Magoosh GRE

The impact of misrepresentation, mistake, duress and undue influence on the validity of a contract.

| August 25, 2016

Introduction

Contract law is primarily concerned with the enforcement of promises and is regulated largely by the common law. In order for any contract to be binding between the parties, there must be an intention to create legal relations as shown in the case of Kleinwort Benson Ltd v Malaysia Mining Corpn Bhd [1989] 1 All ER 785. In the case of an ordinary commercial transaction, there will, in fact, be a presumption that the parties had intended to create legal relation although this presumption will be capable of being rebutted in certain circumstances (Saha, 2010: 163). The party who wishes to rebut the presumption will have the onus of proving that they did not have the intention to create legal relations because of a particular factor (Gulati, 2011: 127). This will often prove extremely complex  (Poole, 2006: 199) since the courts will adopt an objective test when deciding whether the parties had the intention to create legal relations as identified in Edwards v Skyways Ltd [1964] 1 All ER 494. Thus, it was noted in this case that the courts will “attach weight (a) to the importance of the agreement to the parties, and (b) to the fact that one of them has acted in reliance upon it.” In accordance with this, it will be discussed what impact misrepresentation, mistake, duress, and undue influence has upon the validity of a contact.

Misrepresentation

During the negotiation stage of a contract many things are said, some which are considered representations and thus enforceable under the contract and some which become terms of the contract. A representation is a statement of opinion made by one party to another which subsequently induced the other party to enter into a contract (Fafinski and Finch, 2009: 113). If the statement that has been made is untrue, then this may amount to a misrepresentation and thereby affect the validity of the contract, whether or not this is a statement of fact or law as shown in MCI WorldCom International Inc v Primus Telecommunications Inc [2004] EWCA Civ 957. A mere statement of opinion or intention will not, however, amount to a misrepresentation unless it can be shown that the person who gave the opinion did not hold it, or could not reasonably have been expected to hold it. In Royal Bank of Scotland plc v Chandra and Another [2011] EWCA Civ 192 it was held by the Court of Appeal that a husband’s over-optimistic assessment of a business venture did not amount to a misrepresentation. Nevertheless, with regards to implied representations the court will be required to consider whether a reasonable person would have inferred what was being implicitly represented by an express statement as in IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm). In deciding this, however, the court will be required to determine the particular circumstances in which the statement was made and decide whether the representee a) understood the statement in the sense to which the court did and b) subsequently relied on it; Smith v Chadwick (1884) 9 App Cas 187.

In Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm) the court dismissed a misrepresentation claim on the basis that both parties were sophisticated. Arguably, this suggests that it will be extremely difficult for individuals to establish a claim of misrepresentation if it can be shown that they were sophisticated enough to have known that there had been a misrepresentation. Silence, on the other hand, does not necessarily amount to a misrepresentation unless there has been a “representation by conduct” as in Spice Girls Limited v Aprilia World Service BV [2002] EWCA Civ 15, if a party has made a statement that is a half truth, if a statement was true when it was made but later becomes untrue, if the contract is one of the utmost good faith (Norwich Union Insurance Limited v Meisels [2006] EWHC 2811 (QB)) or if there is a duty of disclosure between the parties (Ross River Limited and Blue River LP v Cambridge City Football Club Ltd [2007] EWHC 2115). In order for a party to rely on doctrine of misrepresentation, nonetheless, it must be established that the representee was “materially induced” to enter into the contract; Morris v Jones [2002] EWCA Civ 1790. Therefore, if the party was only slightly induced by the representation and there were additional factors that were material to him being induced then the court will not find that there has been a misrepresentation. Again, this makes it more difficult for a claim to be established and a representee cannot be said to have been induced by the misrepresentation if he did not materially rely on it (McKendrick, 2011: 242). Hence, reliance is a question of fact with the burden of proof being on the defendant to the misrepresentation action; Kyle Bay Limited t/a Astons Nightclub v Underwriters Subscribing under Policy No. 019057/08/01 [2007] EWCA Civ 57. If the court decides that one of the party’s has been induced to enter into the contract then the contract may be rescinded and/or damages may be awarded.

Mistake

A mistake is a belief that is held by one or more of the parties to a contract that is erroneous. The mistake can be a mistake of fact or a mistake of law and must have induced the mistake party to enter into the contract (Wildman, 2009: 2). Depending upon the nature of the mistake, a contract can be voided unless the court decides to correct the mistake as a matter of construction or order rectification of the contract. A mistaken party cannot, however, receive damages for mistake since this type of claim is not considered to be a claim of wrongdoing. There are three different types of mistake of fact, which are common mistake, mutual mistake and unilateral mistake. Common mistake occurs when both parties make the same mistake as in Bell v Lever Bros [1932] AC 161. If this happens the court is likely to hold that the contract was void from its inception and thereby rescind the contract. However, the court must be satisfied that the mistake was sufficiently fundamental to the contract in order to render it void at common law; Great Peace Shipping Ltd v Ttsavliris Salvage (International) Ltd [2002] EWCA Civ 1407. Therefore, if the mistake is only a minor one then the contract will still be enforceable as this would not have affected the contract per se. As such, in order for a party to establish that there has been a mistake they must be satisfied that the mistake was fundamental to them, entering into the contractual relations with the other party.

