Contract Law Problem Scenario - Case Study Example

Topic: Contract Law Problem Scenario Language Style: English UK Grade: 1st Pages: 8 Answer: This question raises some issues from contract of illegality, unconscionable conduct, undue influence, economic duress and misrepresentation. Here the main function will be to advise Clarence and Ginger whether they have claim/claims for damages arising out of the above scenario, and if so, what the likely outcome of such claim/claims is likely to be. Here Seamus had mortgaged Ginger's property. This mortgage can be set aside or the terms modified because here is evidence of undue influence or misrepresentation. A borrower can be pressurized by the lender in such a way that the transaction that he enters is not from his own free will, for example the terms may be particularly favourable to the lender because the borrower is so desperate for money that he is willing to accept very unfavorable terms. Equity has always sought to protect the weaker of two parties from oppression and from exploitation. In the context of a mortgage, equity will seek to intervene where the mortgage terms are oppressive. In order to answer this question it needs to consider presumed undue influence, which was defined in Bank of Credit and Commerce International SA v Aboody1. In this case the Court held that there was a relationship of trust and confidence between the parties of such a nature that it is fair to presume that the trust and confidence of the claimant were abused. Ginger is mother of Seamus, so the case falls in Class 2A types presumed undue influence for specific relationship. In Royal Bank of Scotland v Etridge (No. 2)2, the principle judgement was given by Lord Nicholls. In this case Ginger is especially proud of Seamus, who is a real success in her eyes. Lord Nicholls considered that a bank or any financial institution lending money should take steps to ensure that the claimant receives legal advice by asking for the name of the claimant's legal adviser. Here Northern Bank sends Miss Bindie with all the necessary paperwork but she did not provide adequate information. On the other hand Miss Bindie advised for solicitor or accountant to explain details of legal responsibilities and risks involved before sign papers. In order to answer this question it is also necessary to argue whether the contract was unconscionable or not. Here the contract was unconscionable for Ginger. Ginger is a pensioner, and has no other income. In Commercial Bank of Australia Ltd v Amadio3, in the High Court, it was held that the transaction should be set as side on the grounds that the bank's behaviour was unconscionable. An English court might well have reached the same conclusion on these facts by the application of the rules of undue influence. In Portman Building Society v Dusangh4, a father borrowed money on mortgage from the claimants so as to fund a loan to his son who was planning to buy a supermarket. The father was 72, retired, illiterate in English and spoke it poorly. No fraud or undue influence on the part of the son was alleged and the son was not in financial difficulties at the time of the loan. The father, the son and the building society sought to enforce the mortgage and the father argued that the transaction as unconscionable was not excluded but on the facts the transaction was held not to be unconscionable. In Barclays Bank plc v O'Brien5, Mrs O'Brien sought to set aside the mortgage transaction on the ground that she signed the documents under undue influence and misrepresentation. It was held that the mortgage had been obtained either by her husband's misrepresentation or because of undue influence over her and the court ordered it to be set aside. Ginger can apply to the under s.14 of Trusts of Land and Appointment of Trustees Act 1996 (TOLATA), whereby the court may make any order, including one not to sell (unlike the old s.30 of the Law of Property Act 1925, where sale was often the required way to resolve any dispute unless the purposes for which the property was acquired were still extant). The matters to which the court must have regard in deciding what order to make are set out in s.15 and include the intention of the settler, the purpose of the property, and the welfare of any minor.) Here Court might be considering the age of Ginger. Section 14 Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) enables a trustee of land or any person who has an interest in the property to apply to the court to order a proposed course of action. If Court considers the circumstance then Ginger will get right to possession and court may postpone sale. If Ginger applies under s.14 then Court will consider section 15 of TOLATA. Here it necessary to say that S.15 TOLATA provides guidance to the court on matters to resolve the problem and Court must consider. The welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home; and The interests of any secured creditor of any beneficiary. Here Northern Bank is a secured creditor; so in this circumstance Court will consider the overall effect of s.15 and Court can order to postpone sale and it is possible to give right of occupation. However, Prima facie the Court has