9 Genuine consent
Learning objectives
On completion of this Chapter, you should be able to:
- explain the effect of a mistake on a contract
- explain the different types of mistakes
- explain the effect of a mistake on a written document and the effect of the operation of the legal doctrine of non est factum
- distinguish between innocent and fraudulent misrepresentation and describe their effects on a contract
- explain what is required to amount to a negligent misrepresentation
- explain the meaning of the terms ‘duress’ and ‘undue influence’, and describe their effects on a contract
- explain what unconscionable conduct is and its effect on a contract.
Key terms
You will notice these key terms, which are mentioned throughout the chapter, to help you to better understand and remember the material:
-
- Collateral contract: a separate or subsidiary contract to the main contract, which may be verbal or written, and which exists independently of the main contract (that is, it is not a term of the main contract
- Common mistake: both parties are mistaken as to existence or identity of the subject matter
- Duress: threats of, or use of, force that deprives the innocent party of exercising their free will
- Misrepresentation: a false statement of fact, which may be intentionally or unintentionally made
- Mutual mistake: where both parties to a contract are mistaken, but about different things
- Non est factum: ‘not my doing’ or ‘not my deed’; where a party under a disability is mistaken about the very nature of a document that they are signing, believing it to be one thing when in fact it is something quite different
- Rescission: the reversal of a transaction which restores both parties back to their original positions
- Representation: a statement of fact
- Restitution: an equitable remedy available for the unjust enrichment of the defendant at the plaintiff’s expense
- Unconscionable contract: an unfair or unjust contract
- Undue influence: the improper use of power
- Unilateral mistake: where one party is mistaken about some aspect of the contract, but the other party is not.
Introduction
In the last chapter we looked at the capacity of you and the other party to see whether you understood both the rules and obligations associated with entering into a contract. In this chapter we are going to look at exactly what it is that you would have consented to when entering into a contract.
- made a mistake
- made a misrepresentation
- used duress (force)
- undue influence, or
- displayed unconscionable conduct,
Step 5: Is there genuine consent?
If you are satisfied that there is no problem with the ability of you and the other party to fully understand what you are entering into (as in, the question of capacity), then you can move on and consider whether there is genuine consent between you and the other party.
what have the parties consented to?
If the contract has been entered into because of a mistake by you or the other party, or because one of you may have a superior bargaining position and has made a misrepresentation or used duress (force), undue influence or unconscionable conduct to get an ‘agreement’, then there is no genuine consent and therefore no valid contract.
The question you must ask yourself when considering the question of consent is: Was the consent between us genuine? Is this what we have agreed to?
What is mistake?
So, let us begin with mistake. If you or the other party says that they have misunderstood the situation, or they have made a mistake, has an agreement been reached or not? As a general rule, if the parties appear to have reached an agreement, the law assumes that they have in fact reached agreement.
The law is reluctant to accept a mistake as grounds for voiding a contract as it would provide an easy way out for a dissatisfied party to get out of an agreement and it would also seriously undermine the certainty and reliability essential to commercial transactions. So, what is the effect on the contracting parties if there is a mistake?
What is the effect of mistake on the contracting parties?
Where a mistake does operate, and the mistake is serious, one outcome is to make the whole transaction null and void from the very beginning (they call that void ab initio). This would put you and the other party in the same position as if no contract had ever been made. However, if the mistake is trivial or does not go to the main purpose of the contract, it may still be enforceable.
What is effect of mistake on third parties?
While you and the other party may not be concerned about being restored to your original positions, innocent third parties may not feel the same way. Suppose you sell your car to John who pays you by cheque, which is subsequently dishonoured. You want your car back, but John has already sold it to Liz, a third party. You track down Liz and the question you have to consider is whether you can recover your car from Liz or the money from John.
Business tip
Never accept a cheque from a buyer unless it is a bank cheque or if you do, wait until the cheque is cleared before you give them the item they have agreed to buy.
If the original contract between you and John is now declared void for mistake, he has no title to ownership of the car and therefore cannot pass good title on to Liz. The contract is void from the beginning (or void ab initio) and the title to the car will remain vested in you. Liz, who is a third party, would be required at common law either to return the car to you or pay you, its value. Liz’s right to sue John is generally limited because he is not going to hang around and disappears. It is because of this kind of injustice that the courts place such stringent limitations on the operation of mistake. The question for the courts is, who is going to be the loser because there has to be one. It is going to be either you or Liz.
What is mistake of fact?
Two principles are clear:
- Only mistakes of fact can render a contract void. If one of the parties makes a mistake of law (for example, wrongly interpreting a statute), a mistake of judgement (for example, buying clothes and then not liking the style or colour) or a mistake as to quality, then that party generally cannot rely on the mistake to avoid the contract. However, money paid under a mistake of law may be recoverable.
- There are very few mistakes of fact that provide grounds on which courts can invalidate a contract.
In brief
Basic types of mistakes of fact
| TYPE OF MISTAKE | DESCRIPTION | EFFECT |
|---|---|---|
| Common mistake (rarely arises in practice) for example, buying a painting that you and the seller believe is an original when it is not | Both parties are mistaken about the same thing | Rarely a remedy at common law but may be in equity in rescission or rectification |
| Mutual mistake (rarely arises in practice) for example, where you think you are buying B's 2023 Ford Ranger when they think you are buying his 2020 his 2021 Ford Ranger. | A mistake made by both parties but about different things, so no genuine agreement | Contract void |
| Unilateral mistake (more common) for example, where you are contracting with B, who you never intended to deal with because you thought they were C | Only one party is mistaken about a material fact regarding the subject matter of the contract, so no genuine agreement | Remedy usually in equity in rescission or rectification. Contract may be void or voidable |
| Non est factum—it is not my deed (occurs only rarely) for example, if you were illiterate and could speak little English and you signed a document believing it to be a receipt when in fact it was option to purchase your house. | Signatory did not understand the nature of the agreement they signed, so no genuine agreement | Contract void |
What is the difference between common mistake, mutual mistake, unilateral mistake and non est factum?
