The Legal Issue Arising in Regards to Contracts at Common Law - Assignment Example

Name Course Tutor Date Introduction Alice an 80 year woman has transferred ownership of half of his piece of land to Will in unquestionable circumstances. As Alice’s family is far away the old suffering from her age and Alzheimer’s disease which causes her lapses of memory she relies on a social worker employed by the local council to serve her. As Alice feels indebted to Will she decides to transfer half of her piece of land to Will but she first wants to consult her family before effecting the transfer. However, Will advices against this and Alice finally transfer the Land to him? After a short period Alice goes into a comma and her family decides to sell the land to offset her hospital bills but they discover half of it has been sold to LJ Hooker Pty Ltd for $500,000 by Will. The family requires a lawyer’s advice whether they can succeed in legal action against Will by having the contract annulled and the property returned. This paper explores the relevant facts in the case to contract and identifies the legal issue arising in regards to contracts at common law. Secondly, it analyzes how courts have treated similar issues in cases on contractual obligation. In the third section the principles and tests identified in the analyses of legal precedents is applied to Alice’s case. Ultimately the paper comes to the conclusion that the contract between Alice and Will is invalid and thus Alice’s family can succeed in repossessing the land they had lost unlawfully. Issue The information from the case relevant to an issue that can lead to a contract being rescinded is: a) Alice is aged, illiterate and suffers short term memory loss. b) Will is a social worker assigned to take care of Alice by the local council. c) Alice trusts Will and relies on her for advice. d) Alice feels indebted to Will for his services. e) To compensate Will, Alice decides to transfer half of his land to him. f) Before making the transfer Alice plans to consult her relatives. g) Will advices Alice from contacting her relatives before transferring the land to him. h) Alice signs an agreement prepared by Will sealing the transfer of the land to him. i) After a short time Will sells the Land for $500,000 From the facts gathered above two legal issues that could lead to the revoking of the contract can be identified. These legal issues are; a question of whether Alice had the capacity to enter into a contract? Whether Will used any undue influence over Alice in the contract formation stage to take advantage of her situation? Principles Under Australian law a contract is defined as a promise by a party to act or refrain from acting in an agreed way in return for some kind of consideration1. For a contract to be legally binding it has to have the following elements; an agreement (where one party offers and the other accepts), consideration where each party has to benefit from the contract, intention to create legal relations, it must adhere to legal formalities and parties involved in the contract should posses the legal capacity to enter into a contract2. In our cases it may be argued that Alice did not have the legal capacity to enter into contract with Will. Legal capacity is defined as the power an individual has to voluntarily enter into a contract as he/she understands the implication the contract is likely to have on him/her. In Blomley v Ryan (1954) 99 CLR 362 it was established that a person who does not fully understand the in implication of entering into a contract does not possess the capacity to enter into a contract3. In the case, Ryan aged 78 had entered into a contract with Blomey while under the influence of alcohol to sell his piece of land at a discount of 24 per cent. In the Judgement it was pointed out that intoxication cannot be generally taken as exit to the performance of a contract. However, the Justice noted that it would be unfair to enforce a contract where the offering party takes advantage of the conditions of the other party. The case established the following principle while dealing with capacity to contract; a person who accepts a contract in condition of poverty or need, sickness, advanced age, frail health conditions, drug intoxication and lacks someone to assist them in understanding the contract may be excusable by law from performing the contract as these are common conditions that place one party at a serious disadvantage4. In the cases the issue of consideration came up as unfair consideration is evidence of the unfairness of a contract made by people whose capacity to enter into contract are limited by any or a combination of the conditions listed above. Undue influence in law is defined as a situation where a party uses the influence he has over another individual to enter into a contract that benefits him. The principle that guides issues of undue influence in Australia was set out in Huguenin v Baseley [1803-13] All ER