BCD1004 – FUNDAMENTAL

PRINCIPLES OF
COMMERCIAL LAW
LECTURE 5 – CONTRACT VITIATING FACTORS:
MISREPRESENTATION; MISTAKE; DURESS & UNDUE
INFLUENCE; CONTRACTS IN RESTRAINT OF TRADE
 MISREPRESENTATION
Terms vs. Representations
The previous lecture we had discussed that a term of the contract
contains promises which form part of a contract. Its breach is remedied
by an action for breach of contract. A representation, on the other
hand, are statements made during negotiations which induces another
party to enter into contract, it may or may not translate into a term of
the contract. If it transpires to be untrue, an action for
misrepresentation may lie.
Definition of a misrepresentation
A misrepresentation may thus be defined as an untrue or false
statement made by one party in the course of negotiations which
induces the other party to enter into the contract.
 MISREPRESENTATION
In order for a misrepresentation to be effective and actionable in a
court of law, the following must be met:
It must be a statement of fact, not opinion or intention
The statement was addressed to the party misled, before or at the
time the contract was made
The statement must be material enough to induce the other party to
enter into the contract and did in fact induce the making of the
contract
The other party must rely on it during the course of negotiations,
ultimately suffering loss.
 Statement of Fact
• The operative statement must be one of past or existing fact.
It cannot be a statement of opinion. Bisset v Wilkinson. Nor
a statement of intention or some likely future event.
Edgington v Fitzmaurice and Tan Chin Seng v Raffles Town
Club.
• “Silence” in itself does not amount to misrepresentation
unless:
It is a half-truth by what is left unsaid
A change of circumstances
Insurance contracts where a duty of utmost good faith exists
 Inducement & Reliance
• To qualify as a misrepresentation, the statement must induce the
innocent party into the contract. The statement need not be the sole
inducing factor, so long as it played a part in the inducement.
Panatron Pte Ltd v Lee Cheow Lee.
• Therefore it follows that a person who was not induced by the
statement cannot succeed in his action. Tai Kim San v Lim Cher Kia –
there must actually be an inducement.
• Reliance by the innocent party must come soon after he has been
induced into the contract.
• Sometimes the opportunity to investigate the truth of the statement
presents itself to the victim. If he did avail himself of the opportunity,
the law would still protect him despite the fact that his own enquiries
fails to discover the truth. Redgrave v Hurd.
 TYPES OF MISREPRESENTATIONS
Essentially there are 3 major types of misrepresentations
recognized by law:
Fraudulent misrepresentation
Negligent misrepresentation
Innocent misrepresentation
 Fraudulent Misrepresentation
• Fraudulent Misrepresentation involves a calculated and
deliberate untruth.
• What this means is that the critical determinant of whether a
statement is fraudulent or not is whether the representor
had an honest belief in its truth at the time of making it.
• To succeed in fraud, The misled party (the representee) must
prove that the representor had no honest belief in the truth
of the representation in the sense in which the representor
intended it to be understood.
 Derry v Peek (1889) 14 App Cas
• The 337 were the directors of a tramway company. They
defendants issued a
prospectus stating that the company was entitled to use steam and other
mechanical power to run its trams.
• That statement was false. The company had applied for the necessary consents
but they were not forthcoming.
• Relying on the representation, Peek subscribed for shares. When the company
was later wound up because the consents were never received, he sued the
directors alleging fraud.
• They argued that they were not liable as they honestly believed that getting the
consents was a mere formality.
• The Court Held:
The directors were not liable. Because they had honestly believed the statements were true,
they were not found to be guilty of fraud.
For fraudulent misrepresentation to arise the false statements must be made “knowingly, or
without belief in its truth, or recklessly, careless as to whether it is true or false”. None of
these elements were present here so there was no fraudulent misrepresentation
Panatron Pte Ltd v Lee Cheow Lee (2001) 3 SLR 405
A had induced L to invest in a company called Panatron, by
stating that the company was profitable. In fact A knew that
this was not the case and knew instead the company was
chalking up massive losses, which was not formally reported.