In the event of common mistake, there is a genuine agreement between the parties as they are both agreed on the same matters. The offer and acceptance have corresponded, and the parties are of one mind. However, owing to a common error as to some fundamental fact, the agreement may have no legal effect. In the case of mutual mistake, unilateral mistake and non est factum, there is no genuine agreement, as there is no real correspondence of offer and acceptance.
What is common mistake?
In the case of a common mistake, the parties acknowledge the existence of an agreement (for that is admitted) but, because of a fundamental assumption as to the existence or identity of the subject matter, they wish the court to set the agreement aside from the beginning. In other words, the parties are asking the court to treat the agreement as having no legal effect and for any money or property that the parties have paid or conveyed to each other in reliance on that agreement to be recovered.
The courts have generally been reluctant to void contracts in which the common mistake involves accidental qualities or attributes of the subject matter. For example, you purchase a painting that you and the seller believe has been painted by a famous painter. However, you later discover when you go to sell the painting that it is counterfeit and virtually worthless. Can you rescind the contract and get back your purchase price from the seller?
Because there was no error as to what you were given, what you have is a common mistake. You and the seller were agreed on the same terms on the same subject matter, and that is sufficient to make a contract.
Mistake as to the existence of subject matter. A common mistake must involve the existence or identity of the contract’s subject matter. If you and the other party were both mistaken, the transaction will be void from the beginning because of the absence of the thing on which the contract was based. In each case it is a matter of construction. A common mistake as to the quality, nature or value of the contract is not enough to render the contract void from the outset.
Reflection question
Take a break for a couple of minutes and think about this real-life fact situation.
FACTS: The Commission advertised for tenders for the purchase and salvage of an oil tanker:
Tenders are invited for the purchase of an oil tanker lying on Jourmaund Reef, which is approximately 100 km North of PNG. The vessel is said to contain oil. Offers to purchase the vessel and its contents should be submitted to the PNG Disposals Commission and should be lodged not later than 2pm March 31, 2024.
You decided to tender for it and were successful based on information provided by the Commission as to where to find the tanker.
You hired a ship, fitted it out and proceeded to the location given by the Commission. After a month of searching, no luck. Not surprising because there was never any tanker lying at or near the location given by the Commission.
ISSUE: Has the Commission made an implied promise of the existence of the tanker? Have you acted in reliance of that promise to your detriment? Is the Commission bound?
DECISION: What do you think?
Where the contract is for the sale of specific goods which have perished at the time the contract is made, the Goods Act 1951 provides that ‘where there is a contract for the sale of specific goods, and the goods, without the knowledge of the seller, have perished at the time when the contract was made, the contract is void’ (Goods Act 1951, s 8(1)). Thus, if you sell your car to a friend, and unknown to you the car caught fire and was burnt out an hour before the sale, the contract would be void and there would be no liabilities incurred on either side (Goods Act 1951, s 8(2)).
Mistake in equity may give relief where the mistake involves the quality or attributes of the subject matter. Here, the court may treat the contract as voidable, however, as the remedy is being sought in equity, it is a discretionary remedy. It is also worth noting that neither you nor the other party can rely on their own mistake to say that the contract was a nullity from the outset.
What is mutual mistake?
In the case of mutual mistake, as the parties are talking about different things, there is no real agreement between them. For example, you decide to buy your friend’s car. However, you think you are buying his 2023 Toyota Corolla, but he thinks you are buying his 2023 Toyota Camry. Here you and the other party are talking about the same manufacturer but different models. Each of you is unaware of the error and are mutually mistaken as to the other party’s intention. In other words, the offer and acceptance do not correspond and so the contract is void ab initio.
Where mutual mistake has been pleaded, the courts apply an objective test of the reasonable person to the words or conduct of the parties to determine whether or not any agreement has been reached or whether you and the other party are at cross-purposes.
Reflection questions
Take a quick break and think about these two questions.
1. Explain why money paid under a mistake of law may be recoverable while a party who makes a mistake wrongly interpreting a statute, or a mistake of judgment (for example, buying clothes and then not liking the style or colour) or a mistake as to quality, generally cannot rely on the mistake to avoid the contract.
2. You were in London when you received an order from a Middle East agent for ‘Moroccan horsebeans described here as feveroles’. Not knowing what the term meant, you asked the defendants, who replied that feveroles were the same as horsebeans, which they were in a position to supply. The plaintiffs then ordered a quantity of horsebeans from the defendants and the goods so described in the written sale document that was drawn up were delivered to the plaintiffs, who in turn shipped them to Egypt. When they reached Egypt, the plaintiffs refused to accept them since they were not feveroles. Had the plaintiffs any cause of action against the defendants?
What is unilateral mistake?
Like mutual mistake, there is a lack of agreement between the parties. However, here only one party to the contract knows, or ought to be reasonably aware, of the mistake and does nothing to correct it. Such cases usually involve a mistake as to the identity of the parties to the contract, and while the majority of cases concern fraud, it should not be assumed that this is the only way unilateral mistake operates.
