Contracts – Problem Question
Week 10 – Question 2: Mistake, Undue Influence
Johanan Ottensooser: 10873305
Chris Croese, Wednesday, 12:00pm.
Word Count: 1,096
1 Question
Grace is now 95 years old and lives alone. She is devoted to her only relative, her nephew John.
John tells Grace that he would like to lease her classic 1966-MG sports car that has been
unused in Grace's garage since her cataract operation 10 years ago. He offers to lease the car
for $500.00 per year. He tells her that if she doesn't agree he will not look after her or visit her
at weekends. Grace agrees.
John asks Grace to sign a document that (unbeknown to Grace) is in fact a contract for the
sale of the car to John for $500.00. John subsequently resells the car to Sam for $50,000.00
Can Grace successfully recover the car from Sam? What should Grace have done to protect
herself from such a situation arising? What else can she do?
Discuss neither misrepresentation nor unconscionability.
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2 Contents
1
Question .................................................................................................................................. 1
2
Contents................................................................................................................................... 2
3
Formation of the contract ....................................................................................................... 3
4
Mistake .................................................................................................................................... 3
5
4.1
Non est factum ................................................................................................................. 4
4.2
Unilateral mistake at equity ............................................................................................. 4
Undue influence ...................................................................................................................... 5
5.1
Presumed undue influence .............................................................................................. 6
5.2
Express undue influence .................................................................................................. 6
6
Conclusion and recommendations .......................................................................................... 7
7
Bibliography ............................................................................................................................. 8
8
7.1
Articles, books, journals ................................................................................................... 8
7.2
Case law............................................................................................................................ 8
7.3
Statutes ............................................................................................................................ 9
Appendix: diagrams for presentation.................................................................................... 10
8.1
Fig. 1 – formation ........................................................................................................... 10
8.2
Fig. 2 – types of mistake ................................................................................................. 11
8.2.1
Fig. 3 – non est factum ............................................................................................ 12
8.2.2
Fig. 4 – unilateral mistake at equity........................................................................ 13
8.3
Fig. 5 – undue influence ................................................................................................. 14
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3 Formation of the contract
It seems that the elementary requirements of contract are satisfied. There is an explicit offer
and acceptance in the written contract and Grace’s signature.
Both sides provide consideration: John’s being cash and Grace’s the vehicle. Whilst the
consideration might seem inadequate, consideration need only be sufficient, that is, of some
value.1 Consideration is satisfied.
The contract was formed within an extended family. This may attract a rebuttable presumption
that there was no intention to be legally bound. 2 This claim is weakened since John is a distant
family member.3 Further, the presumption would be rebutted since written contracts have
obvious legal consequence.4 Intention to be legally bound is established.
Grace is old, but of sound mind.5 As such, there is no issue of capacity.
The contract formed for the sale of Grace’s 1966 MG sports car to John for $500 appears valid.
Grace’s mistake as to the contents of the contract, as well as John’s apparent undue influence
may allow her to options in common law and equity.
4 Mistake
Since only Grace mistook the contents of the contract unilateral mistake is relevant to this case.
Grace is likely to pursue non est factum and unilateral mistake in equity: mistaken identity is
irrelevant.6 Such mistakes exclude consensus ad idem.
Legal mistake requires that a term central to the construct is mistaken.7 Grace believed the
terms of the document were different: a contract for lease as opposed to a contract for sale,
satisfying this requirement.
1
Thomas v Thomas [1842] 2 QB 851; White v Bluett (1853) 23 LJ (NS) Ex 36.
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95.
3
John was her nephew, a relationship which does not attract this presumption, as opposed to a husband or son
which may have.
4
Riches v Hogben [1986] 1 Qd R 315.
5
Gibbons v Write (1954) 91 CLR 423.
6
Common law will not void a contract for unilateral mistake outside of mistaken identity, where identity is central
and cases of non est factum: Ingram v Little [1961] 1 QB 31; Taylor v Johnson (1983) 151 CLR 422.
2
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4.1 Non est factum
Non est factum8 derives from a drastic mistake via explanation. Grace bears the burden of
proof for this plea.9 Where a third party’s rights may be at stake,10 there is a higher burden on
the signer.11
Petelin suggests a heavy burden on Grace. 12 Being literate, she can only succeed in this plea if
she: “through no fault […], is unable to have any understanding of the purport of a particular
document.”13 Whilst her ability to understand the document would have been diminished by
age and John’s pressure, had she read the document, she would have understood it. Thus, this
element is not satisfied.
It is clear that it was her carelessness14 that created this mistake. Since there is an innocent
third party involved, carelessness is unacceptable.15
Non est factum would not succeed.
4.2 Unilateral mistake at equity
For the unilateral mistake to succeed in equity, the mistake must be known and fundamental. 16
This may lead to specific performance being denied (to John), the rescission of the contract, or
rectification of the terms of the contract.
