defects of a contract

7/28/2019 Defects of a Contract

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Defects of a contract

Here the matters which can invalidate a contract are considered. They are namely

misrepresentation, illegality, duress and undue influence and mistake. An agreement

entered into voluntarily where there has been a meeting of minds genuine consent ,

i.e. each party has met their contractual obligations will prove to be a perfect situation.

However the courts often face a situation where the agreements are invalidated by

certain defects known as vitiating factors. The presence of a vitiating factor makes a

contract either void (there was never a contract in the first place) or makes the contract

voidable (where the innocent party can choose whether or not to render the contract

void).

Difference between terms and representations

Terms are expressly stated on the contract where as representations are merely

statements made that induce one party to enter into the contract. If the terms stated

are untrue then the situation is straight forward as the injured party would always have

a remedy for a breach of contract. However if the statements made leading up to the

formation of the contract are untrue it would be a misrepresentation since they are not

mentioned on the contract and the resulting procedure to seek for remedies is different.

In the case of differentiating terms from representations for an oral contract, the

objective test is carried out by the courts, where the court looks at whether areasonable person would have thought that the parties intend the statement to be a

term or representation.

Strong statements are likely to be terms: Schawel V Reade (the defs statementthat the horse was sound amounted to a term as it was so strong being the basis

on which the offer and acceptance was made)

The weaker the statement the more likely it is to be a representation. : Ecay V

Godfrey(the statement that the boat was sound was only a representation and

was not part of the contract as it was a guarded statement)

If one party demonstrates that the statement is considered to be vitallyimportant then the statement is likely to be a term. Bannerman V White (the

defs statement that the hops had not been treated with the sulphur was a term

because the claimant indicated that he considered the term to be vitally


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important as he otherwise stated that he would not buy the hops treated with

sulphur at any price)

A party with more knowledge about the subject matter of the contract is likely tomake terms, while the party with less knowledge is likely to make mere

representations. This was seen in the case ofOscar Chess Ltd. V Williams ( here

the statement of the customer that the car was a 1939 model was held to be a

representation as the car dealer was as well placed as the consumer to know the

true age of the car) In contrast Dick Bentley(productions) Ltd V Harold Smith

(motors) Ltd(the statement by the car dealer that the car had done only 20000

miles when in fact it had done 100000 miles was held to be a term of the

contract, as the dealer had a great knowledge of cars and thus was more likely to

know if the statement was untrue rather than the claimant)

Misrepresentation

An actionable misrepresentation is an untrue statement of fact made by one party

which induced the other party to make the contract. There are three conditions that

need to be satisfied for a statement to amount to misrepresentation.

Untrue pre contractual statement

The first condition to misrepresentation is that an untrue statement of fact must havebeen made to one party and generally silence cannot be a misrepresentation as the old

rule caveat emptor (let the buyer beware) applies as laid down in Fletcher V Krell(here

the claimants silence where the governess did not reveal being divorced did not

amount to misrepresentation)

However there are four exceptions where silence amounts to misrepresentation, if

there has been a change of circumstances, in contracts of insurance, if there is a

fiduciary relationship between parties and if silence makes another statement

misleading.


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Change in circumstances

If a person makes a statement which is true, but due to a change of circumstances the

statement becomes untrue before the contract is made, then it may be a

misrepresentation not to reveal that the circumstances have changed.

With V OFlanagan (the doctor not revealing the change in turnover from the time the

statement was made and contract formed amounted to misrepresentation)

Contracts of insurance

Contracts of insurance are considered as contracts ofuberrimae fidei(of the utmost

good faith). In such contracts, everything which could affect the price of the premium

(risk level) is a material fact. A person taking out insurance must reveal all material facts,

whether asked about the matter or not.

