Law of Contract I

DR.RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW

Project: law of contract-i TOPIC : general defences in law of contracts

SUBMITTED TO:Dr. Visalakshi Vegesna Associate Professor (Law)

SUBMITTED BY:ashutosh mani Ii Semester B.A.LL.B (Hons.) Roll No. - 34

Law of Contract I

Index

Introduction Mistake Duress Frustation of Purpose Impossibility of Performance Misrepresentation Conclusion Bibliography

Law of Contract I Introduction

Like the law of torts, in the law of contracts, there are various defences that can be raised for breach of contract. There are many valid defences that can be raised to a claim of breach of a contract. Depending upon the particular facts and circumstances of the contract and the actions of the parties, an attorney can advice you of what makes sense. Going it alone is not the wisest choice and legal help is almost a certainty. 1 The more common defences to a breach of contract claim are: (1) One side was not competent to enter into the contract, either due to age or mental illness; (2) One side had a "free way out" and really never provided any form of "consideration"; (3) One side was under pressure and duress or other undue influence to sign; (4) One side engaged in "fraud" to procure the contract; (5) One side prevented the other from fulfilling its/her/his end of the bargain; (6) The original contract was changed with the agreement of all parties; (7) There was a mistake of fact or mistake of law prior to signing the contract; (8) The contract has an illegal purpose or act; (9) Something happened, through no fault of either side, making the duties under the contract impossible to perform; (10) The side claiming the breach accepted the performance without claiming a breach had occurred. The most common raised defences in law of contracts are, 1) Mistake 2) Duress/ Coercion 3) Frustration of purpose 4) Impossibility of performance 5) Misrepresentation.2 MISTAKE In contract law, a mistake is an erroneous belief, at contracting, that certain facts are true. It can be argued as a defence, and if raised successfully can lead to the agreement in question being found void ab initio or voidable, or alternatively an equitable remedy may be provided
1 2

en.wikipedia.org/defence_contract nd Law of Contracts, S.K. Kapoor, 2 edition, Central Law Publications.

Law of Contract I
by the courts. Common law has identified three different types of mistake in contract: the 'unilateral mistake', the 'mutual mistake' and the 'common mistake'. It is important to note the distinction between the 'common mistake' and the 'mutual mistake'.3 Unilateral Mistake A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter contained in a contract. This kind of mistake is more common than other types of mistake. One must first distinguish between mechanical calculations and business error when looking at unilateral mistake. For mechanical calculations, a party may be able to set aside the contract on these grounds provided that the other party does not try to take advantage of the mistake, or 'snatch up' the offer (involving a bargain that one did not intend to make, betrayed by an error in arithmetic etc.). This will be seen by an objective standard, or if a reasonable person would be able to know that the mistake would not make sense to one of the parties. Unless one of the parties 'snatched up' the one-sided offer, courts will otherwise uphold the contract.4 Conversely, when a party is guilty of an error in business judgment, there is no relief. Leading cases on unilateral mistake are Smith v Hughes5and Hartog v Colin & Shields6.There are situations, such as in the contracting and subcontracting contexts, where a subcontractor provides a bid that would not seem reasonable in the context of industry norms. Similar to Donovan v. RRL Corp7 if a person sees an advertisement and there is a mistake that a person reading the newspaper would believe to be a valid offer and there is sufficient reliance on the offer, then it is unlikely that a court will rescind the contract. In the case of Donovan, the error in the newspaper was not the fault of the car dealer. The mistake was made on the part of the newspaper company that printed the error. This would be more of an example of a mutual mistake. Both the buyer (Donovan) and seller (RRL Corp.) mistakenly believed that the advertisement was correct. As is discussed in the mutual mistake section on this page, most likely a court will excuse each of a duty to perform the contract. Mutual mistake theory will also discuss the factors that will determine the allocation of risk in the event of a mutual
3 4

en.wikipedia.org/mistake www.legalserviceindia.com 5 (1871) LR 6 QB 597. 6 [1939] 3 All ER 566 7 27 P.2d 702 (Cal. 2001)