Rep 1. Lord Eldon in his judgement set out that a contract that have been made by a person unaware of its impact, nature and consequence should be set aside for the interest of the protecting people who have been vulnerable due to a relationship of influence with the second part5. Further principles of the law on undue influence were set out in Allcard v Skinner (1885) 36 Ch D 145 which divided undue influence into presumed and actual undue influence. Actual undue influence is defined as conducts were the ‘Donee’ intentionally uses his influence to take advantage of the other party in the contract6. While, presumed undue influence is where the donee benefits from his influence on the donor without intentionally exerting his/her influence over the donor. Allcard v Skinner placed the burden of proof in cases of presumed undue influence on the Donee to show the court he/she has not misused his position of influence7. In Royal Bank of Scotland v Etridge [1998] 4 All ER 705 (No 2), Lord Nicholls set out a test for establishing presumed undue influence. In the test set out by Lord Nicholls involves8; a) The plaintiff must prove that the defendant was in position of influence over him as he had placed trust and confidence in relation to the matter at hand or he was in a special relationship with the defendant which implies irrebuttable presumed influence over the donor. b) The plaintiff must prove that the transaction arising from the presumption of undue influence is questionable. Application and Analysis In order for Alice’s family to have the contract between Will and Alice rescinded they can argue that Alice did not have the capacity to enter into a legally binding contract. This can be supported by the fact that Alice was 80 years old and was illiterate and she tried to seek help in understanding the contract from her relatives. It is possible to annul the contract at this stage as the conditions of Alice during the signing of the contract were among those noted in Blomley v Ryan as placing a party under serious disadvantage while forming a contract9. However, an argument for insanity would be refuted by the fact that Alice only suffered temporary memory lapses which rebuts insanity as an escape for contractual obligation. Moreover, the Will’s occasional visits as consideration for the land are a pointer to Alice’s lack of capacity to enter a valid contract. Even if Will can succeed in proving to the court that Alice has the capacity to enter into a contract he would also have to mount a defence against accusations of undue influence over Alice during the formation of the contract10. The fact that Will advised Alice not to consult his relatives prior to the completion of the contract may be taken as actual undue influence as Will knew Alice’s family would advise against the transfer of the land to him. Furthermore, the relationship between Will and Alice satisfies the first element of the test of presumed undue influence as set out in Royal Bank of Scotland v Etridge (No 2) as it falls under the special relationships that imply irrebuttable presumed influence. It is also easy for Alice’s relative to satisfy that the transfer of land to Will was a transaction that needs further explanation as it falls under the definition of questionable transaction spelt out by Lord Nicholls in Royal Bank of Scotland v Etridge “cannot be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act”11. Conclusion Based on common law judgements discussed above on the issue of capacity to contract and the issue of undue influence whether actual or presume Alice’s relatives are likely to succeed in having the contract rescinded. It is evident from the facts of the case that Alice did not have the capacity to contract and the aspect of undue influence was present in the contract formation process. It is also clear Will had influence over Alice which he used in having half of Alice’s land transferred to his name. Therefore, the case would be a straightforward victory for Alice’s family as it satisfies conditions for setting aside a contract on grounds of lack of capacity to enter a contract and undue influence in contract formation. Remedy The restoration of the land to Alice would be the most suitable remedy for the avoidance of the contract with Will. Bibliography Sim, Disa. "Burden Of Proof in Undue Influence: Common Law and Codes on Collision Course." International Journal of Evidence & Proof 7.4 (2003): 221-236 Smith, Tony. "The Current State Of Contract Law In Australia And Why It Is Important For Rural Managers To Understand It." AFBM Journal: Agricultural Business Management & Farming Systems 8.2 (2011): 67-71 Gray, Anthony. "Termination for Convenience Clauses and Good Faith." Journal of International Commercial Law & Technology 7.3 (2012): 260-275 Burns, Fiona. "Mortgages, seniors and the Common Law Contractual Doctrine of Mental Incapacity in Australia." International Journal of Law & Psychiatry 34.2 (2011): 79-93 Read More