Topic

Law of Contract (Free Consent to Contract)

TOPIC5

LA W O F CONTRA CT (FRE ECONSE TO CONTR NT ACT)

Figure 5.1: Factors which affect consent

5.1

COERCION

Coercion under Section 15 of the Contracts Act 1950 means the committing, or threatening to commit any act forbidden by the Penal Code, or the unla wful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. It is immaterial whether the Penal Code is or is not in force in the place where the coercion is employed.

TOPIC 5

LAW OF CONTRA CT(FREECONSENT TO CONTR AC T)

61

In the case of:

Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119, the Court held that a transfer executed under the order of the Sultan, issued under duress of two Japane officers during the JapaneseOccupation of Malaya se was invalid.

In the case, consent was not freely given and the transfer became voidable at the will of the party whose consent was so caused. In another case of Chin Nam B ee Development Sdn Bhd v. Tai Kim Choo & 4 Ors. [1988] 2 MLJ 117, the respondents purchased houses to be constructed by the appellants. Each respondent had signed a sale and purchase agreement to purchase a house at RM29,500.The respondent was then made to pay an additional amount of RM4,000. The issue was whether the additional payment was made voluntarily or under threat by the appellants to cancel the respondents booking. The Court held that the payment was not voluntary and had been made under threat. There was coercion as defined in Section 15 of the Contracts Act 1950.

5.1.1

Effect of Coercion

Where there is element of coercion in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 19(1) of the Contracts Act 1950 provides that when consent to an agreement is caused by coercion...the agreement is a contract voidable at the option of the party whose consent was so caused.

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TOPIC5

LA W O F CONTRA CT (FRE ECONSE TO CONTR NT ACT)

5.2

UNDUE INFLUENCE

According to Section 16(1) of the Contracts Act 1950, a contract is said to be induced by UNDUE INFLUENCE where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Based on the wording of Section 16(1), the two important aspects of undue influence are: (a) (b) The domination of the will by one party over the other; and Obtaining an unfair advantage.

5.2.1

Real or Apparent Authority

A person holds a real or apparent authority over the other, for instance; parents authority over a child and husbands authority over a wife.

5.2.2

A Fiduciary Relation

A person stands in a fiduc iary relation to the other, for instance; the relationship of a solicitor-client, a doctor-patient, a trustee-beneficiary and a religious adviser- follower.

In the case of Tate v. Williamson (1866) LR 2 Ch App 55,

T (an Oxford undergraduate), aged 23, was being pressed to pay his college debts. He asked his great-uncle to advise him how he should find the means to pay. The great-uncle was unable to advise in person, owing to ill health, thus, he deputed the defendant (his nephew) to do so. Conversations took place between T and the defendant in which T expressed the desire to sell part of his estate. The defendant offered to buy it for 7000. Before the sale was completed, the defendant obtained a report from a surveyor on the property and it was valued at 20,000. The defendant did not disclose this fact to T, but proceeded with the purchase.

It was held that the purchase must be set aside. The defendant, having been asked to give advice, stood in a confidential relationship to T. This prevented him from becoming a purchaser of the property without the fullest communi cation of all material information which he had obtained as to its value.

5.2.3

Mental Capacity is Temporarily or Permanently Affected by Reason of Age, Illness, or Mental or Bodily Distress

When a person makes a contract with another person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress, the presumption is that the person wi ll dominate another person will, to obtain advantage which is unfair to the other person. The other person could be old, or sick, or suffering from certain illnesses or diseases, or in a state of unsound mind, that affect his mental capability and also physical suffering. In the case of Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468, the Court held that the charge document that has been signed by the third plaintiff who was of unsound mind could be set aside at his option.

5.2.4

Burden of Proof

According to Section 16(3)(a) of the Contracts Act 1950, where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other

In the case of Lloyds Bank, Ltd. v. Bundy [1975] QB 326,

The defendant, an elderly farmer, and his only son, had been customers of the plaintiff bank for many years. The son founded a company which banked at the same bank. In 1966, the defendant guaranteed the companysoverdraft for 1,500 and charged his farm to the bank to secure that sum. Subsequently, the overdraft was increased and the bank sought further security. In May 1969, the defendant took legal advice and signed a further guarantee in favour of the bank for 5,000 and a further charge for 6,000. In December 1969, the bank manager visited the defendant and indicated to him that the continuance of the companysoverdraft facility was dependent upon the defendant executing in favour of the bank a further guarantee for 11,000 and a further charge for 3,500. The bank manager did not advise the defendant to seek independent advice, and the defendant signed the required guarantee and charge without such advice.

