ABE Principles of Business Law 2008

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Sheikh Brothers Ltd v. Ochsner (1957)

The company granted Ochsner a licence to cut sisal on its estate in Kenya, on condition that he delivered to the company for processing 50 tons per month of the sisal cut. Unknown to both, the estate was incapable of producing this quantity of sisal.

HELD: The contract was avoided. It was based on a false and fundamental assumption.

Unilateral Mistake

As we mentioned earlier, this occurs when only one party is mistaken. It is fundamental that no contract can validly be formed if offer and acceptance do not correspond. So, if one party makes an offer which is accepted in a radically different sense by the other, there is no valid agreement.

However, contracts are construed objectively – so, the test is not what the intention of the one mistaken party was but, rather, what would a hypothetical reasonable person have understood from the words used? Cases can occur when there is so much ambiguity, whether actual or latent, that no reasonable agreement could be reached. Once again, these fall into various categories.

Mutual Mistake

If, even after applying the objective test, the parties are genuinely at cross-purposes as to the subject-matter, or as to the terms of offer or acceptance, the contract will be void.

Raffles v. Wichelhaus (1864)

The parties contracted to buy a cargo of cotton to arrive "ex Peerless from Bombay". Two ships, both named "Peerless" sailed from Bombay – one arriving in October and the other in December. The parties each intended that the contract should be in respect of the different ships.

HELD: The contract was avoided.

The case of Scriven v. Hindley referred to under (d) Mistake as to the Quality of the Subject-matter (above) could also be considered to fall into this category. One party thought the contract was for hemp, the other thought it was for tow.

(a)Mistake as to the Terms of the Contract

A mistake as to the terms of a contract will serve to avoid the contract only if the mistake is known to the other party. In this case there is, probably, an element of bad faith, if not of actual fraud. The normal "objective" test can, therefore, be replaced by subjective intention. It must, however, be an error as to the terms, not as to the quality or substance. These latter constitute motive, and an error in motive will not avoid a contract.

Hartog v. Colin and Shields (1939)

Argentine hare skins were offered for sale. By mistake, they were offered at a price per pound instead of a price per piece. The custom of the trade and previous negotiations had been based on a price per piece. The offer was accepted.

HELD: The purchasers must have known that the offer did not reflect the true intentions of the seller, so the contract was void.

Smith v. Hughes (1871)

Oats were purchased in the belief that they were old oats. They were, in fact, new oats which were quite unsuitable for the purpose. The decision hinged on whether the purchaser made a mistake in thinking they were old oats, or whether he was mistaken

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in thinking he was being offered old oats. In the former event, the mistake would be one of motive – thus, not avoiding the contract. In the latter event, it would be a mistake as to terms, which, if known to the seller, would avoid the contract. The actual decision was, therefore, one of fact for the jury.

It was decided that the contract was binding since the mistake related to the quality or substance of the oats (i.e. motive) which the seller had done nothing to induce.

(b)Mistake as to Person

The next category of mistake is where one party is mistaken as to the person with whom he/she has contracted. It is in this area where most confusion arises, and in which the courts have drawn fine distinctions.

When solving examination questions on this subject, there are two vital questions which you must ask yourself:

"Does the identity of the person with whom the contract is being made matter?" In other words, is it the intention to contract with that particular person, and no other? And, if the answer is "yes", then:

"Is the mistake as to his/her identity, not as to his/her attributes" (e.g. solvency; character; social standing; etc.)?

If the answer to both these questions is "yes", then, in all probability, the contract will be avoided if a mistake has been made.

Let us explain the reason for asking these questions. In the first place, in many contracts it is of no significance with whom a person is contracting. A shopkeeper is not concerned whether he sells a packet of cigarettes to me, or you, or the man in the moon. Hence, if we have falsely stated who we are, it does not affect the validity of the contract.

Whereas, if it is intended to contract with a particular person, and no other, then a mistake as to his/her identity is one which the law recognises as grounds for avoiding the contract. For instance, if you want a solicitor to defend you on a drink/driving charge, and you have heard that Mr A L Cohol is the best man in town, then you want him, and no one else. It is the essence of the contract that he is employed to defend, and not his brother or his clerk.

The second point is that the mistake must be as to the identity of the other person. An error as to his/her attributes does not affect the validity. It is no good thinking that you wish to contract with Lord Gooseberry because he is rich, of high standing, and known to be a good guy. If it turns out that the contract goes sour because his lordship is, in fact, bankrupt, and a thoroughly nasty character, then you have no redress by trying to avoid the contract.