Eventually the company went into liquidation and L lost
everything he had invested. The court Held that the
misrepresentation was fraudulent.
 NEGLIGENT MISREPRESENTATION
• This may be defined as a statement made without due care,
with no fraudulent intention and no reasonable grounds to
believe it to be true. See: Section 2 of the Misrepresentation
Act
• Usually in a situation where a person is held out as
competent to give information and advice, and if he realises
that he is being trusted to give correct information or advice,
he will be liable if the information or advice is incorrect.
• See: Howard Marine v. Ogden Ltd (next slide).
 Howard Marine Ltd v Ogden Ltd (1978) QB 574

O had chartered two barges from HM. HM had made

representations about the capacity of the barges which were
based on entries found in Lloyd’s Register and not the actual
shipping documents (which were available). The court said
that a reasonable person would have checked the shipping
documents and not Lloyds Register. There was no reasonable
ground for believing in the Lloyd’s register, when the actual
documents could be verified. The court Held therefore that it
was a negligent misrepresentation.
 INNOCENT MISREPRESENTATION
• This happens when a statement is made without fraud
and without fault on the part of the maker as he had
reasonable grounds to believe it to be true.
• It generally occurs where statements are made in the
honest but mistaken belief that they are correct.
 EFFECT OF MISREPRESENTATION
Misrepresentation has the effect of rendering a contract voidable. This
means that it is valid and binding until “rescinded” by the misled/innocent
party. In addition, the misled/innocent party can also:
Claim damages for fraudulent misrepresentation in the tort of deceit; or
Claim damages for negligent misrepresentation in the tort of negligence
Bars to Rescission
There are certain “bars” to rescission in that rescission is not available:
• If the contract is/has been affirmed
• A reasonable time has elapsed since discovering the misrepresentation
• The parties cannot be restored to their pre-contractual positions
• A court exercises its discretion under section 2(2) of the Misrepresentation Act.
 MISTAKE
When a contract is entered into, because one or the other parties are
under some mistaken misapprehension about something forming the
basis of their agreement, it can be argued that there is no true or real
consent and that consequently, the contract should be set aside.
However, this is not the position under the law since not all mistakes
will vitiate a contract. This is because of the onerous criteria required
to prove a mistake under the law. In general, only 3 types of mistakes
may be able make a contract ineffectual, these are:
Common mistake
Mutual mistake
Unilateral mistake
 Common Mistake
• This happens when both parties make the same fundamental
mistake of fact relating to the same subject matter, believing
that a particular state of affairs exists or that a particular
underlying fact is correct.
• A common mistake will render the contract void both at
common law and in equity, at least where the mistake is as
to something fundamental to the obligation undertaken
under the contract.
• Because the contract is void at common law, neither party
may sue for the other party’s failure to perform.
 Couturier v Hastie (1842) 115 ER 1250
• The parties entered into a contract for the sale and purchase of a cargo of corn
believed to be en-route from Salonica to UK. Unbeknown to the parties, the
corn in fact had become so heated up and damaged that it had been unloaded
and sold off at Tunis.
• Despite this, the seller demanded that the buyer pay the full price of the cargo.
The buyer, for his part, contended that since the cargo was not in existence at
the time of the contract, he was not bound to pay for it.
The Court Held:
The contract had been an agreement to buy a specific goods (corn) rather
than an agreement to purchase the adventure.
Because those specific goods ceased to exist in a commercial sense before
the time of the contract, there was no subject matter to contract about and
consequently, no valid contract has come into existence.
Therefore, the buyer did not have to pay the price.
 Mutual Mistake
• This occurs when the parties misunderstand each other
totally and are at cross purposes.
• For example, Lim offers to sell his Toyota and Tan accepts
what he thinks is Lim’s offer to sell a Nissan. If both parties
are not aware of each other’s mistake, there is a mutual
mistake.
