Vitiation of Contracts : International Contractual Principles and English Law 9781139613019, 9781107031784

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VITIATION OF CONTRACTS

Vitiation of Contracts proposes a new theory to explain the rationale of general vitiating factors in English contract law. It provides a clear link to voluntariness as the foundation of contractual liability, and compares the English position, in light of this theory, with the Principles of International Commercial Contracts (PICC), the Principles of European Contract Law (PECL), the Draft Common Frame of Reference (DCFR) and the US Restatement (Second) of Contracts. gareth spark is a lecturer in law at the University of East Anglia.

VITIATION OF CONTRACTS International contractual principles and English law

GARETH SPARK

c a m b r i d g e u n i v e r s i t y p re s s Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Sa˜o Paulo, Delhi, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9781107031784 # Gareth Spark 2013 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printed and bound in the United Kingdom by the MPG Books Group A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Spark, Gareth, author. Vitiation of contracts : international contractual principles and English law / Gareth Spark. pages cm ISBN 978-1-107-03178-4 (Hardback) 1. Impossibility of performance. 2. Nullity. 3. Discharge of contracts. 4. Breach of contract. 5. Impossibility of performance–England. 6. Nullity–England. 7. Discharge of contracts–England. 8. Breach of contract–England. I. Title. K875.S63 2012 346.020 2–dc23 2012021842 ISBN 978-1-107-03178-4 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

For the girls, Mills and Dudes, who taught me what love is, who lay beside me for so many hours of the work which led to this book, and who always knew when it was time to take a break and go for a walk. They were the most amazing companions imaginable. For my wife Tory, who taught me that it is possible to love a person as much as a dog. Your love means the world to me. For my parents, without whose support, financial and emotional, none of this would have happened. For my grandparents, who I know will always be there for me.

CONTENTS

Acknowledgements page x Abbreviations xi Table of cases xiii Table of statutes xviii 1

Introduction

1

1.1 Key points and structure 1 1.2 The general vitiating factors and the importance of understanding the rationale of vitiation 6 1.3 The importance of comparative analysis 8 1.4 Why analyse the PICC, PECL, DCFR and US Restatement (Second) of Contracts? 10 1.5 Voluntariness and the desire to protect the integrity of contractual consent 12 1.6 Absence and impairment of consent; voidness and voidability 19 1.7 Absence of consent and the objective principle; impairment of consent and unacceptable conduct 21 1.8 Voidability as the universal consequence of vitiation? 26 1.9 How the present law fits my central theory 28 1.10 Conclusion 51

2

Mental incapacity

53

2.1 English law 53 2.2 The US Restatement (Second) of Contracts

3

Non est factum in English law 3.1 3.2 3.3 3.4

4

75

Introduction 75 The underlying rationale of vitiation The elements of non est factum 79 Conclusion 91

Common mistake in English law 4.1 Introduction

93

vii

76

93

62

viii

contents 4.2 4.3 4.4 4.5 4.6

5

95

108

Mistake as to identity in English law 5.1 5.2 5.3 5.4

6

The underlying rationale of vitiation Res sua and res extincta 101 Mistakes as to “quality” 103 The elements of common mistake Conclusion 113

Introduction 115 The underlying rationale of vitiation The rules of mistake as to identity Conclusion 132

115 116 120

Mistake as to terms in English law 6.1 Introduction 133 6.2 The elements of mistake as to terms 6.3 Conclusion 138

133 135

7

Mutual mistake in English law

8

Mistake under the PICC, PECL, DCFR and US Restatement (Second) of Contracts 142

139

8.1 The PICC, PECL and DCFR 142 8.2 The US Restatement (Second) of Contracts

9

Misrepresentation

170

9.1 English law 170 9.2 The PICC, PECL and DCFR 192 9.3 The US Restatement (Second) of Contracts

10

Duress

Undue influence

Unconscionability

273

279

12.1 English law 279 12.2 The US Restatement (Second) of Contracts

13

236

251

11.1 English law 251 11.2 The US Restatement (Second) of Contracts

12

196

212

10.1 English law 212 10.2 The PICC, PECL and DCFR 230 10.3 The US Restatement (Second) of Contracts

11

155

296

Undue influence and unconscionability under the PICC, PECL and DCFR 299 13.1 Introduction

300

ix

contents 13.2 Unconscionability 13.3 Undue influence

14

Conclusion

301 306

309

14.1 14.2 14.3 14.4

My central theory 309 My central theory reflected in English law 311 My central theory and the PICC, PECL and DCFR My central theory and the US Restatement (Second) of Contracts 317 14.5 My central theory and development of English law

Bibliography Index 326

322

314

318

ACKNOWLEDGEMENTS

Thank you first and foremost to my wife, parents and grandparents: your positive effect on me and on this book is beyond words. Thank you to Professor Neil Andrews, Clare College, Cambridge, who is a fantastic teacher, scholar and person: this work would have faded long ago but for your support and advice. Thank you also to everyone at, or connected with, CUP who has helped me with this project. In particular, thank you to Finola O’Sullivan, whose support throughout the long process of publication made this book happen. Thank you to Rob and Debs, for making the office fun. (Although, you did somewhat slow down the process of rewriting by distracting me!)

x

ABBREVIATIONS

Beatson (2002) Bigwood (2003) Birks and Chin (1995)

Capper (1998) Cartwright (1991)

Cartwright (2007) Chen-Wishart (2010) Chitty (2008) DCFR (2009)

Enonchong (2006) Furmston (2006) McKendrick (2010) O’Sullivan and Hilliard (2008)

J. Beatson, Anson’s Law of Contract (28th edn, Oxford University Press, 2002). R. Bigwood, Exploitative Contracts (Oxford University Press, 2003). P. Birks and N. Y. Chin, ‘On the Nature of Undue of Undue Influence’, in J. Beatson and D. Friedmann (eds.), Good Faith and Fault in Contract Law (Oxford University Press, 1995), 57–97. D. Capper, ‘Undue Influence and Unconscionability: A Rationalisation’ (1998) 114 LQR 479. J. Cartwright, Unequal Bargaining: A Study of Vitiating Factors in the Formation of Contracts (Oxford University Press, 1991). J. Cartwright, Misrepresentation, Mistake and Nondisclosure (2nd edn, London: Sweet & Maxwell, 2007). M. Chen-Wishart, Contract Law (3rd edn, Oxford University Press, 2010). H. Beale (ed.), Chitty on Contracts (30th edn, London: Sweet & Maxwell, 2008). C. von Bar, E. Clive, H. Schulte-No¨lke et al. (eds.), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) Outline Edition (Munich: Sellier, 2009). N. Enonchong, Duress, Undue Influence and Unconscionable Dealing (London: Sweet & Maxwell, 2006). M. Furmston, Cheshire, Fifoot and Furmston’s Law of Contract (15th edn, Oxford University Press, 2006). E. McKendrick, Contract Law: Text, Cases and Materials (4th edn, Oxford University Press, 2010). J. O’Sullivan and J. Hilliard, The Law of Contract (3rd edn, Oxford University Press, 2008).

xi

xii PECL (2000)

Restatement (Second) Robertson (2005) S. A. Smith (2006) Stoljar (1968) Treitel (2007) UNIDROIT (2004)

Vogenauer and Kleinheisterkamp (2009)

list of abbreviations O. Lando and H. Beale (eds.), Principles of European Contract Law Parts I and II, (The Hague: Kluwer Law International, 2000). American Law Institute, Restatement of the Law (Second) Contracts (St. Paul, MN: American Law Institute Publishers, 1981). A. Robertson, ‘The Limits of Voluntariness in Contract’ (2005) 29 Melbourne ULR 179. S. A. Smith, Atiyah’s Introduction to the Law of Contract (6th edn, Oxford University Press, 2006). S. Stoljar, Mistake and Misrepresentation: A Study in Contractual Principles (London: Sweet & Maxwell, 1968). G. Treitel, The Law of Contract, ed. E. Peel (12th edn, London: Sweet & Maxwell, 2007). International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts 2004 (Rome: UNIDROIT, 2004). S. Vogenauer and J. Kleinheisterkamp (eds.), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (Oxford University Press, 2009).

TABLE OF CASES

Alec Lobb v. Total Oil [1983] 1 All ER 944, HC Alec Lobb v. Total Oil [1985] 1 All ER 303, CA Alev, The [1989] 1 Lloyd’s Rep. 138 Allcard v. Skinner (1887) 36 ChD 145 Andrews v. Mockford [1896] 1 QB 372 Archer v. Cutler [1980] 1 NZLR 386 Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255 Astley v. Austrust Ltd (1999) 197 CLR 1 Astley v. Reynolds (1731) 2 Stra 915 Atlantic Baron, The [1979] QB 705 Atlas Express v. Kafco [1989] QB 833 Australian Woollen Mills Pty Ltd v. Commonwealth (1954) 92 CLR 424 Avon Insurance v. Swire Fraser [2000] 1 All ER (Comm) 573 Aylesford v. Morris (1873) 8 Ch App 484 B&S Contracts and Design v. Victor Green Publications [1984] ICR 419 Ball v. Mannin (1829) 1 Dow & Cl 380 Bank of Ireland v. M’Manamy [1916] 2 IR 161 Barclays Bank v. O’Brien [1994] 1 AC 180 Barry v. Croskey (1861) 2 J & H 1 Barton v. Armstrong [1976] AC 104 BCCI v. Aboody [1990] 1 QB 923 Bell v. Lever Bros. [1932] AC 161 Beverley’s Case (1603) 4 Co Rep. 123b Bisset v. Wilkinson [1927] AC 177 Blomley v. Ryan (1956) 99 CLR 362 Boughton v. Knight (1873) 3 P & D 64 Boustany v. Pigott (1995) 69 P & CR 298 Boulton v. Jones (1857) 2 H & N 564 Bradford Third Equitable Benefit BS v. Borders [1941] 2 All ER 205 Brennan v. Bolt Burdon [2004] EWCA Civ 1017; [2005] QB 303 Bridgewater v. Leahy (1998) 194 CLR 457 Browne v. Joddrell (1827) M & M 105

xiii

xiv

table of cases

Carillion Construction v. Felix [2001] BLR 1 Carlisle and Cumberland Banking Co. v. Bragg [1911] 1 KB 489 Chesterfield v. Janssen (1751) 2 Ves Sen 125 CIBC v. Pitt [1994] 1 AC 200 Clark v. Malpas (1862) 4 De G F & J 401 Commissioner for the New Towns v. Cooper [1995] Ch 259 Cooper v. Phibbs (1867) 2 HL 149 Cre´dit Lyonnais v. Burch (1997) 29 HLR 513 Crescendo Management v. Westpac (1988) 19 NSWLR 40 Cresswell v. Potter [1978] 1 WLR 255 CTN Cash & Carry v. Gallaher [1994] 4 All ER 714 Cumming v. Ince (1847) 11 QB 112 Cundy v. Lindsay (1878) 3 App Cas 459 Curtis v. Chemical Cleaning and Dyeing [1951] 1 KB 805 Dane v. Viscountess Kirkwall (1838) 8 Car & P 679 Davies v. London and Provincial Marine Insurance (1878) 8 ChD 469 Dennant v. Skinner [1948] 2 KB 164 Derry v. Peek (1889) 14 App Cas 337 Dimmock v. Hallett (1886) 2 Ch App 21 Dorimex v. Visage [1999] EWCA Civ 1427 Downs v. Chappell [1997] 1 WLR 426 DPP for Northern Ireland v. Lynch [1975] AC 653 DSND Subsea v. PGS [2000] BLR 530 E. A. Grimstead v. McGarrigan [1999] All ER (D) 1163 Edgington v. Fitzmaurice (1885) 29 ChD 459 Elliot v. Ince (1857) 7 De G M & G 475 Esso Petroleum v. Mardon [1976] QB 801 Evia Luck, The [1992] 2 AC 152 Foster v. Mackinnon (1869) 4 CP 704 Frederick E. Rose v. William H. Pim Jr. [1953] 2 QB 450 Fry v. Lane (1888) 40 ChD 312 Gallie v. Lee (sub nom Saunders v. Anglia BS) [1969] 2 Ch 17, CA Gibbons v. Wright (1954) 91 CLR 423 Goldsworthy v. Brickell [1987] Ch 378 Goodchild v. Bradbury [2006] EWCA Civ 1868 Gore v. Gibson (1843) 13 M & W 623 Graves v. Graves [2007] EWCA Civ 660; [2008] L & TR 15 Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679

table of cases Griffith v. Brymer (1903) 19 TLR 434 Grist v. Bailey [1967] Ch 532 Hammond v. Osborn [2002] EWCA Civ 885 Hardman v. Booth (1863) 1 H & C 803 Harrison and Jones v. Bunten and Lancaster [1953] 1 QB 646 Hart v. O’Connor [1985] AC 1000 Hartog v. Colin Shields [1939] 3 All ER 566 Hasham v. Zenab [1960] AC 316 Hassard v. Smith (1872) 6 IR EQ 429 Hedley Byrne v. Heller [1964] AC 465 Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145 HM’s Commissioners of Customs and Excise v. Barclays Bank [2006] UKHL 28; [2007] 1 AC 181 Horsfall v. Thomas (1862) 1 H & C 90 Howaston v. Webb [1907] 1 Ch 537, HC Howaston v. Webb [1908] 1 Ch 1, CA Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620 Imperial Loan v. Stone [1892] 1 QB 599 Ingram v. Little [1961] 1 QB 31 Irvani v. Irvani [2000] 1 Lloyd’s Rep. 412 JEB Fasteners v. Marks Bloom [1983] 1 All ER 583 Keates v. Cadogan (1851) 10 CB 591 Kennedy v. Panama Royal Mail Co (1867) 2 QB 580 King’s Norton v. Edridge (1897) 14 TLR 98 Kleinwort Benson v. Lincoln City Council [1999] 2 AC 349 Lake v. Simmons [1927] AC 487 Lampleigh v. Brathwait (1615) 80 ER 255 Leaf v. International Galleries [1950] 2 KB 86 Lewis v. Averay [1972] 1 QB 198 Lewis v. Clay (1897) 67 LJQB 224; [1897] All ER Rep. Ext 1738 Lloyds Bank v. Bundy [1975] QB 326 Lloyds Bank v. Waterhouse [1993] 2 FLR 97 Macklin v. Dowsett [2004] EWCA Civ 904 McLaughlin v. Daily Telegraph (No2) (1904) 1 CLR 243 McRae v. CDC (1951) 84 CLR 377 Magee v. Pennine Insurance [1962] 2 QB 507

xv

xvi

table of cases

Maskell v. Horner [1915] 3 KB 106 Mercantile Credit v. Hamblin [1965] 2 QB 242 Molton v. Camroux (1848) 2 Exch 487 Molton v. Camroux (1848) 4 Exch 17, Exchequer Chamber Moorcock, The (1889) 14 PD 64 Multiservice Bookbinding v. Marden [1979] Ch 84 Museprime Properties Ltd v. Adhill (1991) 61 P & CR 111 National Commercial Bank (Jamaica) Ltd v. Hew’s Executors [2003] UKPC 51 National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447 National Provincial Bank of England v. Jackson (1886) 33 ChD 1 National Westminster Bank v. Morgan [1985] AC 686 Niersmans v. Pesticcio [2004] EWCA Civ 372 Norwich Union Fire Insurance v. WM H. Price Ltd [1934] AC 455 Nottingham Patent Brick and Tile v. Butler (1886) 16 QBD 778 Pan Atlantic v. Pine Top [1995] 1 AC 501 Pankhania v. London Borough of Hackney [2002] EWHC 2441 Pao On v. Lau Yiu Long [1980] AC 614 Peek v. Gurney (1873) 6 HL 377 Petelin v. Cullen (1975) 132 CLR 355 Phillips v. Brooks [1919] 2 KB 243 Portman v. Dusangh [2000] 2 All ER (Comm) 221 R v. Attorney-General [2003] UKPC 22; [2003] EMLR 24 Raffles v. Wichelhaus (1864) 2 H & C 906 Rashdall v. Ford (1866) 2 EQ 750 RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773 Re Brocklehurst [1978] Ch 14 Re Coomber [1911] 1 Ch 723 Redgrave v. Hurd (1881) 20 ChD 1 Reynell v. Sprye (1852) 1 De GM & G 660 Said v. Butt [1920] 3 KB 497 Saunders v. Anglia BS [1971] AC 1004, HL Schneider v. Heather (1813) 3 Camp 506 Scott v. Coulson [1903] 2 Ch 249 Scriven Bros v. Hindley [1913] 3 KB 564 Selby v. Jackson (1843) 6 Beav 192 Sheikh Bros. v. Ochsner [1957] 2 WLR 254 Shirlaw v. Southern Foundries [1939] 2 KB 206 Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919

table of cases Siboen, The and The Sibotre [1976] 1 Lloyd’s Rep. 293 Skeate v. Beale (1841) 11 Ad & E 983 Smidt v. Tiden (1874) 9 QB 446 Smith v. Chadwick (1884) 9 App Cas 187 Smith v. Eric S Bush [1990] 1 AC 831 Smith v. Hughes (1871) 6 QB 597 Smith v. Land & House Property (1885) 28 ChD 7 Solle v. Butcher [1950] 1 KB 671 Sowler v. Potter [1940] 1 KB 271 Spice Girls Ltd v. Aprilia World Services [2002] EWCA Civ 15 Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685 Traill v. Baring (1864) 4 De G J & S 318 Tremills v. Benton (1892) 18 VLR 607 UCB v. Williams [2002] EWCA Civ 555 Universe Sentinel, The [1983] 1 AC 366 Vorley v. Cooke (1857) 1 Giff 230 Wade v. Simeon (1846) 135 ER 1061 Westdeutsche Landesbank v. Islington LBC (1993) 91 LGR 323 Westdeutsche Landesbank v. Islington LBC [1996] AC 669 William Sindall v. Cambridgeshire CC [1994] 1 WLR 1016 Williams v. Bayley (1866) 1 HL 200 Williams v. Roffey Bros. [1991] 1 QB 1 Wilson v. The King [1938] 3 DLR 433 With v. O’Flanagan [1936] Ch 575 York Glass v. Jubb [1925] All ER Rep. 285 Zamet v. Hyman [1961] 1 WLR 1442

xvii

TABLE OF STATUTES

Family Law Reform Act 1969 Sale of Goods Act 1979 Companies Act 1985 Local Government (Contracts) Act 1997 Mental Capacity Act 2005

xviii

1 Introduction

1.1

Key points and structure

I shall analyse the vitiating factors of mental incapacity, non est factum, mistake, misrepresentation, duress, undue influence and unconscionability. It will be explained that these are what I label the general vitiating factors in English contract law. I will adopt a fourfold classification of mistake: common (shared) mistake as to subject matter,1 mistake as to identity, mistake as to terms and “mutual” mistake.2 My analysis will focus upon English law, the American Law Institute’s Restatement (Second) of Contracts (the Restatement), and the law under three major international or European “soft law” codes: namely, UNIDROIT’s Principles of International Commercial Contracts (PICC), the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR). The purpose of my analysis is to determine the underlying rationales of these vitiating factors under each “system” of law to be considered and to assess the links between the vitiating factors and the different systems of law. My main contention will be that the law’s desire to protect the integrity of contractual consent is a central concern in each of the general vitiating factors. It will be argued that this reflects the fundamental importance of the general principle that contractual obligations are voluntarily assumed. However, it will also be argued that there is a vital distinction between those vitiating factors based upon an absence of subjective consent from the complainant and those based upon the fact 1

2

It will be contended that the law should not require a mistake as to subject matter to be shared before it can be operative: see pp. 113–14, below. Nonetheless, references in this book to common or shared mistake in English law are reference to common mistake as to the subject matter. In this book, ‘common mistake’ refers to the situation where both parties make the same mistake and ‘mutual mistake’ to the situation where both parties are mistaken, but as to different matters.

1

2

introduction

that the complainant’s consent was impaired by the defendant’s unacceptable conduct.3 The distinction in theory and in practice between absence and impairment of consent will be analysed and explained. It will then be argued that the distinction between absence and impairment of consent justifies in principle the distinction between the consequences of successfully establishing one of the vitiating factors in English law, namely, between the consequences of voidness ab initio and voidability. In principle, those vitiating factors based upon absence of consent justify the conclusion that the putative contract is void ab initio, because of the absence of any voluntary assumption of contractual obligations, which is the main justification for contractually binding the complainant. For, when a contract is void ab initio, it never existed in law, and this reflects the fact that the complainant did not ever voluntarily assume the putative contractual obligations. On the other hand, those vitiating factors based upon impairment of consent by the defendant’s unacceptable conduct justify the conclusion that the impugned contract is voidable, because of the manner in which the complainant’s consent was induced.4 For, when a contract is voidable, the complainant has the right to elect to avoid it ab initio or to affirm it, and this reflects the fact that the complainant did consent to the impugned contract, but that his consent was unacceptably impaired, having been brought about by the defendant’s unacceptable conduct. Therefore, the complainant has the initial right to revoke his impaired consent, thereby avoiding the impugned contract ab initio, if this right is not lost by affirmation or one of the other bars to rescission. It must be noted that the universal consequence of pleading one of the general vitiating factors under the PICC, PECL, DCFR or Restatement is voidability.5 However, it will be argued that this is a policy decision taken to promote security of contracts and does not represent

3

4 5

In this book, ‘complainant’ refers to the party pleading the vitiating factor and ‘defendant’ to the other party to the putative/impugned contract. Unless otherwise stated, ‘consent’, ‘intention’, ‘voluntariness’ and their derivatives are used in the subjective sense in this book. Bigwood (2003), 204–5. Note that the Restatement actually recognises certain circumstances in which one of the vitiating factors can prevent formation of a contract, which is in many ways similar to a putative contract being rendered void ab initio. See, for example, }163 (misrepresentation as to character or essential terms of a contract precluding formation), pp. 201–11, below; }174 (duress by physical compulsion preventing formation of a contract), pp. 248–9, below.

key points and structure

3

a fundamental difference in the underlying rationales of the vitiating factors under these systems of law.6 The fundamental general principle of voluntariness in the assumption of contractual obligations also provides the explanation for why it is only when an impairment of consent was caused by the defendant’s unacceptable conduct (or by unacceptable conduct of which the defendant had knowledge or which was committed by one for whom the defendant was responsible)7 that it can be sufficient for vitiation; whereas the source of an absence of consent does not matter, unless it is the complainant’s own carelessness.8 As explained above, absence of consent directly infringes the principle of voluntariness, so the main justification for legally binding the complainant to the putative contract disappears. On the other hand, an impairment of consent does not directly infringe the principle of voluntariness, because it necessitates that the complainant did consent to the impugned contract. However, the law must seek to prevent procurement of contracts by unacceptable means, so it must provide for vitiation when an impairment of consent is caused by the defendant’s unacceptable conduct.9 It is contended that vitiation for (1) mental incapacity, non est factum and mistake is based upon absence of consent; whereas vitiation for (2) misrepresentation, duress, undue influence and unconscionability is based upon impairment of consent by unacceptable conduct. Those vitiating factors in: (1), above, form my first category of vitiation; and those in (2) form my second category. It will be explained why the consequence of successfully establishing mental incapacity in English law is voidability, even though it is based upon absence of consent. The remaining vitiating factors in my first category 6

7

8

9

Although it has been contended that the distinction between voidness and voidability is justified in principle, this is not to say that the policy decision, reflected in of each of the PICC, PECL, DCFR and Restatement, to provide for voidability as the usual consequence of vitiation is “wrong”. However, it will be contended that it must be overtly recognised that it is a policy distinction, to ensure that it is not allowed to blur the fundamental distinction in principle between absence and impairment of consent: see pp. 26–8, below. E.g., Barclays Bank v. O’Brien [1994] 1 AC 180, HL; RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773. Unless the context requires otherwise, references in this book to the relevance to vitiation of unacceptable conduct by the defendant include references to unacceptable conduct of which the defendant had actual or constructive knowledge or which was committed by someone for whose conduct the defendant was responsible. It is contended that the complainant should not be allowed to rely upon an absence of consent induced by his own carelessness. See p. 22, below. See pp. 19–26, below.

4

introduction

do lead to voidness in English law, and all of the vitiating factors in my second category lead to voidability.10 Drawing these points together, my central argument is that the desire to protect the integrity of contractual consent is the fundamental link between each of the general vitiating factors but that there is a vital distinction between absence and impairment of consent. In mental incapacity, non est factum and mistake, the desire to protect the integrity of contractual consent is important because a successful plea of any of these vitiating factors establishes an absence of consent. This infringes the fundamental general principle of voluntariness in the assumption of contractual obligations: one does not voluntarily assume an obligation to which one did not consent. It is accepted that this cannot be sufficient for vitiation, because it would simply replace the objective principle with subjectivity. It will be explained that this is why each of the first-category doctrines requires proof of an additional factor to render the absence of consent operative. In misrepresentation, duress, undue influence and unconscionability, proof of an absence of consent is not required. However, each of these vitiating factors requires proof that the complainant’s consent was impaired by the defendant’s unacceptable conduct. Impairment of consent does not directly infringe the principle of voluntariness, and it is not a sufficient basis for vitiation, because no contractual decision is, in reality, ever completely free: one’s contractual consent will almost always be impaired to some degree by outside pressures. Indeed, there are many perfectly acceptable pressures which severely impair consent but which contract law should not seek to regulate. However, when an impairment of consent was caused by the defendant’s unacceptable conduct, there is an additional reason for vitiation, distinct from, but linked to, the desire to protect the integrity of contractual consent: namely, the desire to prevent procurement of contracts by unacceptable means. It is the combination of these two elements which justifies the conclusion of voidability in the second category of vitiating factor. This introductory chapter will proceed along the following lines. First, I will explain why I am analysing the seven vitiating factors mentioned above, and no others, and why understanding the rationale of vitiation is important. Second, I will explain why a comparative analysis of the law is important, for assessing both the validity of my theory and the treatment 10

It has already been noted that the PICC, PECL, DCFR and Restatement provide for voidability as the universal consequence of the general vitiating factors: see p. 2, above.

key points and structure

5

of the general vitiating factors under the different systems of law (i.e., English law, the PICC, the PECL, the DCFR and the Restatement). Third, I will explain why I have chosen the PICC, PECL, DCFR and Restatement as the focus of the comparative analysis. Fourth, I will contend that the common link between the vitiating factors is the desire to protect the integrity of contractual consent and explain why the law should be concerned with this. In doing so, I will explain the relevance of voluntariness and show why it remains a fundamental general principle of contract law, even though it is not an absolutely necessary element of a binding contractual obligation. Fifth, I will explain the distinction between absence and impairment of consent and show how this distinction, and the two different degrees of infringement of the principle of voluntariness it reflects, justifies the distinction between the consequences of voidness ab initio and voidability. Sixth, I will explain why an impairment of consent must have been brought about by the defendant’s unacceptable conduct before it can lead to vitiation; whereas the source of an absence of consent does not matter (unless it is the complainant’s own carelessness),11 but there must be an additional factor to render it operative before it can lead to vitiation. Seventh, I will consider the merits of the approach, taken under the PICC, PECL, DCFR and Restatement, of providing for voidability as the universal consequence of vitiation. Finally, I will briefly show how the rules of the general vitiating factors in English law and under the PICC, PECL, DCFR and Restatement establish that they fit my central theory. That is, how the rules of mental incapacity, non est factum and all forms of mistake show that vitiation for these doctrines is based upon the complainant’s absence of consent, and how the rules of misrepresentation, duress, undue influence and unconscionability show that vitiation for these doctrines is based upon the fact that the complainant’s consent was impaired by the defendant’s unacceptable conduct. In Chapters 2–13, I undertake in-depth doctrinal analysis of the general vitiating factors. For each vitiating factor, I analyse the position in English law and the position under the PICC, PECL, DCFR and Restatement.12 The rules of mistake in English law differ according to the nature of the mistake. Therefore, the analysis of mistake in English law is separated into five chapters, one dealing with non est factum, one 11 12

See pp. 21–6. The PICC, PECL and DCFR do not address mental incapacity (or, indeed any form of contractual incapacity).

6

introduction

with common (or shared) mistake, one with mistake as to identity, one with mistake as to terms and one with mutual mistake. However, the PICC, PECL, DCFR and Restatement all take a unified approach to mistake (including non est factum), applying the same rules regardless of the nature of the mistake,13 so the analysis of mistake under these documents is contained within a separate chapter.14 Similarly, the PICC, PECL and DCFR do not distinguish between the treatment of the equivalents of undue influence and unconscionability, so I analyse the treatment of these doctrines by the three “soft law” codes in a single chapter.15 Finally, Chapter 14 draws together the different threads of analysis and comparison, to summarise the current law and highlight proposed development.

1.2 The general vitiating factors and the importance of understanding the rationale of vitiation The reason that I shall analyse mental incapacity, non est factum, mistake, misrepresentation, duress, undue influence and unconscionability, and only these vitiating factors, in depth, is that that they are the general vitiating factors of English contract law: that is, they are the vitiating factors that can apply to any type of contract and any type of relationship between the contractual parties, where the reason for vitiation is not public policy. Public policy may influence them to one degree or another, but contractual principle is their foundation. For example, abuse of confidence, although closely related to presumed undue influence, applies only to fiduciary relationships and ‘is founded on considerations of general public policy’.16 Although, in undue influence, the irrebuttable presumption of influence applies only to certain formal categories of relationship (which are fiduciary 13

14 16

Although, note that }163 of the Restatement recognises that ‘a misrepresentation as to the character or essential terms of a proposed contract’ will prevent formation of a contract (rather than merely rendering an impugned contract voidable) if it induces the other party to act in such a way that it appears that he is consenting to the putative contract. It will be explained that this is similar to the separate treatment of non est factum in English law, save for the fact that it also applies to non-written contracts and the fact that English law does not actually require a misrepresentation before non est factum can be successfully pleaded. See pp. 210–11, below. 15 Chapter 8, see pp. 142–69, below. Chapter 13, see pp. 299–308, below. CIBC v. Pitt [1994] 1 AC 200, 209, HL, per Lord Browne-Wilkinson; generally, Enonchong (2006), 201–29.

vitiation and its rationale

7

or highly analogous), the requisite influence of defendant over complainant can be proved to exist in any type of relationship, which need not be fiduciary.17 Another example by way of contrast with general vitiating factors is the duty of disclosure, which, in English law, applies only to contracts of the utmost good faith or as between parties in a fiduciary relationship. Therefore, even though it is highly analogous to misrepresentation, nondisclosure is not a general vitiating factor.18 Additionally, illegality is not a general vitiating factor. This is not merely because, strictly speaking, it is not a vitiating factor at all;19 it is because illegality is based upon public policy. It would be to encourage (or at least not to dissuade) contracts for illegal purposes if they could be legally enforced; and it would be against public policy for a court to provide remedies for nonperformance, or to compel performance, of an illegal act. Similarly, the reason for vitiation on the basis of minors’ incapacity is the public policy of protecting minors.20 Rectification of a contractual document for mistake is in many ways similar to vitiation for mistake. Where the parties agreed to terms XYZ, but mistakenly recorded them as ABC, neither party intended to agree to terms ABC. Similarly, the complainant may mistakenly believe that the document is on terms XYZ, when it is actually on terms ABC, and the defendant knows of this mistake or unconscionably induced it. Rectification may be available in each of these circumstances.21 If it is, there is no contract on terms ABC. Here, the effect is the same as mistake as a vitiating factor. The difference, however, is that there is a contract on terms XYZ. Therefore, rectification is not concerned with vitiation of contracts; it is concerned with enforcing a (different) contract.22 This is why I do not consider it in depth.

17

18

19

20 21 22

Cf. Bigwood (2003), 401–23 (“relational” (i.e., presumed) undue influence cases necessarily fiduciary in nature). Under the PICC, PECL, DCFR and Restatement, there is a general duty of disclosure, applicable regardless of the type of contract or the relationship between the parties. However, under the PICC, PECL and DCFR, a non-disclosure must be fraudulent before it can lead to vitiation. The usual consequence of a successful plea of illegality is unenforceability rather than voidness or voidability, but, in certain circumstances, restitution might be available, so the effect could be the same as vitiation. See p. 53, below. Commissioner for the New Towns v. Cooper [1995] Ch 259, 277, 280, per Stuart-Smith LJ. Ibid., 278, per Stuart-Smith LJ.

8

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There have been various attempts to discern theoretical links between some of the general vitiating factors.23 However, it is submitted that my theory: (1) establishes an important universal link between the general vitiating factors (the desire to protect the integrity of contractual consent); (2) establishes an important, rational distinction (the distinction between absence and impairment of consent); and (3) explains and justifies the practical and theoretical significance of this distinction (the distinction between voidness ab initio and voidability). One of the main reasons why understanding the rationale of vitiation is important is the significance contract law places upon the notion of security in contractual dealings. This principle necessitates that, once the requirements of formation are apparently satisfied, there must be a sound reason for vitiation. When one knows the rationale of a vitiating factor, one can assess whether it represents a sound reason for overriding the principle of security of contracts. Further, understanding the rationale of vitiation helps to guide development of the law, because it allows one to determine whether new fact-patterns come within that rationale and should therefore fit within a particular vitiating factor. For example, each step in the development of non est factum24 has required proof of facts establishing an absence of consent, because this has always been the basis of the plea.25

1.3 The importance of comparative analysis It is submitted that analysis of English law and the PICC, PECL, DCFR and Restatement will highlight fundamental similarities between the treatment of the general vitiating factors across the different “systems” of law. It will be contended that these fundamental similarities are reflected in the application of my central theory to each system of law. This will help to highlight the validity of my theory, but, much more importantly, it will highlight the validity of the approaches taken by English law and the PICC, PECL, DCFR and Restatement to the general vitiating factors. For, it is submitted that the in-depth doctrinal analysis will show that the different systems of law share fundamental contractual 23

24

E.g., Lord Denning MR in Lloyds Bank v. Bundy [1975] QB 326; Cartwright (1991); Birks and Chin (1995); Capper (1998); Bigwood (2003); Enonchong (2006); M. Conaglen, ‘Duress, Undue Influence, and Unconscionable Bargains – The Theoretical Mesh’ (1999) 18 NZULR 509. 25 See p. 85, below. See pp. 76–9, below.

importance of comparative analysis

9

principles, such as voluntariness and the objective principle, and have adopted many similar policy considerations, such as the desire to dissuade procurement of contracts by unacceptable means and (to varying degrees) the desire to protect bona fide third-party purchasers whose title depends upon the validity of a previous contract of sale to which he was not a party. In terms of assessing the validity of my central theory, I believe that (and will seek to argue why) it is logically sound, recognising (and being based upon) both the fundamental general principle of voluntariness in the assumption of contractual obligations and the crucial theoretical and practical distinction between absence of consent and present-butimpaired consent. The fact that my theory is reflected across each of the important systems of law26 helps to underline its soundness. Moreover, the fact that each of the systems of law has the same rationale underlying the general vitiating factors helps to show the sound basis in principle of each system. For example, it is contended that it is vitally important to recognise that all of the systems of law I consider share the fundamental principles of voluntariness and objectivity in contract formation. Recognising such fundamental similarities is an important step in appreciating the close and vital links between the different systems. However, this, of course, is not to say that the systems of law are identical, or that my theory is reflected perfectly, without any areas of departure, within each system. It is vital to identify any differences between: (1) my theory and the prevailing rules of English law and the PICC, PECL, DCFR and Restatement; and (2) the rules of the systems of law themselves. Once any differences have been discovered, they must be analysed to seek to determine why they exist and whether there are any ways in which any of the systems of law could or should be developed, as well as to identify whether there are any theoretical or practical weaknesses within my theory. For example, there is a significant difference in the consequence of successfully establishing one of the general vitiating factors in English law, on the one hand, and under the PICC, PECL, DCFR or Restatement, on the other. In the latter case, the universal consequence is voidability; whereas English law maintains the 26

As explained below (see p. 11), the PECL was based in part upon the PICC, and the DCFR is heavily based upon the PECL; but even if one were artificially to treat these codes as a single system of law, the comparative analysis would still show that my theory is reflected across three internationally significant systems of law: English law, the three codes and the US Restatement.

10

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distinction between voidness ab initio and voidability. It is important to identify and critically analyse such a significant distinction, to ask why the systems of law take such different approaches. It will be explained below why I believe that this distinction is policy based, recognising the greater emphasis placed upon security of contracts under the PICC, PECL, DCFR and Restatement.27 The important question then becomes why the systems give different weight to competing policy considerations: is there something about English law which justifies giving greater effect to the distinction between absence and impairment of consent and recognising this in a distinction between voidness ab initio and voidability; or should English law consider favouring security of contracts and adopting the universal consequence of voidability?28 When we appreciate the differences between systems of law and ask why they exist, we can begin to determine whether these differences are appropriate, and analyse whether there are lessons that can be learned and perhaps should lead to development of the law under one or more of the systems.29

1.4

Why analyse the PICC, PECL, DCFR and US Restatement (Second) of Contracts?

It has already been argued that comparison of the position of English law with that of other jurisdictions is a valuable tool for analysing my theory. The question, then, becomes why I have chosen to compare English law with the PICC, PECL, DCFR and Restatement. The first three documents are the three main European or international statements of principles of contract law that deal with the general vitiating factors,30 and they deal with all of the general vitiating factors except mental incapacity. One of the main points of value of the comparison between the codes and English law is the fact that a wide range of different jurisdictions were considered in the drafting of each code. Of particular interest for the comparison will be civil law influences on the three codes. 27 29

30

28 See pp. 26–8, below. Ibid. Similarly, if new codes, such as the Common Sales Law for Europe proposed by the Commission, are developed, it will be important that consideration is given to the major European and international codes, as well as the law of each member state; a comparative analysis of the of the systems, highlighting similarities and differences and the reasons for these similarities and differences, will be fundamentally important to the process of development. The Vienna Convention on Contracts for the International Sale of Goods expressly does not deal with the validity of contracts: Art. 4(a).

why analyse the picc, pecl, dcfr and restatement?

11

The PECL and PICC are “opt-in” codes: that is, they do not apply to a contract unless the parties agree that they will.31 The DCFR is part of a continuing review of EU-wide contract law.32 It is an academically oriented document, not yet intended as even an “opt-in” code. Nonetheless, it is important to analyse the DCFR, because it is an official step towards the intended political Common Frame of Reference, to be formally adopted by the legislative institutions of the EU.33 The DCFR contains ten “books”, each focusing on a different area of private law. Book II is the book in which the DCFR deals with, inter alia, the general vitiating factors. Therefore, all references to Articles in the DCFR are references to Articles in Book II, unless otherwise stated. There is nothing in the PICC that expressly limits their application to international commercial contracts, but, as their name suggests, that is their intended area of application.34 The PECL and DCFR are intended to apply to all types of contracts within the EU, whether completely domestic or interstate, provided that the parties adopt them as applicable to their contract.35 The three codes are related. Indeed, the DCFR is in part based upon the PECL.36 Further, it is clear that the drafters of the PECL drew upon the first version of the PICC. As none of the codes covers mental (or any form of) incapacity, it might seem that mistake is the only one of my first-category vitiating factors covered. However, under the codes, non est factum is covered by the provisions on mistake, because there are no separate rules for mistakes in relation to signed documents. Misrepresentation, duress, undue influence and unconscionability are all covered. The US legal system clearly has great significance across the world, especially the commercial world. It is, therefore, an important jurisdiction with which to compare English law’s treatment of the general vitiating factors. The federal legal system, with the different legal traditions across the States, would potentially make a direct case law-based comparison extremely complicated. Furthermore, US law does not have 31 32

33 35

36

Art. 1: 101(2) PECL; preamble of the PICC. ‘A More Coherent European Contract Law: An Action Plan’ COM(2003) 68 final, 12/02/ 2003; ‘European Contract Law and the Revision of the Acquis: The Way Forward’ COM (2004) 651 final, 11/10/2004. 34 DCFR (2009), 7. UNIDROIT (2004), 2, 3. Art. 1: 101(1) PECL. Note that the DCFR is not yet even intended as an opt-in code, but the drafters envisage that certain of its principles might, if a full CFR is adopted, be mandatory: Book II, Art 1: 102. DCFR (2009), 8, 30.

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a comprehensive legislative instrument dealing with vitiation of contracts. Indeed, the Uniform Commercial Code does not deal with this topic at all. Therefore, I have chosen the Restatement as the focus of my comparison with US law. The Restatement is not binding legislation; nor is it actually even intended to be an “opt-in” code, unlike the PICC and PECL. Rather, it is a highly persuasive statement of the law, spanning the various legal systems across the different States. Indeed, it is submitted that it is one of the most significant documents in relation to contract law in the United States. The American courts are not bound to follow the Restatement, but it is an immensely influential document. As such, there is considerable value in comparing English law with the Restatement.

1.5

Voluntariness and the desire to protect the integrity of contractual consent

It is submitted that a desire to protect the integrity of contractual consent is the common thread of principle running through the rationales of the general vitiating factors. For each vitiating factor necessitates proof of either absence or impairment of consent, and this is the reason for vitiation. The principle is infringed to a greater degree in (1) mental incapacity, non est factum and mistake than in (2) misrepresentation, duress, undue influence and unconscionability. In the first category, the complainant establishes an absence of consent to the putative contract; whereas, in the second, he does not establish an absence of consent, but proves that his consent was impaired by the defendant’s unacceptable conduct. The theoretical and practical significance of this distinction will be addressed fully below.37 For present purposes, it is important to determine why the law is concerned to protect the integrity of contractual consent. It is submitted that the desire to protect the integrity of contractual consent is a sound basis of vitiation because of the importance of voluntariness as the main reason why contractual obligations are binding. For example, Chen-Wishart says that ‘[d]efective consent voiding contracts is the logical corollary of the positive argument for enforcing contracts . . . namely, the voluntary assumption of obligations’.38 Although it will be explained that there is an important distinction 37

See pp. 19–26, below.

38

Chen-Wishart (2010), 278.

voluntariness and protecting the integrity

13

between absence of consent and impaired (defective) consent, it is clearly correct to note the link between consent/voluntariness as a reason for enforcing contractual obligations and its absence or impairment as a reason for vitiating contracts. Indeed, although he rejects a consent theory of duress, Smith says that ‘it seems self-evident (to most lawyers) that consent should play a role in this area of the law’.39 Two important preliminary points must be noted. First, there is no meaningful distinction to be drawn between consent, voluntariness and intention in the sense in which I shall use the terms, because the three concepts will be used in a purely subjective sense unless otherwise stated. Therefore, one necessarily voluntarily assumes, and intends to assume, an obligation if one consents to being bound by it; one necessarily consents to being, and intends to be, bound by an obligation if one voluntarily assumes it; and one necessarily voluntarily assumes, and consents to being bound by, an obligation if one intends to assume it and executes this intention. Second, in determining the appropriateness of a desire to protect the integrity of contractual consent as a reason for vitiation, what matters is the necessity of consent/voluntariness as a reason for contractual obligations being binding, not the sufficiency. If something is a necessary condition of the binding nature of contractual obligations, its absence is a sound reason for a putative contractual obligation not to bind, even if it is not a sufficient condition for that apparent obligation to bind in the first place.40 Therefore, I shall not consider in depth those general consentbased theories of contract which focus largely upon voluntariness as a sufficient basis for, or near-total explanation of, the binding nature of contractual obligations.41 Instead, I shall simply argue why I believe that voluntariness is a fundamental general principle of contract law, in the sense that one must normally have voluntarily assumed an obligation before one is contractually bound by it. The first step in seeking to justify the contention that voluntariness is a fundamental general principle of English contract law and the law 39 40

41

S. A. Smith (2006), 283. This is why the requirement of, for example, consideration is not an argument against the relevance of voluntariness: it shows that voluntariness is not a sufficient reason for contractual obligations to bind, but it does not weaken the argument that voluntariness is necessary. See, e.g., C. Fried, ‘Contract as Promise: A Theory of Contractual Obligation’ (Cambridge, MA: Harvard University Press, 1981); R. Barnett, ‘A Consent Theory of Contract’ (1986) 86 Col. LR 269.

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under the PICC, PECL, DCFR and Restatement is to define voluntariness. It must be remembered that it is the voluntary assumption of contractual obligations that matters. Therefore, the mere presence of a voluntary act that leads to contractual obligation is insufficient. For example, the mere fact that a complainant freely chose to do an act that placed him under a contractual obligation does not establish that he voluntarily assumed that obligation. He voluntarily did the act, but if he did not know that a consequence of this would be to place him under a contractual obligation, it cannot be said that his voluntary act is a voluntary assumption of a contractual obligation.42 It is contended that a complainant voluntarily assumed a particular obligation if he consciously chose to do an act knowing that doing it would place him under that obligation. In choosing to do the act with knowledge of its consequences, he chose to accept those consequences. This is true even if he merely knew that doing the act would place him under an obligation and he chose to do the act without determining the nature of the obligation. Although he did not know the precise nature of the consequences, he nonetheless chose to bring them upon himself, whatever they may be. The only exception to this is if the obligation in question was one to which the complainant actually believed he would not be bound by doing the act. His positive belief that he would not be bound by the particular obligation means that he did not voluntarily accept it as a consequence of his actions. For example, if the complainant chose to sign a document knowing that he would thereby be bound by its terms, he voluntarily assumed the obligations therein, even taking voluntariness as a subjective concept. This remains the case even in relation to obligations he did not know were contained in the document, provided that the reason for this lack of knowledge was that he chose not to familiarise himself with the terms. In these circumstances, he chose to be bound by the obligations contained in the document whatever they may be. The only exception to this is if the document contained an obligation that he believed it did not contain: one does not consent to an obligation one believes will not be imposed upon one. Expanding upon this exception, assume that the complainant voluntarily did an act apparently binding him to an obligation, but he positively believed that doing the act would not bind him to that obligation, so he has not voluntarily assumed that obligation. In the 42

See, e.g., P. S. Atiyah, ‘Contracts, Promises and the Law of Obligations’, in Essays on Contract (Oxford University Press, 1986), 19–20.

voluntariness and protecting the integrity

15

majority of cases, these circumstances will exist only if the complainant was careless or the false impression was created by the unacceptable conduct of another. It may, of course, be both. When the complainant was careless, this is a sufficient reason not to allow the absence of voluntariness to impinge upon the binding nature of the contract.43 However, when the defendant unacceptably induced the complainant’s belief that the obligation in question would not bind him, this is a sufficient reason for the absence, or even an impairment, of consent to be operative and lead to vitiation. Indeed, if the defendant’s conduct was unreasonable or fraudulent, the absence of consent should be operative even if the complainant was careless, because the defendant’s fault negates that carelessness.44 The most important point is that a voluntary assumption of an obligation does not require a desire to be bound, or even knowledge of, the nature of the particular obligation. The complainant voluntarily assumes an obligation if he chooses to do an act knowing that, by doing it, he will be bound by the obligation. This is so even if he does not know that he will be bound by the obligation in question, provided that he knows he will be bound by an obligation (or some obligations, as the case may be), and does not actually believe that he will not be bound by the obligation(s) in question. For, in choosing to do the act that he knows will bind him, without determining what the obligation is, he is choosing to assume that obligation whatever it may be. In addition, he must be capable of understanding the nature of the obligation, because one cannot voluntarily assume an obligation one is incapable of understanding.45 It is submitted that this is an appropriate definition of voluntariness. It is further submitted that, in accordance with this definition, 43

44

45

It will be shown that, in English law, this is reflected in the law of non est factum and common mistake, and should be a general principle: see pp. 111–12 (non est factum), 80–1 (common mistake), 320 (general principle), below. Moreover, it is reflected in the law of mistake under the PECL and DCFR (Art. 4: 103(2)(a) PECL; Art. 7: 201(2)(a) DCFR; see also PECL (2000), 234 and p. 154, below); while the PICC precludes a complainant from relying upon his own mistake if he was grossly negligent (Art. 3.5(2)(a)) and the Restatement precludes relief if the complainant’s fault in coming to be mistaken amounted to a failure to act in good faith and in accordance with reasonable standards of fair dealing (}157), which clearly requires something more than mere carelessness (see Restatement (Second), Volume I, 416 and pp. 168–9, below). Under the PECL, the complainant’s carelessness will not preclude him from relying upon his own mistake if the defendant ‘was at least equally to blame’ for the mistake: PECL (2000), 234. See also p. 154, below. See pp. 28–9, 55, below.

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voluntariness is a fundamental general principle of English contract law and the law under the PICC, PECL, DCFR and Restatement: under these systems of law, a complainant will generally only be bound by contractual obligations if he is capable of understanding them46 and does an act that he knows will place him under some binding obligation(s),47 without believing that the particular impugned obligation(s) will not bind him.48 This definition of voluntariness is wider than some.49 Therefore, it treats as voluntary some actions that others would treat as involuntary. However, it is contended that it is an appropriate definition. The main problem in this area of the law is not necessarily the definition of voluntariness, but the assumption that the only options are voluntariness or involuntariness. This fails to distinguish between degrees of voluntariness, and, more importantly, degrees and sources of impairment of consent. An important aspect of my theory is a distinction between absence of consent (involuntariness) and impaired consent (voluntariness, but impaired voluntariness), and a further distinction between different degrees and sources of impairment of consent. Therefore, under my theory, the presence of a voluntary decision to contract does not render the impugned contract unimpeachable, so the width of my definition of voluntariness is not a weakness of my theory. Even my conception of voluntariness is not an absolute requirement of binding contractual obligations. For example, the objective principle 46

47

48

49

If he is not capable of understanding the obligations, the law of mental incapacity can, in appropriate circumstances, lead to vitiation of the impugned contract: see Chapter 2. Although, note that the PICC, PECL and DCFR do not deal with the law of contractual incapacity. This is not specifically required by the rules of any of the systems of law considered in this book, but it is clear that conduct of the complainant which he did not know would place him under a contractual obligation will not normally do so, at the very least because it is rare that such conduct will be objectively interpreted as an offer or acceptance. It has already been contended that, if a complainant positively believes that particular obligations will not bind him, he cannot be said voluntarily to have assumed those obligations, but that this state of affairs will normally only arise if the complainant has been careless (in which case, his carelessness should preclude him from relying upon his own absence of consent, as a matter of policy) or the belief was induced by the unacceptable conduct of the defendant (in which case, the defendant’s unacceptable conduct justifies rendering the absence of consent operative): see pp. 14–15, above. E.g., Robertson (2005), 180 (‘an obligation can only be regarded as voluntary if the obligation is meaningfully understood and the decision to adopt it is substantially unconstrained’).

voluntariness and protecting the integrity

17

can lead to the imposition of contractual obligations to which the complainant did not (subjectively) consent, thus which he did not (subjectively) voluntarily assume. This remains so regardless of whether one favours promisor, promisee or detached objectivity, and even if one accepts Barnett’s argument that the objective principle is an evidential necessity of a consent theory of contract because one cannot be sure of another’s subjective intentions.50 For, the complainant’s subjective interpretation of his contractual obligations (and thus his subjective belief as to what obligations he is voluntarily undertaking), and, indeed, his subjective belief as to whether he is undertaking any obligations by his conduct, can differ from the objective interpretation. However, first, in the vast majority of cases, the complainant’s subjective intention will coincide with the objective principle. Therefore, the objective principle does not defeat voluntariness as a fundamental general principle. Indeed, Robertson contends that many contractual obligations are not voluntarily assumed, but nonetheless accepts that ‘the objective nature of contract doctrine does not seriously undermine the idea that contractual obligations can be regarded as voluntary’,51 because ‘[i]n most cases the parties’ [objective] intentions will coincide with their actual [subjective] intentions’.52 Second, it will be shown that neither proof of impaired consent, nor even of an absence of consent, is sufficient for vitiation. Even when the complainant proves an absence of consent, he must prove an additional factor to render this operative, to overcome the objective principle. Therefore, it is not contended that an absence of consent is sufficient for vitiation; it is merely contended that it is the underlying reason for vitiation when it exists and is rendered operative. The same is true for an impairment of consent, because it must, if it is to lead to vitiation, be caused by the defendant’s unacceptable conduct. Therefore, my theory explains the balance between the competing fundamental principles of voluntariness and objectivity in formation.53 The mandatory implication in law of terms into contracts may also result in the imposition of obligations one did not voluntarily assume. However, first, this exists only in specific circumstances, where the court or legislature feels that policy requires it. Therefore, it represents at most individual instances of conflict with the principle of voluntariness, rather than a general conflict. Second, if the complainant knew that making the 50 52 53

51 Barnett, ‘A Consent Theory of Contract’, 305. Robertson (2005), 203. Ibid., 204. See also Barnett, ‘A Consent Theory of Contract’, 309; Stoljar (1968), 10–1. See pp. 19–26, below.

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impugned contract would lead to an obligation being implied in law, then, under my definition, that obligation was voluntarily assumed, unless the complainant positively believed the obligation in question would not be implied.54 As such, it is submitted that voluntariness is a fundamental general principle of English contract law and the law under the PICC, PECL, DCFR and Restatement. It is generally a necessary precondition for the existence of contractual obligations. There are many cases that support this view.55 Therefore, it is clear why the law should be concerned to protect the integrity of contractual consent: an infringement of the integrity of contractual consent is an infringement of the principle of voluntariness in the assumption of contractual obligations. It is not a new concept to argue that contract law’s desire to protect the integrity of contractual consent is an important part of the rationale of the general vitiating factors. For example, Barnett argues that ‘all valid contract [defences] describe general circumstances where the appearance of assent tends to lack its normal moral significance’.56 Further, Birks and Chin argue that, in undue influence, ‘relief is given because of the impairment of the integrity of the [complainant’s] decision to [enter into the impugned transaction]’.57 Similarly, Smith notes, but does not accept, the argument that ‘when a contract is set aside for duress, the underlying reason is that the [complainant’s] consent was impaired’.58 However, Birks and Chin’s and Smith’s “consent theories” are both treated as alternatives to the contention that wrongdoing by the defendant is the reason for vitiation. On the other hand, although he notes the relevance of impairment of consent, Cartwright argues that ‘the underlying principle of the vitiating factors [of misrepresentation, duress, undue influence and unconscionability] [is] the unfair procurement of the contract’.59 The fact that many theories treat procurement by unacceptable conduct and impairment of consent as competing rationales of vitiation has

54 55

56 57 59

See also S. A. Smith, Contract Theory (Oxford University Press, 2004), 67–8. Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145, 194, HL, per Lord Goff; HM’s Commissioners of Customs and Excise v. Barclays Bank [2006] UKHL 28, at [14]; [2007] 1 AC 181, per Lord Bingham. See also the Australian authorities of Astley v. Austrust Ltd (1999) 197 CLR 1, 1, per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ; Australian Woollen Mills Pty Ltd v. Commonwealth (1954) 92 CLR 424, 457, per Dixon CJ, Williams, Webb, Fullagar and Kitto JJ. Further, Bigwood (2003), 86. Cf. Robertson (2005). R. Barnett ‘A Consent Theory of Contract’, 318. See also Bigwood (2003), 87–8. 58 Birks and Chin (1995), 61. S. A. Smith (2006), 272. Cartwright (1991), 231.

absence and impairment of consent; voidness–voidability 19

two negative consequences. First, the theories fail to recognise the interaction of these two features; second, they fail to recognise the vital distinction between absence and impairment of consent. My theory of the underlying rationales of the general vitiating factors, however, highlights the interaction of the desire to protect the integrity of contractual consent and the desire to prevent procurement of contracts by unacceptable means.60 Further, it draws the fundamental distinction between absence and impairment of consent.61 Additionally, it is wider in scope than others, because it applies to all of the general vitiating factors and highlights the important link and the rational distinction between them.

1.6 Absence and impairment of consent; voidness and voidability Although protection of the integrity of contractual consent is the fundamental link between the general vitiating factors, there is an important theoretical and practical distinction between absence and impairment of consent. As has already been explained, this distinction is recognised in the separation of the general vitiating factors into two categories: (1) mental incapacity, non est factum and mistake; and (2) misrepresentation, duress, undue influence and unconscionability. The doctrines in the first category all require proof of an absence of consent; whereas those in the second require proof that the complainant’s consent was impaired by the defendant’s unacceptable conduct. English law gives effect to this distinction by concluding that a successful plea of any of the first-category doctrines renders the putative contract void ab initio and that a successful plea of any of the second-category doctrines renders the impugned contract voidable. The only exception to this is mental incapacity, which requires absence of consent but renders an impugned contract voidable. It will be shown that this has been caused by the policy influences that have affected the development of mental incapacity.62 For present purposes, it is important to explain the significance of the distinction between absence and impairment of consent, and why this justifies in principle the different consequences of voidness and voidability.63

60 63

61 62 See pp. 19–26, below. See pp. 119–21, below. See pp. 353–62, below. The desirability, or not, of adopting voidability as the universal consequence of vitiation will be considered below: see pp. 126–8.

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The distinction between impairment and absence of consent is, fundamentally, between choosing to do something and not choosing to do it. No matter how highly constrained a decision to do something is, the very presence of the decision to do it necessitates that one chose to do it. However, if one did not consent to doing something, one did not choose to do it. This theoretical distinction would be of dubious significance if the only distinction recognised in law were between involuntary and voluntary actions, between an absence of consent and consent itself. Such a stark dichotomy would lead to even the most highly constrained choices being treated in the same way as completely free choices, and choices constrained by acceptable pressures being treated in the same way as choices constrained by unacceptable pressures. However, my theory recognises that there is an important distinction between degrees and sources of impairment of consent, on the voluntary side. It shows that the law only vitiates an impugned contract on the basis of an impairment of consent if the impairment was of a sufficient degree and caused by the defendant’s unacceptable conduct. What is a sufficient degree of impairment of consent in the second-category vitiating factors, given the nature of the defendant’s unacceptable conduct, is an important part of the doctrinal analysis to be explained below. For present purposes, it is important to recognise that my theory shows that the law does not: (1) treat all voluntary decisions, all manifestations of consent, in the same way, regardless of whether they were completely free or constrained; or (2) respond to all constrained decisions in the same way, regardless of the degree and source of the constraint. It shows that the law makes a distinction not merely between the involuntary and the voluntary, between the absence and presence of consent, but also between choices constrained by acceptable pressures and choices constrained by unacceptable pressures, and between different degrees of impairment of consent caused by unacceptable pressures. This is established in two ways: first, by the fact that each of the second-category doctrines requires proof that the complainant’s consent was impaired by unacceptable conduct; and, second, by the lower causative standard in fraudulent, as opposed to “innocent”, misrepresentation, and in duress to the person as opposed to economic duress, in English law. Fraudulent misrepresentations are normally more unacceptable than “innocent” misrepresentations, and duress to the person normally involves conduct that is more unacceptable than that present in economic duress. Therefore, the lower standard of impairment of consent required in fraudulent

consent, objectivity and unacceptable conduct

21

misrepresentation and duress to the person, as compared to the standard required in “innocent” misrepresentation and economic duress, represents an increased desire to prevent procurement of contracts by more highly unacceptable means.64 Applying this analysis to a contractual setting, when the complainant proves an absence of consent to a putative contract, he establishes that he did not choose to make that apparent contract and thus did not voluntarily assume the putative contractual obligations. Therefore, if the absence of consent is rendered operative, he should not be bound by those apparent obligations: the putative contract should be void ab initio. For example, Lord Wilberforce said, in the context of non est factum, that ‘a document should be held to be void (as opposed to voidable) only when the element of consent to it is totally lacking’.65 Similarly, it has been said that ‘absence of consent would logically render a contract void’.66 On the other hand, when the complainant proves that his consent was impaired, he necessarily establishes that he chose to make, and thus consented to, the impugned contract. Yet, if the law is genuinely concerned to protect the integrity of contractual consent, it cannot simply accept the complainant’s choice to make the impugned contract as sufficient to establish that contract as unimpeachable regardless of how highly constrained the choice was, or what was the source of the constraint. In the second category of vitiation, the complainant must also prove that his decision to contract was induced by the defendant’s unacceptable conduct. Therefore, he establishes a right to revoke this impaired consent: the impugned contract is voidable. For example, Lord Simon said that duress, in ‘contrast with non est factum’, includes ‘an intention on [the complainant’s] part to contract’, but the complainant’s consent was impaired by unacceptable conduct, so a ‘contract procured by duress is . . . not void: it is voidable’.67

1.7 Absence of consent and the objective principle; impairment of consent and unacceptable conduct When the complainant proves an absence of consent, he proves that he did not voluntarily assume the putative contractual obligations. Therefore, the fundamental general principle of voluntariness, the main justification for the binding nature of contractual obligations, does not apply 64 66

See pp. 25–6, below. Chitty (2008), 596.

65 67

Saunders v. Anglia BS [1971] AC 1004, 1026, HL. DPP for Northern Ireland v. Lynch [1975] AC 653, 695, HL.

22

introduction

to the putative contract. It should not generally be necessary to ask why there is an absence of consent,68 because the very existence of an absence of consent is, subject to two caveats, sufficient for vitiation. The first caveat involves a situation in which the cause of the complainant’s absence of consent is, as a matter of policy, a sound reason for preventing it from being operative. If the complainant carelessly brought about his own absence of consent, he should not be able to rely upon it in seeking vitiation. This is purely a standalone policy decision, to dissuade carelessness in contractual negotiations.69 The only exception to this is that, if the defendant had actual or constructive knowledge of the absence of consent, or induced it by unreasonable or fraudulent conduct, his unacceptable conduct (in seeking to contract with a complainant he knows or should know has not consented to the putative contract or in unacceptably causing the absence of consent) should negate the complainant’s carelessness. This is recognised, to varying degrees, in non est factum and common mistake in English law70 and in mistake under the PICC, PECL, DCFR and Restatement.71 The second caveat reflects the need to balance the fundamental general principle of voluntariness with the (at least equally) fundamental objective principle. To allow mere proof of an absence of consent to lead to vitiation would be to replace the objective principle with subjectivity. Therefore, while the source of an absence of consent does not matter (subject to the caveat discussed above), the first-category vitiating factors require proof of an additional factor to render the absence of consent operative, to justify overcoming the principle of security of 68 69

70

71

Chitty (2008), 596. It could be argued that the complainant’s carelessness should not negate his absence of consent unless the defendant suffers some harm as a result of that carelessness. However, it is submitted that, so far as “harm” should be required, it would be present in holding the putative contract void: that is to say, the law should deem that the defendant would suffer harm by not being able to enforce what would otherwise be a valid contract, and the appropriate way to prevent this harm is to preclude the defendant from relying upon his own carelessness rather than requiring him to pay damages to compensate the defendant for any financial loss which might be caused by holding the putative contract void. Saunders v. Anglia BS [1971] AC 1004, HL (non est factum); Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 707 (common mistake). See also pp. 82–5 (non est factum), 111–12 (common mistake), below. Art. 3.5(2)(a) PICC; Art. 4: 103(2)(a) PECL; Art. 7: 201(2)(a) DCFR; }157 Restatement. See also PECL (2000), 234; Restatement (Second), Volume I, 416; pp. 154–5, 168–9, below; and n. 43 above.

consent, objectivity and unacceptable conduct

23

contracts. Birks and Chin speak of a ‘restrictor’, something ‘to subject plaintiff-sided relief for impaired autonomy to a pragmatic restriction’.72 The most important point is that the purpose of the additional factor is to render the complainant’s absence of consent operative, to justify allowing him to assert it, and not allowing the defendant to insist upon the putative contract, even in the face of an apparently binding objective agreement. The relevant additional factors recognised in English law and under the PICC, PECL, DCFR and Restatement are the defendant’s: (1) actual or constructive knowledge of the absence of consent; (2) unacceptable inducement of the absence of consent; and (3) own absence of consent. In English law, the first additional factor is recognised in mental incapacity, mistake as to identity and mistake as to terms; the second in non est factum, mistake as to identity and mistake as to terms; and the third in common mistake. Under the PICC, PECL, DCFR and Restatement, all three additional factors are recognised in the law of mistake.73 Under the Restatement, the first additional factor is also recognised in the law of mental incapacity.74 It is important to note that a relevant additional factor might amount to unacceptable conduct by the defendant, but it need not, because the source of an absence of consent does not matter.75 An impairment of consent does not directly infringe the principle of voluntariness: the complainant still chose to contract, so voluntarily assumed the contractual obligations, albeit that this choice was constrained in some way. Nevertheless, if contract law is to take voluntariness seriously, it must be concerned with impaired contractual consent. The reality of human life means that very few decisions are completely free. Particularly in contractual dealings, various pressures, social, commercial, personal, etc., affect one’s decision-making. Many of these pressures are perfectly natural and acceptable consequences of human life which should not, in their own right, be regulated by contract law.76

72 73

74

75 76

Birks and Chin (1995), 90. Under the PICC, PECL and DCFR, the mere fact that the defendant shares the complainant’s mistake is a sufficient additional factor, even though this will not necessarily establish an absence of consent from the defendant. See p. 153, below. Actual or constructive knowledge of the absence of consent caused by the complainant’s mental incapacity is not actually required for the standard case of non-intoxication mental incapacity under the Restatement: see pp. 72–4. Subject to the caveat regarding the complainant’s carelessness: see p. 22, above. For example, one’s increased personal desire for an item could be said to impair one’s consent to any contract to purchase that item, but this cannot, without more, be relevant to vitiation of the impugned contract.

24

introduction

Therefore, whether the law responds to an impairment of contractual consent cannot be determined merely by a quantitative assessment of the degree of impairment,77 short of an absence of consent. What matters is the source and nature of the pressure impairing the complainant’s consent: namely, whether the impaired consent was brought about, or exploited, by the defendant’s unacceptable conduct.78 For, while contract law cannot realistically hope to achieve a state of completely unimpaired decision-making, it should seek to prevent procurement of contracts by unacceptable means. As such, if the complainant’s consent was procured by the defendant’s unacceptable conduct, contract law should treat that consent as revocable.79 Analysis of the role of impaired consent in contracting (and thus of contract law’s approach to vitiation) leads towards two important conclusions in relation to the second category of vitiating factor. First, in this category, the law requires both an impairment of the complainant’s consent and unacceptable conduct by the defendant, because, as discussed above, contract law must be concerned to protect the integrity of contractual consent but must not seek to regulate everyday, acceptable pressures. Second, the law requires the defendant’s unacceptable conduct to have been a source or exploitation of the impairment of consent, because contract law must seek to prevent procurement of contracts by unacceptable means but is an inappropriate tool for dissuading unacceptable conduct which is not connected to the impugned contract.80 This latter point shows that, even when contract law is seeking to 77

78

79

80

Lloyds Bank v. Bundy [1975] QB 326, 336, per Lord Denning MR; Bigwood (2003), 120, 496–7. Barton v. Armstrong [1976] AC 104, 121, PC, per Lords Wilberforce and Simon. See also PECL (2000), 257; Bigwood (2003), 289–90, 497–8. See The Universe Sentinel [1983] 1 AC 366, 384, HL, per Lord Diplock (in the context of duress). One can apply a harm- or damage-based analysis to the situation, by analogy with the law of tort. In tort, the defendant is not liable for, or simply because of, his unacceptable (e.g., negligent, fraudulent, etc.) conduct; he is liable for, and because of, the loss caused to the other party by his conduct. Similarly, in the second category of vitiation, contract law is not concerned simply with the fact that the defendant engaged in unacceptable conduct; it is concerned with the fact that the defendant’s unacceptable conduct caused the complainant to enter into the impugned contract: i.e., with the fact that the defendant’s unacceptable conduct impaired the complainant’s consent (or amounted to an exploitation of that pre-existing impairment of consent: see pp. 288–9, below, for a discussion of unconscionable passive receipt). If one wishes to take the harm- or lossbased analogy a stage further, one can say that contract law deems that the complainant suffers “harm” or “loss” by entering into a contract to which he did not fully or freely

consent, objectivity and unacceptable conduct

25

prevent procurement of contracts by unacceptable means, it is still protecting the integrity of contractual consent. Although, in the second category of vitiation, the source of the impairment of consent is vital in determining whether contract law should respond, this does not mean that the degree of impairment is irrelevant. The impairment of consent must have resulted from the defendant’s unacceptable conduct if contract law is to respond, but the law need not require the same degree of impairment of consent from every type of unacceptable conduct. Indeed, it is submitted that, in the second category of vitiation, the requisite standard of impairment of consent from the defendant’s unacceptable conduct should decrease the more unacceptable that conduct is, provided that a minimum standard of each is present. This ensures that the law shows a greater desire to prevent procurement of contracts by more highly unacceptable means and reflects the fact that the rationale of the second category of vitiating factor is the interaction of the desire: (1) to protect the integrity of contractual consent; and (2) to prevent procurement of contracts by unacceptable means. McKendrick notes the validity of this concept in duress. He says that ‘courts may prefer to apply a sliding scale according to which the causal threshold diminishes as the degree of illegitimacy increases’.81 Capper likewise notes the relevance of the principle in his proposal for an umbrella doctrine of unconscionability.82 It will be shown that this principle is recognised to a degree in the law of misrepresentation and duress but not in undue influence or unconscionability. Misrepresentation and duress each have three discrete classes across which the degree of unacceptability of the defendant’s conduct generally follows a sliding scale. For, duress to the person normally involves more severely unacceptable conduct than duress of goods, which normally involves more severely unacceptable conduct than economic duress; and a fraudulent misrepresentation is normally more unacceptable than a negligent misrepresentation, which is normally more unacceptable than an “innocent” misrepresentation.83 It will be shown that English law clearly requires a lesser standard of

81 83

consent, as a result of the defendant’s unacceptable conduct (regardless of the substantive balance of that contract). 82 McKendrick (2010), 657. Capper (1998), 500. It will be explained that, despite the terminology, an “innocent” misrepresentation is nonetheless properly treated as unacceptable conduct: see pp. 170–3, below.

26

introduction

impairment of consent in duress to the person than in economic duress.84 Similarly, it will be argued that, in English law, rescission for fraudulent misrepresentation requires a lesser standard of impairment of consent than rescission for “innocent” misrepresentation.85 However, neither the standard for duress of goods nor the standard for rescission for negligent misrepresentation has been clearly set. Therefore, although the English law of misrepresentation and duress partially recognises an increased desire to prevent procurement of contracts by more highly unacceptable means, it does not fully recognise this principle. It is contended that it should do so, and the appropriate standard of impairment of consent for negligent misrepresentation and duress of goods will be addressed below.86 Engaging in a case-by-case assessment of the degree of unacceptability of conduct would be too uncertain. It is perhaps technically possible for conduct in one of the lower classes of misrepresentation or duress to be more unacceptable than that in a higher class, but this is unlikely. It is submitted that the value of reflecting the increased desire to prevent procurement of contracts by more highly unacceptable means outweighs the potential injustice of this remote possibility. However, it is submitted that a sliding scale measuring the degree of unacceptability of conduct cannot reasonably be applied to undue influence or unconscionability, because these doctrines deal with such a vast array of conduct. The uncertainty of a case-by-case assessment would be the only way to reflect this principle in these two doctrines. It is submitted that this is why it is appropriate that undue influence and unconscionability do not require a lesser standard of impairment of consent as the degree of unacceptability of the defendant’s conduct increases.

1.8 Voidability as the universal consequence of vitiation? It has been argued that the distinction between the consequences of voidness and voidability is a sound one in principle. However, it must be recognised that, in certain cases, the consequence of voidness ab initio can have a harsh effect on innocent third parties. This is classically illustrated by English cases dealing with “mistake as to identity”,87 where a bona fide purchaser acquires property from the defendant, who had obtained the property from the complainant by fraudulently claiming to 84 86

85 See pp. 225–8, below. See pp. 184–8, below. See pp. 184–8 (misrepresentation), 225–8 (duress), below.

87

See pp. 115–32, below.

voidability as the universal consequence of vitiation? 27

be someone else. If the putative contract between complainant and defendant is void (for “mistake as to identity”), title to the property cannot have passed to the defendant so cannot have passed to the third party.88 If, however, it is merely voidable (for fraudulent misrepresentation), title passes from the complainant to the defendant and from the defendant to the bona fide third-party purchaser (as long as the complainant has not effectually rescinded the impugned contract before conclusion of the contract between defendant and third party).89 Lord Nicholls has criticised this distinction and argued that the conclusion of voidability should be favoured in such cases.90 This would be similar to the position under the PICC, PECL, DCFR and Restatement (to be addressed below), because all of these documents adopt voidability as the universal consequence of the vitiating factors with which they deal. If any system of law wishes to choose the consequence of voidability instead of voidness, even where vitiation is based upon absence of consent, that is a legitimate policy decision. It will, in particular, promote security of contracts and protect the position of bona fide thirdparty purchasers of property to which title passed under a voidable contract between complainant and defendant. However, it is submitted that it should be made completely clear that this is a policy decision, to ensure that the fundamental distinction between absence and impairment of consent is not obscured, because this distinction is vital in determining what additional elements should be required before a contract can be vitiated on the basis of absence, as compared to a mere impairment, of consent.91 If the distinction between absence and impairment of consent is clearly recognised and rigorously maintained, it is submitted that there is no objection to adopting a universal consequence of voidability for all vitiating factors, or in applying it to some vitiating factors based upon absence of consent. Indeed, it is submitted that the fact that the PICC,

88 89 90 91

E.g., Cundy v. Lindsay (1878) 3 App Cas 459; Ingram v. Little [1961] 1 QB 31. E.g., King’s Norton v. Edridge (1897) 14 TLR 98; Lewis v. Averay [1972] 1 QB 198. Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919. The distinction between absence and impairment of consent could have yet further practical significance if it were decided to have what is best described as a “hybrid” void– voidable category for those vitiating factors based upon an absence of consent: i.e., a situation where, as between complainant and defendant, it is as if the putative contract is void ab initio, but, when a third-party bona fide purchaser is involved, it is as if the contract were voidable. In these cases, it would effectively be that title passing to a bona fide third-party purchaser would be the only bar to rescission.

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PECL, DCFR and Restatement all favour voidability adds great weight to the argument that English law should consider whether it is appropriate to adopt this as the universal consequence of the general vitiating factors. However, where there is no clear recognition of the policy behind the decision, there is a significant risk of blurring the crucial theoretical distinction between absence and impairment of consent. This, then, would lead to a risk of treating absence and impairment of consent in the same way, not just in terms of the conclusion to be reached if they are rendered operative, but in what the law requires in order to render them operative. It is contended that the conclusion of voidability has been adopted in relation to: (1) mental incapacity in English law and under the Restatement; and (2) mistake under the PICC, PECL, DCFR and Restatement, precisely for policy reasons, primarily to promote security of contracts92 and protect the interests of bona fide purchasers. The main reason why I believe that policy is the basis of the decision is that all of the systems of law I consider clearly recognise, in the rules for establishing the general vitiating factors, both: (1) the distinction between absence and impairment of consent; and (2) the fact that absence of consent can be rendered operative (and thereby lead to vitiation, whether in the form of voidness ab initio or voidability) without proof of any unacceptable conduct, whereas an impairment of consent can only be rendered operative by unacceptable conduct. Moreover, there is a general policy under the PICC, PECL, DCFR and Restatement to promote security of contracts, highlighted by various provisions which seek to limit the right to avoidance in certain circumstances.93 However, it must be noted that the fact that policy is the basis of the decision to adopt the consequence of voidability has not been clearly recognised, leading to the risks outlined above.

1.9

How the present law fits my central theory 1.9.1 The first category

English law In English law, absence of consent in mental incapacity is established by the fact that the complainant must prove that he was incapable of 92

93

For, if a contract is voidable only, then it can continue to exist and to bind the parties if the contract is affirmed or the right to rescission is otherwise lost. E.g., Arts. 4: 105, 4: 109(2) and (3), 4: 116 PECL; Arts. 7: 203, 7: 207(2) and (3), 7: 213 DCFR; Arts. 3.13, 3.10(2) and (3), 3.16 PICC; }}15(2), 152(2), 165 Restatement.

how the present law fits the book’s central theory

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understanding the nature of the putative contract.94 One cannot consent to what one is incapable of understanding. This absence of consent is then rendered operative by the requirement that the defendant must have actual or constructive95 knowledge of the mental condition.96 It is submitted that it amounts to unacceptable conduct for a defendant to seek to contract with one he knows, or should know, is not consenting to the putative contract. This is why the defendant’s state of knowledge is a sufficient reason to render the absence of consent operative.97 The sufficiency of constructive knowledge is reflected in the objective principle itself, and the sufficiency of actual knowledge is reflected in the residual subjective element of the objective principle. If the defendant should have known that the complainant was incapable of understanding the nature of the putative contract, the reasonable person in his position would have known this, and thus would have known that the complainant cannot have consented to the putative contract: i.e., that the complainant was not promising to be bound by the apparent terms of the putative contract. Therefore, taking a promisee objectivity approach, there is no objective agreement. Further, the residual subjective element of the objective principle states that, when a “promisee” knows that a “promisor” is not actually promising to be bound by the terms of an objective (apparent) agreement, the putative agreement is not binding.98 If the defendant knows that the complainant is incapable of understanding the nature of the putative contract, he must also know that the complainant is not promising to be bound by the terms of the putative agreement, because one cannot be subjectively promising to do what one is incapable of understanding. It is contended that this analysis 94

95

96

97

98

Ball v. Mannin (1829) 1 Dow & Cl 380, 384 (direction of the trial judge, affirmed on appeal); Gore v. Gibson (1843) 13 M & W 623, 625, 626, 627, per Pollock CB and Parke and Alderson BB; Molton v. Camroux (1849) 4 Exch 17, 19; Boughton v. Knight (1873) 3 P & D 64, 72; Imperial Loan v. Stone [1892] 1 QB 599, 600, per Lord Esher MR. York Glass v. Jubb [1925] All ER Rep. 285, 292, per Warrington LJ; Hart v. O’Connor [1985] AC 1000, 1014, PC. Imperial Loan v. Stone [1892] 1 QB 599, 601, 602–3, per Lord Esher MR and Fry and Lopes LJJ. Although unacceptable conduct is not a necessary element of the additional factors to render an absence of consent operative, it is clearly relevant in two of the additional factors: namely, the defendant’s: (1) actual or constructive knowledge of the complainant’s absence of consent; and, ex hypothesi (2) unacceptable inducement of the complainant’s absence of consent. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694.

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shows that mental incapacity should in principle render the putative contract void, because there was never any binding objective agreement. The same analysis applies whatever the source of an absence of consent: if the defendant has constructive knowledge of that absence of consent, the reasonable person in his position would know of it, so the objective interpretation is that the complainant is not promising to be bound. If the defendant has actual knowledge, he actually knows that the complainant is not promising to be bound. Therefore, this additional factor is fundamentally established in English contract law. Indeed, it exists in the rules of the objective principle itself. As such, it should be capable of applying to all of the first-category vitiating factors, to render any absence of consent operative. In English law, it is recognised in mental incapacity, mistake as to identity and mistake as to terms. Absence of consent in non est factum is established by proof that the complainant made a fundamental mistake regarding the nature of the impugned contractual document. The mistake must be of such effect that it renders the act the complainant intended to do by execution of the document contractually different from the act as it will be if the document is upheld.99 This may be because the complainant did not intend an act of contractual effect, or because the contract he intended to make by execution of the document is different from the putative contract. If the complainant did not intend an act of any contractual effect, he did not consent to any contract. If, however, he intended to make a contract, he consented to the putative contract unless it is different from the contract he intended to make. If it is different, then he did not consent to the putative contract; he consented only to the intended contract. Consent only to one particular contract cannot be consent to a different contract. Further, non est factum can apply where the complainant did not actually execute the impugned document. This is an obvious example of an absence of consent. Non est factum does not actually recognise the need for an additional factor to render the absence of consent operative. In most cases, the complainant’s mistake, and thus his absence of consent, will have been induced by the defendant’s unacceptable conduct. This is a sufficient reason to render the absence of consent operative: the defendant should not be able to take advantage of his unacceptable conduct. However, neither unacceptable inducement of the mistake, nor any sufficient

99

Saunders v. Anglia BS [1971] AC 1004, 1025, 1026, HL, per Lord Wilberforce.

how the present law fits the book’s central theory

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additional factor, is a prerequisite of the plea.100 Therefore, this is an area of the law where my theory highlights the need and the reason for a change in the elements of a vitiating factor: namely, the need to require an additional factor to render the absence of consent operative, so as not to subvert the objective principle. Absence of consent in common mistake is established in a similar way to absence of consent in non est factum. Indeed, all forms of the doctrine of mistake establish an absence of consent in the same way: they require that the complainant’s mistake was either a mistaken belief that his act would not be contractual in nature or was of such effect that it rendered the contract he intended to make different from the putative contract. It has already been explained how each of these situations necessarily establishes an absence of consent. The former type of mistake has only been recognised in non est factum, but it is submitted that it should also be capable of applying to contracts not made in, or even evidenced by, writing. Determining whether the complainant intended an act of contractual effect is conceptually simple: one merely asks whether he had any intention to promise to be legally bound to another. If he did not, but this would, otherwise, have been the effect of his conduct, he mistakenly believed that his act would not be of contractual effect. However, determining whether a mistake renders the putative and intended contracts different is more difficult. The inclusion or exclusion of any term of a contract makes it a different contract, no matter how minor the term. A contract with term X is different from one without term X. Even if a term is a mere warranty, it is not for the courts to say that it is unimportant so its inclusion or exclusion does not alter the contract. If they did, this would undermine the fundamental notion of freedom of contract. This area of the law is not similar to classification of terms, which affects merely the remedial consequences of a breach, not the actual content of the contract. Whenever a complainant is mistaken as to terms, he intends to make, and consents to, a contract with or without a particular term. However, contrary to this intention, the putative contract does or does not include that term, as the case may be. Therefore, the putative contract is different from the contract the complainant intended to make; he consented only to the latter, not the former.