A mistake of this type can arise, for example, when A contracts with B, believing B to be C. In the English case of Boulton v Jones (1857) 157 ER 232 (‘Boulton v Jones’), it was Jones’ intention to contract with Brocklehurst and no one else, as Brocklehurst owed him money. But unknown to Jones, Brocklehurst had sold his business to Boulton. When Jones sent a written order for goods expressly addressed to Brocklehurst, Boulton struck out Brocklehurst’s name and substituted his own and then completed the order. He did not tell Jones of the change of ownership. When he asked for payment, Jones refused to pay, arguing he never intended to contract with Boulton because he had a set-off with Brocklehurst on which he intended to rely. As Jones had no intention of contracting with Boulton, and Boulton knew this but assumed it didn’t matter, there was no contract.
In such a situation there is no correspondence between offer and acceptance, and the agreement can be avoided. Because the courts will not generally declare a contract void from the outset (or void ab initio) for unilateral mistake under the common law, the mistaken party will generally seek an equitable remedy of either rescission or rectification. In a case like Boulton v Jones, the court in its equitable jurisdiction will generally require some improper conduct before granting equitable relief. In Boulton’s case, Boulton knew that Jones had no intention of contracting with him but did nothing about it.
What happens where the parties meet face to face?
Where the parties meet face to face, it is assumed that a contract was concluded between the parties because the offer was accepted by the person to whom it was directed. The onus of rebutting the presumption lies on the party pleading the mistake of identity. They have to show all three elements:
- they intended to deal with C and no one else—personal identity is vital
- they never intended to deal with B, and to this end they took reasonable precautions to check B’s identity; and
- B knew that they never intended to deal with anyone but C.
The courts will allow an action for unilateral mistake to succeed and treat the contract as void. However, if the intention is to deal with the offering party, whoever they might be, then the contract can only be treated as voidable.
Business tip
Where the parties meet face-to-face and there is a third–party involved, if you are the plaintiff you are going to have to show that identity is crucial to completion of the contract or the courts will treat it as voidable, which generally results in the third–party getting title.
Where the distinction becomes important is when an innocent third party becomes involved because, because if you are the injured party until you rescind, the contract is valid and binding. This means that if a swindler can sell the goods before you rescind and the third party is a purchaser for value and in good faith, the third party will get good title and you will be left with the problem of finding the swindler if you want to get your money back. Good luck with that. So, the question of personal identity is vital.
The questions the court will consider in this type of situation are:
- who did you intend to contract with? The person standing in front of you or someone else? and also,
- did you take sufficient steps to check the identity of the person in front of you?
The rights of an innocent third party will prevail if they can establish that they acquired rights in the goods before you were able to rebut the presumption that you had not intended to deal with the person in front of you.
The importance of unilateral mistake is that it makes the contract void ab initio (void from the beginning). This means that a third party cannot get good title to your goods and you can recover them from whoever has possession. The third party then has to try and recover their money from the swindler. Actual knowledge of the mistake is not necessary. It is enough if the party who is not mistaken ought to have known, or strongly suspected, that you had made a mistake of a fundamental character.
Business tip
When buying or selling goods always check the identity of any party with whom you are dealing. Do not rely on what they say, do not rely on who they say they are and do not hand over any goods until you have taken all reasonable steps to identify the person with whom you are dealing. If you are the seller, this means getting the ‘cash’ before handing over the goods. If you are the buyer, it means making sure that you get title with the goods when you hand over the money. Check the Personal Property Security Act 2011 in the Personal Property Security Registry to see if the goods are registered and if they are, you will not get a good title. So, keep copies of all documents.
Online reference
The Personal Property Security Act 2011 is a very important Act as it impacts on virtually all commercial transactions in PNG, whether by corporations or individuals. The Act applies to almost all types of property other than land including physical assets and intangible property by creating a security interest, which is ‘a legal interest in personal property that secures payment or performance of an obligation’.
What is non est factum?
Sometimes a person will sign a document and later discover that what they signed is fundamentally different from what they thought it was. Where this occurs, the party who signs the document knowing that it contains contractual terms will generally be bound by those terms, whether they have read them or not. If they want to avoid the contract, the signing party would have to argue that the agreement was void because it was radically different from what they thought it was. This is the defence of non est factum, which means it is ‘not my doing’ or ‘not my deed’.
To succeed in a plea of non est factum, two conditions must be met:
- the person must believe that the document they signed is radically different from what they believed it to be—the mistake must go to the fundamental nature of the document and not its contents; and
- there must be an absence of carelessness or negligence in the execution of the document.
There is a heavy onus of proof on the person raising the defence, especially if a third party is involved. They have to establish that they acted carefully. It follows that if a party signs a document leaving blanks to be filled in by a third party, the plea of non est factum would be unavailable owing to the carelessness of the signer.
Signing without reading the document does not prevent the defence of non est factum from being raised. However, the classes of persons that can raise the defence are limited to two groups:
- those who are unable to read owing to blindness, illiteracy or a congenital intellectual impairment and who must rely on others for advice about what they are signing; and
- those who, through no fault of their own, are unable to understand the meaning of a particular document.
Even if the plea of non est factum is unsuccessful, there is generally an element of fraud or undue influence involved which would make the contract voidable. As long as there are no innocent third parties involved, the injured party will still be able to avoid the contract.
What is the effect of mistake on a contract?
