Consumers and Contracts

Excuses

Defective Negotiations

Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. The law recognises that various forms of defective negotiation may provide the "victim" with an excuse which allows that person to cancel the contract (and possibly a right to damages)

Negotiations may be affected by any of the following matters:

• mistake;
• misleading conduct or misrepresentation;
• duress; and
• undue influence/unconscionability.

The remedy of rescission

A person adversely affected by any one of these may cancel (rescind) the contract. This can be done by way of defence to a claim on the contract or the party can take the initiative and cancel. Because a contract may be cancelled, it is said to be voidable, that is, it is a perfectly good contract unless and until it is cancelled.

Rescission is something that must be done straight away. The contract is legal and effective unless it is properly cancelled. If the purchaser delays, he or she may lose the right to cancel. It must be possible to restore the parties substantially to the pre-contract position. If this is not possible (for example, the goods have been substantially used up or have been sold to a third party), then the remedy of rescission is lost.

For further information about the nature of rescission, see Rescission.

As will be seen below, with some types of defective negotiation, particularly misrepresentation, it may also be possible to seek damages, either under legislation or under the common law.

Mistake

Only a few types of mistakes will cause the contract to be non-binding on the parties to it: they must be mistakes that go to the very basis of the agreement. For example, where there is a contract for the sale of a car that both parties assume to exist, although in reality it has been destroyed by fire, this contract may be rescinded. By contrast, where the parties are only mistaken about the model of the car, then this contract would be binding.

Another example is when a person signs a written document mistakenly believing that it relates to something entirely different from what in fact it does relate to, in which case the person will not be bound by it. This means that if X is told to sign a document which X reasonably believes to be something like a character reference to assist Z obtain a loan from a finance company, and the document is later discovered to have been a guarantee of the loan contract, then the guarantee will not be held binding on X.

A third example is when Y cannot read, owing to blindness or illiteracy or other disability. Someone else tells Y what is in the document and Y signs it. The document Y signed is not what the other person claimed it was. The document Y signed would not be binding on Y.

By contrast, if a person who signs a document believing it to be a contract does not read the terms and conditions, that person will be bound by the contract and will not be entitled to plead mistake.

Other factors may also be relevant to a successful plea of mistake. For instance, whether or not the defence of mistake will be allowed often depends on whether an innocent third party will be adversely affected by a decision that the contract is non-binding. Again, if the signer was careless, failing to take reasonable precautions, the defence will not be allowed to succeed. For these reasons, it is wise to seek legal advice about whether or not a court would hold the contract binding on these grounds. See generally Seddon and Ellinghaus, chapter 12.

Misleading conduct and misrepresentation

A Misleading or deceptive conduct

The enforceability of a contract may be affected by defective negotiations, in particular if a party has engaged in misleading or deceptive conduct. During negotiations many things may be said or promised. Some of these things end up as terms of the contract (see The Terms of a Contract). If so, and they are wrong or inaccurate, then there may be a remedy for breach of contract. But many things are said or written which do not end up as terms of the contract. Yet they have a legal effect if they are wrong or inaccurate. These are generally called misrepresentations, that is, statements which turn out to be incorrect which played some part in persuading the other party to enter into the contract.

There is a very powerful legislative provision found in the Australian Consumer Law s 18 which states that "a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive".

This section applies to individuals and to corporations and is discussed in detail below at Misleading or Deceptive Conduct. However it is important to note that the section is not confined to consumer transactions despite appearing in the Australian Consumer Law.

The section is, however, confined to "trade or commerce" and so it does not apply to non-business transactions. For example, if a person misled a potential buyer in the private sale of a motor vehicle, this would not be covered by the Australian Consumer Law s 18 as a private sale would not be regarded as being in trade or commerce.

The effect of this legislation is that a person who has entered into a contract after being misled by the other party may be able to cancel the contract or obtain compensatory damages. There are other remedies available, for example, modification of the contract.

This law also applies to advertisements and it is possible to obtain an injunction under the legislation to put a stop to misleading advertisements. An ordinary citizen cannot afford to do this but can bring the advertisement to the attention of the Australian Competition and Consumer Commission or the ACT Office of Fair Trading.

B Misrepresentation under common law

If this legislation does not apply (for example, in a private sale) then it may still be possible to rescind a contract induced by a misrepresentation. The right to rescind under common law principles has been made less restrictive by the Civil Law (Wrongs) Act 2002 (ACT) s 173.It is possible to rescind after the contract has been executed whereas under common law principles this may not be possible where the misrepresentation was a non-fraudulent one. Section 175 of this Act also provides for damages in lieu of rescission at the court's discretion.

