Law of Contract: Genuine Consent

Although the contract may have the essentials of a valid offer, acceptance, legal intentions and consideration, its validity or enforceability may be affected by a number of factors. The agreement may be wanting in genuine consent between the parties. That is, although the parties may appear to have reached an agreement, it may not have been genuinely achieved because of misconduct, pressure, unfairness, or fear by those involved.

As separate issues to genuine consent, the law allows minors and others lacking legal capacity to be relieved of contractual obligations in certain circumstances; additionally, the validity of the contract is affected if the subject matter of the contract is illegal at law, or the contract is not in the required form under a particular statute.

For the purposes of this course, we focus on the topic of ‘absence of genuine consent’ and specifically the issues of misrepresentation (both innocent and fraudulent), undue influence, duress and unconscionable conduct. In such circumstances, the parties have not entered into the contract voluntarily or with real agreement, although on the face of it, the rules for offer and acceptance may appear satisfied. Here, the law allows the innocent party to ‘avoid’ the contract, involving the return of the parties to the pre-contractual position. Such a remedy is known as rescission. Please note that the issue of ‘mistake’, which is also falls under the category of ‘genuine consent’ or ‘lack of true agreement’, is not part of this course.

On successful completion of this lecture, you should (within the scope of the course) be able to:

explain the significance of ‘an absence of genuine consent’ in relation to a simple contract define misrepresentation and describe the key elements of misrepresentation distinguish between fraudulent and innocent misrepresentation, and identify the respective remedies for each define duress, describe the key elements of duress and identify the remedy for duress define undue influence, describe both types of undue influence and identify the remedy for undue influence define unconscionability, describe the key elements of unconscionability and identify the remedy for unconscionability

Effect on Contract Before we begin our discussion, it is important to revisit the notions of void and voidable contracts which were defined at the beginning of the lectures on contract. Void contracts are those which have no legal effect whatsoever and hence cannot be enforced in a court. Voidable contracts, on the other hand, include those which can be rescinded, if possible, at the option of one of the parties on the basis that they did not genuinely consent to the agreement.

Rescission (the noun from the verb rescind) returns the parties to their original pre-contractual positions. In the case of voidable contracts, the innocent party can either expressly or impliedly affirm the contract or otherwise exercise the option to rescind it. The right to rescind might not be available if: it is not exercised within a reasonable time

the parties cannot be restored reasonably close to their original positions third parties acting in good faith and for valuable consideration have acquired intervening rights (such as the goods that were the subject of the contract being later on-sold to a 3rd party) if the contract has been expressly or impliedly affirmed by the innocent party

ABSENCE OF GENUINE CONSENT

The grounds for alleging a lack of genuine consent include:

  1. Misrepresentation
  2. Duress
  3. Undue influence
  4. Unconscionability

MISREPRESENTATION

Background Generally, when contracts are being negotiated, pre-contractual statements are made between the parties in the natural course of discussion, some of which may become part of the contract, and others which may serve only as inducements to one party or the other to enter the contract. Statements which are intended by the parties to have contractual effect are known as ‘contractual representations’ or ‘terms’. Statements which induce a contract but are not intended by the parties to become part of the contract are known as ‘non-contractual representations’ or ‘mere representations’.

For the purposes of this course, and to avoid possible confusion, we shall use the word ‘representation’ in the latter sense, namely those pre-contractual statements intended to induce a contract but which do not form a part of the contract. Hence, representations must be distinguished from statements that become part of the terms of a contract and will therefore give the innocent party a right to terminate and/or sue in the event of their breach. Representations must also be distinguished from the self evident exaggerations in sales talk and mere advertising “puff”, such as “the best little car in town.” In certain circumstances, a representation may amount to a misrepresentation, and allow the contract to be avoided by the party to whom it was made.

Definition A misrepresentation is a pre-contractual (i.e. it is stated before the contract is made) false statement of fact made by one party which induces the other party to enter into the contract.