The effect of mistake, with the exception of unilateral mistake as to a term of the contract, will depend on the remedy that you, if you are the plaintiff, are seeking. Remedies include:
- at common law: declaring the contract void ab initio (from the beginning) if the mistake affects the very existence of the contract (which means neither party can enforce the contract), an action in rescission to recover any money paid (if the contract is yet to be performed), or the tort of conversion (if the agreement has been performed)
- in equity: rescission (cancellation), restitution (unjust enrichment unless there are third-party rights), rectification (if the terms of the contract have been incorrectly written down), or specific performance, and
- by statute: under the Fairness of Transactions Act 1993.
Reflection questions
Take another quick break and think about these three questions.
1. Buka has a very poor understanding of English. When you approached him with a document for his signature, Buka was under the honest and mistaken belief that what he was to sign was only a letter of introduction to his agent. What he in fact signed was a lease of his shop premises to you —which at no time did Buka intend or want to do. You are now suing for specific performance (to force him to give you his shop) and damages for breach of contract. Advise Buka.
2. Explain why you would prefer to base a case on unilateral mistake rather than common mistake or mutual mistake, if there is a third party involved.
3. You own the Gold Star jewellery shop in Port Moresby. A well-dressed customer comes in one Friday lunch time and asked to look at some jewellery as a present for his wife. He selects a number of items, which add up to K59,750, and offered to pay you by cheque. He explained he would have used his debit card but it was damaged in a recent flood, and he is now waiting for a replacement from the bank. He told you he is Mr Wayne Bruce MP, sitting member for the seat of Rabaul, and gives you an address. As he was signing the cheque, he offered as a sign of good faith, to take half now and collect the other half when the cheque was cleared. You check online and finding details of Bruce, you take the cheque. Later that afternoon, Bruce pawned the jewellery to Brooks, a pawnbroker, for cash. When the cheque was dishonoured, you tried to recover the jewellery from Brooks.
-
- Is there a contract between you and Bruce? Explain why/why not.
-
- Do you think you have done enough to check on the identity of Bruce?
What is misrepresentation?
The apparent consent of the parties can be affected if it is subsequently found that one party has misrepresented the facts to the other. If you, as the plaintiff, can establish that the other party has made a false or misleading statement of fact which has induced you to enter into a contract, this is called a misrepresentation. The misrepresentation can be fraudulent, innocent, or negligent and can be made orally, in writing, by silence or by conduct. The remedies available to an injured party will depend on the type of misrepresentation.
Business tip
It is important, if the transaction you are entering into is of value to you, that you do your homework before the transaction is to take place. That means that you and the other party should attempt to obtain all the information relevant to the contract. This is often difficult, and so it becomes necessary to rely on the representations, promises and conduct of the other party. But if things go wrong, you must be able to demonstrate to the court that you have taken all reasonable steps to ensure that the transaction can go ahead.
What is a representation?
A representation is a statement of past or present fact made by one party either before or at the time of making the contract that induces the other party to enter into the contract. If the representation is untrue, then it is called a misrepresentation, which, depending on the circumstances, can be:
- fraudulent
- innocent, or
- negligent.
Note that the three different forms of misrepresentation provide the injured party with different remedies, so it is important to understand the difference between each action.
The following are generally not considered to be representations and therefore do not form part of the contract:
- statements of law
- statements as to future conduct or intention, unless the party making the statement has no intention, or there are no reasonable prospects, of fulfilling it
- statements of opinion – for example, if you say that the value of your car is K40,000 when it is only worth K25,000, then you are stating an opinion, but if you said you paid K10,000 for it when you only paid K5000 then that is a misrepresentation because you are falsely stating a fact
- statements of a highly exaggerated nature (example, advertising puffery)
- silence or non-disclosure if it creates a false impression.
No action is available for breach of contract because they are not part of the contract, although there may, depending on the circumstances, be an action in tort for negligence or deceit, or an action under the Fairness of Transactions Act 1993 based on unfairness.
Representations forming part of the contract are known as terms and if they turn out to be untrue (as in, they are misrepresentations) the innocent party may be able to rescind the contract and/or be able to recover damages. More on that in Chapter 11.
It is not necessary for the representation to be made directly to you if you are the injured party as long as it is made with the intention that it should be acted on by you – that is, it must produce a misunderstanding and be one of the reasons for you to enter into the contract. If you had knowledge of the untruth of a representation before the contract was entered into or signed, it is not possible to assert that the statement has misled you and any right to relief for you would be lost.
What types of misrepresentation are there?
In brief
Types of misrepresentation
| TYPE | DESCRIPTION | REMEDY |
|---|---|---|
| Fraudulent | A false fact made knowingly, or without belief in its truth, or recklessly, or carelessly as to whether it is true or false, with the intention to induce a person to enter into a contract, and which was relied on and did induce the contract, causing the innocent party to suffer loss. | Remedy in the tort of deceit for damages.
Rescission in equity and/or damages at the option of the injured party in contract. May be a remedy under the Fairness of Transactions Act. |
| Innocent | The maker of a statement of fact believes it to be true at the time of making—there is a lack of intentional deceit. | No remedy in tort.
Right in equity to rescind or resist an action for specific performance. May be a remedy under the Fairness of Transactions Act. |
| Negligent | The maker of the statement innocently but carelessly makes a false statement, which the innocent party relies on and consequently suffers loss. | Remedy in tort of negligence for damages; contract may be rescinded. |
What is fraudulent misrepresentation?
Fraudulent misrepresentation is distinguished from innocent misrepresentation by the intentional deceit of one party by the other. Fraudulent misrepresentation refers to a deliberate false statement made with the intention of inducing someone to enter a contract. The contract, as it is induced by fraud, is voidable at your option if you are the deceived party because it does not represent the parties’ true agreement.