The Civil Law (Wrongs) Act 2002 (ACT) s 176 controls the use of exclusion clauses which attempt to exclude remedies for misrepresentation. They are subject to a test of reasonableness.

It is also possible to seek damages for a misrepresentation under the law of torts: in the tort of deceit if the representation is fraudulent; in the tort of negligence if the representation is negligent. Each of these has its difficulties. Proving fraud is difficult: there must be very clear evidence that the person has lied. Bringing a negligence action for misrepresentation is also not straightforward. It must arise from a situation where the allegedly negligent person owes a duty of care to the other party. This is not readily found by the courts. The circumstance must generally be one where the person providing the information is an expert or is providing it in a business or professional setting. Casual remarks between friends and acquaintances do not usually generate negligence liability.

The Civil Law (Wrongs) Act 2002 (ACT) s 174 provides for a statutory right to damages for misrepresentation in addition to a right to damages under the law of torts. This right can be asserted against the other party to a contract or the agent of that party. The defendant is not liable for damages if he or she can show that there were reasonable grounds for believing that the representation was true. In the case of a misrepresentation made by an agent, the defence requires that both the agent and the other party to the contract had reasonable grounds for believing that the representation was true.

A pre-contractual misrepresentation is best dealt with, so far as possible, under the Australian Consumer Law s 18 which is far easier to use than the law just described. Any dealings with a trader or business will be covered by this legislation.

Duress

Proper consent may be affected by duress. Duress is held to have occurred where there has been actual or threatened violence either to the other contracting party or to their immediate family, near relatives or close associates. The duress may be made by someone acting under the instructions of the party to the contract. The net effect, though, will have been that a party has been forced into the contract by being deprived of their free will to act.

Duress now extends to contracts entered into as a result of threats to a party's economic well being, that is, a threat to a person's business or trade. This form of duress is called economic duress.

The consequence of establishing duress is that the contract is voidable at the election of the wronged party. That is, as discussed above, the wronged party must act promptly or risk losing the right to cancel.

Undue Influence and unconscionability

A. Undue influence

Proper consent may be affected by undue influence. Undue influence is exercised by taking unfair and improper advantage of the weakness of the other party, to the extent that it cannot be said that that party intended voluntarily to enter into the contract.

The main reason for the rule against the use of undue influence is to correct abuses of trust and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.

There are two categories of undue influence.

The first is where the parties are in a confidential relationship. Most cases of undue influence fall into this category. A confidential relationship exists when one party's position towards the other involves a dependency or trust, in the form of authority or an expectation to give fair and independent advice to the weaker party. Where a confidential relationship is found to exist, a presumption of undue influence will arise. It is then necessary for the stronger party to show that the contract was not the result of any undue influence.

In this first category, a confidential relationship and the presumption of undue influence arises in certain established relationships (though the list is not closed), for example, solicitor and client, doctor and patient, religious or spiritual adviser and devotee, guardian and ward and parent and child.

The second category is where a relationship exists in which one party is vulnerable vis-a-vis the other party. This may arise over time where, for example, a party becomes dependant on the other party in some way. Or it can arise in a one-off situation. If the stronger party uses some pressure or wrongful act expressly to gain an advantage from the weaker party, then the advantage may have been obtained by the use of undue influence. The weaker party will have to prove that undue influence was actually exerted.

The confidential relationship, although not falling within the first category, may be such that the complaining party is able to show that the other party was in a position of influence. For example, it could be the relationship between a bank and its customer, because of a special position of trust that the bank had come to occupy in connection with the conduct of this customer's affairs. (It has been stressed, however, that in ordinary circumstances no presumption of undue influence arises out of a banker--customer relationship.)

The consequence of establishing undue influence is that the contract may be voidable at the election of the wronged party who must act promptly if he or she wishes to cancel the contract.

B. Unconscionability

A contract may be cancelled if it was the product of unconscionable dealing by one of the parties. This is closely related to undue influence (discussed above) but the usual feature of undue influence is the exploitation of a relationship of dependency whereas unconscionability is more general.