Most of the cases involve fraud in one form or another. They often arise because a fraudulent person has purchased goods and sold them to an innocent third party. The problem then is that, if the contract is void for mistake, the third party has no title to the goods, and must return them. If, on the other hand, the contract is merely voidable for fraud, and is not validly avoided in time, then the third party gets a good title.

A case which illustrates the first question as to whether the identity of the other party is material is Upton-on-Severn RDC v. Powell (1942), which we mentioned in the previous study unit.

To recap: Mr Powell's farm was on fire, so he called the police, which called Upton fire brigade. The Upton brigade promptly arrived and put out the fire. However, unbeknown to Mr Powell, his farm was actually in the Pershore fire brigade area. The Upton brigade sent in a bill for an "out of area" call. Had the Pershore brigade been called, it would have come for free.

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HELD: It was of no significance to Mr Powell which brigade came, so, if he made a mistake, the contract was not avoided, and he must pay.

The other side of the coin is shown by Boulton v. Jones (1957).

Mr Jones had, for a long time, had business dealings with a certain Mr Brocklehurst. One day, he sent a written order for goods, addressed to Mr Brocklehurst. By chance, on that very day, Mr Brocklehurst, without telling Jones, had transferred his entire business to his foreman, Mr Boulton. The latter, on receipt of the letter, dispatched the goods. Jones refused to pay.

HELD: He was not liable to. The identity of the other party was a material consideration and, therefore, the contract was void for mistake.

The question of identity, rather than attributes, is answered by the following illustrations.

Cundy v. Lindsay (1878)

A fraudulent person, called Blenkarn, wrote to Cundy, offering to buy some goods. He forged the signature of Blenkiron & Co. which was a reputable firm, trading in the same street.

Cundy sent the goods under the impression that he was dealing with Blenkiron & Co. The innocent Mr Lindsay purchased them from Blenkarn.

HELD: The contract between Cundy and Blenkarn must be void for mistake. The identity of the contracting party was of material importance.

The opposite result occurred in Kings Norton Metal Co. v. Edridge, Merrett & Co. (1897). One Wallis ordered goods from Kings Norton Metal on the letter heading of a fictitious firm, called Hallam & Co. They were delivered, and Wallis sold them to Edridge Merrett.

HELD: The first contract was good. Kings Norton Metal intended to contract with the writer of the letter. That the company made a mistake as to his attributes did not affect the validity of the contract.

If people contract face to face, this problem of the identity of the other person often presents difficulties. However, the principles, and the questions to be asked, are the same.

Lake v. Simmons (1927)

A woman, called Ellison, posing as the wife of a wealthy customer called Van der Borgh, went into a jeweller's shop. She purchased a few trivial items, to inspire confidence. As a result, she was allowed by the jeweller to take away two valuable necklaces "on approval", for her purported husband. That was the last that was seen of her!

HELD: The jeweller thought he was dealing with Mrs Van der Borgh, and it was for that reason alone that he allowed her to take away the necklaces. The contract was void for mistake.

However, you must always consider the basic rules of contract as to when the contract was actually formed.

Phillips v. Brooks Ltd (1919)

A certain Mr North went into a jeweller's shop. He selected some jewellery and bought it. As he was writing out a cheque for £3,000, he said: "I am Sir George Bullough", and gave an address. The jeweller checked with a directory and found that Sir George did,

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indeed, live at that address. He allowed North to take away the jewellery. The cheque bounced.

HELD: The contract was made before the identity of the person had been disclosed. However, even if it hadn't been, the jeweller intended to contract with the man who came into his shop. The contract was, therefore, valid.

It might have been voidable (i.e. avoidable) but it had not in any case been avoided before title passed. Lewis v. Averay (1972) expressly prefers the voidable (Phillips v. Brooks Ltd (1919)) approach to the void (Cundy v. Lindsay (1878)).

Non Est Factum

The doctrine of "non est factum" (that is not my deed) is a form of unilateral mistake. The principle is that a person is, normally, bound by his signature to a document. If he has not bothered to read it, or he does not understand it, then that is his problem. However, if he has been misled or deceived into signing a document which is essentially different from that which he intended to sign, then he can claim "non est factum", and the document and signature are void. The defence is not lightly available – a mistake as to the contents is not sufficient: it must be one as to the character or effect of the document.

