Tuesday 27 February 2007

This week we looked at THE VITIATING ELEMENTS OF A CONTRACT. Vitiate means spoil, deprive of efficacy, invalidate. Those elements which may spoil a contract and make it invalid include:

A lack of formality – some contracts need to be made in a particular way
Various kinds of mistakes
Misrepresentation
Duress and undue influence
Illegality and vagueness

LACK OF FORMALITY

Most contracts are valid and enforceable regardless of whether they are in writing or oral. Formality is sometimes required, however:

Land conveyances and leases longer than three years need deeds.
Consumer credit agreements need to be in writing - though there is no need for a deed.
Contracts for the “sale or other disposition of land” need written evidence of their existence before they can be enforced by court process - s40 (1) LAW OF PROPERTY ACT 1925. Richarfd will cover this with you in Property Law.


MISTAKES

A contract may be void at common law due to a mistake made by the contracting parties. Even where it is valid at law, it may nevertheless be voidable in equity on the grounds of mistake.

There is no underlying general ‘doctrine of mistake’, the areas are quite separate:

signed documents
identity
subject matter

A mistake which makes a contract void is described as an ‘operative’ mistake.

SIGNED DOCUMENTS

As a general rule, a person is bound by their signature to a document, whether or not he has read or understood the document. It will be voidable where the inducement to sign came about through fraud or misrepresentation, as we shall see later.

Gallie v Lee [1971] – a 78 year old Mrs Gallie had lost her reading glasses, and signed a document which had been prepared by a crook named Lee. He was the partner of her nephew, a Wally Parkin. The document had the effect of transferring the house to Lee and she was held to be bound by her signature on the document.

To escape the consequences of your signature you would need to prove:

The document signed was radically different to the one that you believed you were signing
That you had not been careless in signing the document
That had the true contents of the document have been known you would not have signed it

Mrs Gallie could show the last point, but not the others. The courts are not sympathetic to a claimant as Justice Byles said (in essence) in:

Foster v MacKinnon [1869] – to escape liability you need to be blind, illiterate and without a friend in the world!

MISTAKE AS TO IDENTITY OF THE OTHER PARTY

An examiner’s favourite. If you advertise your car for sale, and someone calling herself Jean Bloggs buys it, but you later find out it is the transvestite Bill Bloggs who has bought it, should it be of any consequence to you? If he/she then sells on to a third party, should you be able to get the goods from them? The answer on both counts is apparently ‘No’. Just because you don’t like transvestites is not going to allow you to void the contract.

Unless you can prove that the identity of the other party was crucial in that you would not have sold to anyone else, then it doesn’t matter even if the sale was induced by fraud.

If you can trace the person prior to him selling on then you could recover the goods because of misrepresentation, but not because of the mistake alone. If you advertise goods for sale, should you care a jot who buys them?

Lewis v Averay [1972] – the claimant advertised a car for sale, and a rogue claiming to be the actor Richard Greene offered to buy it. The rogue signed a cheque, but the claimant only allowed him to take the car away after being shown a (forged) studio admission pass. The cheque was dud and the rogue sold the car to the defendant, an innocent purchaser. Who owns the car? The Court of Appeal said that the contract, though voidable, was not void. The view of the Court is that where the parties are face to face there is a presumption that a person intends to deal with him, as identified by sight and hearing. There was no evidence that the claimant would have sold only to Robin Hood!

There are cases where the courts have recognised that the identity of the other party is fundamental to the contract. It is all very well, but if you were the innocent purchaser how would you feel about this?

Cundy v Lindsay [1878] – a rogue named Blenkarn, trading as Blenkiron and Co, placed a large order for linen handkerchiefs through the post. Both Blenkarn and the real Blenkiron and Co had premises in Wood Street. The claimant thought that he was dealing with the reputable firm, Blenkarn contributed to this in the way he signed the order. The goods were supplied and sold on to an innocent third party. It was held that there was no contract between the claimant and Blenkarn. Lord Cairns pointed out that the claimant never intended to deal with Blenkarn, and had never thought of him. There was no consensus of mind which could lead to an agreement, therefore there was no contract.

Had Blenkarn had paid, of course, this case wouldn’t have arisen. This clearly was not a face to face contract as in Lewis v Averay, but it did mean that an innocent third party was required to return goods for which he had paid and then spend more money in trying to trace and then sue Blenkarn.

