VITIATING ELEMENTS IN CONTRACT

These are factors that if present in a contract will cripple or invalidate the contract. The presence
of any of these will undermine a contract. These elements are misrepresentation, mistake,
duress, undue influence and illegality.

1. MISREPRESENTATION

Contracting parties frequently make all sorts of statements, both before and at the time a
contract is made, and such statements are not all treated in the same way. Even if the statement
is not incorporated as a term, it may nonetheless have been very influential in persuading the
other party to enter into the contract. What if this sort of statement (generally called a
representation) turns out not to be true—in other words, it turns out to be a misrepresentation?

Misrepresentation is concerned with the situation in which a false statement leads a contracting
party to enter into a contract which would otherwise not have been undertaken. It provides in
certain circumstances for the party whose actions have been affected to escape from the
contract or claim damages (or both).

The basic requirements that are necessary in order for there to be a contractual remedy for a
misrepresentation are as follows. The false statement must have been made by one of the
contracting parties to the other; it must be a statement of fact, not opinion or law; and the
statement must have induced the other party to enter into the contract.

Statement by one party to the other

Where a claimant is seeking to rescind a contract on the basis of a misrepresentation, then the
normal rule is that the false statement must have been made by, or on behalf of, the other
contracting party. If a person has entered into a contract on the basis of a misrepresentation by
a third party, this will have no effect on the contract, or on the person’s legal relationship with
the other contracting party.

Misrepresentation must be of fact

Only a misrepresentation of fact will give rise to liability. Other sorts of statements, such as
exaggerated, flippant comments not intended to be taken seriously (known as ‘mere puffs’),
statements of opinion, or statements of future intention, will not generally be actionable.

Contracting parties are expected to realise that exaggerated sales hype or vague boasts about
the subject matter of a contract are not intended to be and should not be relied upon. Such
statements do not give rise to liability, even if they are unjustified. But if, judging the matter
objectively, the court thinks that the statement was intended to be taken seriously, it will not be
dismissed as a mere puff even if it is somewhat extravagant.

If the maker of a statement has special knowledge or expertise relative to the other party (which
is, after all, likely to be the more common fact pattern), the courts tend to treat what appears to
be an opinion as nonetheless actionable as a misrepresentation.

This mirrors the approach taken in cases like Esso Petroleum Co Ltd v Mardon (1976) to
deciding whether a statement is a term of the contract. So a statement of opinion is commonly
interpreted as carrying the implication that there are facts to support it. As Bowen LJ said in
Smith v Land and House Property Corpn (1884), ‘if the facts are not equally known to both
sides, then a statement of opinion by 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’.

It has often been said that a misrepresentation must satisfy two distinct requirements in order
to be actionable, namely that it was a material misrepresentation and that it induced or caused
the representee to enter the contract. The basic rule, then, is that the representee must have
relied on the representation, so where the representation did not influence the representee at
all, there can be no remedy. For example, if the representation did not come to the representee’s
attention or if the representee knew that the representation was not true, there was no reliance.

However, where the misrepresentation made no difference at all to the representee, in that he
would have acted in precisely the same way and contracted on precisely the same terms even
if the misrepresentation had not been made, there is no possibility either of rescission or
damages. This is illustrated by JEB Fasteners v Marks Bloom & Co (1983). JEB were
negotiating the take-over of a manufacturing company. The company’s audited accounts, drawn
up by the defendant accountants, contained substantial inaccuracies. JEB read the accounts,
suspected that they were erroneous in a number of respects, but proceeded with the take-over
anyway because they wished to acquire the services of its two directors. JEB sued the
defendants for negligence, but the Court of Appeal agreed with the judge’s finding that they
did not rely on the accounts and thus there was no causal connection between the defendant’s
negligence and the loss incurred on the take-over.

REMEDIES FOR MISREPRESENTATION

A person who enters into a contract in reliance on a misrepresentation may elect to rescind, or
‘undo’, the contract. As Millett LJ explained in Bristol v West Building Society v Mothew
(1998), ‘Misrepresentation makes a transaction voidable not void. It gives the representee the
right to elect whether to rescind or affirm the transaction. The representor cannot anticipate his
decision. Unless and until the representee elects to rescind the representor remains fully bound.’
Rescission involves, so far as possible, restoring the parties to the pre-contract position, or as
it is sometimes expressed, restoring the ‘status quo ante’. This means that ‘executory’
obligations under the contract (ie, obligations that have yet to be performed) no longer have to
be performed and, crucially, any parts of the contract that have already been performed
(‘executed’ obligations) are ‘undone’. Putting it metaphorically, rescission means unravelling
the contract ab initio—setting it back to the beginning. So any property transferred pursuant to
the contract is returned. In a simple case in which, for example, I buy a painting from you in
reliance on your false representation that it was painted by Constable, rescission will involve
me returning the painting to you and you returning the price to me.