Lambert V Co op Insurance Society Ltd. ( the insurance co. did not need to pay on the

damages for the stolen jewellery worth 300 as the policy became null when the

insurance co. discovered that the claimant had failed to mention that her husband had

been convicted, thus here silence amounted to misrepresentation)

International Management Group UK Ltd V Simmonds (here the insurance co. Did not

have to pay the compensation and could retain the premiums as IMG breached the

requirement of utmost good faith by failing to reveal the rumours heard that the Indian

Government was unlikely to allow the Indian players to play for the Sahara cup, thus

voiding the contract)

When there is a fiduciary relationship between the parties

A fiduciary relationship is a relationship of great trust. When the parties in such a

relationship make a contract with each other, everything must be revealed. If this is not

done, the silence will amount to misrepresentation. Examples of fiduciary relationships

are the lawyer - client, doctor patient, partnerships, promoters and directors of

companies shareholders, and any relationship where it can be proved that one party

had reasonable need to trust the other.


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Silence makes a statement misleading

Even a statement which is literally true can amount to a misrepresentation if the

statement conveys a misleading impression, like for instance only the partial truth being

revealed.

Nottingham Patent Brick and Tile Co. V Butler(the solicitors statement that he was not

aware of any restrictive covenants amounted to misrepresentation as the solicitor

merely hadnt bothered to read the documents about the land, thus the claimant was

entitled to withdraw from the contract)

Dimmock V Hallett( here the seller of land said the farms on the land were let but failed

to mention that the tenants were about to leave, and this gave a distorted picture of the

true situation and amounted to misrepresentation)

The statement must be one of fact (the state of a mans mind is as much as a fact

as his digestion)

Statements of mere opinion cannot amount to misrepresentation, as shown in the case

ofBisset V Wilkinson (the defs statement that the farm could support 2000 sheep was

held to be just an opinion and could not amount to misrepresentation as the claimant

knew that the farm had never been used for sheep farming).

However some statements of opinion may imply statements of fact as the following

cases demonstrate.

Smith V Land and House Property Corporation(here the statement made that the

tenant was a desirable tenant amounted to misrepresentation and was not a mere

statement of opinion as it implied a statement of fact that the tenant paid the rent

when the claimants knew that Mr. Fleck had several months of rent in arrears)

{Bowen LJ said if the facts are not equally to known both sides then a statement of

opinion by the one who knows the facts best involves very often a statement of material

fact, for he impliedly states that he knows facts which justify his opinion}


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Edington V Fitzmaurice ( here the prospectus issued for loans was held to be a

statement of misrepresentation as was a misrepresentation of the state of mind, since

the def. Knew that he would not use the money obtained for the purposed stated)

When a party has superior knowledge which makes an opinion which the other party

relies on, then it can amount to a representation that the opinion has been made using

reasonable care and skill. For instance in Esso Petroleum Co Ltd. V Mardon the

statement made by the Esso rep. that the filling station would sell 200000 gallons of

petrol a year within three years amounted to a statement of fact as the claimant had

relied on the expertise knowledge of the rep. and the reasonable care and skill with

which the statement was delivered, made it a misrepresentation.

Misrepresentation made without wordsSpice Girls ltd. V Aprilla World Service (here

the Spice girls had signed for an advertising contract while at the time knowing that oneof the girls were going to leave the group, the courts held that the girls acting in the

filming amounted to misrepresentation as the co. representing the Spice Girls did not

know and had no grounds to believe that one of the group intended to leave. Thus the

mere action of acting without any statements being made amounted to

misrepresentation).

{Dimmock V Hallettmere sales talk does not amount to misrepresentation}

The statement must induce the other party to make the contract

A statement can only amount to misrepresentation if it was one of the reasons for

which one party made the contract.

If a person makes a contract without checking the truth of the statement then the

statement did induce the other party to make the contract, as in Redgrave V Hunt(the

claimants statement about the value of the practice was misrepresentation as the

defendant relied on the claimants words and did not check the papers to prove

otherwise)

A person who checks the truth of the statement cannot later say that the statement

induced the making of the contract as inAttwood V Small(the statement about the

mines capacity was not held to be misrepresentation as the claimant did not rely on it

proved by him appointing his own experts to check the statement)


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Remedies for misrepresentation

There are three types of actionable misrepresentation. Each type gives rise to different

remedies.

Fraudulent misrepresentation

Fraudulent misrepresentation was defined in Derry V Peekas a misrepresentation made

either, knowing that it was untrue or not believing that it was true or recklessly not

caring whether it was true or false.

