Introduction

What is Law of Contract?

Law of contract is the exchange of legal promises between two or more parties voluntarily with the intention to create legal obligations, or refrain from doing an act, which is enforceable in a court of law.
There are different forms of a contract, i.e. in writing, verbally, by conduct or action.

What are Vitiating Factors?

Vitiating factors are referred to as, if a contract is voidable, which means that a contract is misrepresented, duress or to have undue influences, or stated as void which means a contract is to have mistakes or illegal.

‘Vitiating factors are elements which make an agreement either void or voidable, depending on which vitiating factor present.’ (Kelly, H., L., 2005:153).

There are many factors recognized by law, which makes an otherwise valid contract invalid, i.e.

ü  Minors

ü  Duress

ü  Undue Influence

ü  Mistakes

ü  Misinterpretation

Minors

To make a contract to be operated, the parties should have the willingness according to the preceding law of contracts

Furmston Cheshire and Fifoot (2007: 548) define minors as any person under the age of eighteen years. They also mention that minors are allowed to deem any contract they have entered into as void if they want to.

Perhaps the person is a minor (anyone under age of 18 years old ), he /she can be taken to have inability in law to contract. Basically he / she who is under 18 years old (minors) cannot get into any legal bindings, even though if he / she who is a minor get involved in any contracts it will be considered as void. 

Duress

Collins (2003:139) explains duress as a ‘situation where an illegitimate act performed by one party that causes the other to consent to the contract.’ Richard Stone describes these illegitimate acts as physical coercion, threats and economic pressures which influences an entry into a contract.  Even a breach of contract is considered to be as duress.

Undue Influence

A contract is voidable if the party who made the contract did so under the influence of another person. This exploitation can be done to gain an unfair advantage.

·         Undue influence is of two types:

·         Actual undue influence

·         Presumed undue influence

Mistakes and Misrepresentations are explained in detail in the following report.

“Mistakes and Misrepresentations are considered to be Vitiating factors under the law of Contract.” This statement describes that people make mistakes and misrepresentations in day to day life which leads to violation of a breach of law.

To further clarify this statement above my colleagues and I have described the vitiating factors, identified the mistakes and the misrepresentations made by the law and finally the significance of each part to make you recognize how crucial mistakes and misrepresentation are. Moreover, we have referred to cases in which these laws were violated.

3. Misrepresentation

This is one of the most widely talked vitiating factors in the law of contracts in the current context. Misrepresentation as explained in Investopedia , misrepresenatation is, “A false statement of fact made by one party which affects the other party's decision in agreeing to a contract”.  If the misrepresentation is revealed, the contract can be later affirmed void and the situation remedied if the party who relied on the misrepresented fact files suit. For this reason, it is important to be truthful when disclosing facts applicable to a contract negotiation.

For there to be an actionable misrepresentation, there are several factors that should be present. A few of them are explained in detail:

·                     A representation must be made

For misrepresentation to be actionable, first of all there must be a representation. A representation can be by words, written or spoken or even by conduct. Inorder to make this factor more understandable, it is best to confer about the case of Spice Girls v. Aprilia World Service B.V. (2002). The claimant company had contracted with the defandants, for members of the famous Spice Girls group to appear in an advertising shoot. After the contract had been signed one member left the group, and later on it was found by the defendant that the member who had left the group had informed of her resignation prior to the signing of the contract. The defendant argued that the claimants had made a misrepresentation during negotiations by representing that there was a group of five members. Thus, the court held that there was representation by conduct and that the defendant had started all advertising by thinking that there would be five members in the group.

·                     It must be representation of facts

Misrepresentation action is only possible if the representation is a representation of facts. To make this factor clearer, let’s take a look at the case of Bissett v Wilkinson (1927). A vendor(Bissett) of a farm told the prospector purchaser(Wilkinson) that the land would carry 2000 sheeps. Wilkinson had known that the farm wasn’t previously used for grazing sheep. But, then later on it was found out that the farm could not hold 2000 sheep in it. Thus, court held that there is no misrepresentation because the representatiuon was not a fact but was a mere opinion.

However, there are situations where an expression of an opinion or an intention may give rise to a misrepresentation action. One of these situations is when a person who has expressed an opinion knew the facts, which means that the opinion cannot be sustained, then that opinion expressed may be considered an act of misrepresentation.