In certain circumstances, the misrepresentee loses the right to rescind the contract— in
technical language, rescission is said to be barred. First, a contract cannot be rescinded if the
misrepresentee does something unequivocal, intending to affirm the contract after discovering
the truth. Affirmation can involve expressly communicating to the representor that the contract
is affirmed, or acting in a way that is inconsistent with a desire to set aside the contract. But it
will not be inferred lightly: for example, in Street v Coombes (2005) the purchaser’s actions in
trying to keep the business going, having discovered its true, disastrous financial position, came
nowhere near to evincing an intention to affirm the contract.

Second, if the misrepresentee delays too long before rescinding, this will bar the claim. Of
course, delay after discovering the truth is closely analogous to affirmation, but it is not entirely
clear whether delay operates merely as evidence of affirmation or is a distinct bar in its own
right. For example, in Leaf v International Galleries (1950) L bought a painting from IG in
1944, in reliance on their innocent representation that it had been painted by Constable.
L only discovered the truth five years later when he tried to sell the painting through Christies
auctioneers and attempted to rescind immediately. The Court of Appeal held it was too late to
do so—he had not acted within a reasonable time.

Fraudulent misrepresentations

Where a misrepresentation was made fraudulently, the innocent party may elect not to rescind
the contract but to claim damages for the tort of deceit instead. Damages are also available for
fraudulent non-disclosure in cases of contracts uberrimae fidei, whereas for non-fraudulent
non-disclosure the claimant’s only remedy is rescission (confirmed by the Court of Appeal in
Conlon v Simms (2006) concerning a solicitors’ partnership agreement where one of the
partners fraudulently failed to disclose dishonest conduct that ultimately led to him being struck
off by the Solicitors’ Disciplinary Tribunal). To establish fraud, it must be shown that ‘a false
representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly,
careless whether it be true or false’—Derry v Peek

2. MISTAKE

There are situations where a contract may be regarded as never having coming into existence,
or may be brought to an end, as a result of a mistake by either or both of the parties. What is to
be done when a good contract is apparently made—with offer and acceptance coinciding
perfectly— but where both parties share a mistaken assumption about their contract. For
example, both may think that the subject matter of the contract is in existence when it is not,
or that the subject matter has some quality or characteristic that it does not actually have.

The rules developed by the courts impose fairly heavy burdens on those arguing that a mistake
has been made. This is not surprising. It would not be satisfactory if a party to a contract could
simply, by saying ‘I’m sorry, I made a mistake’, unstitch a complex agreement without any
thought for the consequences for the other party, or any third parties who might be involved.
To allow this to be done would be to strike at the purposes of the law of contract, which has as
one of its main functions the provision of a structure within which people can organise their
commercial relationships with a high degree of certainty. On the other hand, a fundamental
principle of the English law of contract is that, as far as possible, the courts should give effect
to the intentions of the parties. If either, or both, of the parties has genuinely made a mistake as
to the nature of their contract, to enforce it may run counter to their intentions. The courts do,
therefore, recognise the possibility of mistakes affecting, or even destroying, contractual
obligations which would otherwise arise.
Common Mistake

There are undoubtedly a number of cases which seem to decide that certain sorts of common
mistake render contracts void at common law. The clearest type of mistake which renders a
contract fundamentally different from what the parties thought they were agreeing to, and
which will be regarded as rendering the contract void, is where the parties have made a contract
about something which has ceased to exist at the time the contract is made. If, for example, the
contract concerns the hire of a specific boat which, unknown to either party, has been destroyed
by fire the day before the contract was made, the agreement will undoubtedly be void for
common mistake. The parties have reached agreement, but that agreement is nullified by the
destruction of the subject matter. This type of common mistake is sometimes referred to by the
Latin tag of res extincta. An example from the cases is Galloway v Galloway. The parties, who
thought they had been married to each other, made a separation agreement. It was then
discovered that their supposed marriage was invalid, because the husband’s previous wife was
still alive. As a result, the separation agreement was void, and the ‘husband’ had no liability
under it.

As regards contracts for the sale of goods, the common law rule is given statutory effect by the
Sale of Goods Act. This states that: Where there is a contract for the sale of specific goods, and
the goods without the knowledge of the seller have perished at the time when the contract is
made, the contract is void.