Mutual mistake occurs when the parties misunderstand each other. In such circumstances the contract would be rendered void at common law, however, if the mistake does not relate to an important part of the contract the court may be willing to disregard the mistaken term and therefore uphold the remainder of the contract; Raffles v Wichelhaus [1864] 2 H&C 906. Accordingly, where there type of mistake occurs the parties must be able to show that they were both mistaken in relation to the particular fact or law, and that it was an integral part of the contract, which again induced them to enter into it. Unilateral mistake occurs when one party makes a mistake, which the other party knows of or is must be taken to know of. In these circumstances, the mistake must be related to the terms of the contract and the court will adopt a subjective approach when deciding whether or not to set aside the contract; Andrew Fender (Administrator of FG Collier & Sons Ltd) v National Westminster Bank Plc [2008] EWHC 2242. The subjective approach allows each case to be determined on its own factors, which is necessary given that different individuals will be unlikely to make the same mistakes. If there has been a mistake of law, any money that has been paid under this type of mistake will be recoverable if the mistake led to one party receiving an unintended benefit; Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL).

Duress

In order for a party to establish that they have suffered from duress during the formation of a contract they must be able to show that there has been some illegitimate pressure as in Barton v Armstrong [1976] AC 104. Nevertheless, as put by Smith (1997: 56) one must distinguish between “wrongdoing and lack of consent” before a contract can be rescinded on the grounds of duress. Duress is a defence under the common law and is concerned largely with threatening behaviour. Therefore, unless there has been a serious threat to the party concerned, they will be less likely to establish a claim of duress and may have to rely on undue influence if they have merely been pressured into entering into the contract. In effect, duress is more serious and will be evident on the facts of the case. Thus, as argued by Beatson (1991: 113); in order for duress to be established it must be shown that there was a “very high degree of interference with the victim’s decision making process.” Essentially, duress will be demonstrated if there is evidence of pressure that is extremely grave. Once it has been established that there exists some illegitimate pressure it must then be shown that the pressure induced a “coercion of the will, which vitiates consent” as in Pao On v Lau Yiu Long [1980] AC 614 and but for that illegitimate economic pressure, the claimant would not have entered the relevant contract or made a payment; SL Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyds Rep 620. Effectively, duress on its own will not render the contract voidable, it will need to be shown that the party would not have entered into the contract had it not been for the duress in which the party suffered. Consequently, if one party has entered into the contract under duress then the contract is voidable by the injured party.

Undue Influence

Undue influence occurs when one party exerts on another party any pressure or influence, which subsequently induced that party to enter into the contract. There are two different types of undue influence which exist, namely; actual and presumed. Actual undue influence happens when one party to a contract inflicts illegitimate pressure onto the other party in order to take advantage of that party. Presumed undue influence, on the other hand, happens when one party takes advantage of a relationship involving trust and confidence with the other party. In Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773, it was held by the court that; “undue influence includes cases of coercion, domination, victimisation and all the insidious techniques of persuasion.” Consequently, if there has been some illegitimate pressure placed upon a party in order to enter into a contract then undue influence will be established if that pressure does not involve a serious threat. This was a significant decision as it illustrated that undue influence will depend entirely upon the circumstances of the case (Adkinson, 2008: 7341). Nevertheless, in demonstrating that undue influence has occurred one must demonstrate that the transaction entered into was “manifestly disadvantageous” in order for the innocent party to succeed because as said by Birks (2004: 34); “not all cases of undue influence can be regarded as cases of wrongs.” This was highlighted in Macklin v Dowsett [2004] EWCA Civ 50 where it was held that; “a transaction that is so manifestly unfair to the transferor can itself be evidence of a relationship of ascendency/dependency.” This decision provides an example of how the court will intervene in order to “protect the vulnerable from exploitation” (Walden-Smith, 2005: 4). A contract will thus be rendered voidable if undue influence is established as shown in Dunbar Bank Plc v Nadeeem [1997] 2 All ER 253.

Conclusion

Overall, there are certain factors that will render a contract void or voidable based upon the particular circumstances of the case. If a contract is void then it cannot be enforced by either of the parties, whereas if a contract is rendered voidable then although it is a valid contract, it can, in fact, be cancelled. Essentially, whilst a void contract cannot be performed, a voidable contract can be until either of the parties decides to cancel it. If there has been a misrepresentation or a mistake the contract may be rendered void and therefore be rescinded. If duress or undue influence has occurred, then the contract may be rendered voidable and thereby capable of being cancelled.

The circumstances in which the protection afforded to members by separate legal personality and the ‘veil of incorporation’ will be removed by the courts.

Introduction

The doctrine of separate legal personality, also known as the veil of incorporation, seeks to protect individuals from liability. However, it is important that there remain exceptions to this doctrine in order to preserve the interests of the public. This is because unless certain circumstances could give rise to the piercing of the corporate veil, the doctrine would allow for significant abuses to occur. In light of this the various exceptions will thus be discussed in this assignment in order to determine what circumstances the veil of incorporation will be removed by the courts.

