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Wednesday, December 15, 2010

GENUINE CONSENT IN CONTRACT

An agreement can only result in a binding contract if the parties consent freely and genuinely to its terms. As the court explained in Adeola v. Henry Stephens & Sons Ltd., a contract is essentially an expression of the free-will of the parties, not an imposition or, something obtained through trickery or fraud. The parties' negotiations must result in a genuine consensus ad idem (a meeting of the minds), or no binding contract can arise.

VITIATING FACTORS:
These are factors Which operate to nullify or negate the consent which parties appear to have bestowed on a contract. The four factors which vitiate a contract are as follows:
1. Duress,
2. Undue influence,
3. Misrepresentation, and
4. Mistake.
Each of these vitiating factors affect a contract differently. Some may render an agreement totally void, while others only make it voidable, unenforceable, or just illegal.




DURESS
Duress arises when a party is induced to enter into a contract by force or the threat of force. In this event, consent is not freely given and hence such contracts are voidable at the option of the party under coercion.


In Cummings v. Ince, an eighty-year old lady was threatened that she would be confined unlawfully to a mental asylum if she refused to sign a document transferring some of her property to a relative. Held: her consent to the transfer was vitiated by duress.


Legal Effect of Duress:
It is generally agreed that the effect of duress is to make the agreement voidable. The party concerned can have it set aside if he wishes. If he does not do that but acts on it voluntarily, he will be bound by the agreement.


UNDUE INFLUENCE
Undue influence arises if excessive authority or pressure brought to bear on a party to such extent that his free will is completely overcome by the other party's. Undue influence vitiates consent because it renders a party incapable of acting as a free agent. Almost all cases of undue influence arise because a party who has authority or power over another, uses this power wrongfully to exert his consent to agreement.


Proof of Undue Influence
The following approaches or methods are possible:


(a) Agreements between specially related parties:
If a special (fiduciary relationship exists between the parties so that one can unduly control the mind of the other, their agreement shall be presumed to be vitiated by undue influence once the allegation is made. The following parties are linked by special/fiduciary relationship at law:
(i) Solicitor and client,
(ii) Priest or spiritual adviser and disciple,
(iii) Parent and child.
(iv) Trustee and beneficiary,
(v) Doctor and patient,
(vi) Guardian and ward,
(vii) Husband and wife.
The list however is not exhaustive. The test is whether opportunity for unconscientious use of one's authority over another exists or not Whenever undue influence is alleged and presumed in cases like these the other party can refute or rebut the presumption by proving that the complainant obtained independent (legal) advice before he entered into the disputed agreement.
It is necessary too to prove that the adviser had all relevant information about the agreement to enable him give independent advice. In Taylor v. Brewer (1813) 1 M & S. 290, a woman challenged an agreement under which she had transferred some of her property to her father. It was held that her consent was vitiated by undue influence since her father also acted as her solicitor in the transaction and he had not proved that the lady obtained independent advice before she consented to the transfer.


(b) Agreements where parties are not specially related:
In such cases, no presumption of undue influence arises. Rather the party making the allegation has to provide evidence to show that undue influence exists in fact. This can be done, for example, by showing that the other party had obtained some authority over the plaintiff which he had used unconscientiously to obtain his consent to the agreement. In Hodgson v. Mark, an elderly lady transferred her house to her lodger and allowed him to manage her affairs. He later sold the house. Held: undue influence was to be presumed from the relationship and the benefits obtained by the lodger.


Legal Effect of Undue Influence:
Undue influence makes an agreement voidable. The person unduly influenced can have the agreement set aside if he acts in good time, and does nothing to show that he has subsequently affirmed the agreement. Again, the agreement should be avoided before innocent third parties become affected or involved.
MISREPRESENTA TION
Misrepresentation is another important factor whose presence vitiates consent and prevents an agreement from becoming a binding contract.
Definition: Misrepresentation consists of untrue statements, relating to some existing facts, or past events, made by a party to induce the other party to enter into an agreement. From the definition, the features of misrepresentation are as follows:-


(a) Misrepresentation takes the form of an untrue statement:
There must be evidence that an untrue statement was made (either in writing, verbally, or by conduct). For the general rule is that silence does not constitute misrepresentation. The exceptions to this rule or the situations in which silence may amount to misrepresentation are as follows:


