Business Law - the Effect of Misrepresentation in a Contract - Essay Example

? Business Law By Dec Misrepresentation Young (2009) defines misrepresentation as a false ment of existing or past fact made by one party before or at the time of making the contract, which is addressed to the other party and which induces the other party to enter into the contract. Therefore, misrepresentation covers pre-contractual statements made before entering into the contract in order to induce one party into the contract which they would not otherwise have entered into (p. 122). Misrepresentation is a vitiating factor to a contract, and actionable misrepresentation entitles the innocent party to several remedies. For a statement to be actionable misrepresentation, it must satisfy several requirements: it must be a statement by one party of a contract, to the other party. A misrepresentation by a third party, as a general rule, shall have no effect to the contract. The statement must have been of an existing fact or law, but not an opinion (Bisset v Wilkinson). Finally, the misrepresentation must have formed part of the reason why the claimant entered into the contract. The effect of misrepresentation in a contract generally, is that it makes the contract voidable at the option of the innocent party. That is, the contract remains valid, but may be set aside by the innocent party. However, the remedy available to the innocent party depends on the type of misrepresentation. There are three types of misrepresentation: Innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation. Once one has established presence of misrepresentation, the next course of action is to determine the type of misrepresentation in order to determine the remedy available. There are several remedies available. The contract may be rescinded under the common law; damages may be recovered under the Misrepresentation Act 1967: the tort of deceit can provide further avenues to claim damages. Rescission is available for all types of misrepresentation. Rescission involves returning the parties to their pre-contractual position, as though the contract was never entered into; any party that has already gained benefit is required to make it up for the other party. The injured party may rescind the contract by giving notice to the injured party or by any act evidencing rescission. However, rescission is an equitable remedy, given at the discretion of the court. Some things act as a bar to rescission. They include where the injured party affirms the contract by, with full knowledge of misrepresentation, they expressly state they wish to proceed with the contract. Secondly, where the innocent party fails to take action within a reasonable time, the equitable right is lost. Finally, the court will not order rescission if restitution in integrum is impossible: that is, the parties cannot be restored to their original positions. Secondly, the injured party may recover damages under the tort of deceit. This happens if there is fraudulent misrepresentation. Additionally, for negligent misrepresentation, the injured party may recover under the tort of negligent misstatement. In Royscott v Rogerson [1991] 2 QB 297, it was held that the principle of fraudulent misrepresentation under the tort of deceit also applies to negligent misrepresentation. The purpose of damages is to restore the innocent party to their pre-contractual position. The injured party recovers all the direct loss incurred as result of the fraudulent misrepresentation. If there is innocent misrepresentation, the remedies available is rescission or damages in lieu of rescission. The innocent party cannot claim both. Mistake Mistake exists when one or both parties to the contract believe that an event or a condition exists when in reality it does not. One of the key requirements of existent of a contract is that the parties must be at consensus ad idem, that is, both parties must have a uniform understanding on the terms of the contract. Mistake negates the presence of a common mind understanding meaning that the parties were at cross-purposes. Mistake is a ground for setting aside the contract; however, not every mistake makes the contract void. The effect of a mistake depends on the type of the mistake. Mistakes are categorized into three broad categories: common mistakes, mutual mistakes and unilateral mistakes. Common mistake arises when both parties make a similar mistake regarding an essential fact. They are categorized into Res extincta, res sua and mistake as to quality. Res extincta arises, for example when the subject matter of the contract does not exists. For instance, res extincta arises when A contracts to purchase corn from B, when unknown to them, the cargo had perished and had been disposed (Couturier v Hastie (1856) 5 HL Cas 673). The effect of this is that the contract becomes void ab initio. This is also statutorily provided under section 6 of Sale of Goods Act 1979. Res sua occurs when a party enters in a contract to purchase what, unknown to both of them, belongs to him. For example, in Cooper v Phibbs (1867) LR 2 HL 149, a person entered into a lease contract for a fishery, which unknown to both parties, belonged to him. The court held that the contract would be set aside as it had proceeded under common mistake. With regards to mistake as to quality, a contract becomes void only if the contract becomes essentially different from what it was thought to be. If the mistake as to contract does not render the contract different from what the parties thought it to be, it is not actionable (Bell v Lever bros [1932] AC 161). A mutual mistake arises where both parties are at cross purposes. The court applies an objective test to look whether the correspondence between the parties can be understood to have a single meaning. If there is no a single meaning, the contract becomes void. In unilateral mistake, only one party is mistaken as either to identity or as to terms of the contract. Mistake as to identity arises when a party contracts with B believing him to be C. The law distinguishes contracts made where parties are face to face and where they are not. If the parties are face to face, a unilateral mistake is only operative if the innocent party intended to deal with someone else, they regarded identity as crucial and the other party was aware of this. If it is operative, the contract becomes void. When the contract is made while both parties are not physically present to each other, the mistake is operative if one party is mistaken as to the identity and not the attributes of the other party. The effects of an operative mistake are that the contract becomes void, and a court shall not grant the equitable remedy of specific performance. Duress and Undue influence Duress is an illegal pressure that is exerted on a person in order to coerce them to enter into a contract that they would naturally not enter. It involves the use of, or threat of use of force on a party, in order to induce them to enter into a contract. The basis of duress is that there is complete lack of free consent to contract, which is a fundamental requirement. On the other hand, undue