100

See pp. 75–92, below.

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However, mistakes regarding surrounding circumstances, as all mistakes other than those as to terms are, only render the putative and intended contracts different (and thus only establish an absence of consent) if they are so serious that a contract on the same terms is different in the actual state of affairs than it would have been in the state of affairs the complainant believed to exist. For example, a contract for a red car is different from a contract for a blue car, where colour is a term. However, a contract for a car is not necessarily different simply because the car is blue rather than red. Yet a contract for a car may be different if the car (as believed) has an engine and wheels rather than (as is actually the case) having no engine or wheels, even when this is not a term of the contract. This is why assessment of the severity of the mistake is required in common mistake, non est factum and mistake as to identity, but not mistake as to terms.101 Therefore, a common mistake as to the subject matter must be sufficiently serious (fundamental) before it renders the putative and intended contracts (which are on the same terms) different and thus establishes an absence of consent.102 It is submitted that the additional factor in common mistake rendering the absence of consent operative is the fact that the defendant shared the complainant’s mistake. The fact that the mistake must be in relation to a matter recognised by both parties as fundamental to the putative contract103 means that both parties would see the putative contract as different from the intended contract, even if the difference would be positive for the defendant but negative for the complainant. Therefore, neither party intended to make the putative contract; thus neither party consented to it. The defendant did not have any knowledge of the complainant’s absence of consent and did not act unacceptably, nor necessarily even induce the complainant’s mistake in an entirely innocent way, but he should not be able to hold the complainant to a putative contract which neither party intended to make.104 It is submitted that this goes hand in hand with the traditional explanation of common mistake: namely, that the parties shared a

101 102

103

104

Cf. Treitel (2007), 340. How to apply this test in practice, to determine whether the putative and intended contracts are different, will be considered below: see pp. 37–9, 97–9, below. Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton. Chen-Wishart (2010), 279.

how the present law fits the book’s central theory

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fundamental mistake so did not actually make the objective (apparent) agreement embodied in the putative contract. This is entirely correct, but conflates the analysis. It is important to note that, in this context, saying that the parties have not made the objective (apparent) agreement means that neither party subjectively consented to it. In any case where common mistake is at issue, there is an apparent objective agreement. However, the complainant is seeking to disavow its alleged binding force and the defendant is seeking to propound it. In order to balance these competing claims, one must analyse the position of each party. The objective agreement is on the defendant’s side. If he cannot establish this, there is no contract that the complainant needs to vitiate. Therefore, the complainant must establish two things to justify overcoming the objective principle: first, a reason to allow him to disavow the objective (apparent) agreement; and, second, a reason to preclude the defendant from asserting it (i.e., a reason to allow the complainant’s disavowal to be operative). The complainant’s absence of consent is a sufficient reason to satisfy the first step, because it establishes an absence of voluntariness to the putative contract. This is so regardless of the state of the defendant’s consent. Once the complainant has proved his own absence of consent, the defendant’s absence of consent is sufficient to render this operative, because it is then a sound reason to preclude the defendant from relying upon the objective (apparent) agreement he established but to which neither party consented. A mistake as to the identity of one’s co-contractor is normally a mistake as to an external circumstance, not as to terms. It is only a mistake as to terms if identity is a term of the putative contract. If so, the analysis should proceed under the law of mistake as to terms. If not, the mistake does not necessarily render the putative and intended contracts different, so it does not necessarily establish an absence of consent. A mistake as to identity will only establish an absence of consent when the identity of his co-contractor is sufficiently important to the complainant that he would see a contract with the person with whom he believed he was contracting as different from a contract with the defendant, the person with whom he actually dealt. The question to ask is whether, from the complainant’s perspective, a contract with the defendant is different from a contract, on the same terms, with the person he believed the defendant to be. Therefore, as with common mistake, the key to whether a mistake as to identity establishes an absence of consent is the severity of the complainant’s mistake (which, here, is determined by the importance to

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the complainant of his co-contractor’s identity),105 because this determines the effect that the mistake had on the complainant’s consent. Cases of mistake as to identity often involve fraud. The classic factpattern is that the defendant fraudulently claims to be someone he is not. In such cases, as well as the absence of consent being induced by the defendant’s unacceptable conduct, the defendant obviously knows of the complainant’s mistake, and he will be unable to argue that this is not to be equated with knowledge of the absence of consent itself. For, the very reason the defendant claimed to be someone else will normally be that he believed the complainant would be willing to contract with that person but not with him. Therefore, the defendant: (1) knows that the complainant believes he is contracting with someone else; and (2) believes that the complainant would see a contract with that person as different from a contract with the defendant. The defendant, then, must be deemed to know that the complainant is not making a promise to be bound to him, the defendant, and this amounts to knowledge of the absence of consent. As such, the residual subjective element of the objective principle applies, to render this absence of consent operative.106 There is a dearth of authority on mistake as to identity where the defendant did not know of the complainant’s mistake. However, any of the additional factors rendering an absence of consent operative should be capable of applying to any of the first-category vitiating factors: that is, they should be capable of applying regardless of the genesis of the absence of consent. Nothing in the nature of any additional factor justifies it being treated as insufficient to render a particular type of absence of consent operative. This is especially important in cases of mistake as to identity, because there is no authority that actually requires knowledge or unacceptable inducement of the mistake. Hart v. O’Connor requires that the defendant has actual or constructive knowledge of a mental incapacity before that vitiating factor can be successfully established.107 Bell v. Lever Bros. requires that a mistake as to the subject matter is shared (and fundamental) before it can be operative.108 Therefore, 105

106 107

108

Boulton v. Jones (1857) 2 H & N 564, 566, per Bramwell B; Ingram v. Little [1961] 1 QB 31, 50, 51, 57, per Sellers and Pearce LJJ. See pp. 117–18, below. [1985] AC 1000, 1014, PC. See also York Glass v. Jubb [1925] All ER Rep. 285, 292, per Warrington LJ. [1932] AC 161, 218, HL, per Lord Atkin. See also Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703.

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to recognise that any potential additional factor can be sufficient in mental incapacity or mistake as to the subject matter would require a change to binding authority,109 but this would not be required in mistake as to identity. It has been shown that, whenever a complainant makes a mistake as to terms, this necessarily establishes an absence of consent to the putative contract. He intended to make a contract with or without the particular term, as the case may be, so he consented to that contract and not the putative contract. The classic cases on the residual subjective element of the objective principle involve mistakes as to terms.110 Therefore, it has been recognised that knowledge of the absence of consent established by a mistake as to terms is sufficient to render it operative and overcome the objective principle.111 Further, in Scriven Bros. v. Hindley, it was held that, even though the defendant did not know of the complainant’s mistake as to terms, the fact that he induced it by his own unreasonable conduct was sufficient to render the absence of consent operative.112 It is clear that this is an appropriate additional factor, because an unreasonable inducement of an absence of consent is unacceptable conduct, and one should not be able to take advantage of one’s own unacceptable conduct. Indeed, it is submitted that any unacceptable inducement of a complainant’s absence of consent is a sufficient reason to render it operative. An inducement will be unacceptable if fraudulent or negligent, or if it amounted to an operative “innocent” misrepresentation.113 Classification of mistake is often broken down into the categories of common, unilateral and mutual mistake. Although the terminology of mutual and common mistake is often confused, a mutual mistake exists, on this terminology, when each party is mistaken as to a different matter. It is submitted that there is not actually any English case where a contract has been vitiated for mutual mistake: cases allegedly involving mutual mistake are actually cases in which the evidence was insufficient to establish that there was any objective agreement, rather than cases where mistake operated to vitiate an otherwise binding objective agreement.114

109

110 111 114

Although Hart v. O’Connor [1985] AC 1000 is a Privy Council case, based on the law of New Zealand, it expressly affirmed that knowledge of the incapacity is required in English law. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568. 112 113 See pp. 133, 136–7, below. [1913] 3 KB 564, 569. See pp. 170–3, below. E.g., Smidt v. Tiden (1874) 9 QB 446, 449.

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For example, the Court of Appeal has explained the supposedly classic case of mutual mistake, Raffles v. Wichelhaus,115 as a case ‘where an objective appraisal of the facts reveal[ed] that no agreement ha[d] been reached’.116 It is submitted that, in any case of mistake, the key is the effect that the complainant’s mistake had on his state of mind.117 The defendant’s state of mind is relevant merely as to whether or not a proven absence of consent from the complainant can be rendered operative. The classification of common mistake is helpful in this regard, because it establishes that the defendant made the same mistake as the complainant. Therefore, if the mistake is recognised by both parties as sufficiently serious to the foundation of the contract, neither party consented to the putative contract.118 Further, the rules that have developed around mistakes as to the subject matter, mistakes as to identity and mistakes as to terms ensure that the relevant mistake establishes an absence of consent from the complainant. However, classifying a mistake as mutual can be confusing. Each party’s mistake must be separately analysed. First, one must classify the complainant’s mistake: whether it is as to subject matter, identity or terms. Next, one must apply the rules of the relevant form of mistake, to determine whether the complainant’s mistake establishes an absence of consent. If it does, one must determine whether there is a sufficient reason to render that absence of consent operative. This can be the defendant’s: (1) knowledge of the absence of consent; (2) unacceptable inducement of the absence of consent; or (3) own absence of consent. The fact that the defendant made a separate mistake does not affect either of the first two additional factors. However, one must classify and assess the severity of the defendant’s mistake, in the same way as the complainant’s mistake, to determine whether it establishes an absence of consent from him and can thus be a sufficient additional factor to render the complainant’s absence of consent operative. Indeed, it is submitted that, whenever the complainant proves an absence of consent, proof of an absence of consent from the defendant should be sufficient to render this operative. For example, each party may have made its own, separate, fundamental mistake; the complainant may suffer from a mental incapacity and 115 116

117

(1864) 2 H & C 906. Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 690. See also Chitty (2008), 469. 118 Stoljar (1968), 80. See pp. 32–3, above.

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the defendant has made a fundamental mistake; or both parties may suffer from a mental incapacity.119 Stoljar is undeniably correct to say that a mistake does not necessarily establish an absence of consent,120 but he is not correct to say that legally operative mistakes do not necessarily establish an absence of consent.121 It has been shown that, in order to vitiate a contract on the basis of any of the forms of the doctrine of mistake (including non est factum), it must be proved that the mistake rendered the complainant’s intended act contractually different from the act of making the putative contract. Whether this is because the complainant mistakenly believed that his act would not be of contractual effect or because the mistake rendered the putative contract different from the contract the complainant intended to make, it necessarily establishes an absence of consent.122 The complainant may have consented to a contract, but not the putative contract. It is submitted that Stoljar’s error is to fail properly to recognise this distinction between intending to make a contract and intending to make the putative contract: none of the forms of the doctrine of mistake necessarily establishes that the complainant did not consent to any contract whatsoever; but they do each at least establish that he did not consent to the putative contract. Indeed, Stoljar maintains the assertion that an operative mistake does not necessarily establish an absence of consent despite recognising that, ‘[i]n . . . contract, the point of the mistake is to show that the mistaken party intended something different [from making the putative contract]’.123 Therefore (to answer Stoljar’s question), what is meant by the fact that a mistake is sufficiently serious to be operative124 is that it establishes either that the complainant did not intend to make any contract or that he intended to make one different from the putative contract. This is why a legally operative mistake establishes an absence of consent and why voidness is the appropriate conclusion for all forms of the doctrine of mistake.125 How to determine whether a given mistake is sufficiently serious to be legally operative has always been an extremely difficult task.

119

120 122

123

See also pp. 119–20 (mistake as to identity), 139–41 (mutual mistake), 319–20 (general principle), below. 121 Stoljar (1968), 2. Ibid., 73. See p. 30 (non est factum), 31–2 (common mistake), 33 (mistake as to identity), 4–31, 35 (mistake as to terms), above. 124 125 Stoljar (1968), 149 (my italic). Ibid., 38. Cf. ibid., 71–9.

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Commentators and judges alike have struggled to define the requisite seriousness. It is accepted that my explanation of the basis of vitiation for mistake will not eradicate the difficult issues of fact and degree which abound in this area of the law. However, it is submitted that my central theory will, first, ensure that the law is asking the correct question, and therefore undertaking the correct enquiry, in principle; and, second, with a little guidance as to its application, help to render the law clearer in practice. I shall deal first with ensuring that the law is asking the correct question as a matter of principle. My theory explains that all forms of the doctrine of mistake are based upon absence of consent. A complainant’s mistake can only lead to an absence of consent if it is a mistaken belief that his act will not be of any contractual effect or has the effect of rendering the contract he intended to make different from the putative contract. Therefore, it is clear that, in cases of mistake as to the subject matter, the question is whether the complainant would see a contract for the actual subject matter as different from a contract for that which he believed was the subject matter. In cases of mistake as to identity, the question is whether the complainant would see a contract with the defendant as different from a contract with X, the person with whom he believed he was contracting. In cases of mistake as to terms, it is clear that a contract with a particular term is different from a contract without that term. Of course, if the mistake is not a mistake as to terms, we are still left with a very difficult question to answer: would the complainant see the intended and impugned contracts as different?126 However, by accepting my theory, at least the law is now asking the correct question: it is not simply asking whether the actual subject matter is fundamentally different from the subject matter for which the complainant believed he was contracting; or whether the complainant made a mistake as to the defendant’s identity or attributes. These are only preliminary questions on the way to establishing whether the complainant has proved an absence of consent. Certainly, if the putative and intended subject matters are fundamentally different, the complainant will probably see a contract for the intended subject matter as different from a contract for the actual subject matter; and if the complainant mistakenly believed 126

It has already been argued that, if the mistake is as to terms, it always renders the putative and intended contracts different for, and therefore establishes an absence of consent from, the complainant: see pp. 31, 35, above.

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that his co-contractor was someone other than the defendant, rather than merely that the defendant had a particular attribute, this makes it more likely that he would see the putative and intended contracts as different (provided that identity is important to the complainant’s decision to contract). However, even if these preliminary questions will answer the true question in the majority of cases, the law still needs clearly to identify what is the crucial question (namely, whether the complainant would see the putative contract as different from the intended contract), and why it is the key question (because, if the complainant would see the putative and intended contracts as different, he consented to the latter and not to the former). Once the law has identified the correct question in principle, the issue becomes how to apply it in practice; and this is where the difficult issues of fact and degree arise. It is submitted that, as a matter of evidence, the law must initially apply an objective approach to determining whether the putative and intended contracts are different. Although this seems to undermine the essentially subjective nature of my theory, it is contended that an objective approach will normally be an evidential necessity. Moreover, it should be open to the parties to displace the objective findings. That is to say, if the defendant were to prove that the complainant would not have seen the putative and intended contracts as different (even though, objectively, they were), he would have proved that the complainant did consent to the putative contract. Conversely, if the complainant were to prove that he did see the putative and intended contracts as different (even though, objectively, they were not), he would have proved an absence of consent. The objective approach would, therefore, work as a rebuttable presumption in all forms of the doctrine of mistake.127

The PICC, PECL and DCFR As noted above, the PICC, PECL and DCFR do not deal with mental incapacity.128 However, they do address all forms of mistake.129 Comparison of English law with the three codes shows that the 127

128 129

This is similar to the position some contend applies in relation to materiality and inducement in English law: see pp. 189–90, below. See p. 10, above. The codes do not distinguish between application of the rules of mistake to written or non-written contracts, so the treatment of non est factum falls under the general rules of mistake.

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first-category vitiating factors are treated in a similar fashion under each of the systems of law. The main difference is that the consequence of successfully establishing any of the vitiating factors under the codes is voidability. Therefore, the distinction between voidness and voidability recognised in English law is not recognised under the codes. It has been explained that this distinction reflects the fundamental difference between absence and impairment of consent.130 However, it is contended that the universal consequence of voidability does not mean that the codes fail to distinguish between absence and impairment of consent, but is, instead, a policy decision, to promote security of contracts. For each of the codes does recognise the fundamental distinction between absence and impairment of consent, requiring the former (and an additional factor, which need not amount to unacceptable conduct, to render it operative) under the doctrine of mistake131 but not for a successful plea of misrepresentation, duress, undue influence or unconscionability, which instead requires proof of consent impaired by unacceptable conduct. An important distinction between mistake in English law and under the PICC, PECL and DCFR is the fact that the codes (like the Restatement) do not apply different rules in relation to different types of mistake. English law has developed different rules for mistakes as to the subject matter (common mistake), mistakes as to identity and mistakes as to terms (as well as the possible category of mutual mistake), but the PICC, PECL and DCFR apply the same rules regardless of the nature of the mistake. It is contended that this is appropriate, because the crucial element in each form of mistake is the effect that it has on the complainant’s consent, and the rules should not differ based upon the nature of the mistake.132

130 131

132

See pp. 19–21, above. It has been contended that the PICC ‘emphasize protecting the reliance of [D] on the contract rather than protecting the true will of [C]’ Vogenauer and Kleinheisterkamp (2009), 415. However, this statement is intended to highlight the restrictive approach to mistake taken by the PICC and is not in any way a suggestion that the PICC do not require an absence of consent. Indeed, requiring merely an impairment of consent would be a less restrictive approach. This is not necessarily to say that English law should adopt a unified doctrine of mistake in the same way that the codes and Restatement have. Certainly, it is contended that English law should recognise that any of the additional factors should be sufficient to render any absence of consent operative, and this would require changing the law of mistake as to the subject matter (which at present requires the mistake to be shared:

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Absence of consent in mistake under the PECL and DCFR is established by the fact that each of these two codes requires the complainant to prove that he made a mistake which was so serious that he would not have entered into the impugned contract had he not made it.133 If the complainant would not have made the impugned contract but for the mistake, then he must have seen the impugned contract as different from the contract he intended to make. For, if he had seen the impugned and intended contracts as the same, he would have been equally willing to make one as the other. Therefore, he consented to the latter contract but not the former. Although the PICC do not expressly require an absence of consent from the complainant, it is submitted that this is an implicit requirement and will at least normally be present if mistake under the PICC is established. Under the PICC, a mistake is sufficiently serious if the reasonable person in the complainant’s position would not have made the impugned contract but for the mistake.134 Therefore, a relevant mistake under the PICC establishes an objective absence of consent (in the sense that it proves that the reasonable person would have seen the impugned and intended contracts as different and have consented to the latter but not the former), but not necessarily a subjective absence of consent. However, first, it is contended that, if the defendant proved that the complainant would have seen the impugned and intended contracts as the same, and would thus have been equally willing to make one as the

133

134

Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin; see also, Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703) and the perception of the rules of mistake as to identity and mistake as to terms (which have never accepted absence of consent from the defendant as sufficient; although, they have never rejected it, either). Nonetheless, it might be useful for English law to maintain the separate categories, given the years of case law that have gone into extrapolating the rules for determining when a mistake of each type (subject matter, identity and terms) establishes an absence of consent. Art. 4: 103(1)(b) PECL; Art. 7: 201(1)(a) DCFR. Both the PECL and DCFR treat a mistake as sufficiently serious if the complainant would not have entered into the impugned contract at all or would have done so only on fundamentally different terms. However, if the complainant would only have entered into the impugned contract on different terms, he would not have entered into the impugned contract at all, because any change in the terms of a contract renders it a different contract: see pp. 31, 35, above. Similarly to the PECL and DCFR, the PICC accepts that a mistake is sufficiently serious if the complainant would not have made the impugned contract at all or would have done so only on materially different terms: Art. 3.5(1). If the reasonable person would not have made the impugned contract on the same terms but for the mistake, he would not have made it all.

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other, the court would surely not accept that the complainant had successfully established mistake. If this is correct, the fact that a mistake established an objective absence of consent would not render it sufficiently serious. Second, even if this is not correct, then, in the vast majority of cases, there will normally be a subjective absence of consent if there is an objective absence of consent. The additional factors recognised under each of the codes are similar to those in English law. It is particularly important to note that, under the codes, the fact that the defendant shares the complainant’s mistake is sufficient to render the complainant’s absence of consent operative. The mere fact that the defendant shared the complainant’s mistake does not establish an absence of consent from the defendant, because the mistake could be completely trifling for him. Indeed, this is precisely why common mistake in English law requires that the mistake is one that both parties recognised as fundamental to the putative contract.135 It is submitted that, if the defendant’s mistake does not establish an absence of consent from him, it should not be sufficient to render the complainant’s absence of consent operative. Nonetheless, it is vitally important to recognise that, by accepting the sharing of a mistake as a sufficient additional factor, the PICC, PECL and DCFR all recognise that an absence of consent can be rendered operative without the need for proof of any unacceptable conduct on the part of the defendant.136 Therefore, the universal consequence of voidability under the codes does not represent a fundamental difference in the underlying rationale of vitiation in the first category. First, mistake under the codes requires proof of an absence of consent from the complainant (subject to the minor potential lacuna that the PICC actually only require proof of an objective absence of consent). Second, the complainant’s absence of consent requires an additional factor to render it operative, but this need not be unacceptable conduct by the defendant.

The US Restatement (Second) of Contracts There are two main points of difference between the treatment of the first-category of vitiating factor in English law and the Restatement. 135

136

Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton. This is in contrast with rescission for misrepresentation or duress under the codes, which requires proof that the complainant’s consent was impaired by the defendant’s unacceptable conduct.

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First, similarly to the position under the PICC, PECL and DCFR, the Restatement adopts the universal consequence of voidability across the general vitiating factors. Second, the Restatement clearly reflects a desire to promote substantively balanced, and thus to deter substantively imbalanced, transactions, and this affects the rules of the general vitiating factors, including mistake and mental incapacity, in certain respects. These differences are fundamentally based upon policy: the policy of promoting security of contracts by adopting the conclusion of voidability; and the policy of promoting substantively fair contracts. The important point to note is that these distinctions do not undermine the fundamental distinction between absence and impairment of consent under the Restatement. Indeed (with minor exceptions to be considered below), in order successfully to plead either mental incapacity or mistake under the Restatement, a complainant must prove an absence of consent, and the additional factor to render this operative need not be unacceptable conduct. In the standard case, absence of consent in mental incapacity is established in the same way under the Restatement as in English law: proof of an inability to understand the nature of the impugned contract. There is a slight semantic difference in that the Restatement does not require an absolute inability to understand the nature of the impugned contract, but, rather, accepts that the complainant has proved a sufficient mental incapacity if he establishes that he was incapable of understanding the nature of the impugned contract in a reasonable manner.137 While this might seem theoretically wider than the requirement under English law, it is submitted that, in reality, it is not possible to have an unreasonable understanding of an impugned contract: an unreasonable understanding of something is not actually an understanding of that thing at all. Therefore, an inability reasonably to understand the nature of the impugned contract is an inability to understand it at all. The Restatement also recognises a category of mental incapacity which precludes formation of a contract (thus having a similar effect to rendering the putative contract void ab initio). This category of incapacity is established when the defendant’s mental condition causes him to do an act (which is interpreted, both objectively and subjectively by the defendant, as amounting to consent) without the intention to do that act.138 If a person does an act without intending to do it,

137

}15(1)(a).

138

Restatement (Second), Volume I, 31.

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then he clearly cannot have consented to accepting the consequences of that act (for present purposes, binding contractual obligations). Therefore, this category of mental incapacity also clearly requires an absence of consent. As well as recognising two types of mental incapacity which both require proof of an absence of consent, the Restatement recognises a category of mental incapacity which actually requires merely an impairment, rather than an absence, of consent. Under sections 15(1)(b) and 16(b), a complainant successfully proves a relevant mental incapacity if he proves that he was ‘unable to act in a reasonable manner in relation to the transaction’. A complainant who proves this form of incapacity does not necessarily prove that he did not consent to the impugned contract. For example, he may have been unable reasonably to balance the positive and negative consequences of entering into the impugned contract but nonetheless have made a voluntary decision to do so, fully understanding the nature of his contractual act. It is submitted that this form of incapacity under the Restatement more closely resembles the doctrine of unconscionability in English law, especially as it requires that the defendant had actual or constructive knowledge of the complainant’s mental condition (which would clearly amount to a relevant weakness under the doctrine of unconscionability in English law).139 It is submitted that, if the defendant were to contract with such knowledge, he would often be guilty of unconscionable passive receipt in English law.140 A significant difference between English law’s treatment of mental incapacity and the treatment of mental incapacity under the Restatement is the fact that the Restatement does not actually require proof of an additional factor to render the absence consent operative, unless the mistake was caused by intoxication141 or consisted of an inability to act in a reasonable manner in relation to the impugned contract,142 in which cases, actual or constructive knowledge of the absence of consent is required. This is a fundamental departure from my theory and conflicts with the objective principle, which is the fundamental basis of formation of contracts under the Restatement.143 Indeed, it is submitted that not requiring proof of any additional factor to render the absence of consent 139 142 143

140 141 See pp. 70–1, below. See pp. 288–9, below. }16. }}15(1)(b) and 16. }19. Although, note that the Restatement adopts a standard of promisor objectivity: }19(2).

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operative goes too far in subverting security of contracts, which goes against the general policy of the Restatement.144 Although the Restatement deals with common (shared) and unilateral mistake in different sections, it applies the same standard for each type of mistake: the distinction relates merely to the nature of the relevant additional factor(s) rather than to the nature of the mistake. Therefore, like the PICC, PECL and DCFR, the Restatement takes a unified approach to the doctrine of mistake. In order to be operative under the Restatement, a mistake must have been one as to ‘a basic assumption on which’ one or both parties made the contract.145 Although the phrase is not further defined, it is contended that it requires, similarly to the test for mistake under the PECL and DCFR, proof that the complainant would not have made the impugned contract but for the mistake. It is submitted that this is implicit in the requirement that the mistake must be as to a basic assumption on which the complainant (or both parties) made the contract. It has already been explained that, if the complainant would not have made the impugned contract but for the mistake, he would have seen it as different from the contract he intended to make (or he did not intend to make any contract) and therefore did not consent to that impugned contract.146 Mistake under the Restatement also requires proof of an additional factor to render the absence of consent operative, which can be the fact that the defendant: (1) shared the mistake;147 (2) knew of the mistake; or (3) was at fault in causing the mistake.148 These mirror the additional factors in English law and under the PICC, PECL and DCFR.149 Additionally, under the Restatement, if a mistake made only by the complainant has such an effect that it would be unconscionable to enforce the contract against him, the mistake is rendered operative.150 144

145 147 149

150

The fact that the right to avoidance can be lost under }15(2), to the extent that: (1) the impugned contract has been performed in whole or in part; or (2) circumstances have so changed that avoidance would be unjust, but only if the contract is substantively fair and the defendant has no knowledge of the mental incapacity, goes some way towards redressing the balance. Moreover, it emphasises the policy, found throughout the Restatement, of promoting substantively fair contracts. 146 }}152 (common mistake) and 153 (unilateral mistake). See p. 41, above. 148 }152. }153. The fact that, under }152, a shared mistake must be one as to a basic assumption on which both parties made the contract ensures that this additional factor does establish an absence of consent from the defendant. }153(a).

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The element of unconscionability is not fully defined under the Restatement, but it will be argued that it is linked to substantive unfairness.151 While I do not believe that substantive unfairness should be a sufficient additional factor to render an absence of consent operative, this is a perfectly legitimate policy decision taken under the Restatement, as part of the general policy to promote substantively fair contracts.152

1.9.2 The second category English law In English law, all of the second-category doctrines require proof that the defendant engaged in unacceptable conduct which impaired the complainant’s consent. The definition of ‘unacceptable conduct’ includes unlawful conduct,153 morally reprehensible conduct, and conduct falling below the standard required by contract law. The third of these categories cannot be defined in the abstract, but it will be argued that all conduct relevant to one of the second-category vitiating factors is rightly treated as unacceptable, and conduct not covered by them is rightly not treated as unacceptable. Further, this third type of unacceptable conduct is not wholly subjective, even though the defendant’s bona or mala fides is relevant.154 The absence of a clear definition of ‘unacceptable’ introduces uncertainty into the law, but it is submitted that this is an unavoidable consequence of the flexibility required to deal with the vast array of potential consent-impairing objectionable conduct. Fraudulent and negligent misrepresentations undoubtedly amount to unacceptable conduct. Further, the requirement of inducement necessitates that the misrepresentation impaired the complainant’s consent. Similarly, the requirement of illegitimacy in duress is a requirement of 151

152 153

154

Although, note that the Restatement actually requires proof of substantive unfairness in all cases of mistake (in the requirement of proof that the mistake had ‘a material effect on the agreed exchange of performances’: }}152 and 153), so it is contended that the element of unconscionability, being linked to substantive unfairness, adds little, and can only make sense if it requires a greater degree of substantive imbalance: see pp. 161–4, below See p. 168, below. But some unlawful conduct (e.g., a breach of contract) might not be unacceptable: see pp. 220–4, below. Bigwood (2003), 500; see also, CTN Cash & Carry v. Gallaher [1994] 4 All ER 714, CA (duress).

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unacceptable conduct,155 and the requirement of causation necessitates that this unacceptable conduct impaired the complainant’s consent. The terminology of “innocent” misrepresentation seems to conflict with a requirement of unacceptable conduct. However, the rules determining when an “innocent” misrepresentation is operative require that the defendant: (1) made a false statement which impaired the complainant’s consent; and (2) at least should have known that the complainant was likely to rely upon that statement. It will be contended that this ensures the defendant’s conduct is properly classified as legally unacceptable, even though it is not morally reprehensible or unlawful.156 For, it is appropriate to place the defendant under an absolute duty to ensure the veracity of any representation he makes with at least constructive knowledge of the fact that the complainant is likely to rely upon it; and it is, thus, appropriate to treat the breach of such a duty as legally unacceptable conduct. As with fraudulent and negligent misrepresentation, the requirement of inducement necessitates that the defendant’s unacceptable conduct impaired the complainant’s consent. Proof of undue influence requires proof of an undue exercise of influence which brought about the impugned contract.157 Further, the only distinction between presumed and actual undue influence is the evidential route to proof: however one proves undue influence, be it affirmatively or with the aid of the evidential rebuttable presumption, the same thing is established.158 The fact that the defendant’s exercise of influence must be undue seems clearly to establish unacceptable conduct, and this must have caused the complainant’s decision to contract, so it must have impaired his consent. Nonetheless, it has been doubted whether undue influence genuinely requires conduct that is properly treated as unacceptable.159 It will be shown that unacceptable conduct by the defendant is a prerequisite of undue influence. The conduct need not be unacceptable in itself, but must be unacceptable in the circumstances in which it was executed. The most important circumstance is that the complainant was vulnerable because of the defendant’s influence over him.160 155

156 158 159

160

Barton v. Armstrong [1976] AC 104, 121, PC, per Lords Wilberforce and Simon; The Universe Sentinel [1983] 1 AC 366, 385, HL, per Lord Diplock. 157 See pp. 170–3, below. BCCI v. Aboody [1990] 1 QB 923, 967, CA. See pp. 253–5, below. Birks and Chin (1995). Birks later recognised that this argument was not reflected in the law, but maintained that it should be: P. Birks, ‘Undue Influence as Wrongful Exploitation’ (2004) 120 LQR 34. See pp. 258–60, 270–2, below.

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Modern authorities on unconscionability make it clear that the doctrine requires unconscionable (unacceptable) conduct.161 However, it has not been clearly recognised that this unacceptable conduct must have impaired the complainant’s consent. Indeed, there is no clear recognition of any requirement of causation in unconscionability. It is, however, submitted that this requirement is implicit: if it were proved that the unconscionable conduct had no effect on the complainant’s decision to contract, unconscionability could not be established.162

The PICC, PECL and DCFR All of the second-category doctrines under the PICC, PECL and DCFR render the impugned contract voidable. Moreover, with one narrow potential exception under the equivalents of undue influence and unconscionability, to be discussed below, they are all based upon an impairment of the complainant’s consent caused by the defendant’s unacceptable conduct. Misrepresentation under the codes is narrower than misrepresentation in English law because only a fraudulent, as opposed to a negligent or innocent, misrepresentation can lead to vitiation.163 However, it still clearly requires proof that the defendant engaged in unacceptable conduct which impaired the complainant’s consent. Likewise, duress under the codes clearly requires proof of unacceptable conduct (a wrongful164 or unjustified165 threat) which induced the complainant’s decision to contract (and thus impaired his consent). Unlike English law, however, the PICC, PECL and DCFR do not distinguish between the different types of duress, so they do not require any lesser standard of impairment of consent from a threat of, say, murder as opposed to a threat to destroy one’s goods or breach a contract. Relief for the equivalents of undue influence and unconscionability under the codes can technically be established without proof that the defendant engaged in any unacceptable conduct. Under the PECL and DCFR, a complainant must prove a relevant weakness of which the defendant had actual or constructive knowledge and either that the 161 162

163 164

E.g., Boustany v. Pigott (1995) 69 P & CR 298, 303, PC. The only exception is unconscionable passive receipt, which is the label used when the circumstances of the case are such that the defendant’s mere act of contracting (which cannot itself impair the complainant’s consent) amounts to the requisite unacceptable conduct: Capper (1998), 486. See also pp. 288–9, 295, below. Art. 3.8 PICC; Art. 4: 107 PECL; Art. 7: 205 DCFR. 165 Art. 4: 108 PECL; Art. 7: 206 DCFR. Art. 3.9 PICC.

how the present law fits the book’s central theory

49

defendant exploited this weakness or took ‘an excessive benefit’.166 Under the PICC, the complainant simply has to prove that the impugned contract, or a particular term of it, ‘unjustifiably gave the [defendant] an excessive benefit’:167 the fact that the defendant took unfair advantage of the complainant’s weakness is merely one potentially relevant factor to consider if present on the facts.168 If the defendant has actively exploited, or taken unfair advantage, of the complainant’s weakness, then he has clearly engaged in unacceptable conduct. Moreover, this conduct must surely have impaired the complainant’s consent, because actively to exploit or take unfair advantage of a weakness requires a successful utilisation of that weakness, and this cannot be the case unless the defendant’s conduct has at least caused the weakness to impair the complainant’s consent. However, the defendant’s mere act of entering into a contract, even a substantively unfair one with a complainant he knows or ought to know suffers from some weakness, will not necessarily amount to unacceptable conduct. It is possible that such conduct could amount to unconscionable passive receipt (and an exploitation, albeit a passive one, of the complainant’s weakness), which is recognised as a form of the doctrine of unconscionability in English law,169 but it is submitted that it will not always do so if the defendant has no actual or constructive knowledge of the substantive unfairness. Nonetheless, it will be argued, first, that the defendant will normally have at least constructive knowledge of the substantive unfairness; and, second, that the mere act of entering into the impugned contract will amount to unconscionable passive receipt if the defendant did have at least constructive knowledge of the substantive unfairness and the complainant’s weakness.170

The US Restatement (Second) of Contracts Misrepresentation, duress and undue influence under the Restatement are all based upon an impairment of consent caused by the defendant’s unacceptable conduct and all render the impugned contract voidable. In order to be operative under the Restatement, a misrepresentation must be fraudulent or material.171 It will be argued that the definition of 166 167

168

Art. 4: 109(1) PECL; Art. 7: 207(1) DCFR. If only a particular term of the contract unjustifiably gives the defendant an excessive benefit, only that term is affected, as long as severance is possible (Arts. 3.10(1) and 3.16). 169 170 171 Art. 3.10(1). See pp. 288–9, below. See pp. 302–5, below }164.

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fraud under the Restatement potentially treats as fraudulent conduct which should not be regarded as such.172 However, if conduct is fraudulent under the Restatement, it is rightly regarded as unacceptable. Section 163 of the Restatement deals with misrepresentations ‘as to the character or essential terms’ of the impugned contract. Such misrepresentations prevent formation of a contract (which is similar in effect to rendering a putative contract void ab initio) and are more closely linked to non est factum in English law.173 Importantly, it is submitted that it will almost always amount to unacceptable conduct for a defendant to misrepresent the character or essential terms of the impugned contract, even innocently. For, in such cases, unless the defendant reasonably believes that his representation does not go to the character or essential terms of the impugned contract (which must surely be exceptionally rare, if at all possible), he at least should know that the complainant is likely to rely upon the veracity of his representation, and it is contended that it is appropriate to place on the defendant an absolute duty to ensure the veracity of a representation when he at least ought to know that the complainant is likely to rely upon it.174 Under section 162(2) of the Restatement, a misrepresentation is material if it would have been likely to induce the reasonable person to enter into the impugned contract or the defendant knew that it was likely to induce the complainant to enter into the contract. Therefore, the defendant at least should have known that the complainant was likely to rely upon the representation before it can be regarded as material, and it has already been argued that it is appropriate to treat any misrepresentation as unacceptable conduct in these circumstances. Section 164 of the Restatement requires the complainant to prove that he was induced to contract on the basis of a fraudulent or material misrepresentation before he can set aside the contract. Therefore, the Restatement clearly requires proof of impairment of consent. Under section 175 of the Restatement, a contract is rendered voidable for duress if the complainant was induced to contract by an improper threat. Section 176 determines when a threat is regarded as improper, and it is submitted that all forms of improper threat under this section 172 173

174

See pp. 208–9, below. In such cases, the complainant must neither know, nor have had reasonable opportunity to know, the character or essential terms of the putative contract, so he clearly cannot have consented to it. See pp. 170–3, below.

conclusion

51

are rightly regarded as examples of unacceptable conduct.175 The requirement that the complainant was induced to contract by the improper threat clearly necessitates proof of impairment of the complainant’s consent by the defendant’s unacceptable conduct. Undue influence under the Restatement requires the complainant to prove that he suffered from some weakness relative to the defendant176 and that he was induced to contract by the defendant’s unfair persuasion of him. The element of unfair persuasion is synonymous with unacceptable conduct, and the requirement that this unfair persuasion induced the complainant’s decision to contract ensures that it impaired the complainant’s consent. There is a major difference between unconscionability under the Restatement and unconscionability in English law (and the standard case of its equivalents under the PICC, PECL and DCFR).177 Unconscionability under the Restatement is primarily concerned with the substantive balance of the impugned contract. It is, therefore, a doctrine based upon the policy of promoting substantively balanced contracts, rather than upon protecting the integrity of contractual consent and dissuading procurement of contracts by unacceptable means, and this represents a fundamental departure from my central theory.

1.10

Conclusion

It has been argued that my central theory explains both the links and distinctions between the general vitiating factors. The main link is the desire to protect the integrity of contractual consent, and the main distinction is between absence and impairment of consent. Moreover, it has been contended that my theory explains that the theoretical distinction between absence and impairment of consent is the basis of 175

176

177

}176(2) sets out situations in which a threat is only improper if it leads to a substantively unfair contract. It will be argued that all conduct in this category should be regarded as unacceptable, and (subject to proof of impairment of consent) the impugned contract should thus be voidable even if it is substantively balanced: see pp. 243–8, below. }177 requires proof that the complainant was under the ‘domination’ of the defendant or was justified in believing that the defendant would not ‘act in a manner inconsistent with his welfare’. Those marginal cases in which undue influence/unconscionability can be established under the three codes without proof of unacceptable conduct by the defendant (see pp. 48–9, above) are primarily based upon the substantively unfair nature of the contract, and therefore more closely resemble unconscionability under the Restatement.

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the practical distinction between the consequences of voidness ab initio and voidability in English law. Further, it has been argued that adoption of the universal consequence of voidability under the PICC, PECL, DCFR and Restatement is a policy decision to promote security of contracts, and therefore does not represent a difference in principle from my theory. The basic way in which my theory is reflected in the present law has been shown. I will engage in detailed doctrinal analysis of each of the vitiating factors to explain this more clearly. In-depth doctrinal analysis will also help to highlight and explain more fully the ways in which the law should develop.

2 Mental incapacity

2.1 English Law 2.1.1 Introduction The law of mental incapacity does not distinguish between incapacity caused by a mental condition and incapacity caused by intoxication.1 The following discussion presupposes that the court has not made a declaration that the complainant lacks mental capacity.2 It is contended that, if it has, no contract concerning any matter within that declaration binds the complainant.3 If a contract is for necessary goods or services supplied to the complainant, ‘he must pay a reasonable price for them’,4 but it is submitted that this rule applies only if the defendant has actual or constructive knowledge of the mental incapacity. If he does not, the contract is fully binding,5 so the complainant must pay the contract price.6 The law on mental incapacity has changed from the position that the putative contract was void ab initio where one party lacked mental capacity; to the position that no man could be allowed to stultify himself by pleading his own mental incapacity; to the present position that such

I will not address minors’ incapacity in depth, because it is not a general vitiating factor. This is for two reasons: first, it applies only to complainants under the age of 18 (s. 1, Family Law Reform Act 1969; Chitty (2008), 672; Treitel (2007), 566; Furmston (2006), 548; Beatson (2002), 215); and, second, vitiation is based upon the public policy of protection: the complainant-minor need not prove that he was incapable of looking after his own interests, and it is not sufficient for the defendant to prove that he was capable. 1 2 Chitty (2008), 707. S. 15 Mental Capacity Act 2005. 3 Treitel (2007), 588; Chitty (2008), 706. 4 S. 7 Mental Capacity Act 2005 (replacing, from 1 October 2007, s. 3 Sale of Goods Act 1979, which applied the same rule, but only to ‘necessar[y] [goods] . . . sold and delivered’ to the complainant). 5 Imperial Loan v. Stone [1892] 1 QB 599, 601, per Lord Esher MR; Hart v. O’Connor [1985] AC 1000, 1027. 6 Chitty (2008), 704.

53

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mental incapacity

a plea is available and will render the impugned contract voidable, but only where the defendant has actual or constructive knowledge of the incapacity.7 It will be explained that these changes have been made for policy reasons. There are conflicts within the law which make discerning what is the true rationale of vitiation difficult. As Chen-Wishart says, ‘although an incapacitated party is logically incapable of giving valid consent (so that resultant contracts should be void and of no effect), the actual picture is far messier’.8 For example, the law requires that the defendant has knowledge of the mental incapacity,9 and it will be shown that: (1) this necessarily amounts to knowledge of the absence of consent; and (2) it is necessarily unacceptable for the defendant to seek to contract with knowledge of the complainant’s absence of consent.10 Therefore, the defendant’s conduct is a form of unconscionable (unacceptable) passive receipt.11 However, it will be argued that this unacceptable conduct does not form the rationale of vitiation for mental incapacity: the true rationale is the complainant’s absence of consent. The requirement of knowledge is merely an additional factor to render the absence of consent operative, and the substitution of voidability for voidness as the consequence of a successful plea of mental incapacity is a policy decision.

2.1.2 The underlying rationale of vitiation The abstract theory behind mental incapacity is a simple one, which perfectly fits my first category of vitiating factor, save for the conclusion of voidability. This was reflected by the original rule that a successful plea of mental incapacity rendered the putative contract void, because ‘a person of unsound mind . . . had no mind capable of assenting to a contract [so] the element of agreement which was the very foundation of contract was regarded as not being present’.12 Similarly, the Privy

7

8

9

10 12

Archer v. Cutler [1980] 1 NZLR 386, Supreme Court NZ, and Hart v. O’Connor [1985] AC 1000, 1018–19, PC (both tracing this historical development). Chen-Wishart (2010), additional online chapter: www.oup.com/uk/orc/bin/9780199570058/ 01student/01chapters/chenwishart3e_webchapters.pdf, accessed on 28/03/2012. Imperial Loan v. Stone [1892] 1 QB 599, 601, per Lord Esher MR; Hart v. O’Connor [1985] AC 1000, 1027. 11 See p. 57, below. See Capper (1998), 486, and pp. 288–9, below. Archer v. Cutler [1980] 1 NZLR 386, 396, Supreme Court NZ.

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Council in Hart v. O’Connor explained that ‘[t]he original rule at law . . . was that a contract with a person of unsound mind was void, because there could be no consensus ad idem’.13 It is important to note that the rule was not merely based upon a legal absence of consent, with the law dictating that a complainant suffering from the relevant mental state could not, as a matter of law, give contractual consent. The requisite degree of unsoundness of mind was, and remains, such as actually establishes a factual absence of consent. Although the test has been phrased in a number of different ways, it requires an inability in the complainant to understand the nature of the impugned contract,14 and one who cannot understand the nature of the impugned contract obviously cannot consent to it. However, it has already been noted that to allow mere proof of an absence of consent to render a putative contract void would be to subvert the objective principle, the bedrock of security of contracts in English law.15 Therefore, it is submitted that it is appropriate to require the complainant to prove something in addition to the absence of consent before he may succeed. This is not the case in minors’ incapacity, and some have criticised the requirement in mental incapacity.16 However, the objective principle, and the fundamental notion of security of contracts which it serves, dictate that mere proof of an absence of consent cannot be sufficient for vitiation unless there are strong and sound policy reasons for this. It is submitted that the mere presence of a mental incapacity is insufficient. The mentally infirm must be adequately protected, but it must be remembered that the law of incapacity has to balance the interests of people suffering from an incapacity with those of people who deal with them.17 Although there are no doubt many situations in which it will not be apparent that a complainant is a 13 14

15 16 17

[1985] AC 1000, 1018–19. E.g., Ball v. Mannin (1829) 1 Dow & Cl 380, 384 (direction of the trial judge, affirmed on appeal); Gore v. Gibson (1843) 13 M & W 623, 625, 626, 627, per Pollock CB and Parke and Alderson BB; Molton v. Camroux (1849) 4 Exch 17, 19, per Patterson J., Exchequer Chamber; Boughton v. Knight (1873) 3 P & D 64, 72; Imperial Loan v. Stone [1892] 1 QB 599, 600, per Lord Esher MR. See also Gibbons v. Wright (1954) 91 CLR 423, 438, HCA; Archer v. Cutler [1980] 1 NZLR 386, 393, Supreme Court NZ. See pp. 22–3, above. E.g., A. Hudson, ‘Mental Incapacity Revisited’ [1986] Conv. 178. McKendrick (2010), additional online ch.1: www.oup.com/uk/orc/bin/9780199579792/ 01student/extra/pdf/mckendrick4e_extra_ch20a.pdf, accessed on 28/03/2012; ChenWishart (2010), additional online chapter: www.oup.com/uk/orc/bin/9780199570058/ 01student/01chapters/chenwishart3e_webchapters.pdf, accessed on 28/03/2012.

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minor, one’s age will normally be more readily discernible than the state of one’s mental faculties. Therefore, it is more appropriate to have a sweeping protective rule for minors, because determining the age of a co-contractor does not place too great a burden on defendants. Recognition of the need to protect security of contracts was part of the policy behind the first of the alterations in the law of mental incapacity noted above, namely, the rule, expressed in Beverley’s Case, that no man may be allowed to stultify himself by pleading his own unsoundness of mind.18 For, the original ‘doctrine of incapacity . . . acted as a restraint of trade and alienation, encouraged fraud, and led to insecurity of enjoyment’.19 The rule in Beverley’s Case clearly greatly strengthened security of contracts, but it was recognised that it went too far and ‘was also capable of bringing about injustice’.20 Therefore, the rule was changed to its present state, to strike a balance between the two extremes of the previous rules, so that, if the complainant proves that the defendant had actual or constructive21 knowledge of the incapacity, the impugned contract is voidable.22 In the Supreme Court of New Zealand case of Archer v. Cutler, McMullin J. held that knowledge was a sufficient additional factor to allow for vitiation, but was not a necessary one. For, his Honour said that, even if the defendant does not know of the complainant’s mental incapacity, the impugned contract can be set aside if substantively unfair to the complainant.23 The Privy Council in Hart v. O’Connor rejected this, holding that it was not the law in England or New Zealand.24 However, the reason McMullin J. thought that the rule existed, or at least was not precluded by authority, is important. It hints at the arguments surrounding the reason for, and effect of, the adoption of knowledge as an additional element of mental incapacity. Many of the cases cited as laying down the requirement of knowledge set the rule within the context of avoiding a fair contract.25 McMullin J. took this to mean substantively fair, and to suggest that substantively unfair contracts 18 19 21

22

23 25

(1603) 4 Co Rep. 123b. 20 Archer v. Cutler [1980] 1 NZLR 386, 396, Supreme Court NZ. Ibid. York Glass v. Jubb [1925] All ER Rep. 285, 292, per Warrington LJ; Hart v. O’Connor [1985] AC 1000, 1014, PC. Imperial Loan v. Stone [1892] 1 QB 599, 601, 602–3, per Lord Esher MR and Fry and Lopes LJJ. 24 [1980] 1 NZLR 386, 401. [1985] AC 1000, 1027. E.g., Molton v. Camroux (1848) 2 Exch 487, 503; Hassard v. Smith (1872) 6 IR EQ 429, 433.

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could be avoided without the need for proof of knowledge of the incapacity. However, their Lordships in Hart v. O’Connor rejected this interpretation, holding that references to fairness were references to procedural fairness.26 This highlights the debate concerning whether the reason for vitiation in mental incapacity is the defendant’s unacceptable conduct. Actual or constructive knowledge of the complainant’s mental incapacity is actual or constructive knowledge that the complainant is incapable of understanding the nature of the putative contract, and this necessarily amounts to actual or constructive knowledge of the absence of consent, which necessarily flows from the requisite mental incapacity: one cannot consent to what one is incapable of understanding. It is submitted that to contract with actual or constructive knowledge that the complainant is not consenting to the putative contract amounts to unacceptable conduct:27 the defendant is seeking to impose obligations he knows the complainant has not chosen to accept. The question, then, becomes whether this was the reason for adoption of knowledge to limit the plea, as the additional factor to render the absence of consent operative; and, further, whether this, therefore, makes mental incapacity a vitiating factor based upon unacceptable conduct. In Elliot v. Ince, Lord Cranworth said that preclusion of vitiation for mental incapacity unless the defendant had knowledge of it was ‘a decision of necessity [because] a contrary doctrine would render all dealings unsafe’.28 Therefore, as the High Court of Australia has noted, ‘public policy seems to be the foundation of the doctrine’ in this form.29 Of course, the rule, in altering the position in Beverley’s Case,30 actually increased, rather than limited, the scope for contracts to be impugned on the basis of mental incapacity. However, the point is that it was recognised that the two extremes of the previous rules (first, that mere proof of mental incapacity in the complainant rendered any putative contract void; second, that no one could be allowed to plead his own incapacity to avoid a contract) needed to be balanced. The policy of the law was to allow mental incapacity to be a vitiating factor, but to limit its scope.

26 27

28 29 30

[1985] AC 1000, 1027, PC. Gore v. Gibson (1843) 13 M & W 623, 626 (‘actual fraud’, per Parke B.). Cf. Wilson v. The King [1938] 3 DLR 433, 436, per Duff CJC. (1857) 7 De G M & G 475, 487. McLaughlin v. Daily Telegraph (No. 2) (1904) 1 CLR 243, 275, per Griffith CJ. (1603) 4 Co Rep. 123b.

58

mental incapacity

In this sense, the rule clearly brings mental incapacity completely within the bounds of my first category of vitiating factor: the incapacity establishes the absence of consent; and the requirement of knowledge, as a limitation of the plea, is the additional factor rendering the absence of consent operative, to ensure appropriate respect for security of contracts.31 Absence of consent infringes the fundamental general principle of voluntariness, but simply to allow this to lead to vitiation would be to replace the objective principle with subjectivity. However, the defendant’s actual or constructive knowledge of the complainant’s mental incapacity is a sound reason to allow it to be operative. Indeed, when the defendant knows, or should know, that the complainant did not consent to the putative contract, the objective principle and its residual subjective element preclude any binding agreement between the parties. Where the defendant actually knows that the complainant is incapable of understanding the nature of the putative contract, he knows that the complainant is not subjectively promising to be bound by the terms of the putative contract: one cannot subjectively make a promise to do something one is incapable of understanding. Therefore, the residual subjective element of the objective principle precludes formation of a binding agreement.32 Further, where the defendant should know that the complainant is incapable of understanding the nature of the putative contract, the reasonable person in his position would know that the complainant is not subjectively promising to be bound by it. Therefore, the objective principle would not be satisfied. As such, the development and present state of the law of mental incapacity seem inexorably to point to the conclusion that it is a vitiating factor falling perfectly within my first category. However, it must be recognised that mental incapacity renders the impugned contract voidable, not void. This is despite the fact that the rules of the objective principle and its residual subjective element suggest that the doctrine should render the putative contract void ab initio. Further, the defendant must have knowledge of the complainant’s incapacity, and it is submitted that to contract with this knowledge amounts to unacceptable conduct. There is a significant difference between, on the one hand, 31 32

See pp. 22–3, above. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694.

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knowledge necessarily establishing unacceptable conduct and, on the other, unacceptable conduct being the (or part of the) rationale of vitiation. However, some commentators and judges assert that unacceptable conduct is at least part of the reason for vitiation. Indeed, in the Supreme Court of Victoria, Hodges J. accepted33 the assertion of Story that ‘[t]he ground upon which courts of equity . . . interfere to set aside the contracts . . . of persons who are . . . non compotes mentis, is fraud’.34 Similarly, Patterson J. in Dane v. Viscountess Kirkwall said that, to avoid a contract on the basis of mental incapacity, it must be established that the defendant knew of the incapacity ‘and took advantage of it’.35 In Selby v. Jackson, Lord Langdale MR suggested that the absence of unacceptable conduct would defeat a plea of mental incapacity, because he said: [W]hen . . . it turns out that [the defendants] . . . acted fairly and disinterestedly for the benefit of [the complainant] . . . the circumstances under which the deeds were executed, become of comparatively trifling importance.36

However, crucially, his Lordship also said that there was in the case ‘no allegation that the [complainant] had not the means of understanding and was not capable of understanding the effect of that which he did’.37 This clearly negatives the possibility that the complainant was actually suffering from a sufficient mental incapacity, despite being confined to an asylum. In Browne v. Joddrell, Lord Tenterden stopped the complainant’s counsel in argument and said that there could be no successful plea of mental incapacity ‘unless it be shewn that the [defendant] imposed on the [complainant]’.38 The complainant’s counsel then admitted he had no evidence to suggest knowledge of the incapacity, so judgment was entered for the defendant. This establishes that his Lordship felt that unacceptable conduct (imposition) by the defendant was a prerequisite of the plea and that knowledge was seen as a prerequisite for establishing unacceptable conduct. This passage was referred to with approval by the Court of Exchequer in Molton v. Camroux,39 and, when the judgment in 33 34

35

36 39

Tremills v. Benton (1892) 18 VLR 607, 623. W. W. Story, A Treatise on the Law of Contracts Not Under Seal (Boston, MA: Little and Brown, 1844). (1838) 8 Car & P 679, 685. (However, note that taking advantage of the incapacity is treated as separate from contracting with knowledge of it.) 37 38 (1843) 6 Beav 192, 202. Ibid., 199. (1827) M & M 105, 105. (1848) 2 Exch 487, 502.

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that case was affirmed by the Exchequer Chamber, Patterson J. said that ‘when [the mental incapacity] was unknown to the other contracting party, and no advantage was taken . . . the defence cannot prevail’.40 In Archer v. Cutler, McMullin J. described the alteration to the rule in Beverley’s Case,41 noted above, as applying ‘when the sane party knew of the lunatic’s incapacity or took advantage of or imposed upon the lunatic’.42 His Honour said that ‘[a] contract made in those circumstances was tantamount to fraud’.43 However, in Hart v. O’Connor, the Privy Council said: [T]he validity of a contract entered into by a lunatic who is ostensibly sane is to be judged by the same standards as a contract by a person of sound mind, and is not voidable . . . by reason of ‘unfairness’ unless such unfairness amounts to equitable fraud which would have enabled the complaining party to avoid the contract even if he had been sane.44

Their Lordships, therefore, treated unacceptable conduct and knowledge as separate invalidating grounds. It is submitted that this shows that the unacceptable conduct inherent in knowledge of the incapacity is not the basis of vitiation for mental incapacity. It clearly establishes that proof of ‘equitable fraud’, which must amount to proof of unacceptable conduct and include forms of unacceptable conduct other than contracting with knowledge of an absence of consent, is not an alternative to knowledge of the incapacity. If the complainant cannot prove that the defendant had knowledge of the incapacity, he cannot succeed on the basis of mental incapacity, no matter how bad the defendant’s conduct. If he is to succeed, he must succeed on the basis of a different vitiating factor. If unacceptable conduct were the reason for vitiation in mental incapacity, this would be inappropriate. Although Hart v. O’Connor was an appeal from New Zealand, their Lordships said there was no sound reason for distinguishing New Zealand and English law in this respect.45 Therefore, it is contended that comments treating the defendant’s unacceptable conduct as the basis of vitiation derive from misinterpretation of the significance of the fact that the requirement of knowledge necessarily establishes unacceptable conduct. It is accepted that knowledge may well have been chosen as the condition to limit the plea because it establishes unacceptable conduct, but this does not mean that unacceptable conduct forms any part of the basis of vitiation. Further, 40 43

41 (1849) 4 Exch 17, 19. (1603) 4 Co Rep. 123b. 44 45 Ibid. [1985] AC 1000, 1027. Ibid.

42

[1980] 1 NZLR 386, 396.

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although the consequence of a successful plea of mental incapacity is voidability, it is submitted that this is part of the policy decision that was taken to limit the scope of the doctrine, to ensure proper respect for security of contracts, and especially to protect third parties whose title to goods acquired from the defendant depends on the validity of the impugned contract with the mentally incapacitated complainant.

2.1.3 Conclusion The rules of mental incapacity are clear, but the rationale behind those rules has become obscured. Proof of the requisite mental incapacity necessarily establishes a factual absence of consent. For, it requires that the complainant was incapable of understanding the nature of the impugned contract, and one cannot consent to what one is incapable of understanding. Further, it is submitted that knowledge was adopted as a requirement to limit the plea and balance the two extremes of the previous positions on mental incapacity: first, voidness upon mere proof of the incapacity; and, second, preventing a complainant from pleading his mental incapacity. Therefore, apart from the conclusion of voidability, mental incapacity clearly fits the rationale of vitiation in my first category: the complainant proves an absence of consent, which is rendered operative by the defendant’s actual or constructive knowledge of it. Knowledge is clearly a sufficient reason to render the absence of consent operative, because the defendant should not be able to hold the complainant to a contract to which he knows, or should know, the complainant did not consent. The fact that contracting with knowledge of the incapacity necessarily establishes unacceptable conduct by the defendant has been taken by some to suggest that the defendant’s unacceptable conduct is the basis of vitiation. However, Hart v. O’Connor shows that this is not correct,46 and my theory helps to explain why this is so. For, it explains that there must be an additional factor to render the absence of consent operative, because, without it, the law would simply be replacing the objective principle with a subjective approach. Therefore, even though knowledge necessarily establishes unacceptable conduct, this does not have to form part of the rationale of vitiation.

46

Ibid. See also p. 60, above.

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The conclusion of voidability in mental incapacity conflicts with the objective principle. Knowledge of the incapacity is knowledge that the complainant cannot understand, thus cannot consent to, the impugned contract. As such, constructive knowledge establishes that the reasonable person in the defendant’s position would have known that the complainant was not promising to be bound by the terms of the alleged objective agreement, so there actually was no objective agreement. Similarly, actual knowledge establishes that the defendant knew that the complainant was not promising to be bound, so he cannot hold the complainant to the apparent objective agreement.47 Therefore, as a pure matter of theory, it should be recognised that a successful plea of mental incapacity renders a putative contract void. For the law to adopt voidability as the consequence of a successful plea of mental incapacity is acceptable, but it must be made clear that policy is the basis of this decision.

2.2 The US Restatement (Second) of Contracts } 12. Capacity to Contract (1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances. (2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is (a) under guardianship, or (b) an infant, or (c) mentally ill or defective, or (d) intoxicated

} 13. Persons Affected by Guardianship A person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.

47

Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694.

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} 14. Infants Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday. } 15. Mental Illness or Defect (1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition (2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires. } 16. Intoxicated Persons A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication. (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction.

2.2.1 Introduction Unlike the PICC, PECL and DCFR, the Restatement deals comprehensively with contractual capacity. Section 13 deals with the capacity of persons whose property is under guardianship. In such cases, the complainant has no contractual capacity whatsoever. Therefore, he cannot make any contract at all (i.e., any putative contract he attempts to make is void ab initio). It has been argued that the same is true in English law if the court has made a declaration of incapacity against the complainant: i.e., the complainant has no contractual capacity in relation to any transaction falling within the declaration.48 Therefore, it can clearly be

48

See p. 53, above.

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seen that the Restatement and English law adopt commensurate approaches to these very similar areas of the law. Section 14 of the Restatement deals with the incapacity of minors (‘infants’). It will not be considered in depth, because it has been explained that English law’s treatment of minors’ incapacity is heavily based upon policy.49 While similar policy considerations are likely to be influential in America, such considerations are outside the scope of this work. As with English law, an operative mental incapacity renders the impugned contract voidable under the Restatement.50 Although the Restatement deals with mental incapacity caused by intoxication and “general” mental incapacity in separate sections, it requires the same standard of mental incapacity: an inability reasonably to understand the nature of the impugned contract. It will be contended that, despite inclusion of the element of reasonableness, this is the same standard of mental incapacity required in English law. Therefore, it will be argued that, as in English law, vitiation for mental incapacity under the Restatement is based upon an absence of consent.51 However, the Restatement requires knowledge of an incapacity caused by intoxication before the impugned contract is voidable, but does not require any additional element to render the absence of consent operative when dealing with non-intoxication mental incapacity. It will be explained that this reflects a desire to limit avoidance on the grounds of intoxication, due to the belief that incapacity caused by voluntary intoxication is less excusable than incapacity caused by a mental condition.52 Furthermore, the Restatement provides a potential defence in relation to non-intoxication mental incapacity, which, if successfully pleaded, precludes avoidance of the contract on this basis. This defence applies to wholly or partly executed contracts, or to situations in which avoidance would be unjust, but only if the contract is substantively fair and the defendant had no actual or constructive knowledge of the mental incapacity.53 Although it places the burden of proof on the defendant, this defence goes some way towards limiting the plea on non-intoxication mental incapacity. Nonetheless, the mere fact that the defendant is unable to establish the defence (which will normally mean that he cannot prove the contract was substantively fair

49 52

50 51 Ibid. }}15 and 16. See pp. 65–72, below. Restatement (Second), Volume I, 47. See also p. 271, below.

53

}15(2).

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and that he did not have any form of knowledge of the incapacity) does not necessarily mean that there was a sufficient reason to render the absence of consent operative.54 Therefore, it will be contended that the treatment of non-intoxication mental incapacity under the Restatement can be criticised as too wide in principle, because it does not require proof of an additional factor to render the absence of consent operative and thereby does not afford sufficient weight to security of contracts and the objective principle.55 Nonetheless, it must be recognised that this might well reflect a legitimate policy of protection of the vulnerable; and, even though it is submitted that such a degree of protection seems too wide, it is indirectly offset, to a degree, by the conclusion of voidability, rather than voidness, because the right to rescission can be lost in certain circumstances. As such, one must balance the pure theoretical analysis of mental incapacity under the Restatement with the underlying policy considerations, which play an important role in this area of the law. Comment (c) to section 12 of the Restatement deals with mental (or physical) incapacity sufficient to preclude formation of a contract: that is, incapacity effectively rendering a putative contract void.56 This form of incapacity exists when the complainant lacks the intention to do the act that is interpreted, objectively (and subjectively by the defendant), as amounting to consent.57 It will be explained that, while this form of incapacity is, superficially, wider than a relevant mental incapacity under sections 15 and 16, the fundamental basis and effect of the different forms of incapacity is the same: namely, they each establish an absence of consent. It will be argued that, therefore, these different forms of incapacity should be treated in the same way.58

2.2.2 The absence of consent Both in English law and under the Restatement, the consequence of an operative mental incapacity (including mental incapacity by reason of intoxication) is to render the impugned contract voidable, not void. 54 56 57

58

55 See pp. 269–70, 72–4, below. See pp. 72–4, below. Restatement (Second), Volume I, 31. The Restatement uses the term ‘assent’, which refers not only to pure subjective consent, but to the situation where the complainant knows or ought to know that the defendant interprets the conduct as subjective consent even if it does not, strictly speaking, amount to subjective consent (e.g., }19(2)). See pp. 68–9, below.

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Furthermore, both English law and the Restatement have similar tests for establishing the requisite incapacity. As explained above, the essence of the requirement in English law, whatever the particular phrase used, is that the complainant must be incapable of understanding the nature of the impugned contract, and this necessarily establishes that he cannot have given subjective consent to the contract.59 Under the Restatement, the complainant must be incapable of a reasonable understanding of the nature of the contract.60 Addition of the word ‘reasonable’ might seem to render the Restatement wider than English law, because it would suggest that a complainant can succeed under the Restatement if he has some, but not a reasonable, understanding of the impugned contract; whereas this would not be sufficient in English law. However, it must surely be the case that, if the complainant had some understanding of the nature of the contract, but this understanding was not a reasonable one, English law would accept that the complainant had proved a relevant mental incapacity. Indeed, it is surely strongly arguable that, if the complainant does not have reasonable understanding of the impugned contract, he cannot really be said to understand the nature of that contract at all. Certainly, there is no case in English law in which a plea of mental incapacity has been rejected because the complainant had some marginal, but unreasonable, understanding of the contract. Therefore, it can be seen that the requisite incapacity in English law and under the Restatement necessitates an absence of consent; yet, for both, when the incapacity is rendered operative, the contract is rendered voidable, not void. It has been explained why it is contended that an absence of consent, if operative, should, as a pure matter of theory, render a putative contract void, not merely voidable.61 Moreover, it has been explained that the consequence of voidability, as opposed to voidness, in English law derives from the policy tensions at play during the development of the law of mental incapacity.62 In particular, it was submitted that the consequence of voidability was favoured by English law in order to support the principle of security of contracts and to protect any third party whose title to property depended upon the impugned contract 59 60

61

See p. 55, above. }15(1)(a). The alternative ground of avoidance for mental incapacity under }}15(1)(b) and 16(b) does not necessarily require an absence of consent and is considered below: see pp. 70–1, below. 62 See pp. 19–21, above. See pp. 53–62, above.

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between complainant and defendant. However, it has also been argued that, while this policy might, in itself, be acceptable, the courts should clearly recognise that policy is the basis of the decision, to ensure a clear and proper understanding of the theory and principle underpinning the law.63 In particular, it is important to recognise the fundamental distinction between absence and impairment of consent. For, it is has been contended that this distinction should be given effect in the law by requiring that, before it can be operative, an impairment of consent must have been brought about by the defendant’s unacceptable conduct; whereas an absence of consent, representing an absence of voluntariness, should not require unacceptable conduct before it can be rendered operative.64 It is submitted that the conclusion of voidability under the Restatement is also based upon the policy of security of contracts. This is highlighted by section 15(2), which precludes avoidance if the contract has been performed (in whole or in part) or the circumstances have changed to such a degree that the court concludes it would be ‘unjust’ to allow avoidance, provided that the contract is substantively fair (‘made on fair terms’) and the defendant has no knowledge of the incapacity.65 Limiting the right to avoidance of the contract supports the fundamental concept of security of contracts, so it is clear that this policy is recognised as important under the Restatement, especially when dealing with mental incapacity. Indeed, Comment (a) to section 15 specifically refers to the policy (using the label ‘security of transactions’) and notes the need to balance it with the desire to protect mentally incapacitated persons. Further, the Comment discusses the different weight that has been applied to each policy throughout the development of mental incapacity, tracing the different conclusions that have historically been applied to the doctrine, ranging from voidness ab initio upon mere proof of the incapacity to precluding a mental incapacity from having any effect on the validity of a contract,66 mirroring the historical development in English law.67 Applying the conclusion of voidability, rather than voidness, also clearly supports the policy of security of contracts and seeks to balance this with the need to protect the mentally 63 65

66

64 See pp. 26–8, above. See pp. 19–26, above. }15(2) does not apply if the mental incapacity consists of intoxication. In the case of vitiation on the basis of incapacity caused by intoxication, knowledge of the incapacity is always required: see pp. 73–4, below. 67 Restatement (Second), Volume I, 42. See pp. 53–4, 33, above.

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incapacitated: a void (putative) contract cannot ever have existed as a matter of law so cannot be affirmed or ever lead to contractual obligations; whereas a voidable contract is fully valid and binding unless avoided, at which point, the mentally incapacitated party is protected. Promoting security of contracts, in general, and adopting voidability as the consequence of incapacity in particular, are both valid policy aims. However, similarly to English law (and the position under the PICC, PECL and DCFR in relation to mistake),68 it is submitted that the Restatement should make it clear that the decision to adopt the consequence of voidability was one based upon policy. If this were done, it would help to maintain the clear and rigorous theoretical distinction between absence and impairment of consent, which does exist under the Restatement.69 If this distinction is not to have any effect, the Restatement must explain why. Comment (c) to section 12 states that, ‘if [the complainant’s] mental disability is so extreme that he cannot form the necessary intent [to engage in the conduct that is objectively interpreted as consent to the putative contract], there is no contract’.70 It is clear that this form of mental incapacity goes beyond the standard situation, where the complaint intended to do the act that was objectively interpreted as consent to the contract but was unable to understand the nature of that contract. Indeed, one can see the superficial logic of distinguishing between situations where the complainant did not even intend to do the act objectively interpreted as consent to a putative contract and the situation where he intended to do that act, but did not intend its consequences (because he could not understand the nature of those consequences: i.e., he could not understand the nature of the contract). However, even in the former situation, the reason that the complainant’s conduct does not lead to a binding contract must be that he has not subjectively consented to the putative contract; it is simply that this the absence consent to the putative contract is established by proof of an absence of consent to 68

69

70

See pp. 26–8 (generally), 60–1 (mental incapacity), 143–4 (voidability under the codes), above. For, it is contended that the analysis in this chapter will show that mental incapacity and mistake under the Restatement are both based upon absence of consent from the complainant; while misrepresentation, duress and undue influence are all based upon impairment of the complainant’s consent by the defendant’s unacceptable conduct: see pp. 65–72 (mental incapacity); 159–61 (mistake), 190–211 (misrepresentation), 236–50 (duress), 273–8 (undue influence), below. Restatement (Second), Volume I, 31.

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doing the act objectively interpreted as contractual consent. It makes no sense to distinguish between these different types of absence of consent to a contract by providing for voidness (or no formation of any contract) in one situation but voidability in the other, unless it is assumed that a complainant suffering from the former, more extreme type of mental incapacity is weaker, and thus deserving of greater protection, than a complainant suffering from the latter form of mental incapacity. While this might be so in some cases, there seems to be no reason why it will necessarily be so in all, or even the majority of, cases. Under section 15(2) of the Restatement, avoidance is precluded if the defendant proves: (1) that he did not have any knowledge of the incapacity and that the impugned contract was substantively fair (‘made on fair terms’); and either (2) that the contract has been performed in whole or in part; or (3) circumstances have changed to such an extent that it would be unjust to allow avoidance. The relevance of knowledge and substantive (im)balance highlights another link to the discussion of mental incapacity in English law. For, knowledge of the incapacity is a prerequisite of any successful plea of mental incapacity in English law; and this means that proof of the fact that the impugned contract was substantively unfair/imbalanced is not an alternative to proof of such knowledge.71 Under the Restatement, neither knowledge of the mental incapacity, nor substantive unfairness in the impugned contract is a prerequisite for the complainant to establish the prima facie right to avoidance.72 It is submitted that, therefore, there is a clear need to limit the plea of mental incapacity in some way, to prevent mere proof of the incapacity necessarily being sufficient to render the impugned contract voidable.73 The requirements of section 15(2) serve this purpose to a degree, but the burden to prove these elements lies on the defendant. If the defendant cannot prove these elements, the contract is voidable by the complainant, even though there has not actually been proof of any additional element to render the absence of consent operative.

71 72

73

See pp. 56–7, above. Unless, the incapacity was caused by intoxication, in which case, knowledge of the incapacity is required: }16. It has been contended that this is why all forms of vitiating factors based upon an absence of consent should require proof of an additional factor to render the absence of consent operative; and all forms of vitiating factor based upon an impairment of consent should require proof that the impairment of consent was caused by the defendant’s unacceptable conduct: see pp. 21–6, above.

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mental incapacity

Nonetheless, it is clear that the purpose of section 15(2) is to limit the right to avoidance, thereby giving weight to the policy of security of contracts. It is submitted that, not only does the reversal of the burden of proof under section 15(2) cause potential problems, but the rule makes too much of the distinction between completely executory contracts and contracts that have been executed in whole or in part, because section 15(2) does not apply to the former category of contracts (unless circumstances have changed to such a degree that it would be unjust to allow avoidance), thereby rendering them easier to avoid. It is submitted that this is inappropriate, particularly because there is no provision for section 15(2) to apply where the defendant has (reasonably) detrimentally relied upon an executory contract in some way other than by rendering partial or complete performance.74 Use of the wide concept of “unjustness” in section 15(2) can lead to uncertainty, because it cannot be clearly determined when it would be unjust to allow avoidance. Although it is submitted that the clearer position in English law (namely, that proof of mental incapacity and knowledge is sufficient to allow for vitiation)75 is preferable, it must be recognised that, despite the potential uncertainty, first, provision of a wide discretion for the courts accords with a general policy of the Restatement;76 second, a general prohibition on avoidance where it would be unjust accords with a general duty of good faith in the performance and enforcement of contracts;77 and, third, it would be perfectly possible for the courts to provide clear guidance in authority to determine when it would be unjust to allow avoidance. Sections 15(1)(b) and 16(b) allow the complainant to avoid the impugned contract if he was unable reasonably to control his actions in relation to the transaction, provided that the defendant had at least

74

75

76

It is submitted that }15(2) should not apply to partly or wholly executed contracts, either, and, instead, the complainant should have to prove an additional factor to render the absence of consent operative. However, if the section is to apply to partly or wholly executed contracts, it should apply to executory contracts if the defendant has reasonably detrimentally relied upon the contract. It is reiterated that proof of knowledge should merely be one potential additional factor to render the absence of consent operative and that a successful plea of mental incapacity should, as a pure matter of theory, render a putative contract void ab initio (see pp. 53–62, above), but the basic formula of “mental incapacity plus additional factor” is clear and logical. 77 See, e.g., }}154(c), 158(2). }205.

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constructive knowledge (‘reason to know’) of the complainant’s condition. These provisions allow avoidance even if the complainant fully understood the nature of the impugned contract. To the extent that the complainant’s inability to act in a reasonable manner caused him apparently (objectively) to consent to the contract when he did not intend to do so, the relevant mental incapacity will establish an absence of consent even if the complainant fully understood the impugned contract. However, it seems that the relevant condition need not extend to this degree,78 and, in such cases, the complainant would be able to succeed without proving an absence of consent. Nonetheless, even here, the complainant’s consent would surely at least be impaired. It is contended that, in the case of impairment of consent, voidability would be the appropriate conclusion. Indeed, it is submitted that, if the complainant proves an inability to act in a reasonable manner in relation to the impugned transaction and that the defendant had at least constructive knowledge of this fact, he will have proved what amounts to unconscionability in English law. For, the complainant’s mental condition must be such as impairs his ability to look after his own interests, and for the defendant to enter into the contract with knowledge of this fact would surely amount to at least unconscionable passive receipt.79 The fact that the complainant’s mental incapacity was caused by intoxication does not affect the requisite standard of incapacity: the complainant must still prove an inability reasonably to understand, or an inability to act in a reasonable manner in relation to, the transaction.80 However, if the incapacity was caused by intoxication, the contract is only voidable if the defendant had at least constructive knowledge of the complainant’s mental incapacity. Comment (a) to section 16 confirms that this is because ‘voluntary intoxication not accompanied by any other disability has been thought less excusable than mental illness’.81 Therefore, mental incapacity by reason of intoxication is treated similarly under the Restatement and in English law. Indeed, it is treated similarly to mental incapacity as a whole under English law.

78

79

80

For example, an inability to insist upon a reasonable price would surely suffice under }} 15(1)(b) and 16(b) but would not necessarily establish an absence of consent. See pp. 281–4 (relevant weakness in unconscionability), 288–9 (knowledge of weakness relevant to unconscionable passive receipt), below. 81 Restatement (Second), Volume I, 47. Ibid.

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It is submitted that this position, requiring proof of the mental incapacity (which establishes an absence of consent) and that the defendant had knowledge of it, is preferable to the position in relation to the treatment of non-intoxication mental incapacity under section 15. Although the former position still provides for the conclusion of voidability without recognising the distinctive nature of an absence of consent, it follows the clear formula of requiring proof of the mental incapacity and an additional factor to render it operative, rather than allowing avoidance upon mere proof of the mental incapacity, subject to the possible defence of partial or complete performance, or the unjustness of avoidance, coupled with an absence of knowledge of the incapacity and a substantively fair transaction. Both formulas seek to balance the need to protect a mentally incapacitated person, by allowing him to avoid a contract entered into by reason of his incapacity, with the need to protect the security of contracts,82 but it is submitted that the former applies a more logical, certain methodology.

2.2.3 Knowledge/an additional factor to render the absence of consent operative When dealing with the general category of mentally incapacitated persons, rather than with those whose mental incapacity has been caused by intoxication, the Restatement does not require proof of an additional factor to render the absence of consent operative. The complainant can succeed simply by proving that he was incapable of any reasonable understanding of the transaction. As has been noted above,83 if the contract has been performed, completely or partially, or if circumstances have changed to such a degree that it would be unjust to allow avoidance, the contract will not be voidable if it can be proved that it was substantively fair and that the defendant had no actual or constructive knowledge of the complainant’s incapacity.84 Therefore, in relation to executed and partly executed contracts, the fact that the defendant had knowledge of the incapacity and that the contract was substantively unfair are both, effectively, potential alternative additional factors. This is similar to the position proposed by McMullin J. in Archer v. Cutler85 but rejected by the Privy Council in Hart v. O’Connor.86 However, under the Restatement, the burden of proof would be on the defendant to 82 85

83 Ibid., 42. See pp. 67–8, above. [1980] 1 NZLR 386, Supreme Court NZ.

84

}15(2). 86 [1985] AC 1000.

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establish that neither factor is present (and that the contract is, therefore, not voidable), rather than upon the complainant to prove that one was present (and that the contract is, therefore, voidable). It is of course possible in any given case that neither factor was actually present but the defendant is unable to prove this. Even though this could be interpreted to mean that, as a matter of law, one or both of the facts is taken to be established, in reality, the contract would be avoided despite the absence of any additional factor. Furthermore, it must be reiterated that the limitation on the right to avoid does not apply at all to wholly executory contracts, unless it can be proved that it would be unjust to allow the complainant to avoid the contract. If the contract is wholly executory, mere proof of the mental incapacity will suffice to avoid the contract under section 15(1)(a), subject to the ill-defined “unjustness of avoidance” exception (which must be coupled with proof that the contract is substantively balanced and that the defendant had no knowledge of the incapacity). It is submitted that this exception will not apply simply because there is no additional factor that would be sufficient to render the complainant’s absence of consent operative.87 Certainly, it cannot apply simply because the defendant has no knowledge of the complainant’s mental incapacity and the contract is substantively balanced, because this would render the “unjustness” exception obsolete. It is contended that allowing vitiation of a contract, even if wholly executory, upon mere proof of the mental incapacity is inappropriate, as an abrogation of the objective principle,88 which is recognised as the foundation of contracts under the Restatement.89 If the complainant’s incapacity was caused by intoxication, the contract is not voidable unless the complainant has at least constructive knowledge of the incapacity.90 The same is true if the complainant’s incapacity (whether caused by intoxication or not) consisted of an inability to exercise reasonable control over his conduct with relation to the transaction.91 This reflects, first, that a voluntarily intoxicated complainant is less worthy of protection than one suffering from a 87

88 89

90

Such as the defendant’s knowledge or inducement of the incapacity or the defendant’s own absence of consent: see pp. 21–3, above. Ibid. E.g., }19(2) (any intentional conduct amounts to a manifestation of assent if the party engaging in that conduct ‘has reason to know that the other party may infer from his conduct that he assents’). 91 92 }16. }}15(1)(b) and 16. Restatement (Second), Volume I, 47.

