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KAREN ABIDICONTRACT B

Remedies for Vitiating Factors

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Revision

To do, under exam conditions:

Answer last year’s Contract B exam in preparation for next week’s lecture.

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Where are we?

1. Termination of contracts2. Remedies for breach of contract3. Frustration of contracts4. Vitiating factors

• Misleading or deceptive conduct• Duress• Undue influence• Unconscionable dealing• Impropriety by third parties• Unconscionable conduct under statute• Remedies for vitiating factors under the

unwritten law: rescission• Remedies for misleading or deceptive conduct under

statute

Vitiating factors

Vitiating factors under the

unwritten law

Statutory vitiating factors

Undue influence Statutory unconscionability

Unconscionable dealing The prohibition on misleading or deceptive conduct

Duress

Vitiating factors under the unwritten law lead to eligibility for rescission

Statutory vitiating factors lead to eligibility for statutory remedies

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What is rescission?

Aims to restore the parties to their original positions – a situation referred to as “restitutio in integrum”. Sets contract aside, not only prospectively but also retrospectively (ab initio). Effectively, it is as if the contract never existed.

Rescission is the remedy (where available) for vitiating factors under the unwritten law: duress, undue influence, unconscionable dealing, and the rule in Yerkey v Jones.

Contrast rescission to termination, which operates only to discharge future rights. Termination only affects rights in futuro (into the future).

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Why rescission?

“Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, … undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience.”

Mason J, Amadio

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Voidable

An entitlement to rescission in equity means that the contract is voidable (not automatically void).

The victim has the right to elect whether to affirm or rescind the contract.

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Who rescinds?

Is rescission a self-help remedy like termination, or does it require a court order to bring it about?

This issue is somewhat controversial, with various authorities in support of each possibility.

9Precise or substantial restitution?

Common law permits rescission only where:

(1) there is duress or fraud; and

(2) precise restitutio in integrum is possible

Equity permits rescission whenever:

(3) there is a vitiating factor; and

(4) substantial restitutio in integrum can be made (eg Alati v Kruger )

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Alati v Kruger

Purchaser bought fruit business from seller for £700.

Fraudulent misrepresentation that average weekly takings were £100.

Issue: Was the purchaser’s rescission valid? Was restitutio in integrum possible?

Held: Yes – equity requires only substantial restoration of the parties to their original position – not precise restitutio in integrum.

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Alati v Kruger

“…equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitution in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo.”

12How to rescind

In general, victim must communicate intention to rescind to the other party.

But notice is not always required.

Where the other party has absconded,

victim may express intention to rescind

by overt means, eg contacting police.

13Partial rescission

Two scenarios: But for vitiating factor, would disadvantaged party:

(1) not have entered into any contract: then whole contract will be rescinded (full rescission).

(2) have entered into a limited contract: if possible, rescission only of that part of the contract that P would not have entered but for vitiating factor (partial rescission): Vadasz v Pioneer Concrete, and also Deane J in Amadio.

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Vadasz v Pioneer Concrete

Vadasz was a director and shareholder of Vadipile (a company in business as a foundation piling contractor).

Pioneer Concrete supplied concrete to Vadipile.Vadipile had received concrete on credit for over

$200,000.Vadasz signed a personal guarantee for “all moneys”

owed by Vadipile to Pioneer Concrete in return for Pioneer Concrete continuing to supply Vadipile concrete on credit. This guarantee was signed on the basis of a misrepresentation, and Vadasz had been told it was a guarantee for only future debts.

Pioneer Concrete sued Vadasz on the guarantee.Vadasz wanted to rescind the guarantee.

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Vadasz v Pioneer Concrete

Full rescission of the guarantee was not appropriate, because Vadasz would have entered into the guarantee for the future debts. Equity can grant partial rescission to ensure the observance of “good conscience” and “practical justice”. The guarantee was rescinded in relation to Vadipile’s prior debts (and enforced only re: future debts) because: “he who seeks equity must do equity” (unconscionability “works

both ways”); Vadasz would have entered into the guarantee for Vadipile’s

future indebtedness despite the misrepresentation. Vadasz benefitted from the continuing supply of concrete to

Vadipile on credit; was “practically just” for both parties.

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Bars to Rescission

#1: Affirmation

A party will be unable to rescind a contract that is voidable by reason of a vitiating factor if they have previously elected to affirm it.

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Bars to Rescission

#2: Intervening third party rights

A party will generally be unable to rescind a voidable contract if, before doing so, a third party has obtained rights in the subject matter of that contract

However, see Hartigan v International Society for Krishna Consciousness which provides that it’s sometimes possible to pursue a personal remedy against the other party even when they no longer have the property

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Pecuniary Rescission

Where third party intervention bars rescission, defendant may be ordered to pay monetary value of asset lost by plaintiff.