The Court of Appeal held that the last guarantee and charge should be set aside for undue influence because a special relationship of confidence existed between the defendant and the bank in the particular case.

Other important casesof undue influence are the case of:

Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57.

The plaintiffs husband executed a conveyance of property belonging to himself and the plaintiff to his brothers, B and C. The plaintiff agreed to the conveyance but after her husbands death, she brought an action seeking to set aside the agreement and the conveyance. The Court held that a confidential relationship existed between the plaintiff and B and C. The burden of proof therefore lay on B and C to show that the plaintiff fully understood the transaction and executed the conveyance freely and without being subject to undue influence. Since B and C failed to discharge the burden, the transaction was set aside.

In the case of:

Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196.
The respondent was the registered proprietor of a piece of land. She claimed that she was induced by fraud and undue influence of the first and second appellant to transfer her land to the second appellant. The Federal Court held that the appellants and respondent were in a solicitorclient relationship and the transaction was unconscionable. Therefore, the burden was on the appellants to rebut the presumption of undue influence. In this case, the appellants had not discharged that burden and thus the transaction was set aside.

5.2.5

Effect of Undue Influence

Where there is element of undue influence in a contract, the contract wi ll become voidable at the option of the party whose consent was so caused. Section 20 of the Contracts Act 1950 provides that when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused .

S ELF-C H EC K 5.1 ACTIVITY 5.1

5.3

FRAUD

Fraud refers to acts committed by a party to a contract with the intent to deceive the other contracting party. According to Section 17 of the Contracts Act 1950, fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: It means fraud will exist when the party to a contract is suggesting a fact which is not true to another party, and he himself knows that the fact is not true. In the case of:

Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198,

The plainti ff, an illiterate Indian woman rubber tapper, claimed to rescind the sale and purchase agreement made with the defendant on the ground of fraudulent misrepresentation. According to the plaintiff, she was induced to enter into the agreement whereby the defendant had fraudulently represented to the plaintiff that she was signing for a loan document and also other documents to free her land from a charge. In actual fact, she was signing a sale agreement relating to her land in Port Dickson.

The Court held that the evidence clearly showed that the defendant had exercised fraud and therefore the plaintiff was entitled to rescind the contract.

5.3.1 Effect of Fraud

In the case of:

Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201,
The Court held that the respondent had sufficient means to carry out his own inspection or investigation in determining the truth of the facts in their contract. Thus, there was no fraud on the appellantspart.

In the case of:

Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814,

The Indian Supreme Court stated that: A false representation, whether fraudulent or innocent, is irrelevant if it has not induced the party to whom it is made to act upon it by entering into the contract. The burden of proving fraud lies on the party making the claim.

5.4

MISREPRESENTATION

Misrepresentation refers to an untrue statement made by a representor and that induces the other party to enter into a contract. Misrepresentation under Section 18 of the Contracts Act 1950 includes: (a) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.

(b)

Any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him. Causing, however innocently, a party to an agreement to make a mistake as to the substanceof the thing which is the subject of the agreement. In brief, misrepresentation is a representation of untrue or misleading statement of fact, made by a party to the contract, to induce the other party to enter into the contract. The difference between fraudulent misrepresentation and misrepresentation under Section 18 is that, misrepresentation under Section 18 is made without any intention to deceit. In other words, a misrepresentation in which no element of fraud is present. This is because the party making such a statement honestly believes in the truth of the statement, or negligently or innocently makes such statement which is untrue or causesanother to make a mistake of fact. It is important that the statement represented is a statement of fact and not only a statement of opinion. In the case of:

(c)

Bisset v. Wilkinson [1927] AC 177,

The respondents agreed to purchase from the appellant certain lands at Avondale, in the Southern Island of New Zealand, for the purpose of sheep-farming. The respondents relied on the appellantsstatement that he estimated the lands to carry two thousand sheep. The appellant had not, and no other person had at any time, carried out sheep-farming on the lands in question. When the appellant claimed the balance of the purchase price, the respondents counter-claimed to rescind the contract on the ground of misrepresentation. The Court held that the statement was merely of an opinion which the appellant honestly held. The claim to rescind the contract failed.

