Topic >» Law of 5 Contract (Free Consent to Contract) LEARNING OUTCOMES > INTRODUCTION Previous chapters have discussed the important elements to form a valid contract. Apart from the elements, free consent of the parties to enter into contract is also essential in determining the legality of the contract. As provided by Section 10(1) of the Contracts Act, 1950 that “all agreements are contracts if they are made by the free consent of parties competent to contract...” There are various factors which can affect an agreement once it has been formed. These factors which affect the true consent of one or both parties may release the party from contractual obligation. Under Section 13 of the Contracts Act, 1950, “two orTOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) <4 59 more persons are said to consent when they agree upon the same thing in the same sense.” Therefore, under Section 14, consent must be free and not caused by Refer to Figure 5.1 : * Coercion (Section 15). * Undue influence (Section 16). * Fraud (Section 17). © Misrepresentation (Section 18). * Mistake (Section 21, 22 and 23). Coercion Undue influence / ' 1F . 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 unlawful 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 means, if a person commits or threatens to commit any act forbidden under the Penal Code 1950 (the criminal law of the country) with the intention to make the other party enter into a contract with him, then he is said to have employed coercion.60 P TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) According to Explanation to Section 15, it is “immaterial whether the Penal Code is or is not in force in the place where the coercion is employed.” What is meant by the explanation provision is illustrated below: A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Penal Code. A afterwards sues B for breach of contract at Taiping. A has employed coercion, although section 506 of the Penal Code was not in force at the time when or place where the act was done. Coercion under Section 15 covers the common law “duress” which means actual violence or threats of violence to the contracting party. In the case of: Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] ML 119, the Court held that. a transfer executed under the order of the Sultan, issued under duress of two Japanese officers during the Japanese Occupation of Malaya 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 Bee 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 Rm 29,500. The respondent was then made to pay an additional amount of Rm 4,000. 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TOPIC'S LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 461 by coercion, ....., the agreement is a contract voidable at the option of the party whose consent was so caused.” The term “voidable” refers to an agreement which gives one or more parties but not the other, the choice of either affirming or rejecting it. Thus, the agreement is valid and binding until the party entitled to avoid it chooses to do so. 5.2 UNDUE INFLUENCE When a person enters into a contract under the influence exercised by another person, the contract can be rescinded on the ground of 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) The domination of the will by one party over the other; and (b) Obtaining an unfair advantage. Further, in Section 16(2), a person is said to be in a position to dominate the will of another where: (a) He holds a real or apparent authority over the other; or (b) He stands in a fiduciary relation to the other; or (©) He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental; or bodily distress. 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 husband’s authority over a wife. For example: tustration (a) A, having advanced money to his son, B, during his minority, upon B's coming of age, obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence.62_P TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 5.2.2 A Fiduciary Relation A person stands in a fiduciary relation to the other, for instance; the relationship of a solicitor-client, a doctor-patient, a trustee-beneficiary and a religious adviser- follower. For example: Ilustration (b) A,a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. Undue influence applies to every case where influence is acquired and abused, or where confidence is reposed and betrayed. In the case of Tate v. Williamson (1866) LR 2 Ch App 55, T (an Oxford undergraduate), aged twenty three, 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 communication of all material information which he had obtained as to its value.TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 463. Another example of a case where a confidential relationship arises is the case of: Tufton v. Sperni{1952] 2 T.LR. 516. The plaintiff and defendant were fellow members of a committee formed to establish a Moslem cultural centre in London. It was understood that the plaintiff would provide the funds for the centre. The defendant induced the plaintiff to buy his (defendant's) own house for the purpose at a price which grossly exceeded its market value. The Court of Appeal set the contract aside. 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 will dominate another person’s 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 ML] 468, the Court held that: the charge document that has been signed by the third plaintiff who was 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.” For example:64 Pm TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Illustration (c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. In case where undue influence is shown to exist, the presumption of its exercise can be rebutted by proof that the party reposing the confidence has formed a free judgement and independent of any kind of control. The way to establish this is by showing that the person has received independent legal advice and took it. However, a transaction will also be upheld despite the absence of independent advice. The essential is to show that the transaction was “the result of the free exercise of independent will.” 