·                     It must have been made during negotiation

·                     It must be made by one party to another

·                     It should not have become a term of a contract

·                     It should have induce the other to enter into a contract

·                     Representation must be false

3.1. Remedies for misrepresentation

The primary remedy for misrepresentation is rescission. This means that the innocent party will be able to decide to avoid the contract.

The other damages for misrepresentation are explained below with the types of misrepresentation.

3.2. Types of misrepresentation

When discussing about misrepresentation, there are three types of misrepresentation that should be looked at:

·         Fraudulent Misrepresentation

This is where a false representation has been made intentionally, or without certainty in its truth, or recklessly as to its truth. This type of misrepresentation can be further explained using the following case:

 Derry v Peek (1889)

In a company prospectus the defendant (Derry) stated the company had the right to use steam powered trams as oppose to horse powered trams. However, at the time the right to use steam powered trams was subject of approval of the Board of Trade, which was later refused. The claimant purchased shares in the company in reliance of the statement made and brought a claim based on the alleged fraudulent representation of the defendant.

Court held that the statement made by Derry was not fraudulent because the company had applied, and honestly believed that they would get it because permission was a mere formality. But unfortunately the prospectus was given out by this time.

(e-lawresources.co.uk)

Remedies for fraudulent misrepresentation

The remedy for the fraudulent misrepresentation is that the innocent party will be able to leave the contract and also will be able to claim the entire loss faced by them. These damages are based on the tort of deceit. Another remedy would be that the guilt will have not pay the entire loss, but to mitigate the loss faced by the innocent.

Thus, this shows that if the statement made by a certain party isn’t made with intention to fraud the other party, then the damages will not have to be paid to the party suffering the loss. In the case of Doyle v Olby (1969), the remedies for fraudulent misrepresentation were outlined, but these were affirmed in the case of Smith New Court Securities v Scrimgeour Vickers (1996).

Smith New Court Securities v Scrimgeour Vickers (1996).

Citibank loaned £23M to Parent Industries Incorporated (PII). PII secured the loan on shares they held in Ferranti International Signal (FIS) valued at £28M. PII then defaulted on the loan. In July 1989 Citibank sold the shares in FIS to the claimant (Smith New Court Securities) for £23M (82p per share) through a broker, the defendant (Scrimgeour Vickers). Mr Roberts was a senior employee of citibank and a director of the defendant company arranged the sale. He told the claimant that there had been two other bids on the shares when in fact no other bids had been made. The market value of the shares was stated as 78-82p per share, however, a massive fraud had been perpetrated on FIS which meant the market value was fictitious. This came to light in Sept 1989. Smith subsequently sold the shares in small parcels between Nov 1989 and April 1990 for prices between 30-49p per share making a loss of 11.3M.

Court held that the defendant was guilty of committing the action of fraudulent misrepresentation. Thus, the judge said that the innocent party will be able to claim the total loss incurred due to this contract.

·         Negligent misrepresentation

As said in e-lawresources.com, negligent misrepresentation is “misrepresentation is neither fraudulent, nor not proved to be made, fraudulently but made carelessly”. This can be explained in a more meaningful way: negligent misrepresentation is where although the person making the statement believes in what he said; he had no reasonable basis to believe his statement was true.

This can be further explained using the following the case:

Howard Marine v Ogden (1978)

              A seller made a false statement as to the capacity of the barges that he was selling. He honestly believed that the barges had that capacity (therefore it was not a fraudulent misrepresentation). However, the issue was whether it was a negligent misrepresentation. This in turn would depend on whether he has reasonable grounds to believe that the barges had that capacity. He claimed that he had relied on Lloyd’s register which had given the capacity as such.

Court held that Howard Marine had acted negligently and the misrepresentation was a negligent misrepresentation. This is because it was found that he also had access to shipping documents which had described the capacity differently. In such a situation, it was negligent to rely on one document without seeking a clarification.

Remedies for negligent misrepresentation

The remedies for this type of misrepresentation is that the innocent party can sue damages under the section 2 (1) Misrepresentation Act 1967. This means that the innocent party will be able to claim the same damages as in fraudulent misrepresentation. The case of Royscott Trust v Rogerson (1991) confirmed that the principle in fraudulent misrepresentation relating to tortuous damages applied also in negligent misrepresentation.

·         Innocent Misrepresentation

“An innocent misrepresentation exists where the representor can demonstrate reasonable grounds for belief in the truth of the statement”. (e-lawresources., 2010). But it would be clearer if it is explained as a misrepresentation that is neither fraudulent nor negligent misrepresentation.

