LAW OF CONTRACT

Set out below are situations which may render a contract not legally enforceable.

In this case the contract may be void or voidable.

Void

A contract that is void cannot be enforced by either party.

The law treats a void contract as if it had never been formed. A contract will be
considered void, for example, when it requires one party to perform an act that is
impossible or illegal.

Voidable

A "voidable" contract is a valid contract and can be enforced.

Usually only one party is bound to the contract terms in a voidable contract. The
unbound party is allowed to cancel the contract, which makes the contract void.

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Mistake

An apparent agreement may be void or voidable where the parties enter into the
agreement under a fundamental mistake which the law recognises as preventing
the parties from ever reaching agreement.

There are two types of agreement mistake:

Mutual mistake; and

Unilateral mistake.

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Mutual mistake

Each party is mistaken as to a term of the contract making a different mistake in their
reasonable interpretation of a term.

For example A agrees to sell B his car for 8,000. B believes that A only has one
car, a Volkwagen Golf, but in fact A has two cars. The other is a Vauxhall Astra and it
is this one which he offering to sell.

Raffles v Wichelhaus & Anor (BAILII: [1864] EWHC Exch J19 ) (1864)

The claimant entered into a contract to sell "125 bales of Surat cotton" to the
defendant. The contract specified that the cotton would be arriving in Liverpool on
the ship Peerless from Bombay ("to arrive ex Peerless from Bombay"). It so
happened that there were two British ships named Peerless arriving in Liverpool
from Bombay, one departing in October and another departing in December. The
defendant thought the contract was for cotton on the October ship while the
claimant thought the contract was for the cotton on the December ship. When the
December Peerless arrived the claimant tried to deliver it. However the defendant
repudiated the agreement saying that their contract was for the cotton on the
October Peerless.

The issue before the Court was whether the defendant was bound by the agreement
to buy the cotton of the claimant's Peerless.

The court held that because of the mutual mistake the contract was void and gave
judgment for the defendants.

Couturier v Hastie (BAILII: [1856] UKHL J3 ) 10 ER 1065

A cargo of corn was in transit being shipped from the Mediterranean to England. The
owner of the cargo sold the corn to a buyer in London. The cargo had however
perished and been disposed of before the contract was made. The seller sought to
enforce payment for the goods on the grounds that the purchaser had attained title
to the goods and therefore bore the risk of the goods being damaged, lost or stolen.

The court held that the contract was void because the subject matter of the contract
did not exist at the time the contract was made.

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Unilateral Mistake

A unilateral mistake occurs where one party is mistaken as to a term of the contract
and the other knows or ought to know this mistake and cannot be allowed to take
advantage of it.

Hartog v Colin & Shields [1939] 3 All ER 566

The defendants mistakenly offered a large quantity of hare skins at a certain price
per pound whereas they meant to offer them at that price per piece. This meant that
the price was roughly one third of what it should have been. The claimant accepted
the offer.

The court held that the contract was void for mistake. Hare skins were generally sold
per piece and given the price the claimant must have realised the mistake.

A mistake can be as to identity.

Cundy v Lindsey (1878) 3 App Cas 459

A rogue, Blenkarn, hired a room at 37 Wood Street, London. He sent a written order
for handkerchiefs to the claimants, Lindsey. He made it appear that the order had
come from a respectable firm, Blenkiron & Co, of 123 Wood Street. The claimants
had heard of Blenkiron & Co and sent them the handkerchiefs on credit but were
never paid.

It was held that the contract was void for unilateral mistake as the claimants were
able to demonstrate that they had intended to contract with an identifiable existing
business, Blenkiron & Co, and not with Blenkarn.

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Misrepresentation

A misrepresentation is a false statement of fact made by one party to another, which,

although not a term of the contract, induces the other party to enter into the contract.

A wants to sell his car to B and informs him that the engine is in good
condition although he knows that it has to be replaced. Based on this
assurance B buys the car.

An actionable misrepresentation must be a false statement of fact, not of opinion or

future intention, or of law:

Bisset v Wilkinson (BAILII: [1926] UKPC 1 ) [1927] AC 177

The claimant purchased a piece of farm land to use as a sheep farm. He asked the
seller how many sheep the land would hold. The seller had not used it as a sheep
farm but estimated that it would carry 2,000 sheep. In reliance of this statement the
claimant purchased the land. The estimate turned out to be wrong and the claimant
brought an action for misrepresentation.

The Privy Council held that the statement was only a statement of opinion and not a
statement of fact and therefore not an actionable misrepresentation. The claimant's
action was therefore unsuccessful.

