Principles of Business Law
Week 8 lecture
Circumstances
that may
invalidate legal
transactions
About this lecture
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Objectives: To be aware of circumstances in which a contract might be vitiated; to
distinguish between factual situations involving: duress, undue influence, mistake,
unconscionable dealing, and misleading conduct; to explain the consequences of
such circumstances.
1. Behavioural imperatives in legal transactions
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The law does not allow certain types of conduct, e.g. behaviour that is contrary to
good conscience. If a legal transaction (including a contract) is entered into in
such circumstances, it may be treated as void, or declared void by a court, even if
the formal requirements of that transaction are satisfied.
•
A legal transaction is said to be ‘void ab initio’ when the attempt to create it has no
legal effect.
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A legal transaction is said to be ‘voidable ab initio’ when a valid transaction is
initially created, but a court sets it aside as from its beginning. The word ‘vitiated’ is
sometimes used to describe a contract that is made void.
•
If a legal transaction is void ab initio, or after it is set aside as void ab initio, the
parties must restored to their pre-contractual position. This is done by reversing
any performance that was made. This process is called restitutio in intergrum.
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In Australian law, the validity of a legal transaction can be affected by any of the
following circumstances: duress; mistake; undue influence; unconscionable
dealing; and misleading conduct.
Particular vitiating circumstances
In Australian law, the validity of a legal transaction can be affected by any of the
following circumstances:
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duress
undue influence
mistake
unconscionable dealing
misrepresentation
illegality
Wildlife Park
Wolfgang owns Wildlife Park, a small private zoo near
Melbourne. Erica, aged 18, is an employee at the
Park. She is also member of Green Peace and an
animal-rights activist. She has a great emotional
attachment to the gorilla she looks after. Wolfgang
knows all of these things. Anxious to save money, he
asks Erica to give part of her salary towards the
gorilla’s upkeep. Otherwise, Wolfgang tells Erica, he
will have the gorilla ‘put down’ because it is too
expensive to keep. Erica does not trust Wolfgang,
who she thinks is a very devious person, but even so,
she believes he will carry out this threat. Without
asking anyone for advice, she signs a contract
prepared by Wolfgang in terms of which she agrees to
give 25% of her salary to the zoo for as long as she is
employed there. Two weeks later, on the advice of
her family and friends, Erica regrets what she has
done and wants to avoid the contract. On what
grounds might she be able to do so?
Continued…
Wildlife Park continued…
Wolfgang is the owner of a male tiger. Max, the manager of a Sydney
Zoo, says to Wolfgang: “Will you make your male tiger available to
mate with my female tiger?” Wolfgang says: “Yes, for a fee of
$10,000.” Max agrees to these terms and Wolfgang sends his tiger to
the Sydney Zoo for a fortnight. The two tigers get on very well and
are dutifully amorous but the female does not fall pregnant. Max asks
for tests to be carried out on Wolfgang’s tiger. Both Wolfgang and
Max are surprised to find out that Wolfgang’s tiger is infertile. Max
now wants to claim back the fee he has paid to Wolfgang. He says
both he and Wolfgang believed the tiger was fertile and, because it
was not, the contract should be treated as void.
Vitiating circumstances
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DURESS
undue influence
mistake
unconscionable dealing
misrepresentation
illegality
2. Duress
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Duress exists when one party uses, or threatens to use, unlawful force or harm to
obtain the other party’s agreement.
The force or harm may be physical harm to the person; or economic harm; or illegal
actions over their goods (such as refusing to return goods).
The force or harm may be directed at the contracting party themselves, or to
members of their family.
If illegitimate pressure is used to get consent the contract comes into existence, but
can be set aside as void by the court if the person who was forced acts within a
reasonable time.
– Barton v Armstrong [1973] 2 NSWLR 598; [1975] 2 All ER 465
– North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705;
[1978] 3 All ER 1170
Barton v Armstrong
Armstrong seller
Barton -
Barton purchased some
shares in a company from
Armstrong. Some time later,
Barton wanted to avoid the
sale on grounds of duress.
purchaser
It was proved that Barton had decided to buy the shares,
partly for business reasons, and partly because of the
threats made by Armstrong to kill Barton and his family
unless Barton bought the shares .
Could the transaction be set aside as
void on grounds of duress if the threats of
harm were not the only reason for buying
the shares?
North Ocean Shipping v Hyundai
NOS Purchaser
Hyundai agreed to build a
tanker for NOS at a price
fixed in American dollars.