The word ‘perished’ almost certainly encompasses more than simply physical destruction, as
is shown by the pre-SGA 1893 case of Couturier v Hastie. The contract concerned a contract
for the purchase of a cargo of corn. At the time of the contract, the cargo had, because it was
starting to deteriorate, been unloaded and sold to someone else. The purchaser was held to have
no liability to pay the price.

An operative common mistake may also arise where, although the subject matter of the contract
has not been destroyed, performance is, and always was, impossible. This may result from a
physical impossibility, as in Sheikh Bros v Ochsner, where land was not capable of growing
the quantity of crop contracted for, or legal impossibility, where the contract is to buy property
which the purchaser already owned. There is also one case, Griffith v Brymer, where a contract
was found void for what may be regarded as ‘commercial impossibility’. The contract was to
hire a room to view an event which, at the time of the contract, had already been cancelled.
Performance of the contract was physically and legally possible, but would have had no point.
Effect of an operative common mistake

The effect of an operative common mistake at common law is to render the contract void
ab initio (from the beginning). It is as if the contract had never existed, and therefore, as far
as is possible, all concerned must be returned to the position they were in before the contract
was made. This applies equally to third parties, so that the innocent purchaser of goods which
have been ‘sold’ under a void contract will be required to disgorge them, and hand them back
to the original owner. These powerful and far-reaching consequences perhaps explain why the
courts have shown a reluctance to extend the scope of common mistake too far, preferring to
allow the flexible application of equitable remedies to pick up the pieces in the majority of
cases.

Mistakes Negativing Agreement

As indicated above, there are two categories of mistake which may have the effect of negativing
agreement – that is, where the contract fails because there never was an agreement between the
parties as to some essential matter. The first category is where neither side is aware of the fact
that the other is contracting on a different basis. The lack of agreement is ‘mutual’. The second
category is where one party is aware of the other’s mistake. Here the mistake is ‘unilateral’.
These two categories will be considered separately.

Mutual mistake

This refers to the situation where the parties are at cross-purposes, but neither side is aware of
this when they purport to make a contract. The mistake may relate to the subject matter of the
contract, or the identity of the other contracting party. If the mistake is sufficiently fundamental
that it means in effect that there was no agreement between the parties, then there can be no
contract, and any actions taken on the basis that there was a contract will have to be undone. in
Scriven Bros v Hindley,56 where there was confusion as to the nature of two lots in an auction,
one being ‘hemp’, the other being much less valuable‘tow’. The defendant who had bid an
unusually high price for the tow, in the mistaken belief that it was hemp, was allowed to avoid
the contract.

Unilateral mistake

Unilateral mistake refers to the situation where the agreement is ‘negatived’, that is, prevented
from coming into existence, because one party is aware that the other is mistaken about an
aspect of the contract. In many situations involving unilateral mistake there will have been a
misrepresentation which will provide the other party with a remedy. If there was no such
misrepresentation, however, or the remedies available for misrepresentation are inadequate,
there may be a remedy on the basis of a mistake. For this to be available, however, the mistake
must be sufficiently important that, viewed objectively, it prevents there being an agreement.

An example of a situation where one party was not allowed to take advantage of a mistake
made by the other is to be found in Hartog v Colin & Shields. The contract was for the sale of
hare skins. The price quoted by the seller was stated to be ‘per pound’. This was a mistake,
since the price should have been ‘per piece’. The mistake meant that the skins appeared to be
being offered at a price about two-thirds lower than intended by the seller. The normal practice
in the trade is for skins to be sold by the piece. The buyers accepted the seller’s offer in the
terms stated, but the seller refused to supply on this basis, claiming that the buyers were trying
to take unfair advantage of a genuine mistake. The court was of the view that the buyers were
aware that a mistake had been made. On this basis there was no contract, and the sellers did
not have to supply at the price stated.

3. DURESS

This involves situations in which an agreement which appears to be valid on its face is
challenged because it is alleged that it is the product of improper pressure of some kind. This
may take the form of threats of physical coercion or ‘economic’ threats (such as to break a
contract), which place pressure on the other party. It seems that explicit threats are needed.

