Three Contractual Situations Involving Vitiating Factors

Situation 1: Misrepresentation in a Consumer Sale

1. The parties involved

The parties are a consumer, Mr Evans, and a second-hand car dealership, ‘Speedy Motors Ltd’.

1. The contract involved

The contract is for the sale and purchase of a used vehicle, a 2018 convertible sports car, for the sum of £25,000.

1. The alleged vitiating factor

The vitiating factor is misrepresentation. During negotiations, the sales representative for Speedy Motors Ltd told Mr Evans that the car had ‘one careful lady owner from new’ and had ‘never been in an accident’. Mr Evans later discovers from a vehicle history check that the car had two previous owners and had been subject to a major insurance claim for accident repairs.

1. How consent was affected

Mr Evans’s consent to enter the contract was based on false information. The statements made by the sales representative were false statements of fact which induced Mr Evans to agree to purchase the car for £25,000. Had he known the truth about the car’s history, he would not have entered into the contract. Therefore, his consent was not genuine as it was procured by untruths.

1. Whether the contract should remain valid

The contract should not remain valid if the innocent party chooses to act. A contract entered into as a result of a misrepresentation is voidable, meaning it is valid and binding unless and until it is set aside (rescinded) by the wronged party. Mr Evans has the option to either affirm the contract (keep the car) or rescind it.

1. What remedy may be available

The primary remedy for misrepresentation is rescission. This is an equitable remedy that aims to restore the parties to their pre-contractual position. Mr Evans would return the car to Speedy Motors Ltd, and the dealership would be required to refund the £25,000 purchase price.

Additionally, Mr Evans may be entitled to damages. If the misrepresentation was fraudulent, he could claim damages in the tort of deceit. More likely, he could claim damages under section 2(1) of the Misrepresentation Act 1967. This provision allows for damages to be awarded for non-fraudulent misrepresentation and places the burden of proof on the misrepresentor to show they had reasonable grounds to believe their statement was true. The measure of damages under s.2(1) is the same as for fraudulent misrepresentation (Misra, 2021).

1. Relevant legal principles

A vitiating factor is an element which can invalidate a contract. An actionable misrepresentation is defined as an unambiguous, false statement of existing fact, made by one party to the contract to the other, which induces the other party to enter into the contract.

Representations can be classified as fraudulent, negligent, or innocent.

• Fraudulent misrepresentation requires proof that the statement was made knowingly, without belief in its truth, or recklessly as to its truth (Derry v Peek (1889) 14 App Cas 337).
• Negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967 is established where a party makes a false statement without reasonable grounds for believing it to be true.
• The statement must have induced the claimant to enter the contract, as confirmed in Redgrave v Hurd (1881) 20 Ch D 1.

1. Supporting case law

• Derry v Peek (1889) 14 App Cas 337: This House of Lords case established the definition of fraudulent misrepresentation, requiring a high standard of proof of dishonesty.
• Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574: This case illustrates the operation of section 2(1) of the Misrepresentation Act 1967. The defendants were held liable for a negligent misrepresentation because they could not prove they had reasonable grounds to believe their false statement was true, as they had failed to check the official shipping documents.
• Redgrave v Hurd (1881) 20 Ch D 1: This authority confirms that a claimant can demonstrate inducement even if they were given an opportunity to discover the truth but failed to take it.

Situation 2: Economic Duress in a Commercial Agreement

1. The parties involved

The parties are a small, specialist engineering firm, ‘Innovate Ltd’, and their largest client, a multinational construction company, ‘Global Construction Plc’.

1. The contract involved

The original contract was for Innovate Ltd to supply bespoke steel components to Global Construction Plc for a fixed price over two years. The situation concerns a subsequent agreement to vary this contract by reducing the price of the components by 20%.

1. The alleged vitiating factor

The vitiating factor is economic duress. Global Construction Plc, aware that Innovate Ltd was financially dependent on their contract, threatened to immediately terminate their business relationship and source components elsewhere unless Innovate Ltd agreed to the 20% price reduction.

1. How consent was affected

Innovate Ltd’s consent to the contract variation was not freely given. They agreed to the price reduction under immense pressure, facing the prospect of immediate insolvency if they lost their main client. Their will was coerced by an illegitimate threat, leaving them with no practical alternative but to submit to the demand. This is not genuine consent but rather a 'compulsion of the will' (Poole, 2021).

1. Whether the contract should remain valid

The variation to the contract is voidable for duress. The original supply contract remains enforceable, but the agreement to reduce the price can be set aside by Innovate Ltd. The contract is not void from the beginning but can be rendered void by the innocent party.

1. What remedy may be available

The main remedy is rescission of the contract variation. This would mean that the agreement to lower the price is set aside, and Innovate Ltd would be entitled to demand payment based on the price originally agreed in the first contract. The party claiming duress must not affirm the contract once the pressure has been lifted.