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Hartigan v Int. Soc. Krishna Consciousness

Mrs Hartigan gave her farm to the Hare Krishna movement.

Undue influence – presumed relationship of influence (spiritual advisor and disciple) – presumed undue influence – no independent advice.

Restitutio in integrum not possible as the property was sold to third party (before rescission).

Hare Krishnas ordered to pay to Mrs Hartigan an amount equal to the proceeds of the sale of the property.

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Where are we?

1. Termination of contracts2. Remedies for breach of contract3. Frustration of contracts4. Vitiating factors

• Misleading or deceptive conduct• Abuse of power• Remedies for vitiating factors under the

unwritten law: rescission• Remedies for misleading or

deceptive conduct under statute

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Statutory Remedies

If you find that s18 (the prohibition on misleading or deceptive conduct) or s20 (the prohibition on unconscionability within the meaning of the unwritten law) have been contravened, you need to consider the availability of statutory remedies under s236 (damages) and s237 (other orders the court might make).

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s236 ACL

(1) If:(a) a person (the claimant) suffers loss or

damage because of the conduct of another person; and

(b) the conduct contravened a provision of chapter 2 or 3 [includes sections 18 and 20];

the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.

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s237 ACL

Gives the Court the power to grant any other orders it sees fit to prevent loss or likely loss suffered as a result of a contravention of various provisions, including ss 18 and 20.

A non-exhaustive list of the orders the Court might make it set out in s 243.

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s243 ACL

Orders include: an order declaring the contract void (as of a

certain date, or always); an order varying the contract; an order refusing to enforce the contract; an order for the return of money or property; an order for the payment of money; an order to repair or provide replacement parts; an order to supply services; an order to vary, terminate or otherwise affect an

instrument for the transfer of land.

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When will statutory remedies be available?

1. Where there has been a contravention of s18 or s20; and

2. Some “loss or damage” has been (or is likely to be) suffered; and

3. There is a causal connection between the “loss or damage” and the breach.

26Ways of causing loss

Misleading or deceptive conduct may cause loss in two different ways:

(1) P relied on D’s conduct; eg P entered into transaction with D or third party

(2) Third party relied on D’s conduct and thereby caused loss to P; eg D made untrue statement about P’s products

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tort damages v contract damages

In contract law, awards of damages are calculated to put the plaintiff in the position they would have been in had the contract been properly performed.

In tort law, awards of damages are calculated to put the plaintiff in the position they would have been in had the tort not been committed.

Be aware of how this difference could result in a different quantum in any given fact scenario, depending on whether a tort or contract measure of damages was adopted.

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Calculating damages – tort v contract

Scenario 1: Furniture worth about $50 is listed on eBay with a “buy it now” price of $200. In the final seconds before the end of listing, someone clicks “buy it now” and contracts to purchase the furniture for $200. They later refuse to proceed with the contract.

Assume that this constitutes both a breach of contract and commission of the tort of deceit.

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Calculating damages – tort v contract

How much $ would be awarded under a contract law measure of damages?

Ie how much money would it take to put the plaintiff in the position they would have been in had the contract been properly performed?

How much $ would be awarded under a tort law measure of damages?

Ie how much money would it take to put the plaintiff in the position they would have been in had the tort not been committed?

HINT: to determine this, identify the position they would have been in if not for the tortious transaction...

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Calculating damages – tort v contract

Scenario 2: Furniture worth about $50 is listed on eBay as an auction listing with a start price of 99c. Bidding war between two users – the winning bid is $200, the underbid is $197.50. Several days later purchaser repudiates the transaction.

Assume that failure to complete the transaction constitutes both a breach of contract and commission of the tort of deceit.

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Calculating damages – tort v contract

How much $ would be awarded under a contract law measure of damages?

Ie how much money would it take to put the plaintiff in the position they would have been in had the contract been properly performed?

How much $ would be awarded under a tort law measure of damages?

Ie how much money would it take to put the plaintiff in the position they would have been in had the tort not been committed?

HINT: to determine this, identify the position they would have been in if not for the tortious transaction…

32Calculation of loss

• General principle: P will be put in position as if misleading conduct had not occurred (tort measure)

• Where D’s statement induced P to enter into contract, P will be put in position as if P had not entered into that contract (reliance loss)

• in general, P’s loss is not the profit that P would have made had D’s statement been true (expectation loss)

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Gates v CML

Difference between: CML’s misleading statement - disability insurance benefit

paid if Gates can’t work in his occupation as a builder. Insurance contract - disability insurance benefit paid out if

can’t work in any occupation.