Duress involves one party coercing or pressurising the other party into making a contract. But
it is not easy to define precisely what sorts of pressure will count as duress. At one end of the
spectrum, a contract signed at gunpoint is undoubtedly vitiated by duress. At the other, a
contract entered into because of pressure of circumstances (like the social ‘pressure’ to
purchase a new car to impress the neighbours) is undoubtedly valid. Somewhere in between is
the boundary of actionable duress. The most important feature of duress is that it generally
involves pressure applied by means of an illegitimate threat, although occasionally a threat to
do something lawful made for an unlawful purpose will suffice. An express threat is not
necessary: the law is subtle enough to recognise that a threat can be implicit (such as where a
robber twirls a gun menacingly while asking for money, without expressly threatening his
victim that he will use it). The Court of Appeal in B & S Contracts and Designs Ltd v Victor
Green Publications Ltd (1984) treated a ‘veiled threat’ to breach a contract as sufficient for
economic duress. Moreover, a threat that is carried into effect may equally establish duress—a
contract signed after a beating is just as tainted by duress as a contract signed under threat of a
beating.

Duress by Physical Threats or Coercion

Although it is possible that a person could be physically forced to sign a contract, by someone
holding their arm and moving it, the most obvious form of duress is where a contract is brought
about as a result of a threat of physical injury. A fairly modern example is to be found in Barton
v Armstrong, where the managing director of a company was threatened with death if he did
not arrange for his company to make a payment to, and buy shares from, the defendant. The
Privy Council held that the contract could be set aside for duress. The threat need not be of
serious physical violence – any illegality in the form of a crime or tort against the person (such
as false imprisonment) will apparently be sufficient.

There are thus two questions to ask in relation to duress, namely, first, were the defendant’s
threats ‘illegitimate’, and secondly, was the claimant’s behaviour affected by them? Only if
both are answered positively will the conditions arise for the contract to be set aside.

Economic Duress

It is now well established that certain forms of economic pressure can count as duress. Some
cases involve threats to induce third parties to breach their contracts with the claimant, usually
in the context of industrial disputes. The best known derive from the campaign by a maritime
union to improve the terms and conditions of sailors working.

There seem to be three distinct requirements for economic duress: (1) illegitimate pressure or
threat; (2) which caused the victim to act as he did; and (3) which would have caused a
reasonable person in the victim’s position to act in the same way (ie, there was no realistic
alternative course of action).

Remedies or Duress

The remedy that the victim of duress will be seeking is to escape from the agreement that has
resulted from the duress – in other words rescission. As has been noted in relation to mistake
and misrepresentation, however, rescission may be lost through affirmation of the contract,
lapse of time, the impossibility of restitution, or the intervention of third party rights.

4. UNDUE INFLUENCE
Duress is essentially a common law concept. Alongside it must be placed the equitable doctrine
of ‘undue influence’. This operates to release parties from contracts that they have entered into,
not as a result of improper threats, but as a result of being ‘influenced’ by the other party,
whether intentionally or not.

In Williams v Bayley, for example, the plaintiff had agreed to give a mortgage over his colliery
as security for debts incurred by his son, who had forged his father’s signature on promissory
notes. The creditors had threatened that the son would be prosecuted if the mortgage was not
given. The agreement was set aside as being obtained by undue influence. Similarly, in Mutual
Finance Ltd v John Wetton & Sons Ltd implied, though not explicit, threats to prosecute a
member of a family company in relation to a forged guarantee, led to the company giving a
new guarantee. This was again set aside on the basis of undue influence. Both these cases
involve ‘pressure’ being placed on a party.

One of the main difficulties with undue influence, as with duress, is to find the limits of
legitimate persuasion. If it were impermissible to seek to persuade, cajole, or otherwise
encourage people to enter agreements, then sales representatives would all be out of a job.
‘Influence’ in itself is perfectly acceptable: it is only when it becomes ‘undue’ that the law
will intervene. Clarity in deciding when that has occurred is not assisted by the fact that the
word ‘undue’ has two potential meanings. It can be used to indicate some impropriety on the
part of the influencer. The influence is ‘undue’ because an imbalance of power between the
parties has been used illegitimately by the influencer. Alternatively, the word can be used
simply to indicate that the level of influence is at such a level that the influenced party has lost
autonomy in deciding whether to enter into a contract. This does not imply any necessary
impropriety on the part of the influencer.