Law of Contract I
mistake. The test to determine the allocation of risk is as follows: A defendant should bear the risk of the mistake if: (i) the agreement allocated the risk to the defendant; (ii) the defendant was aware of having limited knowledge with respect to the facts to which the mistake related but treats his limited knowledge as sufficient; or (iii) the court finds that it is reasonable under the circumstances to allocate the risk to the defendant. Given the facts in Donovan, who is in the better position to bear the risk? The car dealer who provides the advertisement? Or the consumer? Many jurisdictions would claim that the car dealer has more knowledge in this regard than a consumer. A consumer, generally, will not be aware of errors in an advertisement nearly as often as a commercial seller of goods who is in the business of advertising their own products to the public at large.8 As any area of law, any doctrine has its exceptions. In Speckel v. Perkins,9 there was a unilateral mistake by one of the parties. However, the mistake should have been apparent to a reasonable person in the position of the party who did not make the mistake. The court determined that the offer of US$50000 was, on its face, clearly a mistake. The correct amount, as both parties were aware, was for US$15000. The question raises, at what point will the unilateral mistake become so apparent that it leaves unilateral mistake theory and enters into mutual mistake doctrine?10 Mutual Mistake A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract. They are at cross-purposes. There is a meeting of the minds, but the parties are mistaken. Hence the contract is voidable. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract. For a mutual mistake to be void, then the item the parties are mistaken about must be material (emphasis added). When there is a material mistake about a material aspect of the contract, the essential purpose of the contract, there is the question of the assumption of the risk. Who has the risk contractually? Who bears the risk by custom? Restatement (Second) Contracts Sec. 154 deals with this scenario. This is easily confused with mutual assent cases such as Raffles v Wichelhaus.11 In Raffles, there was an agreement to ship goods on a vessel named Peerless, but each party was

8 9

Law of Contract, B.L. Meena, 5 edition, Universal law publications 364 N.W.2d 890 (Minn. Ct. App. 1985) 10 ELR 1985 11 (1864) 2 Hurl & C 906 Court of Exchequer.

th

Law of Contract I
referring to a different vessel. Therefore, each party had a different understanding that they did not communicate about when the goods would be shipped. In this case, both parties believed there was a "meeting of the minds," but discovered that they were each mistaken about the other party's different meaning. This represents not a mutual mistake but a failure of mutual assent. In this situation, no contract has been formed, since mutual assent is required in the formation stage of contract. Common Mistake12 A common mistake is where both parties hold the same mistaken belief of the facts. The House of Lords case of Bell v Lever Brothers Ltd13 established that common mistake can void a contract only if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible. Later in Solle v Butcher,14 Lord Denning added requirements for common mistake in equity, which loosened the requirements to show common mistake. However, since that time, the case has been heavily criticized in cases such as Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd.15 DURESS16 In jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black's Law Dictionary (6th ed.) defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner [they] otherwise would not [or would]". Duress is pressure exerted upon a person to coerce that person to perform an act that he or she ordinarily would not perform. The notion of duress must be distinguished both from undue influence in the civil law and from necessity. Duress has two aspects. One is that it negates the person's consent to an act, such as sexual activity or the entering into a contract; or, secondly, as a possible legal defense or justification to an otherwise unlawful act. As a defense, a defendant is arguing that he or she

12 13

en.wikipedia.org/mastake/common_mistake [1932] AC 161 14 1950 1 KB 671 15 2003 QB 679. 16 www.indiankanoon.org

Law of Contract I
should not be held liable because, even though the act broke the law, it was only performed because of extreme unlawful pressure. Duress in the context of contract law is a common law defense, and if one is successful in proving that the contract is vitiated by duress, the contract may be rescinded, since it is then voidable. Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition". Black's Law Dictionary (8th ed. 2004) Duress in contract law falls into two broad categories:

Physical duress, and Economic duress

PHYSICAL DURESS17 Duress to the person In Barton v. Armstrong [1976] AC 104, a decision of the Privy Council, Armstrong threatened to kill Barton if he did not sign a contract, which was set aside due to duress to the person. An innocent party wishing to set aside a contract for duress to the person need to prove only that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. Duress can be made also by social influence. Courts frown on this type of contract because there is really no manifestation of mutual assent "meeting of the minds" or agreement to the terms. Rather, when someone is threatened and agrees to act to avoid physical harm by the party making the offer, all you truly have is a mirror of the other party's manifestation of mutual assent not the manifestation of mutual assent by the party being forced or induced to assent to the terms of the contract. Therefore, the meeting of the minds "in truth" does not exist. Since there is no meeting of the minds there can be no contract. Duress to goods

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www.en.wikipedia.org

Law of Contract I
In such cases, one party refuses to release the goods belonging to the other party until the other party enters into a contract with them. For example, in Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, the contract was set aside after Hawker Pacific's threats to withhold the helicopter from the plaintiff unless further payments were made for repairing a botched paint job. ECONOMIC DURESS18 A contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract.