power to order sale of property held by trustees where the original purpose of the trust has come to an end. In Re Citro (A Bankrupt)6 it was held that bankrupts are melancholy consequences of debt and improvidence with which every civilized society has been familiar. In contrast Re Holliday7, the court refused sale because it held that the circumstance in this case exceptional. In Claughton v Charalambour8, where the bankrupt's wife was seriously ill and the property had been specifically converted to her needs. Where bankruptcy does not intervene, the court entitled to look at the purpose of the original trust. In Abbey National v Moss9, property was transferred by mother in to the names of her daughter and herself. The daughter mortgaged her share into the claimant and then failed to maintain the payments. The court held that there was an underlying collateral purpose which was that they should both have the right to live in the property independently of each other. The power of sale is the most important remedy for Northern Bank here the mortgagor Seamus defaults on the loan. Seamus has defaulted in a repayment of capital and Ginger was guarantor. According to Section 101 of the Law of Property Act 1925, as a mortgagee Northern Bank has a statutory power to sell the mortgagor's legal estate. Under section 103 of the Law of Property Act 1925, the power of sale is not exercisable until they defaulted in a repayment of capital. So these sections will be applicable here. Court may consider s.105 to distribute sale of property the LPA 1925. Ginger and Clarence will extend his loans from $1 million to $2 million. Therefore the bank were secured creditor, so Court may ordered to pay them first. Before attempt to discuss Seamus's liability, it needs to know about misrepresentation. We know a representation is a statement of fact which induces the other party to enter into a contract or otherwise act to his detriment. The representor does to enter does not promise any thing; he simply asserts the truth of his statements and invites reliance upon the statement. When a representation is false then it is a misrepresentation. Here it is necessary to consider Seamus's statement to his mother Ginger. Seamus asks Ginger to agree to guarantee the loan and to mortgage her house. To induce her he stated that there is virtually no risk because business is booming, the guarantee is only for $500 000 for 24 months, and my house is worth over a million dollars. Even if I can't repay the loan, selling my house will more than cover the debt. But not long after that, Seamus' business collapses. His house is sold, but it does not meet the debt. The bank call Ginger's guarantee. They want to sell her house, which would repay most of the debt owed by Seamus. It is a clear example of fraudulent misrepresentation. In Derry v Peek10 Lord Herschell LJ held that fraud constitutes a "false representation made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false". In other words, the representor must have lacked an honest belief in the truth of his statement. However, motive is immaterial, so a party can be liable of fraud, even though no harm was intended. Recklessly was enunciated to mean "consciously indifferent to the truth" and not merely "gross negligence". Under the Misrepresentation Act 1967, Seamus would be entitled to damages if Ginger can prove the misrepresentation had been fraudulent. Northern Bank may not be liable for misrepresentation because as a general rule mere silence or passive failure to disclose the truth is not actionable, though they are deceptive. On the other hand, since Peek v Gurney11 the courts have recognised that a half truth may be just as much a false representation as a complete lie. According to Nettleship v Weston12 it is established that all road users owe a duty of care to other road users. It follows that Clarence and Seamus has a potential duty to pedestrian. After hitting the young pregnant woman, Seamus offers to keep silent, but only if Clarence will pay him $20 000. It was clear scenario of economic duress. That harm respectively, property damage suffered by Clarence and suffered personal injury by pregnant woman, both of which appear to be foreseeable consequences of a road traffic accident. In such condition Clarence need to consider Seamus's liability and Clarence may sue against Seamus for damages personal injury claims, medical and other expenses including $20,000 which Seamus get by economic duress. Economic duress is a very recent innovation, perhaps originating from Lord Denning's theory of inequality of bargaining power and from his judgements in such as D & C Builders Ltd v Rees 13and Arrale v Costain Civil Engineering ltd14. Two cases are essential in the development of the Economic duress doctrine. First, in Sibeon and the Sibotre15, Kerr J stated, Obiter, that a court must in every case at least be satisfied that the consent of the other party was overborne by compulsion so as to deprive him of any animus contrahendi'. Secondly, in Barton v Armstrong16, lords Wilberforce and Simon (dissenting) stated: "In life many acts are done under pressure, sometimes overwhelming pressure, so that one can say that