Genuine Consent: Factors that Negate a Contract

Negating Factors

 Consent is the cornerstone of the law of contract

 Functions of contract law:

 Promote certainty that promises will be kept

 Allocate the risk that is inherent in many contracts

 What kinds of risk may occur over the life of a contract?

 Functions of contract law are compromised by lack of genuine consent

 Void  no legal effect

 Voidable  permits one party to escape it at their option

Void contracts:

 A void contract is unenforceable  neither party has legal recourse against the other for a
breach

 A contract can be void from the beginning or become void due to certain circumstances,
including:

o illegal activity

o against public policy

o impossible to perform

o involves a person who is not legally competent

 A contract may be valid when it is executed, but later become void due to

o changes in the law or

o the circumstances of either party make fulfilling the contract impossible.

 Some issues will make a contract “void on its face,” meaning that the contract as written is
void and cannot be amended to make it enforceable.

Voidable Contracts:

 A voidable contract can still be performed under the law; however, the aggrieved party has
the option to cancel the contract if genuine consent has been negated by legal defects, such
as:

o Misrepresentation

o Unconscionability

o Duress or undue influence

o Mistake
Misinterpretation

Promised this:
Got this:

Statements are made during contract negotiations which lead the other person to make the
contract.

 A ‘mere representation’ is not part of the contract because the parties do not regard these
as binding

 But a statement that the car is a 2020 BMW is a misrepresentation if it is untrue

 However, just saying it is a ‘luxury car’ is puff, not a misrepresentation

 To succeed in an action for misrepresentation person must show that the:

 Statement was false AND

 That statement induced them to enter the contract

Misinterpretation (False statement of fact)

Derry v Peek (1889)
Facts: Peek bought shares in a tramway company on the basis of a prospectus (info the company
provides) that stated the company had the right to use steam powered trams as opposed to horse
powered trams. This statement was incorrect; the permit to use steam power was never granted
and the company went into liquidation.

Issue: Could Peek recover his money on grounds of fraud?

Held: The statement was not fraudulent but made in the honest belief that approval was
forthcoming.

Fraudulent misrepresentation is a statement which is made:

i) knowing it to be false, or
ii) without belief in its truth, or
iii) recklessly, carelessly as to whether it be true or false.
To be a
misrepresentation, there must be a mis-statement of fact

Tip: Identify the statement in question

eg “the farm will support 1000 sheep” Bisset v Wilkinson [1927]

Has this statement induced the party to enter into the contract?

Silence generally does not constitute misrepresentation but exceptions:

 Half truths

 Change of circumstances

 Fiduciary relationship

 Contracts where full disclosure is req’d

 Active concealment: R v Kylsant [1932]

Misinterpretation: Options for mis-representee

 Contract is voidable at option of mis-representee: a right to rescind

 The effect of rescission is to put the parties back into their pre-contractual positions

 Parties’ positions are adjusted by court

HOWEVER, the right to rescind a contract can be easily lost by:

- affirmation of the contract after becoming aware of misrep or

- by delay or

- where total restoration of the parties to their positions pre-contract is not achievable
(parties may be substantially restored)

Damages ($$) will be awarded with the intention of putting the plaintiff in the same position that
they would have been if the misrepresentation had not occurred.
 The Remedy of Rescission

Alati v Kruger [1955] 94 CLR 216

Facts: K purchases fruit business

from A for £700, clause in contract
said weekly takings were £100 – in
fact it was much less.

Issue: Could contract be rescinded

for misrep?

Held: Yes. Contract was rescinded

Misinterpretation: Alternative Arguments and A was ordered to return the
Note right to rescind (‘R2R’) lapses after reasonable purchase price and compensate K for
amount of time. If R2R is lost  his losses.

 aggrieved party might instead try and prove that the statement formed part of the
contract rather than being a misrepresentation

 they could then sue for breach of a condition

 See Oscar Chess v Williams

 Alternatively, the aggrieved party could argue that the statement constitutes a
collateral promise

- thus enabling them to argue breach of collateral contract.

 See also s 18 of the ACL

Mistake:

 Doctrine applies to mistakes of FACT not law

 People are presumed to know the law

 Although the law is reluctant to set aside contracts, if one or both parties are so mistaken
about an aspect of the contract it may bring into question whether there was agreement

 Three Kinds of Mistake

1. Common Mistake – both parties mistaken about the same fundamental thing

2. Mutual Mistake – both parties mistaken about different things

3. Unilateral Mistake – only one party is mistaken

Common Mistake

The test of ‘objective conditionality’: was consent conditional on the truth of what was believed?