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genuine mental illness;92 and, second, that an inability reasonably to control one’s actions, while understanding the nature of the consequences of those actions, is considered a less severe weakness than an inability reasonably to understand the contract, so that, again, it is deemed that a lesser degree of protection is appropriate. It is submitted that the position regarding mental incapacity caused by intoxication, or consisting of an inability to exercise reasonable control over one’s actions, is preferable to the general position regarding mental incapacity, because it requires proof of the mental incapacity and an additional factor to render this operative. Nonetheless, it is submitted that the reasoning behind requiring an additional factor in the former class of cases is inappropriate. The reason for the requirement seems to be based upon how worthy, or in need, of protection the complainant is, rather than upon the fundamental contractual policy of security of contracts and the objective principle. There is no doubt that protection of the vulnerable is a legitimate aim for contract law, and the law must generally seek to offer greater protection to those who are more vulnerable. However, it is submitted that, if the Restatement seeks to achieve this, it should be done by requiring knowledge of even a general mental incapacity, to ensure proper respect for security of contracts and the 93

E.g., substantive unfairness, to provide evidence of the fact that the defendant has acted in an unacceptable way in entering into a substantively unfair contract with a person he knows suffers from some form of mental weakness.

objective principle, and then requiring a complainant suffering from a lesser incapacity, or from an incapacity caused by voluntary intoxication, to prove a further element93 before being entitled to relief.

3 Non est factum in English law

3.1

Introduction

Non est factum is a plea applicable only to documents. If successfully established, it renders the impugned document, thus the putative contract allegedly effected by it, void.1 The main points of this discussion will be, first, that the plea is based upon proof of the complainant’s absence of consent to the putative contract. The essence of the plea is that the impugned document is not the complainant’s document, because he did not intend to execute it. If the complainant did not intend to execute the impugned document, he did not intend to make, or consent to, the putative contract allegedly effected by it. This might be because he did not actually sign the document or because he signed it believing its effect was fundamentally different from its actual effect.2 The actual effect of the document, if upheld, is to conclude the putative contract, and in proving that he intended an act fundamentally different from this, the complainant proves either that he did not intend to execute a document of any contractual effect, or that he intended to execute a document of a different contractual effect. If he did not intend a document of any contractual effect, he did not intend to make, or consent to, any contract; if he intended to execute a document of a different contractual effect, he intended to make, and consented to, a contract different from the putative contract. Either way, he did not consent to the putative contract. Second, non est factum does not actually recognise the need for an additional factor to render the proven absence of consent operative. The complainant must prove that he was not careless in executing the impugned document under a mistake,3 but this is insufficient to render the absence of consent operative; it is merely a policy limitation of the 1

Saunders v. Anglia BS [1971] AC 1004, HL.

75

2

Ibid.

3

Ibid.

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plea. It will be shown that a complainant cannot normally prove an absence of carelessness unless he proves either that he suffered from a weakness impairing his ability to understand the impugned document or that he was misled as to the purport of the document. However: (1) it remains theoretically possible, if extremely unlikely, that the complainant can prove an absence of carelessness even without proving either of these facts; and (2) weakness in the complainant is not a sufficient reason to render an absence of consent operative, anyway. Third, there is debate as to whether the requirement of proof of an absence of carelessness applies only when the complainant raises the plea against an innocent third party. It will be argued that the requirement should apply in all cases, as a policy decision to prevent the complainant from relying on his own carelessness, but should be negated if the complainant proves that the person against whom he raised the plea knew of his absence of consent or fraudulently or negligently induced it. Fourth, it is clear that, if the complainant suffers from a weakness impairing his ability to understand the impugned document, this is relevant to the plea.4 There is some suggestion that it is actually a prerequisite of the plea, but it will be shown that this is not correct. Finally, some judicial statements suggest that the complainant must prove that his mistake was unacceptably induced by the defendant,5 but it will be shown that this is not required.

3.2

The underlying rationale of vitiation

It is submitted that non est factum is the doctrine in relation to which it has been most clearly accepted that the rationale of vitiation is the complainant’s absence of consent.6 For example, in Foster v. Mackinnon, in a passage cited with approval in Saunders v. Anglia BS,7 Byles J. said that, when non est factum is established, the putative contract ‘is invalid . . . on the ground that the mind of the signer did not accompany the signature’.8 Further, Lord Wilberforce, in the Saunders case, said that ‘it is the lack of consent that matters, not the means by which this result 4 5

6 7 8

Ibid. E.g., Hasham v. Zenab [1960] AC 316, 335, PC; Mercantile Credit v. Hamblin [1965] 2 QB 242, 268, 280, per Pearson and Salmon LJJ. Cartwright (2007), 454; Furmston (2006), 322–3; Treitel (2007), 357. [1971] AC 1004, 1020, 1026, HL, per Lords Hodson and Wilberforce. (1869) 4 CP 704, 711.

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was brought about’,9 and that, in struggling to set the appropriate requirements of the plea, ‘the courts were groping for the test of what should enable a man to say that the document was not his document, his consent no consent, the contract no contract’.10 His Lordship then said: How, then, ought the principle, on which a plea of non est factum is admissible, to be stated? In my opinion, a document should be held to be void (as opposed to voidable) only when the element of consent to it is totally lacking.11

Viscount Dilhorne, again in the Saunders case, said that the difference between the putative contract and the intended act of the complainant must be such ‘that it was never the [complainant’s] intention to execute the document’.12 Indeed, there are many judicial statements asserting that non est factum requires proof that the complainant did not intend to execute the impugned document.13 If the complainant did not intend to execute the impugned document, he did not intend to make the putative contract allegedly effected by it. It does not matter whether this is because he did not intend to execute a document of any contractual effect or because he intended to execute a document having a different contractual effect. There are other judicial statements referring not merely to the absence of an intention to execute the impugned document, but to the absence of an intention to make, and an absence of consent to, the putative contract.14 However, an absence of consent to the impugned document is necessarily an absence of consent to the putative contract allegedly effected by it. Those statements referring to an absence of consent to the putative contract merely express the conclusion to be drawn from proof of an absence of an intention to execute the impugned document. Therefore, it can be clearly seen that case law accepts that the basis of non est factum is the complainant’s absence of consent to the putative contract. Furthermore, the plea renders the putative contract void.15 9 13

14

15

10 11 12 [1971] AC 1004, 1026, HL. Ibid., 1025. Ibid., 1026. Ibid., 1022. Vorley v. Cooke (1857) 1 Giff 230, 236, per Stuart VC; Foster v. Mackinnon (1869) 4 CP 704, 713; National Provincial Bank of England v. Jackson (1886) 33 ChD 1, 10, per Cotton LJ; Carlisle and Cumberland Banking Co. v. Bragg [1911] 1 KB 489, 495, per Buckley LJ; Lloyds Bank v. Waterhouse [1993] 2 FLR 97, 114, per Purchas LJ. Lewis v. Clay (1897) 67 LJQB 224; [1897] All ER Rep. Ext 1738, 1741, 1742; Carlisle and Cumberland Banking Co. v. Bragg [1911] 1 KB 489, 497, Kennedy LJ; DPP for Northern Ireland v. Lynch [1975] AC 653, 695, HL, per Lord Simon. See also Petelin v. Cullen (1975) 132 CLR 355, 359, HCA. Saunders v. Anglia BS [1971] AC 1004, HL.

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Additionally, in the classic case, the defendant fraudulently induced the complainant’s mistake, or at least had knowledge of the fact that the complainant believed he was performing an act the effect of which was fundamentally different from the act of making the putative contract (which amounts to knowledge of the absence of consent). It has been explained that both the defendant’s (1) unacceptable inducement and (2) knowledge, of the complainant’s absence of consent are sufficient additional factors to render this operative.16 As such, non est factum seems to fit my first category of vitiating factor perfectly. However, it will be shown that neither unacceptable inducement, nor knowledge, of the absence of consent is a prerequisite of the plea. Weakness in the complainant or unacceptable inducement of the mistake, and thus of the absence of consent, by the defendant might be de facto alternative requirements. For, the House of Lords in the Saunders case noted that a complainant will not normally be able to prove that he was not careless unless he proves either that he suffered from a relevant weakness or that he was tricked into believing his act would be of fundamentally different effect from making the putative contract. However, their Lordships expressly left this possibility open.17 Further, the unacceptable inducement of the absence of consent could be by a third party, without the defendant having any knowledge of, or responsibility for, it, and this would not be a sufficient additional factor to render the absence of consent operative as against the defendant. Similarly, it is submitted that the complainant’s weakness is not sufficient to render an absence of consent operative. The weak must be protected from exploitation, but protection of the weak per se, without the defendant possessing any knowledge of the weakness, goes too far. The fact that is has not be recognised that non est factum should require an additional factor to render the absence of consent operative casts no doubt on the fact that the underlying rationale of vitiation is the complainant’s absence of consent, but it does represent a significant problem with the plea. For, effectively, it means that the plea can simply override the objective principle. It is submitted that this is why non est factum can be criticised as too wide. As a matter of fact, this might not cause many problems, because the plea normally arises in cases where the defendant’s conduct or state of knowledge provides a sufficient 16 17

See pp. 21–3 (generally), 29–30 (knowledge), 35 (unacceptable inducement), above. [1971] AC 1004, 1016, 1021, HL, per Lord Reid and Viscount Dilhorne. See also p. 87, below.

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reason to render the absence of consent operative. Nonetheless, it is a theoretical problem with the plea, which my theory highlights. Further, my theory provides the solution to the problem, by showing why proof of an additional factor to render the absence of consent operative is required, and by highlighting what are the relevant additional factors.

3.3

The elements of non est factum 3.3.1 Introduction

Non est factum has two prerequisites, which were firmly established by the House of Lords in the Saunders case.18 First, the complainant must prove that he did not intend to execute the impugned document. He can do this by proving either that he actually did not execute it, or that he executed it believing its effect was sufficiently different from its actual effect that his intended act was contractually different from the act of executing the impugned document. This establishes that he did not consent to the putative contract. Second, he must, at least against innocent third parties, establish that he was not careless. It is also clear that a weakness in the complainant affecting his ability to understand the impugned document, and trickery of the complainant inducing his mistaken belief, are relevant. It is contended that neither is a prerequisite per se, but that, as a matter of fact, the complainant will rarely be able to prove an absence of carelessness unless one or both of these elements is present. Therefore, the main contentious issues concerning the elements of the plea are: (1) the degree of difference between the complainant’s intended and actual acts necessary to establish an absence of consent; (2) whether the complainant must in all cases prove an absence of carelessness; (3) the role of a relevant weakness; and (4) whether unacceptable conduct inducing the mistaken belief is a prerequisite.

3.3.2 Absence of consent: the requisite degree of difference It has already been shown that the basis of relief for a successful plea of non est factum is the complainant’s absence of consent.19 It will also be shown that the test for a relevant weakness laid down in the Saunders case requires an inability to understand, without explanation, the 18

[1971] AC 1004, HL.

19

See pp. 76–9, above.

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purport (nature and effect) of the impugned document.20 Therefore, unless an accurate explanation is given, a complainant suffering from a relevant weakness cannot have consented to the putative contract supposedly created by execution of the impugned document: one cannot consent to that which one cannot understand. Yet the test for the requisite degree of difference between what the complainant thought he was doing and what he was actually doing by executing the impugned document also establishes an absence of consent. For, it requires that the difference is so great that an intention to do the one act cannot properly be equated with an intention to do the other: that is, consent to the intended contract (or non-contractual act) cannot be properly equated with consent to the putative contract. For example, an intention to witness a signature as opposed to an intention to sign a promissory note;21 or an intention to sign insurance documents as opposed to an intention to execute a guarantee.22 As such, it might seem that there is doubt as to exactly which element establishes the absence of consent. However, it will be shown that a relevant weakness is not a prerequisite, so this cannot be the element establishing the necessary absence of consent.23 A sufficient degree of difference between the nature and effect of the intended act and the nature and effect of executing the impugned document is, however, a prerequisite. Therefore, this element is the one which establishes the absence of consent that is the basis of vitiation. The House of Lords in the Saunders case used various expressions to describe the requisite degree of difference. For example, ‘“fundamental” or “serious” or “very substantial”’;24 ‘entirely . . . or fundamentally’ different;25 ‘essentially different in substance or in kind’; ‘basically or radically or fundamentally’ different;26 ‘fundamentally . . . or radically . . . or totally’ different.27 However, whatever phrase is used, the essence is that the difference is so serious that the nature and effect of what the complainant intended to do is different from the nature and effect of execution of the impugned document (i.e., from making the putative contract). Therefore, an intention to do the former necessarily precludes an intention to do the latter. 20 21 22 23 25 27

[1971] AC 1004, 1016, 1034, HL, per Lords Reid and Pearson. See also pp. 85–8, below. Lewis v. Clay (1897) 67 LJQB 224; [1897] All ER Rep. Ext 1738. Carlisle and Cumberland Banking Co. v. Bragg [1911] 1 KB 489, CA. 24 See pp. 85–8, below. [1971] AC 1004, 1017, per Lord Reid. 26 Ibid., 1022, per Viscount Dilhorne. Ibid., 1026, per Lord Wilberforce. Ibid., 1039, per Lord Pearson.

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Case law establishes that this element is the basis of the requisite absence of consent. For example, Lord Wilberforce said that, in seeking to define the appropriate test for the requisite degree of difference, ‘the courts were groping for the test of what should enable a man to say that the document was not his document, his consent no consent, the contract no contract’.28 Further, his Lordship said: How, then, ought the principle, on which a plea of non est factum is admissible, to be stated? In my opinion, a document should be held to be void (as opposed to voidable) only when the element of consent to it is totally lacking, that is, more concretely, when the transaction which the document purports to effect is essentially different in substance or in kind from the transaction intended.29

Before the Saunders case, the test for the requisite degree of difference was too formalistic to necessitate an absence of consent. In Howatson v. Webb, Warrington J., in a judgment unanimously confirmed on appeal,30 held that the plea did not succeed.31 In this case, the complainant executed mortgage deeds in relation to certain property held by him as nominee for the defendant, in the belief that they were mere transfers of the property. The ratio of the decision was taken to be that a mistaken belief regarding the contents of the impugned document would not suffice, but a mistake as to its character and class would.32 Lord Denning MR in Gallie v. Lee (sub nom Saunders v. Anglia BS) correctly noted that this was an artificial distinction.33 His Lordship gave the example of the difference between a guarantee and a bill of exchange for £1,000 (character and class) and the difference between a bill of exchange for £100 and a bill of exchange for £10,000 (contents).34 By any sensible test, the latter mistake is more serious. Therefore, the House of Lords in the Saunders case was clearly correct to assert that this was an inappropriate test. Indeed, Viscount Dilhorne noted35 that it is doubtful whether Warrington J. intended to make such a distinction the true and complete test. For, what the judge actually held, on interpretation of National Provincial Bank of England v. Jackson,36 was that, when a complainant knows that the document he executes deals with the property with which it actually deals (i.e., when he intends to deal with that property), a difference as to contents is, no

28 32 36

29 30 Ibid., 1025. Ibid., 1026. [1908] 1 Ch 1, CA. 33 34 Ibid., 549. [1969] 2 Ch 17, 32. Ibid., 31–2. (1886) 3 ChD 1, CA.

31 35

[1907] 1 Ch 537. [1971] AC 1004, 1022.

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matter how serious, insufficient. However, even adding this additional element, the test is too formalistic, because it fails to deal with the essence of non est factum: the absence of consent. Knowledge that the impugned document deals with the property with which the complainant intended to deal may be relevant to determining whether there is an absence of consent, but, even added to the distinction between character and class, on the one hand, and contents, on the other, it is not necessarily conclusive. The test adopted in the Saunders case, however, goes to the root of non est factum by requiring an absence of consent.

3.3.3 Carelessness The law must impose restraints upon the possibility of avoiding a contract because of a carelessly made mistake. This is recognised in both common mistake37 and non est factum,38 where the complainant must prove that he was not careless in being mistaken. Although carelessness connotes an objective standard, it is inappropriate to apply a completely objective standard, expecting, for example, the same factual standard of care from one who is mentally impaired and from a complainant of full age and understanding. For example, in the Saunders case, an elderly woman inexperienced in property transactions executed a document assigning her leasehold interest to the defendant, but believing she was making a gift of it to her nephew. Viscount Dilhorne felt that it was inappropriate to require the same factual standard of care from her as would be required from an experienced businessman.39 Further, Lord Reid said that complainants suffering from some weakness are ‘not excuse[d] . . . from taking such precautions as they reasonably can’.40 As such, the appropriate standard of care is such as can be reasonably expected from the reasonable person in the complainant’s position and circumstances. Foster v. Mackinnon introduced the relevance of whether or not the complainant had been careless (or ‘negligent’, as was the word there used) in executing the impugned document. The Court of Common Pleas upheld the trial judge’s direction that the verdict must be for the complainant if his signature was induced by fraud, with the belief that he 37

38 39

Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703. Saunders v. Anglia BS [1971] AC 1004, HL. 40 Ibid., 1023. See also ibid., 1034, per Lord Pearson. Ibid., 1016 (my italic).

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was signing a guarantee rather than the impugned bill of exchange, so long as he ‘was not guilty of any negligence’.41 In Carlisle and Cumberland Banking Co. v. Bragg, the Court of Appeal held that the authority of Foster v. Mackinnon was confined to negotiable instruments, but did not rule out the relevance of negligence to other documents.42 Their Lordships held that proof of negligence would not, per se, preclude the complainant from establishing non est factum in these latter cases, but would raise an estoppel against him, precluding him from asserting the plea. Further, their Lordships held that legal negligence was required, with proof that the complainant owed a duty of care to the one against whom the plea was raised and of proximate causation of any loss that party would suffer if the putative contract were declared void.43 Therefore, in addition to requiring legal negligence, as opposed to mere factual negligence (i.e., unreasonableness), the early authorities placed the burden upon the defendant. It was the defendant who sought to rely upon the estoppel, so it was the defendant who had to establish it. As such, whatever the label used, an absence of carelessness was not part of the plea itself, but was separately relevant to the issue of estoppel.44 However, the House of Lords in the Saunders case exposed what their Lordships felt was the fallacious basis in principle and authority of the Bragg case. Lord Wilberforce asserted that it was wrong in principle to require legal negligence, as opposed to mere factual unreasonableness, to prevent the complainant successfully asserting his plea.45 Further, his Lordship said that such a rule was based upon a misinterpretation of Foster v. Mackinnon (which required the complainant to disprove factual negligence) as applying only to negotiable instruments.46 Therefore, for a complainant to succeed with the plea, he must ‘prove that he acted carefully’.47 This is a question of factual reasonableness,48 given the particular circumstances of the complainant, as explained above.49 It is clear that the House of Lords in the Saunders case laid down proof of an absence of careless as a prerequisite where the plea is raised against 41 42 43 45

46 47 49

(1869) 4 CP 704, 710. [1911] 1 KB 489, 493, per Vaughan Williams LJ (the rest of the court agreed). 44 Ibid., 494. Ibid., 495, per Buckley LJ. [1971] AC 1004, 1026. See also ibid., 1019, 1023, 1038, per Lords Hodson and Pearson and Viscount Dilhorne. Ibid., 1026–7. See also ibid., 1020, 1037, per Lords Hodson and Pearson. 48 Ibid., 1027, per Lord Wilberforce. Ibid., 1037, per Lord Pearson. See p. 82, above.

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an innocent third party.50 Further, there is no indication that their Lordships sought to limit the requirement to such cases. However, the plea in the case was raised against an innocent third party. Some commentators argue that the rule applies only in such circumstances,51 but others treat it as a universal requirement.52 Although their Lordships did not fully address the reason for the relevance of carelessness, it is submitted that it is a necessary policy limitation upon the plea. As Lord Hodson said, the basis of the rule is ‘that no man may take advantage of his own wrong’.53 The importance of this is that, in the absence of clear authority as to whether the requirement extends to the plea in all circumstances, the basis of the rule helps to determine whether it should do so. In this regard, Lord Reid noted that the plea ‘generally arises where an innocent third party has relied on a signed document in ignorance of the circumstances in which it was signed’ and that, therefore, ‘there must be a heavy burden of proof on the [complainant] . . . [who] . . . must prove . . . that he took all reasonable precautions in the circumstances’.54 Recognition of the fact that part of the basis of the rule is that the plea is normally raised against innocent third parties might suggest that the rule does not apply, or should not apply, in other cases. However, his Lordship expressly noted that the plea was not confined to such cases, and he did not seek to suggest that an absence of carelessness is not required in other cases. Further, Lord Hodson’s justification of the rule, quoted above, was in absolute terms: ‘no man may take advantage of his own wrong’.55 Viscount Dilhorne56 and Lord Wilberforce57 likewise stated the requirement in universal terms. It is submitted that their Lordships probably intended to assert proof of an absence of carelessness as a universal requirement of non est factum, to limit the plea. However, as they were dealing with a case against an innocent third party and did not expressly assert that the same rule applies to all other cases, this is not a necessary conclusion. Therefore, it is contended that the point remains open as a matter of authority in England. In Australia, however, it has been said that carelessness only precludes the plea as against an innocent party.58

50

51 52 53 56

[1971] AC 1004, 1016, 1019, 1023, 1027, 1034, per Lords Reid, Hodson, Wilberforce, Pearson and Viscount Dilhorne. Furmston (2006), 326; Beatson (2002), 335; Chen-Wishart (2010), 300. Treitel (2007), 360; O’Sullivan and Hilliard (2008), 64; McKendrick (2010) 572. 54 55 [1971] AC 1004, 1019. Ibid., 1016. Ibid., 1019 (my italic). 57 58 Ibid., 1023. Ibid., 1027. Petelin v. Cullen (1975) 132 CLR 355, 360, HCA.

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If the basis of the rule is that no man may benefit from his wrong, then there is a direct conflict where the complainant and the party against whom the plea is raised have both committed some wrong. It would be tempting to seek to weigh the wrongs against one another to determine who may succeed. However, this would lead to uncertainty. It is submitted that a clear, predetermined rule is appropriate. Therefore, it is contended that the basic position should be that the complainant is required to prove that he was not careless, because he should not be able to take advantage of his own careless conduct. However, if he proves that the party against whom he raised the plea knew or should have known of, or fraudulently or negligently induced, the absence of consent, then that party’s unacceptable conduct should negate the requirement. This would be a policy decision, to prioritise the desire to prevent procurement of contracts by unacceptable means over the desire to ensure care in contractual decisions. As the absence of consent necessarily flows from the requisite mistake, inducement of the mistake is inducement of the absence of consent. However, it must be noted that knowledge of the absence of consent requires that the defendant has knowledge of both the fact that the complainant made a mistake and the fact that the mistake rendered his putative and intended acts contractually different from his, the complainant’s, perspective.

3.3.4 Weakness In the Saunders case, Lord Reid noted that, originally, non est factum was developed for cases where the complainant did not sign the impugned document, but was later extended to cover cases where blind or illiterate complainants signed the document believing its effect was fundamentally different from its actual effect.59 His Lordship then said that non est factum must also apply in favour of those who are permanently or temporarily unable through no fault of their own to have without explanation any real understanding of the purport of a particular document, whether that be from defective education, illness or innate incapacity.60

First, one should note that the substance of this test is similar to that in mental incapacity, because it requires an inability in the complainant, at the time of conclusion, to understand the nature of the putative 59

[1971] AC 1004, 1015–16, HL.

60

Ibid., 1016.

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contractual act: in Lord Reid’s words, the ‘purport of [the impugned] document’.61 The test in mental incapacity requires an inability to understand the nature of the contractual act even if it is explained to the complainant;62 whereas non est factum requires merely an inability to understand without an explanation. Nonetheless, where the complainant does not receive a proper explanation, the weakness necessarily establishes an absence of consent, in the same way mental incapacity does.63 Second, his Lordship in this passage was merely indicating one set of circumstances in which the plea might be available; he was not asserting that this, or any, weakness is a prerequisite. Indeed, his Lordship said that ‘there may be cases where this plea can properly be applied in favour of a man of full capacity’; although, only ‘in very exceptional circumstances’.64 Viscount Dilhorne accepted that a man of full age and understanding who can read and write cannot be allowed to repudiate his signature to a document which he knows will have legal consequences if he signs it without reading it.65

However, his Lordship said ‘that this is more an example of a case where the plea will fail than a rule of general application’.66 Of course, without it being made clear why the plea would fail in such a case, if not because of the complainant’s ‘full age and understanding’,67 this comment is ambiguous. However, it is submitted that the plea may fail in the example because the complainant will, on such facts, normally have been careless in not reading the document. Although Viscount Dilhorne noted that he does ‘not think it can be said that in every case failure to read a document by a literate person amounts to carelessness’,68 mere literacy does not establish that a person is capable of full understanding. Therefore, it is submitted that Viscount Dilhorne was not asserting that a weakness is a prerequisite of the plea. Similarly, Lord Wilberforce rejected the contention that the plea should be abolished, because [t]here are still illiterate or senile persons who cannot read, or apprehend, a legal document; there are still persons who may be tricked into putting

61 62 63 67

Ibid. McLaughlin v. Daily Telegraph (No. 2) (1904) 1 CLR 243, 269, HCA, per Griffith CJ. 64 65 66 See p. 55, above. [1971] AC 1004, 1016, HL. Ibid., 1021. Ibid. 68 Ibid. Ibid., 1023.

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their signature on a piece of paper which has legal consequences totally different from anything they intended.69

In this passage, his Lordship distinguished between illiterate and senile persons and persons tricked into signing. This clearly suggests that his Lordship believed that the plea may succeed in the latter class of cases even when the complainant is of full understanding. Lord Pearson expressly reserved his opinion on this issue.70 It is at least clear that their Lordships did not rule out the possibility of non est factum being successfully pleaded by a person of full age and understanding. Indeed, it is submitted that the overall tenor of the judgments suggests that their Lordships expressly envisaged that this is possible, but were understandably at pains to ensure that it does not allow the plea to extend too widely.71 That a weakness is not a prerequisite is supported by Buckley LJ in Carlisle and Cumberland Banking Co. v. Bragg.72 Nonetheless, it is interesting to note that, in leaving open the (albeit remote) possibility that the plea might be successfully invoked by a complainant of full age and understanding, Lord Reid said that this may be so ‘particularly when he was led to believe that the document which he signed was not one which affected his legal rights’.73 His Lordship’s treatment of the complainant’s weakness and the fact that he was misled as potential alternatives raises the possibility that they are actually de facto alternative requirements of the plea, inasmuch as one or the other must be established. For, unless the complainant suffers from some condition that renders him incapable of understanding the nature and effect of execution of the document or is the victim of some trick inducing his mistake, it is unlikely that he will be able to prove that he was not careless in coming to the relevant mistake. In that sense, one of these elements would be a de facto requirement in all cases where proof of an absence of carelessness was required.74 It is submitted that this is, in reality, the true position. Even accepting that a weakness is not a prerequisite, it is important to determine what type of weakness can be relevant and why this is so. The leading authority regarding a relevant weakness in non est factum is Lord Reid’s statement in the Saunders case that the plea 69 72 74

70 71 Ibid., 1025. Ibid., 1035. Chitty (2008), 486. 73 [1911] 1 KB 489, 496. Cf. McKendrick (2010), 572. [1971] AC 1004, 1016, HL. See pp. 82–5, above (carelessness probably a universal requirement, but should be limited to pleas against innocent parties).

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non est factum in english law must . . . apply in favour of those who are permanently or temporarily unable through no fault of their own to have without explanation any real understanding of the purport of a particular document, whether that be from defective education, illness or innate incapacity.75

As has been noted, proof of such a weakness establishes an absence of consent from the complainant, unless a proper explanation was given. Therefore, it is submitted that it should be an alternative to proof of a sufficient difference between the nature and effect of the complainant’s intended act and the putative contractual act, which also establishes that the complainant did not consent to the putative contract.76 However, as their Lordships in the Saunders case asserted that the requisite degree of difference is a prerequisite, this is not, as the law stands, the case. Therefore, it would seem that a complainant gets no benefit from proving a weakness, save for its relevance to potentially establishing that he was not careless.

3.3.5 Trickery/unacceptable conduct In the classic case of non est factum, the defendant (or someone else, to the defendant’s knowledge) deliberately misrepresented the nature and effect of the impugned document to the complainant.77 Therefore, this misrepresentation will normally be the reason that the complainant believed that the effect of his act was fundamentally different from the actual effect of the impugned document, if upheld. However, this does not make it a prerequisite of the plea. Indeed, it is submitted that the presence of unacceptable inducement is, in many cases, merely a factual consequence of the requirement of carelessness. For, it has already been noted that, without at least one of (1) a relevant weakness or (2) unacceptable inducement, it is unlikely that the complainant can prove that he was not careless in executing a document the nature and effect of which is fundamentally different from the document he intended to execute.78 In Gallie v. Lee, Salmon LJ said that

75 77

78

76 [1971] AC 1004, 1016, HL. See pp. 30, 79–82, above. E.g., Foster v. Mackinnon (1869) 4 CP 704; Lewis v. Clay (1897) 67 LJQB 224; [1897] All ER Rep. Ext. 1738; Howatson v. Webb [1907] 1 Ch 537; affirmed [1908] 1 Ch 1, CA; Saunders v. Anglia BS [1971] AC 1004, HL. See p. 87, above.

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in every reported case, save one, in which the plea has succeeded, the party relying on it has proved that he was induced to sign by a fraudulent misrepresentation of the [impugned] document’s true character or class.79

The one exception to which his Lordship referred was the Irish case of Bank of Ireland v. M’Manamy.80 His Lordship accepted that ‘[i]t may be that logically there is no reason why the relevant mistake should have to be induced by fraud to be effective for the purpose of a plea of non est factum’.81 However, he also expressed the opinion that non est factum should not be extended beyond the classic fact-pattern to cover cases where there was no fraudulent representation. Therefore, it is submitted that his Lordship accepted that there was no rule of law requiring a fraudulent misrepresentation in non est factum, but was of the opinion that this rule should be developed, as a policy decision to limit the plea. The Privy Council in Hasham v. Zenab asserted that the plea ‘requires proof of a false statement’, and this forms the ratio of rejection of the plea.82 Similarly, the Court of Appeal in Mercantile Credit v. Hamblin held that the plea could not succeed because there had been no false representation made to the complainant concerning the nature or effect of the impugned documents.83 Pearson LJ, with whom Sellers LJ expressly agreed, also strongly suggested that the intended effect of the transaction (a mortgage to raise around £1,000 on the security of the complainant’s car) was insufficiently different from its actual effect if it stood (a sale, and resale by hire purchase, of the car, from which the complainant would receive around £1,000 and repay an amount similar to what one would expect to repay on a reasonable loan).84 Further, Salmon LJ rejected the plea because he held that it could not be relevant to a case where one signed a document in blank.85 Therefore, it is arguable that the absence of a false representation does not form the ratio of the case. In the Saunders case, Lord Reid said that the plea may be available to a person not suffering from any weakness ‘particularly when he was led to believe that the document which he signed was not one which affected his legal rights’.86 The word ‘particularly’ makes it clear that his Lordship believed there might be other circumstances in which the plea would be available to a person of full age and understanding. Of course, one may be misled as to some fact, relating to the nature and effect of the 79 82 84

80 81 [1969] 2 Ch 17, 45. [1916] 2 IR 161. [1969] 2 Ch 17, 45. 83 [1960] AC 316, 335. [1965] 2 QB 242, 268, 280, per Pearson and Salmon LJJ. 85 86 Ibid., 267–8. Ibid., 279–80. [1971] AC 1004, 1016, HL (my italic).

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impugned document, other than whether or not it affects one’s legal rights. It is thus arguable his Lordship still felt some form of trickery/ misleading was required. Lord Wilberforce suggested that the plea should be available to illiterate or senile persons who cannot read, or apprehend, a legal document; [and] . . . persons who may be tricked into putting their signature on a piece of paper which has legal consequences totally different from anything they intended.87

This strongly suggests that his Lordship believed that trickery was not a prerequisite of the plea, at least where the complainant suffered from a relevant weakness. Some commentators assume that unacceptable conduct inducing the mistaken belief is required.88 Others, however, do not mention it in their treatment of non est factum.89 Still others note that it will normally be present, but assert that it is not a prerequisite,90 or at least do not assert that it is.91 In Foster v. Mackinnon, Byles J. said: [The impugned document] is invalid not merely on the ground of fraud, where fraud exists, but on the ground that . . . [the complainant] never intended to sign, and therefore in contemplation of law never did sign, the contract.92

Lord Wilberforce in the Saunders case explained that this is because, in non est factum, ‘it is the lack of consent that matters, not the means by which this result was brought about’.93 Therefore, it is submitted that, as a matter of authority, it has not been determined that any unacceptable conduct, by the defendant or anyone else, is a prerequisite of the plea. As for whether unacceptable conduct inducing the complainant’s mistake should be required, it is accepted that there is a need to keep non est factum within manageable bounds. Further, the defendant’s unacceptable inducement of an absence of consent is a sufficient reason to render it operative. Also, it is submitted that the only other sufficient reasons are that the defendant: (1) had actual or constructive knowledge of the absence of consent; or (2) himself did not consent to the putative contract.94 It is factually unlikely, but possible, that the latter will be 87 90

91 93

88 89 Ibid., 1025. Furmston (2006), 321. Beatson (2002); McKendrick (2010). Cartwright (2007), 454; Chitty (2008), 485; Chen-Wishart (2010), 298; O’Sullivan and Hilliard (2008), 64. 92 Treitel (2007). (1869) 4 CP 704, 711 (my italic). 94 [1971] AC 1004, 1026, HL. See p. 23, above.

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relevant in cases of non est factum. Indeed, it is accepted that the defendant’s unacceptable inducement of the complainant’s mistake is likely to be the main reason for rendering the absence of consent operative in cases of non est factum. However, it is submitted, first, that it should be recognised that this is the role of unacceptable inducement by the defendant, when present; and second, that the defendant’s knowledge of the absence of consent (and, theoretically, an absence of consent from the defendant) should also be sufficient. Therefore, it is submitted that unacceptable inducement of the absence of consent should not be required. However, it is a sufficient reason to render the absence of consent operative, provided that it amounts to unacceptable inducement by, or to the knowledge of, the defendant. As a matter of fact, such conduct is likely to be present in most successful pleas of non est factum. For, if the complainant did not suffer from a relevant weakness, it is likely that he was careless in coming to the requisite mistaken belief, unless that mistake was induced by the conduct of another, which will normally be unacceptable conduct by the defendant.

3.4 Conclusion The underlying rationale of non est factum is clear: the complainant intended an act the nature and effect of which is fundamentally different from the nature and effect of executing the impugned document. Therefore, he did not consent to the putative contract supposedly effected by it. Additionally, the complainant must, at least as against innocent parties, prove that he was not careless in executing the document under this mistaken belief. These requirements are established by the Saunders case.95 Further, the defendant will normally have engaged in some form of unacceptable conduct inducing the complainant’s mistake (thus absence of consent), so there will normally be an appropriate reason to render the absence of consent operative, and the plea renders the putative contract void. In this sense, the plea fits my first category of vitiation. Nonetheless, unacceptable inducement of the mistake by the defendant is not a prerequisite. Further, even if the complainant were unable to prove that he was not careless without proving that his absence of 95

[1971] AC 1004, HL.

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consent was caused either by a relevant weakness or unacceptable conduct, first, the relevant conduct might not be the defendant’s unacceptable conduct, and the defendant might have no knowledge of it; and, second, it is submitted that a complainant’s weakness is insufficient to render his absence of consent operative, unless the defendant has knowledge of it and this amounts to knowledge of the absence of consent and thus renders entrance into the putative contract unacceptable. Therefore, the plea must develop, to require in all cases an additional factor to render the absence of consent operative, to overcome the objective principle. The three relevant additional factors are the defendant’s: (1) knowledge of the absence of consent; (2) unacceptable inducement of it; or (3) own absence of consent.96 96

See p. 23, above.

4 Common mistake in English law

4.1

Introduction

There are three types of operative common mistake: res sua, res extincta and mistakes as to the “quality” or “identity” of the subject matter. The first arises where the complainant seeks to acquire a property interest which, unknown to both parties, he already holds. The second arises where, unknown to both parties, the subject matter does not exist at the time of conclusion of the putative contract. The third arises where the subject matter is fundamentally different from that which the parties believed it to be. It must also be noted that the prohibition on vitiation of contracts for common mistakes of law1 has been rejected by the Court of Appeal.2 The basis of vitiation for common mistake is that the mistake creates an absence of consent from the complainant, because it renders the putative contract different from the one he intended to make. A common mistake as to the subject matter is a mistake as to external circumstances, so it only establishes an absence of consent if its effect is so serious (“fundamental”) as to render a contract, on the same terms, different in the actual state of affairs than it would have been if made in the state of affairs the complainant believed to exist.3 If the mistake has this effect, the complainant intended to make a contract different from the putative contract, so he did not consent to the putative contract.4 Further, the complainant’s mistake is shared by the defendant, and the matter in relation to which the mistake was made must be recognised by both parties as fundamental to the contract.5 Therefore, the mistake renders the putative and intended contracts different for both parties, 1 2 3 5

Cooper v. Phibbs (1867) 2 HL 149, 170, per Lord Westbury. Brennan v. Bolt Burdon [2004] EWCA Civ 1017; [2005] QB 303. 4 See pp. 31–2, above. See pp. 30, 31–2, above. Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton.

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so neither party consented to it. The defendant’s absence of consent is the additional factor rendering the complainant’s absence of consent operative.6 It will be shown that, in cases of res sua and res extincta, the mistake is always sufficiently serious to render the putative and intended contracts different: a contract for the acquisition of an interest that the “buyer” already holds is different from a contract for the acquisition of an interest that he does not hold; and a contract for the sale of something that does not exist is different from a contract for the sale of something that does exist. With common mistake as to “quality”, however, it is a difficult task to determine what degree of difference between the actual and intended subject matters is sufficient to render the putative and intended contracts different. The House of Lords in Bell v. Lever Bros. used various expressions: for example, ‘essentially different’7 or ‘fundamental’.8 The Court of Appeal in Great Peace Shipping v. Tsavliris Salvage introduced the concept of the mistake rendering the essence of the intended performance impossible.9 It will be shown that this is merely a different label for the same test: whatever label is used, the essential question is whether the putative contract is ‘different in kind from’ the intended contract.10 Common mistake renders a contract void.11 There is a line of Court of Appeal and first-instance authority suggesting that there is an equitable jurisdiction to declare contracts voidable for common mistake.12 However, this has been disapproved by the Court of Appeal in the Great Peace case. It is submitted that this disapproval is sound and will surely be followed.13 For, the supposed equitable jurisdiction rested upon a misinterpretation of Bell v. Lever Bros. as denying a doctrine of common mistake at common law.14 Further, it cannot be argued that Bell v. Lever Bros. looked only to the common law, because it is ‘not . . . conceivable

6 7 9 10 11 12

13 14

Chen-Wishart (2010), 279. See also pp. 32–3, above. 8 [1932] AC 161, 218, per Lord Atkin. Ibid., 208, per Lord Warrington. [2002] EWCA Civ 1407; [2003] QB 679, 704. Bell v. Lever Bros. [1932] AC 161, 223, HL, per Lord Atkin. See also pp. 110–11, below. Ibid., 190, 206, 225, per Lords Blanesburgh, Warrington and Atkin. Solle v. Butcher [1950] 1 KB 671, CA; Magee v. Pennine Insurance [1962] 2 QB 507, CA; William Sindall v. Cambridgeshire CC [1994] 1 WLR 1016, 1042, per Evans LJ; Harrison and Jones v. Bunten and Lancaster [1953] 1 QB 646; Grist v. Bailey [1967] Ch 532; Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255. Cartwright (2007), 402; Chitty (2008), 460. Solle v. Butcher [1950] 1 KB 671, 691, per Denning LJ.

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that the House of Lords overlooked an equitable right . . . to rescind . . . notwithstanding that the agreement was not void for mistake at common law’.15 The House did not discuss this because ‘[t]he jurisprudence established no such right’.16

4.2 The underlying rationale of vitiation There is debate whether common mistake should be operative in English law.17 Indeed, there is even debate whether it actually exists as a vitiating factor. Some commentators argue that, in truth, common mistake is based purely upon construction of the contract: that is to say, if a contract is “vitiated” for common mistake, it is because there is an implied term that contractual obligations will only attach if the actual state of affairs is as the parties believed, or will not attach if the state of affairs is different from this.18 Smith notes that this “implied-term theory” cannot be technically reconciled with the fact that common mistake renders a contract void.19 For, if contractual obligations do not attach because there is an implied term to that effect, this can only be because the court is enforcing that valid term, and the term can only be valid if the contract is valid. Smith argues that this objection ‘seems purely semantic’,20 because, whether the contract is void or says that obligations do not attach in the mistaken state of affairs, the primary effect is the same: executory “obligations” cannot be enforced and there must be restitution of executed “obligations”. However, he accepts that the current law as to the position of third parties presents an important practical objection to the implied-term theory.21 If a contract is void, title cannot pass, so no third party can obtain title from the “transferee” under the putative contract; whereas the same is not true in relation to executed obligations under a voidable contract, or one that is valid but the conditions of which have not been satisfied. Sir John Smith supports the implied-term theory. He suggests that the absence of any intention (express or presumed) to allocate the risk of the mistake may be seen as a presumed intention that the contract should not be binding in such circumstances, and a term to that effect can be 15 16 17

18

Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 715–16. Ibid., 716. J. Cartwright, ‘Solle v. Butcher and the Doctrine of Mistake in Contract’ (1987) 103 LQR 594, 621. 19 20 21 S. A. Smith (2006), 175–8. Ibid., 176–8. Ibid., 176. Ibid., 176–7.

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implied into the contract.22 Therefore, he argues that there is no room for a separate doctrine of mistake: if the contract allocates the risk, there is no room for mistake to operate; if it does not, the parties did not intend it to be binding in the mistaken state of affairs, so there is an implied condition precedent to that effect.23 However, it is submitted that it is unrealistic to treat the absence of an express or presumed intention to allocate the risk of the mistake as a presumed intention that the contract should not be binding in the mistaken state of affairs. The absence of an express or presumed intention to allocate the risk is equally likely to exist because the parties simply had not contemplated the possibility of the mistake; or, at the very least, because the evidence does not sufficiently establish that they shared an intention as to what was to happen if they were fundamentally mistaken. Therefore, as S. A. Smith concedes, if one relates the implied-term theory purely to terms implied in fact, it is a fallacy.24 For, terms implied in fact are implied on the basis of the parties’ presumed intention.25 The evidence will often make it abundantly clear that the parties had not contemplated the fact that they might be mistaken; or at least will not be sufficient to establish that they had any common intention as to what should happen if they were mistaken. However, S. A. Smith further argues that the theory can rest upon terms implied in law, not in fact.26 This means that, when there is no express or implied-in-fact term resolving the issue, the question is whether it is fair and reasonable for contractual obligations to attach in light of the parties’ shared and serious mistake. If it is not, there will be a term implied in law that contractual obligations will not attach. However, this treats the rationale of the absence of binding obligations as a vague policy of fairness, granting relief simply because the bargain has, because of the mistake, turned out to be “unfair” to the complainant.27 It is submitted that this line of reasoning provides little illumination. In effect, all it says is that common mistake will operate when the court believes that it is unfair and unreasonable for contractual obligations to attach given the parties’ shared and serious mistake. How can this be sensibly determined? For example, which is fairer or more reasonable: to 22 23 25 26 27

J. Smith, ‘Contracts – Mistake, Frustration and Implied Terms’ (1994) 110 LQR 400, 403. 24 Ibid., 419. See also Chitty (2008), 440. S. A. Smith (2006), 177. E.g., Shirlaw v. Southern Foundries [1939] 2 KB 206, CA; The Moorcock (1889) 14 PD 64, CA. S. A. Smith (2006), 177–8. See also Cartwright, ‘Solle v. Butcher and the Doctrine of Mistake in Contract’, 620–3.

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oblige a buyer to pay for something fundamentally different from what he supposed he was buying and from what the seller supposed he was selling; to oblige a seller to pay damages because he cannot sell what both parties believed was to be sold; or to hold that neither party is bound? It is contended that the true reason for vitiation in common mistake is the complainant’s absence of consent to the putative contract. The complainant proves a mistake which is serious enough to render the actual and intended subject matters so different that this difference then renders the putative and intended contracts different for him. Therefore, the complainant did not consent to the putative contract; he intended to make a different contract altogether. The reason the mistake is rendered operative is that it is shared by both parties and must be in relation to a matter recognised by them both as fundamental to the putative contract.28 This means that the mistake renders the putative and intended contracts different for both parties. Therefore, the defendant did not intend to make, or consent to, the putative contract, either, so he should not be able to hold the complainant to it: the complainant’s absence of consent is rendered operative.29 It is submitted that this absence-of-consent theory provides a more principled basis for analysing the law. The fact that, before a common mistake can operate, one must look to the express and implied terms of the contract to determine whether it allocates the risk of the mistake30 does not undermine this explanation. Indeed, this approach supports the absence-of-consent theory as much as it supports the implied-term theory. If the impugned contract allocates the risk of the mistake, then that mistake cannot render the impugned contract different from the intended contract, to which the complainant consented: for, both contracts contemplate and deal with the risk of the mistake.31 This is so whether the allocation is express or implied.32 If the risk of the mistake is not allocated under the putative contract, the question is whether it is of such effect that it renders the putative contract different from the one to which the parties consented. It is accepted that one cannot merely say that a contract made in situation 28

29 30

31

Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton. See pp. 30, 31–3, above. Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin; Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679. 32 See also p. 146, below. Cartwright (2007), 510.

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A is different from a contract made in situation B, and then simply conclude that any common mistake as to the subject matter renders the putative and intended contracts different, and thus establishes an absence of consent to the putative contract. Any mistake as to a term renders the putative and intended contracts different, because a contract with a particular term is different from a contract without that term, and vice versa.33 However, a mistake as to the circumstances in which a contract is made will only have this effect if it is sufficiently serious that it can be said that a contract on terms XYZ is different if made in situation A than if made in situation B. For example, a contract for a red car is different from a contract for a blue car, where colour is a term of the contract. However, a contract that is merely for a car is not necessarily different simply because the car happens to be blue rather than red. Yet a contract for a car may well be different if that car is actually merely a mass of scrap metal (but can still be said to be a car), rather than, as both parties wrongly believed, roadworthy. The former mistake, as to colour, where this is not a term of the contract, is merely a minor mistake as to the quality of the subject matter which does not render the putative and intended contracts different. The latter mistake, however, is a fundamental mistake as to the subject matter: a roadworthy car is different from a car that is effectively a mass of scrap metal, so a contract for the former (the intended contract) is different from a contract for the latter (the putative contract). The parties consented to the former, not the latter. This is the essence of common mistake. When a mistake does not relate to a term, it is difficult to determine what degree of severity renders the actual and intended subject matters different to such a degree that the putative and intended contracts are different, so that there is an absence of consent to the putative contract. Some cases may be obvious, but difficult issues of fact and degree abound. However, the test is theoretically sound and grounded in clear contractual principle: namely, the fundamental general principle of voluntariness in the assumption of contractual obligations. This fundamental principle therefore guides application of the law. Moreover, although the test is ultimately a subjective one, it is submitted that assessment of the objective severity and impact of the mistake must be evidentially relevant and will ensure that the test is workable in practice, as well as theoretically sound.

33

See pp. 31–5, above, and 133, 134, below.

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The test must, at its core, be a subjective one, because common mistake is concerned with vitiation of a specific contract between the particular parties to that contract: if the mistake does not render the impugned contract different for the parties, then it does not establish an absence of consent, regardless of the objective severity of the mistake. One could argue that there should, in addition, be an objective element, so that it must be proved that the mistake rendered the putative contract different for the complainant and defendant and that it would have had that effect on reasonable people in the parties’ shoes. A dual subjective– objective test would ensure both greater respect for security of transactions and a close link between common mistake and the objective principle. However, it is submitted that such a test should not be required, because the complainant’s absence of consent is, when rendered operative by the defendant’s absence of consent, a sufficient reason to render the putative contract void.34 This is not to say that the objective severity of the mistake is irrelevant to common mistake; it is simply that proof of an objectively fundamental mistake (i.e., proof that the mistake would have rendered the contract different for the reasonable people in the parties’ shoes) should not be a prerequisite of the doctrine. Objective assessment of the mistake will still be extremely important in applying the subjective test in practice. The court should ask for what the reasonable people in the parties’ shoes would have believed they were contracting and whether they would have thought that, given the mistake, the putative contract was different from the intended contract. If the reasonable people in the parties’ shoes would have seen the putative contract as different from the intended contract because of the mistake, the court will naturally be more likely to accept that the complainant and defendant saw the putative contract as different, and thus that the mistake did establish an absence of consent from them; and if the reasonable people would not have seen the impugned and intended contracts as different, the court will be less likely to accept that the actual parties saw them as different.35 There is no doubt that this test will still be a very difficult one to apply to the facts of individual cases. However, it is contended that, not only is the test theoretically sound, but it is also workable in practice, because it is guided by both recognition of the true underlying rationale of common mistake and by the evidential relevance of an objective assessment of the mistake. 34

See pp. 19–26, above.

35

See pp. 37–9, above.

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O’Sullivan and Hilliard level five criticisms against the absence-ofconsent theory.36 The first is that it is uncertain. However, it has been shown that the implied-term theory is no more certain than the absenceof-consent theory, which is more grounded in contractual principle. The second is that the implied-term theory can deal with the problem, so there is no need for common mistake as a vitiating factor per se, based upon the absence-of-consent theory. It is inappropriate simply to say that there is one possible way to resolve the issue, so any alternative solution is unnecessary. What matters is determining what is the best way to resolve the issue. The third criticism relates to the fact that case law establishes that, once the existence of a common mistake has been established, the first step is to construe the contract to determine whether it allocates the risk of the mistake. Yet it has already been shown why this approach fits perfectly with the absence-of-consent theory.37 The fourth criticism is perhaps the most valid and will be addressed separately below. The final criticism is that treating common mistake as a vitiating factor has led to artificial distinctions between types of mistake, between res sua, res extincta and mistakes as to “quality”. However, it will be shown that, in each of these categories, the test is the same: are the putative and intended contracts different for the complainant and defendant? The factual settings of res sua and res extincta simply answer this question in the affirmative.38 The fourth criticism relates to the fact that, if the complainant is at fault in coming to be mistaken, he cannot successfully plead common mistake.39 The authors argue that there is no clear reason why this is relevant to the absence of consent theory, but that it is clearly relevant to the issues of fairness and reasonableness. However, it was noted that the requirement of an absence of carelessness in non est factum is an appropriate policy limitation on the plea.40 The same is true for common mistake.41 That absence of consent, not the implied-term theory, is the basis of vitiation for common mistake is supported by authority. In Norwich Union Fire Insurance v. WM H. Price Ltd., the Privy Council said that, ‘[a]t common law . . . a contract [entered into under an operative 36 37 39

40

O’Sullivan and Hilliard (2008), 341. 38 See p. 97, above. See also p. 146, below. See pp. 101–3, below. Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703. 41 See pp. 82–5, above. See pp. 111–12, below.

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common mistake] . . . is . . . void, there being in truth no intention to contract’.42 Lord Warrington in Bell v. Lever Bros. said that the law requires a ‘mistake . . . sufficient to justify a Court in saying that there was no true consent’,43 and Lord Atkin said that ‘[i]f mistake operates at all it operates so as to negative or . . . nullify consent’.44 Further, the Court of Appeal in the Great Peace case firmly rejected the implied-term theory.45

4.3 Res sua and res extincta In the leading case of res sua, the impugned contract was held to be voidable.46 However, Lord Atkin in Bell v. Lever Bros. asserted that the putative contract would, in such cases, actually be void.47 As it is impossible to acquire an interest one already owns, it could be suggested that the voidness of the putative contract is attributable to a simple rule of law, based upon this impossibility rather than upon any mistake and consequent absence of consent. However, the mistake will always establish an absence of consent: both parties mistakenly believed that the “buyer” did not own the interest to be sold, and a contract to acquire an interest one already owns is different from a contract to acquire an interest one does not own. The complainant (and defendant) intended to make the latter contract, not the former; they consented to the latter, but not the former. Indeed, Cooper v. Phibbs treated the issue as a matter of mistake, rather than merely one of legal impossibility operating without regard to the parties’ intention.48 Therefore, cases of res sua are merely one example of the general doctrine of common mistake, so the same rules should be applied in these cases as are applied in all cases of common mistake. The only difference is that the very

42

43 45

46 48

[1934] AC 455, 463 (my italic). See also Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407 l[2003] QB 679, 718. 44 [1932] AC 161, 206, HL. Ibid., 217. [2002] EWCA Civ 1407; [2003] QB 679, 703. This is not contradicted by Graves v. Graves [2007] EWCA Civ 660, at [38]; [2008] L & TR 15 (contract rendered invalid by implication of contingent condition, but term implied because construction is a necessary first step in common mistake, not because implied-term theory is correct). See also Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255; Chitty (2008), 466. 47 Cooper v. Phibbs (1867) 2 HL 149. [1932] AC 161, 218, HL. (1867) 2 HL 149, 170, per Lord Westbury. See also Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin.

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nature of the mistake necessarily establishes that it was sufficiently serious to create the requisite absence of consent. Cases of res extincta are those where, contrary to the parties’ belief, the intended subject matter of the putative contract does not, at the time of conclusion, exist. It seems that an artificial distinction might have to be drawn between cases where the subject matter never existed and those where it did, but later ceased to exist, at least where the impugned contract is for the sale of specific goods within the Sale of Goods Act 1979. As a matter of principle, there is no reason why these two situations should necessarily be treated differently. It may well be that, if the subject matter never existed, it is more likely that the complainant acted unreasonably. As will be discussed below, if it is unreasonable for the complainant to be labouring under the mistake, he cannot rely upon it in order to vitiate the impugned contract.49 However, it is not necessary that the complainant will have acted any more unreasonably when the subject matter never existed. The reason the distinction matters, in contracts for the sale of specific goods, is that section 6 of the Sale of Goods Act 1979 states: 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 is made, the contract is void.

Goods that have never existed cannot perish, so section 6 cannot, strictly applied, be relevant in such cases.50 However, as Treitel points out, by a strict application of this section, if the goods existed but perished, it does not matter that the seller may have promised that the goods existed or that the buyer has promised to pay regardless of whether they exist: the contract is void.51 The author is correct to note that it is unlikely such promises will be made,52 but they certainly can be. Indeed, this is demonstrated by McRae v. CDC, where the High Court of Australia held that the complainant-seller had promised that the non-existent subject matter (which had never existed) did exist.53 It has been soundly argued that section 6 should, and will, be interpreted as applying only where the parties have not agreed otherwise: that is, if the seller promised the

49

50 53

Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703. See also pp. 111–12, below. 51 52 McRae v. CDC (1951) 84 CLR 377, HCA. Treitel (2007), 316. Ibid. (1951) 84 CLR 377.

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goods existed or the buyer promised to pay whether they existed or not, the contract will be enforced on those terms.54 To draw an arbitrary distinction between cases where the goods have never existed and those where they have existed but perished is unsatisfactory.55 This might be one relevant factor in determining whether a complainant was careless in coming to be mistaken, but it should not have any wider significance. Other than in contracts for the sale of specific goods, the distinction does not apply, so that all other cases of res extincta must be addressed on the usual principles of mistake. Therefore, the contract must be construed to see whether the risk of non-existence has been allocated. If it has, the terms of the contract must be followed. If it has not, the nature of the mistake is sufficiently serious to establish that the putative and intended contracts are different for both parties. Thus, there is an operative absence of consent to the putative contract, which is therefore void, provided that the complainant has not acted unreasonably in coming to be mistaken. As such, res extincta is, like res sua, merely one specific example of the general doctrine of common mistake.

4.4

Mistakes as to “quality”

The seminal case on common mistake as to the “quality” of the subject matter is Bell v. Lever Bros.56 In this case, the complainant company was the former employer of the defendants, and the impugned contracts were those by which the parties had agreed to terminate the service contracts of the defendants, the complainant paying £20,000 to one defendant and £30,000 to the other. However, it later came to light that, due to breaches of the service agreements, the complainant would have had the right to terminate them without compensation. It was found as a matter of fact that the defendants had forgotten about these breaches, so the mistake was shared. The company claimed, inter alia, that the impugned severance contracts were void for common mistake. By a bare majority, the House of Lords upheld the severance agreements. Nonetheless, even Lords Atkin, Thankerton and Blanesburgh, in the majority, supported the existence of a general doctrine of common mistake that renders a contract void; they simply held that it did not apply on the facts, because the mistake was insufficiently serious. 54

Chitty (2008), 455.

55

Ibid., 454–5.

56

[1932] AC 161, HL.

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Lord Blanesburgh pointed out that, although the financial difference between an entitlement to dismiss two employees without compensation and dismissal by agreement upon the payment of £50,000 is great, the key to the transaction was the complainant’s desire to secure a proposed amalgamation with a competitor. This amalgamation would leave no room for the defendants, but their work in helping to secure it was vital, and it would have been jeopardised if the defendants had been summarily dismissed.57 This reasoning highlights the fact that the mistake was not as serious as it at first seemed, because assessment of the severity of a mistake cannot simply be concerned with legal form: it is the practical effect of the mistake that matters.58 Lord Atkin proceeded along similar lines. His Lordship noted that, as a matter of legal form, ‘a contract immediately determinable is a different thing from a contract for an unexpired term’.59 However, he also noted that, in substance, ‘the party paying for release gets exactly what he bargains for’.60 Lord Thankerton simply asserted that the plea could not succeed because the evidence did not establish that the complainant ‘regarded the indefeasibility of the service agreements as an essential and integral element in the subject-matter of the bargain’.61 This clearly establishes that the difference between the intended and actual subject matters must be sufficiently subjectively serious to the complainant. Indeed, as to formulation of a general doctrine, all of their Lordships made it clear that the most important question was whether there was a sufficient difference between the intended and actual subject matters. For example, Lord Atkin said that a mistake as to quality cannot operate unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.62

Furthermore, his Lordship cited with approval a passage from Kennedy v. Panama Royal Mail Co., where it was said that common mistake would operate if the mistake rendered the actual subject matter ‘different . . . in substance’ from the intended subject matter.63 Lord Atkin, in Bell v. Lever Bros, then encapsulated the issue of common mistake in the following question:

57 58 59 63

Ibid., 181. E.g., Saunders v. Anglia BS [1971] AC 1004, HL (in the context of non est factum). 60 61 62 [1932] AC 161, 223, HL. Ibid., 223–4. Ibid., 236. Ibid., 218. (1867) 2 QB 580, 586–7.

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Is an agreement to terminate a broken contract [the impugned contract for the actual subject matter] different in kind from an agreement to terminate an unbroken contract [the intended contract and subject matter], assuming that the breach has given the one party the right to declare the contract at an end?64

Lord Thankerton accepted those authorities holding a contract void for common mistake and explained that: [I]n all of them it either appeared on the face of the contract that the matter as to which the mistake existed was an essential and integral element of the subject-matter of the contract, or it was an inevitable inference from the nature of the contract that all the parties so regarded it.65

Lord Blanesburgh said common mistake may operate where ‘[t]he mistake . . . go[es] to the whole consideration [i.e., to the whole subject matter]’66 and expressed his ‘entire accord with the conclusions of my noble and learned friends Lord Atkin and Lord Thankerton’.67 For the minority, Lord Warrington accepted as ‘established law’ the trial judge’s statement that the requisite standard for common mistake was: Some mistake or misapprehension as to some facts . . . which by the common intention of the parties, whether expressed or more generally implied, constitute the underlying assumption without which the parties would not have made the contract they did.68

If the parties intended to make a contract but would not have made the putative contract had they known the truth, this must be because the difference in the subject matter would have rendered the putative and intended contracts different from their perspective. Otherwise, they would have been equally willing to make the contract even knowing the truth. It is submitted, therefore, that the House of Lords ‘formulat[ed] . . . an independent doctrine of mistake . . . in Bell v. Lever Bros’,69 which operates whenever there is a sufficient difference between the intended and actual subject matters. Yet Furmston argues that a particular passage from the speech of Lord Atkin shows 64 68 69

65 66 67 [1932] AC 161, 223, HL. Ibid., 236. Ibid., 197. Ibid., 198–9. Ibid., 206. A. Chandler, J. Devenney and J. Poole, ‘Common Mistake, Theoretical Justification and Remedial Inflexibility’ [2004] JBL 34, 39. See also Chitty (2008), 448.

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common mistake in english law that the only false assumption sufficiently fundamental to rank as operative [common] mistake is the [mistaken] assumption that the very subject matter of the contract is in existence.70

In the relevant passage, Lord Atkin said that the central question in any plea of common mistake (or frustration) is: ‘Does the state of the new [i.e., the actual] facts destroy the identity of the subject-matter as it was in the original [i.e., the mistaken] state of facts?’71 However, it is submitted that that the type of “destruction” to which Lord Atkin was referring is markedly distinct from physical destruction, that which takes place in the classic cases of res extincta. That is, his Lordship would consider the intended subject matter “destroyed” if the actual subject matter is ‘essentially different’ from it.72 Even accepting that Bell v. Lever Bros. establishes a doctrine of common mistake operating outside the realms of physical destruction of the subject matter, some argue that, if common mistake could not succeed in that case, it cannot realistically succeed at all, because it is hard to envisage a more serious mistake.73 The effect of the mistake in Bell v. Lever Bros. was that the complainant agreed to pay £30,000 and £20,000 respectively for the termination of the defendants’ service contracts, when they were entitled to terminate without compensation. There is no doubt that, in 1929 (when the impugned severance contracts were made), £20,000 was a very substantial amount of money. Thus, in financial terms, the respective mistakes were very serious. However, the amalgamation between the complainant company and its competitor was, in Lord Blanesburgh’s words, potentially worth ‘millions of pounds’,74 and termination of the defendants’ service agreements was necessary for the realisation of the amalgamation. In this context, £50,000 does not seem such a great sum. Further, the defendants had done an excellent job for the complainant, their breaches notwithstanding, and it seems this was part of the motivation (perhaps even part of the contractual

70

71 73

74

Furmston (2006), 292. See also Stoljar (1968), 47 (non-existence of subject matter necessary for seller to be discharged). 72 [1932] AC 161, 227, HL. Ibid., 218. J. Smith, ‘Contracts – Mistake, Frustration and Implied Terms’, 412; C. MacMillan, ‘How Temptation Led to Mistake: An Explanation of Bell v. Lever Bros.’ (2003) 119 LQR 625, 625; Furmston (2006), 292–6. Ibid., 181.

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consideration)75 for the agreement to pay the sums in question.76 Therefore, the intended contracts were to pay £30,000 and £20,000 respectively to acquire the right to terminate the service agreements; to provide recognition of the excellent service the defendants had given the complainant; and to ensure the smooth amalgamation of the complainant and its competitor. The right to terminate was worthless, because it was already vested in the complainant. However, recognition of the defendants’ excellent service and ensuring a smooth amalgamation were still very valuable to the complainant, even though, on the facts, it was found that the complainant would have summarily dismissed the defendants and terminated the service agreements had it known of the breaches. Therefore, the difference between the intended and actual subject matters is not as great as it first seems. As such, it is submitted that one cannot dismiss their Lordships’ explicit support for a general doctrine of common mistake by arguing that the fact that common mistake did not succeed in Bell v. Lever Bros. shows that it cannot realistically operate at all. Further, it is submitted that the difference in language between the tests proposed by their Lordships, and the difference in result between the minority and majority, reflect the difficult issues of fact and degree that arise in cases of common mistake; they do not disclose a difference as to the existence or basis of the doctrine.77 Furmston nonetheless argues that Solle v. Butcher,78 Leaf v. International Galleries,79 Harrison and Jones v. Bunten and Lancaster80 and Frederick E. Rose v. William H. Pim Jr.81 establish that, even if a doctrine of common mistake exists, the threshold for its operation is so high that, realistically, it can never operate.82 It is true that Denning LJ in Solle v. Butcher asserted that Bell v. Lever Bros. established that no contract can be rendered void for common mistake at common law, and that any case seeming to have this effect rests upon a condition in the contract.83 However, it has been shown that the House of Lords in Bell v. Lever Bros. accepted the doctrine of common mistake, so this is an incorrect

75

76 78 81

Although this would seem to be past consideration, it is arguable that the exception established in Lampleigh v. Brathwait (1615) 80 ER 255 could have applied on the facts. See also Pao On v. Lau Yiu Long [1980] AC 614. 77 MacMillan, ‘How Temptation Led to Mistake’, 636–7. Chitty (2008), 447. 79 80 [1950] 1 KB 671, CA. [1950] 2 KB 86, CA. [1953] 1 QB 646. 82 83 [1953] 2 QB 450, CA. Furmston (2006), 293–7. [1950] 1 KB 671, 691.

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interpretation of the effect of their Lordships’ decision. Further, in the Leaf case, mistake was not pleaded, so the fact that the Court of Appeal asserted that a plea of common mistake could not have succeeded is obiter. In the Harrison and Jones case, Pilcher J. rejected the operation of common mistake on the facts. However, this was because he held that a contract cannot be avoided on the basis of any difference between the intended and actual quality of goods to be sold (the subject matter of the impugned contract) if those goods match their contractual description, no matter how fundamental the mistake.84 Indeed, the same must be true if they do not match that description, because, in both cases, the contract allocates the risk. This is an application of the first step in any case of common mistake: namely, to construe the contract to determine whether it allocates the risk of the mistake.85 Furthermore, Pilcher J. expressly recognised the existence of the doctrine of common mistake.86 In the Pim case, rectification was the only remedy sought, so Denning LJ’s reassertion of the position he stated in Solle v. Butcher, that a contract cannot be rendered void for common mistake, was obiter.87 Further, it has been explained that this position was based upon an incorrect interpretation of Bell v. Lever Bros.

4.5 The elements of common mistake The Court of Appeal in the Great Peace case set out five rules of common mistake: (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.88

The third requirement (the relevance of fault) will be addressed last. It is self-evident that there must be a mistake shared by both parties. Furthermore, the mistake must exist at the time of conclusion of the contract. A mistake as to events occurring after conclusion will not 84 87

[1953] 1 QB 646, 658. [1953] 2 QB 450, 459–60.

85

86 Treitel (2007), 318. [1953] 1 QB 646, 656. 88 [2002] EWCA Civ 1407; [2003] QB 679, 703.

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suffice. The classic illustration of this comes from the so-called Coronation cases, where rooms overlooking the planned coronation procession route of King Edward VII were let for the purpose of viewing the coronation. The procession was postponed due to the king’s illness. Most of the contracts for letting the flats were made prior to the decision to postpone. Therefore, in these cases, the “mistake” was that the procession would take place on the scheduled day. These cases raised issues of frustration. However, in Griffith v. Brymer, the putative contract was made after the decision to postpone had been taken.89 Therefore, the mistake was as to an existing fact: namely, that the procession was scheduled for the day for which the room was let. This meant that the case was one of mistake, rather than frustration. As to the second rule, this is the construction point, discussed above.90 Lord Atkin in Bell v. Lever Bros. recognised the importance of construing the contract to see whether it covered the mistake. His Lordship held that common mistake as to “quality” may operate so as to render a contract void, but said that where the parties contracted that the article should possess the quality which one or other or both mistakenly believed it to possess . . . there is a contract and the inquiry is . . . whether the contract as to quality amounts to a condition or a warranty.91

The Australian case of McRae v. CDC provides a good example of this principle.92 The mistake was as to the existence of a tanker, and the High Court of Australia held that the impugned contract could not be vitiated for common mistake because the complainant had promised the tanker existed. Similarly, in Associated Japanese Bank v. Cre´dit du Nord, the complainant guaranteed a third-party’s payment obligations to the defendant, in relation to certain machinery.93 However, the third party was a fraudster and the machinery did not exist. Neither the complainant nor defendant knew this. Steyn J. held that the defendant-creditor had promised that the machinery existed. As this was a condition precedent to the complainant’s obligations, it was not liable under the guarantee. There was no need to go on to consider mistake. It is important to note that the construction point extends beyond construing the contract to see whether either party made a promise in relation to the mistaken state of affairs and includes non-promissory 89 91

90 (1903) 19 TLR 434. See p. 97, above. See also p. 146, below. 92 93 [1932] AC 161, 218, HL. (1951) 84 CLR 377. [1989] 1 WLR 255.

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terms allocating the risk.94 Therefore, if there is a contingent condition covering the matter, this precludes the operation of mistake in the same way a promissory term would.95 In both cases, the impugned contract covers the mistake so is not rendered different from the intended contract. Therefore, the complainant’s consent to the latter contract is consent to the former contract: they are one and the same. The fourth and fifth points made by the Court of Appeal in the Great Peace case relate to the requisite severity of the mistake. There have been many attempts to capture the essence of this requirement. For example, Treitel suggests that the key is a distinction between identity and attributes/qualities, similar to the one he argues lies at the root of cases of mistake as to identity. He argues that, where the mistaken quality is one by which the subject matter is identified, so that it can properly be said to be a different thing with that quality than without it, the mistake is sufficiently serious.96 It is submitted that the reason a sufficiently serious difference between the intended and actual subject matters is required is to ensure that relief is only available where the intended and putative contracts themselves are different. If a contract is for subject matter X, a minor difference in the subject matter is irrelevant, as long as the subject matter remains identified as X, because the impugned contract remains the one to which the parties consented. If, however, the mistake changes the identity of the subject matter (so that it is now Y), then the putative and intended contracts are different: a contract for Y is different from a contract for X. Indeed, in discussing the implied-term theory of mistake, Lord Atkin said in Bell v. Lever Bros. that ‘a condition would not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts’.97 His Lordship rightly did not favour the implied-term theory, but he said that it represented ‘a common standard’ with his conception of the doctrine of common mistake, namely, ‘[d]oes the state of the new facts destroy the identity of the subject-matter as it was in the original state of facts?’98 This clearly supports the above analysis: when the mistake is sufficiently serious, it ‘destroy[s] the identity of the subject-matter as it was in the original state of facts’ (i.e., the intended subject matter), thus renders ‘the [putative] contract something different in kind from the [intended] contract in the original state of facts’ (i.e., the mistake renders the putative contract, for the actual subject matter, different from the 94 96

Chitty (2008), 439. Treitel (2007), 322.

95 97

Graves v. Graves [2007] EWCA Civ 660; [2008] L & TR 15. 98 [1932] AC 161, 226, HL (my italic). Ibid., 226–7.

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intended contract, for the intended subject matter). Treitel’s test helps to illuminate this: where the identity of the subject matter would be different, the contract would be different because a contract for X is different from a contract for Y. At first blush, the Court of Appeal’s test of impossibility of performance in the Great Peace case might seem to conflict with Bell v. Lever Bros. For, even if the subject matter is sufficiently different that the putative and intended contracts are different, as is required by Bell v. Lever Bros, the contract can still be performed: it is possible to give something, unless the subject matter does not exist. However, the Court of Appeal made it clear that common mistake could operate [w]here it is possible to perform the letter of the contract, but . . . there was a common mistake in relation to a fundamental assumption which renders performance of the essence of the obligation impossible.99

The essence of the obligation clearly relates to the essence of the intended obligation, because one cannot properly determine the essence of an obligation separately from what the parties intended. Whenever a common mistake is so severe that the difference between the intended and actual subject matters has the practical effect of rendering the putative contract for the latter different from the intended contract for the former, performance of the essence of the intended obligation is impossible: the intended subject matter cannot be given. Further, where performance of the essence of the obligation is impossible because of a difference between the intended and actual subject matters, this must be because the difference is so severe that a contract performed in relation to the actual subject matter (the putative contract) would be different from a contract performed in relation to the intended subject matter (the intended contract and the essence of the obligation). Therefore, it is submitted that this is not a new standard, but merely an alternative phrasing of the test.100 As for the third element noted in the Great Peace case, the relevance of “fault” has not been authoritatively determined in English law. In McRae v. CDC, the High Court of Australia said that a party cannot rely on [common] mistake where the mistake consists of a belief which is . . . entertained by him without any reasonable ground, and . . . deliberately induced by him in the mind of the other party.101 99 100

[2002] EWCA Civ 1407; [2003] QB 679, 704 (my italic). 101 Cartwright (2007), 520, 522. (1951) 84 CLR 377, 408.

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In this case, the complainant both acted unreasonably and deliberately induced the mistake in the defendant. Therefore, the court did not have to determine what the situation would be if the complainant had acted unreasonably but not deliberately induced the mistake, or vice versa. It is submitted that, if the complainant has not acted unreasonably in coming to be mistaken, the mere fact that he deliberately (but necessarily innocently) induced the mistake in the mind of the defendant should not disentitle him from relying upon that mistake.102 On the other hand, if he acted unreasonably in coming to be mistaken, the fact that he did not induce (deliberately or otherwise) the mistake in the defendant should not protect him from the consequences of his unreasonable behaviour. In the Associated Japanese Bank case, Steyn J. held that the complainant ‘cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds’, but did not refer to the relevance of whether he induced the mistake in the defendant. Further, he said that the basis of the requirement was a policy decision, to keep common mistake within appropriate bounds.103 The Court of Appeal, in the Great Peace case, approved the rule asserted by Steyn J.104 Discussion of the need for proof of an absence of unreasonableness was obiter in both the Associated Japanese Bank case and the Great Peace case, but the analogy with the requirement of an absence of carelessness in non est factum is clear.105 Therefore, it is submitted that, in common mistake, a complainant should be required, as a matter of policy, to prove that he was not careless in coming to be mistaken. As the mistaken assumption must be shared, the defendant cannot have knowledge of, or have fraudulently induced, the complainant’s absence of consent. If, however, he negligently induced it, this unreasonableness should negate any unreasonableness in the complainant. Of course, it is less likely (but possible) that the complainant will have been unreasonable in coming to the mistaken belief when it was induced by the defendant’s unreasonable conduct.

102

103 104

Cf. Chitty (2008), 453 (complainant should be unable to rely upon a mistake where his inducement of it in the defendant amounts to an operative misrepresentation). [1989] 1 WLR 255, 268. 105 [2002] EWCA Civ 1407; [2003] QB 679, 707. See pp. 82–5, above.

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4.6 Conclusion Despite the controversy surrounding the underlying rationale of common mistake, it is submitted that its true basis is an absence of consent. For, it operates when the mistake is made in relation to a matter recognised by both parties as fundamental to the contract.106 Where the mistake is fundamental, it has the effect of rendering the putative and intended contracts different. Therefore, neither party consented to the putative contract. The complainant’s absence of consent proves an absence of voluntariness, and the defendant’s absence of consent justifies rendering this operative.107 Preclusion of the plea where the complainant acted unreasonably in coming to be mistaken is an appropriate policy limitation, similarly to the position in non est factum.108 It is submitted that, once it is recognised that a relevant mistake as to subject matter establishes an absence of consent from the complainant, it should also be recognised that the defendant’s knowledge or unacceptable inducement of that absence of consent is sufficient to render it operative. If this is accepted, the mistake need not be shared. This clearly contradicts the well-settled authority of Bell v. Lever Bros.109 It also seems to conflict with Smith v. Hughes, which holds that knowledge of even a fundamental mistake as to the subject matter is insufficient.110 Further, it could be argued by some to move towards a duty of a disclosure. However, it must be remembered that it is not knowledge of the mistake that is a sufficient additional factor; it is knowledge of the absence of consent. Where the complainant’s absence of consent comes from his mistake, unacceptable inducement of the mistake is unacceptable inducement of the absence of consent. However, knowledge of the mistake is not necessarily knowledge of the absence of consent. What is required for this is: (1) knowledge of the mistake; and (2) knowledge of the importance of the matter to the complainant: that is, knowledge that

106

107 108 109 110

Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton. See pp. 30, 31–3, above. See pp. 82–5 (non est factum), 97–9, 111–12 (common mistake), above. [1932] AC 161, 218, HL, per Lord Atkin. (1871) 6 QB 597, 607, per Blackburn J. See also Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 695 (‘a unilateral mistake . . . [is] only [operative] when . . . [it is] as to a contract term’; however, the rules of mistake as to identity show that this statement is too wide: see pp. 115–32, below).

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he would see the putative contract as different from the contract he believed he was making. Indeed, it is submitted that any mistake that establishes an absence of consent should be rendered operative by any of the potential additional factors. There is nothing in the nature of any absence of consent or any additional factor that means any combination of them should be treated differently from any other combination. This is the position in relation to mistake under the PICC, PECL, DCFR and Restatement.111 111

See pp. 145, 148–9, 156–7, below.

5 Mistake as to identity in English law

5.1

Introduction

There is debate whether ‘mistake as to identity’ may properly be described as a vitiating factor, or is purely an aspect of the law of offer and acceptance.1 It will be explained that, in most cases where there is an operative mistake as to identity, the rules of offer and acceptance have not been satisfied. However, it will further be explained that the key to cases of mistake as to identity is the subjective severity of the mistake from the complainant’s perspective:2 namely, whether it establishes an absence of consent. Indeed, it will be shown that an offer-and-acceptance and absence-of-consent theory go hand in hand3 in all but one hypothetical area: where the defendant has no knowledge of, and did not unacceptably induce, the complainant’s identity mistake (thus absence of consent), but did not himself consent to the putative contract. For example, if the defendant himself made an operative mistake as to the complainant’s identity or as to terms. This has never arisen, and is unlikely to arise, on the facts of any case, but it is submitted that vitiation should be available here.4 Another contentious issue is whether the cases can all be reconciled. It will be submitted that there are inconsistencies in the way in which the principles of mistake as to identity are applied to factually similar cases, but that the case law establishes consistency in the principles themselves. It will be explained that these inconsistencies stem largely from the fact that the courts have, effectively, had to decide which of two innocent 1

2

3 4

Ingram v. Little [1961] 1 QB 31, 63, per Devlin LJ; A. Goodhart, ‘Mistake as to Identity in Contract’ (1941) 57 LQR 228. Boulton v. Jones (1857) 2 H & N 564, 566, per Bramwell B; Ingram v. Little [1961] 1 QB 31, 50, 51, 57, per Sellers and Pearce LJJ. Cartwright (2007), 462. See pp. 36–7, above, 319–20, below (generally); 119–20 (mistake as to identity), 139–41 (mutual mistake), below.

115

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parties must bear a loss. For, the classic fact-pattern of mistake as to identity involves the defendant fraudulently representing to the complainant that he is X, obtaining goods on credit, selling those goods to Y, a bona fide purchaser for value without notice, and then absconding. If the contract is void, Y must return the goods or their value to the complainant; if not, the complainant gets nothing. Different judges’ views as to who is more worthy of protection in a given case have, it is submitted, clouded their application of the accepted legal principles.

5.2

The underlying rationale of vitiation

Some commentators and judges argue that mistake as to identity can be analysed purely in terms of offer and acceptance.5 It will be shown that all decided cases can be analysed in this way, but that this analysis overlaps with an absence-of-consent theory. If the complainant’s offer or acceptance, as the case may be, is not addressed to the defendant, it cannot lead to a contract with the defendant.6 The problem is how to determine to whom the complainant addressed himself. Judged purely objectively, he addressed the defendant, the person with whom he actually dealt, unless the reasonable person would have known of the identity mistake and its importance to the complainant. Judged subjectively, it might seem that, when the complainant believed he was dealing with X, he addressed X. However, if he did not care about identity, even the subjective interpretation is that he addressed the person to whom his words or conduct were actually addressed, whomever that may be. It is well settled that the interpretation of offers and acceptances is objective. However, it is equally well settled that there is a residual subjective element to the objective principle: if the “promisee” actually knew that the “promisor” was not making a particular promise to him, that promise is not legally binding, whatever the objective interpretation.7 Further, it cannot matter whether the mistake is as to the contents or addressee of the promise. Therefore, it might seem that, 5 6

7

E.g., Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919, 978, per Lord Walker. Ingram v. Little [1961] 1 QB 31, CA; Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694.

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whenever the defendant knows that the complainant believes he, the defendant, is someone else, there is no coincidence of offer and acceptance. Yet this is not necessarily sufficient to render the putative contract void.8 As such, it might seem that an offer-and-acceptance analysis cannot explain cases of mistake as to identity. However, regardless of with whom the complainant believed he was dealing (thus regardless of the defendant’s knowledge of this), if he did not care with whom he dealt, then he was (objectively and subjectively) promising to be bound to the person with whom he actually dealt (the defendant), whomever he may be. Therefore, the fact that knowledge of the mistake is insufficient does not rule out an offer-and-acceptance analysis. Indeed, a mere mistake as to identity, in the sense that the complainant believed the defendant was someone else, does not necessarily establish an absence of consent. If the complainant would not see a contract with the defendant (the impugned contract) as different from a contract with the person he believed the defendant do be (the intended contract), he addressed himself as much to the defendant as to the other person, and he consented as much to the former contract as to the latter. He promised to be bound to the person with whom he actually dealt (the defendant), whomever he may be.9 However, if the mistake is sufficiently serious that the complainant would see a contract with the defendant (the putative contract) as different from one with X, the person he believed the defendant to be (the intended contract), then he did not consent to the putative contract. He intended to deal with X; he consented to a contract with X; therefore, he did not consent to the putative contract. Subjectively, his words of offer or acceptance, as the case may be, were not addressed to the defendant. This does not necessarily mean that the absence of consent should be operative or that there is no objective agreement. For, objectively, the complainant’s offer or acceptance, as the case may be, was addressed to the defendant, unless the reasonable person would have known of the mistake and its importance. However, if the defendant knew of the mistake, the residual subjective element comes into play to preclude a binding offer and acceptance, and there is a sufficient reason to render the complainant’s absence of consent operative. For, if the defendant 8

9

E.g., Phillips v. Brooks [1919] 2 KB 243; Dennant v. Skinner [1948] 2 KB 164; Lewis v. Averay [1972] 1 QB 198, CA. Ingram v. Little [1961] 1 QB 31, 55, per Pearce LJ.