Shogun Finance v Hudson [2003]. A rogue bought a car on hire purchase from a dealer, producing a driving licence (probably stolen) that showed a false name. The finance company carried out the normal credit checks against the name on the licence, and subsequently approved the loan. The rogue sold the car to an innocent purchaser and subsequently defaulted on the loan. (Note: the HIRE PURCHASE ACT 1964 provides that a person who buys in good faith from a “hire purchaser”, believing him to be an outright owner, acquires a good title). The Court of Appeal decided that the claimants were entitled to repossess the car: they clearly intended to hire the car only to the person named on the licence, and the rogue had not acquired any title that could be transmitted to the innocent purchaser.

It looks like a face to face agreement, but it isn’t. The hire purchase company buys from the dealer, and the purchaser contracts with the hire purchase company, so it isn’t a surprise that the House of Lords agreed with the Court of Appeal.

In essence, the law presumed that you intend to deal with the person in front of you, but most companies never see one another.

MISTAKES ABOUT THE SUBJECT MATTER

It would be easy to say that A contracted with B to buy a dog, but B thought that the contract with A was for the supply of a squirrel. If that is what this meant then the court would simply find that there had been no agreement, and therefore no contract.

Mistakes as to the identity of the subject matter have been allowed:

Raffles v Wichelhaus [1864] – the alleged contract was for the purchase of a cargo of cotton due to arrive in England on the ship Peerless, from Bombay. There were two ships of this name, both carrying cotton from Bombay, one of which had left in October, the other in December. In the absence of an agreement between the parties as to which ship was meant, and since there was no objective evidence which could determine the issue, the contract could not stand. The parties were never truly in agreement.

Scriven Brothers v Hindley [1913] – there was confusion as to the nature of two lots in an auction. One was ‘hemp’, the other was a less valuable commodity called ‘tow’. The defendant had bid an unusually high price for the tow in the mistaken belief that it was hemp and was allowed to void the contract.

Strickland v Turner [1852] is a good example of a mistake about the existence of the subject matter. An annuity was taken out on the life of a man who was already dead at the time. Not surprisingly, the court found that no contract had been made at all.

MISREPRESENTATION

For there to be a remedy for a pre-contractual misrepresentation, the statement:

must have been made by one of the contracting parties to the other
must be one of fact, not opinion
must have induced the other party to enter into the contract

Bisset v Wilkinson [1927] – a statement as to the number of sheep that a field would support is opinion, not representation.

Redgrave v Hurt [1881] – false statements were made by the claimant about the income of his practice as a solicitor, on the strength of which the defendant entered into a contract to but the practice and a house. He had been given the option to examine documents which would have revealed the true position, but had declined. This did not alter the fact that the statements made were statements of fact that had induced the contract and so it could be avoided.

The break up of the Spice Girls when Gerri Halliwell left to pursue a solo career was the subject of Spice Girls Ltd v Aprilia World Service BV [2000]. The Chancery Division held that the participation of a pop group in making a film advertising certain goods constituted a representation by conduct of an intention of the group that it would not break up during the term of the advertising contract. It was a continuing representation which the group had a duty to correct when it was untrue.

The court said that although there was no representation in the agreement which was falsified by the failure to disclose the stated intention of Ms Geri Halliwell to leave the group, the court could infer that indirectly Aprilia was induced to enter the contract by the representations made when the group made the shoot.

Spice Girls Ltd participated in the commercial shoot and provided logos and images of five Spice Girls in order that Aprilia should sign the agreement. The court was satisfied that the representations by conduct were such as to be likely to induce a person to enter the agreement.

Spice Girls Ltd failed to discharge its onus under s2(1) MISREPRESENTATION ACT 1967 that it had reasonable ground to believe and did believe at the time of the agreement that the representation was true.

The action was estimated to have cost the group £1, 450,000 in damages and costs.

The Spice Girls appealed, and the case came before the Court of Appeal in 2002. It was held that the group were liable under s2(1) and had to pay damages to AWS for the full extent of its losses.

