VOIDABLE CONTRACT

S.10 : Agreements are contracts if they are made by the free consent of the parties.

S.14 : Consent is free when not caused by one or more of the following:.coercion, undue influence, fraud, misrepresentation and mistake

S.19 (1) : when consent of the agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

1.    COERCION

Definition: committing or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining of any person / property with the intention of causing any person to enter into an agreement. (S.15)

KESARMAL v VALIAPPA CHETTIAR [1954] MLJ 119

A transfer executed under the orders of the Sultan, issued in the ominous presence of two Japanese officers during the Japanese Occupation of Malaysia.

Held -  the consent was not free and therefore the transfer became voidable at the will of the party whose consent was so caused.

CHIN NAM BEE DEVPT SDN BHD v TAI KIM CHOO & 4 ORS [1988] 2 MLJ 117

The respondents purchased homes off the plan to be constructed by the appellants. Each of the respondents had signed a sale & purchase agreement to purchase a house at $29,500. Subsequently, the respondent was made to pay an additional $4,000. the court was asked to determine if the additional payment was made voluntarily or under threat by the appellants to cancel the respondents’ booking for their houses. The lower court had found that payment was not voluntarily but had been made under threat.

Held -  on appeal,  the appeal was dismissed by the High Court which ruled that there was coercion as defined in s. 15 . It further added that the definition in s. 15 should only apply for the purpose contained in s.14 , and not for the entire Act.

2.    UNDUE INFLUENCE

Exist when ‘the relations subsisting between the parties are such that one of the parties is in the position to dominate the will of the other and uses that position to obtain an unfair advantage over the other’ - S.16 (1)

Elements of undue influence:

o   Position to dominate

o   Use that position to obtain unfair advantage

S. 16(2) : Position to dominate exist when:

·         Has real or apparent authority over the other e.g: parent-child

MORLEY v LOUGHMAN [1893] 1 Ch 736

Wright J : ‘The burden lies on the recipient to show that the donor had independent advice, or adopted the transaction after the  influence was removed, or some equivalent circumtances.’

·         Stand in fiduciary relationship to the other. e.g: religious leader – follower, solicitor-client

ALLCARD v SKINNER (1887) Ch D 145

The plaintiff gave all her property to a convent she had joined as was expected to obey the vow of poverty. When she left the convent she sought to recover certain items.

Held – The court found that  she was under undue influence when transferring her property, but plaintiff has lost her rights because her delaying in instituting the proceeding after leaving the  convent.

TATE v WILLIAMSON

T,  a student , intend to sell his property to settle his education fees. He then came to see defendant who was a lawyer to get advice regarding the selling of his property. The defendant then purchased the property for an amount of 7,000 without informing T that the property ‘s value should be 20,000.

Held -  The contract should be dismissed because there was a fiduciary relationship between T and defendant. T refers to the defendant to get advice and the defendant should not purchased the property without disclosing the actual value.

·         Made contract with a mentally incapacitated person by reason of age, illness or distress

INCHE NORIAH v SHEIKH ALI BIN OMAR [1929] A.C. 127

An old and illiterate Malay woman executed a deed of gift of a landed property in Singapore in favour of her nephew who had been managing her affairs. Before executing the deed the donor had independent advice from a lawyer who acted in good faith. However he was unaware that the gift constituted practically the whole of her property and did not impress upon her that she could prudently, and equally effectively, have benefited the donee by bestowing the property upon him by a will.

Held – The gift should be set aside as the presumption of undue influence, which is raised by the relationship proved to have been in existence between the parties, was not rebutted.

S. 16 (3) (a) - Burden of proving no undue influence is on the person in position to dominate.

3.    FRAUD

Sec 17 – Five acts that would constitute fraud:

              i.        Suggestion of fact that is not true

             ii.        Active concealment of fact - HORSFALL v. THOMAS - inserting metal plug in a cannon is active concealment

HORSFALL v THOMAS  (1862) 1 HC 90

The defendant bought cannon which had been manufactured for him by the plaintiff. The cannon had a defect which made it worthless and the plaintiff had tried to conceal the defect by inserting a metal plug into a weak spot in the gun. The defendant never inspected the gun; he accepted it and upon using it for the first time, the gun burst. He refused to pay for the gun and the plaintiff sued him for payment. Since the defendant had not inspected the gun, the never knew of the plaintiff’s attempted concealment, which subsequently did not affect his mind or conduct in entering into the contract. Thus it was held that a person cannot be said to have been induced to enter into a contract by a representation or action that did not influence him or affected his mind at the time of contract.

            iii.        Promise made without intent to perform it

           iv.        Other act fitted to deceive

            v.        Any acts the law declares to be fraudulent

There must be an intention to deceive - that is made knowingly, without belief in its truth or reckless whether it true or false

Generally – silence does not constitute fraud - the misled party has the duty to exercise ordinary diligence

However, under certain circumstances silence or non -disclosure may constitute fraud –

Takes into account the relationship btw parties and where silence is equivalent to speech

Duty to exercise ordinary diligence applies to fraud by silence only – not other cases of fraud

Weber v. Brown - number of rubber trees

WEBER V. BROWN (1908) 1 FMSLR 12

In this case, the respondent sued the appellant for false and fraudulent misrepresentation relating to the number of rubber trees on an estate which the respondent purchased from the appellant. The appellant relied on the Exception to Section 19 of the Contracts Enactment 1899. The Court of Appeal held that the defense that the respondent had the means of discovering the number of trees with ordinary diligence could not be set up because the Exception to Section 19 of the Enactment 1899 does not apply to cases where misrepresentation was made by a false and fraudulent statement.