influence arises where improper pressure is applied on a party to enter into a contract, pressure which falls short of duress. Undue influence exists where there is a relationship between the parties and which is abused by one party to gain unfair advantage in the contract. It can be either undue influence or presumed undue influence. The effect of duress and undue influence on a contract is that it makes the contract voidable at the option of the innocent party. However, if duress involves threats to use physical force, the contract becomes void. With regards to actual undue influence, little legal problems arise. The claimant needs only to prove the acts that consist of undue influence. With regards to presumed undue influence, the claimant need not prove that actual pressure was exerted, but it is sufficient if the claimant establishes that there was a relationship between the parties and that the agreement is one which cannot be explained but for the relationship. Some relationship gives rise to direct presumed undue influence, such as mother/father-child, advocate-client and husband –wife relationships. Where a party establishes undue influence, whether actual or presumed, they will be entitled to set aside the contract. On the other hand, duress can be duress to the person, to the goods and economic duress. If there is threat of use of force on the person, the contract is set aside provided that the threat was the cause of entering into the contract. There is no need to prove that they would not have entered into the contract but for the threat (Barton v Armstrong [1976] AC 104). The effect of duress is to deflect the will of the other party but not vitiate the contract. Therefore, the effect of finding both duress and undue influence is to make the contract voidable but not void. Piercing the Corporate Veil Following the ruling in Salomon v Salomon [1897] AC 22, a company has always been regarded as a legal person that is distinct from its members. Limited liability for the shareholders is one of the key motivations for forming a company. The rule is regarded as a veil that protects the liability of the members. The doctrine of limited liability means that liability of the shareholder is limited to the extent of his shareholding: that is, he can only lose that which they have contributed to the company as shares and nothing more. However, there are is an exception, when the court shall look through the veil of incorporation, to identify the company with its shareholders, and to hold them personally and directly liable for the debt of the company. This is called lifting/ piercing the veil of incorporation. This means that the court disregards corporation where the shareholders commit some iniquities inconsistent with the doctrine of incorporation. The veil may be lifted by the courts or by statutes A court shall lift the veil of corporation in times of war, to establish if a company is owned or controlled by enemies or enemy citizens. This was held in Daimler Co Ltd vs. Continental Tyre & Rubber Co. Ltd (1916). Consequently, a resident company will be identified with its members and assume an enemy status if its members if it is being controlled from or taking instructions from enemy aliens. Secondly, the court will lift the veil of incorporation where the company is a sham that is, used for illegal purposes or to mask fraud. This was held in Jones vs. Lipman. In this case, the defendant sold a piece of land to the plaintiff. In a bid to escape his obligations under the contract, he resold the land to a company that he exclusively owned. Therefore, under the law, the court could not have ordered specific performance since the land had already been disposed to another legal person. However, the court held that the company was a creature of Lipman, was a sham and fraud to avoid recognition in the face of the law. Thirdly, the court shall lift the veil of incorporation where it is necessary to protect revenue for the government; tax revenues. This is especially so when the company is structured in order to evade tax obligations which would otherwise accrue. Additionally, the court shall lift the veil in order to establish which country a company is resident to, for taxations purposes. To do this, the court shall lift the veil to establish where the control of the management is. Finally, the court shall lift the veil of incorporation where the company is acting as an agent of its members. In the case of Firestone Tyre & Rubber v Llewellin [1957] 1 All ER 561, the court held that an American company carried out business with its English subsidiary acting as its agent and was therefore subject to U.S tax regime. Besides common law, the statutes will lift the veil of incorporation under several circumstances. The first is where the members fall below the statutory minimum number of persons. If the members falls below the statutory limit and it continues its operations more than six months from the time the membership fell below the minimum with knowledge of its remaining members, Companies Act provides that remaining members shall bear unlimited liability for obligations incurred following the lapse of 6 months. The second instance is when there is non-publication of the companies’ name. The companies’ Act requires the officers and its agents to write its name on the seal, letterheads, negotiable instruments and business documents. This is to enable third parties transacting with the company know that they are dealing with a limited company. Any officer who fails to do so is liable to the holder of a bill of exchange or a cheque which was non-compliant. The third requirement pertains to the group accounts. A company is required to lay before its meeting comprehensive statements or financial statements of its subsidiaries at the same time it does the same for its own. Therefore, a company is identified with its subsidiaries, which are separate entities and legal persons on their own. Moreover, the veil is lifted when the company is involved in fraudulent trading during the winding down of the company. The Act states that if any business is carried out with the intent to defraud creditors of the company or for any other acts which are fraudulent, the liquidator or any person may apply to the court to declare any party to the fraud, personally responsible without limitation. In conclusion, in the above instances, the court will lift the veil of incorporation to identify the company with its members. This principle is an exception to the doctrine of limited liability, and it is an instance of when the members will be liable to the debts of the company. References Books Adams, A. (2008) Law for Business Students. Pearson Longman. Print Young, M. (1990) Understanding Contract Law. London: Routledge. Print Case law Barton v Armstrong [1976] AC 104 Bell v Lever bros [1932] AC 161 Bisset v Wilkinson [1927] AC 177 Cooper v Phibbs (1867) LR 2 HL 149 Couturier v Hastie (1856) 5 HL Cas 673 Daimler Co Ltd vs. Continental Tyre & Rubber Co. Ltd (1916) Firestone Tyre & Rubber v Llewellin [1957] 1 All ER 561 Royscott v Rogerson [1991] 2 QB 297 Salomon v Salomon [1897] AC 22 Read More