Can you misrepresent something by remaining quiet? Insurance law describes such contracts as ‘uberrimae fidei’ (of the utmost good faith), and so there is a duty to disclose all relevant facts to a contract. When you omit to give details about any serious health problems you are misrepresenting the facts and the insurance company will be able to avoid the contract when they discover the truth.

If a court allows your plea of mistake the contract will be void – it was never made as there had never been an agreement. Where misrepresentation is the issue, the contract is still valid but voidable at the behest of the party misled. This is called rescission, the contract is undone and the parties are returned to their pre-contractual positions. the innocent party may, if he so chooses, continue with the deal.

Innocent = Damages only
Negligent = Rescission & Damages
Fraudulent = Rescission & Heavier Damages

Rescission is the principal remedy, and arises from equity and is, therefore, discretionary only. It will be lost by:

AFFIRMATION - the innocent party affirms the contract.

LAPSE OF TIME - after a long delay in applying for it it appears that the innocent party has decided to carry on even though he was misled. In Leaf v International Galleries [1950] the claimant bought a picture he was told was by Constable, but discovered five years later that this was not the case. This was found to be a common mistake, and although voidable for innocent misrepresentation the court held that the lapse of time defeated the claim. Consider the insurance company who find out that you have angina and you have not disclosed it. They keep it to themselves, and when you expire forty years later they try rescind the contract.

IMPOSSIBILITY OF RESTITUTION, e.g. the goods have been destroyed - clearly it is impossible to get the goods back if they have been consumed or destroyed.

INVOLVEMENT OF THIRD PARTY RIGHTS - goods obtained on the basis of (probably fraudulent) misrepresentation have been sold on to an innocent third party. Remember that equity is all about fairness, why should the third party lose out? They are called “bona fide purchasers for value and in good faith” and even “equity’s darlings”.

DURESS AND UNDUE INFLUENCE
Here the contract appears to be valid, but it is alleged that there has been improper pressure of some kind:

physical coercion/threats
economic pressure
psychological influence.

All make the contract voidable.

DURESS TO THE PERSON – violence/threat of violence to an individual or his family.

Barton v Armstrong [1975] – the managing director of a company was threatened with death if he did not arrange for his company to buy shares from the defendant. Not surprisingly, the contract was held to be void for duress.

DURESS TO GOODS –

The Siboen and The Sibotre [1976] – the case actually concerns the re-negotiation of charters of two vessels, but an obiter statement said that a threat to slash a valuable painting belonging to another party would be duress, but this case fits more neatly within the next category.

ECONOMIC DURESS – one party uses his superior power in an illegitimate way in order to coerce the other contracting party to agree to a particular set of terms.

Universe Tankships of Monrovia v International Transport Workers Federation [1983] – the defendant trade union blacked the claimant’s ship in port and refused to release it unless certain monies were paid, including a payment to the union’s welfare fund. This latter payment was recoverable because the will of the ship owners had been coerced, the pressure applied to make the payment to the fund was illegitimate.

UNDUE INFLUENCE makes a contract voidable, and this is an equitable remedy only. Where parties to a contract have a ‘special relationship’ (e.g. doctor/patient, solicitor/client, bank/customer), then any contract between them will be assumed to have been the result of undue influence, and therefore voidable at the behest of the weaker party, unless the stronger party can rebut the presumption. We covered this in land law and tort.

Lloyds Bank v Bundy [1975] – Mr Bundy was an elderly farmer and was freed of mortgages held by his bank on his house, his only asset. He has acted on the advice of his bank manager and eventually the mortgages outweighed the value of the house. Here is a special relationship, and therefore a presumption of undue influence which was not rebutted by the defendant. The contract was therefore voidable at the behest of the claimant. Lord Denning said that the common thread was the inequality of bargaining power, and the law would protect one who, without independent advice, enters into a contract on terms which are very unfair or transfer property for a grossly inadequate consideration.

This is another are where Richard will speak at length in property law.

ILLEGALITY

Again, the contract appears to be perfectly valid, but the courts will intervene to prevent its enforcement.

Some contracts are illegal by statute, others at common law. It is public policy that declares them to be illegal, it does not necessarily mean that they are criminal in nature. Unacceptable restraints on trade (e.g. where a person may work) is one example, and we shall look at some others.