Measure of damages: Remedy sought not granted (contract measure) – the

benefit of an insurance policy as represented. Remedy assessed (tort measure) – no damages, because

no loss suffered – no evidence that would have entered into a contract with another insurer that gave benefit if he couldn’t work as a builder (no evidence that such a policy even existed).

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Gates v CML

“In contract, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed - he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss) In tort, on the other hand, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).” Mason, Wilson and Dawson JJ

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Gates v CML

“The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other. However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, [relevant ACL] cases, especially those involving misleading or deceptive conduct …”

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Gates v CML

Question to be asked in cases involving misleading conduct is:

“how much worse off the plaintiff is as a result of entering into the transaction which the representation induced him to enter than he would have been if the transaction had not taken place”.

Mason, Wilson and Dawson JJ

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Gates v CML

“The disappointed expectations of a person induced by a misrepresentation to believe erroneously that his insurance policy entitles him to the payment of benefits on maturity or on the happening of a certain event are sometimes so great as to encourage the thought that compensation on the basis of lost expectations would be appropriate. However, neither authority nor principle offer support for adopting this approach …This conclusion involves no element of injustice to a plaintiff who is entitled to damages reflecting the loss of benefits he would have obtained under a contract which he could and would have entered into but for his reliance on the contravening conduct of the defendant. Of course he must prove such loss but there is nothing unfair in requiring him to do so.”

38Expectation loss

• Compensation of expectation loss normally requires that D promised to fulfill expectation

• Exception was made in Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388

• Expectation loss has been compensated in some subsequent cases.

• However, in most subsequent cases, only reliance loss has been compensated.

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Murphy v Overton

Difference between: misleading statement - retirement village unit’s outgoings

estimated to be $55.71 per week. lease contract - entitled to charge outgoings of much more

than stated.

Measure of damages contract (expectation) measure granted - damages to

compensate for loss in undertaking a more onerous contractual obligation than represented to them.

not tort (reliance) measure - no damages, because no loss - no difference between the value of the unit and the price paid - no evidence that would have entered into a less onerous contract with another retirement village.

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Murphy v Overton

“When the respondent started to charge all the outgoings it was entitled to charge, the appellants suffered a loss. The amount of that loss was not to be determined … only by comparing the financial position of the appellants according to whether they entered this lease or took some other occupation… The appellants suffered loss because the continuing financial obligations they undertook when they took the lease proved to be larger than they had been led to believe”.

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Section 237 of the ACL

(1) A court may:(a) on application of a person … who has suffered, or is likely to suffer, loss or damage, because of the conduct of another

person that:(i) was engaged in a contravention of a provision of Chapter 2, 3 or 4; …

make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a

person involved in that conduct.(2) The order must be an order that the court considers will:

(a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons.

42Section 237 of the ACL

• gives the court discretion to make any order that it thinks fit to compensate loss suffered or prevent P from suffering loss.

• it is not required that P has suffered loss; it is sufficient that P is likely to suffer loss.

• orders under s 237 are in court’s discretion; P has no entitlement to any order.

43Orders listed in s 243

(a) Declaring a contract wholly or partially void

(b) Varying a contract(c) Refusal to enforce a provision of a

contract(d) Order to refund money or return

property(e) Order to compensate loss(f) Order to repair, or provide parts for,

goods(g) Order to provide specified services(h) Order to vary an instrument relating to

land

44Exercise of discretion

• exercise of discretion under s 237 is not limited by analogy to common law or equity.

• contract can be rescinded under s 237 even if rescission under the unwritten law is barred.

• but principles of the unwritten law may be a guide: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd

• for compensation of loss, see Marks v GIO Australia Holdings Ltd.

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Henjo Investments v Collins

Difference between: Misleading representation that restaurant sold

licensed to seat 128; It was only licensed to seat 84.

Was rescission or damages the appropriate relief? Rescission not appropriate – due to delay in bringing

the action, and changes in the operation of the business;

Damages awarded.

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Marks v GIO

Difference between promotional statement and contract: Misleading statement by GIO - interest would be fixed. Loan contract - interest variable

Measure of damages under ACL: Remedy sought: s236 damages compensating for

increased interest (or s 237 order varying the contract so interest fixed as represented).

Remedy granted: no damages or contract variation - no loss suffered (the GIO loan, even with the interest increased, was more beneficial than any other loan available).