The contract has been executed by both parties: specific performance is not being sought.
Thus, it cannot be denied by equity. Further, common law will rarely deny specific performance
because of unilateral mistake.17
7
Bell v Lever Brothers Ltd. All E. R. Rep. 1; Petelin v Cullen (1975) 132 CLR 355; Taylor v Johnson (1983) 151 CLR
422.
8
Non est factum translates to “it is not my deed”: Butterworths, Carter on Contract, vol 2 (at Service 27) [22-500].
9
Ibid; Petelin v Cullen (1975) 132 CLR 355, 359.
10
Sam’s rights to the vehicle which he purchase innocently.
11
Petelin v Cullen (1975) 132 CLR 355, 360.
12
Ibid., 359.
13
Ibid., at 359, per Barwick CJ, McTiernan, Gibbs, Stephen and Mason JJ.
14
Grace acted carelessly in not reading the document.
15
Petelin v Cullen (1975) 132 CLR 355.
16
Butterworths, Carter on Contract, vol 2 (at Service 27) [22-300, 22-340]; Philip Clarke, Julie Clarke and Ming
Zhou, Contract Law: Commentaries, Cases and Perspectives (2008) 323; Smith v Hughes (1871) LR 6 QB 597, 605.
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The threshold of inducement required by Taylor v Johnson for rescission is: the unmistaken
party is aware of the mistake “and deliberately sets out to ensure that the first party does not
become aware of the existence of [her] mistake.”18 Here, John not only knew of Grace’s
mistake as to the nature of the contract, he actively induced it in an unconscionable manner.19
Thus, it seems that unilateral mistake at equity may rescind the contract.
Grace may seek that the contract’s terms be rectified: the terms changed to reflect their
agreement. Marulinga Enterprises requires a substantial error as to a term of the contract to
be made by Grace; with John’s full knowledge; where John does not stop Grace making the
mistake; and where it would be unconscionable not to rectify this position.20 John not only
knew of Grace’s error, he caused it. John acted unconscionably in eliciting this mistake and
derived substantial benefit from this transaction.21 As such, it may be that the contract is rewritten in order to reflect the terms agreed upon.
However, these are equitable remedies, and equity will not allow the rescission or rectification
of the contract since it would prejudice Sam’s22 rights.23 It may be possible for Grace to recover
monetary damages equal to the value of the vehicle.24
5 Undue influence
John influenced Grace’s decision. If the court finds this constituted undue influence, the
contract becomes voidable. Grace’s age does not lower the burden for undue influence.25
17
18
Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14700, 14808.
Smith v Hughes (1871) LR 6 QB 597; Taylor v Johnson (1983) 151 CLR 422, 431, per Mason ACJ, Murphy and Dean
JJ.
19
Taylor v Johnson (1983) 151 CLR 422, 444.
ANU, Mistake (2002) ANU <http://law.anu.edu.au/colin/Layout/Mistak_h.htm> at October 9 2010; Maralinga
Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336.
21
He bought the car for $500 and sold it for $50000, a gross profit of $49500.
22
This paper assumes that Sam did not know of John’s trickery and was an innocent third party.
23
McKenzie v McDonald (1972) VLR 134.
24
Hartigan v International Society of Krishna Consciousness Inc [2002] NSWSC 810.
25
Fiona R Burns, 'Undue Influence Inter Vivos And The Elderly' [2002] MULR.
20
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5.1 Presumed undue influence
The relationships which automatically attract a presumption of undue influence are strictly
limited.26 The relationship between an aunt and nephew will not automatically this
presumption.
Outside of the recognized relationships which attract the assumption, a relationship of undue
influenced may still be presumed. Grace must show that she relied and trusted John, who
would have inhabited a position of power in their relationship.27 Johnson allows the intimacy of
the relationship and the manner of business to define the relationship.28 Whilst Grace is
devoted to her nephew, there is no evidence of a relationship of trust. Further, the court has a
tendency not to find special relationships for older people based merely on dependence,
whether physical or emotional.29 John’s manner of business, his lying, may, alongside his
position of power in their relationship and his social threat, attract a presumption of undue
influence.
This presumption, if found, has not been rebutted, since Grace was not given time or
independent advice before signing the contract.30
5.2 Express undue influence
If the court found that their relationship did not attract a presumption of undue influence,
Grace might be able to argue express undue influence based on the manner in which John
conducted his business.31 Whereas most cases of express undue influence require time
pressure, in this case it is probable that undue influence will be found elsewhere in the business
dealings, namely at the leveraging of the relationship and the threat accompanying nonacceptance.32
26
The relationship between a parent and child will attract this automatic presumption, but a relationship between
a husband and wife will not: Johnson v Buttress (1936) 56 CLR 113, 119.
27
Ibid., 121.
28
Ibid., 122, 135, 137.
29
Burns, above, n25, sB.