How about actual illegal acts? A contracts with B to kill C is never going to be enforced by a court, quite clearly, but consider:

Pearce v Brooks [1866] – the claimant supplied the defendant with a brougham, to be paid for by instalments. After one instalment it was returned in a damaged condition. The claimant sued for £15 compensation, payable under the agreement if the brougham was returned. The defendant was a prostitute, and there was evidence that the brougham was to be used to attract customers. At least one partner in the claimant’s firm was aware of this. On this basis the court held that this was an illegal contract, so the claimant was unable to recover either under the contract or for the damages.

Tony Blair knows all about this one:

Parkinson v College of Ambulance Ltd [1925] – Colonel Parkinson was approached by a third party who told him that if he made a contribution to the College (a charity) it would obtain a knighthood for him. He paid £3,000, nothing happened, so he sued for its return. On the face of it the donation was a gift, and could only be explained otherwise by revealing that the consideration was a knighthood. This was prejudicial to honesty in public life and illegal at common law. A statute was to follow as a result of this case, but once again you may be forgiven for wondering on its effectiveness.

Other contracts may not be illegal, but void of legal effect. The courts will not enforce them.

Section 18 GAMING ACT 1845 declares that all gambling contracts, written or otherwise, are null and void. So gambling debts are not enforceable.

Void contracts at common law, which Judges have declared void on the grounds of public policy include the following:

An agreement to oust the jurisdiction of the courts. A contracts with B and a term of the contract includes a term that neither party may take the matter to court. Can’t be done. An agreement as to arbitration first is quite common, but an agreement trying to keep the courts out of a dispute at all is void.

Agreements prejudicial to the sanctity of marriage. A contract between spouses agreeing to separate at some point in the future is void - Brodie v Brodie [1917]. Similarly, a promise by A to pay make a payment to B if he marries someone other than C is also void.

Contracts contrary to public policy. In Carnduff v Chief Constable West Midlands Police [2001] the claimant was a police informer. He claimed that a contract existed with the police to provide information in return for payment. The amount depended upon the seriousness of the crime, the money made by the criminals and so on. The defendants argued that the claim should be dismissed on the grounds of public policy because the defendants would have to reveal information damaging to the public interest. The Court of Appeal said that the public interest in keeping the information secret outweighed the public interest in having the claim tried, and that, therefore, it should fail.

Contracts in restraint of trade. They unfairly restrict competition, or unreasonably restrict people’s ability to work. They are considered contrary to public policy and will be prima facie void. It simply means that they will be unenforceable unless there is proof that the restrictions are justifiable as being reasonable from the point of view of the parties and the community as a whole.

There are three groups of contracts to consider in this area, and we shall look at them again when we consider employment law:

1) Where A leaves the employment of B and agrees not to set up in competition against B or enter the employment of any of B’s rivals.
2) A sells his business to B and contracts with him that he will not carry on a similar business in competition to B.
3) Solus agreements. An agreement between two businesses whereby owner A agrees to restrict himself to taking and selling only the supplies of owner B for some financial benefit.

The first two are the most important for our purpose. They are void as it is contrary to public policy to allow such agreements as they could damage the economy of the community as a whole. They restrict competition by encouraging monopolies and at the same time increase unemployment.

Because such clauses are not allowed there has to be a balance somewhere, and it is provided by the purchaser of a business paying for the goodwill of the business. If the seller then opens a business nearby the purchaser would gain nothing from the goodwill. On the other hand, employers spend a great deal of time and money in building a database of clients, perfecting secret processes and the like and they should be protected from former employees and rival traders simply copying them.

Restraint of trade clauses are not absolutely void, and can be valid if the following three requirements are fulfilled:

A valid interest to protect
The restraint is no more extensive than is reasonable to protect that interest
The restraint must not be contrary to the public interest

The modern position has been developed from:

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. [1894] – N manufactured guns and armaments and sold his business to a company for £287,500 and entered into a restrain of trade contract. Two years later that company was amalgamated with another which agreed to employ N as Managing Director at a sum of £2,000 p.a. This contract amplified the previous clause, he now agreed that he would “not for twenty-five years, if the company so long continued, engage except on behalf of the company, either directly or indirectly in the trade of guns and armaments manufacture, or in any business competing or liable to compete in any way with that for the time being carried out by the company.”