Lewis v. Clay (1898)

Clay was persuaded by a friend of long standing to "witness the friend's signature". A document was placed before Clay, covered up except for four openings for his signature. He duly signed in the spaces provided. In reality, however, what he had signed were two promissory notes and two authorisations to Lewis, to pay the proceeds to someone else.

HELD: The promissory notes were void.

Saunders v. Anglia Building Society (1971)

Mrs Saunders was an elderly widow. She gave the title deeds of her house to her nephew, with the intention that the house should be a gift and enable him to borrow money on the security of it. It was a condition that she should be able to live there for the rest of her life. Later, she was persuaded by a friend of the nephew, who she knew was helping him get a loan, to sign a document. The friend said it was "to do with the gift". The old lady, who had broken her spectacles, signed without reading the document. The document was, in fact, a conveyance of the house to the friend.

HELD: The plea of non est factum failed. The whole series of events had to do with the title of the house; so, the document Mrs Saunders signed was not essentially different from what she thought it was.

E. MISREPRESENTATION

A representation is a statement made by one party to the other, before or at the time of contracting, with regard to some existing fact or to some past event, which is one of the causes inducing the contract. If a person is misled into entering a contract by an untrue statement or representation, made by the other party before or at the time of making the contract, then the party who has been deceived may have a right of redress. Such an untrue statement is called a misrepresentation.

Note that a person's actions or behaviour may amount to a misrepresentation. In Walters v. Morgan (1861) the court stated that "a single word or ... a nod or a wink, or a shake of the head, or a smile" intended to induce a person "to believe in the existence of a non-existing fact, which might influence the price of the subject to be sold" will constitute misrepresentation.

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Rules

There are four rules which decide whether a particular statement is a misrepresentation such as to allow of redress and, if it is, what that redress may be.

In the first place, in order to constitute a misrepresentation, the statement must be one of fact, either past or present. Statements of law or of opinion cannot be misrepresentations, nor can statements of intention which are not carried out. Second, the representation must induce the contract. In the third place, it must be addressed to the party misled. Lastly, it must be false or untrue.

Let us examine these requirements in more detail.

(a)Statement of Fact

In negotiating a contract, all sorts of statements are made. Some are "mere puffs" not intended to be taken seriously. A good example of this is "probably the best lager in the world ".

Others are expressions of opinion.

In Anderson v. Pacific Fire Marine Insurance Co. Ltd (1872), a shipping company effecting an insurance policy wrote to the company and stated that in the ship's master's opinion a certain anchorage was good. The vessel was later lost at that anchorage.

HELD: The letter was not a representation of fact, but merely of opinion.

Expressions of intent do not constitute misrepresentations, unless they are false statements of the intentions of the party making them. If a person says "I intend to do something" and at the time of making the statement she genuinely does so intend, then even if she breaks her promise, it will not constitute a misrepresentation of fact. But if she says it, with the intention at the time of breaking the promise, then she is misrepresenting a fact, and legal consequences flow from it. The fact she has falsely stated is the state of her mind. As Lord Justice Bowen remarked in Edgington v.

Fitzmaurice (1885):

"The state of a man's mind is as much a fact as the state of his digestion .... A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact".

Lastly, the untrue statements must be of fact, not law. This must, however, be taken with reservations. A misstatement of the general law is not a fact, but a false statement of a person's private legal rights may well be a misrepresentation of fact. A person is deemed to know the general law, so should not be deceived, but he/she cannot necessarily know or check on private legal rights. The matters are therefore considered to be facts.

(b)The Statement Must Induce the Contract

If a false statement is made to which the other party pays no attention, or which does not in any way influence him, then this does not affect the validity of the contract. The degree of inducement does not have to be total but the party deceived must, to some material extent, have been influenced by the statement into making the contract.

Horsfall v. Thomas (1862)

Horsfall manufactured a gun for Thomas, which had a defect making it worthless. Horsfall tried to conceal this by inserting a metal plug in the defective part.

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misstatement is negligent if it was merely carelessly made, but it is fraudulent if it is made with evil intent or recklessly.

The distinction is, however, important, for, although the innocent party has a right to claim damages under the Misrepresentation Act 1967, Section 2(1), his/her additional remedy of rescission is by virtue of Section 2(2) of the Act, subject to the discretion of the court. The court's discretion will be exercised only if it would be "equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as the loss that rescission would cause to the other party".