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knows that the complainant believes that he, the defendant, is someone else, he will normally point out this mistake, unless he believes that the complainant might be willing to contract with the other person but not with him, the defendant. Therefore, knowledge of the mistake is to be equated with knowledge of the fact that the complainant is not making a promise to the defendant (i.e., knowledge of the absence of consent). This is even more strongly the case in the classic fact-pattern, where the defendant fraudulently represented himself to be someone else, precisely because he believed the defendant would be willing to contract with that person but not with him.10 Therefore, one can see that an offer-and-acceptance analysis covers a large amount of this area of the law and goes hand in hand with the absence-of-consent theory. This is reflected in authority, because, while some decisions are factually difficult to reconcile, they all treat the most important question as: with whom did the complainant intend to contract? The cases answer this question by assessing the importance to the complainant of the identity of his co-contractor.11 For, if the complainant is mistaken and the identity of his co-contractor is sufficiently important to him, the contract will be void (where, as is almost always the case, the defendant has knowledge of these facts, and thus of the absence of consent); but if it is not sufficiently important, it will not be. The importance of identity determines whether the complainant would see the putative contract between himself and the defendant as different from the contract he intended to make, with the person he believed the defendant to be. This, in turn, determines to whom the complainant addressed his offer or acceptance, as the case may be, and whether he consented to the putative contract. Therefore, a relevant mistake as to identity necessarily establishes an absence of consent. However, in Ingram v. Little, Devlin LJ said that the complainant’s subjective state of mind is ‘immaterial to [the] question’ of whether the putative contract is void for mistake as to identity.12 In his Lordship’s opinion, ‘[w]hen the law avoids a contract ab initio, it does so irrespective of the intentions or opinions or wishes of the parties themselves’.13 It is submitted that this is incorrect. It is absolutely correct to say that the subjective intentions of the parties are not sufficient to 10 11

12

Cartwright (2007), 459. Boulton v. Jones (1857) 2 H & N 564, 566, per Bramwell B; Ingram v. Little [1961] 1 QB 31, 50, 51, 57, per Sellers and Pearce LJJ. 13 [1961] 1 QB 31, 68. Ibid.

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decide the question of voidness ab initio, but they are not immaterial. Indeed, in the same case, Pearce LJ said that an investigation into the complainant’s ‘actual state of mind . . . is a preliminary essential’.14 Devlin LJ surely merely intended to make it clear that an absence of consent is not sufficient, and he did not mean to suggest that it is wholly irrelevant. Indeed, it has been argued that absence of consent cannot be sufficient for vitiation, because this would replace the objective principle with subjectivity.15 However, it was also argued that, if there is a sufficient reason to render an absence of consent operative, the putative contract should, as a matter of theory, be void.16 The additional factor could be the defendant’s knowledge of the absence of consent, but it need not be. For example, in Scriven Bros. v. Hindley, the defendant did not know of, but unreasonably induced, the complainant’s mistake as to the terms of what was being promised (and thus his absence of consent to the putative contract). The judge held that this precluded a binding offer and acceptance.17 There is no reason why this analysis should not apply to an unreasonably induced18 mistake as to identity, or to any mistake creating an absence of consent. Indeed, Lord Philips recognised that the courts take the same approach to determining whether the complainant reached agreement with the defendant as to determining whether he agreed to the terms of the putative contract.19 Identity is not necessarily a term,20 but if a mistake as to identity was sufficiently serious, the complainant was mistaken as to what was being promised: he mistakenly believed he was making a promise to someone other than the defendant, and he would see a promise to the defendant as different from a promise to the person he believed the defendant to be. Once again, therefore, the rules of offer and acceptance provide the solution if the defendant unacceptably induced the complainant’s identity mistake. There is one situation in which the putative contract should be void, but an offer-and-acceptance analysis would not necessarily lead to this conclusion. This is where the defendant had no knowledge of, and did 14 17 18

19 20

15 16 Ibid., 55. See pp. 22–3, above. See pp. 19–26, above. [1913] 3 KB 564. See also pp. 137–8, below. It is submitted that any unacceptable inducement should be relevant. This would include fraudulent and negligent inducements, as well as inducements amounting to an “innocent” misrepresentation, because it will be explained why this is properly treated as unacceptable conduct: see pp. 170–3, below. Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919, 965. Cartwright (2007), 461.

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not unacceptably induce, the complainant’s absence of consent, but did not himself consent to the putative contract. If the defendant did not himself consent to the putative contract, for whatever reason, this is sufficient to allow the complainant’s absence of consent to be operative, to preclude the defendant from holding the complainant to the putative contract. For, that putative contract is based upon an apparent objective agreement that neither party intended to make and to which neither party consented. The analysis is the same as common mistake,21 even though each party’s absence of consent comes from a different source. It is accepted that it will be rare, outside of common mistake, that neither party will have consented to a putative contract. However, it is possible, and it is contended that the putative contract should be void in such cases.22 Nonetheless, it is accepted that it is an implicit assumption that mistake as to identity requires either that the defendant knew of, or unacceptably induced, the complainant’s mistake (and thus absence of consent).

5.3 The rules of mistake as to identity 5.3.1 The key principle: the importance of identity In the preceding section,23 it was explained that the key to resolution of issues of mistake as to identity is to determine with whom the complainant intended to contract,24 and that, in answering this question, the importance to the complainant of the identity of his co-contractor is fundamental.25 Therefore, the mere fact that the complainant believed his co-contractor was someone other than the defendant is insufficient to establish that he did not consent to the impugned contract with the defendant. If the complainant intended to make a contract, it is only when he would see that intended contract and the putative contract as different that his consent to the former is not consent to the latter. 21 22

23 24

25

See pp. 32–3, 97, above. See pp. 32–3, 97, above (common mistake); 36–7, above, 319–20, below (generally); 139–41, below (mutual mistake). See pp. 116–19, above. Boulton v. Jones (1857) 2 H & N 564, 565, 566; Hardman v. Booth (1863) 1 H & C 803, 806–7, 808; Cundy v. Lindsay (1878) 3 App Cas 459, 465–6, 469, 470–1, HL; Phillips v. Brooks [1919] 2 KB 243, 248; Lake v. Simmons [1927] AC 487, 500, HL; Dennant v. Skinner [1948] 2 KB 164; Ingram v. Little [1961] 1 QB 31, 49, 56, CA. Boulton v. Jones (1857) 2 H & N 564, 566, per Bramwell B; Ingram v. Little [1961] 1 QB 31, 50, 51, 57, per Sellers and Pearce LJJ.

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Further, it is only when identity is sufficiently important to the complainant that it can be said he would see the putative contract with the defendant as different from the intended contract with the person he believed the defendant to be. Indeed, case law shows that the key to issues of mistake as to identity is to determine the importance to the complainant of the identity of his co-contractor; or, more accurately, the importance to him of his belief that his co-contractor was the person he believed the defendant to be. For, the more important his belief that he was dealing with the person he believed the defendant to be, the more likely he would see a contract with that person as different from a contract with the defendant. However, where the complainant did not really care whether he made the contract with the defendant or with the person he believed the defendant to be, the impugned and intended contracts are not subjectively different: in the complainant’s mind, a contract with the defendant was in substance the same as a contract with the person he believed the defendant to be. In Boulton v. Jones, the complainant sent in an order to X. The defendant had recently purchased X’s business and he purported to fulfil that order. The defendant sued the complainant for the price of the goods and the latter denied there was ever any contract between himself and the defendant. Pollock CB said: The point raised is, whether the facts proved did not shew an intention on the part of [the complainant] to deal with [X] . . . It is a rule of law that if a person intends to contract with [X], [the defendant] cannot give himself any right under it.26

This does not answer what is the most difficult question in cases of mistake as to identity: namely, how to determine whether the complainant intended to contract with the defendant, the person with whom he actually dealt, merely happening to believe he was someone else, or intended to contract with the specific person he believed the defendant to be. However, the crucial fact in this case was that the complainant had had prior dealings with X, and it was established in evidence that he intended to effect a right of set-off to pay for the goods. Therefore, there can be no doubt that the complainant specifically intended to contract with X, because the identity of his co-contractor as X was vitally important. Indeed, Bramwell B. said: 26

(1857) 2 H & N 564, 565.

122

mistake as to identity in english law Where a contract is made, in which the personality of the contracting party is or may be of importance, as a contract with a man to write a book, or the like, or where there might be a set-off, no other person can interpose and adopt the contract.27

As such, it can be seen that the court held the putative contract void because the complainant did not intend to contract with the defendant, which was established by the fact that the identity of his co-contractor as X was fundamental to the complainant. In Hardman v. Booth, the defendant fraudulently claimed to be a member of firm X, with authority to contract on its behalf.28 The complainant purported to make a contract for the sale of goods to X. The defendant took delivery and pledged the goods to Y, from whom the complainant sought to recover the value of the goods. The success of the action depended upon whether Y had property in the goods, which in turn depended upon whether there had ever been any contract under which the property had passed from the complainant to the defendant. The Court of Exchequer held that there was never any valid contract of sale. All the judges based their decision on the fact that the complainant specifically intended to contract with X, not the defendant.29 However, they did not state why they were of this opinion, beyond the mere fact of the complainant’s mistake. It is true that X was a respected firm of longstanding, and it seems that this was important in the complainant’s decision to contract. Yet the case did seem to come close to adopting the position that the very fact of the complainant’s mistake established that he did not intend to contract with the defendant, even though that was with whom he actually dealt. Indeed, this was the apparent approach taken by the House of Lords in the classic case of Cundy v. Lindsay, where, by correspondence, the defendant fraudulently passed himself off as a member of a wellrespected firm (X) and thereby induced the complainant to send him goods on credit, which he then sold to an innocent third party.30 The House of Lords unanimously held that there was no contract between the complainant and defendant because of the complainant’s mistaken belief that he was dealing with X. Lord Cairns said: Of [the defendant, the complainant] knew nothing, and of him they never thought. With him they never intended to deal. Their minds never, 27 29 30

28 Ibid., 566 (my italic). (1863) 1 H & C 803. Ibid., 806–7, 808, per Pollock CB and Martin, Channel and Wilde BB. (1878) 3 App Cas 459.

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even for an instant of time rested upon him, and as between him and them there was no consensus of mind which could lead to . . . any contract whatever.31

Similarly, Lord Penzance said: ‘No contract was ever intended with [the defendant], and the contract which was intended [with X] failed for want of another party to it.’32 On the facts of both Hardman v. Booth and Cundy v. Lindsay, it seems that the complainant’s belief that he was dealing with a well-respected firm was important in his decision to contract. Yet, in neither case was this fact stressed as relevant in reaching the decision that the complainant did not intend to contract with the defendant. In both cases, it seemed that the mere fact of the mistake was sufficient. However, in Dennant v. Skinner, the lack of subjective importance attached to the co-contractor’s identity was fundamental in rejecting the plea of mistake as to identity.33 In this case, the impugned contract was for the sale of a car at a public auction. Due to the defendant’s fraud in prior dealings with the complainant at the auction, the latter believed, when he knocked down the car in question to the former, that the defendant was X. By an extension of his fraud, the defendant convinced the complainant to allow him to take the car away upon presentation of a cheque. The cheque was dishonoured and the defendant purported to sell the car to Y, who purported to sell it to Z, from whom the complainant sought to recover it or its value. Hallett J. held that there was a valid (albeit voidable) contract between the complainant and defendant. The judge’s reasoning was that, while the identity of the person to whom possession of the car was released on credit was important to the complainant, the identity of the co-contractor per se was not: the sale was at a public auction, and the complainant was willing to sell the car to the highest bidder.34 Therefore, the impugned contract with the defendant was not, subjectively, different from the intended contract with X. Ingram v. Little35 is one of a group of cases36 that are factually hard to reconcile. This aspect of the case will be addressed below.37 The complainants agreed to sell a car to a person who claimed to be X, someone living at a specific address given to them by the defendant and verified by 31 33 36

37

32 Ibid., 465–6. Ibid., 471. See also ibid., 469, per Lord Hatherley. 34 35 [1948] 2 KB 164. Ibid., 167–8. [1961] 1 QB 31, CA. Phillips v. Brooks [1919] 2 KB 243; Lake v. Simmons [1927] AC 487, HL; Ingram v. Little [1961] 1 QB 31, CA; Lewis v. Averay [1972] 1 QB 198, CA. See pp. 131–2, below.

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one of the complainants as the address of X. The defendant took the car away on credit and sold it to Y. By a majority, the Court of Appeal held that the putative contract was void. Sellers LJ noted that the complainants ‘had no intention to contract with [the defendant], as he was’38 and that their belief that he was in fact X, an apparently respectable, trustworthy person, was vital to their decision to make the putative contract.39 His Lordship also noted that if it would, at the time of contracting, have made no difference to the complainants whether they were dealing with the defendant or X, there would have been be a valid contract with the defendant.40 Pearce LJ said that ‘it would be absurd if [a complainant] could avoid the contract . . . when he was equally prepared to make the contract had he not been mistaken’.41 The stress placed by their Lordships on the importance to the complainants of the identity of their co-contractor shows that, at the time of contracting, the complainants would have seen a contract with the defendant, one whose status they had not investigated, as different from one with X, whose status they had investigated. Therefore, the case clearly shows the critical relevance of the importance to the complainant of his co-contractor’s identity. It must be noted that what matters is not, per se, the importance to the complainant of the co-contractor’s identity as the person the complainant believed him to be, but his identity as someone other than the defendant. Whenever the complainant believes that he is contracting with someone other than the defendant and he would see that intended contract as different from the putative contract with the defendant, this establishes the necessary absence of consent to the putative contract. Normally, the complainant can only establish this if it is specifically important to him that his co-contractor is X, rather than merely that he is not the defendant. However, it might be that the complainant does not care with whom he is dealing, as long as it is not the defendant, individually or as a member of a class. In this case, the requisite absence of consent is still established.42 This principle is illustrated by Said v. Butt.43 The defendant was a theatre critic and former business associate of the complainant. Due to a breakdown in the parties’ relationship, the complainant twice refused the defendant’s application for a ticket to the opening night of a particular production at its theatre. The defendant therefore procured X to purchase a ticket for his use. It was held that the complainant was within its 38 42

[1961] 1 QB 31, 49. Stoljar (1968), 57.

39 43

40 Ibid., 48. Ibid., 50. [1920] 3 KB 497.

41

Ibid., 55.

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rights to refuse the defendant admittance on presentation of the ticket, because there was never any valid contract between the complainant and defendant. Although the case is primarily one involving the issue of undisclosed principal, the facts nicely illustrate the present point: there was nothing special in X that induced the complainant to wish to contract with X, but there was plenty in the defendant to ensure that the complainant specifically did not intend to contract with him. In Sowler v. Potter, the defendant, having been convicted of permitting disorderly conduct in a teashop, legally changed her name to X.44 Prior to the change of name becoming official, she had written, under the name X, to the complainant proposing a lease of premises to her for the purpose of running a teashop. Although the lease was not effected until after the defendant had legally changed her name, nothing turned on this point. Tucker J. held the putative lease void for mistake as to identity. Crucially, the complainant’s agent, who conducted negotiations on her behalf, had heard of the defendant’s conviction, and the judge accepted his assertion that the complainant would never have been willing, and thus did not intend, to contract with the defendant, because of the conviction.45 This evidence established that the complainant would, as such, have seen the putative contract with the defendant as different from the intended contract with one who had not been convicted of that offence. The identity of the co-contractor as X did not itself matter, but the identity of the co-contractor as someone who had not been convicted of the relevant offence (i.e., as someone other than the defendant) did. Beatson has criticised the decision and said that it must be taken to have been overruled.46 However, he accepts that a positive intention in the complainant not to contract with the defendant is relevant.47 His criticism of the decision rests largely upon the finding in the case that there was such an intention.

5.3.2 Three rules guiding application of the key principle It has been shown that case law establishes that the most important question is with whom the complainant intended to contract,48 and that, in turn, the key to answering this question is to determine the 44 47 48

45 46 [1940] 1 KB 271. Ibid., 275. Beatson (2002), 330. Ibid., 329. Cf. Chitty (2008), 484. Boulton v. Jones (1857) 2 H & N 564, 565, 566; Hardman v. Booth (1863) 1 H & C 803, 806–7, 808; Cundy v. Lindsay (1878) 3 App Cas 459, 465–6, 469, 470–1, HL;

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importance to the complainant of the identity of his co-contractor.49 However, this remains a difficult factual question. Therefore, the courts have developed rules to guide them in the analysis. For example, whether the person the complainant believed the defendant to be actually existed is clearly relevant. If the complainant had no more heard of that person than of the defendant, there will normally be no substantive difference in his mind between a contract with the one as opposed to a contract with the other. Therefore, the impugned contract will be the contract to which the complainant consented. This is more likely to be the case where the defendant claims to be an entity that does not exist. An example of this is King’s Norton v. Edridge,50 which was, in its material facts, almost identical to Cundy v. Lindsay. The main difference is that the firm the defendant claimed to represent (X) did not actually exist. The Court of Appeal held that there was a (voidable) contract between the complainant and defendant. The difference in result between this case and Cundy v. Lindsay is usually explained by the fact that, in this case, X did not exist, thus the complainant had no more heard of him than he had heard of the defendant; whereas in Cundy v. Lindsay, X was a firm well known to the complainant by reputation.51 Indeed, in this case, Smith LJ said: ‘If it could have been shown that there was a separate entity called [X] . . . then the case might have come within the decision in Cundy v. Lindsay.’52 However, it should not be an absolute rule that, if the person the complainant believes the defendant to be does not exist, there can be no operative identity mistake.53 For, it is theoretically possible that the complainant’s belief in the existence of X might, in exceptional circumstances, be sufficiently firm that he would see a contract with the defendant as different from one with X.54 For example, assume the

49

50 51 52 53 54

Phillips v. Brooks [1919] 2 KB 243, 248; Lake v. Simmons [1927] AC 487, 500, HL; Dennant v. Skinner [1948] 2 KB 164; Ingram v. Little [1961] 1 QB 31, 49, 56, CA. Boulton v. Jones (1857) 2 H & N 564, 566, per Bramwell B; Ingram v. Little [1961] 1 QB 31, 50, 51, 57, per Sellers and Pearce LJJ. See also pp. 116–19, 120–5, above. (1897) 14 TLR 98, CA. Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919, 952, per Lord Millett. (1897) 14 TLR 98, 99. Chitty (2008), 483. Alternatively, it might be a situation where the complainant specifically does not care with whom he contracts, so long as not with the defendant, such that he would see a contract with anyone else as different from a contract with the defendant: see pp. 124–5, above.

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defendant perpetrated an elaborate fraud designed to engender public confidence in the reputation of X, a company that never existed. The complainant, on the basis of this (albeit fraudulently) established reputation, purports to contract with X. In this case, there is no less of an absence of consent than if X genuinely existed but the defendant fraudulently assumed its name, as in Cundy v. Lindsay. The key is whether the complainant has heard of X prior to conclusion and has any beliefs or opinions as to the desirability of contracting with X, rather than merely whether X exists, because this determines the importance to the complainant of the identity of his co-contractor. This is shown by the following passage from the judgment of Sellers LJ in Ingram v. Little: Whether the person portrayed . . . is known to the other party or not is important in considering whether the identity of the person is of any moment or whether it is a matter of indifference. If a man said his name was Brown when it was in fact Smith, and both were unknown to the other party, it would be difficult to say that there was any evidence that the contract was not made and intended to be made with the person present.55

Another rule the courts have developed to help them to determine with whom the complainant intended to contract is a presumption that, when one deals face to face, he intends to contract with the person physically present, whomever he turns out to be.56 This is more of a practical policy decision than a principle directly linked to the importance of the identity of the co-contractor. However, the cases establish that the key to rebutting the presumption is for the complainant to establish the importance of the belief that he was contracting with X. That is, the principles in face-to-face dealings are exactly the same as in the other cases, but the physical meeting of the parties is evidentially relevant to their application.57 An illustration of the face-to-face principle is Phillips v. Brooks.58 The case followed the classic fact-pattern of mistake as to identity. The only material difference from cases such as Boulton v. Jones, Cundy v. Lindsay and King’s Norton v. Edridge was the fact that the complainant and defendant dealt face to face. Horridge J. held that there was a contract between the complainant and defendant, albeit one that was voidable for fraud. He said: ‘[The complainant] intended to contract with the person

55 58

[1961] 1 QB 31, 50. [1919] 2 KB 243.

56

Chitty (2008), 479–81.

57

Cartwright (2007), 476.

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[physically] present, and there was no error as to the person with whom he contracted.’59 He did not say that he applied any presumption that, in face-to-face dealings, one intends to contract with the person physically present, but the fact that the parties dealt face to face appears to have been the most important factor in the judge’s decision that the complainant intended to contract with the defendant as he actually was. Lake v. Simmons was another face-to-face case with the defendant claiming to be X and the complainant dealing with her on that basis.60 Although the case involved interpretation of an insurance policy, the key for present purposes is that the House of Lords held that the complainant intended to contract only with X. Their Lordships did not mention any presumption or stress any important facts that displaced it if it existed. However, in Ingram v. Little, Pearce and Devlin LJJ both held that, in face-to-face dealings, there is a presumption that one intends to contract with the person physically present.61 However, Pearce LJ held that the presumption was rebutted; whereas Devlin LJ held that it was not. As such, it can be seen that the presumption does not necessarily solve the factual difficulties that arise. It is merely a rebuttable evidential presumption. In Lewis v. Averay, Phillimore LJ based his decision that the impugned contract was merely voidable for fraud, not void for mistake as to identity, on the presumption.62 Lord Denning MR also supported the existence of the presumption.63 In Shogun Finance v. Hudson, Lord Nicholls asserted that the presumption should be extended to apply to all contracts: that is, there should be a rebuttable presumption that the complainant intended to contract with the defendant, the person with whom he actually dealt.64 Lord Millett was of the same opinion.65 Lords Nicholls and Millett were in the minority, holding that the impugned contract was voidable for fraud, not void for mistake. The majority did not cast doubt on the existence of the presumption in face-to-face dealings, but held that it had no application to written contracts. It has been argued that the principle might extend to all contracts concluded by ‘inter-personal contact’,66 but it has never been applied other than in face-to-face dealings. 59 62 65

60 61 Ibid., 248–9. [1927] AC 487, HL. [1961] 1 QB 31, 57, 61, 66. 63 64 [1972] 1 QB 198, 208. Ibid., 207. [2003] UKHL 62; [2004] 1 AC 919, 939. 66 Ibid., 950–3. Chitty (2008), 479, at n. 380.

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As an evidential tool in a difficult factual area, the presumption provides some assistance. However, it is essentially arbitrary. It is not correct, even as a general rule, to say that one is more likely to intend to contract with the person with whom he is actually dealing when that person is physically present than when the dealings are not in person. It is certainly not any less likely that he would see a contract with the defendant, the person with whom he actually dealt, as different from one with the person with whom he believed he was dealing. Indeed, the presumption would seem to have the odd effect of making it harder to escape non-written contracts for mistake as to identity, at least where the parties deal face to face. This effect is actually reinforced by the decision in the Shogun case, where their Lordships in the majority held that the issue of mistake as to identity in all cases where the putative contract is reduced to writing is merely one of construction of the relevant documentation. The case involved a hire-purchase transaction for the sale of a car. The defendant claimed to be Mr. Patel, whose driver’s licence he had obtained without authorisation. The written contract described the parties as the complainant and Mr Patel. The majority held that the parol evidence rule precluded introduction of evidence to contradict that these were the true parties. As there clearly could not be any contract between the complainant and Mr Patel, who knew nothing of the dealings, there was never any valid contract. The effect of this decision, therefore, is that, whenever the contractual documentation names the parties, any mistake as to identity necessarily renders the putative contract void. If the complainant had sought to sue Mr Patel on the contract, evidence of the defendant’s fraud would undoubtedly have been permitted to prove that Mr Patel was not a party. Why, then, should it never be allowed in order to seek to prove that the defendant is the true counterparty?67 Furthermore, what if an impugned contract is in writing but none of the contractual documentation specifically identifies the parties? The decision in the Shogun case would not apply on these facts, so the validity of a written contract is made dependent upon the arbitrary distinction of whether the contractual documentation actually names (or otherwise sufficiently identifies) the parties. The parol evidence rule should not preclude the possibility of proving that the complainant would see a contract with the person he believed

67

C. Hare, ‘Identity Mistakes: A Missed Opportunity?’ (2004) 67 MLR 993, 1006.

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the defendant to be (the intended contract) as the same as one with the defendant (the impugned contract), and thus that he did consent to the impugned contract. Indeed, the purpose of the parol evidence rule is to reinforce the security of written contracts,68 but, applied in this way, it undermines that security. It has been suggested that a distinction may have to be drawn between cases where the contract is reduced to writing and cases where the contractual dealings are conducted in, but the contract is not reduced to, writing, with the Shogun case applying to the former but not the latter.69 The distinction might seem to be supported by the parol evidence rule, which applies only when the parties intend the writing to reflect their entire agreement.70 However, first, it has been shown that the parol evidence rule does not justify the decision in the Shogun case. Second, it is submitted that such an arbitrary, absolute distinction is insupportable as a matter of principle: whether the contract is reduced to writing or merely concluded after written negotiations (or, indeed, is wholly oral) does not necessarily affect the importance the complainant attaches to the identity of his co-contractor, which has long been established as the key to cases of mistake as to identity.71 Finally, it is contended that the distinction is not required by authority. Nonetheless, to draw the distinction would at least minimise the effect of the rule in the Shogun case.

5.3.3 Summary Despite the explanation of the key principle and guiding rules of mistake as to identity given above, difficult factual issues remain. Treitel suggests that the central issue is whether the mistake is as to identity or merely attributes, the former being sufficient but the latter insufficient.72 However, he accepts that this is a factually difficult question to answer, because, in reality, every mistake as to the person may be reduced to a mistake as to his attributes. He proposes that the key to resolution of this difficult issue is to determine whether the mistake is as to some attribute by which the person is, for the purposes of the contract, identified. If it is, then the mistake is as to identity. He gives the example of a college putting on a private dance only for its present and prior members. In this case, the main attribute by which a person is identified is 68 71

69 70 Chitty (2008), 865. Ibid., 482, at n. 400. Ibid., 866. 72 See pp. 116–19, 120–5, above. Treitel (2007), 333–4.

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membership of the college. It is submitted that Treitel’s distinction can be a helpful illustration of the solution to the problem, but is essentially no more than recognition of the fact that it is the importance to the complainant of the identity of his co-contractor that matters. For, whenever the complainant would “identify” the defendant by the mistaken “attributes”, it must be because those “attributes” are sufficiently important to him that he would see the putative contract with the defendant (who does not have those “attributes”) as different from the intended contract with the person he believed the defendant to be (and who did have those “attributes”). Going back to Treitel’s example, the reason a mistaken belief that the defendant was a member of the college would be sufficient is that the college would see a contract for a ticket with one who was a member as different from a contract with one who was not. Therefore, a distinction between attributes and identity assists in the analysis of mistake as to identity but should not be the guiding principle.73 What matters is whether the complainant would see a contract with the defendant as different from a contract, on the same terms, with the person he believed the defendant to be. In the classic case of mistake as to identity, the defendant fraudulently obtains property on credit from the complainant and sells it to an innocent third party. If the putative contract between the complainant and defendant is void, the third party must return the property or its value to the complainant, and he cannot find the defendant to recover his payment. If it is voidable, the third party’s title will be good unless the complainant rescinded the impugned contract before the third party contracted with the defendant. Lord Cairns described the courts’ task of determining which of two innocent parties must lose in such cases as ‘a duty which is always a disagreeable one’.74 However, his Lordship noted that, ‘in discharging that duty your Lordships can do no more than apply, rigorously, the settled and well known rules of law’.75 It is submitted that, at times, judges have allowed their sympathies to have an effect upon their decisions. Indeed, it is contended that some of the difficulties in reconciling the cases on mistake as to identity are caused by judges taking a view of which innocent party is “more innocent”, thus should not bear the loss, and then fitting their interpretation of the facts to that conclusion. 73 74

Shogun Finance v. Hudson [2003] UKHL 62; [2004] 1 AC 919, 931. 75 Cundy v. Lindsay (1878) 3 App Cas 459, 463, HL. Ibid.

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Clearly and openly recognising the sound basis in principle of the voidness of contracts for mistake as to identity will quell some of the unease that judges feel. For, a proper understanding of the law shows that the distinction between whether the contract is void or voidable is not arbitrary: it is grounded in fundamental contractual principle. If one still feels that the policy of protecting innocent parties, or of loss sharing, is desirable, legislation, such as proposed by Devlin LJ in Ingram v. Little76 and considered by the Law Reform Committee in its Twelfth Report, entitled The Transfer of Title to Chattels,77 can be adopted. The courts should not become involved in distorting principle to achieve the abstract goal of “fairness”.

5.4 Conclusion The basis of mistake as to identity is the complainant’s absence of consent. This is established by the fact that he did not intend to contract with the defendant, because he: (1) believed the defendant was someone else, with whom he intended to contract; and (2) would have seen the putative contract with the defendant as different from the intended contract with the person he believed the defendant to be. The key, therefore, is to determine the importance to the complainant of the identity of his co-contractor. 76

[1961] 1 QB 31, 73–4.

77

Cmnd 2958, 1966.

6 Mistake as to terms in English law

6.1

Introduction

Mistake as to the terms of a contract is inexorably linked to the rules of offer and acceptance but is also clearly based upon the defendant’s absence of consent. Indeed, as with mistake as to identity, an offerand-acceptance and absence-of-consent analysis go hand in hand.1 For, first, if the defendant knows of the complainant’s mistake as to the terms of the apparent objective agreement, that “agreement” is not binding because the rules of offer and acceptance are not satisfied.2 Second, a mistake as to terms necessarily establishes an absence of consent, and the defendant’s knowledge of that mistake is necessarily knowledge of the absence of consent. Any difference in the terms of the putative and intended contracts renders them different: a contract with term X is different from a contract without term X. Therefore, if the complainant consented to a contract with term X, he did not consent to a contract without that term, and vice versa: his consent to the intended contract establishes an absence of consent to the putative contract. This is so even if the term is a minor warranty.3 Also, a mistake as to terms is a mistake as to what is being promised,4 so if the defendant knew of the relevant mistake, he knew that the complainant did not promise to be bound by the terms of the apparent objective agreement: he knew of the complainant’s absence of consent. This knowledge is sufficient to render the absence of consent operative, because the defendant should not be able to hold the complainant to a contract to which he knows the latter did not consent.5 1 2

3 5

See pp. 116–19, above. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694. 4 See pp. 31–2, above, 34, below. Smith v. Hughes (1871) 6 QB 597. See pp. 29–30, above.

133

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Furthermore, if the complainant’s mistake as to terms (and thus his absence of consent) is induced by the defendant’s unreasonable conduct, the defendant cannot insist upon the apparent objective agreement, even if he does not know of the mistake (and thus does not know of the absence of consent).6 The complainant’s mistake establishes the absence of consent, and the defendant’s inducement of this mistake by unreasonable conduct is a sufficient reason to render the absence of consent operative. Treitel argues that it is inappropriate that any mistake as to terms is sufficient to render a contract void (as long as there is a reason to render that mistake operative), but that a mistake as to subject matter, or the identity of a co-contractor, is only relevant when it is fundamental.7 However, it is submitted that not only is such a distinction clearly supported by the authority of Smith v. Hughes,8 but it is a sensible and proper position as a matter of principle. For, what matters is the complainant’s consent to the putative contract. As explained above, a mistake as to the terms of a contract (i.e., as to what is being promised) necessarily establishes an absence of consent to the putative contract, because it always renders the putative and intended contracts different;9 whereas a mistake as to subject matter or identity will only have this effect if it is sufficiently serious that a contract on the same terms is different if made in the actual circumstances (the putative contract) than if made in the circumstances the complainant believed to exist (the intended contract).10 One might feel that to allow minor mistakes as to terms to render a putative contract void impinges too greatly upon the security of contracts. However, requiring assessment of the severity of a mistake as to terms would render the law far more uncertain. Further, it would impinge upon the sanctity of contracts, because it would allow courts to say that the inclusion or exclusion of a particular term does not change the impugned contract. This would involve judges ranking the practical importance of the parties’ terms, and in a far more extensive way than in the classification of terms, which affects merely the remedial consequences of a breach, rather than the validity of the contract.

6 8 10

7 Scriven Bros. v. Hindley [1913] 3 KB 564. Treitel (2007), 340. 9 (1871) 6 QB 597. See pp. 31–5, 133, above. See pp. 30 (generally), 31–2, 93, 97–8 (common mistake), 33–4, 47 (mistake as to identity), above.

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Therefore, it is appropriate not to require assessment of the severity of a mistake as to terms before it can be operative. Treitel argues that, when the defendant knows of the complainant’s mistake as to terms, there could be a contract on the complainant’s intended terms.11 The argument applies if the defendant behaved so as to induce the complainant reasonably to believe that he, the defendant, was contracting on the complainant’s terms. However, for the argument to succeed, it requires an explanation of why there is no contract on the defendant’s terms. For, it is possible that the complainant’s conduct might objectively be interpreted as consent to terms XYZ, when he actually intended ABC, and the defendant’s conduct might objectively be interpreted as consent to terms ABC, when he actually intended XYZ. Here, there is an absence of consent from both parties to the other’s terms, but the objective interpretation of each party’s conduct is that he agreed to the other’s terms. If the defendant knows of, or unacceptably induced, the complainant’s mistake as to terms, this is knowledge or unacceptable inducement of the complainant’s absence of consent to terms XYZ. Each of these facts is sufficient to render that absence of consent operative, so the rules of mistake as to terms preclude an contract on terms XYZ. One then merely applies the rules of formation to determine whether there is agreement on the complainant’s terms, ABC, but one cannot reach this position without explaining why there is no contract on terms XYZ.

6.2

The elements of mistake as to terms

For a mistake to be properly classified as relating to the terms of the contract, it must be a mistake as to what was promised. For example, in Smith v. Hughes, a mistaken belief that oats, the subject matter of the putative contract, were old, when they were in fact new, was insufficient; but a mistaken belief that the defendant-seller promised that the oats were old was relevant, and sufficient to render the putative contract void if the defendant knew of the mistake.12 Traditionally, this requirement has been stated in terms of a mistake as to what the other party (i.e., the defendant) is promising. For example, in Smith v. Hughes, Hannen J. said: 11 12

Treitel (2007), 345. See also Chitty (2008), 474–5. (1871) 6 QB 597, 607, 611, per Blackburn and Hannen JJ.

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mistake as to terms in english law In order to relieve the [complainant] it was necessary that the jury should find not merely that the [defendant] believed the [complainant] to believe that he was buying old oats, but that he believed the [complainant] to believe that he, the [defendant], was contracting to sell old oats.13

However, it is artificial to draw a distinction between a mistake as to what the defendant is promising and a mistake as to what the complainant is promising. For example, the complainant’s mistaken belief that the defendant is promising to sell X necessarily includes a mistaken belief by the complainant that he, the complainant, is promising to buy X. It is clear that, if the defendant actually knows of the complainant’s mistake as to terms, the contract is void.14 This is said to be the residual subjective element of the objective principle. However, constructive knowledge is also sufficient. For, if the defendant has constructive knowledge of the complainant’s mistake, the reasonable person in his position would have known of it. If this is the case, the reasonable person would have known that the complainant was not promising to be bound by the terms of the alleged objective agreement. Therefore, there actually is no objective agreement, so the putative contract must be void. One technical point should be addressed here. It is generally accepted that promisee objectivity is the appropriate standard for assessing whether there is an objective agreement.15 For, the basic justification of the objective principle, as between the parties to a contract, is that it would be inappropriate to allow a person to conduct himself in such a way that the other party reasonably believed he was agreeing to a contract on particular terms but to deny this on the basis of his subjective intention.16 If a relevant mistake were to be treated as a mistake as to what the defendant is promising, promisee objectivity would require one to ask what the reasonable person in the complainant’s position would believe. This question would be irrelevant to the defendant’s constructive knowledge. Therefore, it is submitted that it should be recognised that a mistake as to terms is a mistake as to what the complainant promised: that is, as to whether he promised to be bound by, or to give something in return for the defendant promising to be bound by, the impugned

13 14

15 16

Ibid., 611. Smith v. Hughes ibid., 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694. Cartwright (2007), 419. Smith v. Hughes (1871) 6 QB 597, 607, per Blackburn J.

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term. In this case, the defendant’s actual or constructive knowledge is sufficient to preclude a binding objective agreement.17 It is sometimes said that, if the defendant did not know, nor had any reason to know, of the complainant’s mistake as to terms, but by his own conduct induced it, the putative contract is void.18 The supposed authority for this proposition is Scriven Bros. v. Hindley.19 In this case, the defendant did not know of the complainant’s mistake as to terms, but caused it by its own conduct. The putative contract was declared void on the basis of the complainant’s mistake. The jury found that the defendant induced the complainant’s mistake but did not find that its conduct was unreasonable. The judge, however, did describe that conduct as unreasonable.20 Therefore, it is submitted that it certainly cannot be said that this case is authority for the proposition that the mere fact that the defendant induced the complainant’s mistake as to terms is sufficient to render it operative. Whether it establishes that unreasonable inducement is sufficient is more complicated. Lawrence J. held that the fact that the complainant intended to buy hemp and the defendant intended to sell tow established that the parties had not reached agreement, so that there could be ‘no contract of bargain and sale’.21 Therefore, he held that the defendant could only succeed in its action for the price if the complainant was estopped from asserting his mistake as to terms. It is submitted that Lawrence J. was here referring to the objective principle. The objective principle resembles, but is not technically, an estoppel.22 Yet, if the judge was not referring to the objective principle, he took a purely subjective approach to formation.23 However this may be, he held that the defendant’s unreasonable conduct precluded it from setting up such a ‘contract by estoppel’.24 Therefore, it is submitted that, although the terminology is unclear, the Scriven Bros. case is authority for the proposition that, if the defendant induces the complainant’s mistake as to terms (and thus the absence of consent) by unreasonable conduct, this is sufficient to render the absence of consent operative, so the putative contract is void. Certainly, it is submitted that this is an appropriate position: an unreasonable inducement of an absence of consent should be sufficient to render it operative. 17 20 23

18 19 Cartwright (2007), 425. E.g., Beatson (2002), 324. [1913] 3 KB 564. 21 22 Ibid., 569. Ibid., 568. Cartwright (2007), 418–19. 24 Chitty (2008), 470, at n. 312. [1913] 3 KB 564, 569.

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It is important to note that an unreasonable inducement does not necessitate that the defendant should have known of the mistake. For example, in the Scriven Bros. case, it was unreasonable for the defendant to use the same shipping marks for hemp and tow,25 but this did not mean that it should have known the complainant believed he was bidding for hemp.

6.3 Conclusion Mistake as to terms is closely linked to the rules of offer and acceptance. Indeed, where the defendant knows of the complainant’s mistake, these rules fully explain the law. However, first, a mistake as to terms also necessarily establishes an absence of consent. Second, the defendant’s knowledge of the mistake is knowledge of the absence of consent, and this is a sufficient reason to render that absence of consent operative. Indeed, this is the basis of the residual subjective element of the objective principle. Additionally, a mistake as to terms renders a contract void if induced by the defendant’s unreasonable conduct, regardless of knowledge of the mistake. This is also a sufficient reason to render the absence of consent operative. Further, it is submitted that the defendant’s own absence of consent should theoretically be sufficient,26 but this scenario is unlikely to arise. 25 26

Ibid. See pp. 36–7, above, 319–20, below (generally); 119–20 (mistake as to identity), 139–41 (mutual mistake), below.

7 Mutual mistake in English law

There are no reported cases of operative mutual mistake. The apparently classic case is Raffles v. Wichelhaus,1 but this is actually a case where the evidence did not establish that the parties had reached an objective agreement, rather than one where the evidence established that an apparent objective agreement was vitiated by mutual mistake.2 The same is true of Smidt v. Tiden.3 The lack of authority on operative mutual mistake means that it is not clear whether it genuinely exists as a vitiating factor in English law. Indeed, it is submitted that it is unlikely the evidence will ever establish an objective agreement where it also establishes that each party made a separate mistake. Nonetheless, it is possible. For example, in Raffles v. Wichelhaus, the parties agreed to the sale of a cargo of cotton aboard The Peerless, sailing from Bombay to Liverpool, without realising that there were two ships of that name sailing that route, both carrying cotton, one leaving in October and one in December.4 However, assume that there had been a third ship of the same name, sailing the same route. It is possible the evidence could establish an objective agreement in relation to the cargo aboard the second ship, but the complainant intended the first and the defendant intended the third. It is submitted that it should be possible for mistake to vitiate the contract in these circumstances, and it is contended that the principles highlighted in the other forms of mistake provide the solution to the analysis. The first step should be to classify the complainant’s mistake: whether it was as to subject matter, identity or terms. The next step is to apply the Although the terminology is not consistently applied across the case law, ‘mutual mistake’ is used in this book to refer to the situation where both parties are mistaken, but each made a different mistake. See also, Chen-Wishart (2010), 301–2. 1 (1864) 2 H & C 906. 2 Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 690. See also Chitty (2008), 469. 3 4 (1874) 9 QB 446, 449. (1864) 2 H & C 906.

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rules developed in these areas of the law to determine whether that mistake establishes an absence of consent. For example, if it is a mistake as to subject matter, whether it renders the putative and intended contracts different;5 if it is a mistake as to identity, whether the complainant would see a contract with the defendant as different from a contract with the person he believed the defendant to be;6 and if it is a mistake as to terms, it necessarily establishes an absence of consent.7 If the mistake establishes an absence of consent, the next question is whether there is a sufficient reason to render that absence of consent operative. The three sufficient additional factors are the defendant’s: (1) knowledge of the complainant’s absence of consent; (2) unacceptable inducement of the complainant’s absence of consent; and (3) own absence of consent.8 The fact that the defendant made a separate mistake is not necessarily relevant to whether he knew of, or unacceptably induced, the complainant’s absence of consent. In common mistake, the defendant necessarily cannot know of the complainant’s absence of consent, because it comes from the complainant’s mistake, which the defendant shares. However, in cases of mutual mistake, the defendant’s mistake is different from the complainant’s mistake, so he might have knowledge of the latter. This is not sufficient to establish knowledge of the absence of consent, but knowledge: (1) of the mistake; and (2) that the mistake renders the putative and intended contracts different for the complainant is. A common mistake must be one that is recognised by both parties as fundamental to the contract.9 Therefore, the very fact that the defendant made the same mistake as the complainant necessarily establishes his absence of consent.10 Where the defendant made a different mistake, however, it must be separately analysed to determine whether it establishes an absence of consent. Therefore, one has to apply to the defendant’s mistake the steps undertaken in analysing the complainant’s mistake: first, the mistake must be classified; second, according to this classification, the relevant rules must be applied to determine whether the mistake establishes an absence of consent. If it does, then the analysis is the same as in common mistake: the defendant should not be able to 5 7 9

10

6 See pp. 32, 33–4, 93, 97–8, above. See pp. 33–4, 117, above. 8 See pp. 31, 35, 133, 134, above. See p. 23, above. Scott v. Coulson [1903] 2 Ch 249, 252, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton. See pp. 32–3, 97, above.

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hold the complainant to a putative contract that neither party intended to make.11 It should not matter that the complainant and defendant have made different mistakes. For example, if the complainant made a fundamental mistake as to subject matter and the defendant a sufficiently serious mistake as to the complainant’s identity. 11

Ibid.

8 Mistake under the PICC, PECL, DCFR and US Restatement (Second) of Contracts 8.1 The PICC, PECL and DCFR PECL, Article 4: 103: Fundamental Mistake as to Facts or Law (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) (i) the mistake was caused by information given by the other party; or (ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or (iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms (2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by it. DCFR, Article 7: 201: Mistake (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different terms and the other party knew or could reasonably be expected to have known this; and (b) the other party: (i) caused the mistake; (ii) caused the contract to be concluded in mistake by leaving the mistaken party in error, contrary to good faith and fair dealing, when the other party knew or could reasonably be expected to have known of the mistake;

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(iii) caused the contract to be concluded in mistake by failing to comply with a pre-contractual information duty or a duty to make available a means of correcting input errors; or (iv) made the same mistake. (2) However a party may not avoid the contract for mistake if: (a) the mistake was inexcusable in the circumstances; or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by that party PICC, Article 3.4: Definition of Mistake Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded. PICC, Article 3.5: Relevant Mistake (1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and (a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or (b) the other party had not at the time of avoidance reasonably acted in reliance on the contract. (2) However, a party may not avoid the contract if (a) it was grossly negligent in committing the mistake; or (b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.

8.1.1 Introduction The most obvious doctrinal difference in the treatment of mistake under the three codes and in English law is the fact that a successful plea of mistake renders the putative contract void in English law and voidable under the codes. Thus, each code provides that the complainant ‘may avoid’ (or, in the case of the PICC, ‘may only avoid’) the impugned contract. It is submitted that this is not a reflection of the fact that vitiation for mistake under the three codes is based upon an impairment, rather than an absence, of consent. On the contrary, it is part of the

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overall policy under the codes of seeking to uphold contracts and contractual relationships: protecting the security of contracts. If the putative contract were void ab initio, the parties’ contractual relationship would necessarily be at an end. When the impugned contract is merely voidable, however, first, the complainant can establish an operative mistake (and thus a right to some relief) but elect not to avoid; second, the right to avoid might be lost in appropriate circumstances; and, third, the added remedial flexibility for which each code provides can take effect. In each of these circumstances, the parties’ contractual relationship continues. Furthermore, although none of the codes expressly distinguishes between absence and impairment of consent, operative mistake under the PECL and DCFR does, as in English law, require proof of an absence of consent.1 The PICC do not expressly require an absence of subjective consent, but they do require proof of an absence of objective consent: that is, proof that the reasonable person in the complainant’s position would not have made the impugned contract had he known the truth. It is submitted that, if the defendant nonetheless proved that the complainant did consent to the impugned contract, because, for example, the mistake was irrelevant to his contractual decision, relief for mistake should not be available. It is further submitted that this is an implicit assumption under the PICC, but has not been expressly considered, because it is unlikely that an objectively fundamental mistake will not also establish an absence of subjective consent in the complainant. These issues will be addressed below.2 Also, similarly to English law, all three codes require proof of an additional factor to render operative the absence of consent established by the mistake, and this need not include unacceptable conduct by the defendant. The three additional factors recognised in English law are: (1) the defendant’s actual or constructive knowledge of the complainant’s absence of consent; (2) his unacceptable inducement of it; and (3) his own absence of consent. The codes also recognise each of these as sufficient to render operative the absence of consent established by the

1

2

This is subject only to the minor lacuna that contractual allocation of the risk of the mistake to the defendant does not preclude the operation of mistake: see pp. 146–7, below. See pp. 147–8, below.

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complainant’s mistake, but there are some differences in the treatment of these elements. For example, first, the codes do not require the defendant’s inducement of the mistake to have been unacceptable before it may be a sufficient additional factor; and, second, each of the codes accepts that the mere fact that the defendant shared the mistake is sufficient, even if this does not establish an absence of consent from the defendant. Finally, the codes do not distinguish between mistakes of fact and mistakes of law. English law used to prohibit relief for mistakes of law, but this prohibition was abolished.3 An important difference between English law and the three codes is that the latter treat any form of mistake, in relation to a written or oral contract, or as to subject matter, the identity of a co-contractor or terms, in the same way. This applies both to the rules for, and consequences of, establishing an operative mistake. Therefore, for example, a mistake as to “quality” need not be shared before it can lead to vitiation, as it must in English law.4 What matters is not the formal classification of a mistake, but its effect on the complainant’s consent. It is submitted that this is an appropriate position which English law should follow. For, the very essence of the relevance of a mistake to vitiation is the effect it has on the complainant’s consent. The nature of a mistake might affect the factual likelihood of it establishing an absence of consent, but every mistake that has this effect should be treated in the same way. This is not to say that English law should merge all forms of mistake into a single doctrine. Indeed, it is submitted that the current doctrinal scheme of English law should be retained. However, it should be recognised that any form of mistake establishing an absence of consent can be rendered operative by any potential additional factor, and that the complainant’s carelessness in coming to be mistaken should preclude him from relying on that mistake, whatever its nature, unless the defendant has knowledge of the absence of consent it creates or negligently or fraudulently induced it.5 This is the effect of the unified treatment of mistake under the three codes. 3 4 5

See p. 93, above. Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin. For discussion of the position in relation to the additional factors, see pp. 36–7, above, 319–20, below (generally), 119–20 (mistake as to identity), 139–41 (mutual mistake), above. For carelessness, see p. 320, below.

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8.1.2 The absence of consent In English law, construing the putative contract to ensure that it does not allocate the risk of the mistake is a prerequisite for a successful plea of common mistake.6 It has been explained that this is necessary to prove that the mistake establishes an absence of consent.7 Indeed, unless the complainant’s mistake is as to terms, or that his act will not be of contractual effect, it is a necessary step in proving that any mistake establishes an absence of consent. A mistake as to terms or a mistaken belief that one’s act will not be of contractual effect necessarily establishes an absence of consent, but whenever the complainant intends to make a contract and that contract allocates the risk of his external mistake, the mistake cannot render the impugned and intended contracts different: the risk of the mistake is an inherent part of the contract. Therefore, consent to the intended contract is consent to the impugned contract. For example, a contract allocating the risk of the existence of the subject matter is the same whether or not the subject matter exists. Articles 4: 103(2)(b) of the PECL, 7: 201(2)(b) of the DCFR and 3.5(2)(b) of the PICC preclude relief for mistake if the risk was allocated to the complainant. None of these provisions precludes relief if the risk was allocated to the defendant. The fact that the risk was allocated to the defendant no less precludes an absence of consent than if it was allocated to the complainant. In both cases, the risk of the mistake is an inherent part of the impugned contract, so it cannot render that contract different from the intended contract. Both the PECL (Article 4: 119) and DCFR (Article 7: 216) expressly state that the complainant’s right to a remedy for non-performance does not preclude the right to avoid a contract. Therefore, it is possible for the complainant to avoid the impugned contract for mistake if the risk was allocated to the defendant. However, Article 3.7 of the PICC precludes relief ‘if the circumstances on which [the complainant] relies afford, or could have afforded, a remedy for non-performance’. Therefore, if the contract allocates the risk to the defendant, the complainant cannot avoid the contract for mistake. 6

7

Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin; Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679. See p. 97, above.

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As such, there is a slight gap in the PECL and DCFR, in terms of a requirement of an absence of consent in mistake. This is inappropriate and conflicts with the policy of security of contracts. Construction of the contract to ensure that the risk of the mistake was not allocated is necessary, but not sufficient, to establish an absence of consent. What is also required is that the mistake must be either: (1) a mistaken belief that the putative contractual act will not be of contractual effect; or (2) of such effect that it renders the putative and intended contracts different from the complainant’s perspective.8 Articles 4: 103(1)(b) of the PECL and 7: 201(1)(a) of the DCFR require that the complainant would not have made the impugned contract had he known the truth, either because he would not have made any contract or because he would have made a contract ‘only on fundamentally different terms’.9 When a complainant intended to make a contract in certain circumstances (as he believed them to be), but would not have made that same contract had he known the truth (in the circumstances as they actually were), the difference in the circumstances (and thus the complainant’s mistake) must have had the effect of rendering the intended and impugned contracts different from his perspective. If he would have seen the contract as the same in both sets of circumstances, he would have been equally willing to make it in either set of circumstances. For example, assume the impugned contract is simply for a car. The complainant believes that the car is roadworthy. In fact, it is a rusted pile of metal, but still identifiable as ‘a car’. Had he known this, he would not have made a contract for this car, or would have insisted on different terms, because he would see a contract for a roadworthy car as different from a contract for a car that is a rusted pile of metal. Further, if the complainant’s mistake was that his act would not be of contractual effect, he clearly would not have made the impugned contract had he known the truth (i.e., had he known that his act would be of contractual effect): he did not intend to make any contract. The test for the severity of the mistake under the PICC does not actually require proof of an absence of subjective consent. Article 3.5(1) requires that the mistake was so serious that the reasonable person in the 8

9

See pp. 30, 75, 76–7 (non est factum), 32, 97–8 (common mistake), 33–4, 116–17 (mistake as to identity), 31, 35, 133, 134 (mistake as to terms), above. Requiring a fundamental, rather than merely any, difference between the impugned and intended contracts limits the scope of operative mistake and reflects the desire to protect the security of transactions.

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complainant’s position would not have made the impugned contract had he known the truth, either because he would not have made any contract or because he would only have made a contract on ‘materially different terms’. The fact that the hypothetical reasonable person is to be placed in the complainant’s position adds an element of subjectivity to the test,10 but it remains a fundamentally objective test. Indeed, it is possible that it might be satisfied even when the complainant would have been equally willing to make the impugned contract had he known the truth and thus would not have seen the impugned and intended contracts as different, so that subjective consent to the latter would necessarily be subjective consent to the former. It is submitted that relief in these circumstances is inappropriate. The fact that the reasonable person would have seen the impugned and intended contracts as different is insufficient. Certainly, it may be evidentially relevant to whether the complainant would see the impugned and intended contracts as different. Indeed, it might even be appropriate to infer the latter fact upon proof of the former. However, it is submitted that, if the defendant proved that the complainant would have been equally willing to make the impugned contract had he known the truth (because he would have seen it as the same as the contract he intended to make), relief on the basis of mistake should, and will, be denied under the PICC. That is to say, it is submitted that it is an implicit assumption that mistake under the PICC requires an absence of subjective consent from the complainant. It is further submitted that this has not been recognised because it is unlikely that a mistake satisfying the objective absence of consent test under the PICC would not also establish an absence of subjective consent from the complainant.11 Therefore, apart from the oversight as to construction of the contract, the PECL and DCFR require a mistake to establish an absence of consent from the complainant before it can be operative. This is not expressly required in the PICC, but it is submitted that it is an implicit requirement.

8.1.3 The additional factors to render the absence of consent operative All three codes recognise that it is not enough to prove a mistake the effect of which is to establish an absence of consent from the 10 11

UNIDROIT (2004), 99; Vogenauer and Kleinheisterkamp (2009), 416. Vogenauer and Kleinheisterkamp (2009), 416 (PICC test ‘[i]n practice, will most likely to lead to similar results’ to a purely subjective test).

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complainant; they all require proof of an additional factor to render that absence of consent operative. As part of their unified treatment of mistake, each code recognises that any of the potential additional factors can apply to any type of mistake. It has been explained why this is desirable.12 The three potential additional factors recognised in English law are: (1) the defendant’s actual or constructive knowledge of the complainant’s absence of consent (recognised in mistake as to identity and mistake as to terms, as well as mental incapacity); (2) the defendant’s unacceptable inducement of the absence of consent (recognised in non est factum, mistake as to identity and mistake as to terms); and (3) an absence of consent from the defendant (recognised in common mistake). Each of the codes recognises these additional factors as sufficient to render the absence of consent operative. Under Article 3.5(1)(b) of the PICC, if the defendant has not, at the time of avoidance, reasonably acted in reliance upon the contract, this is sufficient to render a relevant mistake operative. This is not recognised under the PECL or DCFR or in English law. It is submitted that it is an inappropriate additional factor. It can be argued that avoidance causes no detriment to the defendant if he has not acted in reliance upon the contract, but this undermines the concept of future planning fundamental to security of contracts.13

Actual or constructive knowledge of the absence of consent In English law, it has been recognised in mistake as to identity and mistake as to terms that the defendant’s knowledge of the complainant’s absence of consent is sufficient to render it operative. Neither form of mistake expressly requires knowledge of the absence of consent; rather, each recognises that knowledge of the mistake is sufficient. However, knowledge of a mistake as to terms is knowledge that the complainant is mistaken as to what is being promised: that is, it is knowledge that the complainant is not promising to be bound by the terms of the putative contract. Therefore, it is necessarily knowledge of the absence of 12 13

See p. 145, above. See also pp. 319–20, below. The DCFR adds an additional ground sufficient to render a relevant mistake operative: that is, if the defendant ‘caused the contract to be concluded in mistake by failing to comply with a pre-contractual information duty or a duty to make available means of correcting input errors’ (Art. 7: 201(1)(b)(iii)). This is linked to ensuring appropriate respect for the pre-contractual information duties imposed under various EU legislation and the DCFR (e.g., Art. 3: 101).

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consent.14 Knowledge of a mistake as to identity is not itself knowledge of an absence of consent, because the defendant might believe that the complainant would not see a contract with the defendant as different from one with the person he believes the defendant to be. However, if this is the case, the defendant will almost certainly point out the mistake. One might intuitively think that, if the defendant does not believe the mistake is important, he will not point it out, for that very reason. Yet, when a person is mistaken for someone else, he will, especially in a contractual situation, normally correct the mistake, unless he believes that not to do so would be in his favour: namely, if he believes that the complainant would be willing to contract with the person he believes the defendant to be, but not with the defendant. Therefore, the defendant cannot be heard to deny that his knowledge of the mistake is to be equated with knowledge of the absence of consent.15 As such, recognition of the sufficiency of knowledge of the mistake is, in English law, to be equated with knowledge of the absence of consent. Under the PECL and DCFR, there is, as in English law, no express recognition that relevant knowledge must be knowledge of the absence of consent. In each code, the relevant knowledge is knowledge of the mistake. Both codes require that the defendant had actual or constructive knowledge of the fact that, had the complainant known the truth, he would not have made the impugned contract, but this does not actually necessitate knowledge of the absence of consent, either. It merely requires knowledge of the importance to the complainant of the matter in relation to which the mistake was made. The defendant still might not have any knowledge of the fact that the complainant made a mistake. However, where the defendant has actual or constructive knowledge of the mistake, the combination of these two requirements ensures that he has knowledge of the absence of consent. For, he has knowledge of the fact that the complainant has made a mistake and knowledge of the fact that, had the complainant not been mistaken, he would not have made the impugned contract. If it is accepted that an absence of consent is an implicit requirement of the PICC, then the same will normally be true under that code when the defendant has knowledge of the mistake. For, the PICC require that the mistake would have established an absence of consent from the reasonable person, so the defendant normally at least should have known that it established an absence of consent from the complainant.

14

See pp. 35, 133, above.

15

See pp. 34, 117–18, above.

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Therefore, each of the three codes is similar to English law in this regard, recognising that the defendant’s knowledge of the absence of consent is sufficient to render it operative. The express recognition of the relevance of constructive knowledge suggests that the codes are wider in this regard. However, it has been explained that constructive knowledge of an absence of consent is sufficient in English law because it precludes any objective agreement between the parties, as the reasonable person would have known that the complainant was not promising to be bound by the terms of the apparent agreement.16 Under the PECL and DCFR, knowledge is only a sufficient additional factor if it was ‘contrary to good faith and fair dealing’ for the defendant not to correct the complainant. The PICC has a similar requirement: namely, that it was ‘contrary to reasonable commercial standards of fair dealing’ not to correct the complainant. It is submitted that there is no material difference between these standards, because the different terminology merely reflects the importance of recognising accepted commercial practices in assessing a duty of good faith and fair dealing. This requirement seems to make the codes narrower than English law, which has no such requirement. However, the drafters of the PECL assert that it is ‘unacceptable e.g., as a form of bad faith’ to contract with actual or constructive knowledge of one’s co-contractor’s fundamental mistake.17 The PECL and DCFR expressly require that the defendant has actual or constructive knowledge of the seriousness of the mistake to the complainant,18 and the requirement under the PICC that the mistake must be objectively fundamental means that the defendant will normally have at least constructive knowledge that the mistake is fundamental to the complainant, if it is accepted that subjective fundamentality is an implicit prerequisite. Therefore, under each code, if the defendant has knowledge of the mistake, he has knowledge of the complainant’s fundamental mistake. It is submitted that it is correct to say that contracting with knowledge of the complainant’s fundamental mistake is contrary to good faith, and that this is so not just under the PECL, but under the DCFR and PICC, also. If this is correct, then the requirement of an infringement of the duty of good faith under the three codes will necessarily be satisfied when the other elements of the respective Articles are satisfied, so it does not render the codes different from English law.

16 18

17 See pp. 29–30, 58, 62, 136, above. PECL (2000), 232. Art. 4: 103(1)(b) PECL; Art. 7: 201(1)(a) DCFR. See also p. 150, above.

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Therefore, English law and the three codes are similar in their treatment of the relevance of knowledge of the mistake.

Inducement of the absence of consent As the absence of consent flows directly from a relevant mistake, inducement of the mistake is necessarily inducement of the absence of consent. Both the PICC and DCFR recognise that, if the defendant caused the complainant’s mistake, this is sufficient to render the absence of consent operative. The PECL require that the defendant caused the mistake by giving information to the complainant. However, it is submitted that it would be accepted under the PECL that, if the defendant induced the complainant’s mistake in any way other than by the provision of information, this would be sufficient. This is appropriate because the PECL (similarly to English law, the DCFR and the PICC) require the complainant to prove that he was not careless in coming to be mistaken. Therefore, if the defendant’s conduct did not reasonably induce the mistake, the complainant would be unable successfully to plead mistake. Further, the Comments to the PECL recognise that words or conduct may amount to a misrepresentation,19 so conduct should also be sufficient if it induces a relevant mistake. As such, it is submitted that the codes treat this element in the same way: any inducement by the defendant of the complainant’s mistake is a sufficient additional factor.20 English law has only ever expressly recognised the defendant’s unreasonable inducement of a mistake causing an absence of consent as a sufficient additional factor.21 However, if unreasonable inducement is sufficient, it cannot be doubted that fraudulent inducement is.22 Furthermore, it will be explained why an innocent misrepresentation in English law amounts to unacceptable conduct.23 It is, therefore, submitted that, if the defendant makes an innocent misrepresentation inducing 19 20

21 22

23

PECL (2000), 253. It has been suggested that the PICC require a positive representation by D, by words or conduct, to have been the factor inducing C’s mistake: Vogenauer and Kleinheisterkamp (2009), 418. If this is correct, then D’s conduct will normally amount to unacceptable conduct (what would, in English law, be at least an innocent misrepresentation), because it will be rare that D will make a representation which induces a fundamental mistake without at least being in such a position that he should have known C was likely to rely upon his statement. Scriven Bros. v. Hindley [1913] 3 KB 564. Fraudulent inducement necessitates knowledge of the mistake, and is normally present is cases of non est factum and mistake as to identity. See pp. 170–3, above.

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a mistake in the complainant that has the effect of creating an absence of consent, this should be sufficient to render that absence of consent operative. The fact that relief would be available for misrepresentation should not preclude the possibility of relief for mistake. Although the matter has not arisen in authority, if this were to be recognised in English law, it would narrow the gap with the three codes, but would still leave English law responding only to an unacceptable inducement of the mistake. It is submitted that, if the defendant’s conduct is not unacceptable, the fact that it induced the complainant’s mistake should not be sufficient to render the absence of consent operative.24 Purely causal responsibility is insufficient to overcome the principle of security of contracts. However, it will be rare that conduct inducing a mistake that establishes an absence of consent will not be unacceptable: to induce such a serious mistake without knowledge of it will normally, but not always, be unreasonable; and to induce the mistake with knowledge is always unacceptable (and would satisfy the first additional factor). Therefore, the codes are wider than English law in this respect, but the English position is preferable.

An absence of consent from the defendant Common mistake in English law requires that the shared mistake must be made in relation to a matter recognised by both parties as fundamental to the putative contract.25 Therefore, the relevant mistake necessarily establishes an absence of consent from the defendant as well as the complainant. There is no such requirement under any of the codes. It is true that, under the PECL and DCFR, the defendant must have actual or constructive knowledge that the matter is fundamental to the complainant, and this will normally be the case under the PICC. However, the mistake might still be insignificant to the defendant, and he might, therefore, still reasonably believe that it is not important to the contract. It is submitted that, if this is so, the mere fact that the defendant shares the mistake should be insufficient to render the complainant’s absence of consent operative. As such, the codes are once again wider than English law, and the position of English law is to be favoured. 24 25

Cf. PECL (2000), 231. Scott v. Coulson [1903] 2 Ch 249, 253, per Vaughan Williams LJ; Bell v. Lever Bros. [1932] AC 161, 206, 207, 208, 235, HL, per Lords Warrington and Thankerton.

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8.1.4 Carelessness The rules of both non est factum26 and common mistake27 in English law recognise that, if the complainant was careless in coming to be mistaken, he cannot rely upon his mistake to vitiate the impugned contract. It is contended that this requirement should apply to any form of mistake. The complainant should not be able to rely upon his own carelessness. The only exception to this is if the defendant had actual or constructive knowledge of the absence of consent, or fraudulently or negligently induced it. Fraudulent or negligent inducement by the defendant makes it less likely that the complainant has been careless, but it does not rule it out. Even if the complainant has been careless, the defendant’s knowledge or negligence or fraud should negate this fact. Both the PECL and DCFR preclude the complainant from relying on his mistake if it was inexcusable in the circumstances. The Comments to the PECL treat inexcusability as synonymous with carelessness.28 The PICC require that the complainant was grossly negligent in coming to be mistaken before his conduct will preclude him from relying upon the mistake. It is submitted that the position under the PECL and DCFR and in English law is preferable: carelessness/negligence is a sufficient reason to preclude the complainant from relying upon his mistake. The Comments to the PECL also state that a mistake will not be inexcusable if the defendant ‘was at least equally to blame’ for it.29 This clearly covers the situation where the defendant fraudulently or negligently induced the mistake in the complainant. However, in addition, the drafters say that, whenever the defendant has knowledge of the mistake ‘and it would take little trouble to point it out . . . [the] mistake should not be treated as inexcusable’.30 This seems to move towards a duty of disclosure, but it must be remembered that, whenever the defendant has actual or constructive knowledge of the mistake, the requirement under the PECL and DCFR that he has actual or constructive knowledge of the seriousness of the matter in relation to which the mistake was made ensures that he has knowledge of the absence of 26 27

28

Saunders v. Anglia BS [1971] AC 1004, HL. See also pp. 82–5, above. Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 707. See also pp. 111–12, above. 29 30 PECL (2000), 234. Ibid. Ibid.

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consent. Therefore, it is appropriate that the defendant’s knowledge negates the effect of the complainant’s carelessness. The three codes are similar to English law in their treatment of the requirement of an absence of carelessness from the complainant. It is submitted that the position under the PICC is too narrow, because it requires gross negligence. All three codes rightly expressly recognise that an absence of carelessness is required for every form of mistake.

8.2 The US Restatement (Second) of Contracts } 151. Mistake Defined A mistake is a belief that is not in accord with the facts. } 152. When Mistake of Both Parties Makes a Contract Voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in } 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. } 153. When Mistake of One Party Makes a Contract Voidable Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in } 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake. } 154. When a Party Bears the Risk of a Mistake A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

156

mistake under picc, pecl, dcfr and us restatement } 157. Effect of Fault of Party Seeking Relief A mistaken party’s fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules stated in this Chapter, unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. } 158. Relief Including Restitution (1) In any case governed by the rules stated in this Chapter, either party may have a claim for relief including restitution under the rules stated in }} 240 and 376. (2) In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties’ reliance interests.

8.2.1 Introduction Under the Restatement, an operative mistake renders the impugned contract voidable.31 This is similar to the position under the PICC, PECL and DCFR and in contrast to the position in English law. It will be argued that, similarly to the three codes, the conclusion of voidability was adopted for policy reasons, to promote security of contracts. Furthermore, it will be contended that this does not reflect the fact that mistake under the Restatement is based on impairment, rather than absence, of consent.32 As in English law and under the three codes, the Restatement does not distinguish between mistakes of fact and law.33 Unlike the three codes, however, the Restatement does distinguish between the rules applicable to common (shared) and unilateral mistake. Nonetheless, this distinction relates merely to the additional factor(s) sufficient to render the mistake (and thus the absence of consent) operative. Fundamentally important is the fact that both categories of mistake require proof of an absence of consent from the complainant. Despite distinguishing between common and unilateral mistake, the Restatement does not

31

32

Subject, in particular, to the court’s discretion under }158 ‘to grant relief on such terms as justice requires including protection of the parties’ reliance interests’ if the rules of mistake ‘will not avoid injustice’. 33 See pp. 159–61, below. Restatement (Second), Volume I, 384.

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distinguish between the rules applicable to mistake as to terms, identity or subject matter. It has already been argued that focusing on the effect, rather than the formal categorisation, of the mistake is desirable, because the essential significance of a mistake is its effect on the complainant’s consent. However, it is important to appreciate that a mistake as to terms necessarily establishes an absence of consent; while a mistake as to “surrounding circumstances” (i.e., not as to terms) will only establish an absence of consent if it is so severe that it renders the intended contract, in the circumstances the mistaken party or parties believed to exist, different from the impugned contract, in the circumstances that actually existed.34 Another similarity between English law, the three codes and the Restatement is the fact that they all preclude relief for mistake if the risk has been allocated under the contract.35 It has been argued that this is important in ensuring that mistake is based upon an absence of consent, inasmuch as allocation of the risk of the mistake precludes the possibility of proof of an absence of consent.36 However, analysis of the Restatement’s treatment of allocation of the risk will show that, like the PECL and DCFR, it only precludes relief if the risk is allocated to the complainant, even though allocation to the defendant would likewise preclude proof of an absence of consent. A final important point of similarity between the Restatement, English law and the three codes is the fact that, in certain circumstances, all of them preclude relief for mistake if the defendant has been careless (or is in some other way at fault) in coming to be mistaken. While English law has only specifically taken this policy decision in relation to non est factum and common mistake, the Restatement, like the codes, applies the rule to all forms of mistake. It is submitted that this approach is to be favoured. However, it will be argued that the Restatement, like the PICC, requires more than mere carelessness, and this is inappropriate: carelessness should be sufficient, unless the defendant had knowledge of, or fraudulently or negligently induced, the complainant’s mistake; in which case, his conduct is at

34 35

36

See pp. 31–2, above. }154(c) also precludes relief if the risk is allocated to the complainant by the court on the basis that it is reasonable for him to bear the risk. In terms familiar to English law, this would be a situation where there is a term implied in law, but to the specific contract, not necessarily all contracts of that type. See pp. 97, 109–10, 146, above.

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least as unacceptable as the complainant’s and should, therefore, negate the effect of the complainant’s carelessness.37 One significant distinguishing feature of the Restatement’s treatment of mistake is the fact that it requires proof that the mistake led to substantive imbalance in the contract.38 Substantive imbalance/unfairness is a common feature of claims for vitiation on the basis of mistake. Indeed, the complainant’s motivation for seeking to claim that the contract is vitiated by mistake is usually the fact that it has turned out to be a bad bargain, putatively because of the mistake. However, substantive imbalance is not required in English law or under the three codes. It is submitted that this position is preferable. If a complainant proves a mistake which establishes an absence of consent and an additional factor to render that absence of consent operative, this should be sufficient to allow for vitiation, regardless of whether the contract is substantively imbalanced or not. This criticism leads to the suggestion that the role of substantive imbalance under the Restatement could be as an alternative additional factor to render the mistake operative. However, it is submitted that this is not appropriate either: the mere fact that the contract is substantively imbalanced should not be sufficient to render an absence of consent operative. It must be recognised that analysis of this area of the law cannot help but be affected by individual views about the role of substantive (un)fairness in contract law. Those strongly favouring freedom and security of contracts will not believe that substantive unfairness should be sufficient to render an otherwise unimpeachable contract vulnerable to vitiation. I favour this view, as well as the view that substantive imbalance should not be a necessary element for vitiation, either. It is submitted that, if the complainant has proved an absence of consent and one of the three additional factors recognised in English law, this is a sound reason to vitiate the impugned contract, even if it substantively fair. Nonetheless, it is accepted that it is perfectly legitimate for the law to make a policy decision to give significant weight to substantive (im)balance, whether this represents a desire to promote, as far as possible, substantively balanced contracts or reflects the fact that substantive imbalance can often be evidentially indicative of an imbalance in the parties’ relative strengths and/or of unacceptable conduct in 37 38

See pp. 83–5 (in relation to non est factum). }}152 and 153 both require proof that the mistake had a ‘material effect on the agreed exchange of performances’ under the contract.

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procurement of the contract.39 It is submitted that the Restatement clearly reflects a policy to promote substantive balance. Therefore, the rules of, in particular, mistake must be analysed with this policy in mind.

8.2.2 The absence of consent It has been explained that, in English law, it is necessary to determine whether the risk of a common mistake as to the subject matter is allocated by the contract before considering whether the mistake is sufficiently serious to rank as “fundamental”.40 Furthermore, it has been noted that this assessment is required under the PICC, PECL and DCFR for all types of mistake.41 If the impugned contract allocates the risk of a mistake, that mistake cannot render the contract different, because the risk is then an inherent part of the contract.42 Therefore, consent to the impugned contract is consent to the intended contract.43 The Restatement adopts a similar position to English law and the codes, because it precludes relief if the risk of the mistake is borne by the complainant.44 It was noted in discussing allocation of the risk of a mistake under the codes that even allocation to the defendant precludes establishment of an absence of consent.45 This is recognised under Article 3.7 of the PICC; whereas the PECL and DCFR, like the Restatement, preclude relief only if the risk is allocated to the complainant. Therefore, similarly to the PECL and DCFR, the Restatement allows for vitiation on the basis of mistake even if the risk of the mistake is allocated to the defendant. This means that an absence of consent is not actually required under the Restatement, regardless of the test for the requisite severity of the mistake. However, this is a relatively slight gap, and it is still important to determine whether a requisite mistake would, apart from this lacuna, necessarily establish an absence of consent. 39 40

41 42

43

E.g., S. A. Smith, ‘In Defence of Substantive Unfairness’ (1996) 112 LQR 138. Bell v. Lever Bros. [1932] AC 161, 218, HL, per Lord Atkin; Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679. See also pp. 97, 109–10, above. See p. 146, above. E.g., a contract for the sale of a car both parties believe to exist cannot be rendered different by the non-existence of the car if the contract allocates the risk of this. There is either a contract under which the buyer promises to pay whether or not the car exists, or a contract under which the seller promises that the car does exist. In neither case does the mistake change the nature of the contract. 44 45 See pp. 97, 109–10, 146, above. }}152(1) and 153. See p. 146, above.

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Although the Restatement distinguishes between common (shared) mistake (section 152) and unilateral46 mistake (section 153), the test for the requisite severity of the mistake is the same. In both cases, the mistake must be ‘as to a basic assumption on which the contract was made’ (or, in the case of a unilateral mistake, a basic assumption on which the complainant made the contract) and have ‘a material effect on the agreed exchange of performances’. The first element of the test clearly goes to the subjective importance of the mistake and is, therefore, the crucial factor in determining whether the mistake establishes an absence of consent. The second element looks to the objective effect of the mistake on the substantive balance of the contract and goes more to whether there is a sufficient additional factor to render operative the mistake (and thus any absence or impairment of consent that it establishes), assuming that substantive unfairness is, or might be, a sufficient additional factor. In order to amount to a basic assumption on which the parties made the contract, the matter in relation to which the mistake was made must clearly have been important to the parties. Furthermore, the phrase strongly implies that the matter must have been so important that the parties would not have made the contract but for the mistake: it must be an assumption on which they made the contract. It has already been argued that, if the parties would not have made the contract had they not been mistaken, this must mean that they would have seen the contract in the actual state of affairs as different from the contract they believed they were making, in the state of affairs they believed to exist. For, if the parties would have seen the contract as the same in both states of affairs, they would have been equally willing to make it in both states of affairs. As such, the parties intended to make, and consented to, the latter contract, but did not intend to make, or consent to, the former (impugned) contract.47 This means that, in order to be operative under the Restatement, a mistake must be one that establishes an absence of consent from the complainant.48 The preceding analysis shows that a relevant mistake under the Restatement amounts to proof of an absence of consent, similarly to the treatment of mistake in English law. However, unlike English law, a successful plea of mistake renders the contract voidable, not void. This is 46

47 48

The Restatement does not adopt the terminology of common, unilateral or mutual mistake (Restatement (Second), Volume I, 382–3). See p. 147, above. Whether, in the case of a shared mistake, it establishes an absence of consent from the defendant will be considered below: see pp. 165–8, below.

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the same as the position under the PICC, PECL and DCFR. It has been explained that, under the three codes, the conclusion of voidability was adopted primarily in order to promote security of contracts.49 It is submitted that the same is true under the Restatement, and this is supported by the fact that, before a mistake can be operative at all, it must have caused a substantive imbalance in the contract.50 While it is natural to expect that a mistake sufficiently serious to establish an absence of consent in at least one of the parties will lead to significant substantive imbalance in a contract, this is not a necessary consequence of such a mistake. Therefore, to require substantive imbalance clearly limits the possibility of vitiation on the basis of mistake. Whether this is a justified restriction will be considered in more depth below,51 but the crucial point is that it clearly demonstrates a desire to limit the effect of a mistake and thereby promote the security of contracts (as well as reflecting a general policy to promote substantively balanced, and dissuade substantively imbalanced, contracts).

8.2.3 The additional factors to render the absence of consent operative It has been seen that, under the Restatement, the test for the requisite severity of an operative mistake is the same whether the mistake was made only by the complainant or was shared by both parties.52 Nonetheless, the Introductory Note to the rules of mistake states that the approach to unilateral mistake under the Restatement is ‘more restrictive’.53 This can be seen in the requirement that, if only the complainant is mistaken, he must prove either that: (1) it would be unconscionable to enforce the contract against him, because of the effect of the mistake; or (2) the defendant had knowledge of, or was at fault for inducing, his mistake.54 These two alternatives are, then, the necessary additional factors to render operative the absence of consent established by a unilateral mistake.55 49 50

51 53 55

See pp. 143–5, above. }}152(2) and 153 (the mistake must have ‘a material effect on the agreed exchange of performance’). 52 See p. 168, below. See p. 160, above. 54 Restatement (Second), Volume I, 380. }153. Subject to the point, discussed above (see p. 159) that mistake under the Restatement can render a contract voidable even if the risk of the mistake is allocated to the defendant and therefore cannot establish an absence of consent.

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The second, alternative elements of knowledge or fault-based (unacceptable) inducement of the mistake mirror the position in relation to mistake as to identity and terms in English law.56 It has already been explained that knowledge or unacceptable inducement of a mistake which necessarily establishes an absence of consent amounts to knowledge or unacceptable inducement of that absence of consent itself.57 The first potential additional factor in relation to a unilateral mistake (namely, proof that it would be unconscionable to enforce the contract against the defendant, because of the effect of the mistake) is clearly linked to substantive unfairness and renders unilateral mistake under the Restatement wider than mistake as to identity or terms (the two types of mistake which are, by their very nature, normally made by only one party) in English law. It has been contended that the requirement that the mistake had a material effect on the agreed exchange of performances in order to be operative under the Restatement (whether a shared mistake or one made only by the complainant) is an element requiring proof of significant substantive imbalance in the contract.58 Proof that it would be unconscionable to enforce the contract against the defendant because of the effect of the mistake must, then, go beyond mere proof of this significant substantive imbalance if it is not to be a mere redundancy. Nonetheless, Comment (c) to section 152 states that, in order to prove a material effect on the agreed exchange of performances, the complainant must prove ‘that the resulting imbalance . . . is so severe that he [cannot] fairly be required to [perform the impugned contract]’.59 There is no suggestion that the position under section 153, where the mistake is made only by the complainant, is different. However, Comment (c) to section 153 and the Illustrations of the requirement of unconscionability60 also analyse the concept in terms clearly referable to substantive unfairness, without suggesting how that substantive imbalance must be more severe than, or otherwise different from, the substantive imbalance rendering it unfair to require the complainant to perform (i.e., the substantive unfairness which amounts to a material effect on the agreed exchange of performances). The Comment makes reference to section 208, which deals with unconscionability as a standalone invalidating ground. It is clear that,

56 57 58

See pp. 117–19 (mistake as to identity), 136–8 (mistake as to terms), above. See pp. 117–19 (mistake as to identity), 133–4 (mistake as to terms), above. 59 60 See pp. 160–1. Restatement (Second), Volume I, 388. Ibid., 395–6.

