Business Law

Introduction

Most of the contracts, even the ones that prove the presence of essential elements of a legally binding contract, may not necessarily be legally enforceable. The terms of the contract may be clearly identified and many other factors may be there to show that there was an agreement. Unfortunately, many contracts are not enforced and people seem to wonder the reason why this is so yet there were signatures present. A contract is basically an expression of free will from the parties coming into an agreement. It is not an imposition and cannot be obtained in case one party is tricked into it. Therefore, an agreement results in a binding contract if all the parties consent freely and genuinely to the terms and conditions. The negotiations involved prior to the formation of a contract must result in a rather genuine consensus of the mind; if this is not reached the result will not be a binding contract. There are certain factors which may nullify the consent which parties have bestowed on a contract. These vitiating factors have negative effects on a contract in different ways. Some may result to an agreement being rendered totally void while others may make the contract voidable, unenforceable or even illegal.

Duress

Duress occurs in a situation whereby a party is induced to enter and sign a contract by force or by threat of force. In such a situation, the consent has not been freely given and therefore the contract is voidable at the option of the coerced party. Originally, this law against duress only acknowledged threats with a basis of unlawful physical violence. Fortunately, in these recent times the courts have also recognized economic duress as being part of a valid claim. In such a case, the court has been reluctant to intervene in a case where the threat is to goods; however analogous claims in restitution have suggested that this may also change. In general, a party forced into a contract as a result of duress has the option of rescinding the contract and even claiming damages caused.

Legal effect of duress

Generally, an agreement has been reached that any contract formed under duress shall be made voidable. The concerned party may choose to have the contract set aside or not. The choice made is of great importance because if the party chooses to act on it voluntarily, they become bound by it automatically. In the Barton v Armstrong (1976) AC 104 case, a former chairman of the company threatened the current managing director with death if he did not accept the offer to purchase his shares in the company. There was evidence that the managing director thought the agreement proposed was satisfactory both for himself and that of the company. However he still forwarded complaints that the agreement was made under duress. The court therefore ruled that the managing director had a right to void the agreement even though he might have still consented without the threats of the former chairman.

Undue Influence

Undue influence is whereby excessive authority or pressure is brought on to a party such that his free will is overcome completely by other party’s. This vitiates a contract mainly because it renders a party totally incapable of acting on his free will or rather as a free agent. A greater percentage of cases which arise as a result of undue influence usually feature a party who holds more authority or power over the other one, and therefore uses the power wrongfully to coerce the other party into an agreement.

Proof of Undue Influence

The approaches used to prove that a contract was as a result of undue influence are many. In agreements between parties who are specially related, undue influence may be proved in different ways. If a fiduciary relationship exists, one party can unduly mind control the other. The signing of a contract after being mind-controlled results to an agreement which one party did not intend but still gave way as a result of being influenced negatively by the other. The following parties are linked via fiduciary relationship under law; solicitor and client, parent and child, spiritual adviser and disciple, trustee and beneficiary, guardian and ward, doctor and patient, and lastly among many others is husband and wife. To test this, opportunity for unconscientious use of one party’s authority is checked for existence. In case the alleged undue influence is present, the accused party has the right to refute or rebut the presumed undue influence by proving that the other party obtained legal advice prior to entering into the disputed contract. In such a case, it is also necessary that the accused proves that the stated adviser was already aware of all the relevant information regarding the contract and as a result was capable of giving individual advice.

In situations where the parties are not specially related, presumption of undue influence does not raise whatsoever. However, the party who is making allegations is tasked with presenting proof that undue influence was indeed present. This can be done in various ways, for example, the complainant may show that the accused had possessed some authority and power over the plaintiff which he used unconscientiously so as to obtain his consent to a contract. An example of such a case is the Williams v Bailey (1866) LR 1 HL 200 case. In this situation, a son forged the father’s signature on very important promissory notes before them to the banker. At one of the meetings of al the members of the bank, the father realized what had happened after one party was already complaining about “being parties with a compounding felony. The father offered to make an equitable mortgage in return for the promissory notes. This situation whereby a father was forced to give security as a result of debts caused by his son cannot be considered as a free will. The other party coerced the father to enter into a contract so as to give security for another.

Legal Effects of Undue Influence

If undue influence is ruled in a case, the agreement becomes voidable. If the complainant acts in good time, the agreement can be set aside such that it cannot and shall not be used to show that the complainant subsequently affirmed to it. Such an agreement should be avoided in good time so as to ensure that the innocent third party is not affected or involved.

