The Impact of Misrepresentation, Mistake, Duress and Undue Influence on the Validity of a Contract - Assignment Example

? a) The impact of misrepresentation, mistake, duress and undue influence on the validity of a contract. A contract is an agreement with a specific set of terms and requirements usually called clauses. A contract takes place between two or more persons, entities, often referred to as parties. A contract involves a promise to carry out a task in return for a valuable benefit or advantage to either of the two parties. A contract is the very basic and the most essential part of a business deal. It is amongst one of the most important areas of legal concern and can involve variations on the conditions. It may further bring about complex situations. There must be certain elements present in a valid contract which are: 1. An offer. 2. Acceptance that must have taken place from the corresponding party which would further constitute to mutual understanding between both parties. 3. A promise by the principal party to perform steps ahead that would constitute to the contract 4. A consideration must take place 5. Terms and conditions must be set in order to fulfill the promises made 6. Performance While the above mentioned can be simply called the requirements for a valid contract, however these are the essentials towards constituting or calling a contract effective and in force. Once all these requirements have successfully and rightfully been carried out, we can be sure that the contract is now lawfully in force. The past has left us with numerous amounts of examples and precedents that reflect on contract being voidable under certain circumstances. Elements that constitute a contract voidable are as follows: 1. Misrepresentation 2. Mistake 3. Duress and undue influence We will discuss each element in turn describing the impacts of each upon the validity of the contract. Misrepresentation is a false statement of fact made by one party to another. This is not included in the terms of contract. However, somehow induces the other party to enter into the contract and create a binding force between both parties. This misrepresentation, which can be done in a number of different ways, makes the contract voidable. It also gives the other party the right to rescind the contract or claim damages. A person who has been misled can however take up amongst a number of different options in order to rescind this contract. 1. Refuse to carry out his undertaking, 2. Refuse to carry out the function of specific performance, 3. Can decide to have the contract set aside by taking up means of rescission. Adding to such circumstances, the misled party can claim for damages.   Misrepresentation can be mainly of three types, being fraudulent, negligent and innocent misrepresentation. Fraudulent misrepresentation is when the truth is deliberately concealed by the party in order to constitute the contract. As Lord Herschell defined in a very famous case, Derry vs Peek1, fraudulent misrepresentation being one where a false representation is made knowingly, without belief in the truth and recklessly. If the misrepresentation is that of fraudulent nature, the contract is considered void and the misled person can sue for damages for deceit. Negligent misrepresentation is a false statement made where the person who is making the statement had no reasonable grounds for believing it to be true and did not believe in it. A common example defining negligent misrepresentation is Hedley Byrne v Heller.2 In this case Hedley happened to be an advertising company who had asked for information from his banker regarding the clients’ banker (Heller). The information asked for was regarding its clients’ financial position. Heller went on giving a report to Hedleys’ banker that reflected a strong financial position of the respected client. This report was given with a “without responsibility” clause. The report was given to Hedley by his banker. There was no such contractual agreement or relationship between Heller and Hedley as well. Hedley went on making decisions keeping in mind the report and went on experiencing a financial loss. The reason of the loss being the client had went into liquidation. Hedley moved to sue Heller for its report, which Hedley termed as negligent. The Court held a duty of care was imposed by law as the information was to be relied upon. In a revolutionary ruling, the House of Lords held that Heller would have been responsible if the disclaimer had not been issued. In the presence of the “without responsibility” disclaimer, Hedley could not have any success in the claim. This case made it possible to seek claims for economic damage even if a contract agreement or relationship does not exist between the parties. Furthermore, Hedley Byrne v Heller also became a validation of the value of a disclaimer. As it happened to be Heller’s disclaimer that went on saving him from liability. Whereas innocent misrepresentation is a false statement which the person makes honestly having belief in the statement made to be true. The misled person can sue for damages but the other party does have a defense available (Legalmax.info. 2013). Another element that effects the validity of a contract is mistake. Mistake in the contract law takes place when both parties to an agreement are under mistake as a matter of fact and as essential to the agreement, the agreement is said to be void in these circumstances. Mistake can be carried out as to the subject matter, or mistake as to the identity of the party and as mistake as to the nature of transaction. If any of the above mentioned mistakes take place the contract is said to be void and nullified. However it is necessary for the mistake to be mutual and must not be a matter of law rather fact and should be respective to the matter essential to contract. Smith v Hughes 1871 is a well-known case to be discussed regarding this matter. Mistakes can be made regarding the following elements: 1. Subject matter. 