Where false information is provided with knowledge, or the persons preparing the information were reckless as to its truth or falsity, or if there is a reasonable expectation that if information exists it will be disclosed (a duty of disclosure), if you are the deceived party, you will have a remedy in damages and rescission.
Just as a matter of interest, while both fraudulent misrepresentation and the tort of deceit share similarities, the standard of proof differs with the tort of deceit requiring a higher standard of proof and the remedies may differ. Under the tort of deceit, the injured party may seek compensatory damages, but include punitive damages to punish the defendant.
How do you prove fraudulent misrepresentation?
To amount to a fraudulent misrepresentation, the following elements must all be established:
- There must be a deliberate false statement of fact, not opinion, unless the person making the statement did not hold that opinion. The statement may be written, oral or by conduct. While, as a general rule, there is not a positive obligation on a person to disclose facts, exceptions to this rule include:
- contracts of utmost good faith (insurance contracts)
- statements which are only partially true or distort the truth
- statements which are true at the time of making but change before the contract is entered into
- where silence, having regard to all the circumstances, is likely to mislead or deceive
- the representation must be untrue
- the person making the representation must know that it is false, or not believe in its truth, or be recklessly careless
- the representation must be made with the intention that the other party acts in reliance on it
- the statement must actually induce entry into the contract. That is, you must act on it, although it does not have to be the sole reason for inducing the contract and it is no defence that you were able to check the accuracy of the representation and did not do so; and
- you, as the innocent party, must have suffered some loss, although you also have an obligation to mitigate your loss.
Business tip
Fraudulent misrepresentation (and the tort of deceit) is a tortious action, not contractual, and intention to mislead is a critical part of that action. On discovering the fraud, you, as the deceived party, must elect either to affirm (and lose the right to subsequently rescind) or to rescind (which must be done promptly and only if the parties can be returned to their original positions) and seek damages.
What is an innocent misrepresentation?
An innocent misrepresentation is a misstatement of a material fact, but made without intention to mislead – that is, in good faith or on reasonable grounds to believe that their statement was true – by one party and not known by them to be false, which induces you, as the other party, to enter into the contract. These are statements that are not terms of a contract and so there are no remedies for breach unless:
- there has been a total failure of consideration; or
- the misrepresentation is a term of the contract.
If you want to succeed in an action based on innocent misrepresentation you must be able to show all of the following:
- that the other party made a false representation or statement of one or more facts at the time the transaction took place
- the representation or statement was an important element of the transaction
- that the representation or statement was not true
- you would not have entered into the transaction if the seller had not made the representation or statement and the seller knew this. Of course, if you would have bought the item regardless of what the seller said about it, your action would fail
- you suffered a loss as a result of relying on the seller’s representation and entering into the contract; and
- the seller benefited from the sale, as in, they sold you the goods.
Reflection questions
Take another quick break and think about these two questions.
- The vendor of a farm that you are interested in buying told you that it had never been used to raise cattle but in his judgment the property would easily be capable of carrying 500 cattle. This proved to be untrue. Can you now avoid the contract? Explain how.
- Eddie had a 2023 Toyota Prado Land Cruiser, which he wanted to sell. He advertised it for sale for K100,000. Eddie eventually sold it to Maria, who took it away, after giving him K90,000 cash. Unfortunately, the notes were forgeries and when he took the money to the bank the following morning, the bank refused to accept it and called the police. In the meantime, Maria sold the car through a firm of car dealers to Intergalactic Finance, who had no notice that Maria had acquired the car fraudulently. You bought the car in good faith and without notice of the defect in title. Do you have good title to it?
Negligent misrepresentation
Negligent misrepresentation lies in the tort of negligence, not contract. It arises when a person, not just a professional adviser, provides oral or written advice to another person in ‘serious circumstances’, knowing that the information or advice may be acted on, fails to take reasonable care to ensure the accuracy of the information. ‘Serious circumstances’ are where it would be reasonable to expect that a recipient might act on such advice and could suffer financial loss if the advice was given carelessly.
A negligent misrepresentation can include negligent pre-contractual statements between one contracting party and another, which do not form part of the contract, as well as the giving of information and advice. It is thus possible for a statement to be both a collateral contract or warranty (in relation to representations made in a pre-contractual context) and a negligent misstatement.
To succeed in an action for negligent misrepresentation, the plaintiff has to establish that a ‘special relationship’ existed between the parties and that they relied on the representation.
In brief
Establishing negligent misrepresentation
To establish negligent misrepresentation, the following guidelines are useful:
- A special relationship must exist between the parties such that the person providing the advice or information must be aware that the party seeking the advice or information trusts them to exercise a duty of care in the giving of that information.
- The subject matter of the representation must be of a serious or business nature.
- The person providing the advice or information must realise that the recipient intends to act on that advice or information.
- In the circumstances, it must have been reasonable for the recipient to rely on that advice or information.
- The person receiving the advice must suffer damage, usually in the form of monetary loss.
What remedies are available for misrepresentation?
In order to determine what remedies may be available to you as the innocent party, it is necessary to first determine the type of misrepresentation: is it:
- fraudulent misrepresentation—if the misrepresentation is serious and goes to the root of the contract you can rescind the contract and may have a right to damages
- innocent misrepresentation—the innocent party under PNG law may have no recourse at it is treated as case of let the buyer beware; or
- negligent misrepresentation—damages only (but in the tort of negligence)?