5.4.1

Effect of Misrepresentation

Where there is element of misrepresentation in a contract, the contract wi ll become voidable at the option of the party whose consent was so caused. Section 19(1) of the Contracts Act 1950 provides that when consent to an agreement is caused by ......., or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused .

However, according to Exception to Section 19 of the Contracts Act, 1950, if such consent was caused by misrepresentation or ......., the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

This means, the act of misrepresentation does not give rise to a cause of action if it has not induced or caused the other party to enter into the contract. The representee must have relied on the statement of the representor.

ACTIVITY 5.2

5.5

MISTAKES

Mistake under the Contracts Act 1950 includes a mistake as to a matter of fact (by one or both contracting parties) and mistake as to any law in force or not in force in Malaysia. Sections 21 and 23 of the Contracts Act 1950 provide for the effect of a contract entered into under a mistake of fact. Under Section 21, both parties to the contract are under a mistake of fact, and under Section 23, only one of the parties is under a mistake of fact which is essential to the contract made.

5.5.1

Mistake of Fact

According to Section 21, where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void . According to Section 23, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact . The above provisions provide that if the mistake of fact is done by both parties in a contract, the contract will be void. But if the mistake is done by one of the

parties to a contract, then the contract will not be voidable.

In the case of:

Raffles v. Wichelhaus (1864) H&C 906,

Two parties agreed to a sale of a cargo of cotton arriving in London by a ship called The Peerless, sailing from Bombay. But unknown to both parties, there were two ships of the same name both leaving from Bombay at different times. They were both negotiating under a mistake and had in mind of different ships. Therefore, the contract of sale was ruled void for mutual mistake.

5.5.2

Mistake of Law

Mistake of law is provided under Section 22 of the Contracs Act 1950. Section 22 states, a contract is not voidable becau it was caused by a mistake as to any se law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact . Thus, if the mistake is made by the contracting parties as to the law in force in Malaysia, the contract is not voidable. But if the mistake is made as to the law not in force in Malaysia, then the contract is void.

5.5.3

Mistake as to Document

In the case of:

Awang bin Omar v. Haji Omar & Anor [1949] MLJ Supp 28,
The plaintiff and the second defendant entered into a contract and the performance was guaranteed by the first defendant (who was induced by the second defendant, to sign a document). The first defendant did not know English and he was persuaded to sign in the mistaken belief that he was merely witnessing his brotherssignature. The High Court ruled that there was a mistake as to the nature of the document signed and therefore, the first defendant was not liable.

5.5.4

Effect of Mistake

When a contract is void (for mistake), according to Section 66 of the Contracts Act 1950, any person who has received any advantage under the agreement is bound to restore it or to make compensation for it to the person from whom he received It An example is illustrated below:

Illustration (a)
A pays B $1,000 in consideration of B spromise to marry C (A s daughter). C is dead at the time of the promise. The agreement is void, but B must repay A the $1,000.

Coercion is the act of committing or threatening to commit any act forbidden by the Penal Code, with the intention to make the other party enter into a contract. The effect of a contract made under coercion is voi dable. To establish a contract made under undue influence requires the elements of domination of will and obtaining unfair advantage. The burden of proving that the contract is not induced by undue influence is on the person dominating the will of another. The presumption of undue influence can be rebutted by proving the other party taking independent legal advice. Contracts made under undue influence will become voidab le. Fraud covers an act committed by one contracting party with the intent to deceive another. Mere silence is no fraud. Failure by one party to speak out will amount to fraud if there is a duty of disclosure. Element of fraud makes the contract voidable. A contract under fraud is not voidable if the party being the victim of fraud had the means of discovering the truth with ordinary diligence. A false statement which does not induce or cause the party to enter into a contract does not render the contract voi dable. Innocent misrepresentation in a contract is not made with the intention to deceive but the contract is voidable. Mistake of fact will render a contract void if it is a common or mutual mistake. Unilateral mistake does not render a contract voidable. A contract made under a mistake of law in force in Malaysia is not voi dable. A contract which is void under a mistake of fact requires the party who has received the advantage to restore it to the other party. The defence of non est factum is accepted in mistake cases but in exceptional circumstances. Remedy of rectification is allowed in a contract made under mistake.

Coercion Fiduciary relation Fraud Free consent Mental capacity Misrepresentation

Mistake Ordinary diligence Real/apparent authority Rectification Undue influence Voidable contract

TOPIC 6

LAW OF CONTRACT(VOID AND ILLEGALCONTRACT)

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