Remedies for innocent misrepresentation

For innocent misrepresentation, the remedies would not be the same. This is because; damages will not be awarded; only the remedy of rescission will be awarded.   However, there is a possibility that the court may grant damages to a victim of innocent misrepresentation. This is due to the wording in the section 2 (2) Misrepresentation Act. The court will be able to decide whether a monetary damage will be paid for the innocent party.

4. Mistakes

English contract law has three types of mistakes. They are,

1.      Common mistakes

2.      Mutual mistakes

3.      Unilateral mistakes

Common mistakes

This is where the both parties who related to contract make the same mistake. Following are the reasons cause of action.                           

• Res extinct - the subject matter of the contract no longer exists.
• Res sua - where the goods already belong to the purchaser.
• Mistake as to quality - only available in very narrow limits.

In common mistakes the basic key factors occur as a result of the mistake. The case Scott v Coulson [1903] at the time of entering a contract for life insurance both parties believed the person whose life was to be insured was living. In fact he was dead.  The contract was void for mistake as it was a common mistake as to the existence of the subject matter. This is Res sua.

In Res sua the part this will render the contract void. Although the action is justifiable the contract will be considered rendered. In the case of Cooper v Phibbs (1867),
This is an instance of res sua. Normally where a contract is found to have been entered under a common mistake the contract will be rendered void as oppose to voidable. The lease was held to be voidable rather than void as the claim was based in equity as it related to beneficial ownership as oppose to legal ownership.

In Mistake as to quality is making the contract void where the mistake is to some existence of quality which renders the subject of contract essentially different than it seems. This is proved to in case Bell v Lever bros (1932).

Mutual Mistakes

Here the parties are at cross purpose. The courts apply an investigation to see if the contract can be saved. The parties relates to the case have to understand that the case should be in reasonable single meaning. If the personal fails to explain the meaning the contract is said to be void. This can be explained in a single case study Raffles v Wichelhaus (1864).

In the above case of Raffles V Wichelhaus (1864) parties entered to contract to ship cotton from Bombay. The supplier had shipping on October and December. The defendant thought that it was the October sailing and the claimant believed it was the December sailing which had been agreed. The court applied an objective test and stated that a reasonable person would not have been able to state with certainty which sailing had been agreed. Therefore the contract was void as there was no consensus ad idem. Therefore in order to be recognised as a mutual mistake the contract should be voided under the basic principles of mistakes.

Unilateral mistakes

Here only one party is considered to be mistaken. This is divided in to two

1. Mistakes as to the term of contract.

This can be explained through a case smith v Hughes (1871). Here the claimant has purchased a sample of old oats which he thought was really old oats. He was to give this oats to his horse. But the oats were new and he couldn’t give them to the horse. The seller was aware of the mistake of claimant but said nothing. The claimant brought action against the seller of misrepresentation and mistake. The court held: both actions failed. The action based on misrepresentation failed as you cannot have silence as a misrepresentation. The defendant had not misled the claimant to believe they were old oats. The action based on mistake failed as the mistake was not as to the fundamental terms of the contract but only a mistake as to quality.

2. Mistakes as to identify.

This is case where the party misleads by fraud. The party appears to be someone else whom they are not at all.  A claim based in mistake is more similar to misrepresentation as the affect of a finding of mistake is that of the voidable nature. This is important where the seller has acquired goods and sold them on to a third party. If the contract is void then the seller will never receive title to goods and will not be able to pass title when selling the goods.

However, if the contract is voidable, the contract prevails and passes. If the goods are sold before party rescinds the contract, the purchaser acquires good title to the goods. In determining whether a contract will be held void for mistake the courts draw a distinction between contracts made in following criteria,

 inter absentes – Contracts made at a distance.

inter praesentes- Contracts made by face to face transactions.

Conclusion

Overall, out of all the vitiating factors, Mistakes and Misrepresentations are considered to be the most important in the modern day contracts.

A few related cases which are explained above related to Mistakes and Misrepresentation are some of the most important cases which are well known in today’s context.

So, complying with the statement:

“Mistake and Misrepresentation are considered as recognized vitiating factors in English Law of Contracts,”

This above statement has been explained in detail with relation to all the vitiating factors, most importantly Mistake and Misrepresentation.