The right to rescind returns the parties to their positions before entering into the contract, but it can be lost irrespective of whether the misrepresentation is fraudulent or innocent in at least the following situations:
- if the innocent party waits too long to commence an action
- if the innocent party does something to affirm the contract after learning of the misrepresentation
- if the parties cannot be restored to their positions before the contract
- if there is an innocent third party who purchased the goods for value and in good faith then the third party will gain good title
- if there is unconscionable conduct by the plaintiff; or
- rescission would be inequitable.
Statutory modifications to the law relating to misrepresentation
The inability of the common law to satisfactorily deal with, in particular, innocent misrepresentations by not awarding damages has resulted in limited statutory intervention. The Fairness of Transactions Act 1993 is relevant to certain transactions which are unfair or where there is a misrepresentation. Such contracts can be reviewed by the courts.
What actions can constitute duress or undue influence?
Duress
In brief
Types of duress
| TYPE | DESCRIPTION | REMEDY |
|---|---|---|
| To the person | Actual or threatened violence to one contracting party, or their immediate family or near relatives. | Contract voidable at option of coerced party. |
| To goods | Wrongful threats to seize, damage or destroy the goods of one contracting party. | Contract voidable at option of coerced party. |
| Economic duress | Economic pressure beyond normal acceptable commercial practice, e.g., where the other party to a contract threatens to cancel, which will cause you to go bankrupt, unless you agree to their new demands. | Contract voidable at option of coerced party. |
Duress is the use of violence or illegal threats against a person, their goods or their economic interests to force them to enter into a contract against their will. The duress does not have to be the sole reason for the coerced party entering into the contract, it just has to be one of the reasons. The onus is on the party who has made the threat to show that it had no effect on the other party, and if they cannot do that, the contract is voidable at the option of the coerced party because there is a lack of voluntary agreement.
- To the person
Duress to the person, such as yourself, can take the form actual or threatened violence to one contracting party, or to their immediate family, by or on behalf of the other contracting party. What is important is that the duress was a contributing factor. For example, getting a party to enter into a contract on the threat of criminal proceedings against you or your family.
To establish duress against you for example, it has to be established that:
-
- that the duress by the other forced you to do something against your will, or that was not in your best interests, because of the use of coercion or threats that seemed credible
- the duress prevented you and the other party from meeting and negotiating on equal terms; and
- as a result of the duress, you felt you had no other option but to enter into a contract that you would not normally have entered into.
- To goods
Duress to goods or property could occur where one party carries out or threatens to carry out the detention, seizure or damage to goods or property of you in order to induce you to enter into a contract with them. You, as the coerced party, would have to show that the other party (the coercing party) used extreme pressure on you, thus leaving you with no real alternative but to enter into the contract – for example, burn your business down and put you out of business if you did not agree to enter into a contract.
- Economic duress
This type of action is restricted to commercial activities and the illegitimate use of economic pressure to force a business into entering into a contract that it might not otherwise have entered into. The difficulty here is distinguishing between legitimate commercial pressure, where the parties are of equal bargaining power, and economic duress. It is not a tort per se, and so gives rise only to an action for and avoidance of the contract, not to an action for damages.
To succeed in this action, you would have to establish two elements:
- the pressure was one of the reasons the coerced party entered into the contract; and
- the pressure was such (for example, unlawful threats or unconscionable conduct) that it was beyond what could be accepted as reasonable commercial practice. But it should also be noted that overwhelming pressure, not amounting to unlawful threats or unconscionable conduct, will not necessarily constitute economic duress.
It is sufficient if you can establish that the illegitimate pressure was one of the reasons for entering into the contract. The onus then shifts on to the other party applying the pressure to show that they did not contribute to you entering into the contract.
Undue influence
Undue influence, which is based in equity, involves the improper use of a position of influence or power possessed by one person over another in order to induce the latter to act for the former’s benefit. The contract is voidable at the option of the innocent party, and the usual remedy is rescission.
In brief
Types of undue influence
| TYPE | DESCRIPTION | REMEDY |
|---|---|---|
| No special relationship | Improper use of a position of influence or power—onus on the plaintiff (P) to prove the defendant (D) exercised influence. | Contract voidable at option of weaker party. |
| Special relationship | Unequal relationship presumed to exist between D and P because of parental or confidential relationship—onus on D to prove that the transaction was voluntary and that P understood the contract. | Contract voidable at option of weaker party. |
Can a special relationship be presumed to exist?
Undue influence is presumed to exist in situations where there is a special relationship of trust and confidence between the parties. Examples of special relationships include:
- parent and child
- solicitor and client
- religious adviser and devotee
- doctor and patient
- guardian and ward.
The onus is on the weaker party to prove a special relationship exists. It is then up to the dominant party – that is, the parent, the solicitor, the religious adviser, the doctor or the guardian – to show that that the transaction was a voluntary one and that there was no undue influence exercised over the weaker party.
What if no special relationship exists?
The onus is on the weaker party to prove that the other party (the dominant party and the defendant) exerted influence over them, and thus obtained a contract that they would not otherwise have made.
Examples in this class would include taking advantage of a person who makes a gift of the whole or the bulk of their estate if they:
- suffer from religious delusions
- believe in messages from the dead through a medium
- have little or no education.
The effect of undue influence on the contract, like duress, makes the contract voidable, leaving the innocent party with a right to rescind if they wish. However, the right to rescission can be lost if:
- an innocent third party gets involved; or
- rescission does not occur within a reasonable time (what is a reasonable time is question of fact and depends on the circumstances – for example, whether the contract is for goods that are perishable.
Reflection questions
Time for another break. Think about these questions and how you would answer them if you were the plaintiff.