• With mutual mistake, you can see parties have not at all
agreed about the same subject matter. The question we
should ask is: have the parties truly consented to the same
subject matter? If not, the contract is void.
 Raffles v Wichelhaus (1864) 159 ER 375
• The parties had entered into a contract for the sale of a shipment of
cotton to arrive “ex Peerless from Bombay”. In fact, there were two
ships called Peerless, both sailing from Bombay and both carrying
cotton on board.
• One was leaving in October and the other in December.
• The buyer intended to contract for the October shipment, the seller
meant the December shipment. When the December shipment
arrived, the buyer refused to accept the cotton as he intended to
buy from the October delivery and the seller sued to enforce the
contract.
The Court Held:
The buyer was not liable to take delivery or to pay the price.
There was no contract as the offer and acceptance did not coincide and
there was in reality no true consent in the first place.
 Unilateral Mistake
• Unilateral Mistake occurs where only one party to the
contract is mistaken, the other party is or should be aware
of that mistake and yet purports to proceed with the
agreement anyway.
• In our preceding example supposing Lim knows of Tan’s
mistake but continues with the contract and goes ahead,
then there is a unilateral mistake.
• Unilateral mistake can be in the following forms:
Unilateral mistake as to the terms of the offer or acceptance.
Hartog v Colin and Shields
Equity’s response in unilateral mistake cases. Chwee Kin Keong
& Ors v Digilandmall.com
 Hartog v Colin and Shields [1939] 3 All ER 566
• Both parties entered into a contract to buy and sell 30,000 Argentine
hare skins. In all their correspondence and discussions leading to the
eventual contract, the parties had negotiated on the basis of a price
per piece and in fact, the last price mentioned by the plaintiff
(buyer) was 10 pence per piece. In response, the defendants (seller)
offered to sell at 10.25 pence per pound. (equivalent to about 3.5
pence per piece).
• The buyer quickly snapped up the offer and when the seller refused
to deliver at that price, he sued for damages for non-delivery.
The Court Held:
There was no contract. The defendants (sellers) offer was clearly a mistake,
a fact that was or should have been readily apparent to the plaintiff.
Consequently, no binding contract had ever arisen.
 Equity’s Response (a question of
fairness)
Chwee Kin Keong & Ors v Digilandmall.com [2005] SGCA 2
• Respondent sells IT products and peripherals over the internet via its website
http://www.digilandmall.com. The website was used to sell among other things
HP Printers and in this instance, “HPC 9660A Colour LaserJet 4600”, originally
priced at $3,854 was mistakenly priced at $66 (due to a clerical error).
• Due to the mistake by the respondent’s staff, 784 persons made a total of 1,008
purchase orders for 4,086 printers. The appellant ordered a total of 100 printers
and some even ordered a total of 760 printers.
• Respondent informed the appellant that it would not honour the orders.
The Court Held:
The contract was terminated due to unilateral mistake on the part of
respondent.
The case was not about bargain hunting - which is a time-honored and
perfectly legitimate pursuit, but about 'predatory pack hunting'.
Chwee Kin Keong & Ors v Digilandmall.com [2005] SGCA 2
• Court (Cont’d):
If the price of a product is so absurdly low in relation to its known market
value, it stands to reason that a reasonable man would harbour a real
suspicion that it may not be correct, or that there may be some troubling
underlying basis for such a pricing.
An electronic trail of online messages and e-mail among the friends also
gave the lie to their case that they were simply bargain-hunting (see next
slide).
• Desmond: 13/01/20 01:17 go hp online now
• Scorpio [the first appellant]: 13/01/20 01:17 what hp online??
…
• Desmond: 13/01/20 01:24 just ordered 3 colour lazer printer for S$66.00 each
• Scorpio: 13/01/20 01:24 huh?? How come got such thing?
• Desmond: 13/01/20 01:25 keep trying
• Scorpio: 13/01/20 01:25 ok but how come got such a good deal?