Hyundai manufacturer
After the contract was made, the value of the
American dollar fell steeply. Hyundai said it
would not build the ship unless the price was
renegotiated. NOS, who could not afford a delay
in delivery, agreed to a higher price.
Was Hyundai’s threat to breach the contract and
cause loss to NOS sufficient to constitute duress
and have the new contract set aside?
Is duress applicable to the case-study?
Vitiating circumstances
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duress
UNDUE INFLUENCE
mistake
unconscionable dealing
misrepresentation
illegality
3. Undue influence
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Undue influence may exist when, because of their relationship, one party
necessarily places confidence and trust in the other. The dominant party may
influence the decisions of the weaker.
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If improper (undue) influence is used to make the weaker party enter a contract, the
contract can be declared void.
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The weaker party must act reasonably soon to have the contract set aside.
Continued…
The burden of proof
The particular facts of each case will determine who has the burden of proving
whether or not the transaction in question was brought about by undue influence.
1. Situations where a
general controlling influence
is presumed to exist
The weaker party must prove
existence of relationship
The stronger party
must disprove use of
undue influence
2. Situations where a
general controlling influence
is proved to exist
The weaker party must prove
existence of general controlling
influence
The stronger party
must disprove use of
undue influence
3. Situations where an
actual controlling influence
is proved to exist
The weaker party must prove
that undue influence affected the
transaction
Relationships inevitably involving a general controlling influence
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Some relationships necessarily give the stronger party a controlling influence over
the weaker and contracts between them are presumed to be the result of undue
influence.
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Such recognised relationships are: parent and child; doctor and patient; solicitor
and client; religious advisor and believer.
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To enforce the contract in such cases, the stronger party has the onus of proving
that no undue influence was actually exercised.
– Allcard v Skinner (1887) 36 Ch D 145
Continued…
Allcard v Skinner
Allcard –
Religious
Convert
Allcard joined a religious
order and was persuaded
to give all her assets to
the order.
Some years later Allcard left the
order and wanted to get her
property back.
Skinner –
Representative
of religious
order
What did Allcard have to prove to have the donation
be set aside on grounds of undue influence?
Relationships in which a general controlling influence is proved to exist
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In some relationships, controlling influence is not inevitable but the weaker party
may be able to prove that the stronger party had a general controlling influence.
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Such recognised relationships are: husband and wife; principal and agent;
accountant and client; banker and customer; dentist and patient; employer and
employee.
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If so, a presumption of undue influence arises and the stronger party has the onus
of proving that no undue influence was actually exercised in relation to the contract
in question.
– Johnstone v Buttress (1936) 56 CLR 113
Continued…
Johnstone v Buttress
Butress –
elderly man
After his wife’s death Butress
began to rely on Johnstone
for help in managing his
personal affairs.
Johstone
lady friend
When he had became more reliant on her
help, Johnstone persuaded Butress to
transfer the ownership of his house to her.
After Butress’s death, his children wanted the
transfer of the house set aside as void.
What did Butress’s children have to prove to
have the transfer set aside as void on grounds of
undue influence?
Actual undue influence affecting a specific transaction
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In some circumstances, while a general controlling influence does not exist, it may
be possible for a weaker party to show that the stronger party actually used an
improper controlling influence to bring about the particular transaction.
Example: Your music teacher, who does not normally influence your decision
making, but whose judgement you greatly respect in musical matters, persuades
you to sign up for a six week music camp.
Is undue influence applicable to the case-study?
Vitiating circumstances
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duress
undue influence
MISTAKE
unconscionable dealing
misrepresentation
illegality
4. Mistake (error)
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A mistake is a misapprehension of facts. A mistake might prevent the parties from
reaching sufficient consensus to create a valid contract.
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Agreement is judged objectively: what would a reasonable person conclude from
the external evidence?
– Raffles v Wichelhaus (1864) 2 H&C 906
Continued…
Raffles v Wichelhaus
Raffles buyer
Raffles agreed to buy some bales
of cotton from Wichelhaus. It was
a condition of the contract that
the cotton be placed by the seller
on the ship Peerless at the port of
Bombay.
Wichelhaus
seller
After the contract was made it was discovered
that there were two ships with the same name
(Peerless) due into Bombay at the same time.
In light of the error, was there sufficient agreement for a
binding contract to have been made?
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If, despite the mistake, there is objective agreement, different rules apply,
depending on whether a mistake is bilateral or unilateral.