Rules as to misrepresentation

1) must be a false statement The general rule is that silence cannot constitute a misrepresentation where there is no obligation to divulge information. However, if silence distorts an existing representation, then it may constitute misrepresentation. Hence, a misrepresentation will not be constituted by silence unless: the statement made is a half-truth -for example, a seller of a building says it has tenants but omits to disclose they have been given notice to quit. no disclosure of the fact that a true statement has subsequently become false in the time between the making of the statement and the making of the contract. the contract is one of utmost good faith (for example, a contract of insurance) when full disclosure must be made. there is a fiduciary relationship (one that involves trust and confidence, such as that of a partner in a partnership, of an agent to a principal, and of a director and company)

2) must be of fact not of opinion The statement must of a factual nature, rather than belief or opinion. For example, consider a statement which falsifies the details of past profits. Profits made in the past are of a factual nature as they can be objectively determined. Hence, the statement is one of fact, albeit false. Contrast this with an opinion or prediction of a future event, such as an estimate of future profits

3) must be relied upon in entering into the contract The statement must be relied upon: that is, it was not only intended to induce but it did in fact induce the other party to enter the contract. Hence, there must be an intention by the person making the statement for the other person to rely or act on the statement. Further, the statement must be one of the reasons inducing the other party to enter the contract. A statement will likely have no effect if the other party never knew of its existence, or did not allow it to affect his or her judgement, or they were aware of its untruth.

Innocent v Fraudulent Misrepresentation

Innocent Misrepresentation is one made honestly, with a genuine belief in its truth and without any intention of deceiving the other party. From Derry v Peek (1889) 14 App Cas 337, fraudulent misrepresentation is defined as one made knowingly or without believing in its truth or recklessly (careless whether it be true of false) with deliberate intention to deceive.

Therefore, once misrepresentation has been established (that is, false statement of fact which was intended to induce and did induce the person to enter the contract), for it to be fraudulent, it must be shown that the defendant knew it to be false, or had no belief in its truth, or made it recklessly, careless whether it be true or false. The person making the statement need not actually know that the representation is in fact untrue. Liability arises if the person makes the false statement when he or she has no knowledge whether it is true or false or when he or she fails to verify the statement. There is no fraud if the person making the statement genuinely believed the statement to be true.

Remedies for Misrepresentation For innocent misrepresentation, the other party can rescind but has no right to damages. The common law does not specify any formal action by the courts to effect rescission (for example, the need for court orders), and accepts that the contract comes to an end upon the decision to rescind and not to affirm. Court involvement occurs where the right of rescission is disputed, which is conceivably not uncommon.

For fraudulent misrepresentation, the other party can rescind and/or sue for damages (in tort of deceit, not in contract).

DURESS

Duress to the person involves actual or threatened violence or imprisonment to the contracting party or his or her immediate family (parent, spouse or child) so that the contracting party is deprived of his or her free will.

The violence need not necessarily be actual; it may be by threats. Further, the violence or threat need not be made to the person of the other party; it can be made to her or his family or near relatives. Duress can involve actual or threatened imprisonment or the bringing of unfounded criminal proceedings and may be made by the other party or by someone else who is acting upon her or his instructions and for her or his benefit.

Case Summary reading – Understanding Business Law (2008) text, page 161 (section 6.27) Barton v Armstrong [1976] AC 104

Importantly, Latimer (1998, p. 326) notes that there are two key elements to duress: (i) pressure amounting to compulsion of the will of the victim, and (ii) the illegitimacy of the pressure exerted, which includes a threat to do something unlawful such as actual or threatened violence, imprisonment, or bringing unfounded criminal proceedings. The target of duress need not be the plaintiff; it is sufficient if threats are made concerning their immediate family and near relatives.

Duress may be found to influence the creation of a contract although it need not be the only motivation to contract. Hence, it is not necessary to show that the coercive act was the only cause of entering the contract, just that it was a contributing factor. Duress, if proven, results in the law allowing the party suffering duress to rescind the contract. Given the nature of the circumstances of duress, it is likely that an innocent party would seek a court order to set aside the contract, rather than perhaps seek the cooperation of the other party in returning to a pre-contractual situation.