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under the Restatement, when deciding whether a contract or term can be invalidated on the basis of unconscionability, the relative strengths of the parties, as well as any substantive imbalance, are considered.61 Indeed, Comment (d) to section 208 confirms that ‘gross inequality of bargaining power’ is a factor indicative of unconscionability.62 Therefore, this might seem to suggest that section 153(b) is, likewise, concerned with more than simply substantive unfairness and that, for example, the relative strengths of the parties are relevant. However, first, section 153(a) requires that it would be unconscionable to enforce the contract against the complainant because of the effect of the mistake. A unilateral mistake can certainly be analysed in terms of the imbalance it creates in the parties’ relative positions,63 but this is simply inherent in the fact that only one party has made the mistake. Such an imbalance will, therefore, be present in all cases of unilateral mistake and can only sensibly be used as a means for determining when it would or would not be unconscionable to enforce the contract against the complainant by reference to the severity of the mistake. Analysis of the severity of the mistake will then, surely, lead back to assessment of the substantive impact of the mistake. Moreover, Comment (c) to section 153 refers specifically to Comment (c) to section 208, which deals only with the element of substantive unfairness in the invalidating ground of unconscionability. Therefore, while it is clear that proof of substantive unfairness is required under section 153, it is not clear what effect the element of unconscionability under section 153(a) actually has. It is submitted that it is probably intended to require some greater, more shocking, degree of substantive imbalance, going beyond a “mere” material substantive imbalance rendering it unfair to require the complainant to perform. For, if the element of unconscionability is necessarily established by proof of a mistake which has a material effect on the agreed exchange of performances, the alternative requirements under section 153(b) would be redundant, as the complainant would always have proved enough to avoid the contract by proving: (1) a mistake as to a basic assumption on which he made the contract; and (2) that the mistake materially affected the agreed exchange of performances (and thus that it would be unconscionable to enforce the contract against him). As such, the lack of a clear explanation of the difference between the requirements

61

E.g., Restatement (Second), Volume II, 109.

62

Ibid.

63

E.g., Cartwright (1991).

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of material effect on the agreed exchange and unconscionability causes uncertainty as to the application of section 153. The only potential significant difference between the two concepts seems to be in relation to the position of the defendant, not the complainant. Comment (d) to section 153 states that, if the defendant acts in reliance upon the contract in such a way that cannot be adequately compensated for by operation of the rules under section 158,64 it cannot be said that it would be unconscionable to enforce the contract against the complainant.65 Therefore, if the defendant can prove reliance, proof by the complainant of a material effect on the agreed exchange of performances, such that it would be unfair to require the complainant to perform, would not be sufficient to establish that it would be unconscionable to enforce the contract against him, the complainant, because of the effect of the mistake. It is submitted that reliance by the defendant should not be a sufficient ground for preventing avoidance. For, if the complainant proves the requisite mistake and an additional factor to render the absence of consent operative, he should be entitled to avoid the contract to which he has not consented, regardless of reliance by the defendant.66 However, if it is felt that the defendant’s reliance should preclude vitiation (particularly where the conclusion is voidability, not voidness),67 it is submitted that there should be a separate rule which specifically states this, rather than simply making this an element of a potentially confusing “unconscionability” test. The additional elements of unconscionability or knowledge or inducement of the complainant’s mistake are not required under section 152, in relation to a mistake made by both parties. The Introductory Note to the discussion of mistake under the Restatement asserts that the reason for requiring proof of one of these additional elements under section 153

64

65 66

67

}158(2) gives the court power to ‘grant relief on such terms as justice requires including protection of the parties’ reliance interests’. Restatement (Second), Volume I, 396–7. There is no suggestion that proof of reliance by the defendant would be sufficient to preclude avoidance if he had actual or constructive knowledge of the mistake. If, as in English law, the contract is void ab initio, the defendant has relied upon something that did not ever exist as a matter of law. If, however, the contract is merely voidable, it exists until avoided. Therefore, reliance by the defendant seems a more sensible ground for precluding avoidance when a vitiating factor leads to voidability, not voidness.

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but not section 15268 is that it is more likely to be unfair to allow for vitiation of a contract as against a defendant who did not share the mistake which is the basis of vitiation.69 The suggestion is clearly that, if the defendant shared the (very serious) mistake, it is generally less appropriate to allow him to object to vitiation of the contract on the basis of that mistake. It is submitted that the validity of this argument rests upon ensuring that the defendant did not merely share the complainant’s mistake, but that the mistake established an absence of consent from the defendant. It has already been explained why it is contended that an absence of consent from the defendant should be a sufficient additional factor to render the complainant’s absence of consent operative.70 If a mistake does not establish an absence of consent from the defendant, the mere fact that he has made it should not be a sufficient additional factor. For, even when the defendant’s mistake is the same one made by the complainant and that mistake established an absence of consent from the complainant, the mistake might be, not simply insignificant to the defendant, but might be in relation to a matter that the defendant believes is insignificant to the complainant. This is why it is important that section 152 requires, not merely that the defendant shared the mistake, but that the mistake was ‘as to a basic assumption on which the contract was made’. For, Comment (b) to section 152 makes it clear that this requires that the basic assumption was one ‘on which both parties made the contract’.71 It has been argued that this phrase suggests that the mistake must be so serious that the parties would not have made the impugned contract had they known the truth (i.e., they would not have made the contract but for the mistake) and that this necessarily establishes an absence of consent from the complainant.72 The fact that the mistake must be as to a basic assumption of which both parties made the contract, therefore, ensures that the mistake is sufficient to establish an absence of consent from the defendant as well, and this will be a sufficient additional factor to render the complainant’s absence of consent operative. However, there is a potential problem with this element if the mistake is one that can only possibly affect the contract in a positive way for the 68

69 71

If, indeed, the overlap between the requirement of unconscionability and material effect on the agreed exchange of performances does not negate the effect of these additional elements. 70 Restatement (Second), Volume I, 380. See pp. 32–3, above. 72 Restatement (Second), Volume I, 386 (my italic). See p. 160, above.

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defendant.73 In such a case, the defendant might well have been equally willing to make the contract regardless of the mistake. If this is the case, the “but for” causative explanation of the basic assumption test would not be satisfied. Nonetheless, it is still possible that the mistake will establish an absence of consent from the defendant. It must be remembered that the “but for” causative analysis establishes an absence of consent because it proves that the relevant party (be it complainant or defendant) would have seen the intended and impugned contracts as different, so that consent to the former is not consent to the latter: if one would not have made the impugned contract but for the mistake, this must mean that he would have seen that contract as different from the one he did intend to make and to which he did consent. It is perfectly possible that the defendant74 would still see the intended and impugned contracts as different, even if he would have been equally willing to make the impugned contract had he known the truth, because it might have been a more favourable contract to him. For example, if the parties contract for the sale of a certain quantity of a particular crop from a specific field, both believing that the field is capable of producing the requisite quantity, the question is whether the parties would see the contract as different if they knew that the field was not capable of producing that quantity. If neither party would have made the contract had they known that the field was incapable of such production, the mistake clearly establishes an absence of consent.75 If, however, the defendant-buyer would still have been willing to make the contract had he known that the field was incapable of producing the contract amount,76 he might still have seen the intended and impugned contracts as different. The fact that he would have been equally willing to make the contract (on the same terms) had he known the truth suggests that this is not the case, but it does not absolutely preclude it. He might have seen a contract to deliver the contractual quantity from the particular field as different had he known that the field was incapable of producing that amount, even though he did not care about the field’s lesser capacity. This is where a distinction between the motive for making the contract and the question of whether the parties consented to that contract becomes

73

74 75 76

That is, if it can only possibly reduce the value of the performance he is to render or increase the value of the performance he is to receive. And, indeed, the complainant. See, e.g., Sheikh Bros. v. Ochsner [1957] 2 WLR 254, PC. For example, assume the defendant did not need the full contractual amount of the crop and the price, calculated per ton, would still have been favourable for him.

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important, and a purely causative analysis can be problematic. Management of this difficult distinction will always come down to the court’s assessment of the evidence. It is submitted that it does not pose a significant additional problem and is simply part of the difficult factual and evidential assessment in which the court must become involved in any case of mistake. In seeking to determine whether the mistake establishes an absence of consent, the courts will surely inherently place great significance on the objective importance of the mistake and whether the reasonable person would have seen the impugned and intended contracts as different because of the mistake: the more objectively serious the mistake, the more likely it is that the court will be persuaded that that mistake rendered the intended and impugned contracts different for the mistaken party or parties.77 As long as it is remembered that it is the subjective importance that is the key, and it is recognised that the objective importance is merely of evidential relevance, this will cause no problems. It is important to remember that “but for” causation is sufficient to establish an absence of consent: i.e., if a party would not have made the impugned contract but for the mistake, this must be because he would have seen the intended and impugned contracts as different, and thus he consented to the former but not the latter. However, the causative test is not always necessary, because a party might have seen the intended and impugned contracts as different, yet have been equally willing to make the impugned contract had he known the truth, because it would actually have been a better contract for him. Whether the fact that a mistake renders the contract more favourable for the complainant should prevent his absence of consent from being operative is open to debate.78 However, it is submitted that the fact that a mistake renders the contract more favourable to the defendant should not be allowed to obscure the fact that it might still

77

78

For example, if the mistake is so serious that any reasonable person would see the intended and impugned contracts as different, the court will be less likely to believe that the defendant did not. Conversely, if no reasonable person would have seen them as different, the court will be less likely to be persuaded that the complainant did: see pp. 37–9, 97–9, above. Obviously, it is unlikely the complainant will want to avoid a contract when the mistake renders it more favourable to him. However, it is submitted that, as a matter of principle, he should be able to do so, if he proves the absence of consent and a relevant additional factor to render that absence of consent operative. If, however, one favours the approach under the Restatement, requiring substantive unfairness, one will clearly not agree with this proposition.

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establish an absence of consent from him and thus be a sufficient reason to render the complainant’s absence of consent operative. It is submitted that analysis of the treatment of mistake under the Restatement shows that, in relation to a mistake made by only one party, there is confusion as to whether an additional element sufficient to render the absence of consent operative is actually required. If the section 153(b) alternative elements of knowledge or inducement of the mistake are satisfied, this will clearly be sufficient. However, the lack of a clear distinction between the unconscionability requirement of section 153(a) and the requirement that the mistake must materially affect the agreed exchange of performances under the contract seems to render the section 153(b) requirements redundant. In this case, the only potential additional factor to render the absence of consent operative would be the significant substantive imbalance inherent in the section 153(a) requirements. It is submitted that it is inappropriate to have substantive imbalance as a sufficient additional element to render the absence of consent operative, because a mistake which establishes an absence of consent will normally (although, not always) also lead to a significant substantive imbalance in the contract. In addition to the fact that section 153 seems to treat substantive imbalance as a sufficient additional factor, both sections 152 and 153 require proof of substantive imbalance, because they include the requirement of a material effect on the agreed exchange of performances. It is submitted that it is equally inappropriate, as a matter of principle, to require substantive unfairness before a mistake can be operative. However, it must be recognised that the role played by substantive unfairness in mistake under the Restatement clearly reflects the policy of promoting substantively balanced (and dissuading substantively imbalanced) contracts. This is a legitimate policy aim for the law to pursue if it is felt by the lawmakers to be appropriate.

8.2.4 Carelessness In English law, a complainant cannot successfully plead non est factum79 or common mistake80 unless he can prove that he was not careless (i.e., did not act unreasonably) in coming to be mistaken. The same is true 79 80

Saunders v. Anglia BS [1971] AC 1004, HL. See also pp. 82–5, above. Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 707. See also pp. 111–12, above.

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under the PECL81 and DCFR,82 in relation to all forms of mistake; while the PICC requires that the complainant was grossly negligent before his fault will preclude him from successfully pleading mistake.83 The position under the Restatement is closer to the position under the PICC, because mere carelessness will not preclude the complainant from relying upon his mistake, whether unilateral or shared by the defendant.84 The complainant’s fault in coming to be mistaken will only preclude relief if it amounts to a breach of the duty to act in good faith and according to reasonable standards of fair dealing.85 Comment (a) to section 157 of the Restatement specifically states that this standard was adopted in favour of gross negligence in order to avoid confusion inherent in the definition of the latter standard.86 This suggests that the Restatement does not necessarily reflect a substantive departure from gross negligence. Whether good faith and fair dealing requires a lesser or more severe degree of fault than gross negligence, it clearly must go beyond mere unreasonableness, because Comment (a) states that a failure to ‘exercise . . . reasonable care does not preclude avoidance’.87 It was argued in discussion of the standard of gross negligence under the PICC that it is inappropriate to require more than carelessness from the complainant before his right to vitiation is prevented.88 A complainant should not be able to rely upon his own unreasonable conduct in order to vitiate a contract. The exception to this is if the defendant himself has actual or constructive knowledge of, or fraudulently or negligently induced, the complainant’s absence of consent. For, in such cases, the law should hold, as a policy decision, that the defendant’s unacceptable conduct negates the complainant’s unreasonable behaviour.89 The same argument applies to the requirement of fault under the Restatement. 81 84

85 88

82 83 Art. 4: 103(2)(a). Art. 7: 201(2)(a). Art. 3.5(2)(a). It is contended that it is appropriate not to distinguish between the effect of fault based upon the nature of the particular mistake; whatever the rule as to fault, it should apply equally to all forms of mistake. 86 87 }157. Restatement (Second), Volume I, 416. Ibid. 89 See p. 154, above. See pp. 83–5, 112, above.

9 Misrepresentation

9.1

English law

9.1.1 Introduction McKendrick defines a misrepresentation as an unambiguous, false statement of fact, addressed to the complainant, which induced him to contract, and which may or may not have to be material.1 These elements will be analysed in turn. It is well settled that misrepresentation renders a contract voidable. The requirement of inducement2 establishes that the complainant chose to contract at least partly because of the misrepresentation: that is, he consented to the impugned contract, but his consent was impaired by the misrepresentation. Further, fraudulent and negligent misrepresentations clearly amount to unacceptable conduct. What is more controversial is whether “innocent” misrepresentations are rightly treated as unacceptable conduct. This is the main issue in determining whether misrepresentation fits my second category of vitiating factor. In Solle v. Butcher, Denning LJ, in setting out the law of operative mistake, made the following reference to misrepresentation: The court . . . had power to set aside the contract whenever it was of opinion that it was unconscientious for the other party to avail himself of the legal advantage which he had obtained . . . The court had, of course, to define what it considered to be unconscientious, but in this respect . . . [i]t is now clear that a contract will be set aside if the mistake of the one party has been induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental.3

At the time of Solle v. Butcher, all non-fraudulent misrepresentations were treated as “innocent”,4 so Denning LJ’s words apply to negligent

1 4

McKendrick (2010), 581. Chitty (2008), 505.

2

See pp. 184–8, below.

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3

[1950] 1 KB 671, 692.

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misrepresentations. However, they also clearly apply to what amounts, today, to an “innocent” misrepresentation. Therefore, it is apparent that his Lordship felt that “innocent” misrepresentations amounted to unconscientious (unacceptable) conduct. However, it was not Denning LJ’s purpose to seek to explain why this was the case. Jessel MR in Redgrave v. Hurd justified equity’s granting of rescission for “innocent” misrepresentation in the following terms: A man is not to be allowed to get a benefit from a statement which he now admits to be false . . . Even assuming that moral fraud must be shewn in order to set aside a contract, you have it where a man, having obtained a beneficial contract by a statement which he now knows to be false, insists upon keeping that contract.5

As Cartwright notes, the problem with this justification is that it relies upon the defendant’s state of knowledge of the falsehood subsequent to contracting.6 Stoljar makes a similar point and argues that ‘innocent misrepresentation does not require us to attribute to the [defendant] some wrong or fault’.7 Cartwright also argues that the mere fact that the defendant’s conduct ‘caused the [complainant’s] defect of consent’ is sufficient to justify rescission.8 It is submitted that this is wrong. An impairment of consent not caused by unacceptable conduct is not sufficient for vitiation, even if it was caused by the defendant’s conduct. It might be a sufficient reason for restitution where there is no contract, but it cannot be sufficient to vitiate an otherwise binding contract and thereby overcome the fundamental notion of security of contracts.9 Further, the fact that the defendant’s conduct impaired the complainant’s consent can be an element in favour of that conduct being unacceptable, but only if he knew, or should have known, that it would have this effect. However, cumulatively, the rules determining when “innocent” misrepresentation is operative rightly establish it as unacceptable conduct. Relevant for this purpose are: (1) the requirement that the statement must be false; (2) the requirement that it must have induced the complainant’s decision to contract; (3) the rules relating to the interpretation of statements; (4) the rules determining the type of statements that can amount to an operative misrepresentation; (5) the fact that the 5 8

9

6 7 (1881) 20 ChD 1, 12–13. Cartwright (1991), 104. Stoljar (1968), 86. Cartwright (2007), 123. See also P. Birks, ‘Undue Influence as Wrongful Exploitation’ (2004) 120 LQR 34, 36. See pp. 23–5, above.

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statement must have been addressed to the complainant; and (6) the requirement of materiality.10 It will be shown that elements (3) and (4) are closely linked to materiality.11 Indeed, Cartwright correctly notes that their purpose is to determine whether, as a matter of law, the complainant ‘ought to be entitled to rely’ upon the representation,12 and this is precisely the purpose of materiality. Therefore, the four key elements are the requirements of falsity, inducement, that the statement must have been addressed to the complainant and materiality. The falsity of a statement is a necessary, but not a sufficient, condition. Even adding the requirement of impairment of consent is insufficient: it goes too far to impose an absolute duty to ensure the veracity of any precontractual statement that impairs the complainant’s consent, so that any false statement having this effect is treated as unacceptable conduct. This is where materiality and the rules determining whether the statement was addressed to the complainant are important. Materiality requires that the representation must have been one that would have been a factor leading a reasonable person in the complainant’s position to make the impugned contract, even if he would have done so anyway.13 This establishes, first, that the impairment to the complainant’s consent was not because of his unreasonable conduct; and, second, that the defendant at least should have known that it was likely that the complainant would rely upon the statement in deciding whether to contract. It is appropriate to place upon the defendant a greater duty to ensure the accuracy of a statement when he at least should have known that it was one on which the complainant was likely to rely.14 The rules determining when a statement can be treated as addressed to the complainant establish when he can in law be allowed to prove that he relied upon it. It has not been authoritatively determined whether, for the purposes of rescission, this requires that the defendant intended the complainant to act upon the statement or whether it merely requires that this was reasonably foreseeable.15 However, either way, it reinforces 10

11 12 13

14 15

It will be shown that this is a requirement of “innocent” misrepresentation: see pp. 188–91, below. See pp. 174–5 (interpretation of statements), 178–82 (relevant statements), below. Cartwright (2007), 29. Pan Atlantic v. Pine Top [1995] 1 AC 501, HL (although an insurance law case, their Lordships drew strong parallels with the general law of misrepresentation, so it is submitted that the rules of materiality they developed apply to the general law). P. Koh, ‘Some Issues in Misrepresentation’ [2008] 2 JBL 123, 133–6. See pp. 182–4, below.

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the fact that the defendant at least should have known that the complainant was likely to rely upon the representation. Therefore, the law of “innocent” misrepresentation does not impose an absolute duty to ensure the veracity of every pre-contractual, consentimpairing statement. It imposes a duty to ensure the veracity of every pre-contractual, consent-impairing material statement which the defendant at least should know the complainant is likely to rely upon in deciding whether to contract. Breach of this duty amounts to unacceptable conduct, because: (1) the defendant altered in his favour, by means of a falsehood, the state of dealings between himself and the complainant,16 by impairing the complainant’s consent; (2) his conduct would have had the same effect on a reasonable person in the complainant’s position; and (3) he at least should have known that the complainant was likely to rely upon the statement. The preceding analysis shows that even “innocent” misrepresentation is an example of my second category of vitiation. It is arguable that the label ‘innocent’ should be discarded, because it disguises the true nature of misrepresentation in these cases. However, it is submitted that this is a useful label to distinguish innocent from fraudulent and negligent misrepresentations. The defendant’s conduct is subjectively and morally innocent, but it is rightly treated as legally unacceptable and rightly leads to rescission when it impairs the complainant’s consent.17 An important element of the second category of vitiating factor is the interaction of the two elements of the rationale of vitiation: namely, (1) impairment of the complainant’s consent; (2) by the defendant’s unacceptable conduct. The proper way to give effect to this interaction is to recognise an increased desire to prevent procurement of contracts by more highly unacceptable means. In misrepresentation, this should be done by requiring a lesser standard of inducement for negligent than for innocent misrepresentations, and a lesser standard still for fraudulent misrepresentations. However, the present law does not fully recognise this. For, it has not been thought that there is any advantage in proving negligence or fraud if one is seeking merely rescission, because innocent misrepresentations suffice for rescission.18 If the increased desire to prevent procurement of contracts by more highly unacceptable means is recognised, reduction of the standard of inducement will provide the 16 17 18

See, e.g., Cartwright (1991), 65. Ibid. (operative innocent misrepresentation rightly leads to rescission). Redgrave v. Hurd (1881) 20 ChD 1.

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necessary advantage and ensure a more coherent, rational distinction between innocent, negligent and fraudulent misrepresentations. This will be discussed below.19

9.1.2 The elements of misrepresentation Ambiguity In the majority of cases, the complainant’s interpretation of a representation will not differ from the interpretation of the defendant or any reasonable person. However, the meaning of a representation may be ambiguous. In an action for deceit, if the defendant-representor honestly believes in the truth of the representation in the sense in which he believes the complainant will understand it, he is not guilty of actual fraud, which requires an absence of honest belief in the veracity of a statement.20 With innocent misrepresentation, however, this is no defence, because all it does is negative proof of a fraudulent mens rea. Indeed, unless it is relevant to his mens rea, the defendant’s interpretation of a statement is irrelevant. What matters is: (1) the objective interpretation; and (2) the complainant’s interpretation.21 In E. A. Grimstead v. McGarrigan, the Court of Appeal denied relief for misrepresentation because the complainant did not, and could not, reasonably understand the representation in the false sense for which he contended.22 It is not clear whether the genuineness and reasonableness of the complainant’s belief were treated as cumulative or alternative requirements. However, materiality requires that the representation would have been a factor leading the reasonable person towards deciding to make the impugned contract.23 If the sense in which the complainant interpreted the representation was unreasonable, materiality is not satisfied: the representation would not, in that false sense, have affected the reasonable person’s decision-making process. Further, if the complainant did not understand the representation in a sense in which it was false, he was not induced to contract by a false representation. Therefore, the requirements of inducement and materiality necessitate that an actual and a reasonable belief in the false sense of a representation are 19 20 21 23

See pp. 184–8, below. Derry v. Peek (1889) 14 App Cas 337, 374, HL, per Lord Herschell. 22 Cartwright (2007), 24–5. [1999] All ER (D) 1163. Pan Atlantic v. Pine Top [1995] 1 AC 501, HL.

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cumulative requirements. However, it will be argued that materiality should not be required for fraudulent or negligent misrepresentations, or for innocent misrepresentations on which the defendant knew, or should have known, the complainant was likely to rely.24 Therefore, it is submitted that, if the defendant should have known that the complainant would place an unreasonable false interpretation upon the representation, rescission should be available. The preceding analysis shows that an ambiguous statement can amount to an innocent misrepresentation if the complainant actually and reasonably interpreted it in a sense in which it was false, even if the defendant honestly (and just as reasonably) interpreted it in the sense in which it was true. The links to materiality and inducement show that this rule is part of what makes an innocent misrepresentation unacceptable conduct. It is submitted that, if the representor intends a representation to bear a false meaning, and the representee so interprets it, he cannot complain that the interpretation is an unreasonable one, because he is guilty of fraud. Similarly, if the defendant wrongly and unreasonably believes his statement to be true in one sense (the sense in which he believes it will be interpreted), it should not matter that the complainant has placed an unreasonable false interpretation upon it, even if it is a different unreasonable interpretation from the defendant’s.

False The basic test of the veracity of a representation requires it to be ‘substantially correct’, which it is if the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the [complainant] to enter into the [impugned contract].25

This clearly echoes the requirement of materiality.26 In effect, it requires the representation to be materially false: that is, false in more than a merely trifling manner. This is further justification for why even innocent misrepresentation amounts to unacceptable conduct.

24 25

26

See p. 191, below. Avon Insurance v. Swire Fraser [2000] 1 All ER (Comm) 573, 579. See also With v. O’Flanagan [1936] Ch 575, 581, per Lord Wright MR. Chitty (2008), 515.

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Statement A misrepresentation need not be by words, written or oral; it can be by conduct. The primary reason for the requirement that the defendant must make a “statement” is that it highlights the fact that he must have engaged in some positive conduct that represented a particular fact, because it is well settled that English law does not recognise a general duty of disclosure.27 In Spice Girls Ltd v. Aprilia World Services, the complainant entered into a contract with a musical group. However, it claimed that it was induced to do so by a misrepresentation that no then-current member of the group had, prior to conclusion of the impugned contract, declared an intention to leave the group during the currency of the agreement.28 The Court of Appeal held that there was a false representation to this effect by words.29 However, it also held that there were clear misrepresentations by conduct, which would have sufficed.30 It has been suggested that the true complaint in the case was, in substance, that the defendant group failed to disclose that one of the members had expressed an intention to leave, rather than that there was any active misrepresentation that no member had expressed such an intention.31 There is force in this argument, and cases of misrepresentation by conduct often involve the concealment/non-disclosure of a particular fact being treated as a representation that that fact does not exist. However, they also necessarily include positive conduct that creates a false impression, so they are not truly cases of mere non-disclosure. For example, in Schneider v. Heath, a boat was removed from dry dock and kept artificially afloat, so that damage to the hull below the waterline would not be apparent on visual inspection. This was a fraudulent misrepresentation that there was no such damage, not merely nondisclosure of the damage.32 Similar considerations, as to whether there has been a mere nondisclosure or positive conduct representing a particular fact, apply where a defendant says something literally true, but leaves out facts that would qualify the impression created by the statement. For example, in the Spice Girls case, the draft and final contracts both contained a statement that the agreement was between the complainant company and the band, 27 29 32

28 Keates v. Cadogan (1851) 10 CB 591; Chitty (2008), 511. [2002] EWCA Civ 15. 30 31 Ibid., at [27]. Ibid., at [54], [60]. S. A. Smith (2006), 253. (1813) 3 Camp 506.

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and the band was described as ‘currently comprising’ the then members, including the one who had expressed her intention to leave. The Court of Appeal held that stating the membership of the band (which was literally true) without qualification about the state of potential future membership was a representation that the band had no reason to believe its makeup at the time of conclusion of the contract would not last through the entirety of the agreement.33 Again, in substance, the complaint related to an omission to state a particular fact, but the “duty” to state it was inextricably tied to the impression created by the defendant’s positive conduct. As Morritt VC said: ‘What was omitted rendered that which was actually stated false or misleading in the context in which it was made.’34 Two further examples of this principle are Nottingham Patent Brick and Tile v. Butler35 and Curtis v. Chemical Cleaning and Dyeing.36 In the former case, the defendant’s solicitor said he was unaware of any restrictive covenants affecting the land to be conveyed. This was literally true, but only because he had failed to make enquiries. The statement was treated as an implied misrepresentation that the solicitor had made reasonable enquiries. In the latter case, the complainant took her dress to the defendant dry cleaners and was handed a “receipt” to sign. When she asked what the “receipt” was for, the assistant replied that it excluded liability for damage to and by the beads and sequins on the dress. In fact, it excluded liability ‘for any damage howsoever arising’. The statement was treated as a misrepresentation that bead and sequin damage was the only liability excluded. The law also recognises something analogous to a duty of disclosure when the defendant makes a statement which is true when made but which, prior to conclusion of the contract and to his knowledge, becomes false. For, a statement made in these circumstances amounts to a misrepresentation. This is classically illustrated by With v. O’Flanagan.37 In this case, the defendant represented the takings of the medical practice to be sold as around £2,000 per year. This was true when the representation was made, but, due to the defendant’s illness, the average takings of the practice in the three weeks preceding conclusion were £5 per week. The Court of Appeal held that the intervening falsehood, and the defendant’s knowledge of it, meant that he was guilty of a misrepresentation.38 33 36 38

34 35 [2002] EWCA Civ 15, at [59]. Ibid. (1886) 16 QBD 778, CA. 37 [1951] 1 KB 805, CA. [1936] Ch 575, CA. Ibid., 580–1, 586, per Lord Wright MR and Romer LJ. See also Davies v. London and Provincial Marine Insurance (1878) 8 ChD 469, 475; Traill v. Baring (1864) 4 De G J & S 318, 329, per Turner LJ.

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misrepresentation

Where the defendant actually knows of the falsehood at the time of conclusion, not to disclose it is akin to fraud. Further, it is submitted that Bigwood is correct to argue that constructive knowledge should suffice, because this is akin to negligence.39 Indeed, because of the element of knowledge, Romer LJ is correct to say that the rule is ‘so obviously consistent with the plainest principles of equity’.40 However, it has not been determined what the position is when the defendant has no knowledge of the intervening falsehood. Cartwright argues that knowledge should not be required;41 whereas Bigwood argues that it should.42 It is submitted that the former position is preferable. An innocent misrepresentation amounts to unacceptable conduct because the rules determining when a representation is legally operative establish that the defendant at least should have known that it was likely that the complainant would rely upon the representation in deciding whether to contract.43 Therefore, the defendant’s duty to ensure the veracity of the representation should not be limited to the time at which he makes it, but must extend to the time of conclusion of the contract, when the complainant makes his decision, unless the representation is, by its terms, confined to the present or past.44

Of fact Statements of fact are to be contrasted with four other types of statement, which are generally legally inoperative: mere puffs, and statements of law, opinion or intention. The reason that mere puffs are generally inoperative is linked to materiality. For, they are statements that are so vague and/or obviously not intended to convey something readily capable of verification or disproof that the reasonable person would not allow them to affect his judgement. Therefore, it is unreasonable for the complainant to rely upon them, and there is no reason the defendant even should know that he might do so. If the defendant nonetheless intended the complainant to rely upon a “mere puff ” in a false sense, this is fraud, and rescission should be available. Similarly, if the defendant was negligent regarding the false impression created by a “mere puff ” (i.e., he should have known 39

40 42 44

R. Bigwood, ‘Pre-contractual Misrepresentation and the Limits of the Principle in With v. O’Flanagan’ [2005] 64 CLJ 94, 101 (at n. 22), 111, 117. 41 [1936] Ch 575, 586. Cartwright (2007), 92. 43 Bigwood, ‘Pre-contractual Misrepresentation’. See pp. 170–3, above. Cf. Bigwood, ‘Pre-contractual Misrepresentation’.

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that the complainant was likely to rely upon it in a false sense), rescission should be available. In Dimmock v. Hallett, Cairns LJ said that ‘a statement that the cost will be moderate is too indefinite to amount to a misrepresentation’.45 Similarly, Turner LJ said that ‘such a vague statement . . . puts a purchaser on inquiry, and if he chooses to buy on the faith of such a statement without inquiry, he has no ground of complaint’.46 Therefore, their Lordships clearly held that it would be unreasonable for the complainant to rely upon what was a mere puff. Further, Turner LJ said: [A] mere general statement that land is fertile and improvable, whereas part of it has been abandoned as useless, cannot, except in extreme cases – as, for instance, where a considerable part is covered with water, or otherwise irreclaimable – be considered such a misrepresentation as to entitle a purchaser to be discharged.47

The statement in this case was held to be ‘a mere flourishing description’ for which no liability in misrepresentation could attach.48 However, the fact that his Lordship noted that, in extreme cases, the statement could have founded liability for misrepresentation illustrates that it may be reasonable to rely upon a vague statement for some limited purposes.49 Taking his Lordship’s example, it is clear that it would have been reasonable to rely upon the statement that the land was fertile and improvable to the extent of thus accepting that it was not largely or wholly irreclaimable. This is clearly linked to the reasonableness of reliance: that is, to materiality. It used to be accepted that (innocent)50 misrepresentations (or mistakes)51 of law did not give rise to a right to relief.52 However, it is now widely accepted that this rule has been abolished. In Pankhania v. London Borough of Hackney,53 the judge held that the rule could not stand with the House of Lords’ decision in Kleinwort Benson v. Lincoln City Council,54 where their Lordships held that there could be restitution of money paid under a mistake of law. Their Lordships rejected the argument that mistakes of law could not be operative because every man 45 49 50

51 52

46 47 48 (1886) 2 Ch App 21, 30. Ibid., 27. Ibid. Ibid. See also Cartwright (2007), 31. There was no such bar in relation to fraudulent misrepresentations of law: Treitel (2007), 365; Cartwright (2007), 49; Chitty (2008), 510. Cooper v. Phibbs (1867) 2 HL 149, 170, per Lord Westbury. 53 54 Rashdall v. Ford (1866) 2 EQ 750. [2002] EWHC 2441. [1999] 2 AC 349.

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must be taken to know the law, so ignorance of the law is no defence. This same argument had been applied to misrepresentation. The judge in the Pankhania case held that the argument was even less apposite in misrepresentation, because the complainant’s error will have been induced by the defendant. He therefore allowed damages for misrepresentation of law. The Court of Appeal has, obiter, approved this decision and held that common mistakes of law should be treated in the same way as common mistakes of fact.55 The abolition of the rule is to be welcomed and seems certain to be followed in misrepresentation and mistake. Statements of fact must also be distinguished from statements of opinion. If the defendant merely represents that his opinion is that X is so, he is not liable in misrepresentation simply because X is not so. For, there is no misrepresentation, as long as the defendant genuinely holds the opinion. If he does not actually hold that opinion, he is guilty of misrepresentation. Indeed, this will be a fraudulent misrepresentation, because no person can honestly believe he holds an opinion which he does not in fact hold.56 Nonetheless, it is too stark a distinction to say that a representation of opinion is either fraudulent or not operative. For, if a defendant makes a representation of opinion and has some relevant special skill or knowledge, or is in some special position regarding the matter, that representation of opinion may carry with it an implied representation of fact: namely, the fact that the defendant has reasonable grounds for holding the opinion.57 This is relevant to materiality and the explanation of why an innocent misrepresentation amounts to unacceptable conduct. For, it is unlikely that the judgement of the reasonable person would be affected by the mere expression of an opinion by one who is in no better position than himself to form an accurate opinion. Also, there is no reason why the defendant should know that the complainant is likely to rely upon the expression of opinion, either in itself, or as representing that the defendant has reasonable grounds for holding it. However, the greater the defendant’s relevant special skill or knowledge, the more reasonable it is to rely upon the assumption that he has made proper investigations before stating his opinion. Indeed, in this situation, it is fair to say that the reasonable person would probably believe that the defendant has reasonable grounds for holding the opinion and that the defendant, therefore, at least should know that the complainant is likely to rely upon this belief. 55 56

Brennan v. Bolt Burdon [2004] EWCA Civ 1017; [2005] QB 303. 57 Bisset v. Wilkinson [1927] AC 177, 182, PC. Ibid., 182–4.

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In Smith v. Land & House Property, the defendant contracted to sell a hotel to the complainant, describing it as currently let to a ‘most desirable tenant’.58 The tenant was actually in arrears with his rent, and had previously paid only under threatened distress. The defendant argued that the description was a mere expression of opinion. The Court of Appeal rejected this argument, because the defendant was in a uniquely good position to judge how desirable a tenant the lessee was, so his expression of opinion carried with it an implied (false) representation that he knew of reasonable grounds to justify it. Bowen LJ said: In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion . . . But if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.59

In Bisset v. Wilkinson, the Privy Council accepted the decision and reasoning in this case, expressly citing the passage from the judgment of Bowen LJ quoted above.60 However, in Bisset v. Wilkinson, it was held that the defendant was, to the complainant’s knowledge, not in any better position than the complainant to know of the accuracy of his opinion, which he honestly held. Therefore, he was not guilty of misrepresentation. Statements of intention do not give rise to an operative misrepresentation simply because the defendant does not execute his intention. If he does not actually hold the intention, he is guilty of a misrepresentation, for, as Bowen LJ said in Edgington v. Fitzmaurice: ‘The state of a man’s mind is as much a state of fact as the state of his digestion . . . A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.’61 Indeed, this is fraud, because the defendant has stated a fact in the veracity of which he does not honestly believe. It is a fundamental tenet of contract law that to bind someone to take a particular course of action in the future requires a binding promise. If the defendant merely states his intention, without promising that he will execute it, the judgement of the reasonable person will not be affected by the fact that the intention will be executed. If one were going to allow the defendant’s intention to affect one’s contractual decision,

58 59 60

(1885) 28 ChD 7, CA. Ibid., 15. See also Esso Petroleum v. Mardon [1976] QB 801, CA. 61 [1927] AC 177, 182. (1885) 29 ChD 459, 482.

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one would have extracted from the defendant a binding promise that he will fulfil it. Therefore, the defendant has no reason to believe his intention will be relied upon. The main justification for the preclusion of liability for mere puffs and statements of intention and opinion is that it is unreasonable to rely upon them.62 Indeed, this was part of the reasoning behind the prior preclusion of liability for misrepresentations of law.63 This clearly highlights the relevance of materiality. Therefore, even if materiality were not a standalone requirement of innocent misrepresentation,64 it is nonetheless an implicit prerequisite. It has been explained why this is relevant to justifying innocent misrepresentation as unacceptable conduct.65

Addressed to the complainant If the defendant makes a relevant material statement directly to the complainant, it will almost always be at least reasonably foreseeable that the complainant will rely upon it, because the rules determining when a statement is of the relevant kind and material mean that the reasonable person in the complainant’s position would have relied upon it.66 Indeed, it will be rare that the defendant will not intend the complainant to rely upon the statement: normally, if he did not, he would not have made it. However, the defendant may make a statement to someone else which then gets passed on to the complainant. Indeed, a statement may be infinitely passed on from person to person. It would be unjust to allow the original maker of a statement to bear the consequences of reliance upon it by innumerable people.67 When dealing with rescission for misrepresentation, the problem is limited by the fact that the complainant must make the impugned contract in reliance upon the defendant’s statement. However, this is not a sufficient limitation. When it is not, and cannot be said that it should be, within the defendant’s contemplation that the complainant might even have the statement communicated to him, let alone that he might actually rely upon it, there is no reason to allow that statement, even if false, to affect the validity of the impugned contract. For, the reasonable person in the defendant’s position would not have had reason to believe that the statement might affect the complainant. Therefore, it is submitted that it should be a 62 64 66 67

63 Chitty (2008), 509–10. Ibid., 511. 65 It will be submitted that it is: see pp. 188–91, below. See pp. 170–3, above. See pp. 178–82 (relevant statements), above, 188–91 (materiality), below. Hedley Byrne v. Heller [1964] AC 465, 534, HL, per Lord Pearce.

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requirement either that the defendant intended the impugned statement to be relied upon by the complainant or at least that it was reasonably foreseeable that it would be. It need not be the complainant as an individual to whom the statement was addressed in this sense: if the complainant was identifiable as a member of a group and the statement was addressed to that group, this is sufficient.68 However, it is not clear whether this is required when rescission is the only remedy sought. This is because the authorities dealing with the issue are largely concerned with actions for damages, either for deceit or negligent misstatement. In Peek v. Gurney, the House of Lords held that a secondary purchaser of shares could not have damages for deceit on the basis of his reliance on statements made in a prospectus for initial allotment.69 In Andrews v. Mockford, the Court of Appeal rejected the contention that this was a universal rule for prospectuses, confirming that the decision was based upon the fact that it was never intended by the defendants that the prospectus would be relied upon by secondary purchasers.70 However, neither case made it expressly clear whether the rule was that the defendant must intend the statement to be relied upon by the complainant, or whether it was sufficient if he merely intended it to be communicated to the complainant. Yet, both cases cited with approval a passage from the judgment of Page-Wood VC in Barry v. Croskey, where the complainant sought to vitiate the putative contract on the basis of a fraudulent misrepresentation. The Vice-Chancellor said: Every man must be held responsible for the consequences of a false representation made by him to another, upon which a third person acts, and, so acting, is injured or damnified – provided it appear that such false representation was made with the intent that it should be acted upon by such third person in the manner that occasions the injury or loss.71

This clearly relates to intention of reliance. In relation to a tortious action for negligent misstatement, the House of Lords held that it must be at least reasonably foreseeable that the complainant will rely upon the representation.72 No case precisely in point decides the matter for rescission. Cartwright argues that the courts profess that what is required is an intention 68 70 72

69 Peek v. Gurney (1873) 6 HL 377. Ibid. 71 [1896] 1 QB 372, 383, per Rigby LJ. (1861) 2 J & H 1, 22–3 (my italic). Smith v. Eric S. Bush [1990] 1 AC 831, 848, 856, 865, 871–2, per Lords Templeman, Griffiths and Jauncey.

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that the representee acts on the representation, but that what this actually means is ‘that the representor . . . realised that his statement would be received by the representee and that he might therefore act on it’.73 This is commensurate with the complainant’s reliance being reasonably foreseeable. It is submitted that this is an appropriate standard for rescission for innocent and negligent misrepresentation,74 but intention that the complainant will rely upon the representation is a prerequisite of a fraudulent mens rea.75 As explained above, reasonable foreseeability of reliance ensures that the defendant at least should have known that the complainant was likely to rely upon the statement, which is important in the argument that innocent misrepresentation amounts to unacceptable conduct.76 If intention is required, this strengthens the argument.

Materiality and inducement It can be said that ‘materiality’ is objective causation and ‘inducement’ is subjective causation.77 The former assesses what would have been the impact of the representation in the decision-making process of the reasonable person in the complainant’s position; the latter assesses the actual effect of the representation in the complainant’s decision-making process. There is no doubt that misrepresentation requires proof of inducement.78 For example, in Horsfall v. Thomas, it was held that there was no operative misrepresentation, because a fraudulent concealment of a defect (amounting to a representation that there was no such defect) did not induce the complainant to make the impugned contract: the concealment had no effect on the complainant, because he did not

73 74

75

76 77

78

Cartwright (2007), 62. Chitty (2008), 522 (reasonably foreseeable reliance will suffice, but ‘it is not clear that . . . this is required’). Derry v. Peek (1889) 14 App Cas 337, HL; Koh, ‘Some Issues in Misrepresentation’, 125–7. Cf. Chitty (2008), 523 (intention of reliance possibly not required where rescission for fraudulent misrepresentation is the only remedy sought). See pp. 170–3, above. One must draw a distinction between causation of the complainant’s decision to contract and causation of loss. The former is the requirement of inducement and amounts to impairment of the complainant’s contractual consent. It is the only causation with which this book is concerned, because the latter relates merely to the recoverability of damages: Cartwright (2007), 155. Pan Atlantic v. Pine Top [1994] 3 All ER 581, 610, HL, per Lord Mustill.

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inspect the subject matter, so could not have discovered the defect even if it had not been concealed.79 What is in doubt is: (1) the requisite standard of inducement and whether this varies dependent upon whether the misrepresentation is fraudulent, negligent or innocent, even where the complainant merely seeks rescission; (2) whether there is an inference or presumption of inducement upon proof of materiality; and (3) whether materiality is a discrete requirement of misrepresentation. These issues will be addressed in turn. A misrepresentation need not have been the sole or even the main inducement of the complainant’s decision to contract.80 However, beyond this, there is no authoritative statement as to the requisite standard of inducement for rescission for misrepresentation, whether fraudulent, negligent or innocent. It is submitted that, in actions for deceit or in equity for relief for fraudulent misrepresentation, “but for” causation is not necessary, and it will suffice that the misrepresentation was a factor in the complainant’s decision to contract. For, Lord Cranworth LJ in Reynell v. Sprye said: ‘Once make out that there has been anything like deception, and no contract resting in any degree on that foundation can stand.’81 It is interesting to note that his Lordship referred to a complainant establishing ‘anything like deception’82 and that Reynell v. Sprye was not a common law action for deceit. Therefore, its authority is not so narrowly confined. Indeed, it is submitted that Cartwright is correct to contend that this “a factor” standard is the appropriate one for rescission for fraudulent misrepresentation.83 It is contended that there should be a greater standard for actions for rescission for negligent and innocent misrepresentation. Otherwise, the law is doing nothing to seek to prevent procurement of contracts by fraud, over and above its attempts to prevent procurement of contracts by negligent or innocent misrepresentation. This is not expressly recognised in authority, but only because the requisite standard of impairment of consent in cases of rescission has not been clearly set, rather than because there is any authority precluding recognition of this principle. 79 80

81

(1862) 1 H & C 90. Edgington v. Fitzmaurice (1885) 29 ChD 459, CA; Reynell v. Sprye (1852) 1 De GM & G 660, 708, per Cranworth LJ; Redgrave v. Hurd (1881) 20 ChD 1, 19, per Jessel MR; Chitty (2008), 523–4. 82 83 (1852) 1 De GM & G 660, 708. Ibid. Cartwright (2007), 97.

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In Pan Atlantic v. Pine Top, Lord Goff, in the majority, justified his decision that materiality did not require objective “but for” causation by describing the prior adoption in insurance case law of this standard (the so-called ‘decisive influence’ test) in the following terms: It was, I believe, because it was thought . . . that actual inducement was not required, that . . . [there was proposed] the idea that the test of materiality should be hardened into the decisive influence test by introducing into the concept of materiality something in the nature of inducement, though [on an objective rather than subjective standard].84

As he argues that the decisive influence test is analogous to inducement, it is clear that Lord Goff saw the latter concept as necessitating a “but for” standard. Similarly, Lord Mustill, also in the majority, noted that the juristic basis of [a complainant’s] ability to disclaim the [impugned contract for misrepresentation] is that the misrepresentation . . . vitiates the consent necessary for a binding contract, and consent cannot be vitiated if the [complainant] would have made the same contract even if the [representation had not been made].85

This clearly suggests that “but for” causation is necessary. Their Lordships did not in these passages distinguish between the different classes of misrepresentation, so it seems that they envisaged a universal, “but for” standard of inducement in actions for rescission for misrepresentation. However, as noted, in Reynell v. Sprye, the court adopted an “a factor” standard, and the complainant successfully disclaimed the impugned contract on the basis of fraud. This case is not conclusive authority as to the requisite standard of inducement in actions for rescission for fraudulent misrepresentation, because the effect of fraud on an impugned contract had not at that time been fully determined. Nonetheless, it is not an authority that can be brushed aside as clearly only applying to money claims for fraudulent misrepresentation. Neither Reynell v. Sprye nor the Pine Top case decisively sets the standard of inducement for rescission for any form of misrepresentation. The Pine Top case is persuasive, but the dicta on inducement are obiter, because it was a case of non-disclosure in insurance law. Further, the case does not address the authority of Reynell v. Sprye, which was itself approved (again, obiter) by the Privy Council in Barton v. Armstrong.86

84

[1995] 1 AC 501, 517–18, HL.

85

Ibid., 530.

86

[1976] AC 104, 118–19.

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Indeed, what is the requisite standard of inducement where rescission is the remedy sought has not been directly addressed in authority or by commentators. Certainly, whether there are different standards for the different classes of misrepresentation has not been addressed. It is assumed that the defendant’s state of mind has no relevance to a claim purely for rescission: innocent misrepresentation will suffice; the complainant gets no benefits, when merely seeking rescission, by proving fraud or negligence; so every claim for rescission for misrepresentation is a claim based on innocent misrepresentation. Further, as for what is the requisite standard of inducement for innocent misrepresentation, judges and commentators accept that the relevant false statement need not have been the sole cause of the complainant’s decision to contact, but neither case law nor the academic material goes beyond this and addresses what is, or should be, the actual standard required. Therefore, there is room in the law of misrepresentation, without the need to overrule any cases, for it to be recognised that different standards of inducement apply to the different classes of misrepresentation, even where rescission is the only remedy sought. To have a lesser standard of inducement for fraudulent than for negligent misrepresentation, which would in turn have a lesser standard than innocent misrepresentation, would give effect to a greater desire to prevent procurement of contracts by more highly unacceptable means, and thus recognise the interaction of the two crucial principles justifying rescission for misrepresentation: namely, the desire (1) to protect the integrity of contractual consent; and (2) to seek to prevent procurement of contracts by unacceptable means. For this to be workable in practice, there must be three different, sufficiently certain standards of causation, each of which must be appropriate to its corresponding class of misrepresentation. It is submitted that, for fraud, it should be sufficient if the misrepresentation was a factor in the complainant’s decision-making process, leading him towards contracting. This recognises the highly unacceptable nature of the defendant’s conduct. It has been explained that innocent misrepresentations are unacceptable, even though not subjective moral wrongs because the defendant honestly and reasonably believed in the veracity of his statement.87 It is submitted that “but for” causation is the appropriate standard for innocent misrepresentation.88 This remains consistent 87 88

See pp. 170–3, above. Chitty (2008), 524. (Note that the author argues this standard probably applies also to rescission for negligent misrepresentation.)

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with the clear authority that the representation need not be the sole inducement. This, it is submitted, is largely uncontroversial. Both causative standards are well established in law, and have been referred to in many misrepresentation cases, although not authoritatively established as requirements in clearly defined circumstances. However, finding a third standard, between these two, is more problematic. In JEB Fasteners v. Marks Bloom, a case of negligent misstatement, Stephenson LJ used the label ‘real and substantial’ cause.89 Whatever label is used, the essence of the test is that the misrepresentation must be more than simply a factor in, and need not be a but-for cause of, the complainant’s decision to contract. This requires simply that the misrepresentation was a factor inducing the complainant’s decision, but not the least important one. There will be some factually difficult cases, but this is an inherent part of the law of causation. A complainant’s mere unreasonable failure to seek to verify the veracity of a misrepresentation does not preclude him from proving inducement.90 It is possible that it could be unreasonable not to seek to verify the representation but that the representation would still have affected the judgement of the reasonable person (i.e., have been material). For example, it might be that an attempted verification would not have uncovered the truth (so the representation would still have affected the reasonable person’s judgement), but that this could not have been known at the time (so does not prevent failure to seek verification being unreasonable). However, it will normally only be unreasonable not to seek to verify a representation if an attempt to do so would have disclosed the truth. In this case, the reasonable person’s judgement would not have been affected by a misrepresentation, because he would have taken steps that would have disclosed the truth. The preceding analysis shows that this rule does not directly conflict with materiality but does point in a different direction. It is submitted that, when a reasonable person would have sought verification and discovered the truth, the complainant’s unreasonable failure to seek verification means that an innocent misrepresentation will not be operative, because of the requirement of materiality: the reasonable person’s judgement would not have been affected by the 89 90

[1983] 1 All ER 583, 589. Redgrave v. Hurd (1881) 20 ChD 1, 13, 23, per Jessel MR and Baggallay LJ. Cf. Smith v. Eric S. Bush [1990] 1 AC 831, HL (applicable only to the tort of negligent misstatement).

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representation. However, this rule should not apply if the defendant’s representation was negligent or fraudulent, or if he should have known that the complainant was likely to rely upon the representation, because materiality should not be required in these cases.91 This is similar to the position in non est factum and common mistake: the complainant should not be allowed to rely upon his own carelessness, but the defendant’s knowledge, or unreasonable or fraudulent inducement, of the complainant’s absence of consent should negate this.92 It was settled by the Pine Top case that materiality merely requires that the representation would have affected the reasonable person’s decisionmaking process, making him more likely to contract, even if he would have reached the same final decision.93 There is debate whether the law will presume, or may infer, inducement from proof of materiality. In Redgrave v. Hurd, Jessel MR said that there will be an ‘inference in law’ (a presumption) of inducement upon proof of a representation that was likely to induce the complainant to contract (i.e., was material).94 The phrase ‘inference of law’ must not be taken to suggest that there is an irrebuttable presumption. For, his Lordship referred to two ways in which the inference could be displaced/the presumption rebutted, both of which amount to disproof of inducement.95 However, in Smith v. Chadwick, Lord Blackburn rejected Jessel MR’s dicta. His Lordship said that there might be an ‘inference of fact’, but ‘it is not possible to maintain that it is an inference of law’.96 It is important properly to distinguish between an inference and a presumption. As a matter of law, a presumption is mandatory (even if rebuttable): it will always arise on proof of the primary fact(s). An inference, however, is discretionary.97 Yet the phrase ‘inference of law’, as distinguished from ‘inference of fact’, refers to a presumption (whether rebuttable or irrebuttable). Therefore, Lord Blackburn was asserting that there is no presumption of inducement, even a rebuttable one, but that there may be an inference in a given case, if the evidence justifies it.98 91 92 93

94 97 98

See p. 191, below. See pp. 82–5 (non est factum), 111–12 (common mistake), above. [1995] 1 AC 501, HL (although an insurance law case, their Lordships made it clear that there was no justification for treating the general law of misrepresentation differently). 95 96 (1881) 20 ChD 1, 21. Ibid. (1884) 9 App Cas 187, 196, HL. www.lexisnexis.com/lawschool/study/outlines/html/evid/evid05.htm See also Smith v. Chadwick (1884) 9 App Cas 187, 196–7, HL, per Lord Blackburn (absence of direct evidence of inducement relevant to whether the inference should be drawn).

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Yet, in Museprime Properties Ltd v. Adhill,99 Scott J. accepted that there was a rebuttable presumption of inducement upon proof of materiality, relying on a passage from Goff and Jones.100 Furthermore, in the Pine Top case, Lord Mustill made several references to a presumption.101 However, Lord Lloyd referred to the ‘heresy’ of Jessel MR’s suggestion that there is an inference of law of inducement.102 Therefore, it is unclear whether there is a presumption (properly so called) of inducement. Lord Blackburn’s rejection of it in Smith v. Chadwick remains the strongest authority in this regard. Indeed, it is submitted that there should not be a presumption of inducement upon proof of materiality, particularly because materiality is assessed on an “a factor” standard,103 and it has been argued that inducement for innocent misrepresentation should require a “but for” standard.104 However, proof of materiality may be relevant to a possible inference of inducement. This was the approach of the Court of Appeal in the Spice Girls case.105 Whatever role materiality plays in a presumption/inference of inducement, this does not determine whether it is a prerequisite for relief. In the Pine Top case, Lord Mustill explicitly stated that there was no justification for treating misrepresentation in insurance cases differently from the general law of misrepresentation,106 and their Lordships held that materiality was required in insurance law. Therefore, it is submitted that materiality is a requirement of at least innocent misrepresentation. There is no contrary authority, apart from a first-instance citation of a passage from the, albeit influential, work of Goff and Jones.107 Certainly, it is submitted that the rules regarding (1) when a statement is treated as false, (2) ambiguity, and (3) the types of relevant statement, ensure that materiality is effectively a requirement of innocent misrepresentation. Koh notes that whether materiality is required in fraudulent misrepresentation

99 100

101 104 106 107

(1991) 61 P & CR 111, 124. R. Goff and G. Jones, The Law of Restitution (3rd edn, London: Sweet & Maxwell, 1996). See also Koh, ‘Some Issues in Misrepresentation’, 131. 102 103 [1995] 1 AC 501, 542, 549, 551, HL. Ibid., 570. See p. 189, above. 105 See pp. 184–8, above. [2002] EWCA Civ 15, at [68]–[72]. [1995] 1 AC 501, 530, 544, HL. Museprime Properties Ltd v. Adhill (1991) 61 P & CR 111, 124, citing Goff and Jones, Law of Restitution, 3rd edn.

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has not been authoritatively decided,108 but concludes that it is probably not.109 It is submitted that, if the defendant knows, or should know, that the complainant is likely to rely upon the representation, this should override any lack of materiality.110 Further, the defendant’s state of mind in fraudulent and negligent misrepresentation should negate any requirement of materiality. Materiality is one of the elements establishing innocent misrepresentations as unacceptable conduct;111 but the defendant’s knowledge that the complainant is likely to rely upon the representation, or his negligence or fraud, establishes this regardless of materiality, when added to the requirements that the representation must have been false and have induced the complainant’s decision to contract.

9.1.3 Conclusion Fraudulent and negligent misrepresentations are obvious examples of the second category of vitiation. The label “innocent” misrepresentation suggests that unacceptable conduct is missing in this class of misrepresentation. However, it has been contended that this is not so, because the rules of innocent misrepresentation require that: (1) the defendant made a false representation that impaired the complainant’s consent; (2) this would have been the effect on a reasonable person in the complainant’s position; and (3) the defendant at least should have known that the complainant was likely to rely upon the representation. It is submitted that these elements ensure that even “innocent” misrepresentations are properly regarded as unacceptable conduct.112 It is submitted that the law should recognise an increased desire to prevent procurement of contracts by the more highly unacceptable classes of misrepresentation, by requiring a lesser standard of inducement for negligent than for innocent misrepresentations, and a lesser 108

109

110

111

Compare Downs v. Chappell [1997] 1 WLR 426, 433, CA (materiality required) with Derry v. Peek (1889) 14 App Cas 337, HL, and Bradford Third Equitable Benefit BS v. Borders [1941] 2 All ER 205, HL (materiality not mentioned). Koh, ‘Some Issues in Misrepresentation’, 130. Cf. Cartwright (2007), 136 (materiality required in deceit). Chitty (2008), 526; Cartwright (2007), 96; Stoljar (1968), 91; Koh, ‘Some Issues in Misrepresentation’, 134–6. 112 See pp. 170–3, above. Ibid.

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standard still for fraudulent misrepresentations. The lack of clear authority regarding the requisite standard of inducement when rescission is the only remedy sought allows for recognition of this principle without the need to overrule any cases.113

9.2 The PICC, PECL and DCFR PECL, Article 4: 107: Fraud (1) A party may avoid a contract when it has been led to conclude it by the other party’s fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information which in accordance with good faith and fair dealing it should have disclosed. (2) A party’s representation or non-disclosure is fraudulent if it was intended to deceive. (3) In determining whether good faith and fair dealing required that a party disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to it of acquiring the relevant information; (c) whether the other party could reasonably acquire the information for itself; and (d) the apparent importance of the information to the other party.

DCFR, Article 7: 205: Fraud (1) A party may avoid a contract when the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent non-disclosure of any information which good faith and fair dealing, or any pre-contractual information duty, required that party to disclose. (2) A misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false and is intended to induce the recipient to make a mistake. A non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake. (3) In determining whether good faith and fair dealing required a party to disclose particular information, regard should be had to all the circumstances, including:

113

See pp. 184–9, above.

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(a) whether the party had special expertise; (b) the cost to the party of acquiring the relevant information; (c) whether the other party could reasonably acquire the information by other means; and (d) the apparent importance of the information to the other party.

PICC, Article 3.8: Fraud A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.

9.2.1 Introduction Relief for misrepresentation under the three codes is clearly based upon the fact that the defendant engaged in unacceptable conduct that impaired the complainant’s consent, and a successful plea of misrepresentation renders the impugned contract voidable. Further, as in English law, each of the codes expressly recognises that a misrepresentation can be ‘by words or conduct’. (The PICC use the phrase ‘language or practices’.) The Comments to the PECL state that there is to be no distinction drawn between misrepresentations of fact and misrepresentations of law.114 It has been explained that English law has also come to recognise this position.115 Neither the DCFR nor PICC expressly deal with this matter, but there is no reason to doubt that they treat it in the same way. Therefore, in these respects the three codes are identical to English law. However, in one respect, the codes are markedly narrower than English law, because they allow for relief for misrepresentation only when the defendant acted fraudulently. Therefore, if the defendant made a non-fraudulent misrepresentation, the complainant can only establish a right to relief if that misrepresentation induced a mistake that establishes an absence of consent and satisfies the other requirements of operative mistake under the codes. This is inappropriate, because a negligent misrepresentation amounts to unacceptable conduct, and it 114

PECL (2000), 252.

115

See pp. 179–80, above.

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has been explained above why an innocent misrepresentation under English law is also unacceptable.116 Therefore, if the defendant makes a negligent or innocent misrepresentation that impaired the complainant’s consent to the requisite degree, the impugned contract should be voidable. Despite this fundamental difference in the width of the codes, they are similar to English law in their treatment of relief for fraudulent misrepresentation. The only substantive differences, between the codes themselves and between the codes and English law, relate to the definition of fraud. These differences will be discussed below.

9.2.2 Unacceptable conduct For a misrepresentation to be fraudulent, English law requires that the defendant: (1) knew of the falsity of the representation, lacked an honest belief that it was true, or was indifferent as to whether it was true or false (without believing it to be true); and (2) intended to deceive the complainant.117 That is, English law requires a lack of positive belief in the truth of the representation and an intention that the complainant will rely upon it. The Comments to the PECL state that fraud requires: (1) knowledge or recklessness as to the truth of the representation, and (2) intentional or reckless deceit of the complainant. Recklessness as to the truth is defined as the defendant knowing that he does not know whether the representation is true.118 If the defendant knows that he does not know whether the representation is true, he lacks an honest belief in its truth. Similarly, if he lacks an honest belief that the representation is true, then he must know that he does not know whether it is true, unless he positively believes it to be false. However, applying this definition of recklessness to deceit of the complainant leads to the conclusion that the defendant recklessly deceives the complainant if he knows that he, the defendant, does not know whether the complainant will rely upon the representation. Therefore, the PECL and English law are commensurate in their treatment of the first element of fraud, the defendant’s state of mind regarding the falsity of the representation, but the PECL are wider in their treatment of the second element, the defendant’s state of mind regarding whether the complainant will be deceived. It is submitted that 116 118

See pp. 170–3, above. PECL (2000), 252.

117

Derry v. Peek (1889) 14 App Cas 337, HL.

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merely not knowing whether the complainant will rely upon the representation should not be sufficient for the second element of fraud. If the defendant makes a representation in the truth of which he does not honestly believe, not knowing whether the complainant will rely upon it (but not positively believing that he will not), he has engaged in unacceptable conduct, but not conduct that should be labelled fraudulent. Fraud should have a more stringent requirement of moral turpitude. Under the DCFR, a misrepresentation is fraudulent if it is made with knowledge or a belief that it is false and it is intended to induce the complainant to make a mistake. Therefore, the DCFR is narrower than English law and the PECL in relation to the first element of fraud: it requires at least a positive belief in the falsity of the representation, rather than merely an absence of belief in its truth. However, it is commensurate with English law, and narrower than the PECL, in requiring an intention to deceive. Despite the heavy connotation of impropriety that attaches to the word ‘fraudulent’, it is submitted that it is appropriate to apply the label, as English law does, to situations where the defendant made a representation upon which he intended the complainant to rely, without himself believing the representation was true, even if he did not positively believe that it was false. The Comments to the PICC treat conduct as ‘fraudulent if it is intended to lead the other party into error and thereby to gain an advantage to the detriment of the other party’.119 It is submitted that the requirement of an intention to gain an advantage to the detriment of the complainant should be satisfied by proof that the defendant intended the complainant to rely upon the misrepresentation in deciding whether to contract. If it requires more than this, then it goes too far. This is particularly so because the natural meaning of the requirement that the defendant intended to lead the complainant into error is that he at least positively believed the representation to be false, and there is no qualification of the requirement to suggest otherwise.120 It has been argued that it is appropriate for English law to treat a representation as fraudulent if the defendant did not believe it to be true and intended the complainant to rely upon it. Therefore, if the defendant intended the complainant to rely upon a representation 119 120

UNIDROIT (2004), 104–5 (my italic). Cf. Vogenauer and Kleinheisterkamp (2009), 435–6, which suggests that reckless indifference as to the truth can amount to fraud under the PICC.

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which he positively believed to be false, this should establish a fraudulent intent; an intention to gain any further advantage should not be required. Even if this is accepted, the PICC are narrower than English law because they require a positive belief in the falsity of the representation.

9.2.3 Impairment of consent The Notes to Article 4: 107 of the PECL say that ‘[i]t is the deliberate nature of the fraud which justifies the ready grant of avoidance’.121 Nonetheless, it is clear that the purpose of avoidance is not merely to punish the defendant for his fraud. For, the complainant ‘will not have a remedy unless he has relied on the [false] information in deciding to . . . contract’.122 This is made clear in the language of each of the codes, which requires that the complainant was ‘led to conclude’ the impugned contract by the fraudulent misrepresentation (PECL and PICC) or that the fraudulent misrepresentation ‘induced the conclusion of the contract’ (DCFR).123 What is not clear is the requisite standard of reliance/inducement (impairment of consent) under the codes. It has been argued that the standard in English law for rescission for fraudulent misrepresentation should be “a factor” causation, and that the weight of authority supports this but does not definitively decide it.124 Therefore, the requisite standard of inducement is not authoritatively decided under the codes or in English law, but they all require that the defendant’s unacceptable conduct impaired the complainant’s consent.

9.3 The US Restatement (Second) of Contracts } 159. Misrepresentation Defined A misrepresentation is an assertion that is not in accord with the facts.

121 123

124

122 PECL (2000), 255. Ibid., 253. Vogenauer and Kleinheisterkamp (2009), 435, notes, but rejects, the argument that fraud under the PICC does not require inducement of a mistake. It is suggested that the reason for this is that, if the fraud does not induce a mistake, it cannot be said to have induced C’s decision to contract. See p. 185, above.

us restatement (second) of contracts } 160. When Action Is Equivalent to an Assertion (Concealment) Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. } 161. When Non-disclosure Is Equivalent to an Assertion A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material; (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing; (c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part; (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them. } 162. When a Misrepresentation Is Fraudulent or Material (1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker: (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. (2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. } 163. When a Misrepresentation Prevents Formation of a Contract If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent. } 164. When a Misrepresentation Makes a Contract Voidable (1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

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misrepresentation (2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction. } 165. Cure by Change of Circumstances If a contract is voidable because of a misrepresentation and, before notice of an intention to avoid the contract, the facts come into accord with the assertion, the contract is no longer voidable unless the recipient has been harmed by relying on the misrepresentation. } 167. When a Misrepresentation Is an Inducing Cause A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent. } 168. Reliance on Assertions of Opinion (1) An assertion is one of opinion if it expresses only a belief, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters. (2) If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to facts not disclosed and not otherwise known to the recipient may properly interpret it as an assertion (a) that the facts known to that person are not incompatible with his opinion, or (b) that he knows facts sufficient to justify him in forming it. } 169. When Reliance on an Assertion of Opinion Is not Justified To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the recipient (a) stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or (b) reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or (c) is for some other special reason particularly susceptible to a misrepresentation of the type involved. } 170. Reliance on Assertions as to Matters of Law If an assertion is one as to a matter of law, the same rules that apply in the case of other assertions determine whether the recipient is justified in relying on it.

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} 171. When Reliance on an Assertion of Intention Is not Justified (1) To the extent that an assertion is one of intention only, the recipient is not justified in relying on it if in the circumstances a misrepresentation of intention is consistent with reasonable standards of dealing. (2) If it is reasonable to do so, the promisee may properly interpret a promise as an assertion that the promisor intends to perform the promise. } 172. When Fault makes Reliance Unjustified A recipient’s fault in not knowing or discovering the facts before making the contract does not make reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

9.3.1 Introduction Unlike the three codes, the Restatement allows for vitiation on the basis of a non-fraudulent misrepresentation. However, it will be argued that, similarly to English law, even a non-fraudulent misrepresentation under the Restatement amounts to conduct that is rightly treated as unacceptable in order to be operative. It will be contended that it is the requirement of materiality which ensures that this is the case. Furthermore, under the Restatement, an operative misrepresentation renders the impugned contract voidable;125 and, in order to be operative, that misrepresentation must have impaired the complainant’s consent. This is the same as the position in English law and under the three codes and fits the second category of vitiating factor. As well as rendering an impugned contract voidable when the misrepresentation, amounting to unacceptable conduct, impaired the complainant’s consent, the Restatement recognises that a misrepresentation can lead to an absence of consent. In such cases, the position is the same as if the putative contract were rendered void ab initio, because the misrepresentation precludes formation of a contract. It will be shown that this is similar to the classic fact-pattern of non est factum in English law.126

125

}164(1).

126

See }163 and pp. 210–11, below.

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Similarly to the three codes, but unlike English law, the Restatement recognises a general duty of disclosure.127 However, part of that general duty of disclosure relates to situations where the defendant made a representation which was initially true but which was later falsified by a change of circumstances. In such cases, the defendant has a duty to disclose the present truth if he knows of the change of circumstances.128 This is similar to the position in English law under cases such as With v. O’Flanagan.129 Furthermore, in English law130 and under the Restatement,131 if the defendant actively conceals a particular fact, this is treated as misrepresentation that the fact does not exist. English law,132 the three codes133 and the Restatement134 all recognise that a misrepresentation can be by words or conduct, and none of them distinguishes between the effect of a misrepresentation of fact and one of law. There is also an evidential similarity between English law and the Restatement in terms of proof of inducement. Comment (b) to section 167 of the Restatement states that a representation is ‘assumed’ to have induced the complainant’s decision to contract if it is material, but the complainant must affirmatively prove inducement if the representation is not material.135 It has been noted that there is debate in English law whether proof of materiality actually leads to a presumption or an inference of inducement but that the better position is that it can lead to an inference in appropriate circumstances: that is to say, proof of materiality will not automatically lead to a (rebuttable) presumption of inducement, but it might, in appropriate circumstances, combined with any other relevant evidence, lead the court to infer inducement. Although the term ‘assumed’ does not have any special legal significance, the explanation in Comment (b) uses mandatory language,136 commensurate with a (rebuttable) presumption, not an inference. 127 129 130 132 133 134 135 136

128 }161. }161(a). [1936] Ch 575. See pp. 177–8, above. 131 E.g., Schneider v. Heather (1813) 3 Camp 506. }160. See pp. 176–8 (conduct as misrepresentation), 179–80 (fact and law), above. See p. 193, above. }170 (fact and law); Restatement (Second), Volume I, 427 (conduct as misrepresentation). Restatement (Second), Volume I, 454. That is, the Comment states that inducement ‘is assumed’ upon proof of materiality (ibid.; my italic).

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A significant difference between English law and the Restatement is the flexibility of the rule in section 165. Under this rule, if the facts change in such a way that a representation which was false at the time of conclusion of the contract is now true, the complainant cannot avoid the impugned contract unless, before the change of circumstances, he had already given notice of avoidance or had detrimentally relied upon the contract. This is a clear reflection of a desire to promote the security of contracts, seen in relation to mental incapacity and mistake under the Restatement.137 This policy is also evident in section 171, under which a misrepresentation of intention (which, by its very nature, must be fraudulent),138 cannot be operative if making it was in accordance with reasonable standards of fair dealing. As well as naturally promoting the security of contracts by limiting the right to avoid, the rule reflects an “adversarial” approach to contracting. For example, Comment (a) to section 171 gives the example of the defendant-buyer of land misrepresenting his intended use of the land, ‘to conceal from the seller some special advantage that the buyer will derive from its purchase, which if known to the seller, would cause him to demand a higher price’.139

9.3.2 Unacceptable conduct Unlike the PICC, PECL and DCFR, the Restatement deals with fraudulent and non-fraudulent misrepresentations. In order to be operative, a non-fraudulent misrepresentation must be material.140 It is not entirely clear whether, in English law, materiality is a standalone requirement when the complainant seeks to avoid a contract induced by misrepresentation. However, it was argued that materiality should not be required if the misrepresentation was made fraudulently or negligently or if the defendant knew or should have known that the complainant was likely to rely upon it, because the defendant’s fraud, negligence or knowledge

137 139

140

138 See pp. 66–8 (incapacity), 100–1 (mistake), above. See pp. 181–2, above. Restatement (Second), Volume I, 466. Although, note that the Comment distinguishes between a misrepresentation of intention in order to protect some valuable advantage to the defendant and a misrepresentation of intention in order to conceal some harm that the contract will cause to the complainant. }164.

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(as the case may be) establishes the requisite unacceptable conduct regardless of the objective importance of the misrepresentation; but that it should be required if the misrepresentation was made innocently, because it is an important element in rendering an “innocent” misrepresentation unacceptable.141 The position under the Restatement is similar to this proposed position, but it requires even a negligent misrepresentation to be material.142 As for the definition of materiality under the Restatement, section 162(2) takes the dual objective–subjective approach it was argued should be applied in English law: that is, a misrepresentation is material if would have been important to the reasonable person’s decision to contract or if the defendant actually knew that it was important to the complainant.143 While this determines the general approach to materiality, it does not determine the requisite standard of materiality. Section 162 states that, in order to be material, the misrepresentation must be such as would have ‘induce[d] a reasonable person to manifest his assent, or . . . the [defendant must have] know[n] that it would be likely to induce the [complainant’s assent]’. Section 167 then states that a misrepresentation induces a manifestation of assent if it ‘substantially contributes to [the] decision to manifest assent’. It has already been contended that the language of “substantial cause” is, in itself, vague, but that it is an acceptable label if the substance of the requirement is sufficiently clearly defined.144 Comment (a) to section 167 states that the test does not require that the misrepresentation was ‘the sole or even the predominant factor in influencing’ the decision to contract, nor even proof of “but for” causation.145 Therefore, it seems that the standard of materiality, being linked under the Restatement to the standard of inducement, is different from the “a factor” standard required in English law.146 For, the 141

142

143

144 146

See pp. 170–3 (innocent misrepresentation amounts to unacceptable conduct), 191 (materiality should not be required for fraudulent or negligent misrepresentation), above. }164 (in order to render contract voidable, misrepresentation must be fraudulent or material). See p. 191, above. It does not matter whether the law adopts this dual objective– subjective approach as the definition of materiality or applies a purely objective approach to materiality but allows proof that the defendant knew of the subjective importance attached to the representation by the complainant to override any lack of materiality. 145 See p. 188, above. Restatement (Second), Volume I, 453. See p. 189, above.

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definition under the Restatement connotes that something more than the merely “a factor” standard is required, even though this need not rise to the level of “but for” causation. It is submitted that even a non-material fraudulent or negligent147 misrepresentation is properly regarded as unacceptable conduct. However, the required standard of materiality is important in determining whether an innocent misrepresentation under the Restatement is properly regarded as unacceptable conduct. It was argued that, in English law, both the fact that a misrepresentation must have been addressed to the complainant148 and the element of materiality are vital in ensuring that even an innocent misrepresentation is properly regarded as unacceptable conduct,149 because they ensure that the defendant at least should have known that the complainant was likely to rely upon the representation, justifying imposing an absolute duty on him to ensure the veracity of his statement. The Restatement does not include a specific requirement, similar to the one in English law,150 that the defendant must have intended the complainant to rely upon the misrepresentation or that it must have been reasonably foreseeable that the complainant would rely upon it.151 However, the definition of materiality, explained above, requires that the misrepresentation would have been a substantial factor in the reasonable person’s decision to contract or that the defendant knew that it would be likely to be a substantial factor in the complainant’s decision to contract. Therefore, it can be seen that, in relation to non-fraudulent misrepresentations, including innocent misrepresentations, it must have been at least reasonably foreseeable that the complainant was likely to rely upon the representation. This means that the defendant at least should have known that the complainant was likely to rely upon the representation. As such, it is submitted that an innocent misrepresentation under the Restatement is, similarly to an innocent misrepresentation in English law, rightly treated as unacceptable conduct. Section 164 of the Restatement requires that the complainant was justified in relying upon the representation. Comment (d) to section 164 147

148

149 151

It is important to remember that all non-fraudulent misrepresentations must, under the Restatement, be material, and this obviously includes negligent misrepresentations. Which requires either that the defendant intended the complainant to rely upon the misrepresentation or that it was reasonably foreseeable that the complainant would rely upon it. See pp. 182–4, above. 150 See pp. 170–3, above. See pp. 182–4, above. Note that }162 requires the defendant to have intended the complainant to rely upon the misrepresentation before it can be fraudulent.

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confirms that, when dealing with fraudulent or material misrepresentations, this requirement is normally easily satisfied, unless dealing with misrepresentations of opinion or intention,152 which have their own rules under the Restatement.153 Section 172, however, deals with those situations where the complainant’s fault (amounting to a failure to act in good faith and according to reasonable standards of fair dealing) means that he was not justified in relying upon the misrepresentation. Comment (a) to section 172 makes it clear that the complainant ‘is not entitled to relief if his reliance was unreasonable in the light of his particular circumstances’.154 However, similarly to the position in English law,155 a mere unreasonable failure to verify the representation will not render reliance unreasonable.156 Indeed, the exception under this section seems to apply only where it was unreasonable for the complainant ever to believe the misrepresentation in the first place. It is difficult to envisage a situation where it will be unreasonable for the complainant to rely upon an objectively material misrepresentation, unless the complainant has some special skill or knowledge not possessed by the hypothetical reasonable person. For, if the misrepresentation would have been a substantial cause of the reasonable person’s decision to contract, surely it would be reasonable for the complainant to rely upon it in the absence of such special skill or knowledge to the contrary. Nonetheless, if anything, the inclusion of this exception potentially strengthens the argument that an operative innocent misrepresentation under the Restatement is properly regarded as unacceptable conduct, because the misrepresentation cannot be operative if the complainant was not justified in relying upon it. The Restatement includes specific rules for determining whether the complainant is justified in relying upon the defendant’s representation of opinion. It was argued that, in English law, the rules determining when a representation of opinion can amount to an operative misrepresentation are linked to the rules of materiality and therefore play a role in determining whether an innocently misleading representation of opinion is rightly treated as unacceptable conduct (because the defendant at least should have known that the complainant was likely to rely upon it).157

152 153 154 156

Restatement (Second), Volume I, 447. See pp. 201, above (intention); 204–6 (opinion), below. 155 Restatement (Second), Volume I, 469. See pp. 188–9, above. 157 Restatement (Second), Volume I, 470. See pp. 180–1, above.

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It is clear that materiality is a requirement under the Restatement, and it has been argued that this ensures that an innocent misrepresentation is rightly treated as unacceptable conduct. Nonetheless, it is important to note that sections 168 and 169 apply similar rules to those found in English law with regard to when a representation of opinion can amount to an operative non-fraudulent158 misrepresentation. Section 168 makes it clear that a representation of opinion can carry with it an implied representation that the defendant has reasonable grounds for holding the opinion: i.e., that he does not know of any facts incompatible with his opinion,159 or that he does know of facts sufficient to justify his holding the opinion.160 This is clearly similar to the position in English law, under such cases as Smith v. Land & House Property161 and Esso Petroleum v. Mardon.162 Under the Restatement, an implied representation that the defendant has reasonable grounds for holding his opinion can arise if it is reasonable for the complainant to interpret the defendant’s pure representation of opinion in this way.163 Section 169 then sets out three situations in which such an interpretation by the complainant will be justified: that is to say, situations in which such an implied representation of reasonable grounds for holding the opinion will arise. The first class consists of cases where the defendant stands in a fiduciary or quasi-fiduciary position in relation to the defendant,164 such that the complainant has special reason to trust the defendant’s opinion.165 It is submitted that, in such cases, unless the defendant has absolutely no reason to know of the trust and confidence placed in him by the complainant,166 he at least should know that it is likely that the complainant will rely upon the fact that he has reasonable grounds for holding the opinion. It is further contended that this is the element which makes even an honest representation of opinion a form of unacceptable conduct, when the defendant did not have reasonable

158

159 162 165 166

If the defendant fraudulently misrepresents his opinion, then this is to be dealt with under the Restatement in the same way as any fraudulent misrepresentation. See pp. 207–9, below. 160 161 }168(2)(a). }168(2)(b). (1885) 28 ChD 7, CA. 163 164 [1976] QB 801, CA. See also pp. 180–1, above. }168(2). }169(a). Restatement (Second), Volume I, 460–1. This will be rare, because one will usually have at least constructive knowledge of any special trust and confidence placed in one by a co-contractor.

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grounds for holding the opinion but the belief that he did impaired the complainant’s consent.167 The second class is very similar to the position in English law. Under cases such as Smith v. Land & House Property168 and Esso Petroleum v. Mardon,169 an implied representation of reasonable grounds for holding an opinion will arise if the defendant has some special skill or knowledge in relation to the matter on which he expresses his opinion. Under section 169(b), such an implied representation arises when the complainant reasonably believes that the defendant has some ‘special skill, judgment or objectivity with regard to the subject matter’ of the representation of opinion. In these circumstances, the defendant at least should know that the complainant is likely to rely upon a belief that the defendant has reasonable grounds for forming the opinion, so it is unacceptable for him to represent his opinion without having such grounds. The third class consists of cases in which the complainant is ‘for some special reason particularly susceptible to a misrepresentation of the type involved’.170 Comment (e) to section 169 explains that this covers situations where the complainant suffers from some vulnerability or weakness relevant to the matter in relation to which the defendant has represented his opinion.171 This would clearly make it more likely that the complainant will believe that the defendant has reasonable grounds for forming his opinion. Moreover, if the defendant has some knowledge of the complainant’s circumstances, it might mean that the defendant at least should know that the complainant is likely to form, and rely upon, such a belief. However, there is nothing to require that the defendant at least has reason to know of the complainant’s weakness, so section 169(c) seems to be focused more on protecting vulnerable complainants than preventing unacceptable exploitation of their weakness. Of course, first, these two purposes are closely linked, even if the former is more overtly prophylactic than the latter. Second, it will often be the case that one at least should know of some peculiar vulnerability in his co-contractor, so even this category is relevant to determining whether the defendant’s conduct was unacceptable. 167 169 171

168 See pp. 180–1, above. (1885) 28 ChD 7, CA. 170 [1976] QB 801, CA. See also pp. 180–1, above. }169(c). Restatement (Second), Volume I, 462. There is no reason why such a vulnerability cannot be such as would amount to a weakness for the purposes of unconscionability in English law, but it is not necessarily clear that it must rise to such a level.