Bilateral Mistakes
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‘Bilateral’ mistakes occur when both contracting parties are mistaken, for example:
– Both parties assume the subject matter exists when it does not
– Both parties wrongly assume a seller owns the subject matter
– Both parties are mistaken about the identity or quality of the subject matter of the
contract
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If it can be inferred that the agreement was intended to be conditional on the truth
of the assumption, the contract is voidable in common law: otherwise the contract
remains valid in common law.
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If a mistake is made as to the quality of the thing contracted for, the contract is only
made voidable if the error 'makes the thing contracted for essentially different from
the thing that it was believed to be'
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The error must not be the fault of the person relying on it.
Continued…
Cases on bilateral mistake
– Leaf v International Galleries [1950] 2 KB 86
– Great Peace Shipping Ltd v Tsavliris [2003] QB 679; [2002] 4 All ER 689
– McRae v Cth Disposals Commission (1951) 84 CLR 377
Leaf v International Galleries
Leaf
Leaf saw a painting of
Salisbury Cathedral in
International Galleries shop.
He offered to buy the
painting and sale was made.
buyer
Int Galleries
seller
Although nothing was said at the time of the sale,
both parties believed the painting was by John
Constable. But the painting was in fact the work of
another artist.
Could it be inferred from the circumstances that the
transaction was intended to be conditional on the
truth of the belief that the painting was by Constable?
Great Peace Shipping Ltd v Tsavliris
Sinking ship
Cape
Providence
Tsavliris
Salvage
operator
The owners of the Cape
Providence contracted with
Tsavliris to tow their sinking
ship. Tsavliris was worried
the ship would sink before he
could get there.
Tsavliris contracts with the
owners of the Great Peace
for that ship to stand by as
a rescue ship. Both parties
thought that the Great
Peace was the closest
available ship.
Standby ship
Great Peace
After the contract was made, it was discovered that another
available ship was closer. The error related to a quality of the
Great Peace. Did this error makes the Great Peace essentially
different from the thing that it was believed to be?
McRae v Cth Disposals Commission
CDC –
Government
seller
The CDC advertised a
wrecked tanker for sale.
McRae’s bid of 200
pounds was accepted.
McRae Salvage
operator
Having bought he ship, McRae
searched for her but found in the
end she did not exist.
Did the mistake as to the existence of the ship allow the
contract to be avoided at the instance of the CDC?
Is bilateral mistake applicable to the case-study?
Unilateral mistake
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Unilateral mistakes exist when only one contracting party is mistaken. Examples
are:
– one party misunderstands the terms of the contract
– one party misunderstands the type of agreement being created
– one party mistakes the identity of the other contracting party
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If (objectively) there is unconditional agreement despite the unilateral error, the
contract is valid in common law.
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But equity makes the contract voidable if it would be contrary to conscience for the
other party to take advantage of the error: Taylor v Johnson (1983) 151 CLR 422.
But note: Equity will not make the contract void if the rights of third parties would
be adversely affected, for example, if the property in question has already been
resold to an innocent third party.
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Taylor v Johnson (1983)
Johnson
Seller
Johnson sent a written offer
to sell 10 acres of land to
Taylor for $15,000.
Realising the price was very
cheap, Taylor quickly
accepted the offer.
Taylor
Buyer
After the contract was made, Johnson realised
that the words ‘per acre’ had been left out of the
original offer to sell the land for $15,000.
Only Ms Johnson had been mistaken about the terms of
the offer. Could the contract be enforced by Taylor?
Is bilateral mistake applicable to the case-study?
Time for a break
We resume in 10 minutes
Vitiating circumstances
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duress
undue influence
mistake
UNCONSCIONABLE DEALING
misrepresentation
illegality
5. Unconscionable dealing
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The general law recognises that unconscionable dealing may exist when one
contracting party suffers from a disability or disadvantage and so enjoys no
reasonable equality of bargaining power.
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The disadvantage may arise in different circumstances, e.g. because of sickness,
age, illiteracy, drunkenness, emotional dependence, lack of education, lack of
independent assistance or advice.
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To establish unconscionable dealing it must be proved that:
– The effect of the disadvantage is such that the weaker party can’t properly
judge what is in their own best interest; AND
– The disadvantage is, or should have been, evident to the stronger party; AND
– The stronger party takes unfair advantage of the circumstances, e.g. to extract
unconscionable terms or get consent to onerous terms
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If all these requirements are met, a court may set aside the contract on equitable
grounds.