Remedies:A fraudulent misrepresentation allows the injured party to rescind the

contract and sue for damages for the tort of deceit. If the contract is to be rescinded it

must be done within a reasonable period of time of the innocent party becoming aware

of the misrepresentation. Damages for the tort of deceit are greater than contract

damages as a claim can be made for all expenses and losses caused by deceit, even if

these were not reasonably foreseeable.

{Derry V Peekhere the defendants failed to obtain permission from the dept. Of Trade

to run steam powered trams, as they genuinely believed it was a mere obligation, given

the passing of the Act and therefore were not liable for fraudulent misrepresentation).

Negligent misrepresentation

Section 2(1) of the misrepresentation act 1967 defines a negligent misrepresentation as

one made honestly believing that it was true, but without reasonable grounds for such a

belief.

Remedies:A negligent misrepresentation allows the injured party to rescind the

contract and to sue for damages for the tort of deceit. If the contract is to be rescinded

for negligent misrepresentation this must be done within a reasonable time of the

misrepresentation having been made.

{Hedley Byrne V Heller and Partners the plaintiff co. Easi Power Ltd. asked an

advertising co. Hedley Byrne, to buy substantial amounts of advertising space on behalf

of them. To carry out the transaction Hedley inquired the National Provincial Bank about

the credit worthiness of Easi Power. Then National Provincial Bank contacted Hellers on

two occasions, who were Easi Powers bankers backing them financially. Heller gave

favourable references but with a disclaimer without responsibility on part of this bank,


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unfortunately Easi Power then defaulted on their payment and when the plaintiff sued

Hellers they lost as the reference was given with a disclaimer}

{Esso Petroleum Co Ltd. V Mardon}

Innocent misrepresentation

A wholly innocent misrepresentation is one made honestly believing that it was true,

with reasonable grounds for such a belief.

Remedies: the injured party here can rescind but has no right to sue for damages.

However with regard to both negligent and innocent misrep. s.2 (2) of the

misrepresentation act 1967 allows the court to award contract damages instead of

rescission where the court considers it equitable to do so. The courts rarely use this

with regard to innocent misrep. Unless rescission becomes too drastic a remedy thatthey prefer awarding contract damages.

William Sindell V Cambridgeshire CChere the courts stated that if there was

misrepresentation it was innocent and instead of rescission they would have awarded

damages to cover the small cost of removing sewage pipes.

Burden of Proof

Fraudulent misrepresentation this must be proved to be beyond reasonable doubt.

The burden of proof falls on the claimant who alleges fraudulent misrepresentation.

Negligent misrepresentation this must be proved on the basis of a balance of

probabilities. The burden of proof shifts to the other party to prove that he reasonable

grounds to believe that his statement was true. If he cannot do this then his statement

would have been negligent. This is much easier for the claimant than fraudulent and

since the remedies are the same this type of misrepresentation is more common.

Losing the right to rescind

All three types of rescission gives the injured party the right to rescind the contract.

Rescission of a contract means that the parties will be returned to the position they

were in before the formation of the contract. A party can rescind the contract by simply

letting the other party know that the contract is no longer regarded as binding.


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Rescission can also be used as a defence to a person who is sued for refusing to perform

the contract, as in Redgrave V Hunt.

{Car and Universal Finance Co Ltd. V Caldwellrescission of fraudulent misrep. where a

car was sold to a fraudulent party, the Automobile Association was contacted which

amounted to rescission and therefore the ownership of the car automatically reverted

back to the defendant)

Bars to rescission

Impossibility of restitution Where when a contract is voided the parties cannot be put

into their pre contractual position the contract can then not be voided.

{Vigers V Pike (here the mine was used up thus rescission was impossible)

Clarke V Dickson (cattle had already been slaughtered thus rescission not possible)

Erlanger V New Sombrero Phosphate Co. (here the subject matter was a mine, which

was partially used up, therefore rescission was awared along with damages to

compensate for the partial loss in value}

All or nothing - The High Court stated that a victim of misrepresentation can rescind the

whole of a contract but not part of it, if the whole contract cannot be rescinded then it

would not be rescinded at all and instead damages awarded.

Affirmation -


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Duress and undue influence

Duress

defects of a contract

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