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 company’s overdraft 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 company’s overdraft 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.TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 4 65, Other important cases of undue influence are the case of: Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57. The plaintiff's 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 husband’s 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. And the case of: Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 ML} 196. : The respondent was the registered proprietor of a land. She claimed that she was induced by the fraud and undue influence of the Ist and 2nd appellant to transfer her land to the 2nd appellant. | The Federal Court held that: The appellants and respondent were in a solicitor-client 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 will 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.”66 > TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) ) (b) © (a) What is meant by coercion? What are the important ingredients to establish undue influence? ‘What is the legal effect of a contract made under coercion and undue influence? Who must prove that a contract is not induced by undue influence? In what type of relationship a person is said to be in a position to dominate the will of another in a contract? What is the importance of an independent legal advice in undue influence cases? Discuss the following cases by applying the principle of law on free consent of contracting parties: (a) Mr Best lived with Mr Hard for many years in a house owned by Mr Best. Mr Hard was a man given to violence. After he threatened Mr Best, Mr Best sold the house to Mr Hard for RM30,000. A year later, Mr Hard died and his widow claimed the ownership of the house. However, Mr Best wanted to set aside the sale of the house to Mr Hard on the ground of duress. Explain whether he can succeed. One evening, Jack met Susan and told her that Adam would sue him for his failure to pay the money he owed Adam, amounting to RM100,000. After Jack revealed his problem to Susan, Susan persuaded Jack to sell his bungalow to her at the price of RM100,000, to enable Jack to pay up his debt to Adam. Jack immediately agreed with Susan's proposal because Susan was the only one in his heart. Jack had always listened to Susan and would fulfil Susan’s wishes. A contract to transfer the bungalow to Susan was done and six months later, Susan left Jack to marry her friend, Mark. Jack was frustrated and happened to know that his bungalow worth RM300,000 at the time of the transfer. Now, Jack decided to set aside the contract on the ground of undue influence. Discuss.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 467 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: (a) (b) “The suggestion, as to a fact, of that which is not true by one who does not believe it to be true.” 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 ML] 198, The plaintiff, 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 Jand in Port Dickson. ) The Court held: The evidence clearly showed that the defendant had exercised fraud and therefore the plaintiff was entitled to rescind the contract. “The active concealment of a fact by one having knowledge of belief of the fact.” An example of this act is provided in the following illustration in Section 19 of the Contracts Act 1950.68 > TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Illustration (c) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A’s ignorance, B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A. (©) “A promise made without any intention of performing it.” (a) “Any other act fitted to deceive.” (e) “Any such act or omission as the law specially declares to be fraudulent.” Notwithstanding the above principles, Explanation to Section 17 states that, “mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.” Ilustration (a), Section 17 A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A. Ilustration (d), Section 17 A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B. An example of case to illustrate the principles: In Keates v. Lord Cadogan (1851) 10 C.B. 591, the plaintiff sued for damages arising from the defendant's fraud in letting to the plaintiff a house which he knew to be required for immediate occupation (without disclosing that it was in a ruinous condition). The Court rejected the claim and held that there was nothing amounting to deceit (fraud).TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 4 69 However, the same Explanation (Section 17) continues to provide that, “.,.., unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.” The above statement means, there are circumstances in which failure by one party to speak out may amount to fraud. Firstly, where there is a legal duty to disclose the material facts (duty of disclosure) to the other party in a contract. This duty arises where the relationship between the contracting parties is in the nature of fiduciary relationship, as in a solicitor-client relationship. For instance: Ilustration (b), Section 17 B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is sound. Secondly, where silence is equivalent to speech. For instance: Ilustration (c), Section 17 B says to A, “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here, A’s silence is equivalent to speech. (Here, the act of A keeping silence means, approving B's statement that the horse is sound). 5.3.1 Effect of Fraud Where there is element of fraud 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 sonny fratid, «ne, 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 by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party70 > TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) whose consent was so caused had the means of discovering the truth with ordinary diligence.” This means, if the party who was deceived has the means or capable of investigating the truth of the facts given by the other party, by taking reasonable appropriate measures, then the untruth facts cannot render the contract void. Thus, the contract cannot be rescinded. 