Cases on unconscionable dealing
– Blomley v Ryan (1956) 99 CLR 362
– Commercial Bank of Australia v Amadio (1983) 151 CLR 447
– Garcia v National Australia Bank [1998] HCA 48; (1998) 194 CLR 395
Blomley v Ryan
Ryan
Seller
Blomley wanted to buy
Ryan’s farm, but Ryan
refused to sell.
Blomley Buyer
Knowing Ryan liked to drink excessively,
Blomley took him to a pub, got him drunk
and then got him to agree to sell his farm.
When he had sobered up, Ryan regretted the sale.
Could the transaction be set aside as void on
grounds of unconscionable dealing?
Commercial Bank of Australia v Amadio
Vincente
Amadio –
son and
primary
debtor
Mr & Mrs
Amadio –
parents and
guarantors
V. Amadio needed to extend
his loan from the CBA. They
insisted he find someone to
guarantee the loan. He asked
his parents to mortgage their
property.
CBA Lender and
security holder
Thinking their son’s business was doing well,
and unaware of the extent of the guarantee, Mr
and Mrs Amadio agreed to the mortgage. The
bank accepted their signature without providing
any explanation.
When V. Amadio failed to repay the loan, the bank
sought to enforce the mortgage. In the
circumstances, could the mortgage be made void on
grounds of unconscionable dealing by the bank?
Garcia v National Australia Bank
Mr Garcia
primary
debtor
Mrs Garcia
guarantor
Garcia wanted a loan from
the NAB, who insisted he
provide a guarantor. He
asked his wife, a well
educated woman, to
mortgage her properties as
security for the loan.
NAB Lender and
security holder
Mrs Garcia agreed to her husband’s
request and went to the bank with him
to sign the papers. The bank provided
no advice.
When the bank tried to enforce the mortgage,
Mrs Garcia asked for the security to be set aside
as void on grounds of unconscionable dealing by
the bank. Was she entitled to this relief?
Is unconscionable dealing applicable to the case-study?
Vitiating circumstances
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duress
undue influence
mistake
unconscionable dealing
MISREPRESENTATION
illegality
6. Misrepresentation
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If one person is induced to enter into a contract because of a representation
made by the other contracting party, and the representation turns out to be
untrue, there is no action available for breach of contract, because
representations are not terms of the contract.
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However, if the misrepresentations was made either deliberately or negligently,
then the misrepresentation justifies setting the contract aside as void ab initio.
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Deliberate or negligent misrepresentations also give rise to an action in tort law.
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Misrepresentions that are made neither deliberately or carelessly are called
'innocent misrepresentations' and do not justify setting aside a contract as void,
nor do they give rise to an action in tort. However they may give rise to liability for
misleading conduct under the Australian Consumer Law.
Is misrepresentation applicable to the case-study?
Vitiating circumstances
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duress
undue influence
mistake
unconscionable dealing
misrepresentation
ILLEGALITY
7. Illegality
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In the general law, a transaction may be considered illegal if it contravenes public
policy, for example, by unreasonably restricting a person's right to work or engage
in trade, or because the transaction is considered immoral. There are also a great
number of legislative provisions that may affect the legality of a transaction.
How the law affects an illegal transaction depends on the particular case. Possible
consequences are:
- that the transaction is invalid
- that the transaction is unenforceable
- that the transaction is subject to a penalty
Lindner v Murdock's Garage (1950) 83 CLR 628
Fitzgerald v FJ Leonhardt 1997 HCA 17; 189 CLR 215
Lindner v Murdock's Garage
Lindner
Mechanic
Murdock’s owned and
operated two garages in
towns ten miles apart.
T5hey employed Lindner
as a mechanic in one of
the garages.
Murdock’s
Garage
It was a term of Lindner’s contract that
if he left Murdock’s employment, he
would not work in either town for a
year.
Was this restraint of trade clause reasonable or
unreasonable in its extent?
Fitzgerald v FJ Leonhardt
Fitzgerald
Employer
Fitzgerald employed
Leonhardt to drill boreholes
on his land. Permits were
necessary for the drilling to
commence.
Leonhardt
Driller
Fitzgerald should have obtained the
permits but failed to do so. Leonhard
drilled seven holes and sued for
payment.
Was Fitzgerald entitled to rely on the illegality
(drilling without permits) to avoid paying
Leonhardt?
Is illegality applicable to the case-study?
Notices
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Do the tutorial ‘Avoiding a legal
transaction’ and read Chapter 10 of
the Source Book .
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Check the LMS for the results of
your second skills-task.
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Go to one of the consulting
sessions this week if you need to.
Times and venues are on the LMS.