there.



• This is a matter of construction of the agreement.

• It would be different if subject matter of contract has been destroyed at time of contract and neither party knows – then void ab initio.

• In coming to this decision the Court appeared to argue that *Couturier v Hastie (1856) 5 HLC 673 was a case of failed consideration and the issue of whether the contract was void or not, did not arise in that case.

• See also: Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 ALL ER 902.


*Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 ALL ER 902.

• AJB purchased four machines from Bennett and then leased them back from him. Credit du Nord guaranteed Bennett’s obligation to pay rent.

• In reality there were no machines and Bennett had been fraudulent.

• AJB claimed the benefit of the guarantee. Credit du Nord argued that there was a common mistake as to the existence of the machines.


*Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 ALL ER 902.

• The Court held that:

– There was an implied condition precedent in the contract that the machines existed

– The agreement was void for common mistake as the subject matter of the contract was fundamentally different from that which the parties believe is the case.

• Carter argues that the first two grounds are wrong and the mistake argument is surprising, because the court did not consider the underlying lease to be void for mistake. He argues that the principal in McCrae should be applied here instead.


• McRae appears to complicate this issue in relation to the sale of goods.

• But there is also difficulty in contracts for the sale of land:

– In *Svanosio v McNamara (1956) 96 CLR 186 the Court held that although there was a ‘common mistake’ that the hotel was wholly located on the block of land purchased, the fact that it wasn’t did not make the contract void.

• What about the common mistake about the value or quality of the subject matter (rather than its existence)?....


Bell v Lever Brothers [1932] AC 161 (R&G(C) [16.3C])

• Bell and Snelling were appointed to senior position in Niger Co (a subsidiary of Lever). The employment contract contained a term that they would not make secret profits from their position.

• They were made redundant and negotiated compensation payouts. They entered into an agreement to resign for the payout.

• Later Lever found out that they had engaged in anti-competitive arrangements with a competitor during their employment. They made secret profits. If Lever had known about this before negotiating the payout, it could have dismissed them. Lever sued for the return of the severance payout.



• Was there a common mistake as to the terms of the agreement – it was argued that both parties believed that the only way to get Bell and Snelling to leave early was to pay out their contract (and this was wrong because of their misconduct)

• Was there a unilateral mistake in their failure to disclose their conduct when negotiating the payouts?



• There was no mistake as to the existence or nature of the employment agreements, which formed the basis of the payouts

• Ignorance of facts which affected the quality of the subject matter of the agreement do not justify rescission of the agreement.

• There is no duty to disclose past breaches of duty under service contracts, meaning that innocent concealment did not amount to unilateral mistake.

• In agreeing the termination payout, the parties each got what they bargained for.



• Where parties are commonly mistaken regarding legal rights (such as the vendor’s right to title), the contract is unenforceable, but not void.

• Where parties are commonly mistaken regarding a quality of the thing, mistake will not affect assent unless:

– It is a mistake of both parties; and

– Is about a quality without which, essentially makes the thing different from that which it was believed to be.


*Associated Japanese Bank (International) Ltd v Credit du Nord [1988] 3 ALL ER 902

• Said Bell was describing the position at common law. But that equity could step in, and a contract affected by mistake (at least as to subject matter) in equity was not void, but can be set aside on terms.

• Carter suggests that in Australia, the approach in McCrae should be followed.


Great Peace Shipping Ltd v Tsavirilis Salvage (International) Ltd [2003] QB 679

• Distinguished Solle v Butcher and said that for common mistake to make a contract avoidable at common law:

– Common assumption as to a state of affairs

– No warranty by either party that the state of affairs exists

– Non-existence of the state of affairs is not party’s fault.

– warranty by either party that the state of affairs exists

– Non-existence of the state of affairs must render performance impossible.

– The state of affairs may be the existence of the consideration to be provided, or circumstances that must exist if performance is to be possible.


Great Peace Shipping Ltd v Tsavirilis Salvage (International) Ltd [2003] QB 679

• So now, in UK, if a contract is not void at common law for common mistake, equity will not provide rescission on the basis that it is voidable in equity.

• But what about Australia?

• The authorities are mixed as to whether to follow Solle v Butcher or Great Peace Shipping Ltd


Rough principles – but cases differ

• Common mistake as existence of goods:

– Destruction of subject matter (pre–contract): usually void.