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 appellant's part. Further, Explanation to Section 19 also provides that, “a fraud or misrepresentation which did not cause the consent to a contract of the party on whom the fraud was practised; or to whom the misrepresentation was made, does not render a contract voidable.” This means, the false statement 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. 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:TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 471 (a) (b) © “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.” “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 substance of 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 causes another 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: 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 appellant's statement that he estimated the lands to carry two thousand sheep. The appellant had not, and no other person had at any time, carried on 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 will become voidable at the option of the party whose consent was so caused. Section72_ TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 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.” For instance: Ilustration (b), Section 19 A, by a misrepresentation, leads B erroneously to believe that five hundred gantangs of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred gantangs of indigo have been made. After this, B buys the factory. The contract is not voidable on account of A’s misrepresentation. Further, Explanation to Section 19 also provides that, “a which did not cause the consent to a contract of the party misrepresentation was made, does not render a contract voidable. misrepresentation to whom the 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. What is meant by fraud and misrepresentation? What is the difference between fraudulent misrepresentation and innocent misrepresentation? What is the legal effect of a contract made under fraud and mistepresentation? What is meant by ‘silence is no fraud’? Is there any exception to the above principle? Under what circumstance a contract cannot become voidable by reason of fraud and misrepresentation? What is the implication of not exercising one’s ordinary diligence to discover the truth of a statement made in a contract under fraud and misrepresentation?TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 473 Discuss the following problems by applying the principles of law on consent of the contracting parties: (a) Timis a mechanic who wishes to take a partner into his business. During negotiations between Tim and Kyra, Tim states that the income of the business is RM60,000 a year. The accounts which Tim produces show that the income is not quite RM60,000 a year and Kyra asks about the balance. Tim then produces further accounts to show how the figure is made up. However, Kyra does not examine the accounts in detail but agrees to become a partner. Later, Kyra discovers the true position and seeks to rescind the contract on the ground of fraud. Advise Tim. Jade was induced to lend money to a company by a representation made by its directors that the money would be used to improve the company’s buildings and generally expand the business. In fact, the directors intended to use the money to pay off the company’s existing debts because the creditors were pressing hard for payment. Jade then discovered that she had been misled and sought the legal advice to sue the directors for damages for fraud and misrepresentation. Advise Jade. ‘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.” ‘And 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74 TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) parties to a contract, then the contract will not be voidable. Examples of cases are illustrated below: Ilustration (a), Section 21 A agrees to sell B a specific cargo of goods supposed to be on its way from England to Kelang, It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void. Illustration (b), Section 21 A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. Mlustration (o), Section 21 A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void. Section 21 of the Contracts Act 1950 covers the English common law classification of common mistake and mutual mistake. Common mistake occurs when both parties make the same mistake as to the subject matter of the contract, while mutual mistake occurs when both parties misunderstand each other. 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.TOPIC LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 475. Section 23 covers the unilateral mistake in English common law. The example of case is: || Tamplin v. James (1898) 15 ChD 215, B made a successful bid at an auction for the sale of a public house under the mistaken belief that a certain field was included in the lot when in fact, it was not. The contract was held to be valid by the English court. 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 because it was caused by a mistake as to any law in force in Malaysia; but a mistake as to a aw not in force in Malaysia has the same effect as a mistake of fact.” For example: Illustration A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable. 