Where a statement was true when it was made but due to a change of
circumstances becomes false, there is a duty to disclose the change.

With v O'Flanagan [1936] Ch 575

The claimant purchased a medical practice from the defendant. The claimant was
induced to buy the practice by the defendant's statement that the practice took
2,000 per annum. This statement was true at the time it was made. However,
subsequently the defendant became ill and many patients went elsewhere. By the
time the sale was completed the practice was virtually worthless.

The Court of Appeal held that where a statement is rendered false by a change in
circumstances there is a duty to disclose the change. A failure to do so will result in
an actionable misrepresentation.

As a general rule silence does not amount to a misrepresentation since there is no

general duty in pre-contract negotiations to disclose material facts to the other party.

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A misrepresentation may be:

(i) Fraudulent - made knowingly, without belief in its truth or recklessly; or

(ii) Negligent - made by a person who had no reasonable grounds to

believe that it was true; or

(iii) Innocent- made in the wholly innocent belief that it was true
.
The misrepresentation must have induced, at least partly, the party to enter into the
contract and must have been relied on to at least some degree by the person to
whom it was made. If that person in fact relies on his own judgments or
investigations, or simply ignores the misrepresentation, then it cannot give rise to an
action against the person who made the misrepresentation.

In general there is no obligation to disclose latent defects.

Horsfall v Thomas [1862] 1 H&C 90

The claimant purchased a gun which had a concealed defect. His action for
misrepresentation failed as he hadn't inspected the gun before purchasing it.
Therefore the misrepresentation did not induce him to enter the contract as he was
unaware of it.

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There are multiple remedies available once misrepresentation has been proved:

(i) Rescission - This sets aside the contract and primarily aims to put the
parties back in their original position as if the contract had never been
made. Rescission can be sought for all cases of misrepresentation.
However, this is a discretionary remedy meaning that the courts will
not always allow a party to rescind - and the injured party may lose the
right to rescind if:

a) he has already affirmed the contract;

b) he does not act to rescind in a reasonable time;

c) it is or becomes impossible to return the parties back to their original

position; or

d) a third party has acquired legal rights as a result of the original

contract.

(ii) Indemnity - The court may order payment for expenses necessarily
incurred in complying with the terms of the contract.

(iii) Damages - This remedy varies according to the type of

misrepresentation.

In fraudulent misrepresentation cases there is an automatic right to

damages.

In negligent misrepresentation the injured party may claim damages

under common law or under the Misrepresentation Act 1967 section
2(1).

In situations of innocent misrepresentation, the court has discretion

whether to award damages and may opt to award damages in lieu of
rescission. Damages are discussed further below.

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Duress and Undue Influence

A contract may be voidable because of duress or undue influence.

Duress

Apart from threats of physical violence threats affecting a persons business interests
or financial well-being may avoid a contract.

B&S Contractors v Victor Green Publications [1984] ICR 41

A contractor who had undertaken to erect stands for an exhibition at Olympia told his
client, less than a week before the exhibition was due to open, that the contract
would be cancelled unless the client paid an additional sum to meet claims which
were being made against the contractor by his workforce. The consequence of not
having the stands erected in time would have been disastrous for the client in that it
would have gravely damaged his reputation and might have exposed him to heavy
claims for damages from exhibitors to whom space on the stands had been let.
It was held that the payment had been made under duress and that the client was
entitled to recover it back.
Undue Influence
Lloyd's Bank v Bundy (BAILII: [1974] EWCA Civ 8 ) [1975] QB 326
A father secured the debts of his son's business on his farm which had been in the
family for generations. The father and son had both banked at the branch for many
years and relied on advice given. The son's company also banked at the same
branch and the bank manager was aware of the dire financial position of the
company. The bank had allowed the son to run up an overdraft exceeding security
given thus far and was fearful that the company would go out of business leaving
them with an unsecured debt. The bank manager and the son called at the farm with
the forms already filled in. The father was told of the amount of the charge which was
11,000 and exceeded the value of the farm and he was also required to give a
guarantee. The father agreed to sign in order to help his son. He was not given the
opportunity to think it over or to obtain legal advice.

It was held that there was a relationship of trust and confidence between the father
and the bank manager giving rise to a presumption of undue influence. The charge
and guarantee were therefore set aside.

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Illegality

The law may refuse to give full effect to a contract on the ground of illegality because
it:

Involves the commission of a legal wrong, or

Is in some other way contrary to public policy.

Contracts Involving the Commission of a Legal Wrong

Contracts involving criminal matters:

Here is one of many examples under Section 5 Criminal Law Act 1967.