This was a world-wide restraint since it was an international business. The House of Lords held that this was mostly valid. Held:

Restraint of trade clauses are only prima facie void, and could be validated if in the interest of the parties and the public.
Here it was reasonable between the parties as the business had been sold for a large sum of money. It was in the public interest, since it secured for the UK the business and inventions of a foreigner and increased UK trade. The restriction to any business was severed from the contract as it went beyond that necessary to protect the proprietary interest that the company had bought.
Restraint of trade clauses are severable from contracts, leaving the remainder of the contract enforceable.

Further amendments have been developed, particularly that such a clause was severable.

Mason v Provident Clothing and Supply Co. [1913] – a canvasser who had been employed to sell clothes in Islington was restrained from entering a similar business within twenty-five miles of London. This was considered to be too wide. The case confirmed that all restraint of trade clauses are prima facie void and subject to a test of reasonableness. A sharp distinction was made between restraints of trade:

imposed on the sale of a business
those governing employer-employee relationships

The former are more readily supportable, because in the second the law recognises the unequal bargaining power of the parties, the employer always having the upper hand and the important point that the employee’s further employment chances are limited. As a matter of public policy no employer is entitled to bar an employee from using his labour, skill or talent.

Forster and Sons v Suggett [1918] – the employer had developed a secret glass making process and the defendant works engineer concerned with the process had covenanted not to work for a competitor anywhere in the UK for five years after leaving employment with the claimant. This was held to be reasonable and enforceable.

The same can apply to the protection of trade connections, the list of clients that a business possess as his customer base.

Fitch v Dewes [1921] – a life-long restraint was held to be reasonable against a solicitor’s managing clerk working for another firm of solicitors within a seven mile radius of Tamworth. The modest area allowed him to work quite openly outside the seven mile limit, and was therefore valid. (How long did it take to travel seven miles in those days?)

If the arrangements offer more protection than is adequate, a fifty mile radius of Tamworth perhaps, then they will be invalid. The courts pay special attention to time factors and the geographical area.

Panayiotou and Others v Sony Music Entertainment Ltd [1994] – he had entered into a money spinning contract with Sony, and now wanted to escape from it. He was having a sulk and claimed that the company were restraining his wishes to change the direction of his music and his image. He failed, mainly because he had suffered no financial damage as a result of the association. In fact, the opposite had occurred. He had increased income as the company had successfully promoted him into a super-star in the USA, and the negotiations on his contract had been undertaken by professional negotiators.

It is probably fair to say that, in spite of the above decision, the courts are aware of the need to protect the employee against excessive restraints. That is okay, but George Michael had been happy enough to be made a multi millionaire and Sony were just protecting their investment.

A decision in the ECJ means that professional footballers are no longer tied to their teams at the end of their contract and can move freely to a club of their choice – Union Des Associations Europeenes De Football v Jean-Marc Bosman [1995].

As we saw in Nordenfelt, the courts are more willing to support restraints against the vendor of a business.

Severance involves removing something from a contract whilst allowing the remainder of the contract to be valid.

Goldsoll v Goldman [1915] – the defendant had sold imitation jewellery throughout the UK. He sold the business to the claimant and agreed that for two years he would not deal in imitation or real jewellery anywhere in the UK, France, USA, Russia, Spain, or within twenty-five miles of Berlin or Vienna. The contract was severed so that the restriction applied only to the UK, and to imitation jewellery.

Our final group, the solus agreements. An agreement between two businesses where the owner of one agrees to restrict himself to taking the supplies solely of the other for some financial advantage. Quite common in pubs, and very common indeed in the garage business. An agreement to buy only one brand of petrol means you can expect a discount on the bulk purchase of it. The agreement, however, must still be reasonable.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] – H owned two garages. At garage (A) he agreed to sell Esso exclusively for four years and five months in return for a reduction in costs, and at garage (B) he agreed to sell Esso exclusively, but this was contained in the terms of a mortgage of £7,000 for twenty-one years which could not be redeemed earlier. The House of Lords held that Esso had an interest in the petrol market worthy of protection and should be allowed to enter into such agreements to protect this. Whilst the agreement at garage (A) was fine, the one at garage (B) would be void because the period was too long, i.e. it was unreasonable.

Only VAGUENESS to look at next week, before we turn to discharge of a contract.