– Non-existence of subject matter: depends upon construction (McRae; Associated Japanese Bank (International) Ltd v Credit du Nord SA)

• Is there an ‘implied condition precedent that the goods were in existence’ or a common assumption as to the existence of the goods

• Common mistake as to land: common mistake may not make agreement void: *Svanosio v McNamara

• Common mistake about the value or quality of the subject matter: void at common law or voidable in equity: Bell v Lever Brothers [1932] AC 161


Rough principles – but cases differ

• Common mistake about the value or quality of the subject matter:

– void at common law or voidable in equity: Solle v Butcher [1949] 2 ALLER 1107.

– Not void unless: It is a mistake of both parties; and is about a quality without which, essentially makes the thing different from that which it was believed to be. at common law or voidable in equity: Bell v Lever Brothers [1932] AC 161.

– Can be avoided at common law in certain circumstances (but equity will not expand them): Great Peace Shipping Ltd v Tsavirilis Salvage (International) Ltd [2003] QB 679

Vitiating FactorsMutual Mistake

• A mutual mistake arises where parties are at cross-purposes with each other, in the sense that they are mistaken as to a fundamental part of the contract. In such cases there is no consensus ad idem.

• If one or other of the meanings of the contract can be objectively ascribed to the parties, then it will be enforced. If the test for reasonableness cannot be satisfied, then there is no contract.

• This is closely associated with the concept of a lack of contract for failure of contractual intention.

Vitiating FactorsMutual Mistake

*Raffles v Wichelhaus (1864) 159 ER 375

• Vendor thought that goods were being shipped on the Peerlessleaving Bombay in December. Buyer thought that the goods were being shipped on another ship called the Peerless, leaving Bombay in October. The goods went on the December ship, but the buyer refused to payM

• The Court held that there was no consensus ad idem and no contract.

• But did not explicitly refer to ‘mutual mistake’

Vitiating FactorsUnilateral Mistake as to terms of a contract

• A unilateral mistake arises where only one party is mistaken and the other party is aware of, and to some extent responsible for the mistake.

• The mistake must be fundamental or material.

• In some circumstances it will be voidable and in others it will be void.


Taylor v Johnson (1983) 151 CLR 422 (R&G(C) [16.7C])

• Johnson granted Taylor and option to purchase two adjoining lots of land for $15,000. Taylor exercised the option and entered into the agreement. Later Johnson refused to complete, arguing that she mistakenly believed that the purchase price was $15,000 per acre.

• Had a unilateral mistake been established?


Taylor v Johnson (1983) 151 CLR 422 (R&G(C) [16.7C])

• Unilateral mistake as to the effect of a fundamental term can make the contract voidable if the other party is aware that the first party is under a serious misapprehension and deliberately sets out to ensure that the first party does not become aware of his mistake.

• Here Johnson was mistaken as to a fundamental term (price) and the Taylors deliberately set out to ensure that she did not become aware of the mistake.

– He said that he did not have a copy of the option to show her.

– Avoided discussing the price after he enquiry.

• Voidable in equity, but not void at common law.

Vitiating FactorsUnilateral Mistake as to identity of party

• Cundy v Lindsay (1878) 3 App Cas 459

• Blenkarn, a rogue, wrote to Lindsay, the plaintiff, offering to purchase goods. The rogue signed the letter in such a way as to represent himself as Blenkiron & Co, a respectable company.

• The plaintiff supplied the goods to the rogue, the invoice being made out to Blenkiron & Co. The rogue disposed of the goods to Cundy, the defendant, who was ignorant of the fraud. The plaintiff sued the defendant for conversion of the goods. The action therefore was between two innocent parties.



• Was there was a contract between the plaintiff and the rogue? If yes, then property in the goods validly passed to the defendant, in spite of the fraud on grounds of which the contract may be later impeached.

• The evidence clearly demonstrated that the plaintiffs believed themselves to be dealing with, not the rogue Blenkarn, but the reputable firm, Blenkiron & Co. They never intended a contract with Blenkarn, "of him they knew nothing", and hence, there was no contract. "[T]here was no consensus of mind which could lead to any agreement or any contract whatever."

• Property remained with the plaintiff.



• Therefore, if a party is mistaken as to the identity of the other party and has been led into this mistake by the other party, the agreement will be void.

