Validity of

Contracts
Only a normal, sane, sober adult person can understand what they are entering into. Under common law and some
states (statute law) such as infants, are treated not having ability to understand fully what they are entering into,
affecting the validity of any contracts involving them.
Is there genuine consent between parties? What have they agreed to? If there is misrepresentation, duress
(force), undue influence or unconscionable conduct of one party, then there is no genuine consent (meeting of
mind) and therefore no valid contract (see figure 4.4).

1) Mistake
If one or other of the parties says that they have misunderstood the situation, or they have made a mistake, has an
agreement been reached or not?

- Mistake and the contracting parties: if a mistake does operate, one outcome is to make the whole
transaction null and void form the very beginning; that is void ab initio. Resulting, put parties’ same position
as is no contract have ever been made.
- Mistake of fact: only mistakes of fact can render a contract void. i.e. mistake of law (wrongly interpreting a
statue) or a mistake of judgement (buying clothes and then not liking the style or colour).
If the parties were in error about some fundamental aspect of the contract, court may aside contract for mistake.
The law recognises three possible solutions:

Unilateral Mistake: occurs when one of the parties is mistaken about some detail of the contract (although
not a ground for setting aside a contract as courts expect parties to take care when entering into agreements).
However, If the other party knows about the mistake and takes unfair advantage of it, equity courts may provide
relief. Usually concerning fraud.

- Legal Authority: Boulton v Jones. It was Jones’ intention to contract with Brocklehurst and no one else, as
Brocklehurst owed him money. But unknown to Jones, Brocklehurst had sold his business to Boulton. When
Jones sent a written order for goods expressly addressed to Brocklehurst, Boulton struck out Brocklehurst’s
name and substituted his own and then completed the order. He did not tell Jones of the change of
ownership. When he asked for payment, Jones refused to pay, arguing he never intended to contract with
Boulton because he had a set-off with Brocklehurst on which he intended to rely. As Jones had no intention
of contracting with Boulton, and Boulton knew this but assumed it didn’t matter, there was no contract. In
such a situation there is no correspondence between offer and acceptance, and the agreement can be
avoided.

Common Mistake: occurs when both parties are mistaken about the details of the contract. A mistake as to
existence of subject matter is a common mistake that involves the existence or identity of the contract’s subject
matter.
- Legal Authority: McRae v Commonwealth Disposals Commission.
Because of a fundamental assumption as to the existence or identity of the subject matter, they wish the court to
set the agreement aside from the beginning. In other words, the parties are asking the court to treat the agreement
as having no legal effect and for any money or property that the parties have paid or conveyed to each other in
reliance on that agreement to be recovered. Courts have generally been reluctant to void contracts in which the
common mistake involves accidental qualities or attributes of the subject matter. For example;

- Legal Authority: Leaf v International Galleries. Leaf purchased a painting, mistakenly believed to have been
painted by Constable, a famous English landscape artist, from International Galleries for £85. When Leaf
attempted to sell the painting five years later, he discovered the error and sought to rescind the contract to
recover his purchase price, but his action failed because there was no error in what was handed over. The
parties were agreed on the same terms on the same subject matter, and that is sufficient to make a contract.

Mutual Mistake: occurs when both parties are mistaken, but about different things. Therefore, no real
agreement between them because each part has made their own mistake thus, offer and acceptance do not
correspond and so the contract is void.

- Legal Authority: Raffles v Wichelhaus. Wichelhaus had agreed to purchase a quantity of cotton from Raffles,
to arrive ‘ex Peerless from Bombay’. However, there were two ships of the same name sailing from the same
port (Bombay): one in October, which Wichelhaus had meant, the other in December, which Raffles had
meant. In this case, because there was a latent ambiguity, there was no meeting of the minds (no consensus
ad idem) and so there was no mutual assent to contract. A reasonable person, looking at what was said and
done, would have been unable to determine which ship the parties referred to, so the contract is void ab
initio

Non-Est Factum: limited circumstances where courts will refuse to enforce a contract on the basis that one of
the parties signed the document under a mistaken belief as it its effect. NEF aka ‘not my document’. To succeed in
plea of non-est factum, two conditions must be met:
 - The person must believe document signed is radically different from what they believed it to be-mistake
must go to the fundamental nature of the document and nots its content; and
- Must be an absence of carelessness or negligence in the execution of the document

Signing without reading the document does not prevent the defence of non est factum from being raised, as Petelin
v Cullen illustrates. However, the classes of persons that can raise the defence are limited to two groups:

- those who are unable to read owing to blindness or illiteracy and who must rely on others for advice about
what they are signing; and
- those who, through no fault of their own, are unable to understand the meaning of a document.