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Marks v GIO

“Analogy … is a servant not a master”Gummow J

“…there is nothing in [s236 or s237] … which suggests either that the amount that may be recovered … or that the orders that may be made …, should be limited by drawing some analogy with the law of contract, tort or equitable remedies. Indeed, the very fact that [ss 236 and 237] may be applied to widely differing contraventions of the Act, some of which can been seen as inviting analogies with torts such as deceit [eg. s18] or with equity [eg. s20 and 21] but others of which find no ready analogies in the common law or equity, shows that it is wrong to limit the apparently clear words of the Act by reference to one or other of these analogies.”Gaudron J

Analogies “are not controlling .. They represent an accumulation of valuable insight and experience which may be useful in apply the Act”.Gleeson CJ

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Marks v GIO

Examples given by McHugh, Hayne and Callinan JJ:

“If a person agrees to pay $50,000 for goods which the vendor falsely represents are worth $100,000 but which are, in fact, worth $50,000, what loss has the purchaser who is misled suffered by agreeing to buy (assuming no more is knows)? If a person agrees to pay interest at the rate of 10% for a loan which the lender falsely represents would ordinarily command interest at a rate of 15% but which, in fact, would ordinarily command interest at 12.5% what loss has the borrower who is misled suffered by agreeing to borrow (again, assuming no more is known)? …The fact that each of the misled parties in the examples given may have thought that it was to obtain some advantage from the transaction is not to the point. The contravening conduct has left the party that was misled no worse off than it was before the contravention occurred.”

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Marks v GIO

“..the position of the borrowers is that they were misled into taking a loan which cost them more than was represented to them but which, even so, cost less than any other loan available to them in the market. They suffered and will suffer no loss or damage as a result of the misleading and deceptive conduct of the respondents. No order can be made under [ss236 or 237].”

50Causation

Compensation under s 236 or 237 requires that D’s breach caused P’s loss.

The High Court has applied common sense test of causation that applies at common law.

D’s breach need not be the sole cause of P’s loss: Henville v Walker

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Henville v Walker

Henville bought land from Walker to build units - representation that units would sell for $750,000.

This was misleading or deceptive conduct in breach of [now s18 ACL].

Henville bought land on basis of: 1. representation about the sale price; and 2. his own miscalculation of building costs.

Issue: was the loss sustained by Henville caused by the representation?

Held: Yes.

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Henville v Walker

“By entering upon the project, Mr Henville has lost $319,846.51. If Mr Walker had not made representations in breach of the Act, none of this loss would have occurred. The loss suffered is therefore directly attributable to a contravention of the Act even though other factors played their part in bringing about the loss.”

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Discussion 2010 exam Q2(a)

Kieran O’Clare, a retired sheep farmer, decides to sell some of his old farming equipment in order to finance a trip overseas. Kieran is elderly and quite frail and had very limited formal education, but still has his wits about him and regularly enjoys playing online chess against players from around the world at quite a high standard. Advise him in the following alternative scenarios: a) Kieran’s youngest son, Rufus, has some experience working as a dealer in second-hand farming equipment. When he hears Kieran’s plan to sell the equipment, he offers to buy the goods for $500. Kieran is reluctant to sell on those terms as he privately believes the goods are worth a bit more than that, but he reluctantly agrees as he does not want to hurt his son’s feelings. Several weeks later, Kieran discovers that Rufus had re-sold the goods for $3000. i. Has Rufus engaged in undue influence within the meaning of the unwritten law? ii. Has Rufus engaged in unconscionable dealing? iii. If either of the above causes of action is made out, what remedy would Kieran be likely to be awarded?

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Discussion 2010 exam Q2(b)

Kieran decides to try to sell his farming equipment on eBay, with a buy-it-now price of $2999. On behalf of the Nowra Farming Museum, one of its employees, Fred, enters into a contract with Kieran by going through the “buy it now” process on ebay. However, as a result of a change of policy, the Museum changes its mind about purchasing the equipment and never actually completes the sale by providing the promised payment. No other purchasers were interested in buying the items at that price, but there was another potential purchaser who would have been willing to buy them for $1000 if they had still been available. i. Advise Kieran as to his prospects of success if he brought an action against the purchaser for misleading or deceptive conduct under statute.ii. If such action was successful, what remedy would the court be likely to award?

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What do you need to know?

Rescission under the unwritten law

Bars to rescission; “pecuniary

rescission”

Remedies for breach of s 18 or s20 of

the ACL

Interplay between ss 236 & 237 of the

ACL

Reliance loss vs. Expectation loss

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Acknowledgments and Copyright

Thanks to Sirko Harder, Mark Davison and Rebecca Giblin for the use of their slides.

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