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 A party who has made a mistake as to the nature of a document he has signed, is bound by the terms of the contract.76 TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) In Subramaniam v. Retnam [1966] 1 MLJ 172, The defendant had signed a written acknowledgment of a loan provided in English language. Even if the defendant was ignorant of the language, he was bound by the terms he had signed (provided there was no fraud or misrepresentation). However, there is an exception in English law that allows the defence of non est factum, and the Malaysian courts applied the principle in the local cases. Non est factum means ‘it is not his deed’. Thus, it is a plea that the agreement is not the act of the person. In the case of: Awang bin Omar v. Haji Omar & Anor[1949] ML} 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 brother's signature. The High Court ruled: There was a mistake as to the nature of the document signed and therefore, the first defendant was not liabl 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: Ilustration (a) A pays B $1,000 in consideration of B’s promise 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.TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 477, Section 30 of the Specific Relief Act, 1950 also provides remedy of rectification in cases where the parties made a contract under a mistake and the contract does not accurately record the true intention of the parties. Section 30 states, “when, through fraud or a mutual mistake of the parties, a contract or other instrument in writing does not truly express their intention, either party, or his representative in interest, may institute a suit to have the instrument rectified..... the court may at its discretion rectify the instrument so as to express that intention, so far as this can be done without prejudice to rights acquired by third persons in good faith and for value.” It is also important that the order to rectify must not be prejudicial to the rights of an innocent third party. An example is provided in the illustration below: Ilustration (a) A, intending to sell to B his house and one of three godowns adjacent to it, executes a conveyance prepared by B, in which, through B’s fraud, all three godowns are included. Of the two godowns which were fraudulently included, B gives one to C and lets the other to D for rent, neither C nor D having any knowledge of the fraud. The conveyance may, as against B and C, be rectified so as to exclude from it the godown given to C, but it cannot be rectified so as to affect D's lease. Under the English common law, the remedy of rectification is available in equity. The local case below is a case where rectification of a document was granted to the claimant. || in Lim Hong Shin v. Leong Fong Yew (1918) 2 FMSLR 187, The appellant, Lin Hong shin (and his predecessors) had always been in possession of the middle lot. A third party and his predecessors had always been in possession of the bottom lot. By mistake, the predecessor of the appellant was registered as owner of the top lot, and the predecessors of the claimant-respondent as owners of the middle lot. The High Court ruled: The mistake was common to all parties, so that it could rectify the instrument so as to express the real intentions.78 TOPIC LAW OF CONTRACT (FREE CONSENT TO CONTRACT) What is the effect of a contract made under a mistake of fact? What is the difference between common/mutual mistake and unilateral mistake? What is the effect of a contract made under a mistake of law? What is the meaning of the rule of non est factum? Is the English common law rule of non est factum apply to the Malaysian cases? Is the remedy of rectification available in mistake cases? Discuss the following cases by applying the principles of law on free consent of the contracting parties: (a) (b) Nadia agrees to buy a camera and Hans agrees to sell the same. Explain how the mistakes in the following would affect the contract: (i) Nadia believes that she is obtaining credit over four months whereas Hans believes that it is a cash sale. (ii) Nadia believes that he is buying from Vince and not from Hans. Mr Sam advertised his ‘Durian Orchard’ for sale. Kamal was one of those who was interested in the orchard because he had seen Mr Sam using the adjacent field to graze cows. Kamal always wanted to graze cows that would bring him profit apart from maintaining the orchard. Later, Kamal obtained the details of the sale advertisement which clearly stated that the field in question was not part of the sale since it did not belong to Mr Sam. Kamal did not read this statement and believed that the field would be included in the sale. Kamal then bought the orchard from Mr Sam. After the sale was completed, Kamal discovered that the field was not included in the sale and intended to set aside the contract. Advise Kamal.TOPIC 5__ LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 479 * 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 voidable. * 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 voidable. * 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. © Accontract under fraud is not voidable if the party being 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 voidable. 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. * Acontract made under a mistake of law in force in Malaysia is not voidable. * 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.80 _P TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) MT ec ee cece eee eee es Coercion Mistake Fiduciary relation Ordinary diligence Fraud Real/apparent authority Free consent Rectification Mental capacity Undue influence Misrepresentation Voidable contract Text Books: + Guest, A. G. (1988). Anson’s Law of Contract (26th ed.). Singapore: Oxford University Press. ¢ Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. * Keenan, D. (2006). Smith and Keenan’s Law for Business (13th ed.). UK: Pearson and Longman. * Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases: © Awang bin Omar v. Haji Omar & Anor [1949] ML] Supp 28. * Bisset v. Wilkinson [1927] AC 177. © Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468. * Chin Nam Bee Development Sdn Bhd v. Tai Kim Choo & 4 Ors. [1988] 2 ML] M7, * Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196. * Keates v. Lord Cadogan (1851) 10 CB. 591. * Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119. * Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198. * Lim Hong Shin v. Leong Fong Yew (1918) 2 FMSLR 187.TOPICS LAW OF CONTRACT (FREE CONSENT TO CONTRACT) 481 Lloyds Bank, Ltd. v. Bundy [1975] QB 326. Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814. Rattles v. Wichelhaus (1864) H&C 906. Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57. Subramaniam v. Retnam [1966] 1 ML] 172. Tamplin v. James (1898) 15 ChD 215. Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201. Tate v. Williamson (1866) LR 2 Ch App 55. Tufton v. Sperni [1952] 2 TLR. 516.