The elements of economic duress:1. Wrongful or improper threat: No precise definition of what is wrongful or improper. Examples include: morally wrong, criminal, or tortuous conduct; one that is a threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith". 2. Lack of reasonable alternative (but to accept the other party's terms). If there is an available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met. 3. The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, their background (especially their education), relationship of the parties, and the ability to receive advice. 4. The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress. FRUSTATION OF PURPOSE19 In the law of contracts, frustration of purpose is a defence to enforcement of the contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract, and both parties knew of this principal purpose at the time the contract was made. Despite frequently arising as a result of government action, any
18 19 th

Law of Contracts, R.K. Bangia, 11 edition, Central Law Agency rd Law of Contracts, B.L. Meena, 3 edition, Universal Law Publications

Law of Contract I
third party (or even nature) can frustrate a contracting party's primary purpose for entering into the contract. This concept is also called commercial frustration. For example, if Joe gets a mortgage for a new home, and, after three years, the house is destroyed, for whatever reason, at no fault of Joe's. Without a hell or high water clause, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract (to have a house to live in) has been compromised. However, he might still have a foreclosure on his credit rating. Frustration of purpose is often confused with the related doctrine of impossibility, which is closely related. The distinction between the two is that impossibility concerns the duties specified in the contract, whereas frustration of purpose concerns the reason a party entered into the contract. For example, suppose entrepreneur Emily leases space from landlord Larry so she can open a restaurant that only serves Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses, or if the property is destroyed by a tornado, then both Larry and Emily are excused from performing the contract by impossibility. However, if the Tibetan Speckled Lizard suddenly goes extinct, then Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and that purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to. The leading case in on the subject is the famous 1903 case of Krell v. Henry20, which concerned a party who had rented a room for the purpose of watching the coronation procession of Edward VII. When the king fell ill, the coronation was indefinitely postponed. The hirer refused to pay for the room; the owner sued for breach of contract and the hirer then counter-sued for the return of his 25 deposit. The court determined that the cancellation of the coronation was unforeseeable by the parties, and discharged the contract, leaving the parties as they were: the hirer lost his one third deposit and the owner lost the rest of the rent. In addition, the Court also noted that the doctrine of 'impossibility' could not be applied in this manner, because it would not have technically been 'impossible' for the lessee (the 'renter') to take possession of the flat on that prescribed day and merely sit in front of the window and view the street where the coronation parade was to have occurred. The point the Court was making is this: The illness of the King did not make the execution of the contract 'impossible.'
20

[1903] 2 KB 740

Law of Contract I
Rather, the cancellation of the parade merely frustrated the purpose for which both men originally contracted. IMPOSSIBILITY OF PERFORMANCE21 In contract law, impossibility is an excuse for the non-performance of duties under a contract, based on a change in circumstances (or the discovery of pre-existing circumstances), the nonoccurrence of which was an underlying assumption of the contract that makes performance of the contract literally impossible. For such a defence to be raised performance must not merely be difficult or unexpectedly costly for one party; there must be no way for it to actually be accomplished. For example, if Rachel contracts to pay Joey $1000 to paint her house on October 1, but the house burns to the ground before the end of September, Rachel is excused from her duty to pay Joey the $1000, and he is excused from his duty to paint her house; however, Joey may still be able to sue for the unjust enrichment of any benefit conferred on Rachel before her house burned down (e.g. if Rachel paid Joey in advance, then the amount of payment might be a compensatory injury). However, the parties to a contract may choose to ignore impossibility by inserting a hell or high water clause, which mandates that payments continue even if completion of the contract becomes physically impossible. The English case that established this doctrine at common law is Taylor v. Caldwell22. MISREPRESENTATION23 Misrepresentation is a contract law concept. It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation. According to Gordon v Selico24, it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a
21 22

Law of Contracts, Pollock & Mulla (1863) 3 B & S 826. 23 st Law of Contracts, Avtar Singh, 21 edition, Eastern Book Company. 24 (1986) 18 HLR 219

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Law of Contract I
misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact. Criteria for misrepresentation Misrepresentation is one of several vitiating factors which can affect the validity of a contract. A misrepresentation occurs when one party makes a false statement with the intention of inducing another party to contract. For an action to be successful, some criteria must be met in order to prove a misrepresentation. These include:

A false statement of fact has been made, The statement was directed at the suing party and The statement had acted to induce the suing party to contract.

Distortion of fact A representor may make a statement which prima facie is technically true; however this may tell only half the story. If a statement of fact is made but the representor fails to include information which would significantly alter the interpretation of this fact, then a misrepresentation may have occurred. In Krakowski v Eurolynx Properties Ltd25, Krakowski agreed to enter into a contract to buy a shop premises from Eurolynx as long as a 'strong tenant' had been organised. The contract proceeded on the grounds that such a tenant had been arranged. Unbeknown to Krakowski, Eurolynx had entered into an additional agreement with the tenant to provide funds for the first three months rent to ensure the contract went ahead. When the tenant defaulted on the rent and subsequently vacated the premises, Krakowski found out about the additional agreement and rescinded the contract with Eurolynx. It was held that Eurolynxs failure to disclose all material facts about the 'strong tenant' was enough to constitute a misrepresentation and the contract could be rescinded on these grounds.