the actor had no choice but act. Absence of choice in this sense does negate consent in law; for this pressure must be one of a kind which the law does not regard as legitimate". Here Clarence and Seamus made an illegal contract. In general, an agreement to do something which is expressly or impliedly prohibited by law is unenforceable and property or money transferred under contract cannot be recovered: in pari delicto portior est coditio defendentis (where both parties are equally at fault the possessor is better). The courts will permit the recovery of property or money transferred under contract where the comparative innocence of one party is established. Thus, if the parties are not in pari delicto, a court may allow the less blameworthy to recover money or property transferred under the contract. If Court follows this general principle of illegal contract than Clarence could be recover $20,000. Here need to consider two important cases. In Hughes v Liverpool Victoria Legal Friendly Society17 the plaintiff was allowed to recover premiums paid under an illegal life insurance policy as he was induced to enter into the contract by the defendant's fraudulent misrepresentation that the policy was invalid. However, a claimant's innocence is insufficient without evidence that the defendant acted in some unconscionable manner. In Kiriri Cotton Co. Ltd v Dewani18 the landlord charged the tenant an illegal premium which the tenant then sought to recover. It was held that as the relevant statute placed the obligation firmly on the landlord, the tenant could recover the rent on the grounds that he was not in pari delicto. From these cases it can be said that If Court follows these cases than Clarence could be recover $20,000. Clarence is suffering from a guilty conscience. When he learns that the pedestrian was a young woman who was pregnant, his suffering increases, and he resolves to confess. So he is an innocent party. One further example of "comparative innocence" is provided by the principle of repentance. Specifically, the recovery of property and money will be permitted if the claimant repents by discontinuing his illegal activities before the contract has been substantially performed in Kearly v Thompson19. If Court follows this case, the contract would be void. Clarence an innocent party possesses all the normal contractual remedies available, e.g. recovery of $20,000, however, the test of innocence is objectively applied. Thus, in Asmore, Benson, Pease & Co. Ltd v AV Dawdon Ltd20 the contract involved the transportation of a load in excess of the legal limit for the Lorries used. Naturally, if the Clarence's "innocence" is compromised if then he may forfeit his rights, e.g. perhaps Clarence ought to have recognized that the contract could only be performed in and illegal manner, though it seems less important if the statute is there to protect him in the first place in Show v Groom21. This general objective test has been applied in a different context, to collateral contract which stipulated that the defendant would obtain the required statutory license before commencing work. So far we have been seen that an innocent party possesses better remedies in comparison with his guilty counterpart. But the later is not completely denuded of rights. So it can be assumed that Clarence will entitle to recover the remedy. Clarence can recover $20,000 to help him pay his legal fees if court considers the following cases. In Pao On v Lau Yiu Long22, Lord Scarman observed that there is noting contrary to principle in recognizing economic duress as a factor which may render a contract void able, provided always that the basis of such recognition is that it must always amount to a coercion of the will which vitiates consent. Since the Privy Council was quite clear that there had in fact been no coercion of the will, this statement was not surprisingly of the most guarded kind and more weight should perhaps be attached to the judgement of Mocatta J in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd23. The contract will be voidable if court considers economic duress. However, court also considers Seamus's defence. In Tinsley v Milligan24, the House of Lords allowed the defendant's counterclaim on the ground that evidence of illegality emerged in cross-examination rater than in her original pleadings. From the above discussion it can be said Clarence can recover $20,000 if court apply contract of illegality principle and in case of Ginger, she may get right to position if she can satisfied that the transaction made by misrepresentation. Bibliography: 1. Cheshire, Fifoot and Furmston, Law of Contract, 15th Edition (2006), Publisher LexisNexis UK, 2. McKendrick E. Contract Law, 6th Edition (2005), Publisher Palgrave Macmillan, UK, 7. 3. Catharine Macmillan& Richard Stone, Elements of the Law of Contract, (2003), University of London Press. 4. Beatson. J. Anson's Law of Contract. 28th Edition (2002), Oxford, Oxford University Press. 5. Smith .J. C. Smith & Thomas: A Casebook on Contract, 11th (London; Sweet & Maxwell 2000). 6. Brown, I. And A, Chandler Blackstone's Q&A Law of Contract 6th Edition (2006), Oxford, Oxford University Press. Read More