Vitiating Factors

Contract Defence & Vitiating Factors

Despite a contract being thought to be formed, a party accused of breaching a contract can try to rely on a vitiating factor, which invalidates a contract and therefore the contract is no longer legally enforceable.

There are situations where the parties have reached agreement but the question arises whether the existence or non-existence of some fact, or the occurrence or non-occurrence of some event, destroys the basis upon which that agreement was reached so that the agreement is discharged or in some other way vitiated.

Five main vitiating factors are discussed:

Type of Vitiating FactorExplanationTypesExample
MisrepresentationA party was led into agreeing to the contract due to an untrue or misleading statement.  Fraudulent, negligent & innocentJohn was told the car is brand new. Impressed by this fact, he bought that car. In fact, the owner knew the car was 10 years old.
MistakeOne of the reasons for the party entering into the contract was an erroneous belief.Unilateral, Common, MutualJohn thought the car was brand new. The owner knew John thought it was brand new and also that the car is in fact 10 years old.
DuressOne party threatened the other party with physical violence in order to enter into the contract.Duress to Person, Duress to GoodsThe owner of the car threatens to assault John if he does not buy the car.
Undue InfluenceOne party wrongly exerted influence on another to agree to the contract.Actual Undue influence, Presumed Undue InfluenceThe owner of the car is John’s solicitor, who sells it to him for more than triple the market value.
IllegalityIt is illegal to allow these types of contracts to be enforceable.Illegal by statute, illegal by public policyJohn contracts with Jean to steal the owner’s car and split the proceeds. John sells the car and refuses to give Jean her share.

FAQ

  1. What’s the difference between a void and voidable contract?

Void contracts are treated as never having been formed – the parties do not have a choice to make it valid, though they can make a new contract with the same terms.

A voidable contract can be voided but only if either party chooses to.

Page 1: Misrepresentation

A misrepresentation is a false statement of fact or law which induces the other party to enter in to the agreement. Generally speaking such statements have to be made before the contract is entered in to. In order to amount to an actionable misrepresentation certain criteria must be satisfied:

  • False statement: There must be a false statement of fact or law as oppose to opinion or estimate of future events.[1] Silence will not generally amount to a misrepresentation, but there are exceptions. [2]
  • Inducement/reliance: Once it has been established that a false statement has been made it is then necessary for the representee to demonstrate that the false statement induced them to enter the contract. There can be no inducement or reliance if the representee was unaware of the false statement.[3]

There are three types of misrepresentations: Fraudulent, Negligent and innocent.

FraudulentA false statement known by the person making the statement to be falseRescission of contract and damages for all losses flowing from the breach.
NegligentA false statement not known by the person to be false but they should have known it was false.Rescission of contract and damages for all lossess flowing from the breach.
Wholly InnocentA false statement not known to be false and they were not negligent in not knowing as such.Rescission but not damages, only discretionary damages in lieu.

Rescission

A backward looking common law remedy in which the parties give back what they received under the contract.

However, the right to this remedy can be made unavailable certain circumstances, such as lapse of time, affirmation of the contract, or impossibility.

Page 2: Mistake

Where the courts make a finding of mistake this will generally render the contract void ab initio (from the beginning) so it is as if the contract never existed.

  1. Common mistake – Where both parties make the same mistake

At common law, a common mistake will nullify the agreement where the mistake is to the existence of the subject matter (res extincta)[4], a party buys property which he already owns (res sua)[5] or if there has been a mistake as to the quality which renders the contract impossible to perform or if it is rendered radically different.[6]

  • Mutual mistake – Where the parties are at cross purposes

A mutual mistake is one where the parties are at cross purposes. The courts apply an objective test to see if the contract can be saved, ie: would a reasonable person looking at the correspondence between the parties have understood the contract to have a single meaning. If yes the contract is valid on that meaning. If a reasonable person could not determine the meaning then the contract will be void for mistake.[7]

  • Unilateral mistake – Where only one party is mistaken
  1. Mistake as to the terms of the contract [8]
  2. Mistake as to identity: Mistakes as to identity are generally induced by fraud in that one of the parties is claiming to be someone who they are not.

Page 3: Duress

The effect of a finding of duress is that the contract is voidable. The innocent party may rescind the contract and claim damages.[9]

  1. Duress to the person: Where a person enters a contract as a result of threats of physical violence, the contract may be set aside providing the threat was a cause of entering the contract.[10]
  • Duress to goods: Duress to goods is not recognised as giving rise to grounds for having the contract set aside.[11]

Page 4: Undue Influence

The effect of a finding of undue influence is that the contract is voidable. The innocent party may rescind the contract and claim damages.

Undue influence exists where a contract has been entered as a result of pressure which falls short of amounting to duress, the party subject to the pressure may have a cause of action in equity to have the contract set aside on the grounds of undue influence. Undue influence operates where there exists a relationship between the parties which has been exploited by one party to gain an unfair advantage.

There are three classes of undue influence which were set out in the case of Bank of Credit & Commerce  International v Aboody [1990] 1 QB 923

  • Class 1 – Actual undue influence

Actual undue influence, as the name suggests, requires proof that the contract was entered into as a result of actual influence exerted. The claimant must plead and prove the acts which they assert amounted to undue influence. This may include such acts as threats to end a relationship, continuing to badger the party where they have refused consent until they eventually give in. There is no precise definition of undue influence.

  • Class 2a – Presumed undue influence

Under class 2a there is no requirement to prove that improper influence was actually exerted. Instead it must be established: (1) There was a relationship which as a matter of law gives rise to a presumption of undue influence; (2) The transaction is one which can not readily be explained by the relationship of the parties.[12]

  • Class 2b – Presumed undue influence

Under class 2b there is no automatic presumption arising as a matter of law. Here it must be established that there is a relationship of such a kind that one party in fact placed their trust and confidence in the other to safeguard their interest.[13]

Page 5: Illegality

Whilst the other grounds relate to the manner in which the contract was formed, Illegality relates to the substance of the contract.

Public policy dictates that certain behavior is unethical and that the courts should not condone such contracts by enforcing contracts based on such behavior. 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 are all against public policy..[14]

Contracts can also be illegal if it contravenes legislation. For example, the Gambling Ordinance prohibits all “unauthorized” incidences of gambling, which is defined as including gaming, wagering and bookmaking.

Q&A

  1. How can I check whether my contract is illegal?

The safest way is to seek professional legal advice. The categories of illegal terms are very specific. However, the industry most at risk of illegality are those that involve gambling and gaming.


[1] Bisset v Wilkinson  [1927] AC 177; Esso Petroleum v Mardon [1976] QB 801

[2] Smith v Hughes (1871) LR 6 QB 597

[3] Horsfall v Thomas [1862] 1 H&C 90

[4] Scott v Coulson [1903] 2 Ch 439

[5] Cooper v Phibbs (1867) LR 2 HL 149

[6] Great Peace Shipping v Tsavliris (International) Ltd [2003] QB 679

[7] Raffles v Wichelhaus (1864) 2 H & C 906

[8] Smith v Hughes (1871) LR 6 QB 597

[9] IFR Ltd v Federal Trade Spa [2001] EWHC 519

[10] Barton v Armstrong [1976] AC 104

[11] Skeate v Beale [1840] 11 Ad & El 983

[12] CIBC Mortgages v Pitt [1994] 1 AC 200

[13] Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44

[14] Osman v J Ralph Moss Ltd [1970] 1 Lloyd’s Rep 313

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