• If a party is mistaken as to the identity of the party and can show that the identity of the other party was a material factor in entering in to the contract, it will be void.


Lewis v Averay [1972] 1 QB 198

• The plaintiff advertised a car for £450. He sold it to a rogueimpersonating Richard Greene (famous actor).

• He was convinced because the rogue had a studio pass with his pictureand the name on it. The rogue gave him a cheque. The rogue sold thecar to the defendant [Averay] and disappeared.

• The cheque was dishonoured (as it had been stolen).

• The plaintiff alleged that since there was a mistake as to identity, thecontract between him and the rogue never existed. Thus, the title neverpassed, and the car still belongs to him. He sought damages from thedefendant who had the car.


Lewis v Averay [1972] 1 QB 198

Lord Denning:

"When two parties have come to a contract - or rather what appears, on the face of it, to be a contract - the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is a nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it.“

• So, in this case, the contract was voidable, but then a third-party became involved and thus there is a bar to rescission.

• How is this different to Cundy


Lewis v Avery [1972] 1 QB 198

Lord Denning:

• The difference with face to face mistakes is that even if you're wrong to the actual identity, you are still contracting with this person standing in front of you, so you can't say you were contracting with someone else and therefore there was no consensus.

"When a dealing is had between a seller like Mr. Lewis and a person who is actually there present before him, then the presumption in law is that there is a contract, even though there is a fraudulent impersonation by the buyer representing himself as a different man than he is. There is a contract and with the very person there, who is present in person, liable no doubt to be avoided for fraud, but still a good contract under which title can pass unless and until it is avoided."

Vitiating FactorsNon est factum

• If a party, without carelessness, signs a document that is substantially different to what she believes it to be, can claim non est factum (it is not my deed). If successful, this renders the agreement void ab initio.

• Originally used as a plea in defence against enforcement of a contract and gained popularity when many were illiterate and had contracts explained to them. Now less common.

• You must show that the mistake relates to the fundamental nature of the document, not merely to its contents. This principle is in effect an exception to the signature rule.

• In assessing non est factum, the Court is balancing competing policy considerations – the importance of protecting the signature rule vs injustice of holding someone to a contract if they did not have a consenting mind.


• Traditionally the elements were:

– The person pleading non est factum must belong to a class of persons, who through no fault of their own, are unable to have any understanding of the purpose of the particular document because of blindness, illiteracy or some other disability. The disability must be one requiring the reliance on others for advice as to what they are signing.

– The signatory must have made a fundamental mistake as to the nature of the contents of the document being signed, including its practical effects.

– The document must have been radically different from one intended to be signed.

• *Saunders v Anglia Building Society [1971] AC 1004, 1016.

• *Petelin v Cullen (1975) 132 CLR 355


• Also:

– If the rights of innocent third parties are involved – the signer should not have been careless.

• *Saunders v Anglia Building Society [1971] AC 1004, 1016.

• Non est factum is difficult to claim as it does not allow for negligence on the part of the signatory.

– i.e. failure to read a contract before signing it, or carelessness, will not allow for non est factum.

• Furthermore, the Court has noted that there is a heavy onus that must be discharged to establish this defence as it as an "exceptional defence."


Ford v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658

• The son of Mr Ford had arranged a loan from a bank to arrange for the purchase of a cleaning business, by using his father's residential property as security. The business was in the father’s name but for the benefit of the son. When the son defaulted, the bank sought to enforce its rights under the loan and mortgage agreements.

• Mr Ford suffered from a "significant congenital intellectual impairment" and was illiterate (though capable of signing his name). Therefore he and had no understanding of the particulars of the agreement or consequences of non-payment, the judge at appeal found that he had been the pawn of his son throughout, and "his mind was a mere channel through which the will of his son operated.“


Ford v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658

• It was argued that his only defence was a lack of legal capacity.

• But the court rejected this and held that non est factum applied, and therefore contract was void for non est factum.

Vitiating FactorsDuress

• Text: Radan & Gooley, Chapter 17

• Universe Tankships Inc of Monrovia v International Transport Workers


• Barton v Armstrong [1976] AC 104 (R&G(C) [17.3C])

• Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 (R&G(C) [17.4C])

• North Ocean Shipping Co v Hyundai [1979] QB 705 (R&G(C) [17.5C])

• Illegitimate pressure or threats to force another party to enter into the agreement.