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To say that the defendant has made a fraudulent misrepresentation clearly connotes that he has engaged in unacceptable conduct. Indeed, fraud is generally seen as one of the clearest examples of unacceptable conduct. The definition of ‘fraudulent’ under the Restatement differs from the definition in English law and under the three codes, but it is submitted that a fraudulent misrepresentation under the Restatement still clearly amounts to unacceptable conduct by the defendant. Section 162(1) sets out three alternative scenarios in which a misrepresentation is fraudulent, subject to the fact that the defendant must, in each case, have intended the complainant to rely upon the misrepresentation in deciding whether to contract.172 First, a misrepresentation is fraudulent if the defendant knows or believes that it is false. This is a clear, uncontroversial case of fraud, which would satisfy the various tests in English law and under the three codes.173 At this stage, without looking to the second or third options, it would render the Restatement commensurate with the DCFR and PICC,174 in requiring at least a positive belief in the falsity of the representation, but narrower than English law and the PECL, each of which recognises the lack of a positive belief in the truth of a misrepresentation as sufficient to establish fraud.175 However, the second head of fraud under section 162(1) treats a misrepresentation as fraudulent if the defendant ‘does not have the confidence that he states or implies in the truth of the assertion’. This would clearly cover, not merely a positive belief in (but not rising to the level of actual knowledge of) the falsity of the representation, but also a lack of positive belief in the truth of the representation.176 The second 172

173

174 176

Comment (a) to section 162 states that the defendant can still be held to have intended the complainant to rely upon a misrepresentation even if he does ‘not have [the complainant] in mind as the recipient at the time the misrepresentation is made’; it is sufficient that ‘[h]e merely [has] reason to expect that it will reach any class of persons, of which the [complainant] is a member’. However, it seems that he must still intend that one or more members of the class will rely upon the misrepresentation. The only possible qualification to this is the requirement, noted in the Comments to Art. 3.8 PICC that the defendant must have intended to ‘gain an advantage to the detriment of the [complainant]’ if his misrepresentation is to be fraudulent (UNIDROIT (2004), 104–5). It was argued that this should not require anything more than that the defendant intended the complainant to rely upon the misrepresentation in deciding whether to contract (see pp. 195–6, above). However, if it requires more than this, it would be an element rendering the definition of fraud under the PICC narrower than the first head of fraud under the Restatement. 175 See pp. 194–6, above. Ibid. See, e.g., Comment (b) to }162: Restatement (Second), Volume I, 440.

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head of fraud under the Restatement therefore renders the Restatement commensurate with English law and the PECL, at this stage of analysis, as regards the element of fraud. Under the third head of section 162, a misrepresentation is fraudulent if the defendant ‘knows that he does not have the basis that he states or implies for the assertion’. It is clear that, in such cases, the defendant might honestly believe that the misrepresentation (the original assertion) is, itself, true.177 This initially seems to run contrary to any sensible definition of fraud. However, it is submitted that, in these cases, the actionable misrepresentation should not be the original assertion (representation) itself, but the express or implied representation as to the basis on which that original representation is made. This analysis would ensure that the actionable misrepresentation is one that is properly regarded as fraudulent, because the defendant knows that the representation as to the basis on which he makes the original assertion is untrue. However, if this is the legal analysis of the situation, two further points must be noted. First, in such cases, it should be the representation as to the basis on which the original assertion is made that must be an inducement of the complainant’s decision to contract under section 167. Second, it should not matter whether the original assertion is false or not, if the implied representation is false, fraudulent and an inducing cause. Nonetheless, it seems that this is not what the Restatement intends, because it is the original assertion which is treated as the misrepresentation, and which must, thus, be false and have induced the complainant’s decision to contract. This impression is reinforced by Illustration 2 to section 162, because, in the example given, it is expressly stated that the original representation is false and that the complainant is induced by that original representation.178 Therefore, under this heading of fraud, the original representation is treated as fraudulent, even though the defendant honestly believed that it was true. It is submitted that this confusion and commingling of the elements of an operative misrepresentation is inappropriate. In order to amount to an operative fraudulent misrepresentation, a statement should be false, fraudulent and have induced the complainant’s decision to contract; it should not be enough to prove a false statement which was an inducing cause (but in the veracity of which the defendant honestly believed) and then a separate fraudulent statement, even when that

177

Ibid., 441.

178

Ibid.

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separate statement is directly related to the false statement that induced the complainant’s decision to contract. Of course, the validity of this argument rests upon the notion that a misrepresentation should not be treated as fraudulent if the defendant honestly believes it to be true. Nonetheless, it is submitted that this is the case: the making of a misrepresentation can still amount to unacceptable conduct if the defendant honestly believes the representation to be true, but it should not amount to a fraudulent misrepresentation, with the heavy connotation of impropriety that attaches to the label ‘fraudulent’.179 Despite the inappropriate labelling of the defendant’s conduct as fraudulent under the third head of section 162, it is submitted that such conduct it still properly regarded as unacceptable, because the defendant has been consciously reckless as to the veracity of his original representation in making it with knowledge that he does not have the expressly or impliedly asserted basis for believing in its truth (even if he honestly believed it to be true) and has actually made a fraudulent implied misrepresentation.

9.3.3

Impairment of consent

It is clear that a misrepresentation must have impaired the complainant’s consent if it is to be operative under the Restatement, because section 164(1) requires proof that the misrepresentation induced the complainant’s consent.180 The requisite standard of impairment of consent has been mentioned briefly already, in the discussion of materiality.181 Section 167 states that a misrepresentation is an inducing cause if it ‘substantially contributes’ to the complainant’s decision to consent to the impugned contract. Comment (a) to that section then makes it clear that the misrepresentation need not have been the sole, main or even a “but for” cause of the complainant’s decision to contract.182 It has been contended that the standard of impairment of consent required for vitiation on the basis of misrepresentation in English law 179

180

181

If it were known that the Restatement generally accepted such a wide definition of fraud, so that the heavy connotation of impropriety did not attach to the word in the minds of courts, lawyers, contractual parties and the general public, this would not necessarily be a problem. Nonetheless, it would seem inherently inappropriate to English lawyers and others who attach a similarly harsh moral judgement to the label ‘fraud’. In the terminology of the Restatement, the misrepresentation must have induced the complainant’s ‘manifestation of assent’. 182 See pp. 202–3, above. Restatement (Second), Volume I, 453.

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and under the three codes has not been clearly defined.183 Although there is some inherent vagueness in the label “substantial cause” under the Restatement, the clarification in Comment (a) makes it clear that what is required is that the misrepresentation was a factor in, but not necessarily a “but for” cause of, the complainant’s decision to contract. It is submitted that this is a manageable, workable test. However, it has been argued that it is inappropriate to require the same standard of impairment of consent from a fraudulent and a non-fraudulent misrepresentation.184 As well as dealing with the standard case of a misrepresentation which impairs a complainant’s decision to contract, the Restatement deals with situations where a misrepresentation leads to an absence of consent from the complainant. This is similar to the classic case of non est factum, where the complainant believes that the nature and effect of the putative contract is fundamentally different from its actual nature and effect (if upheld) because of the defendant’s misrepresentation.185 Section 163 states that no contract is formed if the defendant makes ‘a misrepresentation as to the character or essential terms of a proposed contract’ and the complainant purports to enter into the putative contract without actual or constructive knowledge of its character or essential terms. If the complainant does not know the character or essential terms of a putative contract, then he clearly cannot have consented to that putative contract; and if this absence of consent was induced by the defendant’s unacceptable conduct, that is a sufficient reason to render it operative. Therefore, this analysis fits with my overall theory of the general vitiating factors, as a clear example of the first category of vitiation.186 Section 163 does not actually require that the misrepresentation was fraudulent or material, so it seems possible that the misrepresentation might not amount to unacceptable conduct. Section 159 defines a misrepresentation as merely ‘an assertion . . . not in accord with the facts’. It is submitted that, if the defendant makes an innocent misrepresentation without reason to know that the complainant is likely to rely upon it, then his conduct is not necessarily unacceptable. Further, it is contended that a mere inducement of an absence of consent should not be sufficient to render it operative, when that inducement genuinely 183 185

186

184 See pp. 184–8, 196, above. See pp. 25–6, 185, above. Although, it must be reiterated that English law does not actually require a misrepresentation in order for a successful plea of non est factum: see pp. 88–91, above. See pp. 19–26, above.

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does not amount to unacceptable conduct. Nonetheless, it must be noted that, if the defendant makes a representation as to the character or essential terms of the putative contract, then he surely at least should know that the complainant is likely to rely upon the representation. Therefore, it is submitted that such a misrepresentation is rightly treated as unacceptable conduct. One final point to note about section 163 is that, unlike non est factum in English law, it applies to non-written, as well as to written, contracts.

10 Duress

10.1 10.1.1

English law Introduction

There are three classes of duress: duress to the person, duress of goods and economic duress. They all share the same rationale and have the same essential nature: the defendant applies illegitimate (unacceptable) pressure to the complainant, and this induces him to make the impugned contract, thus impairs his consent. Further, it is now accepted that duress renders contracts voidable, not void.1 This reflects the fact that duress requires impairment, but not an absence, of consent. Therefore, duress is a classic example of my second category of vitiating factor. As a general rule, the degree of illegitimacy of the defendant’s conduct decreases across the forms of duress, from duress to the person, to duress of goods, to economic duress. In this way, duress mirrors the distinction between fraudulent, negligent and innocent misrepresentations. Therefore, as was argued should be the case in misrepresentation,2 the law should recognise this sliding scale of illegitimacy (unacceptability) and utilise it to give effect to an increased desire to prevent procurement of contracts by more highly illegitimate means. Case-by-case analysis of the degree of illegitimacy would be too uncertain, but recognition of the sliding scale of illegitimacy generally applicable across the classes of duress allows for

1

2

DPP for Northern Ireland v. Lynch [1975] AC 653, 695, HL, per Lord Simon; The Universe Sentinel [1983] 1 AC 366, 383, HL, per Lord Diplock; The Evia Luck [1992] 2 AC 152, 168, HL, per Lord Goff; The Atlantic Baron [1979] QB 705; Chitty (2008), 621. Cf. Barton v. Armstrong [1976] AC 104, 120, PC; O’Sullivan and Hilliard (2008), 250 (duress to the person renders contract void). See pp. 84–8, above.

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adoption of a different causative standard for each class, decreasing as the degree of illegitimacy increases.3 Mance J. recognised ‘the extent to which any consideration of causation in economic duress inter-acts with consideration of the concept of legitimacy’.4 It is submitted that this is true for all forms of duress. Indeed, the interaction is partly recognised in case law. For example, it is settled that the requisite standard of causation in duress to the person is “a factor” causation,5 but economic duress requires that the illegitimate pressure was ‘a significant cause inducing the [complainant] to . . . contract’.6 The weight of authority is in favour of this requiring “but for” causation.7 Whatever the precise standard, it must require more than “a factor” impairment of consent.8 First, I will address the historical development of the (universal) underlying rationale of duress. Next, I will address the historical development of the three classes of duress. Then each element of duress (illegitimacy and impaired consent) will be analysed in turn. Finally, I will address the argument that, in cases of economic duress, the complainant must also prove that he had no viable alternative to making the impugned contract. It will be shown that this is not required.

10.1.2 Developing the dual rationale There is still confusion regarding the relationship between the two elements of the underlying rationale of duress: namely, (1) protecting the integrity of contractual consent; and (2) seeking to prevent procurement of contracts by unacceptable means. Some commentators see them as competing rationales.9 It is submitted that this is caused by the initial failure to recognise that duress is based upon impairment, not an absence, of consent. 3

4 5 6 7

8 9

E. Macdonald, ‘Duress by Threatened Breach of Contract’ [1989] JBL 460, 472 (threats to person or property should require a lesser causative standard than threats of purely economic damage). Cf. P. Birks, ‘The Travails of Duress’ [1990] 3 LMCLQ 342, 344. Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 637. Barton v. Armstrong [1976] AC 104, 119, 120, 121, PC. The Evia Luck [1992] 2 AC 152, 165, HL, per Lord Goff (my italic). Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 636; Carillion Construction v. Felix [2001] BLR 1, at [31], [33], [34]. See also pp. 225–8, below. See pp. 226–7, below. E.g., S. A. Smith, ‘Contracting Under Pressure: A Theory of Duress’ (1997) 56 CLJ 343, 345.

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Early cases on economic duress used language seeming to require an absence of consent.10 However, case law developed to recognise that this was not required, and it did so at the same time as it recognised that legitimate pressures should not be treated in the same way as illegitimate pressures.11 Therefore, it was thought that this represented a shift in the focus of duress, from protection of the integrity of consent to seeking to prevent procurement of contracts by unacceptable means. For example, Smith argues that the ‘more contemporary explanation of duress focuses on the [defendant’s] situation’: that is, on the defendant’s illegitimate conduct, rather than on the fact that ‘the [complainant’s] consent was impaired’.12 However, it is submitted that absence of consent was never the basis of duress. Even when one is forced to sign a contract at gunpoint, one has a choice whether to sign or be shot. Therefore, if one chose to contract in these circumstances, one consented to the contract, even though the choice was highly constrained.13 If recognition that an absence of consent was not required had gone unchecked, it would have meant that any pressure causing the requisite impairment of consent would have amounted to duress, no matter how legitimate it was. For, the need to assess the nature of the pressure had not been expressly established. This need led to recognition of the requirement of illegitimacy. Indeed, it is important to note that it was in the same case, The Universe Sentinel, that the House of Lords recognised both that duress does not require an absence of consent and that it does require illegitimate pressure.14 It is unsurprising that, in the days when the common law only clearly recognised duress to the person,15 illegitimacy was not obviously established as a prerequisite. For, non-consensual actual or threatened violence to, or detention of, the person is almost always illegitimate.16 In 10

11 13

14 15 16

The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293, 335, 336 (absence of voluntariness; absence of animus contrahendi; coercion of the will so as to vitiate consent); Pao On v. Lau Yiu Long [1980] AC 614, 635, PC (coercion of the will so as to vitiate consent). 12 The Universe Sentinel [1983] 1 AC 366, HL. S. A. Smith (2006), 272. It is submitted that, if the complainant’s hand is physically forced, this is a case of an absence of consent and raises issues of forgery and non est factum: see, e.g., Chitty (2008), 597. [1983] 1 AC 366, 384, 400, per Lords Diplock and Scarman. Skeate v. Beale (1841) 11 Ad & E 983, 990. Cf. Astley v. Reynolds (1731) 2 Stra 915, 916. J. Beatson, ‘Duress as a Vitiating Factor in Contract’ (1974) 33 CLJ 97, 100. This is even more strongly the case when the pressure is used to secure contractual consent. For example, even if the violence would amount to justified self-defence or prevention of

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some cases, assessment of the nature of the pressure was recognised as relevant. For example, in Cumming v. Ince, whether duress was established was determined by whether the threatened detention of the complainant was unlawful.17 Nonetheless, in most cases, the pressure was clearly illegitimate, so assessment of its nature was not recognised as essential. However, as economic duress began to develop, illegitimacy naturally became an issue. For, in the early cases of this form of the doctrine, the impugned contract (or contractual variation) was secured under a threat to breach an existing contract.18 In this situation, the nature of the pressure was clearly relevant: it was naturally important to ask whether the defendant was seeking additional benefits because he had the complainant over a barrel, so to speak (due to the pre-existing contractual relationship), or whether he would genuinely struggle to perform the original contract without variation. As the law developed, it recognised that the issue was the illegitimacy or otherwise of the defendant’s pressure. One can see echoes of this concept in the early cases. Indeed, it is expressly mentioned in the duress to the person case of Barton v. Armstrong.19 Nonetheless, the main focus of the early cases of economic duress was still upon the quality of the complainant’s consent, with the interaction between this and the illegitimacy of the pressure not fully appreciated. For example, in The Siboen and The Sibotre, Kerr J. accepted that the defendant had threatened a breach of contract20 but held that the impugned contractual variation was not voidable for duress.21 The judge said that the complainant ‘was acting under great pressure, but only commercial pressure, and not under anything which could in law be regarded as a coercion of his will so as to vitiate his consent’.22 The vital phrase here is ‘in law’. There is no doubt that, as a matter of fact, any pressure can have such a severe compulsive effect as to establish a ‘coercion of the will so as to vitiate . . . consent’,23 whatever the appropriate definition of that phrase. Therefore, it must be something in the nature of the pressure itself that determines whether it can, as a matter of

17 18

19 22

crime (and thus not be wrongful in its own right), to use it to secure a contract will be illegitimate. Moreover, the same is true for threats of violence to, or seizure of, property. (1847) 11 QB 112, 120. E.g., The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293; The Atlantic Baron [1979] QB 705; Pao On v. Lau Yiu Long [1980] AC 614, PC. 20 21 [1976] AC 104, 121, PC. [1976] 1 Lloyd’s Rep. 293, 334. Ibid., 336. 23 Ibid. Ibid.

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law, amount to duress.24 That this was Kerr J.’s reasoning is supported by the fact that the judge dismissed the defendant’s threatened breach as ‘only commercial pressure’.25 However, he did not fully explore this concept. Instead, he focused on the effect of the pressure on the complainant’s consent, and it could even be argued that he treated this as the key to determining whether the pressure was ‘only commercial pressure’26 or whether it amounted to duress. As such, it is submitted that Kerr J. had in mind the need to assess the nature of the pressure before accepting that duress could be established, but confused this qualitative assessment with the quantitative assessment of its effect on the complainant. In The Atlantic Baron, economic duress was again pleaded in an attempt to avoid a contractual variation procured by threatened breach of contract. Mocatta J. accepted the plea, but held that the complainant had affirmed the contract.27 In the special case stated by the arbitrators, it was noted that the complainant contended that the defendant’s demand for the contractual variation under threat of breach was illegitimate.28 However, the judge did not refer to illegitimacy or specifically address the relevance of the nature of the pressure. Instead, he held that a threatened breach of contract ‘may amount to . . . economic duress’,29 and focused his analysis far more on the effect of the pressure on the complainant’s consent. In Pao On v. Lau Yiu Long, the Privy Council said that ‘[d]uress, whatever form it takes, is a coercion of the will so as to vitiate consent’.30 However, their Lordships then immediately echoed the words of Kerr J. in The Siboen and The Sibotre,31 saying that in a contractual situation commercial pressure is not enough [because] [t]here must be something which could in law be regarded as a coercion of [the] will so as to vitiate . . . consent.32

It is submitted that their Lordships interpreted Kerr J.’s words as asserting that the nature of the pressure must be assessed in order to determine whether or not it can be relevant to a plea of duress. For, their Lordships specifically referred to a passage in Barton v. Armstrong, where the minority33 said:

24 27 31 33

25 26 Bigwood (2003), 287–8. [1976] 1 Lloyd’s Rep. 293, 336. Ibid. 28 29 30 [1979] QB 705, 721. Ibid., 707. Ibid., 719. [1980] AC 614, 635. 32 [1976] 1 Lloyd’s Rep. 293, 336. [1980] AC 614, 635 (my italic). As their Lordships in the Pao On case noted, the relevant ‘observations [in Barton v. Armstrong are ones] with which the majority judgment appears to be in agreement’: ibid.

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The basis of [a] claim [of duress] is . . . that though there was apparent consent there was no true consent . . . Absence of choice . . . does not negate consent in law: for this the pressure must be one of a kind which the law does not regard as legitimate.34

Therefore, the Pao On case began to establish the relevance of assessment of the nature of the pressure. Indeed, their Lordships referred to a passage in which the concept of illegitimacy was said to be a prerequisite of duress as a vitiating factor. This development continued in The Universe Sentinel, where illegitimacy was expressly recognised as a prerequisite. Indeed, whether or not the pressure was illegitimate formed the ratio of the case and the only point of difference between the majority and minority. The fact that the defendant conceded that the pressure had the necessary coercive effect meant that the House of Lords did not have occasion to discuss fully the interplay between the impairment of the complainant’s consent and the illegitimacy of the pressure.35 However, Lord Scarman addressed the distinction between absence and impairment of consent. His Lordship noted that ‘coercion of the will so as to vitiate consent’36 suggests an absence of consent, but that ‘[t]he classic case of duress is . . . not the lack of will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him’.37 Therefore, his Lordship recognised that duress requires an impairment, but not an absence, of consent. The very fact that, in The Universe Sentinel, the House of Lords recognised that duress is based upon an impairment, rather than an absence, of consent and that illegitimacy is a prerequisite for relief clearly highlights the interplay of these two factors in forming the underlying rationale of duress. Indeed, Lord Diplock expressly said that [t]he rationale [of duress] is that [the complainant’s] apparent consent was induced by pressure exercised upon him by [the defendant] which the law does not regard as legitimate.38

There is little doubt that much of the recent case law on duress has concerned the question of what amounts to illegitimate pressure;39 34 36

37 39

35 [1976] AC 104, 121, PC. [1983] 1 AC 366, 383, per Lord Diplock. Pao On v. Lau Yiu Long [1980] AC 614, 635, PC. See also The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293, 336. 38 [1983] 1 AC 366, 400. Ibid., 384. See also ibid., 400, per Lord Scarman. E.g., The Universe Sentinel ibid.; B&S Contracts v. Victor Green [1984] ICR 419, CA; CTN Cash & Carry v. Gallaher [1994] 4 All ER 714, CA.

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whereas, in the earlier cases, the focus was, at least ostensibly, on whether the pressure was of sufficient coercive effect.40 This apparent shift in focus is taken by some to suggest that illegitimacy is, if not the underlying rationale, at least the most important element in it. However, attempts to focus on one particular element of an underlying rationale inevitably lead to failure to recognise the interplay of the elements.41 This was the problem with the early case law, which focused too heavily on the state of the complainant’s consent and, therefore, seemed to require an absence of consent. Now that it has been recognised that duress is concerned with an impairment of consent by illegitimate pressure, one must not place too great a stress on the development of illegitimacy, seeing this as the basis of vitiation. Proper analysis of the law shows that the rationale of vitiation is the interaction of the illegitimacy of the pressure (the defendant’s unacceptable conduct) and the impairment of the complainant’s consent caused by this.42

10.1.3 From duress to the person to a general doctrine It is axiomatic that one should not be allowed to rely upon a contract one has procured by actual or threatened violence to the person. This has long been recognised in English law. Indeed, it is settled that such illegitimate conduct need only have been a reason for the complainant’s decision to contract before duress is successfully established.43 Furthermore, once this type of pressure is proved, it is rebuttably presumed that it had the requisite consent-impairing effect.44 The low causative standard is appropriate because of the interaction of illegitimacy and impairment of consent; and the factual likelihood of the relevant pressure impairing the complainant’s consent justifies the rebuttable evidential presumption of causative effect. Despite the fact that damage to, or destruction or wrongful seizure of, another’s property is normally unlawful, often criminal, it was for a long time not clearly accepted that this type of pressure could amount to duress. As noted by the judges who first recognised economic duress in English law,45 there are old authorities that supported the existence of 40

41 43 45

E.g., The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293; The Atlantic Baron [1979] QB 705; Pao On v. Lau Yiu Long [1980] AC 614, PC. 42 Bigwood (2003), 289–91. Ibid., 291–4. 44 Barton v. Armstrong [1976] AC 104, 119, 120, PC. Ibid., 120. Kerr J. in The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293 and Mocatta J. in The Atlantic Baron [1979] QB 705.

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duress of goods long before modern developments firmly established it.46 However, there was for a long time an apparent obstacle in the way of recognition of duress of goods, in the form of Skeate v. Beale, where it was held that ‘an agreement is not void because made under duress of goods’.47 Yet, over one hundred years earlier, in Astley v. Reynolds, there was a decision supporting the existence of duress of goods. In this case, the complainant pawned some property to the defendant, but, when he went to redeem it, the defendant demanded more than the maximum interest legally allowed.48 The complainant eventually paid and recovered his goods. However, he then sued for return of the amount paid over and above what was legally due, and his action succeeded. The court held ‘that this is a payment by compulsion; the [complainant] might have such an immediate want of his goods, that an action of trover would not do his business’.49 The only apparent distinction between Skeate v. Beale and Astley v. Reynolds is that the former was an attempt to avoid an executory contract and the latter was an action to recover money paid. Therefore, these cases appeared to leave the law in the position that one could recover money paid under duress of goods but could not avoid an executory contract, induced by duress of goods, of a promise to pay, even where every other fact of the cases was identical. As Goff and Jones point out, such a distinction makes no sense, not least because ‘there must [be] a scintilla temporis when [the complainant] . . . agree[s] to pay before making the payment’.50 Thankfully, no such distinction need now be drawn, because it is accepted that duress of goods is a viable vitiating factor.51 What is not clear, however, is the causative standard of duress of goods. This will be addressed below.52 The law has developed from only clearly recognising duress to the person, to recognising duress of goods and economic duress as well. Case law shows that economic duress is the most commercially relevant form of duress today, so the main focus of my analysis of the doctrine will be upon economic duress. However, it must be remembered that the underlying rationale of each form of the doctrine is identical, and the main distinction between the classes relates merely to the degree of illegitimacy normally present in the pressure applied by the defendant. 46 47 50 51 52

E.g., Astley v. Reynolds (1731) 2 Stra 915; Maskell v. Horner [1915] 3 KB 106. 48 49 (1841) 11 Ad & E 983, 990. (1731) 2 Stra 915. Ibid., 916. Goff and Jones, Law of Restitution, 6th edn, 308. The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293, 335; Chitty (2008), 599–601. See pp. 227–8, below.

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10.1.4 The elements of economic duress .

Unacceptable conduct: illegitimacy Since the House of Lords’ decision in The Universe Sentinel, there can be no doubt that illegitimacy is a prerequisite of economic duress.53 Indeed, ‘illegitimate’ is the label used for unacceptable conduct across all forms of duress: whatever class of the doctrine is pleaded, the pressure must be illegitimate.54 Whether the pressure in cases of duress to the person is illegitimate is normally a simple question: non-consensual actual or threatened violence to, or detention of, the person is almost always illegitimate. The same can be said of non-consensual actual or threatened violence to, or detention of, another’s property, unless one has a legal right to detain it. Indeed, the pressure in both of these classes of duress will normally amount to the commission or threat of unlawful activity, of a crime or tort. The choice of the term ‘illegitimate’, rather than ‘unlawful’, suggests that lawful pressure (that is, the threat or commission of acts that are themselves lawful) may still be unacceptable for the purposes of duress. Birks and Chin recognise this when they argue that the word ‘illegitimate’ was ‘chosen precisely because it has softer edges than, say, “unlawful”’.55 Birks points out why this is appropriate, when he says: if . . . lawful pressures are always exempt, those who devise outrageous but technically lawful means of compulsion must always escape restitution until the legislature declares the abuse unlawful.56

Indeed, in The Universe Sentinel, Lord Scarman expressly recognised that ‘[d]uress can, of course, exist even if the threat is one of lawful action’.57 The classic example is blackmail in the form of a threat to report a crime.58 However, first, blackmail is unlawful: that is, the threat becomes unlawful when coupled with the demand. Second, lawful act duress extends beyond this, potentially embracing any form of legal pressure.59 This leaves two big issues to be resolved in order to determine a clear and workable definition of ‘illegitimacy’. First, are unlawful pressures always illegitimate? Second, how is it to be ascertained whether lawful 53 54 56 57 59

[1983] 1 AC 366, 384, 400, per Lords Diplock and Scarman. 55 Barton v. Armstrong [1976] AC 104, 121, PC. Birks and Chin (1995), 64. P. Birks, An Introduction to the Law of Restitution (Oxford University Press, 1989), 177. 58 [1983] 1 AC 366, 401, HL. Ibid., 401, per Lord Scarman. E.g., CTN Cash & Carry v. Gallaher [1994] 4 All ER 714, 717, per Steyn LJ.

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pressures are illegitimate? Lord Scarman, again in The Universe Sentinel, touched on both of these issues. His Lordship said: The origin of the doctrine of duress in threats to life or limb, or to property, suggests strongly that the law regards the threat of unlawful action as illegitimate, whatever the demand . . . [W]hether [lawful pressure is illegitimate] depends upon the nature of the demand.60

It is noteworthy that his Lordship asserted that the threat of unlawful action will normally be illegitimate, but deliberately did not assert that it will always be. Beatson asserts that all forms of unlawful pressure (that is, the threat or commission of an unlawful act), save for threatened or actual breaches of contract, are always illegitimate.61 There is no authoritative statement that this is so, but there is no case that holds that the threat or commission of a tort or crime is not illegitimate. Indeed, it is submitted that, where the pressure consists of actual or threatened actions that amount to a crime or tort, contract law should accept that this is always illegitimate: it is inappropriate for contract law to undermine criminal or tort law in this respect.62 However, contract law is uniquely well positioned to determine whether an actual or threatened breach of contract is illegitimate. Certainly, it is always unlawful, because the legal sanction of damages applies as of right to any breach. Case law establishes beyond doubt that a threatened or actual breach of contract may be illegitimate. For example, in B&S Contracts and Design v. Victor Green Publications, the defendant issued a veiled threat that, unless the complainant paid £9,000 more than the original contract price, it would not complete performance.63 The Court of Appeal held that, in the circumstances, the force majeure clause in the original contract did not cover the particular situation, so the defendant’s non-performance would have been a breach. The court held that, therefore, the complainant’s agreement to the impugned contractual variation was induced by duress. It must not be thought that the court was laying down the rule that, if the conduct did not amount at least to a breach of contract, it could not be illegitimate. Nor, indeed, that if it did amount to a breach, it would necessarily be illegitimate. Kerr LJ specifically noted that a threatened breach of contract will not always amount to duress.64 60 62 64

61 [1983] 1 AC 366, 401, HL. Beatson (2002), 277. See also Chitty (2008), 598, 611. 63 Smith, ‘Contracting Under Pressure’, 351. [1984] ICR 419, CA. Ibid., 429.

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This, of course, must be so because of the requirement of causation, so it is not authority for the fact that a threatened or actual breach will not always be illegitimate.65 Indeed, the only case which specifically holds that a threatened breach of contract is not necessarily illegitimate is DSND Subsea v. PGS, where Dyson J. asserted, albeit obiter, that, even if the defendant had applied pressure in the form of an actual or threatened breach of contract, that pressure was not illegitimate.66 Tan argues that a threatened or actual breach should always be illegitimate, because, in ‘the larger contractual matrix of which [economic duress] is a part’, contract law does not distinguish between acceptable and unacceptable, justified and unjustified, breaches of contract.67 However, there is no doubt that there may be different shades of “wrongdoing” across different types of breach. For example, a complainant may effectively be “locked in” to his relationship with the defendant due to his contractual relations with third parties. It may be that, if the defendant breaches, the complainant will be unable to secure alternative arrangements to fulfil his contracts with the third parties and that the damages to which he will be entitled upon breach would not adequately compensate him. When the defendant knows this and seeks to take advantage simply to increase his profits, this is surely more likely to be illegitimate than when the defendant genuinely comes into financial difficulties, through no fault of his own, and cannot perform the original contract unless he receives additional payment from the complainant. Smith argues that the way to differentiate between these scenarios is to distinguish between a threat to breach and a warning that a breach may be unavoidable.68 However, as Birks notes, ‘th[is] distinction . . . is probably too fine and easily abused to serve as the foundation of 65

66

67

68

See also The Siboen and the Sibotre [1976] 1 Lloyd’s Rep. 293, 333–5; Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 630. [2000] BLR 530, at [134]. Note that, in Williams v. Roffey Bros. [1991] 1 QB 1, 21, Purchas LJ stated that ‘[i]t would not . . . lie in the defendants’ mouth to assert a defence of duress’ because ‘[t]he initiative in [making] the [impugned contract] came from [the complainant] and not from the [defendant]’. This is a clear assertion that the defendant did not apply illegitimate pressure but does not decide that a threatened breach of contract would not be illegitimate. D. Tan, ‘Constructing a Doctrine of Economic Duress’ (2002) 18 Const. LJ 87, 91–2. See also R. Bigwood, ‘Economic Duress by (Threatened) Breach of Contract’ (2001) 117 LQR 376, 379–80; Bigwood (2003), 341–4. S. A. Smith (2006), 270; Smith, ‘Contracting Under Pressure’, 346–8. Cf. Bigwood (2003), 294–8 (true distinction is between threats and offers).

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doctrine’.69 Indeed, even to make the distinction, a court must at least determine whether the breach was unavoidable70 and, if so, whether this was due to the defendant’s fault.71 Smith proposes several reasons why the law is unwilling to accept that threatened or actual breaches of contract always amount to illegitimate conduct.72 He concentrates his discussion on why they do not always amount to duress, but, apart from the final reason he gives (that such pressure may not always impair the complainant’s consent to the requisite degree),73 the focus is on whether or not the pressure is illegitimate. However, the most compelling reason why a threatened breach should not always be treated as illegitimate is that there may be circumstances, falling short of frustration (such that non-performance would be a breach), in which the defendant, through no fault of his own, genuinely cannot perform without variation, and is seeking nothing more than a necessary renegotiation to allow him to perform in the most mutually beneficial way.74 It is unnecessary and unhelpful to say that the pressure in such cases is not illegitimate because it is not a threat: that just begs the question of how to determine whether conduct amounts to a threat. Therefore, it is submitted that an actual or threatened breach of contract may or may not be illegitimate.75 The keys to determining whether it is are: (1) whether the breach is realistically unavoidable; (2) if so, whether this is because of the defendant’s own fault; (3) whether the defendant is seeking no more than is reasonably necessary to enable him to perform; and (4) the defendant’s bona or mala fides. It might seem that, if a breach of contract is not always illegitimate, completely lawful pressure should never be illegitimate: otherwise, unlawful action may be legitimate and lawful action illegitimate. Further, no case has actually held any completely lawful pressure to be illegitimate. Nonetheless, the courts clearly recognise that this is possible.76

69 70 71

72 74

75 76

Birks, ‘Travails of Duress’, 346. See also Bigwood (2003), 298–301. Chitty (2008), 612–13. Bigwood (2003), 335–6. See also Atlas Express v. Kafco [1989] QB 833 (defendant’s mistake rendered original contract favourable to complainant, so defendant refused to perform and secured renegotiation; duress established; although, note there was no suggestion defendant was unable to perform because of the mistake). 73 S. A. Smith (2006), 268–71. Ibid., 270. Chitty (2008), 611–12; R. Halson, ‘Opportunism, Economic Duress and Contractual Modifications’ (1991) 107 LQR 649, 662–3. Chitty (2008), 611. CTN Cash & Carry v. Gallaher [1994] 4 All ER 714, 717, per Steyn LJ.

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Indeed, it is widely accepted that lawful act duress exists as a valid vitiating factor.77 Furthermore, it is submitted that, despite the apparent conflict between the existence of lawful act duress and the fact that breaches of contract are not always illegitimate, both of these situations represent an appropriate and satisfactory state of the law. The key to resolving any apparent conflict is to recognise that illegitimacy is not a purely objective concept. Indeed, recognition of lawful act duress has highlighted the relevance of the defendant’s bona or mala fides in determining whether pressure is illegitimate.78 For, it is submitted that references in the case law to good and bad faith are references to subjective good and bad faith: that is, the defendant’s bona or mala fides. This is not to say that subjectivity is only relevant where the pressure is lawful,79 but it is especially relevant in such cases.80 Nonetheless, it is submitted that pressure in the form of the commission or threat of a crime or tort is always illegitimate. Therefore, in these cases, the defendant’s state of mind should only be relevant in so far as it helps to determine whether the conduct is criminal or tortious.81 In summation, to assess whether pressure is illegitimate, one must first ask whether it consists of the threat or commission of a crime or tort. If so, then it is submitted that it must be illegitimate. Further, if it is an actual or threatened breach of contract (or other unlawful activity, but not a tort or crime), this is a factor indicating, but not necessarily establishing, illegitimacy.82 Finally, the defendant’s bona or mala fides is relevant if the pressure is not the threat or commission of a crime or tort, and is relevant to assessment of both the nature of the pressure and the nature of the demand, the two vital features for assessing illegitimacy highlighted by Lord Scarman in The Universe Sentinel.83 Therefore, whether the defendant believed he had a right to perform the actions he did (or threatened) and whether he believed he was entitled to demand that which he secured by the impugned contract are both relevant.

77

78

79 80 82

Chitty (2008), 616–17; Bigwood, ‘Economic Duress’; Halson, ‘Opportunism, Economic Duress’, 661. Cf. Tan, ‘Constructing a Doctrine of Economic Duress’, 92–3. E.g., CTN Cash & Carry v. Gallaher [1994] 4 All ER 714, 717, per Steyn LJ (defendant’s bona fides ‘critically important’ in holding the pressure legitimate). Cf. Tan, ‘Constructing a Doctrine of Economic Duress’, 90. 81 Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 637. Cf. ibid. 83 See pp. 220–3, above. [1983] 1 AC 366, 401, HL.

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Impairment of consent: causation In developing economic duress, the courts asserted that the true basis of duress as a vitiating factor was the fact that there was a coercion of the complainant’s will so as to vitiate his consent.84 Many commentators and judges treated this as requiring an absence of consent.85 However, Birks has noted that the phrase does not necessitate this definition.86 Nonetheless, Kerr J. in The Siboen and The Sibotre treated the phrase as commensurate with involuntariness87 and an absence of intention to contract.88 Similarly, in the Pao On case, the Privy Council treated it as commensurate with involuntariness.89 However, their Lordships also said that it is necessary to determine ‘whether there was a coercion of the will such that there was no true consent’.90 This suggests recognition of the fact that there will be consent, but that it will be impaired. If their Lordships were referring to a genuine absence of consent, the adjective ‘true’ added nothing. Whatever the meaning intended by those who used the phrase ‘coercion of the will so as to vitiate consent’, and whatever the meaning naturally inferred by other judges and commentators, it is now established that duress does not require an absence of consent. Lord Scarman in The Universe Sentinel said ‘[t]he classic case of duress is . . . not the lack of will to submit but the . . . intentional submission arising from the realisation that there is no other practical choice open’.91 Similarly, Lord Diplock said duress involves ‘apparent consent . . . induced by [illegitimate] pressure . . . [so] that the consent is treated in law as revocable’.92 However, the requisite degree of impairment of consent has not been so authoritatively established, at least not for either duress of goods or economic duress. This leaves a gap in the law. As Macdonald said when discussing economic duress: Once it is acknowledged that the test of the existence of economic duress is not whether [the complainant] acted involuntarily . . . it is necessary to establish what is meant by the test of [impairment of consent].93 84

85

86 88 91 93

The Siboen and The Sibotre [1976] 1 Lloyd’s Rep. 293, 336; Pao On v. Lau Yiu Long [1980] AC 614, 635, PC. The Universe Sentinel [1983] 1 AC 366, 400, HL, per Lord Scarman; The Evia Luck [1992] 2 AC 152, 166, HL, per Lord Goff; P. S. Atiyah ‘Economic Duress and the “Overborne Will”’ (1982) 98 LQR 197, 201. 87 Birks, ‘Travails of Duress’, 344. [1976] 1 Lloyd’s Rep. 293, 335. 89 90 Ibid., 336. [1980] AC 614, 636. Ibid., 635 (my italic). 92 [1983] 1 AC 366, 400, HL. Ibid., 384. Macdonald, ‘Duress by Threatened Breach of Contract’, 461.

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After The Universe Sentinel, some judges interpreted Lord Scarman’s assertion that the classic case of duress involves the complainant deciding to contract because he has no practical alternative as establishing that this was the requisite standard of impairment of consent in economic duress.94 However, they failed to recognise that Lord Scarman was merely highlighting the classic case of duress and was not seeking to lay down the requirements of the doctrine. In The Evia Luck, the House of Lords held the impugned contract voidable for duress without addressing whether the complainant had a viable alternative. Lord Goff, giving the leading speech of the majority, said that economic pressure may be sufficient to amount to duress . . . provided at least that [it] may be characterised as illegitimate and has constituted a significant cause inducing the [complainant] to enter into the relevant contract.95

It is important to note that his Lordship merely asserted illegitimacy and significant causation as the minimum requirements of economic duress. If one adds this to the fact that there was no suggestion that the complainant in this case had any practical alternative, it is arguable that The Evia Luck does not lessen the relevance of the presence or absence of a practical alternative. However, significant causation is clearly the impairment of consent requirement, and this was the role that it had been thought the element of an absence of practical alternatives served. Therefore, it is submitted that proof of impairment of consent in economic duress does not require proof that the complainant decided to contract because he believed that he had no practical alternative to submission to the defendant’s pressure. It will be shown below that there is a line of authority which instead treats the absence of practical alternatives as an additional requirement of objective causation, similar to materiality in misrepresentation. Nonetheless, it is contended that, if Lord Goff had believed such a requirement existed, he would at least have mentioned it.96 As to what the ‘significant cause’ standard actually requires, Lord Goff cited with approval the Australian case of Crescendo Management 94

95

B&S Contracts v. Victor Green [1984] ICR 419, 429, per Kerr LJ; The Alev [1989] 1 Lloyd’s Rep. 138, 146, 147. 96 [1992] 2 AC 152, 165. See pp. 228–9, below.

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v. Westpac, which accepted “a factor” causation as the appropriate standard for economic duress.97 However, it is inconceivable that his Lordship used the word ‘significant’ without intending it to have any meaning.98 Therefore, economic duress must require a greater standard of impairment of consent than the “a factor” standard required in duress to the person.99 Indeed, the minority in Barton v. Armstrong accepted the majority’s “a factor” test for duress to the person, but reserved their ‘opinion as to cases which may arise in other contexts’.100 Enonchong notes101 the case of Dorimex v. Visage, where the Court of Appeal did not question the trial judge’s acceptance of the “a factor” standard in economic duress.102 However, there was no challenge in the Court of Appeal on the issue of causation. In Huyton v. Peter Cremer, Mance J. said that ‘[t]he minimum basic test of subjective causation in economic duress ought . . . to be a “but for” test’.103 Dyson J. in Carillion Construction v. Felix expressly accepted Lord Goff ’s significant cause test.104 He did not expressly state what was the appropriate causative standard for this label, but on several occasions found that “but for” causation was satisfied, without addressing any other standard.105 Therefore, it is submitted that, on the balance of authority, this is the requisite standard for economic duress.106 As for what should be the standard of causation across the forms of duress, it is submitted that it is appropriate to maintain the “a factor” standard in duress to the person, with the burden of proof of absence of causation on the defendant. Further, the “but for” standard of economic duress is appropriate.107 Duress of goods will normally involve conduct that is less illegitimate than that present in duress to the person, but more illegitimate than that in economic duress. For, duress of goods will normally involve the threat or commission of at least tortious activity; whereas economic duress may involve this, but will not normally do so. Therefore, duress of goods should require a standard of impairment of consent less than the “but for” standard applicable to economic duress108 but greater than the “a factor” standard applicable to duress to the person. In this way, duress will reflect an increased desire to

97 99 101 103 105 108

98 (1988) 19 NSWLR 40. Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 636. 100 Cf. S. A. Smith (2006), 270. [1976] AC 104, 121, PC. 102 Enonchong (2006), 41. [1999] EWCA Civ 1427. 104 [1999] 1 Lloyd’s Rep. 620, 636. [2001] BLR 1 at [24]. 106 107 Ibid., at [31], [33], [34]. Chitty (2008), 605, 607. Ibid., 607, 610. Cf. ibid., 606.

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prevent procurement of contracts by more highly unacceptable means, mirroring the position of misrepresentation.109 Once again, a proper understanding of the underlying rationale of vitiation helps one to understand the present law better, to see why duress to the person requires a lesser causative standard than economic duress. The reason is not to punish the defendant for his exceptionally bad conduct; it is to reflect a greater desire to prevent procurement of contracts by more highly illegitimate means. Further, understanding the rationale highlights an important development for the future: namely, the need to determine an intermediate standard of causation for duress of goods.

The lack of practical alternatives Lord Scarman said in The Universe Sentinel that ‘the classic case of duress is . . . not the lack of will to submit but the [complainant’s] intentional submission arising from the realisation that there is no other practical choice’.110 The fact that his Lordship referred to the complainant’s intentional submission coming from the realisation that he had no other practical choice clearly established that he was not referring to a wholly objective concept. Indeed, the test need not have any objective element, because the practicality of any alternatives could be judged from the complainant’s perspective. However, ‘practicality’ was interpreted as (at least partly)111 an objective concept.112 Therefore, the test was taken to be a dual subjective–objective one: the complainant must have (subjectively) decided to contract because he had no (objectively judged) practical alternative.113 It has been argued above that the House of Lords in The Evia Luck recognised that this is not the requisite standard of impairment of consent, and that it is not a prerequisite at all as a purely objective standard: the presence of a practical alternative does not preclude relief for duress.114 However, two first instance cases treat it as a requirement of economic duress.115 Further, Mance J. in Huyton v. Peter Cremer 109 111 112

113 115

110 See pp. 184–5, above. [1983] 1 AC 366, 400, HL. Bigwood (2003), 354–6, 360–2. Macdonald, ‘Duress by Threatened Breach of Contract’, 467; Halson, ‘Opportunism, Economic Duress’, 671–2. 114 Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 638. See p. 226, above. DSND Subsea v. PGS [2000] BLR 530, at [131]; Carillion Construction v. Felix [2001] BLR 1 at [24]. See also Halson, ‘Opportunism, Economic Duress’, 672–3, 677; Tan, ‘Constructing a Doctrine of Economic Duress’, 94–5; Beatson (2002), 281; Bigwood

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rejected it as a prerequisite if taken to be purely objective, but accepted it as a dual subjective–objective requirement.116 It is contended that, whether as a dual subjective–objective, or a purely objective, element, the absence of practical alternatives should not be a discrete prerequisite of any form of duress. It is submitted that, where the defendant’s illegitimate conduct impaired the complainant’s consent to the requisite degree, it should not matter that the complainant acted unreasonably by not pursuing an objectively practical alternative, whether he knew of its existence or not. The illegitimate nature of the defendant’s conduct and the fact that it impaired the complainant’s consent should override the complainant’s unreasonable conduct; the defendant must not be allowed to escape the consequences of his consent-impairing unacceptable conduct. The situation is not similar to innocent misrepresentation, where part of the reason that the defendant’s conduct is unacceptable (illegitimate) is the effect it would have had on the reasonable person.117 Illegitimacy is established separately from this. Certainly, whether the complainant had a viable alternative may be evidentially relevant to whether his consent was impaired to the requisite degree, but it should not be a prerequisite of any form of duress.118 Indeed, it is submitted that it is not, as a matter of authority, a requirement. Despite the first-instance decisions invoking it, no appellate court in England has treated it as a prerequisite, and it was not mentioned by Lord Goff in The Evia Luck. Even though his Lordship sought only to assert the minimum requirements of economic duress, it is unlikely he would have ignored an element he believed to be a prerequisite. Further, the origin of it as an element of economic duress comes from the judgment of Lord Scarman in The Universe Sentinel119 and a reference to it by the Privy Council in the Pao On case.120 However, when he mentioned it, Lord Scarman was not seeking to set the requirements of economic duress, but was merely highlighting the classic fact-pattern, to establish that the underlying rationale is not an absence of consent; and the Privy Council simply mentioned it as one relevant factor in assessing whether duress is established.

116 118 119

(2003), 353–7; O’Sullivan and Hilliard (2008), 252; Chen-Wishart (2010), 352; Macdonald, ‘Duress by Threatened Breach of Contract’, 471–2. 117 Huyton v. Peter Cremer [1999] 1 Lloyd’s Rep. 620, 638. See pp. 170–3, above. S. A. Smith, ‘Contracting Under Pressure’, 355–6; Chitty (2008), 605, 609, 610. 120 [1983] 1 AC 366, 400. [1980] AC 614, 635.

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10.1.5 Conclusion As duress has developed, it has been recognised that it is not based upon an absence of consent, but, rather, upon the fact that the complainant’s consent was impaired by illegitimate conduct. As noted by Atiyah,121 this explains the fact that duress renders a contract voidable, not void.122 Furthermore, it shows that duress is an example of my second category of vitiating factor. To give full effect to the underlying rationale of duress, the increased desire to prevent procurement of contracts by more highly unacceptable means should be recognised, by requiring a lesser standard of impairment of consent across the classes of duress, as the degree of illegitimacy increases. This has been recognised in the different causative standards in duress to the person and economic duress, but it must also be recognised that duress of goods requires an intermediate causative standard.123

10.2

The PICC, PECL and DCFR

PECL, Article 4: 108: Threats A party may avoid a contract when it has been led to conclude it by the other party’s imminent and serious threat of an act: (a) which is wrongful in itself, or (b) which it is wrongful to use as a means to obtain the conclusion of the contract, unless in the circumstances the first party had a reasonable alternative. DCFR, Article 7: 206: Coercion or Threats (1) A Party may avoid a contract when the other party has induced the conclusion of the contract by coercion or by the threat of an imminent and serious harm which it is wrongful to inflict, or wrongful to use as a means to obtain the conclusion of the contract. (2) A threat is not regarded as inducing the contract if in the circumstances the threatened party had a reasonable alternative.

121 122 123

Atiyah, ‘Duress and the “Overborne Will”’, 201. The Universe Sentinel [1983] 1 AC 366, HL; The Evia Luck [1992] 2 AC 152, HL. See pp. 225–8, above.

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PICC, Article 3.9: Threat A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract.

10.2.1

Introduction

Under each of the codes, duress renders the impugned contract voidable and requires that the defendant engaged in unacceptable conduct which impaired the complainant’s consent. Therefore, the three codes clearly reflect the underlying rationale of this vitiating factor in English law. Further, it will be shown that the three codes are materially identical to English law in their treatment of when the defendant’s conduct is unacceptable. This is so even though each code expressly requires a threat; whereas English law does not.124 For, it will be explained that the requirement of application of illegitimate pressure in English law cannot be satisfied without the defendant’s conduct amounting to at least a veiled wrongful threat, and the defendant cannot make a veiled wrongful threat without applying illegitimate pressure. Further, making a veiled wrongful threat must satisfy the requirement of a threat under the three codes. The three codes all treat each form of duress in the same way: that is, they do not distinguish between duress to the person, duress of goods and economic duress, in the way that English law does.125 This means that they do not require a lesser standard of impairment of consent the more unacceptable the defendant’s conduct, to reflect an increased desire to prevent procurement of contracts by more highly unacceptable means. It has been explained that English law recognises this principle to a degree and should do so more extensively.126 The other vital difference between the three codes and English law is that each of the codes precludes relief if the complainant had a reasonable alternative to submission to the defendant’s unacceptable conduct. 124 125 126

See p. 233, below. UNIDROIT (2004), 106; Vogenauer and Kleinheisterkamp (2009), 444. See pp. 225–8, above.

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It has been explained that this is not, and should not be, a requirement of any form of duress in English law.127

10.2.2 Unacceptable conduct Both the PECL and DCFR require that the complainant made a ‘wrongful’ threat; whereas the PICC require an ‘unjustified’ threat. However, it is submitted that there is no meaningful distinction to be drawn between ‘wrongful’ and ‘unjustified’ in this context. Indeed, all three codes assert that conduct will be unacceptable, in the relevant sense, if it is the threat of something that is wrongful in itself or wrongful to use as a means of obtaining contractual consent. It must be noted that the PICC say that a threat is ‘[i]n particular’ unjustified if it meets these criteria. However, they do not elaborate on when a threat might not satisfy the criteria yet still be unjustified. It is submitted that there is no meaningful distinction between ‘illegitimate’, as used in English law, and ‘wrongful’ or ‘unjustified’, as used under the codes. Indeed, the Notes to Article 4: 108 of the PECL state that ‘[t]he threat must be illegitimate’.128 Furthermore, recognition of the fact that conduct might be unacceptable because it is wrongful in itself or because it is wrongful to use as a means of securing contractual consent echoes the approach in English law. For, in The Universe Sentinel, Lord Scarman said: In determining what is legitimate two matters may have to be considered. The first is as to the nature of the pressure . . . [and] the second . . . [is] the nature of the demand which the pressure is applied to support.129

Therefore, the codes and English law all recognise that the starting point is the nature of the threat/pressure itself. This is because certain conduct will almost always be wrongful, unjustified, illegitimate (i.e., unacceptable). However, if the relevant conduct is not itself unacceptable, the next stage under each of the codes and in English law is to assess it in context. For example, take the classic case where the complainant and defendant are in an existing contractual relationship and the former agrees to pay the latter an additional sum, having been informed by the defendant that he will be unable to perform the contract unless this additional sum is paid. Whether the defendant genuinely needed the additional sum to be able to perform, and 127

See pp. 228–9, above.

128

PECL (2000), 260.

129

[1983] 1 AC 366, 401, HL.

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whether this was due to his own fault, must be relevant to whether or not it is wrongful to demand the money in order to secure the renegotiation and whether the demand is of an illegitimate nature. Therefore, there is no substantive difference between the codes and English law in this regard. All three codes expressly require that the defendant made a threat. In English law, no case has expressly required a threat, and the leading cases do not suggest that this is a prerequisite.130 However, unless the complainant believed the defendant would bring about the consequences amounting to the illegitimate pressure (and, in this sense, thus believed that the defendant was at least implicitly threatening to bring about those consequences, even if unintentionally), it is impossible for any illegitimate pressure to have impaired the complainant’s consent. Indeed, it is submitted that a defendant cannot apply illegitimate pressure, as required by English law, without making at least a veiled threat, as long as it is remembered that the defendant need not himself believe that he is making a threat. If the defendant does something which causes the complainant to believe that unwanted consequences will ensue unless the latter enters into the impugned contract, the defendant has, intentionally or otherwise, both applied pressure to the complainant and (at least to the complainant’s mind) threatened to bring about those unwanted consequences. It is contended that such conduct amounts to the making of at least a veiled threat and to the application of pressure, which would surely be sufficient both under the three codes and in English law (subject to the requirement of illegitimacy). Whether the defendant intended to make a threat and whether the reasonable person would believe that he was making a threat are both relevant factors in determining whether that pressure is illegitimate,131 but neither should be a necessary element of illegitimacy.132 The preceding analysis shows that the codes are in substance commensurate with English law in their treatment of the requirement of unacceptable conduct by the defendant.

130 131 132

The Universe Sentinel, ibid.; The Evia Luck [1992] 2 AC 152, HL. E.g., B&S Contracts v. Victor Green [1984] ICR 419, CA. It has been argued that duress under the PICC ‘does not apply to actual (as opposed to threatened) physical violence’ (Vogenauer and Kleinheisterkamp (2009), 443). However, if actual violence carries with it the threat (whether subjective or objective) of further unwanted consequences, it also amounts to a threat.

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10.2.3 Impairment of consent Each of the codes requires that the defendant’s unacceptable conduct impaired the complainant’s consent.133 The PECL and PICC express this as a requirement that the complainant was ‘led to conclude’ the impugned contract by the relevant conduct; whereas the DCFR expresses it as a requirement that the conduct ‘induced the conclusion of the contract’. The PICC and DCFR do not elaborate on the requisite standard of impairment of consent,134 but the Comments to Article 4: 108 of the PECL say that ‘[p]rovided the threat has some influence it need not be the only reason for the contract’, but ‘[i]f the primary reason for paying the amount demanded is to settle the dispute rather than to avoid the threatened action, relief will not be given’.135 There is no suggestion that this principle is limited to monetary demands or to a desire to settle a dispute. Therefore, it is submitted that the requisite standard of impairment of consent under the PECL is that the threat was at least a reason for the complainant’s decision to contract, and there was no more important reason for that decision. The need to compare the weight of competing causes adds a degree of complexity to the analysis, but this is an inherent part of the factual and legal assessment of causation. Each of the codes requires the same degree of impairment of consent from all types of wrongful threat. This is inappropriate, because it means, for example, that nothing more is done to dissuade an operative threat of murder than to dissuade an operative threat to breach a contract. Indeed, it was argued that the law of misrepresentation and duress should reflect an increased desire to prevent procurement of contracts by more highly unacceptable means, by requiring a lesser degree of impairment of consent as the degree of unacceptability generally present across the different 133

134

135

Even if it is correct to that that duress under the PICC ‘primarily focuses on the conduct of [D]’ (ibid., 442), this does not, and is not intended, to negate the fact that the PICC clearly require proof of impairment of consent (ibid., 443). Vogenauer and Kleinheisterkamp (2009), 446 confusingly suggests that causation under the PICC does not require C to prove that he ‘should not have concluded that contract at all, had it not been for the threat’, but that causation is nonetheless not satisfied ‘where the contract would have been concluded irrespective of whether the threat had been made’. Unless ‘should’ is interpreted as referring to a value judgement regarding the wisdom of making the contract, rather than as being a synonym for ‘would’, there is an inherent conflict in the two statements, which highlights the problems which can be caused by the lack of a clearly defined causative standard. PECL (2000), 258.

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classes of these two doctrines increases.136 As only fraudulent misrepresentations are actionable under the codes, this principle is not relevant to that vitiating factor. However, each form of duress recognised in English law, duress to the person, duress of goods and economic duress, is actionable under the three codes. Therefore, the codes should differentiate between the requisite standard of impairment of consent for each form of duress.

10.2.4

The lack of a reasonable alternative

In addition to requiring that the wrongful threat actually impaired the complainant’s consent, each of the codes requires that the complainant had no reasonable alternative but to submit to the pressure: that is, that he had no reasonable alternative but to make the impugned contract. This element has been discussed in cases of economic duress in English law. Indeed, some commentators have argued that it is a prerequisite of this form of the doctrine. It has, however, been explained that it is not established as a requirement in English law and that this is the appropriate position.137 When the defendant engaged in wrongful conduct that impaired the complainant’s consent, and the wrongfulness of that conduct is not dependent upon its effect on the reasonable person, he should not be able to escape the consequences of this simply because the complainant had a reasonable alternative, or even if the complainant actually knew that he had one. The presence of a reasonable alternative can serve an important evidential role. For, the complainant’s belief as to whether he had a reasonable alternative will be evidentially relevant to whether or not the defendant’s unacceptable conduct impaired his consent to the requisite degree. Indeed, the Comments to Article 4: 108 of the PECL say: ‘If there was a reasonable alternative, that suggests that the threat was not the real reason for the [complainant] agreeing to the demand.’138 However, even if the complainant had a reasonable alternative and knew this, the defendant’s unacceptable conduct might still have impaired his consent to the requisite degree, even to a “but for” 136 137 138

See pp. 184–8 (misrepresentation), 227–8 (duress), above. See pp. 228–9, above. PECL (2000), 259. See also Vogenauer and Kleinheisterkamp (2009), 446 (‘having regard to the circumstances’ under Art. 3.9 PICC might allow subjective belief of C to be considered).

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standard, which it is the maximum appropriate standard of impairment of consent in duress.139 One can argue that, if the complainant chose to contract despite having a reasonable alternative, his conduct was necessarily unreasonable, and make the analogy with mistake, where it was contended that unreasonableness in coming to be mistaken should preclude the complainant from relying upon his mistake. However, it was also contended that, if the defendant acted at least as unacceptably as the complainant, this should negate the complainant’s unreasonableness.140 A similar argument applies here, because the illegitimacy of the defendant’s conduct, and the fact that it impaired the complainant’s consent, should override any unreasonableness in the complainant’s conduct: the defendant should not be able to escape the consequences of his unacceptable conduct simply because the complainant acted unreasonably. Therefore, the three codes are narrower than English law in their treatment of duress in this regard, and it is submitted that the English position is preferable.141 Each of the codes also requires that the threat was ‘imminent and serious’. It is submitted that this emphasises the requirement of an absence of a reasonable alternative: if the threat was sufficiently imminent and serious, it must have left the complainant with no reasonable alternative, and vice versa.142

10.3

The US Restatement (Second) of Contracts

} 174. When Duress by Physical Compulsion Prevents Formation of a Contract If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

139 140

141

142

See pp. 227–89, above. See pp. 82–5 (non est factum), 111–12 (common mistake), 154–5 (mistake under the codes), above. It has been suggested that the absence of a reasonable alternative might be merely evidentially relevant in cases of what English law would regard as duress to the person and duress of goods but be a standalone requirement of economic duress under the PICC: Vogenauer and Kleinheisterkamp (2009), 446. A similar argument has been made in relation to English law, but it has already been submitted that this is neither the true, nor the appropriate, position for English law: see pp. 228–9, above. UNIDROIT (2004), 105; Vogenauer and Kleinheisterkamp (2009), 445.

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} 175. When Duress by Threat Makes a Contract Voidable (1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim with no reasonable alternative, the contract is voidable by the victim. } 176. When a Threat is Improper (1) A threat is improper if (a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property, (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (d) the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient. (2) A threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or (c) what is threatened is otherwise a use of power for illegitimate ends.

10.3.1

Introduction

Duress under the Restatement requires proof that the defendant engaged in unacceptable conduct143 which impaired the complainant’s consent,144 and it renders the impugned contract voidable. It is, in this sense, a classic example of my second category of vitiating factor. Similarly to English law and the three codes, the Restatement deals with all three classes of duress: duress to the person, duress of good and economic duress. However, it does not distinguish between the different classes, instead applying the same standard of impairment of consent to all forms of duress. This is similar to the position under the codes,145 in contrast with English law. The position in English law properly reflects an increased desire to dissuade more highly unacceptable conduct, by requiring a lesser standard of impairment of consent across the classes of

143 144 145

}175 (‘improper threat’). }175 (‘induced the complainant’s manifestation of assent’). See pp. 234–5, above.

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duress as the degree of illegitimacy generally present in conduct falling within the relevant class increases.146 The Restatement does, however, distinguish between duress leading to an absence of consent (and thus rendering a putative contract void; or, technically, preventing formation of a contract)147 and duress leading to an impairment of consent (and thus rendering a contract voidable).148 The former category of duress requires proof that the defendant’s unacceptable conduct induced the complainant’s absence of consent149 and so clearly fits my first category of vitiating factor; while the latter requires proof that the complainant’s consent was impaired by the defendant’s unacceptable conduct and so clearly fits my second category. Section 176 determines when a threat is improper for the purposes of duress under the Restatement. This section distinguishes between conduct that is improper in its own right150 and conduct which is improper only if the contract it induces is on unfair terms.151 It will be argued that, while this is potentially a legitimate policy aim, seeking to uphold substantively fair contracts so far as possible, it actually goes too far, because conduct in the latter category should properly be regarded as unacceptable even if the contract it induces is on fair terms.152 Similarly to the codes, the Restatement requires that the defendant made a threat, rather than merely applied pressure, which will suffice in English law. However, it will be shown that, like the codes, the Restatement clearly accepts that an implied threat will suffice,153 and it has already been argued that the making of an implied threat is commensurate with the application of pressure.154 A final similarity between the Restatement and the codes, and a distinction between the Restatement and English law, is that the Restatement requires the complainant to prove that the threat left him with no

146 149

150 153

154

147 148 See pp. 212–13, 227–8, above. }174. }175. Unless the complainant was physically compelled by a third party. It will be argued that, in such cases, if the defendant has no knowledge of the physical compulsion, the case is more closely analogous to the absence of consent in a case of forgery or non est factum, rather than duress: see pp. 248–9, below. 151 152 }176(1). }176(2). See pp. 243–8, below. Restatement (Second), Volume I, 476 (a threat ‘may be inferred from words or other conduct’). See p. 233, above.

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reasonable alternative to making the impugned contract. It has already been argued that this should not be a requirement of duress.155

10.3.2

Unacceptable conduct

Under the Restatement, duress requires an ‘improper threat’.156 The label ‘improper’ clearly suggests that the threat must amount to unacceptable conduct, similar to the label ‘illegitimate’ in English law.157 Moreover, it is submitted that section 176, which sets out the circumstances in which a threat will be improper, ensures that only conduct rightly regarded as unacceptable is improper for the purposes of duress. It would, of course, be extremely surprising to find that the Restatement allowed for rescission on the basis of duress if the relevant conduct did not amount to unacceptable pressure. It has already been argued, in discussing duress under the three codes, that the requirement of a threat is actually commensurate with the requirement of the application of pressure in English law, as long as it is recognised that an implied threat will suffice.158 Comment (a) to section 175 makes it clear that an implied threat will suffice for this element of duress under the Restatement.159 Therefore, the requirement of a threat does not distinguish duress under the Restatement from duress in English law. The fundamental focus of any analysis of the element of unacceptable conduct in duress must be the qualitative standard of “unacceptability” applied. Therefore, when comparing English law and the Restatement, it is vitally important to compare the element of illegitimacy with the element of impropriety. Section 176 distinguishes between two categories of improper conduct, the first where the threat is improper regardless of the substantive (im)balance of the impugned contract; the second where the conduct is only improper if it leads to a substantively imbalanced contract between complainant and defendant. The latter category clearly reflects the policy, already seen in the treatment of mistake under the Restatement, of promoting substantively fair contracts. It is submitted that it would be wrong to prevent a complainant from avoiding a contract to which his consent was impaired by the defendant’s 155 157

158

156 See pp. 288–9, 235–6, above. }175(1). And the labels ‘wrongful’, in the PECL (Art. 4: 108) and DCFR (Art 7: 106), and ‘unjustified’, in the PICC (Art. 3.9). 159 See p. 233, above. Restatement (Second), Volume I, 476.

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unacceptable conduct simply because the contract was substantively balanced. This would lead one towards the position that the classic example of duress, where the defendant places a gun to the complainant’s head and forces the latter to sell his house for a fair price, is an example of a contract not voidable for duress. The Restatement, however, does not lead the law to this position merely by adopting a dual categorisation of improper conduct. All this bifurcated approach does is assert that certain conduct is not legally unacceptable unless is leads to a substantively imbalanced result. If the first category provides sufficient protection for conduct rightly treated as unacceptable regardless of the terms of the impugned contract, having a second category where conduct is only unacceptable if it leads to substantive imbalance would be a legitimate way to pursue a policy of promoting and upholding substantively balanced contracts. Whether one felt that substantive imbalance should play such a role would be a separate issue, similarly to assessment of the desirability of the role substantive imbalance plays in mistake under the Restatement. However, it will be argued that all of the types of improper conduct in the second category should be regarded as improper/unacceptable even if they do not lead to a substantively imbalanced contract. Moreover, that conduct will not necessarily fall under one of the first-category heads of improper conduct, so there is a gap in the law. Section 176(1) deals with conduct which is treated as improper regardless of the terms of the resultant contract. The first type of conduct that is regarded as improper per se is threatening a crime or a tort, or threatening action that would be a crime or tort if it resulted in obtaining property.160 Treating such conduct as always unacceptable is commensurate with the position it was argued should and does apply in English law.161 Moreover, it is contended that this position is uncontroversial: contract law should not undermine criminal or tort law by declaring that conduct amounting to a crime or tort is not unacceptable, not improper, for the purposes or procuring contractual consent. Under the Restatement, it is also always improper to seek to secure contractual consent by threat of criminal prosecution.162 Once again, it 160 162

161 }176(1)(a). See pp. 220–1, above. Although }176(1)(b) simply states that threatening a criminal prosecution is improper, it is clear that it is the fact that the threat is used to seek to secure contractual consent from the complainant which renders it improper, not the mere fact of a (potentially legally sound) threat of criminal prosecution: see Restatement (Second), Volume I, 483.

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is submitted that this is uncontroversial and that the same is true in English law.163 Even if the threat is completely legally justified, in the sense that the complainant has clearly committed a crime, to attempt to use it as a means to secure contractual consent is to use it for improper means. Indeed, in such cases, the contract would be a contract to stifle a criminal prosecution. The threat of commencing a civil action is only regarded as improper if it is made in bad faith.164 Such threats are clearly different in nature from threats of criminal prosecution. In these cases, the impugned contract might be a legitimate compromise of claim, something that the law should clearly promote, unlike contracts to stifle criminal prosecutions.165 However, if the defendant ‘does not believe that there [is] a reasonable basis for the threatened’ action166 (i.e., he does not believe that he has even a reasonable case), he has made his threat in bad faith and there is clearly no possibility of the impugned contract amounting to a legitimate compromise. Again, it is submitted that it is uncontroversial to treat such threats as always being improper and that English law would adopt the same position.167 The final head of conduct that is improper regardless of the substantive (im)balance of the contract is a threat amounting to a breach of the duty of good faith and fair dealing under an existing contract with the complainant.168 Conceptually, this causes no problems. Indeed, it would be absurd for the Restatement to impose a general duty of good faith169 and yet not to treat a threat which amounted to a breach of this duty as improper. The difficulty comes in determining when a threat does amount to a breach of the duty of good faith. The first point to note in assessing this head of improper conduct is that it will normally be applicable to contractual modifications, but it is not, strictly speaking, confined to such cases. Section 176(1)(d) requires

163

164 167

168

Note that such cases have traditionally been viewed as cases of actual undue influence in English law: e.g., Williams v. Bayley (1866) 1 HL 200. However, it is submitted that conduct that is undue for the purposes of undue influence is also illegitimate for the purposes of duress. Indeed, the threat of prosecution cases are the classic example of cases of undue influence which many contend would now be better regarded as cases of the expanded doctrine of duress: e.g., Birks and Chin (1995), 63–7. 165 166 }176(1)(c). Restatement (Second), Volume I, 484 Ibid. E.g., Wade v. Simeon (1846) 135 ER 1061. Note, this case dealt with the matter as an issue of consideration. It is contended that the development of economic duress in English law would allow such a case to be dealt with under that doctrine as well. 169 }176(1)(d). See }205.

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that the threat is a breach of the duty of good faith under an existing contract between defendant and complainant, but it does not require that the contract induced by the threat is a modification of, or even otherwise related to, that contract.170 Nonetheless, this is the classic case with which the provision is mainly concerned. Indeed, this is the classic case of economic duress. It is also important to note that, while this provision will normally deal with a threat to breach an existing contract, first, it does not actually require a threatened breach;171 and, second, a threat to breach a contract is not always regarded as a breach of the duty of good faith and fair dealing.172 Both of these points can be linked to the position in English law, because it has been argued that English law clearly recognises that conduct not amounting to a threatened breach of contract (or a threatened crime, tort or otherwise unlawful conduct) can be illegitimate; while a threat to breach a contract will not always be illegitimate.173 It has also been contended that, in English law, to determine whether a threatened or actual breach of contract is illegitimate, it is crucially important to ascertain why the defendant made the threat or actually committed the breach. That is to say, it must be asked: (1) whether he could reasonably have avoided the breach; (2) if he could not, whether this was because of his own fault; (3) whether he sought no more than was reasonably necessary to enable him to perform; and (4) whether he acted bona or mala fides.174 Comment (e) to section 176 looks at similar factors to determine whether a threatened breach of contract amounts to a breach of the duty of good faith and is thus improper. This Comment states that ‘the extortion of a “modification” without legitimate commercial reason is ineffective as a violation of the duty of good faith’ and explains that the defendant might have to prove an objectively sound reason for seeking the modification (or completely new contract).175 This is clearly commensurate with analysing why the defendant threatened to breach the contract. Moreover, Comment (e) states that whether performance has been rendered more burdensome to the defendant, or whether he is making the threat ‘for some purpose unrelated to the contract’ is an important part of the analysis,176 and this is 170 173 175

176

171 172 See, e.g., Restatement (Second), Volume I, 485. Ibid. Ibid. 174 See pp. 220–4, above. Ibid. Restatement (Second), Volume I, 485 (citing Comment 2 to }2–209 Uniform Commercial code). Restatement (Second), Volume I, 485.

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potentially strongly related to determining, first, whether the defendant could reasonably have avoided the breach;177 second, whether this is due to the defendant’s own fault;178 third, whether he is seeking more than is reasonably necessary to allow him to perform;179 and, fourth, the defendant’s bona or mala fides.180 In determining whether a threat other than a breach of contract, including a threat to do something the defendant has a lawful right to do, amounts to a breach of the duty of good faith, the Restatement looks primarily to whether the defendant’s conduct amounts to an exploitation of some particular power he has over the complainant, not necessarily related to the original contract. Both of the Illustrations of this principle are cases where it is implicit that the defendant is consciously using this power to secure an unrelated benefit181 and can, it is submitted, therefore be seen as examples of the defendant acting mala fides. This provides another link to the position in English law, because it has been argued that the defendant’s bona or mala fides is especially relevant to determining whether the threat or commission of a lawful act can nonetheless amount to the application of illegitimate pressure.182 When assessing the second category of unacceptable conduct under the Restatement, where a threat can only be improper if it leads to a substantively unfair contract, it is important to recognise the fact that substantive imbalance is a common element in, or at least a common motivation for, any plea of vitiation.183 When dealing with the second category of vitiating factor, where the defendant must have engaged in 177

178

179

180

181

182 183

For example, was the change of circumstances, short of frustration, so severe that the defendant could not reasonably financially complete his performance? For, if it is determined that a change of circumstances has rendered performance more burdensome, one can then assess what caused the change of circumstances. For example, was the defendant simply seeking to secure sufficient funds to complete performance, or was he seeking to ensure that he would recoup the originally expected profit? For example, has the defendant suffered some genuine hardship for which he feels that he is entitled to be compensated in some way, or is he merely seeking to exploit the complainant’s contractual vulnerability, stemming from his need for the defendant’s performance? Restatement (Second), Volume I, 486, Illustrations 10 (threat to sell land bordering the complainant’s land to one who would use it in a way detrimental to the complainant, in order to secure contractual release) and 11 (threat to terminate complainant-employee, under contract terminable at will, in order to secure release of claim against defendantemployer) to Art. 176. See p. 224, above. See p. 291 (discussed in the context of unconscionability), below.

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unacceptable conduct which impaired the complainant’s consent, this is even more likely to be the case. For, if the defendant’s unacceptable conduct includes any element of conscious wrongdoing, it is likely that he will have tried to extract an extremely beneficial contract for himself. Substantive imbalance will, therefore, often be highly relevant to any case of duress. However, in relation to the second class of improper threats under section 176, substantive imbalance is not relevant merely as a likely consequence of the defendant’s unacceptable conduct; it is a prerequisite in order for that conduct to be deemed unacceptable. The first situation in which a threat will be improper, but only if it results in a contract ‘not on fair terms’,184 is where the defendant threatens an act that ‘would harm the [complainant] and would not significantly benefit [him]’.185 It is the purpose for which the defendant makes the threat (to seek to induce contractual consent), rather than the threat itself (which will generally be a threat to do something lawful), which renders his conduct improper in such cases. This is similar to Lord Scarman’s assertion that, in English law, the (il)legitimacy of pressure must be assessed in light, first, of the nature of the pressure itself and, second, the nature of the demand for the purposes of which the pressure is applied.186 His Lordship noted that this is particularly so in relation to threats of lawful action,187 with which the current category of improper conduct under the Restatement is primarily concerned. Therefore, there is a similarity in the general approach of the Restatement and English law in these cases. Comment (f) to section 176 explains that a threat to do harm to the complainant without bringing any significant benefit to the defendant will be wrongful because the defendant would, if carrying out the threat upon the complainant’s refusal to contract, be acting ‘maliciously and unconscionably, out of pure vindictiveness’.188 Comment (f) gives an example of such conduct as a threat to release embarrassing information about the complainant unless he contracts with the defendant. In such cases, the defendant would clearly be acting mala fides, and it is submitted that the threat would be improper in its own right. Therefore, the complainant should not be required to prove that the resulting contract was substantively imbalanced in order to avoid it. Requiring substantive imbalance when the complainant’s consent has been impaired 184 187

}176(2). Ibid.

186 }176(2)(a). The Universe Sentinel [1983] 1 AC 366, 401, HL. Restatement (Second), Volume I, 487.

185 188

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(to a sufficient degree) by the defendant’s unacceptable conduct189 means that the law does not provide sufficient protection from the use of improper threats to induce contractual consent. Some of the cases falling under this head might conceivably amount to a form of extortion or blackmail, and thus potentially be the threat of a crime or tort and so improper under section 176(1)(a) regardless of the terms of the contract. However, it is clear that this will not always be the case. Furthermore, the threat will not necessarily be covered by any of the other heads of improper threat under section 176(1). In these cases, there would be a gap in the law, requiring proof of substantive imbalance even though the defendant’s consent-impairing conduct is unacceptable regardless of the terms of the impugned contract. It is not clear that all cases falling under this head of improper threat would necessarily include conduct that is improper in its own right. While it is contended that the preceding analysis highlights a gap in the Restatement’s treatment of duress (because the defendant’s conduct might be improper regardless of the substantive balance of the impugned contract and not covered by section 176(1)), section 176(2)(a) could serve a useful purpose if it dealt with cases where the threat was one that was not improper in its own right but which might be improper when leading to a substantively unfair contract. As noted above, it is the purpose for which the threat is made, rather than the threat itself, that is the key element in determining whether the defendant’s conduct is improper under this head. Therefore, it is submitted that it is perfectly appropriate for the law to recognise that making a threat in order to secure a substantively imbalanced contract might be more likely to be improper than making a threat to secure a contract that is substantively balanced. However, this argument rests upon showing that a threat under this head will not necessarily be improper in its own right. Neither section 176(2)(a) itself, nor the Comments dealing with section 176, expand upon the requisite nature of the harm the complainant would suffer if the defendant carried out his threat. Nonetheless, it must surely be the case that a trifling harm would be disregarded, despite the fact that the clause specifically refers to the lack of a significant benefit to the defendant but does not similarly qualify the nature of the relevant harm. Unless the defendant honestly believes that the threatened action might bring him a significant benefit, it is hard to 189

For present purposes, the analysis is concerned with conduct which is unacceptable whether the impugned contract is substantively imbalanced or not.

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envisage a situation where the threat of an appreciable harm to the complainant, made solely for the purposes of securing contractual consent, would be anything other than improper. For, without this honest belief, the defendant will always be acting mala fides, and the mere fact that he might be threatening something lawful (even such as not contracting with the complainant in the future) should not prevent his conduct from being improper. Although the wording of the clause does not rule out the possibility of a threat being deemed improper under this head when the defendant honestly, but wrongly, believed that the threatened action would bring him a significant benefit, Comment (f) does not contemplate such cases. It is submitted that this is the only situation in which a threat falling under section 176(2)(a) might not amount to improper conduct in its own light. If this analysis is accepted, it means that section 176(2)(a) deals with conduct that should be regarded as improper in its own right, regardless of the terms of the resultant contract. Nonetheless, such conduct will not necessarily fall under section 176(1), where the threat would be regarded as improper without the need to analyse the terms of the impugned contract. Therefore, under the Restatement, it is possible for a complainant whose consent was impaired by unacceptable conduct to be unable to avoid the impugned contract simply because it is substantively fair, and it has already been argued that this is inappropriate.190 Section 176(2)(b) states that a threat inducing a contract on unfair terms will be improper if its ‘effectiveness . . . is significantly increased by prior unfair dealing by the [defendant]’. This head, therefore, necessarily includes an element of unacceptable (unfair) conduct by the defendant. Moreover, that prior unacceptable conduct must have had some causal connection to the effect of the threat and must surely have been committed in relation to the complainant.191 It is submitted that, if an otherwise proper (i.e., not improper) threat is rendered significantly more effective because of prior unacceptable conduct by the defendant, the threat itself must always amount to unacceptable conduct, unless the defendant honestly believed that his prior unfair conduct would not have such an effect. For, without this honest belief, the defendant is either consciously utilising his prior 190 191

See pp. 239–40, above. Comment (f) to }176 clearly contemplates such a requirement, when it explains that clause (b) ‘is concerned with cases in which the [defendant] has by unfair dealing achieved an advantage over the [complainant]’: Restatement (Second), 487.