25

(1995) 183 CLR 563

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Law of Contract I
Learned falsity26 The negotiating stage of a contract can be a time consuming process. Because of this, new information may arise and circumstances may change. This can result in two situations which can result in a misrepresentation if silence is kept. The first is if the representor subsequently discovers that the statement was false, the second being if the statement becomes false at a later time. If a statement is made and it is subsequently made known to the representor that it is false, it would obviously be inequitable to allow the representor to remain silent with the new information. In Lockhart v. Osman27, an agent had advertised some cattle as being well suited for breeding purposes. Later on it was discovered that the stock had been exposed to a contagious disease which affected the reproductive system. It was held that the agent had a duty to take remedial action and correct the representation. The failure by the agent to take such measures resulted in the contract being set aside. Should a statement be made which is true at the time, but subsequently becomes untrue due to a change in circumstances, the representor is obligated to amend the original statement. In With v OFlanagan28, the plaintiff entered into a contract to purchase OFlanagans medical practice. During negotiations it was said that the practice produced an income of 2000 per year. Before the contract was signed, the practice took a downward turn and lost a significant amount of value. After the contract had been entered into the true nature of the practice was discovered and the plaintiff took action in misrepresentation. In his decision, Lord Wright said "...a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation." This means that the representation must be true till the contract is made; creating the obligation mentioned above and accordingly the plaintiffs petition was successful. Types of Misrepresentation29 Four types of misrepresentations are identified with different remedies available: Fraudulent misrepresentation occurs when one makes representation with intent to deceive and with the knowledge that it is false. An action for fraudulent misrepresentation allows for a remedy of damages and rescission. One can also sue for fraudulent misrepresentation in a tort action. Fraudulent misrepresentation is capable of being made recklessly.
26 27

en.wikipedia.org/misrepresentation [1981] VR 57 28 [1936] Ch. 575 29 rd Law of Contracts, B.L. Meena, 3 edition, Universal Law Publications

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Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true. This type of misrepresentation is relatively new and was introduced to allow damages in situations where neither a collateral contract nor fraud is found. It was first seen in the case of Hedley Byrne v Heller30 where the court found that a statement made negligently that was relied upon can be actionable in tort. Lord Denning in Esso Petroleum Co. Ltd. v Mardon31 however, transported the tort into contract law, stating the rule as: if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to anotherwith the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. Innocent misrepresentation (Derry v. Peek)32 occurs when the representor had reasonable grounds for believing that his or her false statement was true. Prior to Hedley Byrne, all misrepresentations that were not fraudulent were considered to be innocent. This type of representation primarily allows for a remedy of rescission, the purpose of which is put the parties back into a position as if the contract had never taken place. Misrepresentation (in India in IPC under Section 90) In India, the federal laws define misrepresentation under "Misconception Of Fact". This is dealt with under the Indian Penal Code in Section 90, which states: Consent given firstly under fear of injury, and secondly under a misconception of fact, is not consent at all. That is what is explained in the first part of Section 90. There are two grounds specified in Section 90 which are analogous to coercion and mistake of fact which are the familiar grounds that can vitiate a transaction under the jurisprudence of India and other countries. The factors set out in first part of Section 90 are from the point of view of the victim; the second part of Section 90 enacts the corresponding provision from the point of view of the accused. It envisages that the accused has knowledge of - or reason to believe that - the
30 31

[1964] A.C. 465 [1976] Q.B. 108 32 (1889) LR 14 App Case 337

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Law of Contract I
consent was given by the victim in consequence of fear of injury or misconception of fact. Thus the second part lays emphasis on the knowledge or reasonable belief of the person who obtains the tainted consent. The requirements of both parts should be cumulatively satisfied. In other words, the Court has to determine whether the person giving the consent has done so under fear or misconception of fact; the court should also be satisfied that the person doing the act (i.e. the alleged offender) is conscious of the fact or should have reason to think that but for the fear or misconception, the consent would not have been given. This is the scheme of Section 90 which is couched in negative terminology. Conclusion The defences in contracts are important in the same way as in any other branch of law to prevent injustice to a common man. However, the restrictions are necessary so as to prevent the misuse of them. The restrictions hold good in case if someone is at fault and tries to save itself by putting the blame on the other party.

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Law of Contract I BIBLIOGRAPHY

Books Law of contracts, S.K. Kapoor, 2nd edition, Central Law Publications Law of contracts, B.L. Meena, 3rd edition, Universal Law Publications Law of contracts & specific relief, Avtar Singh, 21st edition, Eastern Book Company Law of contracts, R.K. Bangia, 11th edition, Central Law Publications. Websites en.wikipedia.org www.legalservicesindia.com www.indiankanoon.org

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