• 3 types:

– Duress of the person

– Duress of goods

– Economic duress.


• Duress and undue influence (next week) are distinct forms of pressure that cause someone to enter into an agreement.

– Duress signifies obtaining consent by an illegitimate threat.

– Undue influence signifies an influence which may fall short of that compulsion and may not be illegitimate, but is still considered undue.

• Generally, where there has been duress, the contract is voidablerather than void.


• Legitimacy of the pressure can be looked at from two aspects:

– The nature of the pressure.

– The nature of the demand that the pressure is applied to support

• The threat of unlawful action will generally be regarded as illegitimate.

• But just because the threat is lawful does not necessarily make the pressure legitimate (there is some debate about this).


• The majority joint judgment of the High Court in *Thorne v Kennedy [2017] HCA 49 at [26], held that:

– ‘[t]he vitiating factor of duress focuses upon the effect of a particular type of pressure on the person seeking to set aside the transaction’.

• They also said:

‘[Duress] does not require that the person's will be overborne. Nor does it require that the pressure be such as to deprive the person of any free agency or ability to decide. The person subjected to duress is usually able to assess alternatives and to make a choice. The person submits to the demand knowing ‘only too well’ what he or she is doing.’


Universe Tankships Inc of Monrovia v International Transport Workers


• ITWF placed a black ban on a ship because it did not have a certificate that the ship owners had met the union’s wages and conditions standards for the crew. This stranded the ship and potentially would inflict heavy losses on owner.

• Owner agreed to pay $80,000 in back pay for crew plus $6,480 for the union welfare fund. The owner agreed. After the payments were made the ban was lifted. The owner tried to recover these amounts, but abandoned the larger one (because this claim was protected by industrial relations legislation). The owners pressed for the smaller amount on the basis of duress.

• Successful at first instance




• 2 elements:

– Pressure amounting to compulsion of the will the victim –practical effect of the pressure is that there is absence of choice.

– Illegitimacy of the pressure – lawfulness

• Contract is voidable and can be rescinded

• Here the majority held that union black ban was illegitimate. Therefore economic duress was established.




• Legitimacy of the pressure involves looking at two aspects:

– The nature of the pressure.

– The nature of the demand that the pressure is applied to support.

• The first factor may be decisive, but if not, you look at the second.

Vitiating FactorsDuress of the person

Barton v Armstrong [1976] AC 104 (R&G(C) [17.3C])

• Death threats made to a party. Barton signed an agreement after having received death threats against him and his family as well as other provocations. Armstrong argued that he signed because he thought that the deal was favourable.

• If threats contributed to decision to enter into the agreement, then duress will be established (even if he may have done so anyway).

• Doesn’t have to be the only reason. Defendant had to prove that the threats did not contribute to the decision at all.

• Must be a threat of physical harm.

• Agreement voidable.

Vitiating FactorsDuress - Economic

Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 (R&G(C) [17.4C

• Hillbrinks sold property and money was paid to Westpac, partly to pay down a mortgage and partly to be passed on to Hillbrinks to purchase another property.

• The bank held all of the money in order to force the Hillbrinks to enter mortgages to secure debts of a related company. As they needed the money to complete the purchase, he signed the contract. They claimed that they signed under duress.


Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 (R&G(C) [17.4C])

• Overwhelming pressure will not constitute economic duress unless it is unlawful or unconscionable.

• Here pressure was unlawful because Westpac was not entitled to the money. The test is to ask whether any applied pressure induced the victim to enter into the contract and then to ask whether that pressure went beyond what the law is prepared to countenance as legitimate.

• It will be illegitimate if it consists of unlawful threats or unconscionable conduct. But the categories are not closed.

• Prima facie duress, but the Court held that Crescendo did not execute the mortgage as a result of the threat, because it was done before the pressure was applied, therefore lost.


North Ocean Shipping Co v Hyundai [1979] QB 705 (R&G(C) [17.5C])

• Hyundai agreed to build a tanker for a price in instalments. After a devaluation of the USD, Hyundai asked for more money to complete, and threatened that it would not complete if the payment wasn’t made.

• North Ocean initially said no, but eventually referred the matter to arbitration to avoid delay.

• Hyundai refused arbitration and gave a final chance to agree the increase or it would terminate. North Ocean agreed because it had already signed shipping contracts that required the tanker, but it ‘reserved its rights’. Nine months after delivery it tried to claim back the increase.