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unacceptable conduct to secure the impugned contract, or at least should know that this will be the effect of his conduct. Once again, then, if this analysis is accepted, it means that section 176(2) has the effect of preventing the complainant from avoiding the impugned contract simply because it is a substantively balanced one, even when he has proved that his consent was impaired by the defendant’s unacceptable conduct. Furthermore, the complainant will not necessarily be protected under section 176(1), because the relevant conduct might not fall under one of the four heads of improper threat under that paragraph. Section 176(2)(c) is a general clause, providing that a threat is improper (if the impugned contract is substantively unfair) when it amounts to the ‘use of power for illegitimate ends’. By its very essence, this head is concerned with the nature of the demand (i.e., the ‘ends’). If the nature of the demand is itself illegitimate, then surely the threat must also be illegitimate; surely it cannot be legitimate to threaten something to achieve illegitimate ends, even when the threat is otherwise perfectly acceptable. The only possible exception to this is if the defendant honestly and reasonably believes that the ends are not illegitimate. However, because (il)legitimacy cannot be a purely subjective concept,192 it will be rare that the defendant will reasonably believe that illegitimate ends are actually legitimate. Comment (f) recognises that this head of improper threat can overlap with section 176(1), under which a threat is improper if it is a threat to launch a criminal prosecution193 or civil action194 against the complainant unless he contracts with the defendant.195 However, it will not necessarily overlap with either of those heads, so there is another gap in protection for a complainant whose consent was impaired by unacceptable conduct. Section 176 does not treat as improper any conduct that should not be regarded as unacceptable, or which would not be regarded as illegitimate in English law196 (or wrongful or unjustified under the three codes). However, it does in some cases require proof of substantive imbalance before the complainant can avoid the impugned contract on the basis of duress, even though, in these cases, it is possible that the defendant’s 192

193 196

See p. 285, below (discussed in relation to the term ‘unconscionable’; but the argument applies equally to any qualitative assessment of conduct). 194 195 }176(1)(b). }176(1)(c). Restatement (Second), Volume I, 487. Subject to the fact that the requirement of good faith and fair dealing, relevant for }176 (1)(d), might be wider than the requirement of illegitimacy in English law.

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conduct will be unacceptable and have impaired the complainant’s consent regardless of substantive (im)balance. While this could be seen as promoting the security of contracts, as well as reflecting the importance attached to substantive balance, it is submitted that it is too restrictive an approach to duress.

10.3.3 Impairment of consent Section 175 makes it clear that, in order for the complainant successfully to plead duress, he must prove that the defendant’s improper threat induced his decision to contract. This obviously requires that the defendant’s unacceptable conduct impaired the complainant’s consent. Comment (c) to section 175 states that the test for inducement is the same in duress as in misrepresentation: that is to say, the defendant’s improper threat must have ‘substantially contribute[d]’ to the complainant’s decision to enter into the impugned contract.197 It has been argued that this standard of causation requires something more than merely “a factor”, but not necessarily rising to the level of “but for”, causation.198 Similarly to the three codes, duress under the Restatement clearly encompasses all three forms of duress recognised in English law but does not distinguish between the standard of impairment of consent applicable to each category, despite the fact that the degree of illegitimacy of the relevant conduct generally follows a sliding scale across the different types of duress.199 Therefore, the Restatement does nothing more to dissuade, for example, threats of murder than it does to dissuade illegitimate threats to breach a contract. The Restatement does recognise a distinction between types of duress, but based upon the effect, not the nature, of the pressure applied. For, by section 174, no contract is formed (so a putative contract would be void ab initio) if the complainant’s apparent manifestation of assent is physically compelled when he did not intend to engage in that conduct. In such cases, there is a clear absence of consent which was induced by the defendant’s unacceptable conduct,200 and it has been argued that English 197 199 200

198 Restatement (Second), Volume I, 478. See pp. 202–3, above. See pp. 234–5, above. Although, note that Comment (b) to }174 states that the rule applies even if a third party physically compels the complainant and the defendant has no reason to know of this: Restatement (Second), Volume I, 475. It is submitted that, in such cases, as between the complainant and the defendant, the issue is clearly more closely linked to forgery than duress.

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law would also recognise that there could be no contract in such cases, whether by virtue of the rules of duress, forgery or non est factum.201

10.3.4

The lack of a reasonable alternative

In order successfully to plead duress under the Restatement, the complainant must prove that the defendant’s threat left him without any reasonable alternative to making the impugned contract.202 This is the same as the position under the three codes, but different from the position in English law, where, it has been argued, this element has been mooted as a possible requirement of economic duress but rightly not adopted as a prerequisite.203 The objective effect of pressure can be relevant to determining whether the defendant’s conduct in applying that pressure was unacceptable. For, if the reasonable person would know that the conduct would leave the complainant without any reasonable alternative to making the contract, the defendant should have known it, and this is an element suggesting that it is unacceptable to apply that pressure so as to back the complainant into a corner, so to speak. It will not necessarily be conclusive, because, first, the threat might simply reflect a legitimate use of legitimately obtained market power; and, second, the defendant might have honestly believed that the complainant would have a legitimate alternative, which would be a factor militating against (but not necessarily preventing) illegitimacy. Nonetheless, it is a relevant consideration. Furthermore, the objective effect of the pressure will be relevant to the evidential question of proof of impairment of consent, similarly to the role of materiality in misrepresentation. As such, whether the complainant had a reasonable alternative or not will be a significant factor in any plea of duress. It should also be noted that including the requirement has the effect of promoting the security of contracts, by making it harder to avoid a contract on the basis of duress. While this is a legitimate policy aim in its own right, it is submitted that proof of a lack of any reasonable alternative should not be a prerequisite of duress, because the unacceptable nature of the defendant’s conduct and the fact that this conduct impaired the complainant’s consent to the requisite degree justify the conclusion of voidability, even if the complainant consciously ignored a 201

See p. 214, above.

202

}175.

203

See pp. 228–9, above.

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reasonable alternative.204 Moreover, even if it were to be adopted as a requirement of economic duress, it would still be inappropriate to require it for duress to the person and duress of goods, where the defendant’s actions will usually be criminal or tortious. In such cases, the highly illegitimate nature of the defendant’s conduct must outweigh any unreasonableness in the complainant’s conduct, even if one does not accept this argument in relation to economic duress. 204

Ibid.

11 Undue influence

11.1 English law 11.1.1

Introduction

Undue influence renders the impugned contract voidable.1 It requires: (1) that the defendant possessed influence over the complainant, which (2) he exercised, (3) in a way that amounted to an abuse (an undue exercise) of that influence and (4) that this brought about the impugned contract.2 Therefore, undue influence fits my second category of vitiating factor: the complainant’s undue exercise of influence is unacceptable conduct,3 and it must have impaired the complainant’s consent.4 Due to the requirement of influence, the complainant will always be vulnerable to the defendant. Moreover, if the defendant has any knowledge of this, it places a greater duty on him when dealing with the complainant.5 Therefore, undue influence has, similarly to unconscionability,6 developed as a doctrine to protect vulnerable complainants from abuse. Undue influence can be established by affirmative proof or with the aid of an evidential rebuttable presumption. The former is called ‘actual undue influence’ and the latter ‘presumed undue influence’.7 Whichever route is taken, the same thing is established.8 Nonetheless, actual and presumed undue influence will be analysed separately, with actual undue influence considered first, because properly understanding this form of the doctrine helps one to understand the presumption.

1 3 4 5 7 8

2 Allcard v. Skinner (1887) 36 ChD 145. BCCI v. Aboody [1990] 1 QB 923, 967, CA. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 794, per Lord Nicholls. P. Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 220. 6 See pp. 258–9, below. See pp. 279–96, below. BCCI v. Aboody [1990] 1 QB 923, CA; Barclays Bank v. O’Brien [1994] 1 AC 180, HL. See pp. 253–5, below.

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11.1.2

The underlying rationale of vitiation

In their classic, but controversial, article, Birks and Chin argued ‘that . . . undue influence is about impaired consent, not about wicked exploitation’,9 that ‘relief is given because of the impairment of the integrity of the [complainant’s] decision to [contract]’.10 There is abundant authority establishing that undue influence requires the complainant’s consent to have been impaired. For example, Lord Westbury in Williams v. Bayley said that the question to be asked is: ‘[W]as the [complainant] a free and voluntary agent, or did he give the security in question under undue pressure exerted by the Defendants?’11 Furthermore, Cotton LJ in Allcard v. Skinner said that, to determine whether there was undue influence, ‘[t]he question is . . . whether . . . [the complainant was] free to determine what should be done with her property’.12 Similarly, Lord Nicholls in RBS v. Etridge (No. 2) said that undue influence exists ‘whenever the [complainant’s] consent . . . ought not fairly to be treated as the expression of [his] free will’.13 However, what is sometimes overlooked, as in the argument by Birks and Chin, is that the impairment of consent must have been caused not just by the influence, but by the defendant’s undue exercise of influence. As the majority of the Privy Council said in R v. Attorney-General: ‘Like duress at common law, undue influence is based upon the principle that a transaction to which consent has been obtained by unacceptable means should not be allowed to stand.’14 Indeed, there is no doubt that the weight of authority professes that the defendant must have engaged in unacceptable conduct that impaired the complainant’s consent.15 Yet there remains debate as to whether unacceptable conduct by the defendant is truly required, or is merely said to be required. It will be shown that undue influence requires at least: (1) that the defendant had actual or constructive knowledge that the influence impaired the complainant’s consent; and (2) that the defendant’s conduct caused the influence to be operative. It will be explained why this necessarily amounts to unacceptable conduct.16 Conduct can amount to 9 12 14 15

16

10 11 Birks and Chin (1995), 58. Ibid., 61. (1866) 1 HL 200, 216. 13 (1887) 36 ChD 145, 173. [2001] UKHL 44; [2002] 2 AC 773, 795. [2003] UKPC 22; [2003] EMLR 24, at [21] (my italic). E.g., RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 795 (‘abuse of influence’), per Lord Nicholls; R v. Attorney-General [2003] UKPC 22; [2003] EMLR 24, at [21] (‘unfair exploitation’). See pp. 258–9, below.

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an undue exercise of influence (unacceptable conduct) without any knowledge of the influence or its effect, but it will only do so when that conduct is, itself, unacceptable. Therefore, it is clear that undue influence genuinely requires unacceptable conduct that impaired the complainant’s consent. This is appropriate, because, even though the complainant is weak, it would be improper for contract law to deprive the defendant of a contract to which the complainant consented when the defendant did not engage in any unacceptable conduct in procuring it.17 Contract law must protect the weak from contractual exploitation, but not merely because they are weak. This protection is offered by recognising that any knowledge the defendant has of the complainant’s weakness imposes a greater duty on him in dealing with the complainant.18

11.1.3

Undue influence: one vitiating factor; two evidential routes to proof

As far back as the classic case of Allcard v. Skinner, it was recognised that equity takes a bifurcated approach to undue influence, having developed an evidential rebuttable presumption of undue influence where the defendant’s influence is particularly strong and the impugned transaction calls for an explanation.19 The development of this approach led to the two classes of the doctrine being called ‘actual undue influence’ (where the complainant affirmatively proves undue influence) and ‘presumed undue influence’ (where he relies upon the evidential rebuttable presumption of undue influence).20 This categorisation, however, seemed to bring to a head a confusion that had been developing, suggesting that the legal position was that, when a complainant succeeded in proving actual undue influence, he proved something different from that which he proved when he succeeded in proving presumed undue influence. The House of Lords in the Etridge case sought to correct this misconception. However, Lord Scott, who made the point most forcibly, 17

18 19 20

Unless one for whose acts the defendant was responsible procured the contract by unacceptable means or the defendant had actual or constructive knowledge of the unacceptable procurement, similar to the three-party surety cases such as Barclays Bank v. O’Brien [1994] 1 AC 180, HL and RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773. Bigwood (2003), 206, 207. See also pp. 258–9, below. (1887) 36 ChD 145, 171, 181, per Cotton and Lindley LJJ. See also pp. 261–72, below. BCCI v. Aboody [1990] 1 QB 923, CA; Barclays Bank v. O’Brien [1994] 1 AC 180, HL.

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unfortunately expressed it in a way that is, with respect, open to misinterpretation. Properly understood, everything that his Lordship said in the relevant passage is correct. However, the tone of his words might be misconstrued as not merely (correctly) denying that there is any legal difference in the result of proving actual or presumed undue influence, but also (incorrectly) suggesting that the latter cannot be established if the former cannot be. The proper position, as a matter of law, is that, whether proved affirmatively or with the aid of the presumption, there is only one vitiating factor of undue influence. In each case, the complainant proves, as a matter of law, precisely the same thing.21 However, if the complainant cannot affirmatively prove (actual) undue influence, this does not necessarily mean that he will be unable to establish (presumed) undue influence using the evidential presumption, and vice versa. Lord Scott said that ‘it makes no sense to find . . . that there was no undue influence but . . . that the presumption applies’.22 This could be interpreted to suggest that the complainant cannot succeed with the presumption if he fails affirmatively to prove undue influence. This is incorrect. The key to a proper interpretation of Lord Scott’s statement is the distinction between a finding that there is no undue influence and a finding that the complainant has not successfully made out his case of actual undue influence. There is a difference between an affirmative finding that something does not exist and a finding that it has not been proved to exist. Properly understood, Lord Scott was referring to the former situation. In this sense, what his Lordship said is correct: as actual and presumed undue influence are merely different evidential routes to proof of the same vitiating factor, a finding that there has been no undue influence must mean either that the presumption has not been successfully raised, or that it has been raised but successfully rebutted. However, a finding that the complainant has not successfully made out his case of actual undue influence is not an affirmative finding of an absence of (actual) undue influence; it is not a finding that it has been proved that (actual) undue influence does not exist, but merely a finding that it has not been proved to exist. Therefore, the complainant might still be able to succeed with the presumption.

21

22

RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 797, per Lord Nicholls. Cf. Bigwood (2003), 389–90. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 853–4.

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Lord Scott also said that ‘[a] finding of actual undue influence and a finding that there is a presumption of undue influence are not alternatives to one another’.23 There is only one vitiating factor of undue influence, so a finding, in relation to the same transaction, of actual undue influence (that is, that the complainant has affirmatively proved undue influence) and a finding of presumed undue influence (that is, that the presumption has been raised and not rebutted) contains a redundancy. Proof of undue influence by either evidential route is sufficient. However, if pleas of actual and presumed undue influence were not alternatives, then, with respect, the presumption would be meaningless. The purpose of the presumption is to help a vulnerable complainant where the influence the defendant possesses over him ‘provides scope for misuse without any specific overt acts of persuasion’.24 If the presumption could not apply when the complainant was unable to prove actual undue influence, it would not be serving this role. Furthermore, if a complainant pleads both actual and presumed undue influence, it is appropriate for the court to make a ruling on both pleas. Lord Nicholls noted in the Etridge case that it is possible for the complainant to succeed with a plea of actual undue influence ‘even where [the] presumption is not available to him’.25 Therefore, it is possible for a judge to find that the complainant has not successfully raised the presumption but has nonetheless affirmatively proved undue influence. This makes it all the more absurd to interpret Lord Scott’s words in such a way as to suggest that it is not possible for the complainant to succeed with the presumption when he fails affirmatively to prove undue influence.26 The preceding analysis provides an important step in analysing rebuttal of the presumption. This is because the four steps to proof of actual undue influence are relatively well set, save for the controversy surrounding what amounts to an undue exercise of influence. Once one accepts that the only difference between actual and presumed undue influence is the evidential route to legal proof,27 it becomes apparent that, to rebut the presumption, it should be sufficient to disprove any of the four prerequisites for affirmatively proving undue influence. The implications of this will be addressed below,28 once the elements of affirmative proof of undue influence have been analysed. 23 26 27

24 25 Ibid. Ibid., 795, per Lord Nicholls. Ibid., 797. See also Goldsworthy v. Brickell [1987] Ch 378, 402, per Nourse LJ. 28 Chitty (2008), 627. See pp. 269–72, below.

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11.1.4

The elements of undue influence

Introduction The Court of Appeal in BCCI v. Aboody said that the four requirements of a plea of actual undue influence are: (1) a capacity in the defendant to influence the complainant; (2) that the influence was exercised; (3) that its exercise was undue; and (4) that its exercise brought about the impugned transaction.29 The court also held that a complainant must prove that the transaction was manifestly disadvantageous to him, but this has been overruled by the House of Lords in CIBC v. Pitt.30 There can, of course, be no exercise of influence unless a capacity to influence exists. Therefore, requirement (1) is a preliminary step. Requirement (2) is the element that necessitates that the influence, which renders the complainant vulnerable in his dealings with the defendant, is operative, and that it was the defendant’s conduct that caused it to be operative. However, at this stage of analysis, the defendant’s conduct need not be unacceptable. This is what is required by (3), and it is the most contentious issue in the law of undue influence. Requirement (4) is the impairment of consent element: it requires that the defendant’s undue exercise of influence (unacceptable conduct) caused the complainant’s decision to contract. As the presumption of undue influence merely presumes that which is affirmatively proved in actual undue influence,31 these are the four elements that are presumed. This means that disproof of any of them must rebut the presumption. In order to raise the presumption, there are specific primary facts that must be proved, and these differ from the four elements of actual undue influence. However, these differences merely reflect the fact that undue influence is presumed, not proved, so the primary facts must be sufficiently indicative of undue influence when it is not affirmatively proved. This does not make presumed and actual undue influence different doctrines. They remain merely different evidential routes to proof of the same thing. Despite this, it is helpful to analyse the elements of actual undue influence first, given the significance of these to rebutting the presumption. A capacity to influence There has been no authoritative attempt to define the general influence sufficient for the first element of affirmative proof of undue influence. 29

[1990] 1 QB 923, 967.

30

[1994] 1 AC 200, 209.

31

See pp. 253–5, above.

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It must be potentially wider than, but necessarily include, that required as the first prerequisite for raising the presumption of undue influence. For, the latter requires an influence readily capable of abuse without this fact being easily susceptible to proof; whereas affirmative proof of undue influence requires affirmative proof that the relevant influence was abused. Any type of influence can be abused, but only a certain type of influence can generally be abused without this fact being readily provable.32 Nonetheless, even the wider influence relevant to affirmative proof of undue influence is not boundless. The essence of a capacity to influence is that it establishes an inherent vulnerability in the complainant vis-a`-vis the defendant, because the latter is able to affect the complainant’s transactional decision. However, everyone has the ability to influence everyone else’s actions by the use of threats or other unacceptable conduct. Influence is something more than this. It is the ability to affect the complainant’s transactional decision in some way other than by applying unacceptable pressure. Of course, the requirement that the exercise of influence was undue necessitates that the defendant engaged in unacceptable conduct, but a relevant capacity to influence must be something capable of being exercised without engaging in unacceptable conduct. For example, if the complainant naturally acquiesces in the defendant’s desires;33 if the defendant has the power to prosecute a relative of the complainant and the latter is keen to avoid this;34 or if the complainant is in financial need and dependent upon the defendant for somewhere to live.35 Further, influence must come from circumstances inherent to one or both of the parties, or their relationship, but it need not be unique to their relationship. The fact that a complainant suffers from some vulnerability that gives everyone in the world the capacity to influence him, does not render it any less of a relevant influence. The key is whether it gives the defendant the chance to affect the complainant’s decision whether to contract, without the need for engaging in unacceptable conduct, and thus makes the complainant vulnerable to the defendant, not whether this is particular to the complainant’s relationship with the defendant.

An exercise of influence It can be seen from the Aboody case, and is apparent from the fact that the exercise of influence and the undue nature of that exercise are 32 34

33 See pp. 263–4, below. BCCI v. Aboody [1990] 1 QB 923, CA. 35 Williams v. Bayley (1866) 1 HL 200. Macklin v. Dowsett [2004] EWCA Civ 904.

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separated into two elements, that an exercise of influence is a neutral concept. In the Aboody case, the exercise of influence was the simple act of the defendant asking the complainant to make the impugned contracts.36 However, not every influence can be rendered operative in this way. Everything depends on the nature of the influence. It is submitted that what is required is that the defendant engaged in conduct that rendered the influence operative in the complainant’s decision-making process, so that it was a factor leading him towards contracting. This means that undue influence requires both the influence and that which makes it undue to have impaired the complainant’s consent.

Unacceptable conduct: the exercise of influence was undue Affirmative proof of undue influence requires the complainant to prove that the defendant unduly exercised his influence.37 As Lord Nicholls said, ‘[t]he objective [of undue influence] is to ensure that the influence of one person over another is not abused’.38 This seems clearly to be a requirement of unacceptable conduct, which must, according to the final requirement in the Aboody case, have impaired the complainant’s consent.39 However, there is doubt as to whether ‘undue’ is defined in such a way that the relevant conduct is properly treated as unacceptable.40 It is clear that ‘undue’ does not require proof of unlawful conduct. Indeed, an undue exercise of influence can be established even when the relevant conduct would not have been unacceptable but for the fact that the defendant knew, or should have known, that the influence rendered the complainant vulnerable in his relationship with the defendant. This is highlighted by the Aboody case, where the defendant’s conduct was undue because he failed to disclose to the complainant matters which the court held that, in good conscience, he should have disclosed, even though he had no legal duty to do so.41 One of the facts the court took into account in deciding this was the strong nature of the influence between the parties, which the defendant clearly knew he possessed.42 Therefore, it can be seen that determination of whether an exercise of influence is undue is inexorably linked to the nature of the influence. This reflects the protective focus of undue influence, but shows that the

36 38 39 41

37 [1990] 1 QB 923, 967, CA. Ibid. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 794. 40 [1990] 1 QB 923, 967, CA. See pp. 252–3, above. 42 [1990] 1 QB 923, 969, CA. Ibid.

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protection is from abuse by the defendant, not merely protection from the effect of the “weakness”. When the defendant knows, or should know, of the influence, he must have a duty not to exploit it.43 It is submitted that it is an exploitation of influence to contract with actual or constructive knowledge that it impairs the complainant’s consent. This is uncontroversial in relation to the influence relevant to the presumption, in light of references in case law to a duty of protection.44 Further, it is contended that it is just as appropriate for all types of influence. The more severe the influence, the more likely it is to impair the complainant’s consent, and the more likely the defendant will have actual or constructive knowledge of its existence and its effect. However, if these conditions are satisfied even in relation to a less severe influence, the conclusion should not be any different. The strength of influence makes it factually more likely that there will be a relevant impairment of consent and knowledge, but it must not alter the nature of the duty where that impairment and knowledge exist. This is especially so because the defendant’s conduct must have caused the influence to impair the complainant’s consent (an exercise of influence). This does not place too great a duty on the defendant, because it only applies where he has actual or constructive knowledge of (1) the influence and (2) that the influence impaired the complainant’s consent. For example, where the defendant knows that the complainant has received advice, it may be that he has no reason to suspect that the complainant’s consent was impaired by the influence, so the duty is not breached. To fail to recognise the duty not to contract with knowledge of the consentimpairing effect of the influence would be to fail to offer effective protection to vulnerable complainants. The element of (actual or constructive) knowledge ensures that vitiation is not merely to protect the complainant, but that it is also based on conduct that is appropriately labelled an abuse of influence. Certain conduct will be undue/unacceptable irrespective of any influence or the defendant’s state of knowledge of that influence or its consent-impairing effect: for example, a fraudulent misrepresentation. Such conduct must always be an abuse and render an exercise of influence undue. The conduct must, of course, also impair the complainant’s consent, to satisfy the fourth requirement in the Aboody case. 43 44

Bigwood (2003), 162, 207. E.g., Allcard v. Skinner (1887) 36 ChD 145, 181, per Lindley LJ; Zamet v. Hyman [1961] 1 WLR 1442, 1446, CA; Lloyds Bank v. Bundy [1975] QB 326, 343, CA, per Sir Eric Sachs.

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The analysis of when an exercise of influence is undue balances those cases stressing the policy of protection45 with those stressing the need for a genuine wrong by the defendant.46 The two are inherently linked.

Impairment of consent: the undue exercise of influence caused the transaction In the Aboody case, the Court of Appeal held that, subject to the requirement of manifest disadvantage,47 ‘actual undue influence on the part of [the defendant was] proved’.48 However, their Lordships further held that the complainant was not entitled to relief because she had failed to show that she would not have entered into the impugned contracts but for the undue influence.49 The combination of these two findings leads to confusion as to whether their Lordships intended to hold that “but for” causation was a necessary element of undue influence, or whether it was not a necessary element per se, but was an additional element required for relief. In UCB v. Williams, the Court of Appeal resolved the confusion.50 Jonathan Parker LJ, with whom the rest of the court concurred, noted51 that, in CIBC v. Pitt, the House of Lords overruled the Aboody case as to manifest disadvantage because [a]ctual undue influence is a species of fraud [and] [l]ike any other victim of fraud, a person who has been induced by undue influence to carry out a transaction which he did not freely and knowingly enter into is entitled to have that transaction set aside as of right.52

His Lordship then held that, therefore, the decision in the Aboody case as regards causation ‘cannot be reconciled with CIBC v. Pitt’.53 It is submitted that the correctness of this assertion depends upon whether the court in the Aboody case held that “but for” causation was required as an element of actual undue influence or as an additional element for relief after actual undue influence is proved. If the former, then actual undue influence is not established without proof of “but for” causation. 45

46

47

48 51

E.g., Allcard v. Skinner (1887) 36 ChD 145, CA; Hammond v. Osborn [2002] EWCA Civ 885. E.g., National Westminster Bank v. Morgan [1985] AC 686, HL; R v. Attorney-General [2003] UKPC 22; [2003] EMLR 24. Which the House of Lords has since ruled is not a requirement of actual undue influence: CIBC v. Pitt [1994] 1 AC 200, 209. 49 50 [1990] 1 QB 923, 970. Ibid., 971. [2002] EWCA Civ 555. 52 53 Ibid., at [86]. [1994] 1 AC 200, 209. [2002] EWCA Civ 555, at [91].

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Therefore, Lord Browne-Wilkinson’s clear (and clearly correct) assertion in the Pitt case that, upon proof of undue influence, the complainant is (as against the defendant) entitled to have the impugned transaction set aside as of right does not come into play until “but for” causation is proved. If, however, the court held that actual undue influence can be established without proof of “but for” causation, but that this is required before relief can be granted, then the Court of Appeal in the UCB case is clearly correct. The way in which the court in the Aboody case expressed itself suggests that “but for” causation was treated as an additional element required for relief after actual undue influence was proved. Certainly, it is submitted that the court in the UCB case was entitled to interpret the Aboody case in this way. Therefore, it is clear that “but for” causation is not a requirement of undue influence. What is the precise standard was not addressed in the UCB case, and has not been expressly addressed in any authority. However, the natural inference from a finding that “but for” causation is not required because anyone ‘who has been induced by undue influence to carry out a transaction which he did not freely and knowingly enter into is entitled to have that transaction set aside as of right’54 is that it is sufficient for the complainant to prove that the undue exercise of influence was a factor in his decision-making process, leading him towards making the impugned transaction, especially because the court did not posit any greater standard for inducement in this area.

11.1.5

Presumed undue influence

Introduction Case law is littered with erroneous statements suggesting that the presumption of undue influence can be raised merely by proof of the relevant relationship of influence. For example, in Barclays Bank v. O’Brien, Lord Browne-Wilkinson said: ‘[O]nce a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely.’55 In the Etridge case, the House of Lords left no room for doubt that proof of the requisite relationship of influence does not suffice to raise a presumption of undue influence. For example, Lord Nicholls noted that 54

CIBC v. Pitt [1994] 1 AC 200, 209, HL.

55

[1994] 1 AC 180, 189, HL.

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‘a [complainant] may succeed even where [the] presumption is not available to him; for instance, where the impugned transaction was not one which called for an explanation’.56 This makes it clear that the presumption is not available when the impugned transaction does not call for an explanation, so mere proof of a relationship of the relevant influence cannot suffice to raise it. Indeed, his Lordship expressly stated that ‘there are two prerequisites to the evidential shift in the burden of proof from the complainant to the other party’.57 As to what are the prerequisites for raising the presumption, the Court of Appeal in Re Brocklehurst said that ‘it is clear that the nature of the gift and the nature of the relationship between donor and donee are the two matters to which the court will have primary regard’.58 Lord Nicholls in the Etridge case said that the two prerequisites for raising the presumption are: First, that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant. Second, that the transaction is not readily explicable by the relationship of the parties.59

Lord Scott likewise identified these two prerequisites.60 The first prerequisite can be established either by proof of a relationship in which the law irrebuttably presumes that the relevant influence exists (2(A) relationships) or by affirmative proof of such influence (2(B) relationships).61 It has been argued that, since the Etridge case, affirmative proof of the requisite influence (a 2(B) relationship) and a transaction not readily explicable by proper motives are merely examples of facts that might be sufficient to raise an inference of undue influence, but will not necessarily have this effect: that is, in this class of case, there is no presumption, properly so called.62 Certainly, there are references in the Etridge case to the shift in the burden of proof being based upon an 56 57 59 60

61

62

[2001] UKHL 44; [2002] 2 AC 773, 797 (my italic). 58 Ibid., 798. See also ibid., 841–2, per Lord Scott. [1978] Ch 14, 39, per Bridge LJ. [2001] UKHL 44; [2002] 2 AC 773, 798. Ibid., 842. See also R v. Attorney-General [2003] UKPC 22; [2003] EMLR 24 at [22]; N. Enonchong, ‘Presumed Undue Influence: Continuing Misconceptions’ (2005) 121 LQR 29, 30. BCCI v. Aboody [1990] 1 QB 923, CA; Barclays Bank v. O’Brien [1994] 1 AC 180, HL; RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 797, 842, per Lords Nicholls and Scott. Chitty (2008), 638–40. (However, note that the author says a relevant relationship and a transaction not explicable by proper motives ‘will be sufficient to move the evidential

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inference of undue influence.63 However, there are equally strong references to it being a presumption.64 Further, first, it is submitted that there is insufficient weight to any of the dicta in the Etridge case to recast the 2(B) presumption as an inference.65 Second, later cases have continued to treat this class of undue influence as being based upon a presumption.66 Finally, there is no justification for treating proof of a 2(A) relationship and a transaction not readily explicable by proper motives as necessarily raising a presumption of undue influence, but proof of a 2(B) relationship and such a transaction as merely potentially raising an inference: 2(A) relationships merely (irrebuttably) presume what is affirmatively proved in 2(B) relationships.67

The first prerequisite: a personal influence It has already been explained that not every type of influence is relevant for the purpose of raising the presumption.68 This does not render presumed and actual undue influence substantively different doctrines; it merely reflects the fact that the presumption serves a protective, evidential gap-filling role, to apply where ‘the influence [the defendant] has over [the complainant] provides scope for misuse without any specific overt acts of persuasion’.69 It is submitted that the type of influence that satisfies this requirement is what will be called ‘personal influence’: that is, where the complainant’s feelings for the defendant render him more predisposed to do as he believes the defendant wishes in relation to the impugned transaction. In this situation, there is ready scope for the defendant to (ab)use that influence to induce the complainant to contract, without doing anything the complainant can readily affirmatively prove as an abuse (or, perhaps, even an exercise) of influence. For example, merely subtly creating the impression that he wants the contract, knowing the effect this will have on the complainant.

63

64 65 66

67 69

burden’ to the defendant: ibid., 643 (my italic). This treats the shift in the burden as mandatory: i.e., as a presumption, not an inference.) E.g. [2001] UKHL 44; [2002] 2 AC 773, 796, 797, 822, 842, per Lords Nicholls, Hobhouse and Scott. E.g., ibid., 796, 797, 798, 799, 840, 841, 854, per Lords Nicholls and Scott. Bigwood (2003), 387. E.g., Hammond v. Osborn [2002] EWCA Civ 885; R v. Attorney-General [2003] UKPC 22; [2003] EMLR 24; Macklin v. Dowsett [2004] EWCA Civ 904; Goodchild v. Bradbury [2006] EWCA Civ 1868. 68 Bigwood (2003), 387, 426. See pp. 262, above, 264, below. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 795, per Lord Nicholls.

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Lord Nicholls’s speech in the Etridge case supports the proposition that this is the requisite type of influence. For, his Lordship explained the reason why an influence might provide scope for covert abuse by saying that ‘[t]he relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other’.70 This echoes the definition of a relevant personal influence given above. In certain relationships, it is so likely that the relevant influence exists that the law irrebuttably presumes that it does. In these cases, called the 2(A) relationships,71 the complainant’s feelings for the defendant might naturally be ones of affection,72 or of trust, possibly without any emotional attachment.73 Either way, it is clear that it is a natural consequence of the relevant relationships that the complainant will likely be predisposed to follow any course that he believes the defendant desires, either because he wants to please the defendant or because he trusts that the defendant is looking out for his, the complainant’s, interests.

The second prerequisite: a transaction not readily explicable by proper motives There has been much debate surrounding the second prerequisite for raising the presumption of undue influence. The fact that there is, and must be, a second prerequisite has been established beyond doubt,74 but there has remained some confusion as to the substance of the requirement. It is important to determine what is the proper purpose of a second prerequisite, to determine whether the element established by authority actually serves this role. Whenever the law develops an evidential rebuttable presumption, it must ensure that the primary fact(s) are sufficiently indicative of the existence of the presumed fact(s) that it is appropriate to presume the existence of the latter upon proof of the former. Clearly, a mere relationship of personal influence and the

70 71

72

73

74

Ibid. BCCI v. Aboody [1990] 1 QB 923, 953, CA; Barclays Bank v. O’Brien [1994] 1 AC 180, 189, HL, per Lord Browne-Wilkinson. E.g., parent–child (RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 797, per Lord Nicholls); religious adviser–devotee (Allcard v. Skinner (1887) 36 ChD 145, CA). E.g., solicitor–client, doctor–patient, trustee–beneficiary: RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 797. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773.

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existence of a transaction between the parties is insufficiently indicative of the fact that the transaction was procured by undue influence.75 In Allcard v. Skinner, Lindley LJ noted that the presumption will not be raised, even where the necessary relationship of personal influence is established, if an impugned gift [is] of a small amount . . . But if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act, the burden is upon the [defendant] to support the gift.76

Lord Scarman in National Westminster Bank v. Morgan used the label ‘manifest disadvantage’ for the second prerequisite. His Lordship described the substance of the test in such a way as to suggest that he was referring to substantive disadvantage, giving as his reason for accepting the trial judge’s finding that the mortgage was not manifestly disadvantage the fact that it was only ever intended (by the defendant-mortgagee as much as the complainant-mortgagor) to cover the advance made to allow the complainant (and her husband) to pay off the existing indebtedness of the complainant and her husband, which was necessary to save the complainant’s home, despite the fact that, by its terms, it was unlimited in nature.77 However, Lord Nicholls in the Etridge case noted that manifest disadvantage is not an appropriate element if it requires substantive disadvantage. Going back to the essential role of a primary fact, whether proof of substantive disadvantage should be required must be determined by how likely it is that undue influence can be present without it: the more unlikely this is, the more appropriate it is to require substantive disadvantage. Lord Nicholls noted that it is unlikely there will be undue influence without substantive disadvantage, because the defendant will often abuse his influence precisely in order to secure a transaction substantively in his favour, and the complainant will often not want to avoid a substantively fair transaction.78 There is no doubt that it is

75 76 77

78

Ibid., 798–9, 820, 821, 841, per Lords Nicholls, Hobhouse and Scott. (1887) 36 ChD 145, 185. [1985] AC 686, 702, 703, HL. However, it must be noted that his Lordship accepted the fact that the complainant was desperate to save her home and that this mortgage was the only way to do so, and this is clearly relevant to the pure explicability of the mortgage. Moreover, in RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 799–800, Lord Nicholls suggested that Lord Scarman intended to explain the test in such a way as to focus upon the explicability of the transaction. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 796.

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possible for there to be undue influence without substantive unfairness, and Lord Nicholls was not suggesting otherwise. Indeed, this possibility was the basis of the decision in the Pitt case that manifest disadvantage was not required in actual undue influence.79 Therefore, requiring proof of substantive unfairness before the presumption is raised would mean that the vulnerable people the presumption is designed to protect would be denied that protection when the impugned transaction was not substantively unfair to them, despite the fact that their consent was impaired by the defendant’s undue exercise of influence. However, unless there is a prerequisite that renders it equally (or more) likely that the impugned transaction was procured by undue influence, the law would have to balance this gap in protection against the consequences of adopting a prerequisite not so strongly suggestive of undue influence, thereby increasing the likelihood of undue influence being presumed when not present. As Lord Nicholls in the Etridge case showed, there is a workable second prerequisite proof of which, in combination with a relationship of personal influence, renders it at least as likely that the impugned transaction was procured by undue influence as proof of substantive disadvantage and a relationship of personal influence does. The origin of this prerequisite is seen in Allcard v. Skinner, in the passage already cited from the speech of Lindley LJ, requiring that ‘the [impugned] gift [be] so large as not to be reasonably accounted for on the ground of friendship, relationship, charity, or other ordinary motives on which ordinary men act’.80 Although this passage refers to substantive disadvantage, the (in)explicability of a transaction by the ordinary motives of ordinary people depends upon the nature of that transaction, and the impugned transaction in Allcard v. Skinner was a gift. As a general rule, all else being equal, the only thing in the nature of a gift rendering it more or less explicable is its size. Normally, a gift of, say, £100,000 will be no more or less explicable than a gift of property worth £100,000. Therefore, the fact that Lindley LJ was dealing with an attempt to set aside a gift must be borne in mind in interpreting his test. Lord Nicholls in the Etridge case felt that this was the correct approach. His Lordship noted that it is difficult to weigh and balance the substantive pros and cons of transactions other than pure gifts or sales with no subsidiary obligations. He said that resolution of this

79

[1994] 1 AC 200, 209, HL.

80

(1887) 36 ChD 145, 185 (my italic).

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problem ‘lies in discarding a label which gives rise to this sort of ambiguity [i.e., “manifest disadvantage”] . . . [and] adher[ing] more directly to the test outlined by Lindley LJ in Allcard v. Skinner’.81 The essence of that test relates to the pure explicability of the impugned transaction within the context of the parties’ relationship: whether it is ‘readily explicable by the relationship of the parties’.82 It is important to note that it is the explicability of the impugned transaction within the context of the parties’ relationship that matters. First, no transaction can be meaningfully explained separately from the context of the relationship in which it was executed.83 Second, the essence of undue influence is the defendant’s abuse of the relationship of influence. Indeed, the purpose of the presumption is to protect those who are vulnerable in the particular relationship of personal influence in which they find themselves. The importance of analysing the explicability of the transaction within the context of the parties’ relationship is that, although a relationship of personal influence provides scope for insidious abuse, it may also carry with it natural and laudable feelings of affection in the complainant towards the defendant. Just as it is appropriate to place a stricter duty on the defendant in his dealings with the complainant because of the powerful influence he possesses, so, too, it is appropriate to recognise the possibility of benign explanation provided by feelings of affection or trust within the parties’ relationship.84 Their Lordships in the Etridge case were aware of this potential conflict. As Lord Scott said, even [i]n cases where experience . . . had led a wife to doubt the wisdom of her husband’s financial or business decisions . . . I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple.85

A good illustration is provided by comparison of two Court of Appeal cases. In Re Coomber, a mother made a gratuitous transfer of a business to her son. Cozens-Hardy MR, with whom the rest of the court agreed, held that the gift could not be set aside for undue influence. He accepted that the complainant ‘was influenced in this transaction by affection for 81 82 83 84

85

[2001] UKHL 44; [2002] AC 773, 799–800. Ibid., 798, per Lord Nicholls. See also ibid., 854, per Lord Scott. Birks and Chin (1995), 83. P. Ridge, ‘Equitable Undue Influence and Wills’ (2004) 120 LQR 617, 628 (in relation to testamentary dispositions). [2001] UKHL 44; [2002] 2 AC 773, 842. See also ibid., 797, per Lord Nicholls.

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her son’.86 Nonetheless, despite the obvious personal influence, the gift ‘was the spontaneous fruit of [the complainant’s] generosity’.87 As Fletcher Moulton LJ said, she wished to benefit her son, to fulfil the strong affection she felt for him: and that wish of hers is not shewn to be brought about in any way by any – I will not say improper conduct of the son, but any – conduct which put any responsibility upon him in the matter.88

This was not a case where the mother’s feelings for the son prevented her from freely considering whether to make the transaction: they were the reason she made the transaction, but because she freely chose to fulfil them, not because they prevented her from properly considering the transaction. In Goodchild v. Bradbury, the court reached the contrary conclusion. The complainant had ‘every reason’ to make a generous gift to the defendant, because of his affection and gratitude towards the latter, but the particular gift was not explicable by proper motives within that relationship.89 The court must weigh the evidence in each case to determine whether it is more likely that the relationship provides a benign explanation for the transaction, because the complainant freely chose to fulfil natural and proper feelings of affection associated with the personal influence, or suggests that the personal influence prevented the complainant from making his own free decision.90 Proof of a relationship of personal influence proves something capable of impairing the complainant’s consent, but this does not, itself, suggest that any impairment was caused by the defendant’s unacceptable conduct. Therefore, equity requires proof of a second primary fact, proof of something suggesting that the complainant’s consent was impaired by the defendant’s unacceptable conduct. As such, one can see that, even in developing the protective presumption, undue influence is inherently guided by its underlying rationale, which perfectly fits my second category of vitiating factor.

86 89 90

87 88 [1911] 1 Ch 723, 725–6. Ibid., 727. Ibid., 729 (my italic). [2006] EWCA Civ 1868, at [20]. Compare Cre´dit Lyonnais v. Burch (1997) 29 HLR 513, 514, per Millett LJ (‘sexual or emotional tie[s] [might] at least make the transaction explicable’) and Barclays Bank v. O’Brien [1994] 1 AC 180, 190, HL, per Lord Browne-Wilkinson (‘sexual and emotional ties . . . provide a ready weapon for undue influence’). There is no conflict between these dicta; the contrast merely highlights the difficult factual balance.

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Rebutting the presumption The two classic statements regarding rebuttal of the presumption come from Allcard v. Skinner and Zamet v. Hyman. In the former case, Cotton LJ said that, when the presumption is raised: the Court sets aside the [impugned transaction], unless it is proved that in fact [it] was the spontaneous act of the [complainant] acting under circumstances which enabled him to exercise an independent will and which justifies the Court in holding that the [transaction] was the result of a free exercise of [his] will.91

In the latter, Lord Evershed MR said that, once the presumption is raised: the onus is cast upon those who support the [transaction] of establishing affirmatively that the [complainant] executed [it] not merely understanding its effect but as a result of full, free and informed thought about it.92

Both of these statements are phrased as if they are prerequisites for rebutting the presumption, rather than merely one particular method of rebuttal. Therefore, they suggest that the presumption can only be rebutted by showing that the complainant’s transactional consent was completely unimpaired. However, it must be recognised that it is exceptionally unlikely that transactional consent will ever be completely free. As such, just as mere proof of impaired consent is not sufficient for any of the general vitiating factors,93 so, too (and for the same reasons), proof of absolutely free consent cannot be required to rebut the presumption. To prove undue influence affirmatively, it must be shown that the complainant’s consent was impaired by the defendant’s abuse of influence, so it must be sufficient, to rebut the presumption, to show that this was not the case. Therefore, the presumption should be capable of being rebutted by showing either that the defendant did not abuse his influence or that the complainant’s consent was not impaired by any such abuse if one existed. It is submitted that it is an implicit element of the two tests for rebuttal cited above that proof of completely free consent means proof of consent completely free from any impairment by the influence itself, or at least free from any impairment by the defendant’s

91

(1887) 36 ChD 145, 171.

92

[1961] 1 WLR 1442, 1445.

93

See pp. 19–26, above.

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abuse of influence. However, it has been shown that disproof of any of the elements of actual undue influence must suffice to rebut the presumption, because actual and presumed undue influence are merely different evidential routes to proof of the same doctrine.94 The first prerequisite for raising the presumption requires the complainant to prove that the defendant had a personal influence over him, so the presumption cannot be rebutted by proof that the defendant did not have the capacity to influence the complainant: that which has been proved, rather than merely rebuttably presumed, cannot be disproved. Further, where the complainant relies upon proof that his relationship falls into a class in which it is presumed that the requisite personal influence exists, this presumption is irrebuttable.95 When the complainant’s feelings for the defendant render him more predisposed to do as he believes the defendant wishes in relation to the impugned transaction, this influence will be rendered operative whenever the defendant does anything suggesting to the complainant that he wants the impugned contract. Therefore, it is submitted that, whenever the defendant possessed a personal influence over the complainant, the mere fact that the defendant agreed to enter into what became the impugned transaction may be an exercise of influence, even when the whole instigation for the transaction genuinely came from the complainant’s desire to please the defendant. An acquiescence by the defendant is an indication that he wants the impugned transaction, so it will cause a personal influence to be operative.96 Only when the complainant was so determined to make the transaction even before the defendant did anything indicating that he wanted it, so that it can truly be said that the complainant’s mind was already made up, can it be said that the mere act of the defendant agreeing to enter into the impugned transaction was not an exercise of personal influence. Therefore, the nature of personal influence renders it unlikely, as a matter of fact, that one can disprove that the defendant exercised it. It is not clear whether a court would accept that the presumption was rebutted if it was merely proved that the defendant had not abused his influence, even though the influence did impair the complainant’s consent. Proof that the defendant did not abuse his influence should rebut 94 95 96

See pp. 253–8, above. RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 797, per Lord Nicholls. See, e.g., Goodchild v. Bradbury [2006] EWCA Civ 1868 (gift genuinely instigated by complainant, but set aside for undue influence nonetheless).

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the presumption,97 because the fact that he did (that his exercise of influence was undue) is a necessary element of the presumption. However, in Hammond v. Osborn, Nourse LJ said that, ‘[e]ven if it is correct to say that [the defendant’s] conduct was unimpeachable and that there was nothing sinister in it, that would be no answer to an application of the presumption’.98 If it is possible for there to be an abuse of influence when the defendant’s conduct is ‘unimpeachable and . . . there [is] nothing sinister in it’, this is unproblematic. However, it would beg the question, if this were so, of what amounts to an abuse of influence. The key to resolving this issue is to recognise that Nourse LJ was addressing whether the defendant’s conduct was, itself, unimpeachable, ignoring the fact that it was committed in relation to a complainant who was vulnerable because of the influence. If the defendant knows, or should know, that he possesses influence over the complainant, conduct that would not otherwise have been unacceptable (i.e., which is, itself, unimpeachable) may be rendered so because of its effect on the vulnerable complainant. Indeed, it has been argued that mere entrance into the impugned transaction with actual or constructive knowledge of the influence and the fact that it impaired the complainant’s consent is an abuse of influence.99 Sir Eric Sachs in Lloyds Bank v. Bundy said: As regards the second class of undue influence . . . [“abuse”] . . . means no more than that once the existence of a special relationship has been established, then any possible use of the relevant influence is, irrespective of the intentions of the persons possessing it, regarded in relation to the transaction under consideration as an abuse – unless and until the duty of fiduciary care has been shown to be fulfilled.100

Nonetheless, the defendant’s conduct itself may still be unimpeachable. Therefore, it is submitted that Hammond v. Osborn is not authority for the proposition that proof that the defendant did not abuse his influence is insufficient to rebut the presumption. Nourse LJ was saying that proof that the defendant’s conduct was, itself, unimpeachable will not suffice, and this is because such conduct may still, when assessed in the context of the parties’ relationship of influence, be an abuse. That this is the correct interpretation of Nourse LJ’s words is shown by the fact that he said that the ‘policy [of presumed undue influence] . . . 97

98 100

Bigwood (2003), 476–7; A. McKnight, ‘A Review of Developments in English Law during 2003: Part 2’ (2004) 19 JIBLR 151, 168. Cf. Birks and Chin (1995), 75–6. 99 [2002] EWCA Civ 885, at [32]. See pp. 258–9, above. [1975] QB 326, 343, CA.

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requires it to be affirmatively established that the [complainant’s] trust and confidence in the [defendant] has not been betrayed or abused’.101 This shows that proof that the defendant’s conduct was unimpeachable (which does not necessarily rebut the presumption) is different from disproof of an abuse of influence (which does rebut the presumption). It is submitted that the latter would require proof of an absence of even constructive knowledge of the consent-impairing effect of the influence (because, for the defendant to contract with constructive knowledge that the influence impaired the complainant’s consent amounts to an abuse of influence), and this, in turn, would require the defendant to prove either: (1) that he had no reason to suspect the existence of the influence; or (2) that he honestly and reasonably believed the complainant was emancipated from its effects. The former would be unlikely, given the pervasive nature of such an influence; the latter would normally require proof of independent advice for the complainant and be very closely related, if not identical, to proof that the complainant fully considered and understood all relevant facts, including the nature and consequences of the transaction, and freely chose to enter into it. This reflects the protective focus of undue influence, particularly presumed undue influence, where the personal influence renders the complainant exceptionally vulnerable. Proof that the undue exercise of influence did not bring about the transaction is proof that it did not impair the complainant’s consent. It has long been accepted that proof that the complainant’s consent was not impaired rebuts the presumption.102 Further, it must also suffice to rebut the presumption to prove that, although the complainant’s consent was impaired, this was not caused by the defendant’s undue exercise of influence. As the requisite standard is merely “a factor” causation,103 to rebut the presumption by disproving causation requires proof that the undue exercise of influence did not affect the complainant’s transactional decision at all.

11.1.6 Conclusion Undue influence is a clear example of my second category of vitiating factor: it renders the impugned contract voidable when the complainant 101

102

Hammond v. Osborn [2002] EWCA Civ 885, at [32] (my italic). See also Niersmans v. Pesticcio [2004] EWCA Civ 372, at [20], per Mummery LJ (the rest of the court agreed). 103 See pp. 269–70, above. See pp. 260–1, above.

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proves that his consent was impaired by both the influence the defendant possessed over him and the defendant’s undue (unacceptable) exercise of that influence. There are two evidential routes to proof of undue influence, but the House of Lords in the Etridge case firmly reiterated that there is only one vitiating factor of undue influence.104 Therefore, whether the complainant succeeds by use of the presumption or by affirmative proof, the exact same thing is, as a matter of law, established.105 The main practical significance of this is that it must be sufficient, in order to rebut the presumption, to prove an absence of any of the four elements required to establish undue influence by affirmative proof.106

11.2

The US Restatement (Second) of Contracts

} 177. When Undue Influence Makes a Contract Voidable (1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. (2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.

11.2.1

Introduction

Undue influence under the Restatement follows the classic scheme of undue influence in English law. That is to say, it requires proof that the complainant suffered from some vulnerability in his relationship with the defendant and that the defendant unacceptably exploited this vulnerability. Furthermore, it will be argued, first, that the two alternative vulnerabilities under the Restatement necessarily amount to a capacity in the defendant to influence the complainant; second, that the elements of unacceptable conduct in English law and under the Restatement are materially identical; and, third, that the Restatement requires proof that both the influence and the defendant’s unacceptable conduct impaired the complainant’s consent. All of these points represent a significant 104 105

E.g. [2001] UKHL 44; [2002] 2 AC 773, 797, per Lord Nicholls. 106 See pp. 253–5, above. See pp. 256, 269–72, above.

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similarity between the treatment of undue influence in English law and under the Restatement. One significant difference between the Restatement and English law, however, is the fact that, similarly to the three codes,107 the Restatement does not recognise the possibility of a presumption of undue influence, which could leave intensely vulnerable complainants without valuable evidential protection.

11.2.2

Influence/weakness

Undue influence in English law is a doctrine primarily concerned with protecting the vulnerable from exploitation. Although a complainant need not suffer from some general “weakness” or deficiency in bargaining power in order successfully to plead undue influence, he must prove that the defendant had influence over him, and this necessarily renders him vulnerable to the defendant.108 The Restatement takes a similar approach to English law in this regard, requiring the complainant to prove either that he is under the domination of the defendant or that the relationship between himself and the defendant is such that he justifiably trusts the latter not to ‘act in manner inconsistent with his welfare’.109 Therefore, the complainant will necessarily be vulnerable to the defendant, even if he would not be vulnerable when dealing with any other potential co-contractor. It is submitted that the essence of the requisite vulnerability under the Restatement is similar to, but narrower than, that required in English law. Whenever the complainant is under the domination of the defendant, the defendant must have the capacity to influence him. Indeed, dominance is an extreme form of influence. Furthermore, if the complainant justifiably trusts the defendant not to act in a manner inconsistent with his welfare, he will be likely to do as the defendant suggests in relation to any proposed transaction, believing that it will, at the least, not cause him any significant harm.110 As such, proof of one of the 107 110

108 109 See p. 308, below. See pp. 256–7, above. }177(1). Indeed, this is true whether the complainant’s belief is justified or not. However, requiring a justified belief that the defendant will not act in a manner inconsistent with the complainant’s welfare will help to restrict undue influence to cases where the defendant at least should know of the complainant’s vulnerability, and the defendant’s knowledge of the complainant’s weakness is relevant to assessment of whether his exercise of influence is unacceptable: see pp. 258–9, above.

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alternative forms of vulnerability under the Restatement will necessarily prove an influence that would be sufficient in English law. However, the fact that the defendant has influence over the complainant will not necessarily mean that he can dominate the complainant or that the complainant justifiably believes that he will not act in a manner inconsistent with the complainant’s welfare. For example, assume that A is infatuated with B, but knows that B does not return A’s feelings. It is possible that A’s infatuation will give B dominance over A, but this is not necessary. Moreover, A will not necessarily (indeed, not normally) be justified in believing that B will not act in a manner inconsistent with A’s welfare. It is contended that the preceding analysis shows, first, that the essential nature of undue influence as a doctrine to protect the vulnerable from exploitation is reflected both in English law and under the Restatement; and, second, that the different forms of vulnerability recognised under the Restatement are similar to, but narrower than, the requisite vulnerability in English law.

11.2.3

Unacceptable conduct

In English law, the essence of the element of unacceptable conduct in undue influence is an unacceptable use by the defendant of the influence he possesses over the complainant.111 Moreover, the nature of the relationship between the parties is vitally important in determining whether the defendant’s conduct actually amounts to an unacceptable use (undue exercise) of influence.112 It is submitted that the same is true of undue influence under the Restatement. Section 177 requires that the defendant engaged in ‘unfair persuasion’ of the complainant, who must either (1) be ‘under the domination of the [defendant]’, or (2) justifiably believe ‘that the [defendant] will not act in a manner inconsistent with his welfare’. It has already been argued that the concept of influence in English law is wider than, and necessarily includes, the relevant vulnerabilities under the Restatement. This means that, whenever the defendant dominates the complainant, or the complainant justifiably believes that the defendant will not harm him, the complainant is under the 111

112

See, e.g., RBS v. Etridge (No. 2) [2001] UKHL 44; [2002] 2 AC 773, 794, per Lord Nicholls (‘[t]he objective [of undue influence] is to ensure that the influence of one person over another is not abused’). See pp. 258–9, above.

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influence of the defendant.113 Moreover, and crucially for comparison of the elements of unacceptable conduct in English law and under the Restatement, the term ‘unfair persuasion’ clearly connotes an unacceptable/unconscionable exercise of this influence by the defendant:114 to persuade someone is surely to exercise an influence over that person; and to do so unfairly is surely to do so in an undue/unacceptable manner. Furthermore, Comment (a) to section 177 makes it clear that, ‘[i]n each case, it is a question of fact whether the relation [between the parties] is such as to give undue weight to the [defendant’s] attempts at persuasion’.115 This highlights the vital link under the Restatement between the nature of the parties’ relationship and determination of whether the defendant’s conduct is unacceptable.116 In English law, undue influence is a flexible doctrine, seeking to include all of the many potential forms of exploitation of a party subject to the influence of another,117 and the Restatement follows this same approach. Comment (b) to section 177 makes it clear that ‘any unfair persuasion on the part of the [defendant]’ will suffice and does not try to limit the relevant forms of unacceptable conduct by further refinement of definition.118 Additionally, the Comment notes that the essence of what makes the defendant’s exercise of influence undue, his persuasion unfair, is the effect it has on the complainant’s consent, stating that ‘[t]he ultimate question is whether the [impugned contract] was produced by means that seriously impaired the free and competent exercise of judgment’ by the complainant.119 This is fundamentally similar to Lord Nicholls’s statement in RBS v. Etridge (No. 2) that undue influence exists ‘whenever the [complainant’s] consent . . . ought not fairly to be treated as the expression of [his] free will’.120 Moreover, Comment (b) notes that issues such as substantive (im)balance, the presence or absence of advice and the degree of the complainant’s vulnerability are all factors to be taken into consideration when determining whether the defendant has engaged in unfair persuasion of the complainant,121 and these are all factors that are important to any plea of undue influence in English law.122

113 115 117 118 120 122

114 See pp. 274–5, above. As is required in English law: see pp. 258–60, above. 116 Restatement (Second), Volume I, 491. See pp. 258–60, above. E.g., Allcard v. Skinner (1887) 36 ChD 145, 183, per Lindley LJ. 119 Restatement (Second), Volume I, 491. Ibid. 121 [2001] UKHL 44; [2002] 2 AC 773, 795. Restatement (Second), Volume I, 491. See pp. 251–73, above.

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The preceding analysis shows that English law and the Restatement take a similar approach to the element of unacceptable conduct in undue influence, both in terms of the essential nature of the relevant conduct and in the key evidential factors relevant to proving it.

11.2.4

Impairment of consent

Section 177 of the Restatement requires proof that the defendant’s unfair persuasion of the vulnerable complainant induced the latter’s manifestation of assent. Therefore, it is clear that undue influence under the Restatement requires proof that the complainant’s consent was impaired. Furthermore, it is contended that, similarly to English law,123 it must be both the complainant’s vulnerability and the defendant’s unacceptable (unfair) conduct which impaired the complainant’s consent. Section 177(1) defines undue influence as ‘unfair persuasion’ of a complainant suffering from one of the requisite vulnerabilities, and it has been argued that each of the vulnerabilities amounts to a capacity in the defendant to influence the complainant.124 Section 177(2) then states that the impugned contract will be voidable if the complainant’s ‘manifestation of assent is induced by undue influence’ (i.e., by unfair persuasion of a complainant suffering from one of the relevant vulnerabilities). It is perfectly possible for the defendant to have a capacity to influence the complainant and engage in consent-impairing unfair persuasion which is not in any way related to this influence. For example, assume the complainant’s romantic feelings for the defendant give the latter the capacity to influence him. There are many subtle ways the defendant could (ab)use this influence to induce the complainant to make a contract. However, it is also perfectly possible that the defendant could secure the complainant’s contractual consent by threatening to murder him. This would clearly amount to unfair persuasion, but it would not be linked to the defendant’s influence over the complainant. Nonetheless, it is surely implicit in the very nature of undue influence that the complainant’s vulnerability must have had some effect on his decision to contract. Otherwise, it should not be relevant to vitiation of the impugned contract.125

123 125

124 See pp. 257–8, 260–1, above. See pp. 274–5, above. See pp. 305, 308 (in relation to unconscionability and undue influence under the codes), below.

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The Restatement does not specifically define the requisite standard of inducement in undue influence. Therefore, it is submitted that the standard must be the same as is required in relation to misrepresentation and duress: that is to say, the defendant’s unfair persuasion of the vulnerable complainant must have substantially contributed to the latter’s decision to contract.126 It has been argued that, in English law, the requirement of an exercise of influence necessitates merely that the influence was a factor in the complainant’s decision to contract;127 while the requirement that the defendant’s undue exercise of influence caused the transaction necessitates that the defendant’s unacceptable conduct was a factor in the complainant’s decision to contract.128 It is not clear precisely how the “substantial cause” standard is applied in relation to the different elements of influence and unacceptable conduct under the Restatement. For example, it could be that both the influence and the unacceptable conduct must have been a substantial cause; or it might be that, so long as each was at least a factor, they must amount to a substantial cause taken together. It is submitted that the lack of case law dealing with the causative standard of undue influence in US law, and the fact that the American Law Institute did not feel the need to clarify this matter, shows that this is not likely to be a practically significant issue. Nonetheless, it is contended that the English position of requiring merely “a factor” causation in relation to the influence should be adopted: if the influence was a factor in the complainant’s decision to contract, it was operative; and if the defendant then engaged in unacceptable conduct which impaired the complainant’s consent to the requisite degree (“a factor” causation in English law; “substantial cause” under the Restatement), a vulnerable complainant has been exploited and the law should recognise that the resultant contract is voidable. 126 127

See pp. 202–3, 209–10 (misrepresentation), 248 (duress), above. 128 See pp. 257–8, above. See pp. 260–1, above.

12 Unconscionability

12.1 English law 12.1.1

Introduction

The doctrine of unconscionability, or unconscionable bargains, developed from equity’s protection of expectant heirs in cases such as Chesterfield v. Janssen1 and Aylesford v. Morris,2 through the generalisation of the doctrine in Fry v. Lane,3 the modernisation of it in Cresswell v. Potter,4 and recognition of its continued vitality in cases such as Alec Lobb v. Total Oil,5 Cre´dit Lyonnais v. Burch,6 and Portman BS v. Dusangh.7 There remain many unresolved issues in English law’s treatment of unconscionability. It is well settled that the four main elements of the doctrine are: (1) weakness in the complainant; (2) unconscionable conduct by the defendant; (3) substantive unfairness; and (4) absence of advice for the complainant. However, the precise role of each element has not been authoritatively determined. In particular, there is disagreement as to what is, in truth, the most important factor in deciding whether relief will be available. Some, such as Chen-Wishart, argue that

Avoidance of extortionate salvage agreements and control of unfair terms are often said to be linked to unconscionability, because the substantive balance of an impugned contract or term is relevant to each doctrine: e.g., McKendrick (2010), 690. However, neither salvage agreements nor control of unfair terms will be addressed in depth. The former is not a general vitiating factor, applying only to certain types of agreements. Moreover, it has been argued that ‘legal toleration of rescue contracts can be explained on policy grounds alone’: Bigwood (2003), 195. The latter is largely under statutory control. Further, it will be shown that unconscionability in English law is ultimately concerned with procedural, not substantive, fairness: i.e., with the fairness of the procedure leading to the impugned contract, not the balance of the terms: e.g., Hart v. O’Connor [1985] AC 1000, 1017–18. Substantive unfairness is relevant only as evidence of procedural unfairness: see pp. 290–3, below. 1 2 3 (1751) 2 Ves Sen 125. (1873) 8 Ch App 484, CA. (1888) 40 ChD 312. 4 5 6 [1978] 1 WLR 255. [1985] 1 All ER 303, CA. (1997) 29 HLR 513, CA. 7 [2000] 2 All ER (Comm) 221, CA.

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substantive unfairness is the basis of relief.8 They argue that it will always be the central matter in any case of unconscionability, and even if the courts rationalise its evidential import in other ways, it is, in truth, the main reason for vitiation. Others argue that, despite the clear evidential relevance it has to establishment of a relevant weakness and/or unconscionable conduct, it is not a prerequisite for relief, which genuinely can and will be granted in the absence of substantive unfairness. For example, Capper accepts that the ‘doctrine of unconscionability . . . seems to be all about transactional imbalance’, but contends that substantive unfairness is a not a prerequisite, and that weakness in the complainant and unconscionable conduct by the defendant ‘are the true invalidating grounds’ of the doctrine.9 It will be argued below that substantive unfairness is not a prerequisite of the doctrine.10 However, one must not simply look to the professed position in the cases, but must determine whether it is realistically possible for relief to be available when the impugned contract is substantively fair.11 It has been stated in two Court of Appeal cases that absence of advice for the complainant is not a prerequisite for relief.12 Further, Lord Selborne LC noted that there was ‘good reason’ for dissenting from the view that an absence of advice was a prerequisite.13 However, in Cresswell v. Potter, Megarry J. recognised that the presence or absence of advice may be relevant to the relative strengths or weaknesses of the parties;14 and, in Portman BS v. Dusangh, Ward LJ recognised that it may be relevant to the presence or absence of unconscionable conduct.15 It is submitted that Capper is correct to assert that the two prerequisites are weakness and unconscionable conduct, and that substantive unfairness and absence of advice may be evidentially relevant to either or both of these requirements.16 One important gap in the doctrine is the failure properly to recognise a requirement of causation (i.e., impairment of the complainant’s 8

9 11 12

13 14 16

Chen-Wishart (2010), 393–4; M. Chen-Wishart, Unconscionable Bargains (Oxford University Press, 1989). 10 Capper (1998), 486. See pp. 290–3, below. S. Waddams, ‘Unconscionability in Contracts’ (1976) 39 MLR 369, 369–70. Alec Lobb v. Total Oil [1985] 1 All ER 303, 311, per Dillon LJ; Portman BS v. Dusangh [2000] 2 All ER (Comm) 221, 234, per Ward LJ. Aylesford v. Morris (1873) 8 Ch App 484, 491–2, CA. 15 [1978] 1 WLR 255, 258. [2000] 2 All ER (Comm) 221, 234. Capper (1998).

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consent). However, it will be submitted that this is an inherent part of unconscionability, that it has been overlooked precisely because it is an obvious, implicit requirement.17 If this is accepted, unconscionability clearly fits my second category of vitiating factor. For, it will mean that unconscionability renders a contract voidable because both the weakness and the unconscionable conduct impaired the complainant’s consent.18

12.1.2

The elements of unconscionability

Weakness In Portman BS v. Dusangh, Simon Brown LJ referred to weakness in the complainant as one ‘of the essential touchstones of an unconscionable bargain’.19 However, his Lordship said the same of substantive unfairness, and it will be argued that, if this means that substantive unfairness is a prerequisite for relief, it is wrong.20 Nonetheless, there has never been any suggestion that unconscionability can be successfully invoked without proof of a weakness in the complainant. It is an implicit assumption, based on years of authority, and the very genesis of the doctrine, that the complainant must prove he suffered from a weakness before he can succeed. In the expectant heir cases out of which the general doctrine flowed, it was accepted that the fact that the complainant was dealing with his expectancy rendered him vulnerable. Lord Selborne LC said of sales of reversions by expectant heirs that ‘power and influence are generally possessed, in every transaction of this kind, by those who trade upon the follies and vices of unprotected youth, inexperience, and moral imbecility’ of expectant heirs.21 However, despite his Lordship’s reference to the relevance of the complainant’s youth and inexperience, and Kay J.’s assertion in Fry v. Lane that the complainant’s youth was ‘an important circumstance’ in the expectant heir cases,22 this was not a necessary element of the requisite weakness. 17 18

19

20 22

See pp. 294–5, below. National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 461, HCA, per Mason J. [2000] 2 All ER (Comm) 221, 228. See also Fry v. Lane (1888) 40 ChD 312; Cresswell v. Potter [1978] 1 WLR 255; Capper (1998), 486. 21 See pp. 290–3, below. Aylesford v. Morris (1873) 8 Ch App 484, 491, CA. (1888) 40 ChD 312, 321.

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In Chesterfield v. Janssen, the complainant was 30.23 The court did not express any concluded opinion on the argument relating to unconscionability, because their Lordships held that the complainant had affirmed the transaction even if it were voidable. Nonetheless, the complainant’s lack of youth was clearly not a bar to relief. This is not because a weakness was not a prerequisite, but because the weakness that equity took to be inherent in expectants, although exacerbated by youth, was not dependent upon it. Normally, an expectant’s means would be meagre by comparison with the size of his expectancy. As Lord Selborne LC said in Aylesford v. Morris, equity was of the opinion that the temptation this provided placed the complainant ‘in fetters, without either the will or the power to take care of himself ’ and ‘that the ordinary effect of all the circumstances [of expectant heirs] . . . is to deliver over the prodigal helpless into the hands of those interested in taking advantage of his weakness’.24 Therefore, unconscionability naturally developed as a doctrine to protect the weak from exploitation.25 This was recognised by Kay J. in Fry v. Lane, where the judge sought to unite different threads of case law.26 He was of the opinion that the expectant heir cases such as Aylesford v. Morris27 did not differ in principle from cases such as Clark v. Malpas,28 where the property sold was in possession, but the complainants were poor and poorly educated. From his review of the case law, Kay J. concluded that the fact that the complainant suffered from some form of weakness was one of the unifying principles. However, he did not seek to formulate a principle of universal application, extending to all types of weaknesses. Instead, he merely noted that the principle extended to all ‘poor and ignorant’ complainants.29 This was also the approach taken by Megarry J. in Cresswell v. Potter. He recognised that it might seem, in the modern age, condescending to describe a complainant as poor and ignorant. The need to adapt the label could have been used as an opportunity to review this element of the doctrine, to show that unconscionability sought to protect against exploitation of the weak generally, rather than merely specific weaknesses. The judge did not seek to do this. He contented himself with 23 25

26 28

24 (1751) 2 Ves Sen 125. (1873) 8 Ch App 484, 492, CA. Chesterfield v. Janssen (1751) 2 Ves Sen 125, 157, per Lord Hardwicke LC; Bigwood (2003), 234. 27 (1888) 40 ChD 312. (1873) 8 Ch App 484, CA. 29 (1862) 4 De G F & J 401, CA. (1888) 40 ChD 312, 322.

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adopting terminology more acceptable in the modern climate, suggesting that ‘the word “poor” [should] be replaced by “a member of the lower income group” or the like, and the word “ignorant” by “less highly educated”’.30 McKendrick has rightly criticised this approach. He said that it seems unnecessary to elaborate on the meaning of ‘poor and ignorant’ . . . [as it should] . . . suffice that the [complainant] was in a weak and vulnerable position, whatever the cause of her weakness or disability.31

Unconscionability seeks to protect the weak from exploitation, and any condition or circumstance capable of impairing one’s ability to look after one’s interests is something capable of being exploited. Indeed, it is submitted that the appropriate definition of a relevant weakness is ‘an appreciably impaired ability to look after one’s interests’. This is a wide definition, but there is no reason that equity should offer protection only to certain types of weaknesses. The High Court of Australia in Blomley v. Ryan treated a relevant weakness as an impaired ability in the complainant to look after his own interests. McTiernan J. said ‘[t]he essence of [relevant] weakness is that the [complainant] is unable to judge for himself ’.32 Kitto J. said that the doctrine of unconscionability applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests.33

Furthermore, the reason his Honour dissented from the conclusion that unconscionability had been successfully established was that the complainant ‘was quite capable of judging his interests and dealing with [the defendants] on equal terms’.34 None of the members of the court sought to place limits on the types of weaknesses that could be relevant. Similarly, in National Commercial Bank of Australia v. Amadio, Mason J. said that ‘the disabling condition or circumstance [must be] one which seriously affects the ability of the innocent party to make a judgment as to his own best interests’.35 30 31

32 34

[1978] 1 WLR 255, 257. E. McKendrick, Contract Law: Text, Cases and Materials (2nd edn, Oxford University Press, 2006), 802. The point does not appear in the third or fourth editions. 33 (1956) 99 CLR 362, 392. See also ibid., 385, 397, 399. Ibid., 415 (my italic). 35 Ibid., 429. (1983) 151 CLR 447, 462, HCA (my italic).

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English law has not yet followed this approach by adopting a universal definition of relevant weakness. It was said by Browne-Wilkinson J. in Multiservice Bookbinding v. Marden that, although [t]he classic example of an unconscionable bargain is where advantage has been taken of a young, inexperienced or ignorant person . . . the categories of unconscionable bargains are [not] limited.36

Yet, the tendency of English law has been to seek to fit relevant weaknesses into the category of poverty and ignorance. Indeed, the Privy Council in Boustany v. Pigott suggested that an elderly lady who owned significant commercial properties could nonetheless be described as ‘poor’, because of the importance to her of getting a steady and regular income from these properties.37 It is submitted that, if a complainant suffered from a weakness that could not properly be described as poverty or ignorance, English law would not reject the plea of unconscionability on this basis: any appreciable impairment of the complainant’s ability to look after his own interests is relevant.38 To recognise expressly that poverty and ignorance are merely examples of relevant types of weaknesses would allow for this without the sort of almost absurd straining of definition that occurred in Boustany v. Pigott. Indeed, the relevance of poverty and ignorance in the early cases was that they impaired the complainant’s ability to look after his own interests. A poor complainant was in need of ready money, so was less able to resist the temptation of selling an asset for ready cash, even at an undervalue. An ignorant complainant was less able to judge what was in his best interests or to understand the impugned contract, so there was scope for him to be exploited. Buxton LJ in Irvani v. Irvani assumed that intoxication could be a relevant weakness.39 Intoxication can lead to a mental impairment that could be described as ignorance, but it is artificial to make this stretch. What matters is the appreciably impaired ability in the complainant to look after his own interests in relation to the impugned contract. Wherever this exists, there exists significant scope for abuse/exploitation.

36

37 39

[1979] [1985] (1995) [2000]

Ch 84, 110. See also Alec Lobb v. Total Oil [1983] 1 All ER 944, 961; affirmed 1 All ER 303, CA. 38 69 P & CR 298, 302. Chitty (2008), 664. 1 Lloyd’s Rep. 412, 425.

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Unconscionable conduct Unconscionable conduct by the defendant is the element of unacceptable conduct in unconscionability, and it is undoubtedly a prerequisite of the doctrine.40 The authorities asserting the need for unconscionable conduct were highlighted by the Privy Council in Boustany v. Pigott, where their Lordships accepted five submissions of counsel for the defendant,41 all of which related to the need for proof of unconscionable conduct by the defendant. The submissions are drawn from two first instance decisions,42 one Court of Appeal case,43 one Privy Council appeal from New Zealand,44 and one decision of the High Court of Australia.45 Despite its connotations, ‘unconscionable’ cannot require subjectively unacceptable conduct: that is, conduct which the defendant thinks is unacceptable. If it did, morally lax defendants would be treated more favourably. It is submitted that the term refers to an objective standard, an objective conception of conscience, but the defendant’s bona or mala fides is relevant.46 In some cases, whether conduct is unconscionable is obvious: for example, threats of murder. However, in many cases, the assessment is difficult, and the term ‘unconscionable’ itself provides little illumination. For, when used without elaboration as a qualitative assessment of conduct, it is vague.47 This might suggest that unconscionability is a vague doctrine, but it is submitted that, when conduct is not itself unconscionable, the other three elements of the doctrine, and the state of the defendant’s knowledge in relation to them, provide important clarity for the assessment.48

40

41 42

43 44 45 46

47

48

E.g., Multiservice Bookbinding v. Marden [1979] Ch 84; Alec Lobb v. Total Oil [1985] 1 All ER 303, CA; Boustany v. Pigott (1995) 69 P & CR 298, PC. (1995) 69 P & CR 298, 303. Multiservice Bookbinding v. Marden [1979] Ch 84, 110 and Alec Lobb v. Total Oil [1983] 1 All ER 944, 961; affirmed [1985] 1 All ER 303, CA. Alec Lobb v. Total Oil [1985] 1 All ER 303, 312. Hart v. O’Connor [1985] AC 1000, 1027–8. National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 462–3. Bigwood (2003), 512 (accepting this is the substance of relevant unacceptable conduct, but arguing that ‘unconscionable’ is an inappropriate, inherently subjective, label). J. Beatson and G. Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR, 352, 354. B. Kremer, ‘Restitution and Unconscientiousness: Another View’ (2003) 119 LQR 188, 190–1 (‘“unconscientious” . . . is informed by the interests . . . equity is seeking to protect’). See also Mason, Sir Anthony, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 LQR 66, 89.

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It is submitted that the defendant’s knowledge of the complainant’s weakness is the most important factor in this regard. It is accepted that, even when the defendant has knowledge of the complainant’s weakness, he has no duty to protect the latter per se. However, unconscionability is, similarly to undue influence, concerned with protecting the weak from exploitation. It is, therefore, submitted that, whenever the defendant has actual or constructive knowledge of the complainant’s weakness and makes the impugned contract with actual or constructive knowledge that the weakness impairs the complainant’s consent, this amounts to unconscionable conduct, an exploitation of a weak complainant.49 Such a rule does not place too great a duty on the defendant, because his conduct is rendered unconscionable by the weakness only when he has at least constructive knowledge of both it and the fact that it impairs the complainant’s consent. Failure to recognise that this amounts to unconscionable conduct would mean that no effective protection from exploitation is offered to weak complainants.50 Judges and commentators both recognise that the complainant’s weakness is relevant to determining whether the defendant’s conduct is unconscionable. In the Amadio case, Mason J. said that, if the defendant has actual or constructive knowledge ‘that [the complainant] cannot make a judgment as to what is in his own interests . . . [and enters] into [the impugned] transaction, his conduct . . . is unconscionable’.51 This might seem to suggest that mere knowledge of the weakness is sufficient. However, the requirement that the complainant cannot judge what is in his best interests necessitates that the weakness is operative (i.e., that it actually impaired the complainant’s consent). Haley notes that ‘what is unconscionable in relation to a poor and ignorant [complainant] may be regarded as conscionable in the context of a wealthy and intelligent [complainant]’.52 As a general rule, each party must determine whether he wants advice. Even if the defendant knows, or should know, that the complainant cannot properly understand the impugned contract without advice, he has no duty, per se, to ensure that the complainant receives advice, or to refuse to contract if he does not. However, if the complainant requires advice to be able to make an informed, sufficiently unimpaired 49 50 51 52

National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 467, per Mason J. See also pp. 258–9, above (the same principle applies in undue influence). (1983) 151 CLR 447, 467, HCA (my italic). M. Haley, ‘Sureties, Banks and the Family Home’ (1997) 9 CFam 173, 177. See also H. Tijo, ‘O’Brien and Unconscionability’ (1997) 113 LQR 10, 14.

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contractual decision, this is a relevant weakness: the complainant’s ability to look after his own interests is appreciably impaired.53 Therefore, the defendant’s actual or constructive knowledge of the complainant’s need for advice is actual or constructive knowledge of the weakness. Consequently, if the defendant contracts with actual or constructive knowledge of the absence of advice in such circumstances, he will have actual or constructive knowledge that the complainant’s weakness impaired his consent, so his conduct is unconscionable.54 In Portman BS v. Dusangh, Ward LJ said ‘that the absence of . . . advice is . . . a powerful factor confirming the suspicion of nefarious dealing which the presence of advice would serve to dispel’.55 In Cresswell v. Potter, Megarry J. said that ‘[t]he more usual it is to have a solicitor, the more striking will be his absence, and the more closely will the courts scrutinise what was done’.56 This applies to any type of advice: the more usual it is for the complainant to have advice, the more likely it is that the defendant has actual or constructive knowledge that the complainant cannot make a sufficiently unimpaired decision without it, and thus the more likely it is that entering into the contract with actual or constructive knowledge of the absence of advice establishes that the defendant knows, or should know, that the complainant’s consent is impaired by his weakness, thereby making the defendant’s entrance into the contract unconscionable.57 It is submitted that substantive unfairness is not a sufficient reason for vitiation, even when coupled with the complainant’s weakness: everyone must be free to burden themselves with obligations outweighing the benefits they receive.58 Nor should it be a necessary element of any of the general vitiating factors. If the complainant’s consent was impaired by unacceptable conduct (or is absent and there is an additional factor rendering the absence of consent operative), the fact of substantive fairness should not matter. However, the presence of substantive unfairness, even when the defendant had no reason to suspect it, may be evidence that the complainant suffered from a weakness and/or that the defendant engaged in unacceptable conduct impairing the

53

54 56

Cresswell v. Potter [1978] 1 WLR 255, 258 (complainant’s ignorance of impugned property transactions relevant to her weakness; no suggestion that defendant understood them better, but he had advice and was not said to suffer any weakness). See also p. 293, below. 55 See p. 286, above. [2000] 2 All ER (Comm) 221, 234. 57 58 [1978] 1 WLR 255, 258. See pp. 286, 287, above. Bigwood (2003), 64, 160.

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complainant’s consent. A complainant whose consent has not been impaired, either by his weakness or the defendant’s unacceptable conduct, is generally unlikely to make a substantively unfair contract. It is possible that he may do so, but those who are capable of looking after their own interests and are not unacceptably pressured into contracting normally seek to extract for themselves the best deal they can get. Indeed, for this reason, if the defendant has actual or constructive knowledge of the substantive unfairness, he will often have at least constructive knowledge of the complainant’s weakness and the fact that it impaired his consent. The role of substantive unfairness as evidence of unconscionable conduct was recognised by Peter Millett QC, sitting as a deputy judge in the High Court, in the first instance decision of Alec Lobb v. Total Oil.59 Its evidential relevance to both weakness and unconscionable conduct has been noted by Capper.60 Unconscionability can consist of active unconscionable conduct or what Capper calls unconscionable ‘passive receipt’.61 The latter concept was recognised by the Privy Council in Hart v. O’Connor.62 It exists where the defendant’s mere entrance into the impugned contract amounts, in appropriate circumstances, to unconscionable conduct, even if he did nothing to bring about these circumstances. It is submitted that, in the context of unconscionability, it is the other three elements of the doctrine, their effect on the complainant’s consent, and the defendant’s state of knowledge with regard to these matters, which are the most important circumstances to consider, just as they are in determining whether the defendant’s conduct amounts to active unconscionable conduct. Mason J. recognised this in the Amadio case. His Honour said: In deciding whether the [defendant] took unconscientious advantage of the position of disadvantage in which the [complainants] were placed, we must ask, first, what knowledge did [he] have of [their] situation?63

He then found that the defendant had at least constructive knowledge of the complainants’ weakness, the absence of independent advice, and the substantive unfairness of the contract64 and said: In these circumstances it is inconceivable that the possibility did not occur to [the defendant] that the [complainants’] entry into the

59 61

60 [1983] 1 All ER 944, 961; affirmed [1985] 1 All ER 303, CA. Capper (1998), 486. 62 63 64 Ibid. [1985] AC 1000, 1024. (1983) 151 CLR 447, 466, HCA. Ibid.