(i) Contracts uberrima fidei - These are contracts like insurance and
Partnership which are based on utmost good faith. Parties are obliged
to volunteer all material information to each other. Non-disclosure
may therefore amount to misrepresentation and make the agreement
voidable.
(ii) If a true statement made in the course of the negotiations subsequently becomes false, failure to inform the other party before the agreement is finalized may amount to misrepresentation.
(iii) When silence distorts and makes a representation untrue, i.e. half-truths.
In R. v. Kylsant (1932) 1 K.B. 442, for example, a company issued a prospectus offering shares for subscription and stated that it had paid dividends throughout the preceding five years. It omitted to disclose that dividend was rather paid from extra-ordinary items. The court held that this omission amounted to misrepresentation since it gave the wrong impression that the company had made profits throughout the period.
(b) The untrue statement must be made before or at the' time of. Making the contract: The purpose of making representations is to persuade a reluctant party to contract. These representations may be incorporated into the agreement itself if the parties want. If that happens, the representations become terms of the contract. If incorporated as a part of the terms of the agreement, it affords a party extra protection since the other party thereby contracts or warrants that the representations are true, and may be sued for breach of contract if they turn out to be untrue.
(c) A statement of opinion, intention or about the law does not amount to misrepresentation: If a party gives an opinion, i.e. he states beliefs which are based on grounds that cannot be subjected to any proof, he cannot be liable for misrepresentation. To advertise a product as "the best of its kind in the world" is regarded as mere puffery. Since every salesman is entitled to "puff-up" h is products to attract customers, he is entitled to state his opinion and commend the virtues of his wares. This right is expressed in the Latin maxim simplex commendatio non obligat (mere commendation creates no obligations). On the basis of this maxim, it was held in Scott v. Hanson that it is not misrepresentation to describe one's land as "uncommonly rich"


Types and Consequences of Misrepresentation
Misrepresentation may be described as either innocent, negligent or fraudulent. Each attracts different legal consequences.


1. Innocent Misrepresentation:
This arises if a party makes untrue representations without being aware that the statements are false. At common law, no remedy for damages existed unless the untrue statement had been incorporated into the terms of the contract. The injured party can only apply for rescission of the contract, i.e. for the contract to be set aside, and all benefits obtained under the agreement restored to their owners.


2. Negligent Misrepresentation:
These are untrue statements made because the maker failed to exercise reasonable care. The position that such untrue statements are actionable was adopted by the House of Lords in the important case of Hedley Byrne & Co. Ltd. v. Heller. & Partners Ltd (1964) A.C. 465. The effect of this rule is that one is liable to pay for losses arising from his failure to exercise reasonable care in making statements that he knows that other parties will rely on to decide whether to contract or not. A party can only sue for damages for negligent misrepresentation if he can prove that he has relied on the statements and suffered damage as a result.


3. Fraudulent Misrepresentation: As defined in Derry v. Peek (1889) 14 App. Cas. 337, fraudulent misrepresentation consists of untrue statements that are made
(a) Knowing that they are untrue, or
(b) Believing that they are untrue, or
(c) Made recklessly, without caring whether they are true or not.
Fraudulent misrepresentation is the worst case of securing consent to agreements falsely. Consequently, the party who is misled into an agreement by fraudulent misrepresentation has the right either:
(i) To rescind the contract if it is possible to restore the parties to their pre-contractual positions, or
(ii) To affirm the contract but still sue for damages for the tort of deceit.


All agreements obtained by fraudulent misrepresentation are voidable. The deceived party may therefore repudiate the agreement, and, if sued, plead the other's fraud as his defence.


SUMMARY OF REQUIREMENTS FOR MISREPRESENTATION
1. It must consist of representations or statements on matters that are material to the contract.


2. The statements or representations must be made before or at the time of entering into the agreement.




3. The statements should be made with the intention that it should be believed and acted upon.


4. The statements must be acted upon by inducing the agreement or causing the party to consent to the agreement.


MISTAKE
The term mistake is used in contract law to describe the situation in which one or both parties to an agreement acted under an untrue belief about the existence or non-existence of a material fact. In at least four situations, mistake as a vitiating factor, may make an agreement void and incapable of being enforced as a valid contract. These are cases of res extincta, res sua, non est factum and a unilateral mistake about the identity of a party. Apart from these four cases, the general rule is that the mistake of a party does not affect the validity of a contract.
TYPES OF MISTAKE
Mistake may be one of these three types, namely, common mistake, mutual mistake and unilateral mistake.


Common Mistake
A common mistake occurs where both parties are suffering from the same handicap. For example, contracts to sell corn to B and unknown to both parties, the corn have perished before the contract was made. The above example is a mistake concerning the existence of the subject matter of the contract.


Mutual Mistake
Mutual mistake occurs where the parties have negotiated at cross-purposes. For example, A agrees to sell his horse to B, A is thinking of his white horse and B is thinking of A’s black horse. This is a mistake concerning the identity of the subject matter of the contract.


