Defective Contracts Notes

Defective Contracts

Introduction

  • A contract is defective if an aspect of the terms and conditions falls under one of the following categories:
    • Misrepresentation
    • Mistake
    • Frustration
    • Duress or undue influence
    • Contractual Incapacity
  • Defective contracts can result in either a void or a voidable contract

Mistakes

  • Mistakes are defined as an “erroneous belief.”
  • Categories of mistakes:
    • Common Mistake: The parties make the same mistake.
    • Mutual Mistake: The parties are mistaken about the same fact but have different understandings. This is typically described as "offer and acceptance" at cross purposes.
    • Unilateral Mistake: Only one party makes a mistake.
Common Mistakes
  • Mistake to title (Res Sua): One cannot buy something he already owns.
    • Case: Cooper v Phibbs (1867)
  • Subject Matter does not exist (Res Extincta):
    • Case: Couturier v Hastie [1856] UKHL J3
      • A cargo of corn was in transit from the Mediterranean to England. The owner sold the corn to a buyer in London.
      • The cargo had already perished before the contract was made.
      • The seller tried to enforce payment, arguing the purchaser had attained title and bore the risk.
      • The court held that the contract was void because the subject matter did not exist when the contract was made.
  • Mistake as to quality: A mistake as to quality only voids a contract if it renders the subject matter essentially different from what it was believed to be.
    • Case: Bell vs Lever Bros (1932)
      • Lever Bros appointed Mr. Bell and Mr. Snelling as Chairman and Vice Chairman of a subsidiary company (Niger) for 5 years.
      • Due to poor performance, Lever Bros decided to merge Niger and make the defendants redundant.
      • Lever Bros created a contract providing substantial payments if they agreed to terminate their employment; the defendants accepted and received payments.
      • Later, it was found the defendants had committed serious breaches of duty, which would have allowed Lever Bros to end employment without notice or compensation.
      • Lever Bros sued based on mistake, arguing they thought they were legally obligated to pay compensation.
      • The House of Lords held that this was only a mistake as to quality and did not make the contract essentially different. The action failed.
Mutual Mistake
  • A mutual mistake occurs when the parties are at cross purposes.
  • The courts use an objective test to determine if the contract can be saved: would a reasonable person looking at the correspondence between the parties have understood the contract to have a single meaning?
    • If yes, the contract is valid based on that meaning.
    • If not, the contract is void for mistake.
  • Case: Raffles v Wichelhaus (1864)
    • The parties contracted for the sale of cotton to be shipped by 'The Peerless' from Bombay.
    • There were two ships named "The Peerless", one sailing in October and one in December. The defendant thought it was the October sailing, and the claimant believed it was the December sailing.
    • The court applied an objective test and determined a reasonable person could not state with certainty which sailing had been agreed. Therefore, the contract was void due to no consensus ad idem (meeting of the minds).
Unilateral Mistake
  • In unilateral mistakes, only one party is mistaken.
  • Two categories:
    • Mistakes relating to the terms of the contract.
    • Mistakes as to identity.
Mistake as to the terms of the Contract:
  • Cases:
    • Hartog v Colin & Shields (1939)
      • The defendants mistakenly offered hare skins at a price per pound instead of per piece, making the price about one-third of what it should have been.
      • The claimant accepted the offer.
      • The court held the contract void for mistake because hare skins were generally sold per piece, and the claimant must have realized the mistake given the price.
    • Smith v Hughes (1871)
      • The claimant purchased what he thought were old oats, based on a sample, but they were new oats.
      • The claimant wanted the oats for horse feed, and new oats were of no use to him.
      • The seller was aware of the claimant's mistake but said nothing.
      • The claimant sued based on mistake and misrepresentation.
      • Held: Both actions failed. Silence is not misrepresentation. The defendant did not mislead the claimant. The mistake was as to quality, not the fundamental terms.
Mistake as to identity
  • Mistakes as to identity are generally induced by fraud where one party claims to be someone they are not.
  • This can occur when parties are not physically present (inter absentes) or face to face (inter praesentes).
Inter absentes
  • When the parties are not physically present (e.g., contract via post, telephone, or internet), the courts will only find mistake if the claimant can demonstrate an identifiable person or business they intended to deal with.
  • A mistake as to their attributes will not suffice.
  • Case: Cundy v Lindsay (1878)
Inter praesentes
  • When parties contract face to face, there is a presumption that parties intend to deal with the person in front of them.
  • Cases:
    • Ingram v Little (1961)
      • Two sisters sold their car to a rogue calling himself Mr. Hutchinson.
      • They agreed on a price for cash, but when the rogue offered a check, Elsie refused.
      • The rogue provided his name and address, and Hilda verified the details, then they allowed Mr. Hutchinson to take the car.
      • The check was dishonored, and the car was sold to Mr. Little.
      • The sisters sued to recover the car.
      • Held: The contract was void for mistake. The Court held that the sisters only intended to deal with Mr. Hutchinson and would not have accepted a check from anyone else.
    • Phillips v Brooks (1919)