2. Title 3. Terms of contract 4. Personal identity The above mentioned elements constitute a contract to be void and nullified. Duress is another important element that can make a contract void. Duress is defined as a threat of harm made to compel a person to carry out a contract without his will or forcefully threatening him to be harmed. A common case law is Barton v Armstrong where the signing party was threatened with that if he did not enter into the contract. Such a contract is void and nullified, however, the burden of proof lies upon the other party to prove that this was not the actual case, and the reason for entering into the contract was not due to any threat or pressure put on the party placing allegations. Undue influence is a doctrine that involves a person taking advantage of his position or authority that drives the other party to sign the contract. This also includes situation between a father and son or between relatives. Where relations take over ones’ own choice and decisions. It can also be seen whether there existed a special bond of trust between parties that compelled them to enter into contractual terms. In situations like these the court has discretely powers and decides whether this trust is to be presumed for the basis of the contract or not. Burden of proof lies upon the superior party in whom the trust was held onto. In the mentioned situations, It cannot be stated instantly whether the contract is void or not. Johnson v Buttress is a case that exemplifies the mentioned circumstances.3 b) The circumstances in which the protection afforded to members by separate legal personality and the ‘veil of incorporation’ will be removed by the courts. One of the basic principle of separate corporate personality may be defined as the corporation having a separate existence from the shareholder. As explained by Vaughan In one of the most important cases in this aspect ‘Salomon v Salomon ‘. A separate legal personality can be the owner of a property and deal with it on his own will, sue others and even be sued on his own behalf. A corporation is said to be an artificial entity which is created under the national legislation and is treated just as an individual, with respect to law. A corporation happens to have rights that are legally enforceable. It also has to capability to acquire, transfer and hold property as well as put itself into legally binding contracts. Litigation can take place against and by a corporation. Corporate veil is a legal concept that differentiates and brings about a border line between the personalities of a corporation from the personalities of its shareholders. The legal notion guards them from being personally held accountable for the company’s debts and other responsibilities brought about with time and during the functions of the company. However it is a matter of argument and observation to see where a court defines that a company’s business is not steered in accordance with the provisions and rules or corporate legislation as laid down. Or whether was this just a cover or a mask for illegal activities to be held. It may also hold the shareholders personally accountable for the company’s current structure under the legal concept of lifting the corporate veil. A company having a DUAL nature as both a committee of its members and a person SEPARATE from its members. The company’s property is the ownership of the company itself but as a separate person rather being the ownership of the members. Likewise, the company’s business is carried out by the company as a separate person rather the members. And as already mentioned, what can be seen is that it is the company as a separate person who enters into contracts to carry out the company’s business, not the members itself. The members are not personally entitled to the benefits or loss or the burdens arising from the functioning of the company, thus their rights are restricted to only receive the share of profits they earn and the liabilities to pay the amounts due from them to the company. One of the greatest privileges of incorporation being the separation between the acts of the company, and the acts of the shareholder. This as a result brings about a line of difference between the company’s liabilities and that of the shareholder. Salomon v Salomon being an important case where the concept of the separate personality of a company as distinct from its shareholders was established by the House of Lords. This led to the veil of incorporation stating that a registered company is a legal person separate from its members. The case established the concept of separate legal personality for companies. At first glance, it was held that the company had carried out the business as an agent for Mr. Salomon, in order to make him responsible of all debts. This approach was rejected by the House of Lords, it can be said that a company may carry on a business on behalf of its shareholders, however does not dictate the relation of principal businessmen and agent between either. The House of Lords deciding later that owning large amounts of shares does not constitute him liable for the shares held in trust for him as his acts, the company’s acts were not his acts, nor were the company’s liabilities his liabilities. There was strong evidence of good faith and confidence in the company and the House of Lords found no evidence of fraud or deliberate abuse of the corporate form. However exceptions exist in relation to the principle in Solomon’s case. These are the situations where the veil of incorporation is lifted, and the law disregards the corporate structure and corporate entity and pays huge regard instead to the economic truth behind the mask. To ‘lift the veil of incorporation’ simply means to ignore or set aside the separate legal personality of a company. Courts never allow the corporate entity to be used as a purpose of fraud, or as an instrument to escape contractual or legal obligations. Wherever there is evidence of fraud to be found, or an intentional breach of trust, the courts set aside the corporate form and entity, pierce the corporate veil in order to achieve justice. Further case law that provide examples of instances when courts pierce down the veil of incorporation are Gilford Motor Co Ltd4 v Horne and Jones v Lipman5. In Gilford Motor Co ltd v Horne a former employee was already bound by a covenant prohibiting him from soliciting customers from his former employer which did not stop him from doing the same and setup a company in order to do this. The court ordered after inquiry that the company was merely a mask for his actions, hence granted an injunction to enforce the covenant stopping him from soliciting against both Horne and the company which he had formed. The second case, Jones v Lipman proved to be one of the most famous cases where the veil was lifted by the courts. The defendant entered into a contract to sell land to Mr. Jones, he then changed his mind and formed a company to transfer the land to the same company being his plan in order to avoid the transaction. The court decided stating the company was an instrument or a mere device used as a sham which proved the facade test results to be positive, the corporate veil had been pierced by the judge. The mentioned principals and legal concepts have taken shape in over years, courts are properly practising when this veil should be removed and permitted. Examples prove that in cases of fraud and sham lifting of this corporate veil is permitted. It has now taken years and centuries to give powers and precedents to the present courts in developing law in this area. Courts need to create a balance between both, justice and the needs of the economy. References Legalmax.info. 2013. Effect of misrepresentation. [online] Available at: http://www.legalmax.info/members2/conbook/effect_o.htm [Accessed: 23 Nov 2013]. Top of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More