stevenclark.com.au

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Following through the Contracts 101 series from the agreement, consideration, capacity, legality of object and possibility of performance, this installment discusses the sixth and final element of the simple contract – genuine consent. In fact, genuine consent also comprises of five elements with which the business operator should become familiar:

1. mistake
2. misrepresentation
3. undue influence
4. duress
5. unconscionability

1. Mistake

There are a number of ways that a mistake can occur when committing to a contract:

• Common mistake… Leaf v International Galleries (1950); The Saints Gallery Pty Ltd v Plummer (1988)
• Mutual mistake… Couturier v Hastie (1956); Raffles v Wichelhaus (1864); Smith v Hughes (1871)
• Uni-lateral mistake… Taylor v Johnson (1983); Ingram v Little (1960)
• Mistake about the identity of the party… Cundy v Lindsay (1878); Lewis v Averay (1971)
• Mistake to the nature of the document itself (non-est factum)… Petelin v Cullen (1975); Pt Ltd v Maradona Pty Ltd (1992)

Be aware that in Gallie v Lee (1969) Lord Denning stated that if somebody signs a document relying on the word of another or to its character or content then they cannot back away from their agreement. Therefore the oops factor defense probably won’t get you very far in a court. You still need to read and sign the document with due care and diligence (including consultation with a legal professional).

The law of mistake has also been simplified in recent years and the court will be unlikely to set aside a contract on the grounds of unilateral mistake. The important thing to note about mistake is that it does not refer to the simple error of judgement definition – in this sense, mistake may be something like the mutual mistake in Couturier v Hastie (1836) where both parties contracted to trade corn which had unbeknown to them been spoiled at sea. Or it could be a mistake where both parties misunderstood each other and therefore there was no real contract.

Also note that to claim non-est factum you must show that the document signed is radically different than that which was contemplated at the time. Questions to concern yourself with at the time of contractual agreements with a client, for example, might include their level of literacy and their competency to understand the contract.

Common Law remedies for mistake include rescission of the original contract, restitution of payments already made, specific performance directives from the court and rectification of the contract by the court. However, the Trade Practices Act provides further powers to the court above those provided by Common Law and provides the ability to impose penalties and fines and order corrective actions (all unavailable under the Common Law solution).

2. Misrepresentation

Misrepresentation consists of four elements:

1. A false statement was made
2. It was addressed to the person
3. It was a statement intended to induce them into entering the contract, and
4. It did induce them into the contract

Also, misrepresentation can either be innocent, negligent or fraudulent, and there are differences in the court’s response under Common Law to any breach. However, note that if it was only opinion that was offered then it is not misrepresentation… Bisset v Wilkinson (1926).

Remedies for misrepresentation include:

• If innocent then the court may refuse to fulful the contract or provide equity
• If fraudulent then there may be a liability for damages

Again, this also comes under the Trade Practices Act as misleading or deceptive conduct (s52), and false or misleading representation (s53), and could result in an injunction (s80), damages (s52) or ancilliary remedies (s87).

3. Undue Influence

Undue influence exists where one party uses their dominance in a relationship in such a way as to result in a situation where the weaker party loses their ability to act freely and voluntarily… Johnson v Buttress (1936). Relationships that inherently warrant attention in this regard include parent-child, doctor-patient, solicitor-client, religious advisor-devotee… Allcard v Skinner (1887). Although the courts do not limit themselves to these identified relationships. Therefore, the very nature of a relationship could affect the ability of the other party to provide genuine consent to the contract.

4. Duress

Again, contracts signed under duress lack genuine consent. Duress occurs where an illegitimate pressure is placed on the party to enter the contract… Scolio Pty Ltd v Cote (1992). As a test, the duress must be present and effective but it does not have to be the sole factor at play – duress can simply be a contributory factor… Barton v Armstrong (1976), and can include economic duress… Crescendo Management Pty Ltd v Westpac Banking Corp (1988); CTN Cash & Carry Ltd v Gallagher Ltd (1992).

5. Unconscionability

Unconscionability is a step further than undue influence or duress. Whereas undue influence is based on the use of influence in a relationship of uneven weight, and duress is based on direct illegitimate pressure to sign the contract, unconscionability involves the direct taking advantage of someone… Schroeder Music Publishing Co Ltd v Macaulay (1974); Commercial Bank of Australia v Amadio (1983); Louth v Diprose (1992).

In assessing unconscionability there must be an identified special disadvantage such as illness, ignorance, inexperience, impaired faculties, financial need or something other than the circumstances, that affected their ability to look after their own interest. This could include the inability to read and write English.Section 51AA-51AC of the Trade Practices Act cover unconscionable conduct with section 51AB(2) covering factors to take into consideration. Remedies include injunctions (s80), damages (s82), non-punitive orders (s86c) and other orders (s87).

Trade Practices Act and Fair Trading Act

The Trade Practices Act and the Fair Trading Act have extended the court’s power to address genuine consent in the context of a contract. The Trade Practices Act applies to corporations and the Fair Trading Act applies to firms and individuals. Therefore they have powers that exceed the Common Law constraints.

Conclusion

As the sixth and final element of the simple contract the genuine consent of parties is critical to the successful outcomes of our associated business objectives. Understanding that the court will not only consider what you are contracting, but also with whom and under what circumstance, can be a potentially business saving tool in your business arsenal. To anybody who has read the preceding installments of the Contracts 101 series there should be an apparent theme – the court will not enforce unfair or illegal contractual arrangements. Even more important to realise, a badly written or unenforceable contract has the potential to cost your business in major league court and lawyer fees over a number of years. So it is critical to business that we utilise lawyers where appropriate, rather than penning our own destinies to save a few dollars. After all, smart business is efficient business.

In the next installment of Contracts 101 the discussion will move to the situation where you may not have a signed contract – promissory estoppel. It may be easiest to picture this in your mind around the common idea of a breach of promise.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

• Contracts 101 – Part 1: Outline
• Contracts 101 – Part 2: Which Contract?
• Contracts 101 – Part 3: The Six Elements
• Contracts 101 – Part 4: The Agreement
• Contracts 101 – Part 5: The Offer
• Contracts 101 – Part 6: The Acceptance
• Contracts 101 – Part 7: Battle of the Forms
• Contracts 101 – Part 8: Consideration
• Contracts 101 – Part 9: Capacity
• Contracts 101 – Part 10: Legality of Object
• Contracts 101 – Part 11: Possibility of Performance
• Contracts 101 – Part 12: Genuine Consent
• Contracts 101 – Part 13: Promissory Estoppel
• Contracts 101 – Part 14: Ending the Contract
• Contracts 101 – Conclusion: Protect your Business