5. Penalties for concealing offences or giving false information.

(1) Where a person has committed an offence, any other person who, knowing
or believing that the offence has been committed, and that he has
information which might be of material assistance in securing the prosecution
or conviction of an offender for it, accepts or agrees to accept for not
disclosing that information any consideration , shall be liable on conviction

Contracts to commit a civil wrong:

Beresford v Royal Insurance Co. Ltd (1937) 2 AER 243

Major Rowlandson had insured his life for 50,000. He ran out of money and had
debts.To pay the debts he committed suicide so that his creditors could benefit from
the insurance policy. At this time suicide was a crime in England.

The court held that his executors could not recover from the insurance company
because the court would not enforce a transaction which would enable criminal or
personal representatives to recover fruits of his crime.

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Contracts Contrary to Public Policy

A contract may be illegal if its object is to interfere with the course of justice for
example where a person promises another money for giving false evidence on his
behalf in criminal proceedings.

Contracts in Restraint of Trade

There are many examples of this. A major one is legislation governing competition.

The Competition Act 1998 is the current major source of competition law in the
United Kingdom, along with other legislation. The act provides an updated
framework for identifying and dealing with restrictive business practices and abuse
of a dominant market position.

One of the main purposes of this act was to harmonise the UK with EU competition
policy.

Here is an extract:

2 Agreements etc. preventing, restricting or distorting competition.

(1) . agreements between undertakings, decisions by associations of

undertakings or concerted practices which

(a) may affect trade within the United Kingdom, and

(b) have as their object or effect the prevention, restriction or distortion of

competition within the United Kingdom,

are prohibited .

(2) Subsection (1) applies, in particular, to agreements, decisions or practices

which

(a) directly or indirectly fix purchase or selling prices or any other trading
conditions;

(b) limit or control production, markets, technical development or

investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading

parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other

parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of
such contracts.

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3. Law of Contract Questions

What is the difference between a void and a voidable contract?

What is meant by mutual mistake?

Company A negotiates with Company B to transport a cargo of corn from Sydney to

Barcelona. Company Bs representative in Sydney sends a message to Company A
which is quite unclear and refers to a cargo of wood to be transported from Sydney
to Hamburg. It is understood by Company A to refer to the cargo of corn for
Barcelona. Company A accepts the order on this basis but then discovers its
mistake. Can Company A withdraw?

What is meant by unilateral mistake?

Company C and Company D are whisky merchants. The normal market price for a
carton of whisky is 50 and Company C has often sold whisky at this price to
Company D. Company C sends Company D an offer for some whisky but owing to a
computer error the price is shown as 5 per carton. Company D accepts the offer.
Company C discovers the mistake. Can Company C rescind the contract?

What is meant by misrepresentation?

What are the three types of misrepresentation?

John Smith wants to charter a yacht from Richard Hughes. He wants to sail it to a
particular village on the French coast and asks Richard Hughes if he will be able to
berth the yacht there. Richard Hughes informs him that he has never been to this
village himself but that he believes that John Smith will be able to find a berth here.
John Smith charters the yacht from him. Before setting off John Smith finds that this
is not the case. Can John Smith rescind the contract?

William Snodgrass wants to sell his car to John Love. William Snodgrass knows that
the engine is in a very poor state but informs John Love that it is in perfect
condition. John Love buys the car for 15,000. A day later the car breaks down
completely and John Love incurs 1,000 in towage and other costs. The mechanic
inspecting the car informs John Love that it is almost worthless. What remedies are
available to John Love?

Jane Smith, an antique dealer, sells a Chinese vase for 3,000 to Hubert Cross
having informed him before the sale that is of a particular type. In fact it is of a
different type making it less valuable. Jane Smith did not state this deliberately but
was careless in checking out the vase in the catalogue. Hubert Cross learns of the
mistake a week after the sale but does nothing for six months. He then tries to return
the vase to Jane Smith and reclaim 3,000. Can he do so?

Company E signs a contract with Company F for 250,000 to construct stands for a
concert at which world famous singers will perform. Two days before the concert
Company E informs Company F that it will require an additional 150,000 to
complete the work on time although there is no provision for this payment in the
contract. As the consequences will be disastrous for Company F if the concert does

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not go ahead Company F reluctantly pays the 150,000. Can Company F recover
this sum from Company E?

Peter Sumption is an employee at a bank and steals 100,000 from it by falsifying

some figures. His colleague Wilfred Hope is aware of this. Peter Sumption offers
Wilfred Hope 10,000 not to give information to the police. Is this a valid contract?

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