- What would you need to establish if you were the plaintiff in order to succeed in an action involving a negligent misrepresentation? Explain why.
- Explain the meaning of the term ‘duress’ and distinguish it from ‘undue influence’.
- Cases of undue influence fall into one of two classes. Briefly explain what the two classes are and give examples.
- Allcare joined a religious order in 2019 aged 19 as a novice nun. In taking her vows of chastity, obedience and poverty she had to give away all her goods and money which she donated to the sisterhood. She left the sisterhood in 2024. Is Allcare entitled to get her goods and money back? Explain why.
What are unconscionable (unfair) contracts?
What is the position at common law?
While contract law assumes that the parties are in equal bargaining positions, the reality is that this is often not the case. Many contracts today are what we call ‘standard form contracts.’ These are non-negotiated pre-written agreements and popular with sellers of high–volume goods and services. Some examples you may have encountered include lease/rental agreements, mobile phone agreements, bus and airline tickets, purchase of white goods, televisions and computers from retail stores to mention but a few.
The problem with standard form contracts is that one party, usually the seller, has a superior bargaining position and is able to force you as the buyer, because of a ‘special disadvantage’, into a contract which may be unfair, harsh or oppressive contract (and which can be described as unconscionable).
The general rule at common law is that the courts will not interfere with such a contract. However, in its equitable jurisdiction the court may set aside a contract as unconscionable where there has been an abuse by the defendant of their superior bargaining position in their dealings with the plaintiff.
Unconscionable conduct leading to an unconscionable contract involves questions of fact and degree, and each case must be judged on its facts. If the facts show that the conduct of the defendant was such that in its factual setting fairness and good faith could properly be expected to be exercised, and it can be shown that they were not, then the conduct of the defendant may be described as unconscionable.
However, it should not be assumed that every unfair contract is automatically also unconscionable and should be struck down. You, for example, will make bad business decisions which can prove to be disadvantageous to you, but it does not necessarily mean that the courts will then automatically find in favour of the other party. Among other things, the courts will look closely at whether the disadvantaged party has done anything to help themselves – for example, by seeking, or being told by the dominant party to seek, independent advice.
In brief
What has to be established for a contract to be set aside as unconscionable?
Not every unfair contract is going to be set aside on the grounds of unconscionability. For a contract to be set aside on the grounds that it was unconscionable, you as the plaintiff must prove that:
- you were in a position of ‘special disadvantage’ at the time of the contract
-
it must have substantially affected their ability to protect themselves
- the defendant must have known, or should have known, of the plaintiff’s ‘special disability;’ and
- the defendant had taken unfair advantage of it in such a way that the actions of the defendant were unconscionable (that is, unfair or unjust).
What is a special disadvantage?
What amounts to a ‘special disadvantage’ is difficult to accurately define, but includes poverty, need, sickness, age, sex, drunkenness, illiteracy or lack of education, or lack of assistance or explanation where assistance or explanation is necessary. Disparity in bargaining power would not be enough to constitute special disability.
Statutory modifications to the common law
Unfair contract terms
In addition to the common law position, s 4 of the Fairness of Transactions Act 1993 also addresses the use of unfair contract terms in contracts. Remember that the overall purpose of this Act is to ‘ensure overall fairness of any transaction…’ where one party for reasons of economic or other advantage is in a superior bargaining position and the other is not able to exercise a free choice…’ or the transaction ‘…appears to be manifestly unfair or not genuinely mutual’ (Part 1, s 1(a)). If a court finds that the overall fairness of the transaction is unfair under s 1(a), the court can re-open, review and rectify the transaction (s 1(b)).
The focus of the Fairness of Transactions Act 1993 is on fairness (s 4) and in the case of a matter going to court, at first instance the court shall attempt a mediated settlement (s 7) and should that fail, the court will then proceed to review the matter (s 8).
Business tip
Steps to avoid claims of unconscionable conduct
For businesses to reduce problems of unconscionability arising in equity or statute law, you should ensure that:
- there is equality of bargaining power
- there is an opportunity to negotiate
- if one of the parties is at a ‘special disadvantage’ – for example, because of health, age, mental capacity, education, literacy or economic circumstances – they have time to consider the contract
- independent legal advice is available if one of the parties is at a ‘special disadvantage’
- the language of the agreement is in ‘plain English’ (easy to understand)
- pamphlets are produced in several languages explaining the contract; and
- normal commercial practice has been followed.
Reflection questions
Time for your last break. Again, reflect on what you have just read and think how you would decide the following questions based on real cases.
Question 1
FACTS: The Buttresses had known the Johnsons for some 20 years. When Mrs Buttress was dying, Mrs Johnson had helped look after her and her husband. After Mrs Buttress had died, Mr Buttress, who by this stage was elderly, illiterate and demonstrating ‘strangeness in disposition and manner’, began to live a somewhat eccentric lifestyle, living in a shack which he built next to the cottage he had lived in with his wife. Mr Buttress said that he wanted Mrs Johnson to have the cottage after he died as thanks for looking after him and his wife. Mrs Johnson’s solicitor prepared the necessary documents after ensuring that was really what Mr Buttress wanted. After Mr Buttress died, his son sought to have the gift set aside on the grounds of undue influence.
ISSUE: Had Mrs Johnson exercised improper or undue influence over Mr Buttress? Who has the burden of proof?
DECISION: What do you think? Why?
NOTE: This was a very finely balanced case.