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transaction was due to their inability to make a judgment as to what was in their best interests.65

In other words, his Honour treated the defendant’s knowledge of: (1) the substantive unfairness; (2) the absence of advice; and (3) the complainants’ weakness as establishing that he must have had at least constructive knowledge of the fact that the complainants’ weakness actually impaired their consent, and held that for the defendant to contract with such knowledge amounted to unconscionable conduct. Phang argues that the Amadio case required knowledge of the weakness,66 but this is not so. The High Court of Australia treated it as a vital factor in establishing unconscionable conduct but did not treat it as necessary. Indeed, no case expressly requires knowledge of the weakness. Many cases refer to a requirement of ‘unconscientious or extortionate abuse of power’67 or ‘unconscientious advantage . . . taken of [the complainant’s] disabling condition or circumstances’.68 This might suggest that relevant unconscionable conduct must be a knowing abuse of weakness.69 However, it does not compel this conclusion, because conduct can exploit a weakness and be unconscientious even if the defendant has no knowledge of the weakness: for example, if, unknown to the defendant, the complainant cannot understand the impugned transaction and the defendant exacerbates this by a fraudulent misrepresentation. The fact that the defendant knows, or should know, of the complainant’s weakness is important in assessing whether his conduct is unconscionable. Indeed, it might be the clinching factor in a given case, rendering otherwise unimpeachable conduct unconscionable.70 Also, the complainant’s weakness cannot be a factor in favour of the defendant’s conduct being unconscionable unless the latter has actual or constructive knowledge of it. However, conduct can be unconscionable if the complainant is not weak, so it can clearly be unconscionable if the defendant has no knowledge of the complainant’s weakness. For example, it is submitted that conduct amounting to duress or misrepresentation

65 66 67 68

69 70

Ibid., 466–7. A. Phang, ‘The Uses of Unconscionability’ (1995) 111 LQR 559, 560. Boustany v. Pigott (1995) 69 P & CR 298, PC. National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 463, HCA, per Mason J. Bigwood (2003), 261. See pp. 258–9, 270–2 (undue influence), 286 (unconscionability), above.

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is unconscionable, and no weakness is required in these doctrines. Further, the availability of relief under a different vitiating factor is no reason to deny relief for unconscionability, or any vitiating factor. Additionally, if the complainant’s weakness impaired his consent and the defendant engaged in unconscionable conduct further impairing his consent, it should not matter that the defendant had no knowledge of, so did not consciously exploit, the complainant’s weakness. Contract law, and particularly unconscionability, must protect weak complainants from such exploitation. Therefore, knowledge of the weakness should not be required in unconscionability.71 No case has granted relief without knowledge of the weakness, but neither has any case (1) denied relief because of an absence of knowledge or (2) expressly required knowledge.

Substantive unfairness Capper accepts that ‘unconscionability . . . seems to be all about transactional imbalance’.72 Similarly, Chen-Wishart argues that substantive unfairness is the best explanation of the basis of relief under the unconscionability doctrine.73 However, Chen-Wishart contends that substantive unfairness is a prerequisite for relief;74 whereas Capper contends that it is not.75 The reason for this difference of opinion is the fact that substantive unfairness has a large evidentiary role, potentially providing evidence of the complainant’s weakness and the defendant’s unconscionable conduct, the two prerequisites of the doctrine.76 Furthermore, when the defendant has actual or constructive knowledge of the substantive unfairness, it may in a given case be the clinching piece of evidence in determining whether the defendant’s entry into the impugned contract amounts to unconscionable passive receipt. Therefore, there might be a case where relief would not be granted if the impugned contract were substantively fair, but is granted when it is substantively unfair. This, however, does not mean that substantive unfairness is a prerequisite of the doctrine. It could simply reflect that, as a matter of evidence in a

71 73 74

75 76

72 Cf. Bigwood (2003), 249–50. Capper (1998), 486. Chen-Wishart (2010), 393–4. Ibid. See also Beatson (2002), 276, 297; Chitty (2008), 663 (doubtful English law would grant relief for unconscionability in the absence of substantive unfairness). Capper (1998), 486. See also O’Sullivan and Hilliard (2008), 292. Blomley v. Ryan (1956) 99 CLR 362, 405, HCA, per Fullager J. See also National Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 475, HCA, per Deane J.

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particular case, the court would not accept that it had been proved that the complainant was weak, that the defendant had acted unconscionably, or either, when the impugned contract was substantively fair. Nonetheless, substantive (un)fairness would be the evidential key to the doctrine in such cases. The significance of substantive unfairness to weakness and unconscionable conduct actually strengthens, rather than weakens, the argument that the underlying rationale of vitiation is impairment of the complainant’s consent by the defendant’s unconscionable conduct. For, even if substantive unfairness is, thus, the evidential basis of the doctrine, this is because of the evidence it provides of impaired consent and unacceptable conduct.77 It is contended that substantive unfairness is not a legal prerequisite for relief. However, it is accepted that, if it is sufficiently factually unlikely that unconscionability can be established without substantive unfairness, this can be said to be the key to (and, arguably, the basis of) the doctrine, and a de facto prerequisite. Capper notes that, in some cases in which unconscionability was established, the substantive imbalance seemed minor.78 However, no case has granted relief for unconscionability without substantive unfairness. It is natural that it will be rare for a substantively fair contract to be set aside, and all the more so in the second category of vitiating factor, where the doctrines all require that the defendant engaged in some form of unacceptable conduct that impaired the complainant’s consent. Lord Nicholls noted this fact in the Etridge case, in relation to undue influence.79 First, a complainant is less likely to seek to avoid a substantively fair, than a substantively unfair, contract.80 Second, if a defendant procured the complainant’s consent by unacceptable means, there is a good chance that he extracted an extremely beneficial contract for himself. Again, this is merely a general, rather than an absolute, rule. Neither principle is sufficient to justify treating substantive unfairness as a prerequisite. It is submitted that the impression that substantive unfairness is a prerequisite of unconscionability was created by the factual and historical development of the doctrine. First, the expectant heir cases always involved substantive unfairness, even after enactment of legislation 77

78 80

Bigwood (2003), 270–2; Cf. M. Chen-Wishart, ‘The O’Brien Principle and Substantive Unfairness’ (1997) 56 CLJ 60, 70. 79 Capper (1998), 490–1. [2001] UKHL 44; [2002] 2 AC 773, 796. Bigwood (2003), 456.

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precluding the setting aside of sales of reversions on the sole ground of undervalue.81 Second, the necessary unconscionable conduct could be inferred from the presence of substantive unfairness, weakness and absence of advice.82 Third, it was accepted that the mere fact that the complainant was an expectant heir rendered him weak.83 Finally, whether the complainant received advice can usually be easily determined. Therefore, often, the only substantial issue to be argued was the substantive balance of the transaction. Nonetheless, even those cases seeming to require substantive unfairness did not do so. They treated substantive unfairness as an element of circumstances sufficient to establish unconscionability, but did not suggest that it was a necessary element. For example, in his classic statement in Fry v. Lane, Kay J. said that ‘where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of Equity will set aside the transaction’.84 Therefore, it is submitted that Megarry J. in Cresswell v. Potter was wrong to label these elements ‘requirements’.85 Indeed, he did not actually treat them as requirements, because he made it clear he was ‘not . . . suggesting that these are the only circumstances which will suffice’.86 Furthermore, a strong analogy can be drawn between unconscionability and undue influence. The links between these doctrines have been partly addressed above, where it was noted that both are concerned with protecting the weak from exploitation.87 Additionally, the relevant exploitation is very similar. Indeed, the Court of Appeal in BCCI v. Aboody treated the word ‘unconscionable’ as synonymous with ‘undue’.88 Also, it has been shown that, whenever the defendant knows, or should know, of the complainant’s weakness and contracts with actual or constructive knowledge that it impaired the complainant’s consent, this is unacceptable conduct for both vitiating factors.89 Although undue

81 82 83 84

85 86

87 88 89

See Aylesford v. Morris (1873) 8 Ch App 484, 490, CA. Fry v. Lane (1888) 40 ChD 312, 322. Aylesford v. Morris (1873) 8 Ch App 484, 491, 492, CA. (1888) 40 ChD 312, 322. See also the dicta of Lord Denning MR in Lloyds Bank v. Bundy [1975] QB 326, 337. [1978] 1 WLR 255, 257. Ibid. See also D. Capper, ‘Unconscionable Bargains and Unconscionable Gifts’ (1996) 60 Conv. 308, 309. See pp. 251 (undue influence), 282, 286 (unconscionability), above. [1990] 1 QB 923, 969. See pp. 258–9 (undue influence), 286 (unconscionability), above.

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influence requires that the defendant’s conduct caused the weakness to become operative (an exercise of influence), this does not affect the substance of relevant unacceptable conduct. Furthermore, the justification given by Lord Browne-Wilkinson in CIBC v. Pitt for not requiring proof of substantive unfairness before a complainant could affirmatively prove undue influence was that undue influence is a species of fraud [and] [l]ike any other victim of fraud, a person . . . induced by undue influence to carry out a transaction . . . he did not freely and knowingly enter into is entitled to have that transaction set aside as of right.90

Unconscionability is likewise a species of equitable fraud.91 Furthermore, the House of Lords in the Etridge case recognised that proof of substantive unfairness is not a prerequisite even for raising the presumption of undue influence.92 Given these similarities, if substantive unfairness is not required in undue influence, it should not be required in unconscionability. In Australia, there is direct authority that it is not required,93 and no English case has denied relief because of an absence of substantive unfairness.

Absence of advice Absence of advice for the complainant is not required in unconscionability94 but may be evidentially relevant in one or both of two ways.95 First, it might be relevant to whether the complainant suffers from a weakness,96 because he may be personally incapable of properly understanding the impugned contract, but would be able to with appropriate advice.97 For example, in Cresswell v. Potter, there was no suggestion that the defendant had any better personal understanding of the impugned property transactions, but he had competent professional advice, whereas the complainant had none. The court held that the complainant suffered from a relevant weakness but did not suggest that the defendant did.98 90 91

92 93 94

95 96

97

[1994] 1 AC 200, 209, HL. Chesterfield v. Janssen (1751) 2 Ves Sen 125; Aylesford v. Morris (1873) 8 Ch App 484, CA; Fry v. Lane (1888) 40 ChD 312. [2001] UKHL 44; [2002] 2 AC 773, 799–800, 845, per Lords Nicholls and Scott. Blomley v. Ryan (1956) 99 CLR 362, 405, HCA, per Fullager J. Alec Lobb v. Total Oil [1985] 1 All ER 303, 311, per Dillon LJ; Portman BS v. Dusangh [2000] 2 All ER (Comm) 221, 234, per Ward LJ; Chitty (2008), 666. Capper (1998), 496. Blomley v. Ryan (1956) 99 CLR 362, 405, HCA, per Fullager J; Bridgewater v. Leahy (1998) 194 CLR 457, 470–1, HCA, per Gleeson CJ and Callinan J. 98 See pp. 286–7, above. [1978] 1 WLR 255.

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Second, absence of advice might be relevant to unconscionable conduct.99 If the defendant knows, or should know, that the complainant cannot make a sufficiently free and informed decision without advice and contracts with actual or constructive knowledge that the complainant does not have that advice, this amounts to at least constructive knowledge that the complainant suffered from a weakness which impaired his consent;100 and for the defendant to contract in such circumstances amounts to unconscionable conduct.101

Impairment of consent: causation There is no clear statement in English law of the need for causation in unconscionability, as there is in misrepresentation, duress and undue influence. However, it is submitted that this is not indicative of the fact that impairment of consent is not required. Unconscionable conduct not connected to the impugned contract must be irrelevant to vitiation, and the only appropriate connection is causation in the complainant’s decision-making process: that is, impairment of the complainant’s consent. Nonetheless, the failure properly to address causation leads to uncertainty as to the burden of proof and requisite standard for this element of unconscionability. Furthermore, causation should be required for the complainant’s weakness. The basis of the second category of vitiating factor is that the complainant’s consent was impaired by unacceptable conduct. This applies to unconscionability, even though it is a doctrine protecting the weak from exploitation. Therefore, one might think that proof of a weakness and of unconscionable conduct that impaired the complainant’s consent should suffice. However, if the complainant suffered from a weakness which did not impair his consent, he was not, in relation to the impugned contract, actually weak, so it would be inappropriate for unconscionability to apply. McTiernan J. said in Blomley v. Ryan that [t]he essence of the fraud thereby charged [by the complainant’s plea of unconscionability] is that advantage was taken of weakness, ignorance and other disabilities on the side of the [complainant] and the contract was derived from such behaviour.102

99 100 102

Portman BS v. Dusangh [2000] 2 All ER (Comm) 221, 234, per Ward LJ. 101 See pp. 286–7, above. See pp. 286, above. (1956) 99 CLR 362, 385, HCA (my italic).

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It is contended that one cannot be said to take advantage of another’s weakness if that weakness is not operative. Moreover, the judge concluded from the evidence that ‘by [their] unconscientious behaviour [the defendants] procured the purchase of the property at a great undervalue’.103 Further, the complainant had, a few weeks prior to conclusion of the impugned contract, refused to sell at the price the defendants eventually extracted from him. The defendants plied the complainant with rum during the negotiations at which they secured that price. This was part of what made the defendants’ conduct unconscionable, and part of the complainant’s weakness was his drunkenness. Therefore, it seems undeniable that both the weakness and the defendants’ unconscionable conduct impaired the complainant’s consent. In the Amadio case, Mason J. said that, in unconscionability, the complainant’s decision to contract, ‘is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position’.104 This clearly relates to the causative effect of the weakness and unconscionable conduct. When the unconscionable conduct is passive receipt, it consists merely of the defendant’s entrance into the impugned contract, and this, as opposed to his indicating that he wants the contract prior to the complainant deciding to enter into it, cannot impair the complainant’s consent. However, this is not a reason to reject unconscionable passive receipt. For, the essence of unconscionable passive receipt is the fact that the defendant’s state of knowledge of the surrounding circumstances means that his entrance into the contract is an exploitation of the complainant’s weakness (and thus amounts to unconscionable conduct), and that weakness must still have impaired the complainant’s consent. As for the appropriate standard of impairment of consent, it is submitted that the analogy with undue influence again provides guidance. In undue influence, the requirement of an exercise of influence necessitates that the influence (the weakness) was a factor in the complainant’s decision-making process, leading him towards contracting,105 and the requirement that the undue exercise of influence (the unconscionable conduct) brought about the impugned contract sets the same standard.106 It is submitted that this low standard is appropriate for both undue influence and unconscionability, because they are doctrines concerned with protecting the weak from exploitation. 103 106

104 105 Ibid., 392. (1983) 151 CLR 447, 461, HCA. See pp. 257–8, above. UCB v. Williams [2002] EWCA Civ 555. See also pp. 260–1, above.

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12.1.3 Conclusion Despite its long history, unconscionability is relatively underdeveloped in English law. Its four main elements are established by a long line of authority, but the specific role of each has not been authoritatively determined. Unconscionability is more developed in Australia, and English law should look to that jurisdiction as it develops the doctrine. It is submitted that the two prerequisites of unconscionability are the complainant’s weakness and the defendant’s unconscionable conduct, and each of these elements must have impaired the complainant’s consent. Absence of advice and substantive unfairness are evidentially relevant to the two prerequisites.107

12.2

The US Restatement (Second) of Contracts

} 208. Unconscionable Contract or Term If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

I will not engage in an in-depth analysis of unconscionability under the Restatement. Indeed, the Restatement does not have an equivalent to the vitiating factor of unconscionability in English law. Section 208 is entitled ‘Unconscionable Contract or Terms’ and there are some similarities between this section and unconscionability in English law. However, it is clear that “unconscionability” under the Restatement is not actually a vitiating factor per se. Section 208 gives the court the power to refuse to enforce an unconscionable term or contract, and Comment (g) recognises that, in certain circumstances, the court can refuse to enforce a wholly executory contract, denying both specific performance and damages.108 In such cases, the effect of section 208 will be similar to vitiation. Furthermore, the Comments to section 208 clearly recognise that the existence of any ‘weakness in the bargaining process’109 will be relevant to a plea of “unconscionability”. Comment (d) confirms that both 107 109

See Capper (1998). E.g., ibid., 108, 109.

108

Restatement (Second), Volume II, 111.

us restatement (second) of contracts

297

weakness in the complainant110 and unacceptable conduct by the defendant111 would fall under this head. It has been argued that these elements are the true prerequisites of unconscionability in English law. Therefore, it can be seen that there are important links between the two forms of unconscionability. Nonetheless, the differences outweigh the similarities and, when this is coupled with the fact that “unconscionability” under the Restatement is not actually a vitiating factor at all, it is submitted that a full comparison would be of little value. In particular, it is clear that extreme substantive imbalance can be sufficient, in its own right, to establish “unconscionability” under the Restatement.112 It is submitted that, no matter how much one might argue that substantive unfairness is the essence of the law’s concern in the doctrine of unconscionability in English law, it has never been the case that mere proof of substantive imbalance, no matter how extreme, could be sufficient to invoke the doctrine.113 Indeed, it is contended that, in English law generally, and unconscionability specifically, substantive imbalance is mainly relevant as potentially providing evidence of weakness in the complainant and/or unacceptable conduct by the defendant; whereas it is the primary and direct focus of section 208. It is interesting to note the importance that section 208 places on substantive (im)balance, because it has been noted that the treatment of incapacity, mistake and duress under the Restatement reflects a general policy in US law to promote substantively balanced, and discourage substantively imbalanced, contracts. For example, if a fully or partly executed contract otherwise voidable for mental incapacity (not caused by intoxication) was made on fair terms, it cannot be avoided (to the extent that it has been performed) unless the defendant has actual or constructive knowledge of the incapacity;114 whereas, if it is substantively imbalanced (not made on fair terms), an absence knowledge of the incapacity is no defence.115 Furthermore, a contract is not voidable for mistake under the Restatement unless the mistake had ‘a material effect on the agreed exchange of performances’.116 Finally, the Restatement 110

111 112

113 116

Ibid., 109 (referring to ‘inequality of bargaining power’ and an inability in the weaker party ‘reasonably to protect his interests by reason of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement’). Ibid. (referring to ‘deception or compulsion’). Ibid., 108. Although, Comment (c) does recognise that it will be rare that mere proof of substantive imbalance will be sufficient. 114 115 See pp. 290–3, above. }15(2). }15(1). }}152 (‘common’ or ‘shared’ mistake) and 153 (‘unilateral’ mistake).

298

unconscionability

adopts a bifurcated approach to proof of unacceptable conduct in duress: certain conduct is unacceptable regardless of the substantive (im)balance of the impugned contract; whereas other conduct is unacceptable only if the impugned contract is ‘not on fair terms’.117 It is contended that none of the general vitiating factors should require proof of substantive unfairness118 before they can be invoked; nor should proof of substantive unfairness be sufficient to render either an absence or impairment of consent operative. If the complainant has proven an absence of consent and a sufficient reason to render this operative, or that his consent was impaired by the defendant’s unacceptable conduct, this should be sufficient, even if the putative/impugned contract is substantively balanced. Conversely, if the complainant cannot prove one of the three established additional factors to render his absence of consent operative, or prove that his consent was impaired by the defendant’s unacceptable conduct, he should not be entitled to vitiate the putative/impugned contract. However, first, there is no doubt that substantive unfairness is a likely consequence, and evidentially relevant to proof, of the general vitiating factors. Moreover, if any legal system wishes to promote substantively balanced contracts in their own right (whether because of the potential connection substantive (im) balance has to weakness in the complainant, impairment of consent and unacceptable conduct, or for any other reason), this is a legitimate policy decision which must be respected and borne in mind when analysing the law. 117 118

}176. It is submitted that there is no distinction to be drawn between the terms ‘substantive (im)balance’, ‘substantive (un)fairness’ and a contract ‘(not) on fair terms’, because none of the labels is concerned with ensuring that the exchange between the parties is precisely equal; rather, the central question is whether there is a significant disparity in the terms of the contract. Therefore, the terms can be used interchangeably.

13 Undue influence and unconscionability under the PICC, PECL and DCFR

PECL, Article 4: 109(1): Excessive Benefit or Unfair Advantage (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) it was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill, and (b) the other party knew or ought to have known of this and, given the circumstances and purpose of the contract, took advantage of the first party’s situation in a way which was grossly unfair or took an excessive benefit. DCFR, Article 7: 207(1): Unfair Exploitation (1) A party may avoid a contract if, at the time of conclusion of the contract: (a) the party was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill; and (b) the other party knew or could reasonably be expected to have known this and, given the circumstances and purpose of the contract, exploited the first party’s situation by taking an excessive benefit or grossly unfair advantage. PICC, Article 3.10(1): Gross Disparity (1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to: (a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and (b) the nature and purpose of the contract.

299

300 undue influence, unconscionability under picc, pecl, dcfr

13.1 Introduction The PICC, PECL and DCFR do not distinguish between undue influence and unconscionability.1 This accords with the proposal of Capper to subsume undue influence under what he argues is the wider doctrine of unconscionability. Capper argues that proof of the former necessarily amounts to proof of the latter.2 It is submitted that this is technically correct, but a merger is not desirable, because it would obscure the fundamental nature of undue influence. A capacity to influence often comes from a close personal relationship between the parties, and the defendant is thus often aware of the existence of the influence (i.e., of the complainant’s weakness).3 Neither of these elements is required by undue influence, but they are common features. The existence of a close personal relationship between the parties will render the complainant intensely vulnerable,4 and this is recognised as imposing a greater duty on the defendant in dealing with the complainant if he has actual or constructive knowledge of the influence.5 If undue influence were subsumed under unconscionability, there is a significant risk that this increased vulnerability would become forgotten, and thus the protection offered by undue influence would be lost.6 Despite their unified approach to the doctrines, the three codes treat undue influence and unconscionability in a similar way to English law, in the majority of cases. In particular, it will be explained that, although each of the codes technically allows for relief without proof of unacceptable conduct, this will rarely happen, because the elements of the respective provisions will normally establish unacceptable conduct by the defendant even though they do not require it. If relief without unacceptable conduct were a significant possibility, this would represent a fundamental difference between the codes and English law, because the fact that the defendant’s unacceptable conduct impaired the complainant’s consent is the rationale for vitiation of undue influence and unconscionability in English law. Indeed, even though it is not a factually significant possibility, in those rare cases where relief may be granted under the codes without unacceptable conduct, the requirements, and rationale, of vitiation are fundamentally different from English law. Even though the codes do not expressly recognise a requirement of impairment of consent, it will be argued that this is an implicit 1 4

2 3 E.g., PECL (2000), 264. Capper (1998). Bigwood (2003), 479. 5 6 Ibid., 400. See pp. 258–9, above. Bigwood (2003), 383, 399.

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requirement. Therefore, the three codes largely follow the general scheme of undue influence and unconscionability in English law: they render the impugned contract voidable; and, in the majority of cases, this is because the complainant proved that his weakness and the defendant’s unacceptable conduct impaired his consent.

13.2

Unconscionability

13.2.1 Weakness In order to establish unconscionability in English law, the complainant must prove that he suffered from some condition or circumstance capable of appreciably impairing his ability to look after his own interests in relation to the impugned contract.7 The PECL and DCFR require that the complainant was: (1) dependent on, or had a relationship of trust with, the defendant; (2) in economic distress or had urgent needs; or (3) improvident, ignorant, inexperienced or lacking in bargaining skill. The PICC do not actually require any weakness in the complainant, but they expressly refer to all of the weaknesses included in the PECL and DCFR (except a relationship of trust between the complainant and defendant) and recognise that, if the defendant took advantage of any of these weaknesses, this is relevant to whether relief is available: that is, to whether the defendant gained an unjustifiably excessive advantage. In each of the situations covered by the codes, the complainant would be suffering from some condition or circumstance capable of appreciably impairing his ability to look after his own interests in relation to the impugned contract. Furthermore, it is submitted that there is no condition or circumstance capable of appreciably impairing the complainant’s ability to look after his own interests in relation to the impugned contract which would not amount to one of the relevant weaknesses under the codes. For, any such condition or circumstance must amount to a deficiency in the complainant’s bargaining skill in relation to the impugned contract. Therefore, there is no substantive difference between the relevant weaknesses under the PECL and DCFR and those in English law. Both the PECL and DCFR require that the defendant had actual or constructive knowledge of the complainant’s weakness. It has been explained that such knowledge will normally be present in cases of 7

See pp. 281–4, above.

302 undue influence, unconscionability under picc, pecl, dcfr

unconscionability in English law and might seem to be an implicit requirement, but it has never been authoritatively asserted as a prerequisite. Further, it was argued that it should not be required per se but is important in determining whether the defendant’s conduct was unacceptable.8 For these reasons, the requirement of knowledge is a technical difference between English law and the PECL and DCFR, but one of minor practical significance. The fact that the PICC do not require a weakness seems to be a major difference between them and English law. However, it is submitted that the difference is not as significant as it seems. For, it is hard to imagine that the impugned contract would be held to give the defendant an unjustifiably excessive advantage if the complainant did not, to the defendant’s actual or constructive knowledge, suffer from some weakness. If the complainant did not suffer from any weakness, then any advantage the defendant gained would surely be the result of his skilful negotiation (or blind luck), and thus not unjustifiably excessive, unless he extracted it by operative unacceptable conduct. Further, if the complainant was weak but the defendant had no actual or constructive knowledge of this, then, even if that weakness led to the impugned contract giving the defendant an excessive benefit, this would surely not be unjustified (again, unless the defendant procured it by unacceptable conduct).

13.2.2 Unacceptable conduct The PECL, DCFR and English law treat the element of unacceptable conduct in a similar way. For, it is submitted that, if the defendant takes grossly unfair advantage of the complainant’s situation (the weakness), his conduct is unconscionable; and if his unconscionable conduct impaired the complainant’s consent, he took grossly unfair advantage of the complainant’s situation, if the complainant’s weakness also impaired his consent, as English law requires.9 However, neither the PECL nor DCFR expressly requires unacceptable conduct. For, the complainant can succeed by proving that: (1) he suffered from a relevant weakness; (2) the defendant knew or should have known this; and (3) the defendant exploited the situation in a grossly unfair way or the impugned contract was substantively unfair, 8

See pp. 286, 288–90, above.

9

See pp. 294–5, above.

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giving the defendant an ‘excessive benefit’. Conversely, it has been shown that, in English law, unconscionability requires unacceptable conduct by the defendant.10 Indeed, this is a vital part of the rationale of vitiation. Therefore, this difference seems to establish a fundamentally different rationale of vitiation under the PECL and DCFR. However, it must be remembered that: (1) relevant unconscionable conduct in English law can take the form of unconscionable passive receipt; and (2) the defendant’s actual or constructive knowledge of the complainant’s weakness and of any substantive unfairness in the impugned contract are important factors in reaching this conclusion.11 If the defendant did not engage in active unconscionable conduct, the PECL and DCFR require both substantive unfairness and actual or constructive knowledge of the complainant’s weakness. It is submitted that, in the vast majority of cases, it will amount to unconscionable passive receipt for the defendant to make a contract that is significantly substantively unfair to a complainant he knows, or should know, is weak. That is, proof of the requirements of the PECL and DCFR will normally establish relevant unconscionable conduct in English law. For, first, it will be rare that the defendant will not have at least constructive knowledge of the substantive unfairness, because any imbalance in a contract that comes to light only after its conclusion will not normally be relevant substantive unfairness, but merely an inherent part of the speculative nature of the contract.12 Second, if the defendant contracts with actual or constructive knowledge of the complainant’s weakness and of the substantive unfairness, this will normally put him on inquiry as to the fact that the complainant’s weakness impaired his consent. Third, if the defendant fails to take reasonable steps to determine that this is not so or to prevent it from happening, he will be affixed with constructive knowledge of it, if it happened. Fourth, it is submitted that it amounts to unconscionable conduct to contract with actual or constructive knowledge that the complainant’s weakness impaired his consent.13 The one important qualification to this is that, if the defendant reasonably believed the complainant had competent independent advice, he will normally not be affixed with constructive knowledge that the complainant’s weakness impaired his consent, but, by a literal reading of the relevant provisions of the PECL and DCFR, this would not preclude 10 13

11 12 See p. 285, above. See pp. 288–90, above. UNIDROIT (2004), 107. See pp. 258–9 (undue influence), 286 (unconscionability), above.

304 undue influence, unconscionability under picc, pecl, dcfr

relief. For, these two codes treat the complainant’s weakness, the defendant’s knowledge of this, and the substantive unfairness as sufficient for relief, whether or not the defendant’s conduct is unacceptable. However, the Notes to Article 4: 109 of the PECL say: The Principles . . . requir[e] one party to have taken advantage of the other’s special weakness to obtain an unfair contract, rather than giving relief simply on the basis of a disproportion in values between performances.14

Therefore, it seems the drafters of the PECL assume that the cumulative effect of the elements of Article 4: 109 is necessarily to establish unacceptable conduct. It has been shown why this will be the usual consequence of establishing a right to relief under the respective Articles of the PECL and DCFR, but that it is not a necessary consequence. The preceding analysis, therefore, shows that: (1) the PECL and DCFR are technically wider than English law, because they do not require proof of unacceptable conduct; but (2) this difference is likely to be minor in practice, because satisfaction of the respective provisions of these two codes will normally establish relevant unconscionable conduct. Nonetheless, in the rare cases where this is not so, the rationale of vitiation under the PECL and DCFR will be different from that in English law, based more on the substantive unfairness of the contract than impairment of the complainant’s consent by the defendant’s unacceptable conduct, similarly to unconscionability under the Restatement. Under the PICC, the fact that the defendant took unfair advantage of the complainant’s weakness is relevant to whether a proven excessive benefit is unjustifiable.15 It is submitted that taking unfair advantage of the complainant’s weakness amounts to unconscionable conduct; and engaging in unconscionable conduct that impaired the complainant’s consent amounts to taking unfair advantage of the complainant’s weakness, when that weakness also impaired the complainant’s consent, as English law requires.16 However, the PICC do not require that the defendant took unfair advantage of the complainant. Indeed, nor do they even require a weakness in the complainant, let alone that the defendant had knowledge of it. However, first, it has been explained that it will be rare that the complainant will have taken an unjustifiably excessive benefit, as is required by the PICC, unless the complainant 14

PECL (2000), 265.

15

UNIDROIT (2004), 107–8.

16

See pp. 294–5, above.

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305

suffered from some weakness of which the defendant had actual or constructive knowledge, or engaged in active unacceptable conduct.17 Second, it has been explained why the defendant’s act of entering into a substantively unfair contract with actual or constructive knowledge of the complainant’s weakness will often amount to unconscionable passive receipt.18 Therefore, the PICC will normally include an element of unconscionable conduct which would be sufficient for this element of unconscionability in English law.

13.2.3

Impairment of consent

None of the codes expressly recognises a requirement of impairment of consent by the unconscionable conduct or the complainant’s weakness. The same is true in English law. However, it was argued that this is an implicit requirement of English law.19 It is submitted that, insofar as a weakness in the complainant and active unconscionable conduct by the defendant are relevant to vitiation under the codes, they must have impaired the complainant’s consent. If the complainant’s weakness did not impair his consent, it was inoperative, so it should not be relevant to vitiation; and if the defendant’s unconscionable conduct did not impair the complainant’s consent, it had no relevance to the impugned contract, so it should not be relevant to vitiation.20 However, as the requirement of impairment of consent has not been expressly addressed under the codes or in English law, the requisite standard is not clear. It is contended that “a factor” causation is appropriate for each of (1) the complainant’s weakness and (2) the defendant’s unacceptable conduct, to reflect the protective focus of unconscionability.21

17

18 20

21

See p. 302, above. See also Vogenauer and Kleinheisterkamp (2009), 452 (excessive benefit factually unlikely unless C suffers from some relevant weakness), 453–4 (absence of even constructive knowledge of the weakness an indication that D did not take unfair advantage of C and that any excessive benefit was not unjustified). 19 See pp. 302–4, above. See pp. 294–5, above. The only exception is unconscionable passive receipt, because the defendant’s mere entrance into the impugned contract (the relevant unconscionable conduct) cannot impair the complainant’s consent: see pp. 288–9 (unconscionable passive receipt generally), 295 (causation in unconscionable passive receipt), above. See pp. 294–5, above.

306 undue influence, unconscionability under picc, pecl, dcfr

13.3 13.3.1

Undue influence Influence/weakness

The treatment of dependence and relationships of trust and confidence alongside the other weaknesses clearly shows that the PECL and DCFR conflate undue influence and unconscionability. Whenever the complainant is dependent on, or has a relationship of trust with, the defendant, the latter will have a capacity to influence him. However, satisfaction of any of the other weaknesses need not establish a capacity to influence. Further, it is not as immediately obvious that a capacity in the defendant to influence the complainant’s contractual decision will necessarily establish any of the relevant weaknesses under the codes. However, it is submitted that, whenever the defendant possesses a capacity to influence the complainant, the latter will, in relation to the impugned contract, lack bargaining skill. He might not suffer from a general lack of bargaining skill, from anything that would hinder him in contractual dealings with anyone other than the defendant, but the defendant’s influence over him will impair his bargaining skill in relation to his dealings with the defendant. Therefore, he will lack bargaining skill in relation to the impugned contract. As with unconscionability, undue influence in English law does not require that the defendant knows of the complainant’s weakness (i.e., his capacity to influence the complainant).22 Given the nature of influence, the defendant often at least should know that he possesses it, but this will not always be so. Therefore, the requirement of actual or constructive knowledge of the weakness under the PECL and DCFR renders these codes technically narrower than English law, but the practical significance of this difference will be relatively small. For the same reasons it was argued that knowledge of the weakness should not be required in unconscionability,23 knowledge of the influence should not be required in undue influence. As noted in the discussion of unconscionability, the PICC do not actually require any weakness in the complainant, but it will be rare that he can establish that the defendant gained an unjustifiably excessive advantage unless he suffered from a weakness of which the defendant had actual or constructive knowledge (or engaged in active unacceptable conduct).24 The weakness need not be anything in the nature of a 22

Cf. Bigwood (2003), 420.

23

See pp. 289–90, above.

24

See p. 302, above.

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capacity in the defendant to influence the complainant, but if consists of the complainant’s dependence on the defendant, it will be.

13.3.2

Unacceptable conduct

It is submitted that the three codes are similar to English law in their treatment of relevant active unacceptable conduct. None of the codes requires active unacceptable conduct, but it is contended that relevant active unacceptable conduct under each of them necessarily amounts to an undue exercise of influence, and vice versa. For, it is submitted that an undue exercise of influence necessarily amounts to taking a grossly unfair advantage of the complainant’s weakness, and taking a grossly unfair advantage of the complainant’s weakness necessarily amounts to an undue exercise of influence, if that weakness is the defendant’s capacity to influence the complainant. The PICC refer merely to the defendant taking unfair advantage of the complainant’s weakness, not to his taking grossly unfair advantage of it. However, it is submitted that: (1) this does not affect the substance of relevant unacceptable conduct; and (2) if it does, even taking an unfair (although not grossly so) advantage of the complainant’s weakness necessarily amounts to an undue exercise of influence when that weakness is the defendant’s capacity to influence the complainant. It has been explained, first, that the PECL and DCFR require at least that the defendant made a substantively unfair contract with a complainant he knew, or should have known, suffered from a relevant weakness; and, second, that the requirements of the PICC will normally establish this. Further, it has been explained that this will normally establish what amounts to unconscionable passive receipt in the English law of unconscionability.25 However, the requirement in undue influence of an exercise of influence necessitates some positive conduct by the defendant causing the influence to become operative. Mere entry into the impugned contract cannot render the influence operative,26 so even if the defendant’s conduct amounts to unacceptable, and undue, conduct in the form of unconscionable passive receipt, it will not amount to an undue exercise 25 26

See pp. 302–5, above. Although, note that, if the influence is a personal one (i.e., if the complainant’s feelings for the defendant render him predisposed to do as he believes the defendant wishes in relation to the impugned contract), it will be rendered operative by any indication that the defendant wants the transaction: see p. 270, above.

308 undue influence, unconscionability under picc, pecl, dcfr

of influence. Therefore, unless the defendant actively takes an unfair advantage of the complainant, his conduct will not normally amount to undue influence in English law, but it may well still amount to unconscionable passive receipt for the purposes of unconscionability. None of the codes recognises the possibility of a presumption that its requirements have been fulfilled. This leaves a complainant whose feelings for the defendant render him more predisposed to do as he believes the latter wishes in relation to the impugned contract without the important protection he would be offered by the presumption of undue influence in English law.27

13.3.3 Impairment of consent It has been explained that undue influence in English law requires that the influence and the defendant’s unacceptable conduct were each a factor inducing the complainant’s decision to make the impugned contract.28 It has also been explained that none of the codes expressly includes a requirement of impairment of consent in its treatment of undue influence and unconscionability, but that they all implicitly require both the complainant’s weakness and the defendant’s unacceptable conduct to have impaired the complainant’s consent.29 Nonetheless, as the requirement remains implicit, the requisite standard has not been determined. 27 28

29

See pp. 261–72, above. See pp. 257–8 (influence must impair complainant’s consent), 260–1 (unacceptable conduct must impair complainant’s consent), above. See p. 305, above.

14 Conclusion

14.1

My central theory

My central theory is that the desire to protect the integrity of contractual consent is the common link running through the general vitiating factors. The importance of this desire is linked to the fundamental general principle of voluntariness. For, as voluntariness has been shown to be the main reason why contractual obligations are binding, it is only right that infringement of this principle is a sound basis of vitiation.1 This is reflected in two ways in the law. First, in mental incapacity, non est factum and mistake, where the complainant must prove an absence of consent, and thus an absence of voluntariness, to the putative contract. This is the first category of vitiation. Second, in misrepresentation, duress, undue influence and unconscionability, where the complainant must prove that his consent to the impugned contract was impaired by the defendant’s unacceptable conduct. This is the second category of vitiation. The distinction between absence and impairment of consent is important and affects both the requirements for, and the consequences of, establishing the respective categories of vitiation. First, an absence of consent to the putative contract is the complete absence of a voluntary assumption of its apparent obligations. Of course, the law cannot simply accept proof of an absence of consent as sufficient for vitiation, because this would be to replace the objective principle with a subjective approach. This is why the law requires an additional factor to render the absence of consent operative before it responds. However, the additional factor need not be unacceptable conduct by the defendant. When the absence of consent is rendered operative, the putative contract is void, because the main reason for those apparent obligations binding the complainant in law does not 1

See pp. 12–19, above; Chen-Wishart (2010), 278.

309

310

conclusion

exist. This is so even if the defendant did not unacceptably induce the absence of consent or in any way act in an unacceptable fashion. The relevant additional factors are the defendant’s: (1) actual or constructive knowledge of the absence of consent (recognised in mental incapacity, mistake as to identity and mistake as to terms in English law; all forms of mistake under the PICC, PECL, DCFR and Restatement; and mental incapacity under the Restatement); (2) unacceptable inducement of the absence of consent (recognised in non est factum, mistake as to identity and mistake as to terms in English law; and all forms of mistake under the PICC, PECL, DCFR and Restatement); and (3) own absence of consent (recognised in common mistake in English law; and all forms of mistake under the PICC, PECL, DCFR and Restatement). The third additional factor is the only one that does not amount to unacceptable conduct by the defendant, but it is no less a sufficient reason for rendering the complainant’s absence of consent operative: the defendant should not be able to hold the complainant to a contract to which neither party consented.2 Second, proof of impairment of consent necessarily establishes that the complainant chose to contract. In this sense, he voluntarily assumed the impugned contractual obligations. If the law is genuinely concerned with consent and voluntariness, this cannot be sufficient to render the impugned contract unimpeachable. However, neither can it be sufficient for vitiation, because, in reality, all contractual decisions are constrained to one degree or another. Indeed, they may be highly constrained by perfectly natural, acceptable pressures that should not be regulated by contract law.3 Therefore, what matters is the source of the constraint (i.e., the source of the impairment of consent). When the source is unacceptable conduct by the defendant, the desire to prevent procurement of contracts by unacceptable means is added to the desire to protect the integrity of contractual consent, and the interaction of these elements justifies vitiation.4 The complainant consented to the impugned contract, but this consent was induced by the defendant’s unacceptable conduct, so he should have an initial right to revoke it: the impugned contract is voidable. 2

3 4

See pp. 32–3, 97, above (common mistake); 36–7, above, 319–20, below (generally); 119–20 (mistake as to identity), 139–41 (mutual mistake), above. Lloyds Bank v. Bundy [1975] QB 326, 336, per Lord Denning MR. Barton v. Armstrong [1976] AC 104, 121, PC, per Lords Wilberforce and Simon. See also PECL (2000), 257.

my central theory reflected in english law

14.2

311

My central theory reflected in English law 14.2.1

The first category

Mental incapacity requires an inability in the complainant to understand the nature of his contractual act. Therefore, it necessitates an absence of consent: one cannot consent to what one is incapable of understanding.5 Non est factum requires that the complainant: (1) did not execute the impugned contractual document; (2) mistakenly believed that his act would not be of contractual effect; or (3) made a mistake regarding the purport of the impugned document, the effect of which mistake was to render the contract he intended to make different from the putative contract. If the complainant did not execute the impugned document, he did not consent to the putative contract apparently effected by it. If he did not intend an act of contractual effect, he did not consent to any contract. If he intended to make a contract, but one different from the putative contract, he did not consent to the putative contract.6 All other forms of mistake require a mistake that renders the intended and putative contracts different from the complainant’s perspective. This is the same as the second type of mistake relevant to non est factum (i.e., (3), above) and establishes an absence of consent in the same way. When the complainant’s mistake is as to the terms of the contract, it necessarily renders the intended and putative contracts different, because any change to the terms of a contract makes it a different contract.7 However, when the mistake relates to an external circumstance, as in all other forms of mistake, it will only have this effect if the complainant would see a contract in the state of affairs he believed to exist as different from a contract on the same terms in the actual state of affairs. For example, a contract, on terms XYZ, where: (1) the subject matter is believed not to be owned by the “buyer”, but actually is (res sua);8 (2) the subject matter is believed to exist, but actually does not (res extincta);9 (3) the subject matter is believed to be fundamentally different than it actually is, when, from the complainant’s perspective, a contract for the intended subject matter is different from a contract for the actual subject matter (mistake as to “quality”);10 5 7 9

6 See pp. 28–9, 55, above. See pp. 30, 75, 79–82, above. 8 See pp. 31, 35, 133, 134, above. See pp. 101–2, above. 10 See pp. 102–3, above. See pp. 31–2, 93, 97–8, above.

312

conclusion

(4) the complainant believes that he is contracting with X but is actually contracting with the defendant, when he would see a contract with X as different from one with the defendant (mistake as to identity).11 Before a complainant can successfully vitiate a contract on the basis of mental incapacity, he must prove that the defendant had actual or constructive knowledge of the relevant state of mind.12 This is sufficient to render an absence of consent operative because, first, knowledge that the complainant is incapable of understanding the nature of the putative contract is knowledge that he cannot consent to that contract; and, second, it amounts to unacceptable conduct for the defendant to contract with a complainant he knows, or should know, is not consenting to the putative contract. Further, this requirement reflects established case law regarding the objective principle and its residual subjective element.13 If the defendant ought to know that the complainant could not consent to the putative contract, the reasonable person in his position would know this, so there would be no objective agreement. If he actually knew it, he knew that the complainant was not promising to be bound, so the residual subjective element establishes that the objective (apparent) agreement is not binding.14 This analysis applies equally to mistake as to identity and mistake as to terms, where knowledge is recognised as sufficient to render the absence of consent operative. For, in each of these doctrines, knowledge of the relevant mistake amounts to knowledge of the absence of consent the mistake causes.15 Non est factum and mistake as to identity normally involve the defendant fraudulently inducing the complainant’s mistake. This is not an essential element of either doctrine, but it is clear why it is a sufficient reason to render operative the absence of consent that necessarily flows from the relevant mistake. Indeed, it is recognised in mistake as to terms that even an unreasonable inducement of the mistake is sufficient to render operative the absence of consent that such a mistake establishes.16 11 13 14

15

16

12 See pp. 32–4, 116–25, above. See pp. 29, 53–62, above. See pp. 29–30, 57, 136, above. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694. See pp. 34, 117–18 (mistake as to identity), 35, 133 (mistake as to terms), 149–50 (generally), above. Scriven Bros. v. Hindley [1913] 3 KB 564.

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313

Cases of res sua, res extincta and mistake as to “quality” require a mistake to be shared by both parties before the absence of consent it establishes can be operative.17 Further, the mistake must be fundamental for both parties, which means that neither the complainant nor defendant intended to make, or consented to, the putative contract.18 One should not be able to hold another to a contract to which neither of them consented, so the complainant’s absence of consent is rendered operative.

14.2.2 The second category Each form of duress requires that the defendant engaged in unacceptable conduct that impaired the complainant’s consent.19 The same is true for fraudulent and negligent misrepresentation.20 Further, it is true for innocent misrepresentation, if one accepts the argument that this is properly treated as unacceptable conduct.21 Similarly, it has been explained why conduct relevant to undue influence is properly treated as unacceptable;22 and that conduct must have impaired the complainant’s consent.23 Unconscionability undoubtedly requires unacceptable conduct by the defendant. It has not been expressly recognised that this unacceptable conduct must have impaired the complainant’s consent, but this is an implicit requirement.24 For, if conduct does not impair the complainant’s consent, it cannot be relevant to vitiation, which is an inappropriate way to dissuade unacceptable conduct per se. It is the desire to prevent procurement of contracts by unacceptable means with which contract law is concerned.25

14.2.3 Summary The first-category vitiating factors (i.e., mental incapacity, non est factum, and all forms of mistake) share the following features: (1) they are based upon an absence of consent from the complainant, which (2) is rendered operative by proof of an additional factor to justify overcoming the principle of security of contracts, embodied in the 17 20 23

See pp. 93–114, above. See pp. 170–92, above. See pp. 260–1, above.

18 21 24

19 See pp. 32, 93, 97–8, above. See pp. 212–30, above. 22 See pp. 170–3, above. See pp. 258–60, above. 25 See pp. 294–5, above. See pp. 19–26, above.

314

conclusion

objective principle, and (3) the absence of consent renders the putative contract void. The only exceptions are: (1) the fact that mental incapacity renders a contract voidable, not void; and (2) the failure in non est factum to recognise expressly the need for an additional factor to render the absence of consent operative. It has been explained that the consequence of voidability in mental incapacity is attributable to the policy influences on the development of this doctrine.26 Further, non est factum will almost always include an unacceptable inducement of the complainant’s absence of consent by the defendant, so there will normally be a sufficient reason to render the absence of consent operative.27 Each of the second-category doctrines of misrepresentation, duress, undue influence and unconscionability requires that the defendant engaged in unacceptable conduct that impaired the complainant’s consent. The only exception is the failure expressly to recognise a requirement of impairment of consent in unconscionability. However, it has been explained that this is an implicit requirement of the doctrine.28

14.3 My central theory and the PICC, PECL and DCFR It has been explained that, in English law, the distinction between absence and impairment of consent is fundamental to the distinction between voidness and voidability as the consequence of successfully establishing one of the general vitiating factors. Absence of consent to the putative contract shows that there was no voluntary assumption of contractual obligations. Therefore, if the absence of consent is rendered operative, the putative contract is void ab initio. Where contractual consent is merely impaired, this does not establish an absence of voluntariness. Indeed, it necessarily establishes that the complainant chose to make, and thus consented to, the impugned contract. However, if the complainant’s consent was impaired by the defendant’s unacceptable conduct, the desire to prevent procurement of contracts by unacceptable means is added to the desire to protect the integrity of contractual consent: the complainant voluntarily assumed the impugned contractual obligations, but the law is justified in treating his consent as revocable because of the unacceptable way in which it was procured. Therefore, the impugned contract is voidable.29 26 29

See pp. 63–4, above. See pp. 19–26, above.

27

See pp. 88–9, above.

28

See pp. 294–5, above.

my central theory and the picc, pecl, dcfr

315

However, under the PICC, PECL and DCFR, the consequence of successfully establishing any of the general vitiating factors is voidability. The reason for this is not made explicit, but running throughout each of the codes is a desire to uphold contracts and contractual relationships wherever possible: a desire to protect the ‘security of transactions’.30 This desire is reflected in the increased remedial flexibility under the codes: for example, adaptation of the contract in lieu of rescission for mistake,31 or undue influence or unconscionability;32 or avoidance of only those terms actually affected by a vitiating factor, unless the terms cannot reasonably be severed from the impugned contract.33 Similarly, providing for voidability, rather than voidness, clearly serves the policy of upholding contracts and contractual relations: first, because the complainant can elect not to avoid; and, second, because the right to avoid might be lost. Therefore, it is submitted that one cannot necessarily assume that the universal consequence of voidability is indicative of a difference in the underlying rationale of vitiation under the codes. Certainly, it has been shown that vitiation for mistake under the PECL and DCFR requires an absence of consent and an additional factor to render this operative.34 Further, it has been argued that, even though an absence of subjective consent is not an express requirement of mistake under the PICC, it is probably an implicit requirement and will at least normally be established by proof of the prerequisites of mistake under the PICC.35 Requiring proof of an absence of consent and an additional factor to render this operative clearly mirrors the position of English law in relation to mistake. Similarly, the relevant additional factors under the codes mirror those in English law. This is particularly significant because it means that proof of unacceptable conduct by the defendant is not a necessary element of rendering the absence of consent operative. On the other hand, rescission for misrepresentation and duress under the codes clearly requires proof that the defendant engaged in unacceptable conduct which impaired the complainant’s consent.36 Once more, this is the same in English law. Further, it represents a distinction in the treatment of an absence and an impairment of consent under the codes: an absence 30 32 33 34 36

31 PECL (2000), 230. Art. 4: 105 PECL; Art. 7: 203 DCFR; Art. 3.13 PICC. Art. 4: 109(2) and (3) PECL; Art. 7: 207(2) and (3) DCFR; Art. 3.10(2) and (3) PICC. Art. 4: 116 PECL; Art. 7: 213 DCFR; Art. 3.16 PICC. 35 See pp. 42–55, above. See pp. 147–8, above. See pp. 192–6 (misrepresentation), 230–6 (duress), above.

316

conclusion

of consent can be rendered operative by the fact that the defendant shared the complainant’s mistake, and this will not include any unacceptable conduct by the defendant; whereas an impairment of consent must have been caused by the defendant’s unacceptable conduct before it can be operative. The equivalent of the English doctrines of undue influence and unconscionability under the three codes can be established without proof of unacceptable conduct by the defendant, but this will rarely be the case. In these marginal cases, the basis of vitiation is significantly different from English law, representing an increased desire under the codes to seek to regulate substantive unfairness. However, in the majority of cases, the basis of vitiation will be the same as in English law: the complainant’s consent was impaired by his weakness and the defendant’s unacceptable conduct, or the defendant’s mere entrance into the impugned contract amounted to unconscionable passive receipt. In short, the rules for establishing the vitiating factors in English law and under the codes are broadly similar, especially in relation to the distinction between absence and impairment of consent. However, the consequences of this distinction are not fully recognised. It appears that the policy of prioritising security of transactions is the main reason for this. It is submitted that there is no objection per se to the more flexible conclusion of voidability for vitiating factors establishing an absence of consent. Indeed, the Restatement takes the same approach. However, it is contended that it must be recognised that adoption of voidability as the universal consequence of the general vitiating factors is a policy decision, which should not blur the important principled distinction between absence and impairment of consent.37 There is a distinction between the codes and English law which represents an area where the three codes follow my central theory more closely than English law. For, the codes treat every type of mistake in the same way. This means that any additional factor to render an absence of consent operative is relevant to any type of mistake that has this effect, and that proof of an absence of carelessness is required for all forms of mistake.38 This will be addressed further below, in discussing how my theory highlights the ways in which English law could develop.39

37

See pp. 26–8, above.

38

See pp. 148–55, above.

39

See pp. 319–20, below.

my central theory and us restatement (second) of contracts 317

14.4 My central theory and the US Restatement (Second) of Contracts The treatment of the general vitiating factors under the Restatement clearly reflects my central theory, recognising the fundamental distinction between absence and impairment of consent. Similarly to the three codes, the Restatement does not, unlike English law, give effect to this distinction by providing for voidness ab initio as the consequence of an operative absence of consent and voidability as the consequence of an operative impairment of consent. It does, however, recognise the need for an additional factor to render an absence of consent operative.40 Moreover, the relevant additional factor need not amount to unacceptable conduct, because section 152 (which deals with ‘common’ or ‘shared’ mistake) recognises that an absence of consent from the defendant can be sufficient to render the complainant’s absence of consent operative. Indeed, the Restatement recognises all three of the sufficient additional factors in English law: actual or constructive knowledge of the complainant’s absence of consent;41 unacceptable inducement of the complainant’s absence of consent;42 and an absence of consent from the defendant.43 Furthermore, misrepresentation, duress and undue influence under the Restatement all require proof that the complainant’s consent was impaired by the defendant’s unacceptable conduct. It is submitted that the fact that the Restatement clearly reflects my central theory strongly suggests that, as argued above, it is the policy of promoting security of contracts that is behind adoption of voidability as the universal consequence44 of the general vitiating factors.45 This, then, is similar to the position under the three codes. Furthermore, the desire to promote substantive balance is another strong policy influence on the Restatement, reflected, in particular, by the rules of incapacity, mistake

40

41 43 44

45

Subject to the fact that mental incapacity not caused by intoxication does not actually require an additional factor to render the absence of consent operative, because of the reversal of the burden of proof with regard to whether or not the defendant had knowledge of the incapacity: }15(2). 42 }}16 (intoxication); 153 (unilateral mistake). }153 (unilateral mistake). }152 (common mistake). Subject to those sections under which no contract is formed, so that, effectively, the relevant ‘“vitiating factor” renders the putative contract ab initio: e.g. }}13 (incapacity where complainant under guardianship); 163 (misrepresentations as to essential nature of contract); 174 (duress by physical compulsion). See pp. 26–8, above.

318

conclusion

and duress. However, it is contended that the effect of these two crucial policy influences, which are not recognised to such a degree in English law, does not lessen the value of the comparison between English law and the Restatement. Indeed, the fact that the two systems of law clearly share vital links in their underlying rationale despite the different policy considerations, and the different weight attached to similar policy considerations, is a sound argument in support of my central theory, because that theory is the fundamental rationale on which both the Restatement and English law (as well as the three codes) are based.

14.5

My central theory and development of English law

As well as explaining the present law of the general vitiating factors, my theory highlights the areas where some development is appropriate. Most notably, this includes recognising that, as a matter of principle, the consequence of a successful plea of mental incapacity should be voidness. Given that this vitiating factor requires the defendant to have actual or constructive46 knowledge of the complainant’s mental state,47 this consequence is actually mandated by the rules of the objective principle. For, if the defendant should know that the complainant is incapable of understanding the nature of the putative contract, the reasonable person would know that the complainant could not be promising to be bound by the terms of the apparent agreement, so there will be no objective agreement. If the defendant actually knew that the complainant was incapable of understanding the nature of the putative contract, then he knew that the complainant was not promising to be bound by the terms of the apparent objective agreement. Therefore, the residual subjective element of the objective principle precludes that apparent agreement from being binding.48 If it is felt that the policy of security of contracts and, in particular, the desire to protect any innocent third party whose title to property rests upon the putative/impugned contract between complainant and defendant is of paramount importance, the conclusion of voidability should be 46

47

48

York Glass v. Jubb [1925] All ER Rep. 285, 292, per Warrington LJ; Hart v. O’Connor [1985] AC 1000, 1014, PC. Imperial Loan v. Stone [1892] 1 QB 599, 601, 602–3, per Lord Esher MR and Fry and Lopes LJJ. Smith v. Hughes (1871) 6 QB 597, 607; Hartog v. Colin Shields [1939] 3 All ER 566, 568; Statoil v. Louis Dreyfus Energy [2008] EWHC 2257 (Comm); [2008] 2 Lloyd’s Rep. 685, 694.

my central theory and development of the law

319

retained in mental incapacity (and perhaps applied to all of the general vitiating factors). However, it should be made clear that policy is the basis of the conclusion of voidability, to ensure recognition of the clear distinction in principle between absence and impairment of consent.49 Furthermore, it is submitted that it should be recognised that non est factum must require, as a matter of law, an additional factor to render the proven absence of consent operative. For, even though one will normally be present, in the defendant’s unacceptable conduct, this need not always be so. To allow the absence of consent to be operative without an additional factor is effectively to replace the objective principle with subjectivity. It is submitted that the law should recognise that any potential additional factor is sufficient to render any proven absence of consent operative. There is nothing in the nature or source of any absence of consent or any additional factor to make this inappropriate. Each additional factor is a sound reason for rendering operative any absence of consent. To recognise this would necessitate changes in the law of: (1) mental incapacity, which requires that the defendant has actual or constructive knowledge of the complainant’s mental state (thus absence of consent);50 (2) mistake as to the subject matter, which requires that the mistake is shared.51 There is nothing in the law relating to non est factum, mistake as to identity or mistake as to terms that expressly requires a particular additional factor to render the relevant absence of consent operative. However, it would undoubtedly be a new concept to recognise in any of these vitiating factors that the defendant’s absence of consent is sufficient to render the complainant’s absence of consent operative. Nonetheless, it is submitted that this is what should be done. An absence of consent from both parties is factually unlikely to exist other than in cases where both parties made the same fundamental mistake, but if it does exist in other cases, its significance should be recognised.

49 50

51

See pp. 26–8, above. Hart v. O’Connor [1985] AC 1000, 1014, PC; Imperial Loan v. Stone [1892] 1 QB 599, 601, 603, per Lord Esher MR and Lopes LJ; York Glass v. Jubb [1925] All ER Rep. 285, 292, per Warrington LJ. See also pp. 53–62, above. [1932] AC 161, 218, HL, per Lord Atkin; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 703. See also pp. 93–114, above.

320

conclusion

This approach would lead to a more coherent and unified treatment of mistake. For, it would mean that any type of mistake that establishes an absence of consent could be rendered operative, thus rendering the putative contract void, by any additional factor. It would, therefore, not matter whether the mistake was as to subject matter, identity or terms.52 Another area for development is recognition of the fact that the requirement of an absence of carelessness in non est factum53 and common mistake54 should apply to all pleas based on mistake. As a matter of policy, a complainant should not be able to rely upon a mistake that has come about because of his own carelessness, unless the defendant has actual or constructive knowledge of the complainant’s absence of consent or unreasonably or fraudulently induced the mistake (and thus absence of consent), in which cases, the defendant’s unacceptable conduct should negate the complainant’s carelessness. Finally, it is submitted that misrepresentation and duress should require a lesser standard of impairment of consent the more unacceptable the defendant’s conduct, to give effect to an increased desire to prevent procurement of contracts by more highly unacceptable means. The way to realise this principle is to require, in misrepresentation, a lesser standard of inducement in fraudulent than in negligent misrepresentation, which would in turn have a lesser standard than innocent misrepresentation.55 In duress, the smallest degree of impairment of consent would be required in duress to the person, the middle standard in duress of goods, and the greatest degree in economic duress.56 For, fraudulent misrepresentations are normally more unacceptable than negligent misrepresentations, which are normally more unacceptable than innocent misrepresentations; and duress to the person is generally more unacceptable than duress of goods, which is generally more unacceptable than economic duress. Undue influence and unconscionability cover such an array of different types of unacceptable conduct that it is not feasible to define within these doctrines different classes in which the degree of unacceptability 52

53 54

55

However, the existing rules of the different forms of mistake in English law will still be relevant to determining whether the mistake establishes an absence of consent, so the classification of mistake as to: (1) subject matter; (2) terms; and (3) identity should be retained. Saunders v. Anglia BS [1971] AC 1004, HL. See also pp. 82–5, above. Associated Japanese Bank v. Cre´dit du Nord [1989] 1 WLR 255, 268; Great Peace Shipping v. Tsavliris Salvage [2002] EWCA Civ 1407; [2003] QB 679, 707. See also pp. 111–12, above. 56 See pp. 84–8, above. See pp. 227–8, above.

my central theory and development of the law

321

of the defendant’s conduct follows, even generally, a sliding scale. A case-by-case assessment of the degree of unacceptability of conduct would be too uncertain, so the principle proposed for misrepresentation and duress should not be recognised in undue influence or unconscionability. Furthermore, the latter two doctrines are concerned with protecting weak complainants from exploitation. This protective focus justifies the minimal “a factor” standard of impairment of consent from the defendant’s unacceptable conduct required by these doctrines.

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INDEX

absence of consent carelessness 154–5 codes 40–2, 144–5, 146–8 common mistake 31, 32–3 constructive knowledge 23, 29, 44, 149–52 critique of theory 100–1 defendants 153 first category of vitiation 4, 19 impaired consent compared 1–2, 19–21 implied-term theory compared 95–101 knowledge 34, 64–5, 69, 72–4, 149–52 mental incapacity 3–4, 23, 28–30, 53–74 mistake 23, 31 mistake as to identity 116–20 non est factum 21, 30–1, 76–9 objectivity 21–6, 41–2, 58 PICC 41–2 policy 22 proof 4, 71–2 putative contracts 3, 13, 21, 35, 37, 58 requisite degree of difference 79–82 Restatement (Second) of Contracts 42, 64, 65–74, 159–61 restriction 22–3 unacceptable conduct 22, 29, 30 unacceptable inducement 23, 30, 36 uncertainty 100 absence of consent operative additional factors 148–55, 161–8 codes 148–55 common mistake 32, 93–4, 95–101

constructive knowledge 29 contractual obligations 21 first category of vitiation 4 general vitiating factors 28 mistake 36, 148–55 objectivity 17, 33, 35 Restatement (Second) of Contracts 45, 159–61 security of contracts 22–3 unacceptable conduct 30 unacceptable inducement 78 unreasonable conduct 35 abuse of confidence, fiduciary relationships 6 ambiguity, misrepresentation 174–5 bona fide purchasers interests protected 28 mistake as to identity 26–7, 116 carelessness absence of consent 154–5 codes 154–5 negotiations 22 non est factum 75–6, 82–5 Restatement (Second) of Contracts 168–9 unacceptable inducement 88 central theory basis 309–10 codes 314–16 comparative law 309–10 English law 311–14, 318–21 first category of vitiation 28–46, 311–13 general vitiating factors 8–10, 28–51

326

index Restatement (Second) of Contracts 317–18 second category of vitiation 46–51, 313 summary 313–14 choice, consent 20–1 codes absent consent 40–2, 144–5, 146–8 absent consent operative 148–55 background 143–5 carelessness 154–5 central theory 314–16 common mistake 42 constructive knowledge 48–9, 149–52 DCFR see Draft Common Frame of Reference duress 230–6 first category of vitiation 39–42 fraudulent misrepresentation 48, 192–6 impaired consent 196, 234–5, 305, 308 misrepresentation 192–6 mistake 23, 39–42, 142–55 non est factum 82–3 PECL see Principles of European Contract Law PICC see Principles of International Commercial Contracts second category of vitiation 48–9 security of contracts 28, 40, 144 unacceptable conduct 48–9, 194–6, 232–3, 302–5, 307–8 unacceptable inducement 152 unconscionability 299–308 undue influence 299–308 voidability 27, 39–40 voluntariness 16 weakness 301–2 see also Restatement (Second) of Contracts common mistake absence of consent 31, 32–3 absence of consent operative 32, 93–4, 95–101 background 93–5 codes 42 common assumption 108–9

327

construing contracts 95, 109–10 elements 108–12 English law 93–114 equitable remedies 94–5 fault 100, 111–12 implied-term theory 95–101 objectivity 99 performance impossible 110–11 quality/identity 94, 103–8 rationale of vitiation 95–101 res extincta 94, 102 res sua 94, 101–2 risk allocation 100 shared fundamental mistake 32 subjectivity 98–9 types 93, 100 warranties 109–10 see also mistake comparative law central theory 309–10 codes see codes duress 212–50 general vitiating factors 8–10 misrepresentation 170–211 mistake 40–2, 142–69 unconscionability 279–98, 299–308 undue influence 251–78, 299–308 US Restatement see Restatement (Second) of Contracts conduct abuse of confidence, fiduciary relationships 6 unacceptable see unacceptable conduct unconscionable conduct 285–90 unreasonable see unreasonable conduct consent absence see absence of consent choice 20–1 impairment see impaired consent integrity protected 4, 12–19, 24–5 terminology 13 voluntariness 12–19, 23–4 constructive knowledge absence of consent 23, 29, 44, 149–52 codes 48–9, 149–52 first category of vitiation 29, 30

328

index

constructive knowledge (cont.) mental incapacity 29, 53–4, 57 reliance upon veracity 47 Restatement (Second) of Contracts 44 second category of vitiation 48–9 weakness 48–9 see also knowledge contract terms inclusion/exclusion 31, 38, 133 mistake see mistake as to terms warranties 31, 133 contracts carelessness see carelessness consent absence of see absence of consent impaired see impaired consent duress see duress England see English law fair see fair contracts incapacity see incapacity misrepresentation see misrepresentation mistake see mistake non est factum see non est factum obligations see contractual obligations putative see putative contracts security see security of contracts service contracts 103 undue influence see undue influence vitiation background 1–52 duty and vitiating factors 7 first category see first category of vitiation general factors see general vitiating factors key points 1–6 rationale see rationale of vitiation second category see second category of vitiation void see void ab initio voidable see voidability contractual obligations consequences 14 implied 17–18 necessity/sufficiency 13 not binding 14–15

objectivity 16–17 putative contracts 13, 21 security see security of contracts subjectivity 14, 17 voluntariness 3, 9, 13–16 disclosure, duty and vitiating factors 7 documents execution, mistake 30, 81 negligence 82–3 see also non est factum Draft Common Frame of Reference (DCFR) analysis 10–12 coercion/threats 230 fraud 192–3 mistake 142–3 unfair exploitation 299 see also codes duress background 212–13, 231–2, 237–9 causation 225–8 codes 230–6 comparative law 212–50 dual rationale 213–18 economic 20–1, 220–9 elements 220–9 English law 212–30 general doctrine 218–19 goods 25 illegitimacy 220–4 impaired consent 25–6, 225–8, 234–5, 248–9 non est factum compared 21 person 25, 218–19 practical alternatives lacking 228–9, 235–6, 249–50 Restatement (Second) of Contracts 236–50 unacceptable conduct 25–6, 220–4, 232–3, 239–48 English law central theory 311–14, 318–21 common mistake 93–114 duress 212–30 first category of vitiation 28–39 mental incapacity 53–62 misrepresentation 170–92

index mistake as to identity 115–32 mistake as to terms 133 mutual mistake 139–41 non est factum 75–92 second category of vitiation 46–8 unconscionability 279–96 undue influence 251–73 equitable remedies, common mistake 94–5 estoppel, objectivity 137 evidence parol evidence rule 129–30 see also proof factors, vitiation see vitiating factors fair contracts policy 43 Restatement (Second) of Contracts 43, 63, 69 substantive unfairness 45, 56–7, 290–3 falseness, misrepresentation 175 fault common mistake 100, 111–12 misrepresentation 199 Restatement (Second) of Contracts 156, 199 fiduciary relationships, abuse of confidence 6 first category of vitiation absence of consent 4, 19 central theory 28–46, 311–13 codes 39–42 constructive knowledge 29, 30 English law 28–39 Restatement (Second) of Contracts 42 vitiating factors 3–4, 19 fraud equitable fraud 60 mistake as to identity 26–7, 34, 116 fraudulent misrepresentation codes 48, 192–6 impaired consent 25–6 non est factum 89 Restatement (Second) of Contracts 49–50, 197 unacceptable conduct 20–1 see also misrepresentation

329

general vitiating factors absence of consent operative 28 absence of/impaired consent compared 1–2 central theory 8–10, 28–51 comparative law 8–10 disclosure duty compared 7 integrity of consent 12–19, 24–5 misrepresentation 170–211 rationale of vitiation 6–8, 54–61 scope 1 unacceptable conduct 28 goods duress 25 sale of specific goods 102–3 guardianship, Restatement (Second) of Contracts 62 identity, mistake see mistake as to identity illegality, policy 7 impaired consent absence of consent compared 1–2, 19–21 codes 196, 234–5, 305, 308 degree of impairment 25–6 duress 25–6, 225–8, 234–5, 248–9 mental incapacity 44 misrepresentation 25–6, 196, 209–11 pressure 23–4 Restatement (Second) of Contracts 44, 209–11, 248–9, 277–8 second category of vitiation 24–5 unacceptable conduct 3, 4, 20–6 unconscionability 305 undue influence 260–1, 308 voluntariness 23–4 incapacity intoxication 63, 71, 73–4 mental see mental incapacity minors 55–6, 64 see also weakness inducement misrepresentation 184–91 unacceptable see unacceptable inducement unreasonable see unreasonable inducement

330

index

influence, undue see undue influence innocent misrepresentation characteristics 170–2 duty 173 fraudulent compared 20–1 inducement 35 negligent misrepresentation compared 25–6 reliance 47 see also misrepresentation intention contractual capacity 62, 63–5, 68–9 intended/putative contracts 30, 31, 32, 37, 38–9, 58 mistake as to terms 31, 35, 133 non est factum 30, 80 promise 31 terminology 13 intoxication, Restatement (Second) of Contracts 63, 71, 73–4 knowledge absence of consent 34, 64–5, 69, 72–4, 149–52 constructive see constructive knowledge mental incapacity 54, 55–60, 61–2, 64–5, 69 mistake 149–52 objectivity 29–30 Restatement (Second) of Contracts 64–5, 69, 72–4, 162 unacceptable conduct 58–60 material misrepresentation inducement 184–91 Restatement (Second) of Contracts 50, 197 mental incapacity absence of consent 3–4, 23, 28–30, 53–74 background 53–4 constructive knowledge 29, 53–4, 57 English law 53–62 impaired consent 44 knowledge 54, 55–60, 61–2, 64–5, 69 pleadings, stultification 53, 56, 57 putative contracts 28–30, 55, 57, 58 rationale of vitiation 54–61

Restatement (Second) of Contracts 43–5, 62–74 unacceptable conduct 57, 58–60 voidability 3–4, 53–74 weakness 85–6 minors incapacity 55–6, 64 Restatement (Second) of Contracts 63, 64 misrepresentation ambiguity 174–5 background 170–4, 193–4 codes 192–6 comparative law 170–211 elements 174–91 English law 170–92 falseness 175 fault 199 fraud see fraudulent misrepresentation general vitiating factors 170–211 impaired consent 25–6, 196, 209–11 inducement 184–91 innocent see innocent misrepresentation materiality see material misrepresentation negligent see negligent misrepresentation non est factum 88–9 Restatement (Second) of Contracts 50, 196–211 statements addressed to complainant 182–4 characteristics 176–8 fact 178–82 unacceptable conduct 25–6, 46–7, 194–6, 201–9 unacceptable inducement 46, 47, 88–9 voidability 197–8 mistake absence of consent 23, 31, 146–8 absence of consent operative 36, 148–55 additional factors 148–55, 161–8 analysis 36

index background 143–5 “basic assumption on which” 45 careless see carelessness classification 1, 35–6 codes 23, 39–42, 142–55 common see common mistake comparative law 40–2, 142–69 correct question 38–9 execution of documents 30, 81 identity see mistake as to identity knowledge 149–52 mistake not known 34–5 mutual see mutual mistake non est factum 30–1 putative contracts 36, 37, 143–5 rectification 7 Restatement (Second) of Contracts 45, 155–69 severity 32, 37–8 state of mind 36 surrounding circumstances 32 unacceptable inducement 30, 34, 35, 152, 162 mistake as to identity absence of consent 116–20 bona fide purchasers 26–7, 116 circumstances/terms 33–4 English law 115–32 fraud 26–7, 34, 116 key principle actual existence 126–7 case law 121–5 face-to-face dealings 127–9 importance of identity 120–5 parol evidence rule 129–30 physical presence presumption 127–9 rules guiding application 125–30 summary 130–2 written contracts 128–30 offer and acceptance 115, 116–17, 118 putative contracts 116–20 rationale of vitiation 116–20 rules 120–32 unreasonable inducement 119 mistake as to quality common mistake 94, 103–8 service contracts 103

331

mistake as to subject matter, difference 38–9 mistake as to terms absence of consent operative 35 background 133–5 elements 135–8 English law 133–8 inclusion/exclusion of terms 31, 38, 133 intended terms 31, 35, 133 objectivity 136–7 offer and acceptance 133 promise 133, 135–6 security of contracts 134 unreasonable conduct 134, 137 mutual mistake classification 35–6, 139 English law 139–41 see also common mistake negligence, documents 82–3 negligent misrepresentation innocent misrepresentation compared 25–6 see also misrepresentation negotiations, carelessness 22 non est factum absence of consent 21, 30–1, 76–9 background 75–6, 79 carelessness 75–6, 82–5 duress compared 21 elements 79–91 English law 75–92 fraudulent misrepresentation 89 intention 30, 80 misrepresentation 88–9 mistake 30–1 proof 75 rationale of vitiation 76–9 requisite degree of difference 79–82 trickery 88–91 unacceptable conduct 78, 88–91 weakness 78, 79, 85–8 objectivity absence of consent 21–6, 41–2, 57 absence of consent operative 17, 33, 35

332

index

objectivity (cont.) common mistake 99 contractual obligations 16–17 estoppel 137 knowledge 29–30 mistake as to terms 136–7 promise 29, 133 subjective element 29–30, 41–2, 58 voluntariness 22–3 obligations, contractual see contractual obligations offer and acceptance mistake as to identity 115, 116–17, 118 mistake as to terms 133 policy absence of consent 22 fair contracts 43 illegality 7 Restatement (Second) of Contracts 43 security of contracts 28, 55–6, 57–8, 66–8 voidability 27, 28 Principles of European Contract Law (PECL) analysis 10–12 excessive benefit 299 fraud 192 fundamental mistake 142 threats 230 unfair advantage 299 see also codes Principles of International Commercial Contracts (PICC) absence of consent 41–2 analysis 10–12 fraud 193 gross disparity 299 mistake 143 relevant mistake 143 threats 231 see also codes promise intention 31 mistake as to terms 133, 135–6 objectivity 29, 133

proof absence of consent 4, 71–2 non est factum 75 Restatement (Second) of Contracts 69–70, 71–2 undue influence 253–5 putative contracts absence of consent 3, 13, 21, 35, 37, 76–9 intended contracts distinguished 30, 31, 32, 37, 38–9, 58 mental incapacity 28–30, 55, 57 mistake 36, 37, 143–5 mistake as to identity 116–20 obligations 13, 21 title to property 27 void ab initio 19 voluntariness 3, 21, 33 rationale of vitiation common mistake 95–101 duress 213–18 general vitiating factors 6–8, 54–61 mental incapacity 54–61 mistake as to identity 116–20 non est factum 76–9 second category of vitiation 173 undue influence 252–3 rectification, mistake 7 representations reliance upon veracity 47 see also misrepresentation requisite factors case law 81–2 degree of difference 79–82 non est factum 79–82 undue influence 6 res extincta common mistake 94, 102 sale of specific goods 102–3 res sua, common mistake 94, 101–2 Restatement (Second) of Contracts absence of consent 42, 64, 65–72, 159–61 analysis 10–12 avoidance precluded 69 balanced transactions 43 carelessness 168–9

index central theory 317–18 constructive knowledge 44 contractual capacity 62, 63–5, 68–9 duress analysis 236–50 impaired consent 248–9 practical alternatives lacking 249–50 provisions 236–7 unacceptable conduct 239–48 executory contracts 70 fair contracts 43, 63, 69 first category of vitiation 42 guardianship 62 impaired consent 44, 209–11, 248–9, 277–8 infants 63 intoxication 63, 71, 73–4 justness 70 knowledge 64–5, 69, 72–4, 162 mental incapacity 43–5, 62–74 minors 63, 64 misrepresentation analysis 50, 196–211 assertion of intention 199 assertion not disclosed 197 assertion of opinion 198 background 199–201 change of circumstances 198 contract formation prevented 197 fault 199 fraudulent 49–50, 197 impaired consent 209–11 material 50, 197 provisions 196–9 reliance 198–9 unacceptable conduct 201–9 voidability 197–8 mistake absence of consent operative 45, 159–61 analysis 45, 155–69 background 156–9 both parties 155 fault 156 provisions 155–6

333

risk allocation 155 unilateral 155, 161, 162–3 voidability 155 policy 43 proof 69–70, 71–2 reasonable understanding 66 second category of vitiation 49–51 security of contracts 66–8 threats 236–7 unacceptable conduct 49–51, 201–9, 239–48, 275–7 unacceptable inducement 162 unconscionability 45, 51, 162–4, 296–8 undue influence analysis 51, 273–8 background 273–4 impaired consent 277–8 provisions 273 unacceptable conduct 275–7 weakness 274–5 voidability 42, 65–72, 155, 197–8 see also codes risk allocation common mistake 100 Restatement (Second) of Contracts 155 second category of vitiation central theory 46–51, 313 codes 48–9 constructive knowledge 48–9 impaired consent 24–5 rationale of vitiation 173 Restatement (Second) of Contracts 49–51 unacceptable conduct 20–1, 24–5, 46–8 vitiating factors 3–4, 19 voidability 3–4, 19 security of contracts codes 28, 40, 144 mistake as to terms 134 obligations 8 policy 28, 55–6, 57–8, 66–8 Restatement (Second) of Contracts 66–8 subjectivity common mistake 98–9

334

index

subjectivity (cont.) contractual obligations 14, 17 subjective element 29–30, 41–2, 58 terms contract see contract terms mistake see mistake as to terms threats DCFR 230 PECL 230 PICC 231 Restatement (Second) of Contracts 236–7 unacceptable conduct 51 trickery, non est factum 88–91 unacceptable conduct absence of consent 22, 29, 30 absence of consent operative 30 codes 48–9, 194–6, 232–3, 302–5, 307–8 degree of impairment 25–6 duress 25–6, 220–4, 232–3, 239–48 general vitiating factors 28 impaired consent 3, 4, 20–6 knowledge 58–60 meaning 46–8 mental incapacity 57, 58–60 misrepresentation 25–6, 46–7, 194–6, 201–9 non est factum 78, 88–91 procurement 24 Restatement (Second) of Contracts 49–51, 201–9, 239–48, 275–7 second category of vitiation 20–1, 24–5, 46–8 threats 51 unconscionability 48, 302–5 undue influence 258–60, 307–8 unacceptable inducement absence of consent 23, 30, 36 absence of consent operative 78 carelessness 88 codes 152 misrepresentation 46, 47, 88–9 mistake 30, 34, 35, 152, 162 Restatement (Second) of Contracts 162

unconscionability advice absent 293–5 background 279–81, 300 codes 299–308 comparative law 279–98 elements 281–95 English law 279–96 impaired consent 305 passive receipt 54, 71 Restatement (Second) of Contracts 45, 51, 162–4, 296–8 substantive unfairness 45, 290–3 unacceptable conduct 48, 302–5 unconscionable conduct 285–90 weakness 281–4, 301–2 undue influence background 300 capacity to influence 256–7 codes 299–308 comparative law 251–78, 299–308 elements 256–61 English law 251–73 exercise of influence 257–8 impaired consent 260–1, 308 presumption analysis 261–72 background 261–3 no proper motives 264–8 personal influence 263–4 rebuttal 269–73 proof 253–5 rationale of vitiation 252–3 requisite influence 6 Restatement (Second) of Contracts 51, 273–8 unacceptable conduct 258–60, 307–8 weakness 274–5, 306–7 UNIDROIT, PICC see Principles of International Commercial Contracts United States DCFR see Draft Common Frame of Reference legal system 11–12 US Restatement see Restatement (Second) of Contracts

index unreasonable conduct absence of consent operative 35 mistake as to terms 134, 137 unreasonable inducement mistake as to identity 119 mistake as to terms 134 vitiating factors background 1–52 first category see first category of vitiation general see general vitiating factors key points 1–6 second category see second category of vitiation void ab initio innocent third parties 26 putative contracts 19 voidability compared 2, 9–10, 19–21 voidability codes 27, 39–40 consequence of vitiation 26–8 mental incapacity 3–4, 53–74 misrepresentation 197–8 policy 27, 28 Restatement (Second) of Contracts 42, 65–72, 155, 197–8

335

second category of vitiation 3–4, 19 void ab initio compared 2, 9–10, 19–21 voluntariness consent 12–19, 23–4 contractual obligations 3, 9, 13–16 definition/terminology 13–16 impaired consent 23–4 objectivity 22–3 putative contracts 3, 21, 33 warranties common mistake 109–10 contract terms 31, 133 weakness codes 301–2 constructive knowledge 48–9 full age and understanding 87 illiteracy/senility 86–7, 90 mental incapacity 85–6 non est factum 78, 79, 85–8 requisite weakness 87–8 Restatement (Second) of Contracts 274–5 unconscionability 281–4, 301–2 undue influence 274–5, 306–7