2) Misrepresentation
What is Misrepresentation? A Misrepresentation is an incorrect statement of fact. A Misrepresentation is an
incorrect statement of fact. A party that is induced into contract on basis of misrepresentation have number of
different remedies. Three different types of misrepresentation:

- Legal Authority for Fraudulent Misrepresentation: the fraud must be distinctly pleaded and clearly proved
or, as Derry v Peek illustrates, the claim will fail. In that case, the defendants, who were directors of a
tramway company, had issued a prospectus stating that the company had a legal right to use steam to run its
trams. At the time the prospectus was issued, the company had not received consent from the Board of
Trade to do so, although the directors honestly believed that consent would be given. The company never
did in fact receive that consent. In reliance on the statement in the prospectus, the plaintiff subscribed for
shares in the company from an original allottee on the open market and he lost his money when the
company was wound up. His claim for his loss failed because, while the statement was untrue, the directors
honestly believed that they could get consent to run their trams, and so they were held liable for their later
failure to get that approval. For a common law action in deceit to succeed, fraud had to be shown. Mere
carelessness on its own is not enough to constitute deceit
- Legal Authority for Innocent Misrepresentation: Whittington v Seale-Hayne, where the plaintiff, a prize
poultry breeder, had leased premises from the defendant on the basis that they were in a sanitary condition,
a fact the defendant genuinely believed to be true at the time when it was not. The plaintiff was entitled to
rescind the lease.
Legal Authority for Negligent Misrepresentation: Esso Petroleum Co LTD v Mardon.
3) Duress
If a party has been forced or threatened to enter a contract against their will the party is said to have acted under
duress. The effect of D on a contract is to make it voidable at the option of the innocent party. Threats against:

- Legal Authority for Duress Type: to the Person: Seear v Cohen. Seear induced Cohen to sign a promissory
note by telling him that, if he didn’t, criminal proceedings would be taken against his son for the
misappropriation of a sum of money. Cohen was not liable on the promissory note, as the threat of criminal
proceedings against his son amounted to duress. 3 Criteria’s Plaintiff need to establish:
- Duress of another party forced then to do something against their will (not in their best interest)
because the threats made seemed credible
- Duress prevented the parties from meeting and negotiation on equal terms
- As a result of the duress, they felt they had no other options but to enter into a contract that would
not normally enter into
- Legal Authority for Duress Type: Goods: Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd
 - Legal Authority for Duress Type: Economic: Universe Tankships Inc of Monrovia v International Transport
Workers’ Federation. The plaintiff’s ship was subject to a ban by the defendant, the financial consequences
of which were such that the plaintiff agreed in writing to the defendant union’s demand to pay money into
its welfare fund if it wanted the ship released. After the ship was released, the plaintiff successfully sought to
have the contract declared void and to recover the moneys that it had paid.)

4) Undue Influence
UI involves the improper use of a position of influence or power possessed by one person over another to induce the
latter to act for the former’s benefit. The contract is voidable at the option of the innocent party, and the usual
remedy is rescission.
5) Unconscionable Contract
If party to a contract suffers some particular disadvantage i.e. illness, ignorance of their rights, financial need or old
age, and the other party exploits this disadvantage to favour their own position, the courts may set aside the
contract on the ground of unconscionable conduct aka unconscionability. Unconscionability is dishonesty or
immoral conduct which favours the wrongdoer at the expense of the disadvantaged party.
- Legal Authority: CBA v Amadio. Illustrates that the conduct of the defendant was such that in its factual
setting fairness and good faith could properly be expected to be exercised, and it can be shown that they
were not, then the conduct of the defendant may be described as unconscionable.
These are the
arguments
dominant party
makes to
establish to
avoid claims for
unconscionable