Contract Law Notes on Invalidity & Fraud PDF

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Notes from lecture on invalidity and fraud in contract law...

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Contract(Lecture(10( Invalid(Contracts( Void/voidable contracts are the outcome of something being wrong with how the apparent contract was reached, resulting in a breach. This perhaps could be the conduct of one of the parties, bringing some sort of wrongful behaviour against one of the parties, or an error on the part of one or both parties on the route to concluding the contract.

Void(Contract( The void contract has no legal existence – there never was any contract in the eyes of the law. The formation process fails to produce a contract because no agreement was ever reached from an objective POV. The parties were not in agreement. E.g. Mathieson Gee.

The(grounds(of(invalidity( From an objective point of view, a process of formation must be completed. There is perhaps a written document which resembles a contract. The external factors which are in play between these parties in making the contract can be used to challenge and strike down an apparent contract. There are five grounds for invalidity: • Force and Fear • Fraud • Facility and Circumvention • Undue Influence • Error - Error in Motive and Misrepresentation In the classical law – the law in time of institutional writers – there were only three grounds for challenge: force and fear, fraud and error. The concept of fraud was initially wide, but became narrower in the 19th century, so other doctrines had to be borrowed to cover these areas. That even had an impact in the law of error. The underlying theory is that contract is made by agreement of people acting in their own interests, in full knowledge. In general, grounds for invalidity are as a result of bad conduct.

Force&and&Fear& Vis ac metus Threats and extortion are central to this. There has to be some conduct during the negotiations between the parties that involve a threat of dire consequences. In the case of Earl of Orkney v Vinfra (1606) Mor 16481, the Earl (who is famous for violence), threatened “to stick him with a winger”, which persuaded Vinfra to strike. The contract was struck down under the concept of force and fear. This would still apply today.

Threats of physical violence cannot be completely eliminated. The law recognises other forms of threat in addition, which may not be threats to life or wellbeing. Vinfra consented because he had no real option. His consent is not really to the contract but rather to avoid the problem. The tendency in these cases is that the contract is void – the contract is not real as there is no real agreement or consent. Another example is where a person’s hand is held and forced to sign. In these cases, the contract would also be void. However, there is an argument that in these cases, it is not the issue of consent, but rather disapproval of the negotiating techniques. Voidness is a sanction for bad misconduct. In the modern development, whereby the force and threat now include more subtle forms of pressure, such as economic or reputational pressure, the contract has held to be voidable. There is no absence of consent, but there is procurement as to how that consent was gain. Threats which were common in the 19th century were threats to bring actions against people, or to report them to the police. These are lawful actions however people were using them as threat to get results at the time. Their consent is real; however pressure is used to obtain it. Hislop v Dickson Motors (Forres) Ltd 1978 SLT (N) 73 Mrs Hislop was the accounting assistant who was siphoning off money from her employers. They found out and confronted her with the truthful accusations and said that they wouldn’t report her to the police if she gave the money or at least some of the money back. However, the employers came back a second time and took more money, under the same threat. Mrs Hislop then went to the court. Held, that there was force and fear in this case. In the first case, it was legitimate in terms of reporting criminal activity, even if the person hadn’t committed any crime. The second extraction of money was not legitimate which constituted force and fear, so the second transaction was voidable. The contract was not void, because there was consent. Often the outcome of a void contract or a voidable contract is the same. Trustee Savings Bank v Balloch 1983 SLT 240 Wife forced by her husband to sign a guarantee. Economic'pressure'

Often, companies which are vulnerable economic, that company’s debtors will offer to pay some of what they owe, in exchange for them signing off the payment of the rest of the debt. One party is taking advantage of the other party’s weakness. That sort of behaviour can be force and fear. The transaction can be struck down, as a result. There has never been a case in Scotland of this type, so it is not clear whether this would be recognised.

Fraud& Fundamentally, fraud is about telling lies. It is classically defined “as a machination or contrivance to deceive” which is said by Erskine. Today, typically is a statement or set of statements made by one contracting party to another, which are misrepresentations. They are representations about fact and if they are untrue, and the party who makes the statements know they are untrue, or do not care whether or not they are true, this is fraud. This derives from Derry v Peek (1889) 44 App Cas 337; 37 Ch D 541. The House of Lords said that “A representation is fraudulent if the defender was aware that his representations were untrue or made them recklessly, without knowing or caring whether they were true or not.” This case came to be seen as defining the general concept of fraud. Fraud also covers where people fail to make statements, which goes against the classical policy of freedom of contract. Each person is to protect himself and not to rely on the other party. Derry v Peek narrows down fraud from this wide idea to a much narrower scope. Boyd & Forest v Glasgow & S W Railway Co 1912 SC (HL) 93; 1912, 1 SLT 475; [1913] AC 404. This case confirms Derry v Peek being applied in Scotland. It concerns the building of a railway line. The surveyor has gone out on the proposed route and took out tests of the soil and surface and reported back on whether the ground was soft or hard which was then issued to parties who were making tenders. The ground turned out to be much harder than suggested. It was argued that the surveyor’s misrepresentations were fraudulent. Held, there is not fraud. There surveyor may have been careless, but his work was carried out in good faith. He did not deliberately try to deceive the parties. The courts were reluctant to impose the notion of fraud on regular business activities. The narrowing of fraud left gaps for the new doctrines. This was in the interest of business.

Facility&and&Circumvention&& This is where someone is facile and so is vulnerable in some way, perhaps due to illness or mental illness but not so ill that one is insane. During this time, they enter into a contract with someone and the transaction is to the advantage of the other party, often a party member. Mackay v Campbell 1967 SC (HL) 53 Mackay sold his island because he thought he was dying, and sold it to his friend for a price lower than its value. He survived and wanted the contract reduced. Held, that Campbell was taking advantage of his friend’s weakness – circumvention. Anderson v The Beacon Fellowship 1992 SLT 111 It is clear that the person was facile and the other party would get considerable benefits from contracting. The other party should recommend independent advice.

Undue&Influence& This is about someone who, in relation to another person, is relatively weak. Instead of looking after their own interests, the individual places trust in someone else to look after their affairs. There is a pre-existing relationship between the parties. A transaction is entered into that is at the advantage of the other party and at the detriment of the weaker person. Where these relationships exist, the transaction can be struck down. An objective standard is being applied with regards to the behaviour of the party. The party breached the trust attributed by the weaker party. Parent and child is a good example of this. Family relationships can often have this particular character. This can also be a relationship between a solicitor and their client. People often trust their solicitor and believe that they know better. Honeyman’s Exrs v Sharp 1978 SC 223 The stronger party is required to recommend that the weaker party takes independent advice....