Doctrine of Separate Legal Personality

The doctrine of separate legal personality was established by the House of Lords in Salomon v Salomon & Co Ltd [1987] AC 22 when they made it clear that individuals could not be held personally liable for the wrongdoings and failures of a company. This provides significant protection to individuals wishing to invest in a company and ultimately protects them against liability. Regardless of this, however, there are certain circumstances in which the protection afforded to members by separate legal personality and the ‘veil of incorporation’ will be removed by the courts. In effect, the veil of incorporation will be capable of being pierced or lifted so that individuals that have acted in a wrongful or unjust manner will not be protected by the law. Although it has been said that this undermines the doctrine (Davies, 2010: 32) and resultantly “undermines the confidence of shareholders” (Hopt and Pistor, 2001: 30), such exceptions are important in preventing abuse as shown in Adams v Cape Industries plc [1990] Ch 433. In Chandler v Cape Plc [2012] EWCA Civ 525 it was held that the veil will be pierced when there is “evidence of fraud, illegality or a sham or if the company is a mere façade concealing the true facts” (sections 213-215 of the Insolvency Act 1986, section 993 of the Companies Act 2006 and section 15 of the Company Directors Disqualification Act 1986). It has nonetheless, been said that much difficulty arises with these exceptions as “veil piecing is not an end in itself but a means to an end” (Talbot, 2007: 29).

Piercing the Corporate Veil

Unless the circumstances of the case give rise to fraud or a pre-existing obligation, however, the courts will be unlikely to pierce the veil in its entirety; Pirelli Cable Holding NV v IRC [2006] UKHL 4. Arguably, the courts will “go to great lengths to avoid any obvious penetration of the corporate veil, whilst still making the sort of inquiries that would be satisfied by just such a process” (Watcher, 2007: 157). This ensures that doctrine is not being completely undermined, whilst at the same time providing protection to the public; Millam v Print Factory (London) 1991 Ltd [2007] EWCA Civ 322. Given the confusion that this may cause, it is integral that the veil is only lifted in exceptional circumstances (French, Mason and Ryan, 2011; 124). This is because individuals will otherwise be discouraged from investing in companies (Ghaiwal, 2012: 3). Therefore, the courts should only be able to “draw back the corporate veil to do justice when common sense and reality demand it” as in Conway v Ratiu [2006] 1 All ER 571.

Conclusion

Although it would seem as though the doctrine of separate legal personality is being undermined by the existence of exceptions, it is important that these remain intact in order to protect the public from abuse. Hence, there needs to be a balance between the interests of the public and the interests of a company and its members. Whether this balance is currently being attained is arguable, though the courts will go to great lengths to determine each case on its own facts in order to maintain fairness. Thus, it is important that the veil of incorporation does not protect those individuals found to have been acting in an unlawful manner. At the same time, however, the integrity of the veil should also be preserved so that a company’s members are not being found personally liable when the company is genuinely suffering.

References

Adkinsion, R., (2008) Under the Influence? New Law Journal, Issue 7341.

Beatson, J., (1991) The Use and Abuse of Unjust Enrichment: Essays on the Law of Restitution, Oxford University Press.

Birks, P. (2004)Undue Influence as Wrongful Exploitation, Law Quarterly Review, 120 LQR 34.

Davies, P. (2010) Introduction to Company Law, 2nd Edition, OUP Oxford.

Fafinski S., and Finch, E., (2009) Law Express: Contract Law. Longman. 2nd Edition.

Ghaiwal, S. (2012) ‘Chandler v Cape plc: Is there a chink in the corporate veil?’, Health and Safety at Work Newsletter, vol 18, no 3.

Gulati, B., (2011) Intention to Create Legal Relations: A Contractual Relationship Necessity ot an Illusory Concept, Beijing Law Review 2, Scientific Research.

French, D. (2011) Company Law, 28th Edition, OUP Oxford.

Hopt, K. L. (2001) ‘Company Groups in Transition Economies: A Case for Regulatory Intervention?’, European Business Organisation Law Review, vol. 2, no. 1.

McKendrick, E., (2011) Contract Law. Palgrave MacMillan. 9th Edition.

Poole, J., (2006). Casebook on Contract Law, 8th Edition, OUP Oxford.

Saha, T. K., (2010) Textbook on Legal Methods, Legal Systems & Research, Universal Law Publishing.

Smith, S. A., (1997) Contracting Under Pressure: A Theory of Duress, 56 Cambridge Law Journal 2.

Talbot, L. (2007) Critical Company Law, Routledge.

Walden-Smith, K., (2005) Protecting the Vulnerable – The Court of Appeal’s Decision in Macklin v Dowsett, Stone Buildings News, Available [Online] at: http://www.5sblaw.com/images/file/5SB_Newsletter_4.pdf

Watcher, V. V. (2007) The Corporate Veil, New Law Journal, vol. 990, no. 7218.

Wildman, E., (2009) Setting aside a contract for mistake, The In-House Lawyer, Available online at: http://www.inhouselawyer.co.uk/index.php/contract/6101-setting-aside-a-contract-for-a-mistake

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