How, then, do the courts decide when influence has overstepped the limits of acceptability, and
become ‘undue’? The basic test in English law is that it is only where there is some relationship
between the parties (either continuing, or in relation to a particular transaction) which leads to
an inequality between them that the law will intervene. The starting point for the law’s analysis
is therefore not the substance of the transaction, but the process by which it came about. Was
this the result of a person who was in a position to influence the other party abusing that
relationship in some way? An initial task is therefore to identify which relationships will give
rise to this inequality.
Essentially, undue influence requires a relationship between the parties, generally one of trust
and confidence or vulnerability and dependency, which pre-dated the contract or gift between
them and which one party exploits for his own advantage. It is, of course, only within a
relationship that there is any possibility of influence: this makes undue influence significantly
different from duress. Occasionally the two come close, as in Drew v Daniel (2005) where a
dominant ‘forceful’ family member coerced a vulnerable elderly relative, but the presence of
the pre-existing relationship nonetheless marks the situation as one of undue influence. A
stranger can assert pressure or make threats, but cannot benefit from the altogether subtler
exercise of influence, which can make undue influence more invidious.

Undue influence cases reveal the difficulty of striking the right balance between protecting the
vulnerable from exploitation, without unduly patronising them or restricting their freedom to
be generous. For example, a common scenario involves an elderly person making gifts before
his or her death to someone who had been caring for them, which are challenged after the
elderly person’s death by his or her relatives: it is by no means easy to adjudicate on the merits
of the relatives’ challenge. A related concern is the need for security in receipts—the more
willing the courts are to undo transactions, the less secure recipients can be that they will be
entitled to keep what they have received. This is seen where a family member, commonly a
wife, guarantees her husband’s business debts to a bank, which may or may not have been
procured by the husband’s undue influence. The courts must find the right balance between
protecting vulnerable spouses from victimisation within their marriage without discouraging
creditors from being willing to finance small businesses on the security of the matrimonial
home.

In Drew v Daniel (2005) a ‘forceful’ and ‘insensitive’ man bullied his elderly aunt into retiring
as trustee of a family trust without the opportunity of seeking legal advice, thereby taking
advantage of her naivety in business matters. Although there was no evidence of overt acts of
coercion, there was evidence of a forceful personality exploiting his vulnerable aunt to an
unacceptable extent, persuading her to execute the deed.

Remedies for Undue Influence

Rescission - The orthodox view is that rescission is the only remedy for undue influence: there
is certainly no statutory regime equivalent to the Misrepresentation Act providing for
damages for undue influence. Rescission will be barred delay, affirmation, intervening third
party rights and the impossibility of restoring the parties to the status quo ante.
 5. ILLEGALITY

Public policy dictates that illegal contracts are unenforceable and the courts should be vigilant
not to enforce any contract with an illegal purpose.

Thus, contracts such as those tending to corruption in public life, promoting sexual immorality,
prejudicial to the administration of justice, trading with an enemy in war time, for future
separation, in restraint of marriage, marriage brokerages and contracts attempting to oust the
jurisdiction of the courts will all be illegal and unenforceable.

However, the scope of the term illegality is not always transparent. Contracts to commit a
criminal act are always unenforceable as in the case of Bigos v Boustead (1951) where the
defendant attempted to evade exchange controls. However a contract to commit a civil wrong
will only be unenforceable where the commission of the tort or breach of contract is deliberate
or if only one party is aware of the wrong by that party.

The case of Anderson v Daniel (1924) demonstrates that a contract may also be unenforceable
if the manner of its performance involves illegality especially where it involves a breach of a
statute intended to confer some protection on the public.

It therefore follows that any contract to indemnify one party against liability for unlawful acts
is also unenforceable in relation to criminal liability (Osman v Ralph Moss Ltd (1970)) and
liability in respect of intentional commission of torts.

Contracts which seek to excessively restraint personal liberty will be unenforceable but in some
cases where such restraint of personal liberty is for the party’s own well being such contracts
are held to be enforceable.

Perhaps the most important area in practice is contracts which are in restraint of trade these
will often manifest themselves as controls over employees, controls over a seller of a business
and solus agreements and other agreements for exclusivity. These are prima facie
unenforceable but may be enforced if they are shown to protect a legitimate interest and the
terms are reasonable in relation to length, scope and geographical area. Such clauses must not
be contrary to public interest The leading case is Nordenfelt v Maxim Nordenfelt Guns and
Ammunitions Co (1894).

The effect of illegality is unclear but will depend on the intention of the parties as only an
innocent party may be able to enforce after consideration of whether the contract is illegal per
se or only in the manner of its performance. Withdrawal will result in restitution of any property
transferred under the illegal contract provided withdrawal takes place before the unlawful act
is carried out and it is voluntary. Where the parties are not pari delicto (equally at fault)
restitution may be ordered only for the innocent party. The courts can sever only that part of
the contract that is illegal and allow the rest of the contract to stand.