North Ocean Shipping Co v Hyundai [1979] QB 705 (R&G(C) [17.5C])

• The threat to break a contract can be duress.

• Even if consideration is paid for a contract under threat of breaking a previous contract, this can be economic duress, as there was no legal basis to do so (the contract did not allow this).

• The new contract is voidable and the excess monies can be recovered.

• However, here, after the duress stopped, NOC Co did not take steps to avoid the contract for nine months and was therefore held to have affirmed the new agreement. It could no longer recover.

• Reserving its rights not good enough.


*ANZ v Karam (2005) 64 NSWLR 149

• In this case a family-owned business had borrowed money from the ANZ Bank. The bank obtained security over the assets of the company and the personal assets of the directors. The directors had been initially unaware that they were personally liable for the company's debts until they had requested further financial accommodation.

• Unknown to the directors, the bank had doubts about the enforceability of the original securities and had made the provision of further loans dependent on the directors executing additional documents acknowledging that they were personally liable for the company's debts. In addition, the directors, at the request of the bank, sold various properties to reduce the company's indebtedness.



• The directors sought relief in relation to the securities on the basis that they were:

– unjust under the Contracts Review Act 1980 (NSW); and

– unconscionable under the general law and should be varied or set aside; and

– and they also sought:

• damages against the bank in negligence;

• damages under s 82 of the Trade Practices Act 1974 (Cth); and

• an order for equitable compensation.

• At first instance, Santow J held that the transactions should be set aside on a number of grounds including unconscionability and economic duress.



• However, on appeal the Court of Appeal overturned that decision.

• The Court of Appeal formed the view that the Bank’s conduct did not amount to the Amadio type of conduct (unconscionable conduct - see Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 – next week) as the family members did not suffer from a ‘special disability’ or ‘special disadvantage’.

• The family members were in as good a position as the bank to form their own views about the financial position of the company and they couldn’t rely on the parlous financial state of the business as itself forming part of the illegitimate pressure.



• The Court of Appeal was also unable to say that there was economic duress. The directors understood the nature and effect of the action they were taking and there could be no question of their will being overborne by the bank. Their actions were driven by the need to obtain additional funds to keep the company going. The bank, for its part, wanted further security as the price for providing further credit to a company already in financial difficulty.

• The Court of appeal held that vagueness in the terms ‘economic duress’ can be avoided by treating the concept of “duress” as limited to threatened or actual unlawful conduct. The threat or conduct need not be directed to the person or property of the victim, but can be to the legitimate commercial and financial interests of the party.



• The Court of Appeal appears to be limiting duress to “threatened or unlawful conduct” [66]. Thus, a threat to the legitimate commercial and financial interests of a party would be sufficient to trigger an action in duress because it would amount to “unlawful” conduct.

• If the threat was not “unlawful”, then the weaker party may still be able to argue that it is unconscionable at common law or be caught under the unconscionability provisions in the Trade Practices Act, but it would not be duress.


*Thorne v Kennedy [2017] HCA 49

• However, in the recent decision of Thorne v Kennedy [2017] HCA 49 at [71]-[72], Nettle J suggested that ANZ v Karam was wrong, when he said:

[T]here appears to be much to be said for the view that, rather than persist with a blanket restriction of illegitimate pressure to pressure exerted by unlawful means, it would better accord with equitable principle, and better align with English and American authority, if the test of illegitimate pressure were whether the pressure goes beyond what is reasonably necessary for the protection of legitimate interests. M Karam's rejection of illegitimate pressure by lawful means was largely based on a view that the concept is too uncertain to be acceptable. Yet it is by no means immediately obvious why it should be considered any more uncertain than the equitable conceptions of unconscionable conduct and undue influence to which Karam held it should be consigned.


*Thorne v Kennedy [2017] HCA 49

• However, because this issue was not relevant to the decision of the court in this case, this was obiter dicta and his Honour conceded that ‘there would need to be detailed argument and deep consideration of the ramifications of departing from Karam before this Court would contemplate that course’.

• So where does that leave duress occasioned by illegitimate pressure by lawful means?

