8

Vitiating Factors and Rescission

© Oxford University Press, 2007. All rights reserved.

Undue Influence• absence of free and deliberate judgment or will

resulting from the improper use of a position of influence or power

• undue influence is presumed where a special relationship (of mutual confidence or influence) exists, eg parent/child, solicitor/client and doctor/patient

• presumption may be rebutted in certain circumstances.

Undue Influence cont…

• no automatic presumption in fiduciary relationship (eg partners) or marital relationship (unless evidence of dominance can be shown)

• where no special relationship exists, the plaintiff must prove that the defendant exerted influence over them

• note difference between undue influence and unconscionability.

Duress

• refers to pressure or compulsion to force a person to enter into a contract against their will

• target of duress may be family members, their goods or economic interests

• duress need not be the only motivation to contract, provided it contributed to the decision to contract.

Economic Duress

• restricted to commercial activities; a form of commercial pressure forcing the consent of one party to agree to the conduct dictated by the other

• the pressure must go beyond what the law is prepared to accept as legitimate business conduct

• conduct that does not amount to duress may still be actionable as fraud or misrepresentation, undue influence or unconscionability

Mistake

• defined narrowly; no general right to be released from a contract on basis of mistake

• does not cover errors of judgment

• does not operate simply because a party later discovers facts which would have convinced them not to enter the contract had they known of them.

Mistake cont…

• underlying policy: not to undermine sanctity and reliability of contracts

• three types: unilateral, common, mutual

• recently relatively few reported cases on mistake. Parties prefer to present their case as misleading or deceptive conduct or as unconscionable conduct.

Equitable Doctrine of Unconscionable Bargains• underlying policy considerations

• Note the three elements of the Amadio doctrine: (i) special disability which substantially affects the person’s

ability to protect themselves

(ii) knowledge (actual or constructive) of special disability

(iii) unfair advantage/ unconscionable conduct by stronger party.

Equitable Doctrine of Unconscionable Bargains cont…• Note in particular:

- mere inequality of bargaining power in itself is insufficient

- carefully assess the facts of every situation

- whether weaker party had access to independent advice is important in determining whether the agreement is unconscionable.

Equitable Doctrine of Unconscionable Bargains cont…• Note the distinction between procedural and

substantive unconscionability

• Amadio essentially focuses on procedure

• Compare statutory unconscionability under s 51AB and s 51AC TPA.

Equitable Doctrine of Unconscionable Bargains cont…Special disability: developments• Louth v Diprose (1992) 175 CLR 621• Bridgewater v Leahy (1998) 194 CLR 457

Guarantees by married women:• Garcia v NAB Ltd (1998) 155 ALR 614.

Equitable Doctrine of Unconscionable Bargains cont…

Remedies:• traditional remedy: set aside or rescind the

transaction, normally in its entirety

• however note Justice Deane’s approach in Amadio towards variation of the terms of the contract in certain circumstances.

Equitable Doctrine of Unconscionable Bargains cont…

Note limits of Amadio in the commercial context:

• commercial parties not normally in a position of special disability

• economic pressure usually the real problem in a commercial context.

MisrepresentationPre-contractual negotiations

(i) mere representations (non-promissory)

(if false: misrepresentations)

(ii) terms(promissory)

(iii) collateral contract

CONTRACT

TERMS:

express/implied

conditions or warranties

Exclusion clauses

Misrepresentation cont ...

Pre-contractual statements may essentially be terms or mere representations:

• apply reasonable bystander test• note subtests.

Misrepresentation cont ...

• Note the elements of misrepresentation- narrow in scope

In particular, note what misrepresentation is NOT:• honest statements of opinion • puffs or exaggerated statements• statements of future intention• mere silence – unless statement made previously

has become untrue or there is an obligation of full disclosure during negotiations.

Misrepresentation cont…

• Note relationship between common law misrep. and misleading or deceptive conduct (s 52 TPA and state equivalents, the FTA’s)

• s 52 and state equivalents are limited to conduct ‘in trade or commerce’

• therefore old common law rules of misrep. are still necessary in cases of private sales and non-commercial transactions.

Misrepresentation cont…

Classification: depends on knowledge or state

of mind of person making the statement

• fraudulent• innocent• negligent.

Misrepresentation cont…Remedies:• very limited range of remedies

• main remedy is rescission – in fact this is the only contractual remedy available (and it may be lost – refer to bars to rescission).

Misrepresentation cont…• damages only available if misrep. is either fraudulent

or negligent (both difficult to prove). In such cases, damages available in tort (tort of deceit or negligence), not contract.

• no damages available for innocent misrep.

• compare breach of contract action – innocent party may terminate contract (for breach of condition) and, in any event, sue for damages (breach of condition or warranty).

Misrepresentation cont…

• Remedies summary:

- rescission may be available in all cases (but note the bars to rescission)

- damages only in tort for fraudulent or negligent misrep.

- damages are not available at common law for innocent misrep.

- compare position under TPA.

RescissionMeaning:• technically, refers to the restoration of the parties to

the positions they occupied before the transaction because of the presence of one of the vitiating (avoiding) factors. Compare remedies for breach of contract.

Historical development:• common law • equity more flexible• courts today apply equitable approach.

• Rescission is an equitable remedy and the right to rescind may be lost (the bars to rescission) where:

- substantial restitution impossible

- affirmation

- intervention of third party rights

- lapse of time (delay)

- executed (completed) contracts in the case of innocent misrep.

- unconscientious conduct of party seeking relief.

Rescission cont…