Pentony, Graw, Lennard and Parker (2003, p. 109) note that the doctrine of duress had been traditionally limited to physical duress but is now extended to circumstances “whenever there has been a coercion of the will of one party so that the consent was a result of the coercion, and thus the act of entering into the contract was not voluntary.” Duress can apply to threats or damage to property or economic interests, although these issues are beyond the scope of this course.

UNDUE INFLUENCE

Definition Undue influence involves the improper use by the dominant or ascendant person of such ascendancy (over the other person) for their own benefit (or someone else) so that the acts of the person influenced in entering into a contract are not free and voluntary acts (from Union Bank of Australia Ltd v Whitelaw [1906] VLR 711 at 720 per Hodges J). That is, the exertion of influence by A over B to such an extent that B is prevented from exercising his independent judgement in entering into the contract. Where it is shown that a contract was tainted with undue influence, the remedy for the innocent party is rescission, whereby the parties are returned to their pre-contractual circumstances.

Types of Undue Influence

Presumed undue influence Where there is a special relationship (recognised by the Courts) between the parties, undue influence is presumed to exist (the presumption can be rebutted by evidence to the contrary). For special relationships of a dominant/subservient nature involving a fiduciary relationship (that is, one involving trust and confidence of one party to another), the courts presume that there has been undue influence in the entering of the contract. These special relationships are: parent and child

guardian and ward trustee and beneficiary solicitor and client doctor and patient religious adviser and devotee or parishioner

The onus of proof is on the dominant person in the relationship to rebut presumption by, for example, proving that the other party had relevant independent third party advice. Khoury and Yamouni (2003, p. 310) note that “the list is not exhaustive” and “it is open to a party to a relationship not included in the list to argue that, in the circumstances, his or hers is a fiduciary relationship. Hence, plaintiffs in other types of fiduciary relationships (such as in certain circumstances, bankers to customers) may also be able to benefit from the presumption.

Case Summary reading – Understanding Business Law (2008) text, page 165 Johnson v Buttress (1936) 56 CLR 113

Actual undue influence Where the parties are not in a relationship of confidence or trust, but the contract is alleged to have arisen from some improper influential conduct by one party to the other, undue influence will need to be proved as a fact. In such a situation, the party seeking to rescind the contract for undue influence has the burden of proof. Here, the courts take into consideration evidence of inadequate value in the contract or a great imbalance in the terms of the contract favouring the stronger party, amongst other matters.

Case Summary reading – Understanding Business Law (2008) text, page 167 Geelong Building Society (in liq) v Thomas (1996) V Conv R 54-545; Aust Contract Reports 90-068

Unconscionability (Unconscionable Contracts or Unconscionable Conduct) Definition Unconscionable conduct arises where B is at a special disadvantage in dealing with A because of illness, ignorance, inexperience, impaired faculties, financial need or other circumstances which affect his ability to look after his own interests and A, aware (or ought to have been aware) of such disability, unconscionably (i.e. against the conscience) takes advantage of the opportunity thus presented in entering into a contract with B. In other words, there is the taking of unfair advantage by A against B.

Unconscionable conduct results in the Law allowing contract to be rescinded. For unconscionability, there is no need for any relationship of trust or confidence as generally in undue influence, just a special disadvantage. Hence, a transaction will be unconscionable only if the party seeking to enforce the transaction has taken unfair advantage of their superior bargaining power, or of the position of disadvantage in which the other party was placed. Importantly, the doctrine of unconscionable conduct looks to a special disadvantage of one party to the other. Just what amounts to unconscionable conduct is something which is objectively assessed by the courts.

Case Summary reading – Understanding Business Law (2008) text, page 168-169 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 Reading for this lecture from the Understanding Business Law text Chapter 6: Apparent Contracts: Lack of True Agreement, sections 6.1 through 6.11; 6.26 through 6.36