When is a Contract not a Contract

Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing.

The law recognises that various forms of defective negotiation may provide the ‘victim’ with an excuse which allows that person to cancel the contract (and possibly a right to damages).

Negotiations may be affected by any of the following matters:

• Mistake;
• Misleading conduct or misrepresentation;
• Duress; and
• Undue influence or unconscionability.

Mistake

Only a few types of mistakes will cause the contract to be non-binding on the parties to it: they must be mistakes that go to the very basis of the agreement.

For example, where there is a contract for the sale of a car that both parties assume to exist, although in reality it has been destroyed by fire, this contract may be rescinded.

By contrast, where the parties are only mistaken about the model of the car, then this contract would be binding.

Another example is when a person signs a written document mistakenly believing that it relates to something entirely different from what in fact it does relate to, in which case the person will not be bound by it.

This means that if X is told to sign a document which X reasonably believes to be something like a character reference to assist Z obtain a loan from a finance company, and the document is later discovered to have been a guarantee of the loan contract, then the guarantee will not be held binding on X.

A third example is when Y cannot read, owing to blindness or illiteracy or other disability.

Someone else tells Y what is in the document and Y signs it. The document Y signed is not what the other person claimed it was. The document Y signed would not be binding on Y.

By contrast, if a person who signs a document believing it to be a contract does not read the terms and conditions, that person will be bound by the contract and will not be entitled to plead mistake.

Other factors may also be relevant to a successful plea of mistake. For instance, whether or not the defence of mistake will be allowed often depends on whether an innocent third party will be adversely affected by a decision that the contract is non-binding.

Again, if the signer was careless, failing to take reasonable precautions, the defence will not be allowed to succeed. For these reasons, it is wise to seek legal advice about whether or not a court would hold the contract binding on these grounds.

Misleading or deceptive conduct

The enforceability of a contract may be affected by defective negotiations, in particular if a party has engaged in misleading or deceptive conduct.

During negotiations many things may be said or promised. Some of these things end up as terms of the contract. If so, and they are wrong or inaccurate, then there may be a remedy for breach of contract. But many things are said or written which do not end up as terms of the contract.

Yet they have a legal effect if they are wrong or inaccurate. These are generally called misrepresentations, that is, statements which turn out to be incorrect which played some part in persuading the other party to enter into the contract.

There is a very powerful legislative provision found in the Australian Consumer Law (ACL) section 18 which states that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’.

This section applies to individuals and to corporations. However it is important to note that the section is not confined to consumer transactions despite appearing in the Australian Consumer Law.

The section is, however, confined to ‘trade or commerce’ and so it does not apply to non-business transactions. For example, if a person misled a potential buyer in the private sale of a motor vehicle, this would not be covered by the ACL section 18 as a private sale would not be regarded as being in trade or commerce.

The effect of this legislation is that a person who has entered into a contract after being misled by the other party may be able to cancel the contract or obtain compensatory damages. There are other remedies available, for example, modification of the contract.

This law also applies to advertisements and it is possible to obtain an injunction under the legislation to put a stop to misleading advertisements.

An ordinary citizen cannot generally afford to do this but can bring the advertisement to the attention of the Australian Competition and Consumer Commission or the TAS Office of Consumer Affair and Fair Trading.

It may be worth getting legal advice if you feel you have been the victim of false advertising.

Misrepresentation under common law – build link to ACL private sale section

If Section 18 of the ACL does not apply (for example, in a private sale) then it may still be possible to rescind a contract induced by a misrepresentation.

It is possible to rescind a contract under the ACL after the contract has been executed, whereas under common law principles this may not be possible where the misrepresentation was a non-fraudulent one.

Under Tasmanian legislation, the common law position on misrepresentation is preserved in contracts for the sale of goods (s5, Sale of Goods Act 1896).

It is also possible to seek damages for a misrepresentation under the law of torts: in the tort of deceit if the representation is fraudulent; in the tort of negligence if the representation is negligent.

Each of these has its difficulties.

Proving fraud is difficult: there must be very clear evidence that the person has lied. Bringing a negligence action for misrepresentation is also not straightforward.

It must arise from a situation where the allegedly negligent person owes a duty of care to the other party. This is not readily found by the courts.

The circumstance must generally be one where the person providing the information is an expert or is providing it in a business or professional setting. Casual remarks between friends and acquaintances do not usually generate negligence liability.

A pre-contractual misrepresentation is best dealt with, so far as possible, under the Australian Consumer Law section 18 which is far easier to use than the law just described. Any dealings with a trader or business will be covered by this legislation.

As the legal information above notes above this is a complex area of law and you should seek legal advice before taking court action in relation to issues of this nature.

Duress

Proper consent may be affected by duress. Duress is held to have occurred where there has been actual or threatened violence either to the other contracting party or to their immediate family, near relatives or close associates.

The duress may be made by someone acting under the instructions of the party to the contract. The net effect, though, will have been that a party has been forced into the contract by being deprived of their free will to act.

Duress now extends to contracts entered into as a result of threats to a party’s economic well being, that is, a threat to a person’s business or trade. This form of duress is called economic duress.

The consequence of establishing duress is that the contract is voidable at the election of the wronged party. That is, as discussed above, the wronged party must act promptly or risk losing the right to cancel.

You should seek legal advice if you believe you have been the victim of a contract created under duress.

Undue influence

Proper consent may be affected by undue influence. Undue influence is exercised by taking unfair and improper advantage of the weakness of the other party, to the extent that it cannot be said that that party intended voluntarily to enter into the contract.

The main reason for the rule against the use of undue influence is to correct abuses of trust and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.

The consequence of establishing undue influence is that the contract may be voidable at the election of the wronged party who must act promptly if he or she wishes to cancel the contract.

Unconscionability

A contract may be cancelled if it was the product of unconscionable dealing by one of the parties. This is closely related to undue influence (discussed above) but the usual feature of undue influence is the exploitation of a relationship of dependency whereas unconscionability is more general.

Unconscionable dealing, as interpreted in case law, occurs where two requirements are satisfied:

• One party to a contract or transaction is under a special disadvantage; and
• The other party takes unfair advantage of the other party’s vulnerability, either with knowledge of that vulnerability or where the other party has ‘closed their eyes’ to the vulnerability.

Although not an express requirement, it is apparent that the courts will more readily hold that a party has taken unconscionable advantage of a person where the transaction is extremely disadvantageous to that person.

Individuals and corporations are prohibited from engaging in unconscionable conduct in trade or commerce under the ACL, Sections 20–22.