• Desmond: 13/01/20 01:25 I think one of the wrong posted price
…
• Scorpio: 13/01/20 01:25 damn don’t tell me they realised their error already
…
• Scorpio: 13/01/20 01:32 shiok … can make a quick profit by selling them
cheap … shd buy more
• Desmond: 13/01/20 01:33 how many u intend to get?
• Desmond: 13/01/20 01:33 10? 20?
• Scorpio: 13/01/20 01:33 as many as I can!
 DURESS
• The word “duress” usually indicates some form of pressure exerted
by one party to coerce (force or threaten) another party to act in a
particular way. In law, it is a common law doctrine under which a
contract made by way of force or threats or occurrence of injury may
render the contract void or voidable.
• Legally, duress must consist of such pressure that would cause a
reasonable person, exercising that ordinary degree of firmness that
the law demands of us all, to do something he would not do
otherwise.
• Duress, as interpreted by the courts would mean:
“the will is deflected not destroyed”
“he or she chooses to submit to the demand or pressure rather than take an alternative
cause of action.”
 Economic Duress
This happens when one party enters into a contract because of threats
affecting the other party’s economic interests or well-being. For
example: one party threatens to withhold or deny an existing
contractual right unless there is a payment or further payment of
money.
According to the Singapore case of Citibank NA v Lim Soo Peng
(2004), the criteria for determining economic duress are:
Whether the victim did or did not protest
Whether the victim, at the time of duress had an alternative course
of action open to him
Whether the victim was independently advised
Whether, after entering the contract, steps were taken by the victim
to avoid the contract
 Economic Duress – Case examples
North Ocean Shipping v Hyundai Construction[1979]QB 705
• The parties contracted for the construction of a ship, The Atlantic Baron,
with the price fixed in US dollars. After payment of the first instalment, the
US dollar was devalued by 10% and the defendant ship builder demanded
10% increase in the price as compensation.
• There was no contractual entitlement to the increase but Hyundai made it
clear that it would not continue with construction unless it was granted.
• North Ocean had no choice but to accept the increase as they could not
afford a delay as they were negotiating a particularly profitable charter.
After delivery, North Ocean sort to recover the additional payment,
alleging that it had been obtained under economic duress.
The Court Held:
On the facts, the agreement to pay the increase could have been set aside for
economic duress.
 Economic Duress – Case examples
• In the North Ocean Case, the courts commented that based on the facts, the agreement
to pay the increase fees could have been set aside for economic duress.
• However, the case also cautioned that such a claim should have been made
immediately.
• Since North Ocean took nine months after the completion of the ship to sue, they have
impliedly affirmed the variation.
• Another example is:
Atlas Express Ltd v Kafco Ltd (1989) 1 All ER 641
AEL were freight forwarders (carriers of goods) and agreed with KL the price they will
charged to carry KL’s goods to X Ltd who were the purchasers of the goods. After a few
deliveries to X Ltd., AEL realized it was not profitable and informed KL they would stop
delivery unless a new price was agreed on. AEL knew KL's business would survive only if
the terms of its contract with X Ltd. were fulfilled. KL was under pressure and they
unwillingly signed a new agreement to pay the new price.
The Court Held: the pressure to pay additional charges amounted to economic duress and
was not binding on KL. KL was entitled to recover the additional charges. Also there was
no valid consideration provided for the additional charges.
 UNDUE INFLUENCE
• Undue influence operates where a dominant party uses the
influence that he or she has over the other party to obtain some
undue benefit. The doctrine is based on the equitable principle that
no one is entitled to retain the proceeds of a fraud or of a wrongful
act.
• Undue influence is an equitable doctrine which therefore allows a
contract to be rescinded because one party unconscientiously used
his power or authority to obtain a benefit or achieve a purpose by
exerting improper pressure on the other contracting party.
• Undue Influence can come in two forms or types:
Actual Undue Influence, and
Presumed Undue Influence, based on “relationships of Trust and Confidence”.