4.    MISREPRESENTATION

Misrepresentation refer to certain false statement of existing or past fact made by a person before or at the time of making the contract which induces a party to enter into a contract.

S. 18 -

Basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in its truth - but for misrepresentation - may himself believe it true.

Like fraud - when there is a duty to disclose - silence may amount to misrepresentation.

However under the Contract Act - Sec 19 - misled party has duty to exercise due diligence

TAN CHYE CHEW v EASTERN MINING METALS [1965] 1 MLJ 201

contract not voidable despite the  misrepresentation as the party has means of discovering the truth with ordinary diligence.

To be actionable:

1. There must be false representation - KEATES v LORD CARDOGAN

2. The representation is one of fact , not opinion - BISSET v WILKINSON

3. The statement was addressed to the party misled - PEEK v GURNEY

4. The statement must induce the contract - ATTWOOD v SMALL

KEATES V. LORD CADOGAN (1851) 10 CB 591

The defendant let the plaintiff a house a house which the defendant knew was in an unfit and dangerous condition. The defendant kept silent and did not disclose the condition to the plaintiff although he knew that the plaintiff required the house on immediate occupation. It was held that silence does not constitute misrepresentation. The principle of caveat emptor applies in this case and thus there is no remedy for the plaintiff.

BISSET V. WILKINSON.

The plaintiff purchased from the defendant two blocks of land for the purpose of sheep farming. During negotiations the defendant said that if the place was worked properly, it would carry 2,000 sheep. The plaintiff bought the place believing that it would carry 2,000 sheep. Both parties were aware that the defendant had not carried on sheep-farming on the land. In an action for misrepresentation, the trial judge said: "In ordinary circumstances, any statement made by an owner who has been occupying his own farm as to its carrying capacity would be regarded as a statement of fact. … This, however, is not such a case. … In these circumstances … the defendants were not justified in regarding anything said by the plaintiff as to the carrying capacity as being anything more than an expression of his opinion on the subject." The Privy Council concurred in this view of the matter, and therefore held that, in the absence of fraud, the purchaser had no right to rescind the contract.

PEEK V. GURNEY. (1873) All E.R. Rep 116

The promoters of a company were sued by the appellant who had purchased shares on the faith of false statement contained in a prospectus issued by the promoters. The appellant however was not the person to whom shares had been allotted on the first formation of the company; he had merely purchased the shares from the original shareholders. The House of Lord held that the prospectus was only addresses to the first applicants for shares, it could not be supposed to extend to others than these; and that on the allotment, the prospectus has done its work and it was exhausted.

ATTWOOD V. SMALL

The purchasers of a mine were told exaggerated statements as to its earning capacity by the vendors. The purchasers had these statements checked by their own expert agents, who in error reported them as correct. Six months after the sale was complete the plaintiffs found the defendant's statement had been inaccurate and they sought to rescind on the ground of misrepresentation. It was held in the House of Lords that there was no misrepresentation, and that the purchaser did not rely on the representations

5.    MISTAKE

Sec. 21 of the Contract Act - ‘where both the parties under the agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void’ - for lack of free consent.

Sec 22 - mistake as to the law - contract not voidable due to mistake of law in force in Malaysia, but if the law not in force in Malaysia - like mistake of fact.

Sec 23 - mistake as to one party (unilateral) - contract is valid

Mistake of fact made by both parties can be as to :-

Existence of the subject matter

STRICKLAND v. TURNER. - annuity for a dead person

Identity of the subject matter

FALCK v. WILLIAMS - identity of charter parties

Quality of the subject matter

KENNEDY v. PANAMA ROYAL MAIL. - shares in a mail company

STRICKLAND V. TURNER. (1852) 7 Exch 208

The plaintiff purchased an annuity and paid the purchase price. Unknown to both parties the annuitant was already dead at the time of the contract. The plaintiff was therefore entitled to recover on the basis that the contract was void as it lacked subject matter. The consideration had totally failed

FALCK V. WILLIAMS (1900) AC 176

The defendants and the plaintiffs were negotiating about two charter parties; one to carry shale from Sydney to Barcelona and another one to carry copra form Fiji to Barcelona. The plaintiff’s agent send a coded telegram intending to  confirm the copra charter but the telegram was ambiguous and was understood by the defendants to refer to the shale charter. It was held that there was no contract due to the mistake.

KENNEDY V. PANAMA ROYAL MAIL. (1867) LR 2 QB 850

The Panama etc Company had contracts for the carriage of intercontinental mail with the government of New Zealand. It issued a prospectus for shares “in order to enable the company to perform the contract recently entered into with the government of New Zealand, for a monthly mail service between Sydney, New Zealand, and Panama, in correspondence with the West Indian Mail Company’s steamers between Southampton and Panama”. Kennedy, induced by this statement, applied for and was allotted shares in the company. The contract referred to in the prospectus had been made by the company with the agent for the New Zealand government. Both the company and the agent honestly believed that the agent had the authority to make the contract, but the government later denied that he had authority, and refused to ratify the contract. Kennedy brought action to recover the money paid for the shares, and for an account. The company sued for money due under a call on the shares. The court held that the shares which he receives were not, because of the difference in value, different in substance from those that the company had contracted to deliver. It was stated that where the difference is only in quality, even though the misapprehension may have been the actuating motive to the purchaser, yet the contract remains binding.