At the time of Derry v. Peek "fraud" was deemed to include recklessness. See also

Spice Girls Ltd v. Aprilla World Service BV (2000).

(c)Innocent Misrepresentation

This type of false statement is one which was made neither fraudulently nor negligently. By virtue of Sections 2(1) and 2(2) of the 1967 Act, the remedies for an innocent misrepresentation are either rescission or damages – but not both. Further, neither of these remedies can be claimed as of right. The court has the unfettered power to make whichever order would be just and equitable in the circumstances.

F. UNDUE INFLUENCE

A contract is voidable at the option of the innocent party if it was entered into as a result of undue influence.

Duress

If a person is coerced into making a contract by fear for his own physical wellbeing or that of his immediate family, or for the safety of the goods, or – on rare occasions – for his economic profits, this is called "duress". The coercion may be either actual or threatened. The socalled contract is void.

(a)Duress to the Person

This consists of actual or threatened violence to the person, or imprisonment. It can be either in respect of a party to the contract or in respect of her immediate family. The degree of threat necessary varies with the physical or mental state of the person threatened. In other words, the test is a subjective one. If the person was in a state of fear, whether reasonably so or not, then this will suffice to permit her to avoid a contract she was coerced into making as a result of the threats of or actual physical violence or imprisonment. Imprisonment, in this sense, does not necessarily mean being thrown into gaol. It also means loss of liberty, e.g. by being locked in a room.

Mutual Finance Co. Ltd v. John Wetton & Sons Ltd (1937)

A family company was induced to give a guarantee for a debt by threats to prosecute a member of the family for the forgery of a previous guarantee. At the time, the coercers knew that the father of the alleged forger was in a delicate state of health.

HELD: The guarantee would be set aside.

(b)Duress of Goods

This is actual or threatened unlawful detention of goods. This type of duress does not, at common law, entitle a party to avoid a contract entered into as a result of the duress

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but, in equity, it entitles him/her to recover any money paid in order to secure the release of the goods.

Maskell v. Homer (1915)

Tolls were paid on goods as a result of the threat of seizure. The tolls were unlawfully demanded.

HELD: The money could be recovered.

(c)Economic Duress

The threat of loss of profits if a contract is not made is called "economic duress". It has only fairly recently been recognised by the law as a possible cause for avoiding a contract, and the law on economic duress is not yet fully developed.

The proposition is that if a person is induced to enter into a contract by fear of loss if he/she does not agree to the contract, this may constitute actionable duress. However, the degree of coercion must be substantial. In Pao On v. Lau Yiu (1979), the Privy Council said:

"There is nothing contrary to principle in recognising economic duress as a factor which may render a contract voidable, provided the basis of such recognition is that the duress must amount to coercion of will which vitiates consent. It must be shown that the payment made or the contract entered into was not a voluntary act."

This case was an unusually complicated one from Hong Kong, and it hinges on factors other than duress. However, a good example is North Ocean Shipping Co. Ltd v.

Hyundai Construction Co. Ltd – "the Atlantic Baron" (1978).

An oil-tanker, the Atlantic Baron, was being built in Korea. As is usual, the price was contractually payable in stages, in US dollars. The owners had made a long-term charter contract for the ship with Shell to commence on the date she was due to be delivered by the builders. Part-way through the building contract, the US dollar was devalued by 10%, and the builders demanded an extra payment on subsequent stages of payments to correct this. They threatened to withhold delivery if these extra sums were not paid. In the meantime, the bottom had dropped out of the tanker charter market, so had the vessel not been delivered in time, the owners would have been compelled to renegotiate the charter contract with Shell at a far lower market rate. The loss over a long-term charter would have been enormous. Thus, to avoid this, they paid up.

HELD: The action of the builders was potentially economic duress such as to allow the owner to recover the money paid under duress. However, in the circumstances, they had failed adequately to protest, and had been deemed to have affirmed the contract as altered.

Contrast Atlas Express Ltd v. Kafco (Importers and Distributors) Ltd (1989), which we mentioned in the last study unit. Here a small company entered into an agreement with a national firm of carriers. The carriers subsequently purported to impose higher charges than previously agreed. Because the company was unable to find an alternative carrier and was heavily dependent on the contract, it reluctantly agreed to the new terms but later refused to pay.

HELD: The facts constituted economic duress and the carriers' claim for additional payment was dismissed.