Leaf v International Galleries:

Facts: both parties mistakenly believed that painting of Salisbury Cathedral was by (famous artist)
Constable but was actually by unknown artist.
Issue: Whether mistake was so fundamental as to render contract void

Held: Not common mistake because buyer bought the painting, mistake was to value/quality
only.Parties were agreed on existence of subject matter. Contract was valid.

The test of ‘objective conditionality is a hard test to satisfy

Great Peace Shipping v Tsavliris Salvage [2003] QB 679

Facts: Ship was in danger of sinking, so owners contracted with the Great Peace (ship) to rescue
crew, both believing it to be closest to the sinking ship. Then TS discovered another ship was closer
and tried to avoid the contract.

Issue: Did the error make the contract voidable?

Held: Not void. The common law takes a strict approach because its important to preserve the
reliability of contracts. Here, although the Great Peace turned out not to be the closest, it was still
capable of performing the task. The mistake was not sufficiently fundamental to void the contract.

Mutual Mistake

Raffles v Wichelhaus (1864)

Facts: W agreed to buy bales of cotton from Raffles. The cotton was in India and it was a condition
that the seller would put the cotton on board the ship Peerless for transport from Bombay to buyer
in England. It was later discovered there were two ships called Peerless, at different times. Each
party believed the contract referred to a different ship.

Issue: Was there a binding contract between W and R?

Held: The contract was void for mutual mistake as a reasonable objective person would declare
there was no agreement as the parties were at cross purposes. The contract was latently ambiguous
and so void.

Unilateral Mistake

Taylor v Johnson (1983)

Facts: J gave T an option to purchase 10 acres of land for $15,000. T exercised the option to purchase
but J refused to sell because she thought the price was $15,000 an acre, making the total price
$150,000.

Issue: Could J rely on unilateral mistake to avoid the contract?

Held: High Court said contract was not void for unilateral mistake since offer and acceptance
corresponded to terms of the agreement. However, court set aside the contract on equitable
grounds because T knew that J was mistaken about the price and sought to take advantage.

Lewis v Averay [1972]

Facts: Lewis sold his car in return for a worthless cheque to a rogue who persuaded him that he was
a well-known actor.

Issue: Whether contract between rogue and Lewis was void for unilateral mistake on the part of
Lewis
Held: ‘When two parties have come to a contract – the fact that one party is mistaken as to the
identity of the other does not mean that there is no contract, …. It only means that the contract is
voidable, …, so long as he does so before third parties have in good faith acquired rights under it. …
The contract is evidenced by the receipts which were signed. It was, of course, induced by fraud. The
rogue made false representations as to his identity. But it was still a contract, though voidable for
fraud.

Example:
 Rose owns two cars, a 2007 Mercedes and a 2012 Nissan. She emailed Pam and offered to
sell her “my car for $3,000”. Pam emailed back “I accept your offer.” However, it now turns
out that Pam thought she was buying the Mercedes, when in fact Rose had meant to sell her
the Nissan.

 Required: Determine using common law principles whether there is a legally binding
contract between Pam and Rose?

Mistake:

1. Unilateral: A one sided mistake, made by only one of the parties (Taylor v Johnson (1983)

2. Common: Where both of the parties are mistaken about a fundamental aspect of the
contract (Leaf v International Galleries [1950]

3. Mutual: Where both parties believe they have reached an agreement but are actually
thinking different things (Raffles v Wichelhaus (1864)

2 ships called ‘Peerless’ sailing btw Bombay and Liverpool!

Issue: Whether there is genuine consent for the purpose of a contract coming into existence.

 Rules

Raffles v Wichelhaus  Mutual mistake

The parties were transacting over different shipments of cotton on two different ships. Here,
although the parties seem to conclude a bargain over “my car”, the parties are contemplating
completely different material.

 Leaf v International Galleries  Common mistake

Both parties thought the painting was by Constable. The mistake must be fundamental eg existence
of subject matter and not merely as to some characteristic such as quality or value

Apply: Rose and Pam are at cross purposes, there is not a mistake as to the subject matter itself so
Leaf is distinguished as not applicable.