Question 2
FACTS: An elderly Italian couple, with little understanding of written English or formal education, signed a guarantee and mortgage over a block of shops to the Commercial Bank as security for payment of the debts of one of their son’s companies. Their son was a property developer and builder. At the time of signing, they were led to believe by their son that the guarantee and mortgage were for up to K150,000 and limited to six months. They were also told by their son that the company was in a good financial situation, when in fact it was in serious financial trouble.
When the bank manager brought the papers to the Amadios’ home for them to sign the mortgage and guarantee, he corrected their misunderstanding about the length of time the guarantee was to run for, explaining that it was for an unlimited time and not six months. However, he did not explain the possible effects of the documents, which the Amadios could not read, and he made no mention of the fact that the amount was unlimited. When the son’s company went into liquidation and the bank attempted to exercise its rights under the mortgage/guarantee, the Amadios attempted to have the contract set aside.
ISSUE: Was the conduct of the bank such that it could be regarded as unconscionable? Had the bank taken unfair advantage of its superior bargaining position for its own commercial gain?
DECISION: So, what do you think here?
HINT: The test for unconscionable conduct is by reference to the special disability that may disadvantage a weaker party in a transaction, with the focus on the exploitation by one party of another’s disadvantage.
REFLECTION: Do you think that the conduct of the bank would still be unconscionable if the Amadios’ had had the benefit of independent legal advice?
Question 3
FACTS: Diprose fell in love and became infatuated with Ms Louth, who did not have similar feelings towards him. When Ms Louth falsely told Diprose that she and her two children were going to be evicted from the house they occupied, Diprose gave her money to buy a house in her own name.
ISSUE: Was Diprose under a ‘special disadvantage’, in the sense that Ms Louth had exploited his feelings for her and manipulated him to her financial advantage, or was this a case of an imprudent gift?
DECISION: And the final question. What do you think here?
REFLECTION: Do you think that if the roles had been reversed, and Ms Louth was infatuated with Diprose, you would have arrived at the same decision?
Key points
An understanding of the following points will help you to better revise and understand the material in this chapter.
- What is the effect of mistake on a contract? The courts are reluctant to strike down a contract just because of mistake. However, if mistake is established, the contract is void in the case of common and mutual mistake, but in the case of unilateral mistake, and depending on the circumstances, the contract may be declared void or voidable.
- What are the different types of mistakes with contracts?
- Common mistake involves agreement, but there is a common error as to the existence or identity of the subject matter – for example, a contract to sell goods, which, unknown to the parties, were destroyed before the contract was made.
- Mutual mistake involves a mistake made by both parties concerning a material fact that is important to the subject matter of the contract, so there is no genuine consent – for example, you have agreed to sell your car, thinking it is a 2022 Toyota Prado. The buyer has agreed to buy your Prado, but thinks it is a 2023 Prado.
- Unilateral mistake involves only one party being mistaken about a material fact regarding the subject matter of the contract so there is no matching of offer and acceptance, thus there is no real agreement – for example, A contracts with B thinking B is C, and B knows of A’s mistake.
- What is the effect of a mistake on a written document, and what is the operation of the non est factum rule? A successful plea of non est factum (it is not document or deed) will result in a court declaring the contract void for mistake. To succeed in such a plea, if you are the mistaken party must believe that the document you signed is radically different from what you believed it to be. That is, the mistake must go to the fundamental nature of the document and not its contents and there must be an absence of carelessness or negligence in the execution of the document.
- What is the difference between fraudulent and innocent misrepresentation, and what is their effect on a contract? Fraudulent misrepresentation is distinguished from innocent misrepresentation by the intentional deceit of one party by the other. Fraudulent misrepresentation is the basis of the tort of deceit, and the remedy for you if you are the injured party lies in tort. You, as the innocent party, can:
- raise the fraud as a defence and counterclaim for damages if the other party attempts to enforce the contract
- repudiate the contract and sue for restitution if the contract has not been completed; or
- carry on with the contract and sue for damages in tort. An innocent misrepresentation is one made honestly, but mistakenly, in believing the facts to be true, both at the time of making the statement and at the time of contracting. Because it is neither fraudulent nor negligent, there is no remedy in tort but there may be a remedy under s 4 of the Fairness of Transactions Act.
- What is required to amount to negligent misrepresentation? In order to succeed in an action for negligent misrepresentation, the plaintiff is going to have to establish that a ‘special relationship’ exists between the parties in addition to the normal elements required to succeed in a negligence action – that is, duty, breach and damage.
- What is the meaning of the terms ‘duress’ and ‘undue influence’?
- Duress is the use of violence or illegal threats against a person, their goods or economic interests to force them to enter into a contract against their will. Thus, there is a lack of voluntary agreement and the agreement is voidable at the option of the innocent party.
- Undue influence involves the improper use of a position of influence or power that one person has over another in order to induce the latter to act for the former’s benefit. It is an equitable doctrine that makes the contract voidable at the option of the innocent party.
- What constitutes unconscionable conduct at common law? A transaction can be described as unconscionable when there has been an abuse by the defendant of their superior bargaining position in their dealings with you, if you are the plaintiff. If the facts show that the conduct of the defendant was such that in its factual setting fairness and good faith could properly be expected to be exercised, and it can be shown they were not, then the conduct of the defendant may be described as unconscionable. Again, the Fairness of Transactions Act 1993 might provide a remedy.
- What is the effect of the Fairness of Transactions Act 1993 on unconscionable conduct? Look at s 4 of the Fairness of Transactions Act 1993 which sets out the concept of fairness based on principle of what is just and equitable and then look at the circumstances of the parties existing before, at and after entering into the transaction and consider whether there or not there has been a failure to observe the principles of fairness.