Vitiating FactorsProblem

In February, Samson agrees to make crucial deliveries of Tara's specialty candles for the pre-Christmas trade for £1,000. Samson fails to make a number of deliveries and explains that this is because he had a small heart attack (from which he has recovered but must take it easier) and because petrol prices had increased by 300% because of international events. He tells Tara that unless she agrees to increase the price to £3,000 and reduce the number of deliveries by 40%, the deliveries would not be made. He adds: 'What we agreed just can't be done. I'll go bust or keel over and that's no use to you.' Tara reluctantly agrees as she feels she has no choice at this stage. Samson makes the deliveries. Advise Tara.

Next weekM..

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Lecture 8

Vitiating Circumstances

• (d) Undue Influence

– Radan & Gooley, Chapter 18

– Johnson v Buttress (1936) 56 CLR 113

– *Yerkey v Jones (1939) 63 CLR 649

– Garcia v National Australian Bank Ltd (1998) 194 CLR 395

• (e) Unconscionable conduct


– Commercial Bank of Australia v Amadio (1983) 151 CLR 447

– *Kakavas v Crown Melbourne Limited [2013] HCA 25

– *Louth v Diprose (1992) 175 CLR 621

• (f) Rescission


– Alati v Kruger (1955) 94 CLR 21690

Lecture 8

Vitiating Circumstances

– (1) Affirmation

• *Coastal Estates v Melevende [1965] VR 433

– (2) Restitutio impossible

• *Vadasz v Pioneer Concrete (1995) 130 ALR 570 or (1995) 184 CLR 102

– (3) Third parties

• *Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525

– (4) Lapse of time

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Lecture 8

• (g) Statutory Unconscionability

– Radan & Gooley, Chapter 19 (paras 19.59-19.94)

(1) Application of the Australian Consumer Law

– Part XI (particularly s 131) and Sch 2 of the Competition and Consumer Act 2010 (Cth).

(2) Unconscionable conduct

– Part 2-2 of the ACL: s 20 (general), s 21 (supplies to consumers) and s 22 (supplies to or acquisitions from certain businesses). ss 232 (injunction), 236 (damages), 237, 238 and 243 (orders to compensate for loss or to prevent or reduce loss).

– *Pritchard v Racecage Pty Ltd & Ors (1997) ATPR 41-5

– ACCC v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153

(3) Application of the Australian Securities and Investments Commission Act 2001

– (Cth) ss 12BA, 12BAB, 12BD, 12CA, 12CB, 12CC

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Lecture 8

• (h) Contracts Review Act 1980 (NSW)


– *Baltic Shipping Company v Dillon [1991] 22 NSWLR 1 *Ford v Perpetual Trustees Victoria Limited (2009) 257 ALR 658

• (i) Misleading or Deceptive Conduct


– Competition and Consumer Act 2010 (C’th), Schedule 2 (referred to as Australian Consumer Law) ss 2, 4, 18, 232, 236, 237, 238, 243. (*see also Australian Securities and Investments Commission Act 2001 (Cth) s 12DA)

– Henjo Investments v Collins Marrickville (1988) 79 ALR 83

– Taco Co of Australia v Taco Bell Pty Ltd (1982) 42 ALR 177

* Contributory negligence and proportionate liability (Part VIA (ss 87CB-87CI) of the Competition and Consumer Act 2010 (Cth). Section 137B of the Competition and Consumer Act 2010 (Cth). Part 4 (ss 34-39) of the Civil Liability Act 2002 (NSW).

See also Perpetual Trustee Company Ltd v Milanex Pty Ltd (in liq) [2011] NSWCA 367 at [84]ff (Macfarlan JA); Henville v Walker (2001) 206 CLR 459.

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Lecture 8

• (j) Unfair Terms


– Competition and Consumer Act 2010 (C’th), Schedule 2 (referred to as Australian Consumer Law) ss 23-28, 232(3), 237, 250) (*see also Australian Securities and Investments Commission Act 2001 (Cth) ss 12BF, 12BG, 12BK)

– *Jetstar Airways Pty Ltd v Free [2008] VSC 539

– * Director-General of Fair Trading v First National Bank [2002] 1 AC 481; [2002] UKHL 52

– *Office of Fair Trading v Abbey National plc [2010] 1 All ER 667; [2009] UKSC 6

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LPAB – Summer 2016/2017 Lecture 7 2017-18/Summer... · Lecture 7 Vitiating Circumstances • (a)...

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