Example:

 Adam entered the Reality Art Gallery and saw a painting which he immediately liked. On
making enquiries to Rudy, the owner of the gallery, he was told the particular painting was a
Vermeer landscape and had a price of $500,000. Adam saw this as a good investment and so
he purchased the painting. Some months later a scandal broke out involving a master forger
who specialised in Vermeer paintings. Adam became very worried and after seeking an
 expert evaluation, his worst fears were confirmed. He further learnt that the painting has a
value of about $1,000.

 Adam wishes to know whether he has any legal remedies. Advise him.

First Issue: Whether representation: he was told the painting was a Vermeer landscape is a
misrepresentation

Rule: A misrepresentation is a false statement [first element] of fact which induces [2 nd element] the
representee to enter a contract. Can be:

1. fraudulent misrepresentation see Derry v Peek

- knowingly

- without belief in its truth

- recklessly

1. negligent misrepresentation

- in breach of duty of care

3. innocent misrepresentation

- genuinely believed to be true

Application: Most likely innocent misrep as forgery only came to light a few months after sale

Conclusion: The affect of a finding of misrepresentation is the contract is voidable ie the contract
exists but may be set aside by the representee. Thus Adam can rescind the contract and get his
money back

Other legal issues regarding the representation: he was told the painting was a Vermeer landscape

 Misleading and deceptive conduct: s 18 Australian Consumer Law 

 Mistake as to quality  no remedy (Leaf v International Galleries) .

 Breach of contract: is the representation a term?

Savage v Blakney  statement or opinion? Statement

Oscar Chess v Williams - was dealer an expert? Yes

Handbury v Nolan - how soon before the contract was statement made? Appears quite soon

Routledge v Grant - was statement reduced to writing? no, he was ‘told’

Van den Esschart v Chappel - How important was statement? Very!

Conclude: On balance of above factors, it is more likely the representation was a term, so contract
breached. Rudy will be able to claim damages (loss on value)

Collateral Contract:– Did representation cause Adam to enter main contract to purchase painting?

Rule: De Lasalle v Guildford

Set out requirements for collateral contract

Application: Statement was promissory, does not contradict main contract and was the price
(consideration of entry into main contract) as Rudy would not otherwise have paid that high price,
therefore collateral contract

Conclusion: Breach of collateral contract

Unconscionable Conduct:

Unconscionable Conduct (‘UC’) in the General Law

 Law does not tolerate conduct that is contrary to good conscience

 ‘Unconscionable’ means conduct against good conscience, or behaviour that is harsh and
oppressive.

 Courts apply a generalised idea of the behaviour good conscience dictates

 UC may occur in a pre-contractual situation in which one of the contracting parties has
superior bargaining power and the other party has some ‘special disability’.

 Contract will usually involve an inequality of bargaining power but must have more than that
for UC.

Commercial Bank v Amadio (1983)

FACTS: Vicenzo Amadio owned a building company in financial distress, a fact well known to bank.
The CB froze overdraft. His parents were elderly Italian immigrants who spoke little English and who
were regular customers of the bank. Vicenzo told bank his parents would guarantee his debts by
mortgaging their property in favour of bank. Amadio parents believed business was successful and
Vicenzo told them their liability was limited to $50k (both lies). Bank manager brought documents to
Amadio’s home – did not explain nor check they understood. Months later the company went
insolvent and parents faced financial ruin.

ISSUE: Could mortgage contract be set aside on grounds of unconscionable dealing?

HELD: Yes. Parents were at a special disadvantage because did not know of son’s debts, nor the true
extent of their liability under the mortgage. They were elderly and had little English. They relied on
Vicenzo to judge their best interests. Bank knew enough about these circumstances to be put on
enquiry, and should have taken steps to ensure the Amadios appreciated what they were signing.

Three requirements for UC:

1. The weaker party must have a “special disability” vis a vis the stronger party so that there is
no real equality between them.

2. The stronger party must be aware of that “special disability”

3. It must be unfair or “unconscientious” for the stronger party to procure agreement in those
circumstances

4. The bank was a stronger party compared to Amadios so unequal bargaining power.

5. Amadios ‘special disability’ which bank knew about:

 old

 reliant on son
  spoke poor English,

 didn’t get a benefit from the contract,

 didn’t get independent advice

 circumstances of signing the contract (in the kitchen of their home)

UC - Garcia v National Australia Bank [1998]

Facts: Garcia had signed guarantee in favour of NAB over loans to husband’s gold trading business,
secured by family home. Business failed and couple divorced.