 Actual Undue Influence
Actual undue influence occurs where one party exploits a (usually)
temporary position of strength to gain an advantage to which he is
not entitled, usually by influencing in some serious way the actions of
that other. To establish Actual Undue Influence, it was stated in the
case of Lim Geok Hian v Lim Guan Chin, that the victim has to show
the following:
That the other party had the capacity to influence the victim
The influence was exercised
The exercise was undue
Its exercise brought about the transaction
 Williams v Bayley (1866) LR 1 HL 200

Bayley had given the appellant bankers a number of promissory notes

on which he had forged his father’s signature. When this fact was
discovered, the bankers called Bayley and his father in and intimated
that unless a suitable arrangement is reached, they would have no
alternative but to have Bayley prosecuted. Under that veiled threat, the
father caved in and signed an agreement to give the bank an equitable
mortgage of his property as security. He subsequently sued the banker.
The Court Held:
He succeeded. The pressure asserted on the father had been such that he was not a free and
voluntary agent at the time of agreeing.
The banker had taken an unfair advantage of his position of vulnerability and thus the
agreement could be declared void.
 Presumed Undue Influence
• In this second type of undue influence, the law presumes, by virtue of the
relationship of trust and confidence existing between the parties, that undue
influence is present. The burden is then on the party exercising the influence to
show that no undue influence has in fact, under the particular circumstance,
have been exercised.
• Lord Chelmsford LC said:
“Wherever two persons stand in such a relation, that, while it continues,
confidence is necessarily reposed by one, and the influence which naturally
grows out of that confidence is possessed by the other and this confidence is
abused, the person so availing himself of his position will not be permitted to
retain the advantage.”
• Such relationships may include:
Parent and child
Guardian and ward
Doctor and patient
Lawyer and client
 Tate v Williamson (1866) LR 2 Ch 55

• Tate was in debt and sought advice from Williamson, a close relative.
They met. Tate suggested selling some of his property and Williamson
offered to buy from him at £7000. Tate accepted. Before any binding
agreement was signed, Williamson discovered the property was
worth substantially more but he withheld that information from Tate
and proceeded with the purchase.
• Tate subsequently sued to have the sale set aside.
The Court Held:
Williamson had stood in a fiduciary relationship to Tate and therefore, had
been under a positive duty to inform him of the higher selling price.
The sale could be set aside based on presumed undue influence.
 ILLEGALITY
This concept seems rather odd like a “misnomer” because most of us
are under the impression that once a contract has been effectively
made it is obviously legal and so the issue of illegality will never arise.
Unfortunately, this impression or assumption is a misunderstanding and
at times it is clearly wrong! A contract can be illegal if:
• It is in the public interest that it should not be enforced; for example
several parties contracted to kill someone;
• The consideration is illegal; for example, a contract to receive a bribe;
• The purpose of the contract is illegal; for example, a contract to hire a
car to smuggle illicit drugs into a country.
 ILLEGALITY
Because illegality taints the contract, it is unlikely to be
enforceable. There are 4 possible types of illegal contracts:
• Gaming & wagering contracts
• Contracts which are contrary to public policy
• Contracts which are contrary to statute
• Contracts in restraint of trade
Our focus will be on the last point – Contracts in restraint of
Trade
 Contracts in Restraint of Trade
• A restraint of trade clause (found in some contracts)
usually seeks to prevent a person from engaging in a
specified profession or business
• Such restraints are generally void. The rationale is because
it is contrary to the principle of competition and free
enterprise
• However, in some limited circumstances, restraints may be
enforceable
 Contracts in Restraint of Trade
A restraint may be enforceable if it satisfies 3 conditions:
• The restraint must protect a legitimate interest, such as trade
secrets or confidential information. Stratech Systems v. Nyam.
• The restraint is “reasonable” in terms of time period, geographical
scope and subject matter. Asiaweek v. Ismail.
• It is not contrary to the public interest. Esso Petroleum v. Harper’s
Garage.
END OF PRESENTATION