Misrepresentation

Another factor which vitiates consent and also prevents an agreement from becoming a binding contract is misrepresentation. This factor is composed of untrue statements relating to some of the existing facts, or past events which have been prepared by one party to induce the other into an agreement. Judging from this statement, one of the features of misrepresentation is that it takes the form of an untrue statement. In such cases, silence cannot be associated with misrepresentation since evidence of the claimed untrue statement must be presented either in writing, verbally or through the conduct of the assumed. There are some exceptions whereby silence may be considered misrepresentation. One is contracts uberrima fidei which are contracts whose basis is utmost faith like insurance and partnership. In such contracts, the parties have an obligation to volunteer all the information to one another. Non-disclosure in such a case may be ruled as misrepresentation which may make the agreement voidable. Two, in case a true statement created in the course of the terms negotiations subsequently becomes false, the silence involved in not telling the other party before finalizing the agreement may be considered as a misrepresentation. Three, silence amounts to misrepresentation in case it distorts and changes the state of the representation to untrue. This results to what is sometimes referred to as “half-truth”.

In a misrepresentation, the untrue statements must be created before or at the specific time which the contract is being made. The main purpose of a representation is to persuade a more reluctant party into a contract. At times, the representations are incorporated into the agreement. If this is the case, the representations switch status to become terms of the contract. If it is incorporated as part of the terms, a party affords extra legal protection since the other one warrant that the representations are true, and by signing the contract he may be sued for breaching in case of any false statement.

Misrepresentation is not composed of opinion statements, intention or statements about the law. This means that in case a party states what they believe in on grounds which cannot be proved, he cannot be sued for misrepresentation. For example, by advertising a malfunctioned good and stating that it is the best in the world, this statement cannot be used in the court as misrepresentation. An example of such a case is the Bisset v Wilkinson [1927] AC 177. In this case, the plaintiff bought from the defendant two blocks of land which he intended to use for sheep farming. At the time of the negotiations, prior to the signing of the contracts, the defendant said that the land would carry 2000 sheep if worked properly. Thereafter, the plaintiff bought the piece of land believing that it would be enough for 2000 sheep. They were both aware that the defendant had never been involved in sheep farming on the land. Therefore in this case, the trial judge ruled that the statement made by the defendant was merely a statement of opinion and not a fact.

Types and Consequences of Misrepresentation

The different types of misrepresentations attract different legal consequences. Innocent misrepresentation arises if one party makes untrue representations without actually knowing that they are false. At common law, the complainant cannot file for damages unless the stated untrue statement was incorporated into the terms of the agreement. Unless that is the case, the affected party may only file for a contract rescission which means that the contract will be set aside and all benefits acquired shall be restored to the rightful owners. Negligent misrepresentation is when the untrue statements are made mainly because the maker of the contract did not exercise reasonable care during the process. In this situation, the responsible party is liable for paying for the damages caused as a result since he did not exercise reasonable care in the making of the statements when he knew that the parties will rely on them when deciding to come into contract or not. The complainant may only qualify to file for negligent misrepresentation if proof can be presented that he has relied on those statements and suffered as a result.

Fraudulent misrepresentation is composed of untrue statements which were created while a party knew they were untrue, or believing that they were untrue, or which are created recklessly without researching if they are true or not. According to the law, this is the worst possible way through which a party may secure consent to agreements falsely. Consequently, the misled party may act in various ways. One, he may rescind the contract if it is indeed possible to restore parties to the positions they were in before the contract. Two, he may affirm the contract but still continue with his pursuit for damages caused as a result of the deceit.

All the agreements obtained as a result of fraudulent misrepresentation are considered voidable. The deceived party has many options. He may choose to repudiate the agreement and in case he is sued; he may plead the other party’s fraud for defence.

Mistake

In contract law, mistake is when one or both parties act under an untrue belief about existence or nonexistence of material fact. In specific situations, a mistake may act as a vitiating factor which may result to an agreement becoming voidable and hence being incapable of use as a valid contract. The main cases are four including res extinct, res sua, non est factum and unilateral mistake about a party’s identity. Aside from these four instances, the general rule remains that a mistake made by a party does not affect the contract.

Types of mistakes

There are three types of mistakes, common, mutual and unilateral. A common mistake is when both parties are all in the wrong. Mutual mistake is when both parties have negotiated at cross purposes and lastly unilateral mistake is when only one of the parties is mistaken and the other already knows or will know about it.