30
Johnson v Buttress (1936) 56 CLR 113, 137.
31
Butterworths, Carter on Contract, vol 2 (at Service 27) [24-001].
32
Odorizzi v Bloomfiled School District (1966) 246 Call App 2d 123, 133.
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It is clear that John acted outside of the spirit of contract: he lied as to the nature of the
contract; he threatened as to the consequences of not immediately accepting; and he exploited
his relationship with Grace. As such, he may have exerted undue influence on Grace, nullifying
her consent. Again, here, Grace would be allowed the option, since the contract would be
made voidable, of recovering money or accepting the contract. Her right to recover property is
null because John passed the title of the car to Sam, an innocent third party.
However, it is not clear whether Grace signed the contract because of John’s influence or
because she wanted to rent the car for $500 a week. If evidence shows that his influence did
not affect her wanting to sign the contact (which she believed to be a rental agreement), then
undue influence would be unavailable to her as a legal option.
6 Conclusion and recommendations
It is clear that consensus ad idem has not, objectively, been reached.33 However Grace cannot
retrieve her car from Sam. She may recover damages from John if her claims of mistake or
undue influence are upheld. Grace might have been able to claim under s42 of the FTA.34
To prevent this from occurring in the future, I would recommend reading any contract signed,
and to take legal advice before signing every contract.
33
34
Lucy v Zehmer (1954) 84 SE 2d 516.
Trade Practices Act 1974 (Cth) s52; Fair Trading Act 1987 (NSW) s42.
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7 Bibliography
7.1 Articles, books, journals
ANU, Mistake (2002) ANU <http://law.anu.edu.au/colin/Layout/Mistak_h.htm> at October 9
2010.
Burns, Fiona R, 'Undue Influence Inter Vivos And The Elderly' [2002] MULR.
Butterworths, Carter on Contract, vol 2 (at Service 27).
Clarke, Philip, Clarke, Julie and Zhou, Ming, Contract Law: Commentaries, Cases and
Perspectives (2008).
7.2 Case law
Bell v Lever Brothers Ltd. All E. R. Rep. 1.
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95.
Gibbons v Write (1954) 91 CLR 423.
Hartigan v International Society of Krishna Consciousness Inc [2002] NSWSC 810.
Ingram v Little [1961] 1 QB 31.
Johnson v Buttress (1936) 56 CLR 113.
Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14700.
Lucy v Zehmer (1954) 84 SE 2d 516.
Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336.
McKenzie v McDonald (1972) VLR 134.
Odorizzi v Bloomfiled School District (1966) 246 Call App 2d 123.
Petelin v Cullen (1975) 132 CLR 355.
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Riches v Hogben [1986] 1 Qd R 315.
Smith v Hughes (1871) LR 6 QB 597.
Taylor v Johnson (1983) 151 CLR 422.
Thomas v Thomas [1842] 2 QB 851.
White v Bluett (1853) 23 LJ (NS) Ex 36.
7.3 Statutes
Fair Trading Act 1987 (NSW).
Trade Practices Act 1974 (Cth).
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8 Appendix: diagrams for presentation
8.1 Fig. 1 – formation
Agreement
Consideration
Intention
Capacity
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• Was there an offer? ✓
• Was there acceptance acceptance? ✓
• Consensus ad idem? see mitigating factors
(§6.2, 6.3, below)
• Was there consideration? ✓
• Was the consideration suficient? ✓
• Was there an intention to create legal
relations? ✓
• Were the parties of age? ✓
• Were the parties lucid? ✓
10
8.2 Fig. 2 – types of mistake
Mistake
✓
One party makes an
error
✓
Both parties make
errors
Unilateral Mistake
✓
Mistaken Identity
Mistake as to the
nature of the
contract
?
Non est factum
?
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Recission
The error is the
same
The errors are
different
Unilateral mistake
at equity
?
Common mistake
Mutual mistake
Rectification
Refusal of specific
performance
11
8.2.1 Fig. 3 – non est factum
Non est factum
✓
Defendant signer cannot
read/understand the
document
?
Through no fault of their
own
?
The actual contract was
radically different from
the one explained
✓
Third party involved
✓
No third party
Mistake was not due to
carelessness
?
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8.2.2 Fig. 4 – unilateral mistake at equity
Unilateral mistake at equity
The mistake is fundamental
✓
The mistake is "induced"
✓
The non-mistaken party knew of the
mistake
✓
The non-mistaken party did not bring
the mistake to the mistaken party's
attention
✓
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8.3 Fig. 5 – undue influence
Undue influence
Express undue
influence
Presumed undue
influence
Relationships that
automatically
attract the
presumption
Time pressure
Leveraging of
relationship power
Consequences for
not accepting the
offer
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Parent/Child
Lawyer/Client
Other
relationships
which attract the
presumption
etc.
A relationship of
trust
A relationship
where one party
has dominance
14