Non est factum

  • This means: “That is not my deed.”
  • Can be relied upon if, at the time of entering the contract, the person was:
    • Tricked
    • Disabled (physically and mentally)
    • Not Careless
Mistakes relating to signed documents - non est factum
  • If a party signs a document under complete misapprehension as to its effects, a plea of non est factum (it is not my deed) may be raised.
  • However, this is rarely successful.
  • It applies only where the document signed is fundamentally different from what was believed and only where the party was not careless in signing.
  • Case: Saunders v Anglia Building Society (Gallie v Lee) (1970)

Frustration

  • Legal termination of a contract due to unforeseen circumstances that:
    • Occur after the contract has been formed.
    • Render its performance illegal.
    • Is not due to the fault of either party.
  • Examples: Change in law or injury.
  • When a frustrating event occurs, the contract is automatically discharged, and the parties are excused from future obligations.
  • Frustration is not acceptable if the circumstance was foreseeable and is not applicable to certain contracts like insurance policies.
Examples of Frustration
  • Destruction of the subject matter
    • Taylor v Caldwell (1863)
  • Personal incapacity of a party
    • Condor v Baron Knights (1966)
  • Where the contract becomes illegal to perform
    • Fibrosa Spolka v Fairbairn (1943)
  • Where the contract cannot be performed in a specified manner
    • Nicholl and Knight v Ashton, Eldridge & Co [1901]
  • Where the contract is deprived of a commercial purpose
    • Krell v Henry [1903]
Frustration is not available when:
  • An alternative method of performance is possible
  • The contract is merely more expensive to perform
  • The event is brought about through one of the parties' conduct
  • The parties have made express provision for the consequences of the particular event which has occurred (force majeure clause)

Duress & Undue Influence

  • Duress: Forced into contract through threat of violence or economic duress, which forces the other to vary the contract based on a monetary disadvantage. Where a party enters a contract under duress, they may have the contract set aside.
  • Undue Influence: Pressure to contract, which prevents the contracting party from exercising independent judgment.
  • The Sibeon and The Sibotre [1976] 1 Lloyd's Rep 293
    • Kerr J: States that if one is compelled to sign a contract under threat, the law would likely not uphold the agreement. The question is whether the agreement was concluded voluntarily.
Duress Requirements
  • The threat must be of serious bodily harm or death.
  • The threatened harm must be greater than the harm caused by the crime.
  • The threat must be immediate and inescapable.
  • The defendant must have become involved in the situation through no fault of his or her own.
Types of Duress
  • Physical Duress: "Your money or your life."
  • Economic Duress:
    • Wrongful or improper threat: A threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith".
    • Reasonable alternative (but to accept the other party's terms): An available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met.
    • The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, background (especially their education), relationship of the parties, and the ability to receive advice.
    • The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress.
Duress Cases:
  • Barton v Armstrong [1975]
    • Former company Chairman threatened Manager with death if he didn’t buy his shares.
  • Skeate v Beale (1840)
    • Landlord threatened to sell furniture if he did not receive the rent.
Economic Duress Cases
  • The doctrine of economic duress was first canvassed by Kerr J in The Sibeon and the Sibotre.
    • Whilst the contract was not held to be voidable for duress, Kerr J did state that where there exists coercion of the will so as to vitiate consent, it should be possible to set the contract aside. However, commercial pressure was not enough.
  • Case: North Ocean Shipping v Hyundai Construction (The Atlantic Baron) [1979]

Undue Influence

  • Taking advantage of a position of power over another person.
  • Royal Bank of Scotland plc v Etridge [2001]
    • Husband convinced wife to put the house up as security for a loan to pay off business debt. Husband lied about amount needed and how badly the business was doing.
Positions of Power and Trust
  • Parent/child
  • Priest/member of parish
  • Lawyer/client
  • Doctor/patient

Contractual Incapacity

  • The inability to understand that a contract is being made and to understand its terms, due to mental or physical reasons.
  • Examples:
    • Minors
    • Insanity
    • Intoxication (rare)