In CTN Cash and Carry Ltd v. Gallaher Ltd (1994), the claimants owned six wholesale warehouses and the defendants were manufacturers and distributors of certain popular cigarette brands. Separate supply contracts were entered into periodically between each of the warehouses individually and the defendants, and the

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defendants granted the claimants credit facilities, though these could be withdrawn at any time.

The manager of one of the claimants' warehouses submitted an order to the defendants, but through mistake the cigarettes were delivered to one of the other warehouses. The defendants arranged to collect the cigarettes and deliver them to the right one, but before they could do so, they were stolen. The defendants, under the mistaken impression that the cigarettes were at the time of the burglary at the claimants' risk, invoiced the claimants for their payment.

The claimants rejected the invoice, whereupon the defendants notified the claimants that their credit facilities would be withdrawn. The claimants, faced with this threat, paid the invoice and thereafter took proceedings against the defendants, contending that the money had been paid under duress.

HELD: The defendants' conduct had not amounted to duress, and accordingly the claimants’ claim failed. Common law does not recognise inequality of bargaining power in commercial dealings: the defendants had merely exerted commercial pressure not amounting to legal duress with a view to recovering a sum of money which they believed in good faith at the time to be due to them.

The lesson to be learnt from these cases is:

That the duress must be such as to vitiate consent, and

That any contract entered into or money paid must be done under formal protest, and rescinded as soon as the duress has lifted.

Undue Influence

Undue influence is said to exist where one person has a special relationship with another and, as a result of this relationship, that other is induced to enter into a contract to his/her disadvantage.

Where there is a confidential or fiduciary relationship, the stronger party must show that undue influence was not exerted.

Lord Chelmesford said in Tate v. Williamson (1866):

"Wherever two persons stand in such a relationship that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed."

Examples of where such a confidential relationship is likely to exist are:

Parent and child

Guardian and ward

Solicitor and client

Doctor and patient

Religious adviser and the person to whom advice is given

Trustee and beneficiary.

A confidential relationship is, strangely enough, not automatically presumed between husband and wife, although it can be shown to exist. Nor is the above list exhaustive. Any

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situation where trust and confidence are imposed by reason of the relationship can be one where undue influence can apply.

In Tufton v. Sperni (1952), P and D were both members of a committee to establish a Moslem cultural centre in London. P was going to provide funds, and D induced him to buy D's house for the centre at a grossly high price.

HELD: The contract would be set aside by reason of undue influence.

There is no necessity for there to have been actual fraud for a contract to be set aside for undue influence. Undue influence must, however, be proved, except in cases of confidential relationships.

In Credit Lyonnais Bank Nederland NV v. Burch (1996), the defendant was employed by a company which was experiencing financial problems. One of the company's directors, who was known to the defendant and her family, asked the defendant to put her flat up as collateral security for the company's overdraft in favour of the claimant bank, the company's bankers. He did not, however, explain the company's detailed financial position to her, but intimated that if she failed to provide the collateral security requested, the company would collapse and she would be out of work.

The claimant bank took steps to advise the defendant to take independent legal advice before entering into a formal mortgage of her flat to them, but she did not do so and entered into the mortgage, guaranteeing repayment of the company's borrowing from them without limit. It became necessary to enforce the mortgage by her, due to the further deterioration in the company's trading position.

HELD: The mortgage could not be enforced against the defendant and would be set aside because the transaction was so patently disadvantageous to the defendant as to raise a strong presumption of undue influence. This presumption had not been rebutted, because the claimant bank had failed to take reasonable steps to avoid being fixed with constructive notice of the employer's undue influence over the defendant, when neither the potential extent of her financial obligations had been explained to her nor had she received independent advice in fact. It was necessary that she should have at least received independent advice in the circumstances before she entered into the mortgage.

Contracts made under undue influence are voidable. Rescission is, however, an equitable remedy, and, therefore, discretionary. Existing rights are not affected but the contract comes to an early end.

The party seeking to set aside a transaction on the grounds of undue influence cannot do so in the following circumstances:

If third parties have acquired rights under it, bona fide and for value.

If there has been unreasonable delay. "Delay defeats equity." The facts of each case must determine what constitutes reasonable delay.

Allcard v. Skinner (1887)

A young lady, on entering a convent, made over her property to the convent. After a year she left the convent but delayed for five years before applying to the court to rescind her gift. It was held that she was defeated because of the unreasonable delay. Once she had left the convent, any undue influence had ceased and she should have taken prompt action in the matter.

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