1. Relevant legal principles

Economic duress occurs when one party uses its superior economic power in an illegitimate way to pressure the other party into agreeing to a contract or a variation of a contract. For a claim of economic duress to succeed, the claimant must establish two key elements:

• The pressure applied was illegitimate. A threat to breach a contract is generally considered illegitimate pressure.
• The illegitimate pressure was a significant cause inducing the claimant to enter into the contract, leaving them with no reasonable practical alternative.

1. Supporting case law

• Pao On v Lau Yiu Long [1980] AC 614: The Privy Council outlined factors to consider when determining if consent was vitiated by coercion, including whether the person protested, had an alternative course open to them, was independently advised, and took steps to avoid the contract after entering it.
• The Universe Sentinel [1983] 1 AC 366: This case established that the key question is whether the pressure applied was illegitimate. A threat to do something unlawful, such as a breach of contract, is generally illegitimate.
• Carillion Construction Ltd v Felix (UK) Ltd [2001] BLR 1: This case provides a clear example of a threat to withhold performance of a contract amounting to illegitimate pressure. The court found that the defendant’s threat to withhold deliveries unless a dispute was settled constituted economic duress, as the claimant had no practical alternative but to agree to protect their own commercial interests.

Situation 3: Undue Influence in a Family Transaction

1. The parties involved

The parties are an elderly widow, Mrs Green, aged 85, and her nephew, Mr Carter, who has been helping her manage her finances and daily affairs.

1. The contract involved

The contract is a deed of transfer, where Mrs Green agrees to sell her home, valued at £400,000, to Mr Carter for £100,000.

1. The alleged vitiating factor

The alleged vitiating factor is presumed undue influence. A relationship of trust and confidence exists between Mrs Green and her nephew, Mr Carter. The transaction itself is highly disadvantageous to Mrs Green and therefore ‘calls for explanation’.

1. How consent was affected

Due to Mrs Green’s age, her reliance on Mr Carter, and the nature of their relationship, the law presumes that her consent was not an act of her own free and independent will. The influence of Mr Carter is presumed to have been a significant factor in her decision to enter into a transaction that was manifestly to her disadvantage. Her consent is therefore tainted.

1. Whether the contract should remain valid

The contract is voidable at the option of Mrs Green. If the presumption of undue influence is not rebutted by Mr Carter, a court can set the transaction aside. The contract is not void automatically.

1. What remedy may be available

The remedy is rescission. The court would order the transaction to be set aside, meaning the transfer of the house would be reversed. Mrs Green (or her estate) would regain ownership of the property, and Mr Carter would be entitled to have his £100,000 payment returned.

1. Relevant legal principles

Undue influence is an equitable doctrine that applies where one party uses their influence over another to persuade them to enter into a contract. There are two classes:

• Class 1: Actual undue influence, where the claimant must prove that improper pressure or coercion was actually used.
• Class 2: Presumed undue influence. This arises where there is a pre-existing relationship of trust and confidence, and the transaction is one that 'calls for explanation'. This creates a rebuttable presumption that undue influence was exercised. The burden then shifts to the defendant to show that the claimant's consent was freely given, for example by showing they received independent legal advice.

1. Supporting case law

• Allcard v Skinner (1887) 36 Ch D 145: This is a foundational case establishing the principle that where a transaction occurs between parties in a relationship of trust, and the transaction cannot be reasonably accounted for on the grounds of friendship or charity, a presumption of undue influence arises.
• Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44: This is the leading modern authority from the House of Lords. It clarified the law on presumed undue influence, confirming the two requirements: a relationship of trust and confidence, and a transaction that calls for explanation. Lord Nicholls stated that the presumption is an evidential one; it shifts the burden of proof to the alleged influencer.
• Lloyds Bank Ltd v Bundy [1975] QB 326: Although its wider doctrine of ‘inequality of bargaining power’ was not followed, this case remains a classic example of a relationship of trust and confidence (between a bank and a long-standing customer) giving rise to a presumption of undue influence.

References

Misra, D. (2021) The measure of damages under section 2(1) of the Misrepresentation Act 1967. Available at: https://www.39essex.com/the-measure-of-damages-under-section-21-of-the-misrepresentation-act-1967/ (Accessed: 15 May 2024).

Poole, J. (2021) Textbook on Contract Law. 15th edn. Oxford University Press.

Allcard v Skinner (1887) 36 Ch D 145

Carillion Construction Ltd v Felix (UK) Ltd [2001] BLR 1

Derry v Peek (1889) 14 App Cas 337

Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574

Lloyds Bank Ltd v Bundy [1975] QB 326

Misrepresentation Act 1967

Pao On v Lau Yiu Long [1980] AC 614

Redgrave v Hurd (1881) 20 Ch D 1

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

The Universe Sentinel [1983] 1 AC 366