Unilateral Mistake
Unilateral mistake occurs where one party only is mistaken, and the other party knows or is deemed to know about the mistake. For example, A makes an offer to B only; C accepts the offer, knowing full well that the offer was made to B only. A thinks mistakenly that the acceptance was made by B. This is a mistake as to the identity of the other contracting party.
Legal Effect of Mistake
Though "to err is human", the law does not accept that once a party makes a mistake, he should be forgiven and released from his obligations. The following kinds of mistake do not generally an agreement:


(a) Where a party makes a mistake about his legal rights and powers. For the general rule affirmed in Agbaje v. Bankole "ignorance of the law is no excuse" (ignoratio juri excusat). Everybody is presumed to know his or her legal rights.


(b) A mistake as to the true value, quality or characteristic of something contracted for will usually not affect the agreement. Parties are normally held bound by the contract because rule that parties must protect their own interest, i.e. caveat emptor (buyer must beware).


Laymen are prone to believe as a result, that the law is harsh on parties who made genuine mistakes. However, the common law and equity have accepted some situations in which some genuine errors on the part of one or both parties may render the contract, if any, void and of no effect.




The four situations in which mistake may make an agreement void are as follows:
1. RES EXTINCTA:
Where both parties make a common mistake about the existence of the subject matter of the agreement, the agreement is void. For example, in Couturier v. Hastie (1856) 5 H.L.C. 673, the parties who were in Britain were not aware that the cargo of maize they had contracted for had been sold already in Spain by the shipmaster because it was going bad before the contract was signed. Held: no contract.


An insurer may also mistakenly agree to insure the life of somebody without
the customer/proposer or the insurer knowing that the person to be insured had already died as in Srickland v. Turner (1852) 7 Exch. 208. These examples are cases where the goods or subject matter of the agreement had ceased to exist before the agreement was entered into.


2. RES SUA:
If a party mistakenly buys what belongs to him, there is no contract. In Abraham v. Oluwa (1944) 7 NLR 123, for example, neither the seller nor the buyer knew at the time of the sale of piece of land that the land already belonged to the buyer. The court consequently held that their common mistake rendered the agreement void. This situation is known as res sua.


3. NON EST FACTUM (IT IS NO MY DEED):
If a party mistakenly signs a document, the doctrine of non est factum may permit the agreement signed to be set aside if all the following conditions are satisfied:
(a) The party signing must have been led to sign a document which is fundamentally different in nature from the one he intended to sign.
(b) The other party was aware of his mistake; he normally tricks the other party to sing, and
(c) The party who singed must act without negligence i.e it must be shown that he took reasonable care.
In Lewis v. Clay (1987) 67 LJQB 224, the defendant was presented with a document covered with blotting paper by a fraudulent lord. He was informed by the Lord that the document related to some secrete family matters, and the defendant was expected to sign as a mere witness. It turned out to be a note in which the defendant promised to pay certain debts owed by the lord to the plaintiff. The court held that the defence of non est factum will avail the party who signed. However, it is better to read and understand documents before one signs them. The general rule, to which the above may be regarded as an exception is that once a person signs a document he is bound by its contents, his mistake as to its meaning or terms notwithstanding.


5. UNILATERAL MISTAKE AS TO THE IDENTITY OF THE PARTY CONTRACTED WITH:
The fourth and very common mistake in agreements occurs where A for example, believes that he is dealing with B, whereas it is rather X who is pretending to be B. If X issues a cheque (in B's name) to pay for goods obtained from A and the cheque bounces, how is the agreement affected by A's mistake as to the identity of the person he is dealing with? A unilateral mistake is usually the result of misrepresentation by one party. The party misled is then entitled to rescind the contract for misrepresentation but it may then be too late to recover the goods. Title to the goods passes to the dishonest party under a contract which is voidable and he may re-sell them to an innocent third party who is entitled to retain them (since the rogue still had title at the time of the re-sale to him). If on the other hand the contract is void for mistake at the outset, no title passes to the dishonest party and it may be possible for the party misled to recover his goods. The difference between a voidable and a void contract determines which of two innocent persons is to bear the loss caused by fraud.


Most of the case-law on this type of mistake is concerned with mistake of identity. As will be seen, there is an almost standard procedure in swindles of this type. A contract is only void for mistake by the seller about the buyer's identity if the seller intended to sell to someone different from the actual buyer. If that is the position, the seller never intends to sell to the actual buyer and the contract with him is void. In any other case, the contract is valid when made though it may later be rescinded. The parties may negotiate the contract by correspondence without meeting face to face. If the buyer assumes the identity of another person known to the seller with whom the seller intends to make the contract the sale to the actual buyer is void.


The summary of the legal position is that such mistakes as to a party's identity can only render an agreement void if all the conditions below are satisfied. It must be proved that:
(a) The mistaken party intended to deal with somebody other than the person he deal t with. His intention can• be gathered from the surrounding circumstances of each case.
(b) That the person with whom he contracted was aware of his mistake.
(c) That at the time of the contract, the mistaken party regarded the identity of the other party as vital to the transaction.
(d) And he took reasonable steps to verify the person's identity i.e. he did not act negligently.

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