Issue: Could wife set aside guarantee on grounds of UC by bank?

Held: Bank could not enforce its security against the wife.

i. Wife did not understand effect of transaction

ii. Wife gained no financial benefit

iii. Trust & confidence relationship between husband/wife  bank must ensure understanding
of matters

iv. Bank did not take steps to explain transaction to wife

Louth v Diprose (1992)

Facts: Diprose was infatuated with Louth & showered her with gifts. Louth advised Diprose she was
depressed and was going to be evicted and would commit suicide (untrue). In response, Diprose
agreed to buy a house for her to live in. Years later, when their relationship deteriorated, Diprose
asked Louth to transfer the house into his name. She refused and he brought proceedings seeking to
recover the house.

Issue: Could the house be recovered?

Held: Yes. Louth had manufactured an 'atmosphere of crisis' where non existed. Diprose was in a
position of emotional dependence on Louth. Louth's conduct was unconscionable; calculated to
induce, and actually inducing, an improvident transaction conferring a benefit upon her.

Kakavas v Crown Melbourne(2013)

Facts: K was gambler, lost $20m over a year.

Issue: Had Crown acted unconscionably?

Held: No. Gambling is a rare commercial activity where each party seeks to cause the other financial
damage. UC if casino had encouraged a pensioner or drunk patrons, however K was a wealthy ‘high
roller’, who could stay away when he wished.

Example: Maddie’s business is in trouble and the bank has now advised her that it can no longer
extend credit without some form of security. Maddie’s boyfriend, David, owns his own house. David
is very much in love with Maddie and wishes to please her. While David is recuperating from
concussion in hospital, Maddie and the bank’s loans officer get David to sign a contract of guarantee
to secure Maddie’s business debts using his house as security. When signing, David has no idea that
Maddie’s business is in trouble. Maddie’s business becomes insolvent, and the bank seeks to recover
$100,000 from David under the contract of guarantee.

Required: Using common law principles, advise David as to whether the contract can be set aside.

UC – doctrine of equity – equity is concerned with how people behave

ISSUE: The legal issue in this matter is whether David can set aside the contract on the grounds of
unconscionable conduct (UC).

 RULE: Commercial Bank of Australia v Amadio (1983)

Unconscionable conduct involves unfairly taking advantage of another person’s special weakness or
disadvantage.

The elements of UC are:

1. One party has a special weakness or disadvantage.

2. The other party knows of this weakness or disadvantage.

3. The other party uses or takes advantage of the weakness or disadvantage.

APPLY: David must establish is that he has a special weakness or disadvantage.

Could argue that he is very much in love with Maddie and wished to please her (Louth v Diprose
(1992)

Was recuperating from concussion in hospital. Thus there is a special weakness, as in she knew of
this weakness and exploited it to her advantage.

 Maddie has superior bargaining power

 David has some ‘special disability’.

 Maddie taking advantage of David’s concussion and feelings for her will amount to
unconscionable conduct

 Does not appear that bank has undertaken steps to ensure David is aware of his liability under the
contract.  

CONCLUSION: If David is successful in establishing UC, the guarantee will be void.

Undue Influence

 Undue Influence (UI) in the General Law Presumption of UI when the parties are in a special
relationship of trust and confidence such as:

 Parent/child

 Doctor/patient

 Teacher/student

 Trustee and beneficiary

 Solicitor and Client

 Religious adviser & devotee

  UI == the improper use of ascendancy acquired by one person over another for the
benefit of the ascendant person, so the acts of the person so influenced are not
really their own voluntary acts.

UI: Johnson v Buttress (1936)

Facts: Mr B Senior was old, illiterate, recently widowed & very dependent on Mrs J. Mr B Senior gave
friend Mrs J a cottage. After Mr B Senior died, his son Mr B sued Mrs J to get the cottage back.

Issue: Could Mr B set aside contract on grounds of UI?

Held: Because Mr B Senior depended on & trusted Mrs J, the relationship was one of trust &
confidence, so that UI was presumed (& Mrs J was not able to prove that Mr B Senior had acted
voluntarily), so she had to give cottage back.

Undue Influence (UI)

 UI usually arises when there is a transfer of property for no consideration or inadequate

consideration.

 If weaker party can prove the stronger party had a controlling influence, the court will
presume any transaction entered into with the stronger party is tainted by UI

 If an unreasonable amount of time has lapsed may lose right