Legal Effect of Mistake

Although no man is free from making mistakes, the law does not understand this and therefore it does not forgive nor does it relieve one from his duties. The following are some of the mistakes which do not affect an agreement. One, when a party makes a mistake with regard to his legal rights and power. Two, when the mistake made is about the true value, quality or characteristic of a good contracted for. In this case, both parties are held bound by the contracted because everyone has a right to protect their own interests.

The Four Situations of a Mistake

Res Extincta where by both parties make a common mistake about the subject matter of the agreement. The agreement is usually made void. Res Sua is when a party mistakenly purchases a product which is already under his name. In this case the contract is voidable. Non est factum is whereby a party signs a document mistakenly. In this case, certain conditions need to be affirmed before the court may decide to set the document aside. The conditions include when a party signs the wring document because he is led to believe that it is what he intended to sign. The accused party being aware of his mistake, still tricks the other party to sign, and the party who signed must have acted without negligence.

An example of a mistake is the Couterier v Hastie (1856) 5 HL Cas 673 case. In this case, the complainant’s merchants shipped a cargo of Indian corn and sent the bills to their London agent who later employed the defendant to sell the cargo. The defendant sold the cargo on credit to Challender. The vessel had sailed on 23 February unfortunately as a result of the heat it fermented such that it became unfit to be carried and was sold. Later in May 23, Challender gave notice to the plaintiff that he had repudiated the contract on grounds that at the time of sale, the cargo did not exist. This resulted to the plaintiff asking for a recovery of the purchase price. The judge ruled that a recovery of the purchase price was impossible since the contract shows that at the time of sale, the corn was existent and capable of delivery.

The circumstances in which the protection afforded to members by
separate legal personality and the ‘veil of incorporation’ will be removed
by the courts

The two principles of limited liability and corporate personality have been closely guarded by the courts since they state that it is fundamental to today’s company law. It upholds the separate legal personality of any corporate entity. Originally, the intention of these two principles was to enable companies to raise capital via the sales of shares without necessarily exposing the shareholders to risks. Presently, the attraction to incorporating a company is the main aim of these principals as it shields behind a curtain of limited liability so as to prevent being abused by some businessmen. Limited liability shields a company’s owners, shareholders and also managers in case the company winds up insolvent. As a result, the company members are not expected to contribute their personal assets so that the company can meet the requirements of investors.

If the corporate does not meet the requirement of seven members, it cannot be described as a separate legal personality. According to the Companies Act, any incorporation formed with less members cannot be offered shielding incase the company fails financially. The shareholders will therefore remain unshielded. Salomon v Salomon & co.ltd (1897, HL) is a case whereby the options are clear. At first, Salomon was considered a fraud and his company a sham; however after proving that the company was well set up, the verdict changed. Mr. Salomon was acknowledged as a distinct entity from the company, his directorship and shareholdership and also his rights as a secured creditor was restored to him. Therefore at law, a company is a different person altogether from its subscribers. The subscribers can never be liable in any form except to the extent prided by the Act. This shielding ensures that business transactions will still be carried on even after the changes in administration or ownership are made.

At times, the courts may choose to remove this protection even if the company qualifies. In instances of abuse or fraudulent use of a corporate structure which is a sham, the principles are ignored. The courts choose to ignore this principle so they can be able to peer behind the shielding veil in order to identify what is referred to as “the directing mind and will” that controls the company in general. A good example is with the Salomon v Salomon & co.ltd (1897, HL) whereby the court was forced to ignore the principles and peer behind the veil so as to identify if the company was indeed a sham or not.

Cases Used

Barton v Armstrong (1976) AC 104.

Bisset v Wilkinson [1927] AC 177.

Couterier v Hastie (1856) 5 HL Cas 673.

Salomon v Salomon & co.ltd (1897, HL).

Williams v Bailey (1866) LR 1 HL 200.

Bibliography

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Gergen, MP 2013, ‘Negligent Misrepresentation as Contract’, California Law Review, 101, 4, pp. 953-1011, Business Source Complete, EBSCOhost, viewed 13 December 2013.

Neyers, JW 2000, ‘CANADIAN CORPORATE LAW, VEIL-PIERCING, AND THE PRIVATE LAW MODEL CORPORATION’, University Of Toronto Law Journal, 50, 2, p. 173, Academic Search Premier, EBSCOhost, viewed 13 December 2013.

Waddams, S 2012, ‘Equity in English Contract Law: the Impact of the Judicature Acts (1873–75)’, Journal Of Legal History, 33, 2, pp. 185-208, Academic Search Premier, EBSCOhost, viewed 13 December 2013.