Unconscionable dealing, as interpreted in case law, occurs where two requirements are satisfied:

• one party to a contract or transaction is under a special disadvantage; and
• the other party takes unfair advantage of the other party's vulnerability, either with knowledge of that vulnerability or where the other party has "closed their eyes" to the vulnerability.

Although not an express requirement, it is apparent that the courts will more readily hold that a party has taken unconscionable advantage of a person where the transaction is extremely disadvantageous to that person.

The following cases are examples of factors where a special disadvantage existed, and was exploited by the other party to the transaction.

Economic necessity and financial over-commitment: Vital Finance v Taylor (1991). A finance contract was set aside as it was found that the consumers, the Taylors, were at a special disadvantage because of their financial need. The Taylors had no cash and pressing financial commitments which had to be met. It was also found that they had limited understanding of the transaction and were commercially inexperienced. The repayments under the contract were increased from an initial level of $1,500 per month to $2,500, and it was found the financier did not in truth believe that they would be able to meet these payments.

Drunkenness: Blomley v Ryan (1956). A farmer agreed to sell his farm at 30 per cent less than its true value, while in the middle of a prolonged bout of heavy drinking. The sale contract was set aside by the court.

Old age and improvident transaction: Commercial Bank of Australia v Amadio (1983). The Amadios, an elderly couple with a poor understanding of English, signed a mortgage and guarantee with the bank to support their son's ailing business. They thought that their son's business was prosperous, when in fact it was in financial difficulties. The bank enhanced the business's appearance of solvency by selectively honouring cheques that overdrew its account. The bank obtained security for a non-performing loan as a result of the guarantee. The guarantee was set aside as unconscionable, as it was manifestly disadvantageous to the Amadios, the bank must have been aware of this and took no steps to ensure that the Amadios were properly advised in relation to the transaction.

Emotional dependence: Louth v Diprose (1992). A male solicitor made a gift of $59,206 to a woman to enable her to purchase a house. It was held by the High Court that the transaction was unconscionable because the woman took advantage of the man's emotional dependence on her.

Illiteracy: Lee v Cafred Pty Ltd (1992). Lee was an uneducated and illiterate purchaser, wholly inexperienced in business. He bought a property (Lot 3) after being misled as to its suitability for running wild turkeys, including adequate fencing and a dam. After complaining to the vendor, he was induced to swap Lot 3 for Lot 7. Lot 7 was also unsuitable. The transaction was set aside as unconscionable as, first, the vendor was aware that Lee was informed that he was bound by the contract for Lot 3 (and could not recover his money), which was false, and, second, that he was misled as to the attributes of Lot 7.

Lack of knowledge of relevant circumstances: Collection House v Taylor (2004). An employee of Collection House contacted Taylor in 2001 about a debt that was incurred in 1992. The employee claimed that if the debt was not paid legal action might be taken against Taylor. Taylor then agreed to pay $5,000 to settle the debt. However, the next day she sought the advice of a financial counsellor and discovered that the debt was, in fact, statute barred. Collection House was also aware that Taylor was in difficult personal and financial circumstances at the time. It was held by the court that Collection House had engaged in unconscionable conduct. The judge held that Taylor had been at a special disadvantage because of her lack of knowledge of the matters at issue and that Collection House had wrongly exploited its position of advantage.

The typical unconscionability case involves a bank persuading an unsophisticated person to sign a contract providing security to the bank when that person has pretty clearly little idea of the risks he or she is running (as in Amadio above). There are many cases decided by the courts on unconscionability. There is little doubt that a court is faced with a difficult dilemma: either set aside the transaction and thus allow the vulnerable party to escape a bad situation; or leave the contract on foot and the vulnerable party loses his or her house (or whatever other security has been provided).

The cases outlined above may give the impression that it is relatively easy to argue unconscionability. The courts will not readily set aside a contract on the grounds of unconscionability because it is generally assumed that people should take some care in their affairs. The focus is on the party trying to enforce the transaction. There must be very clear evidence that, at the time of making the contract, that party acted in a seriously uncaring, insensitive or exploitative way. The High Court in ACCC v CG Berbatis Holdings Pty Ltd (2003) made it clear that it is difficult to establish unconscionable conduct, even when a party has acted in a manner that some would think very tough or unfair. The case law is often difficult to rationalise and may be explained by the different attitudes of judges when faced with a difficult decision. The case law is fully discussed in Seddon and Ellinghaus, chapter 15.

Individuals and corporations are prohibited from engaging in unconscionable conduct in trade or commerce under the Australian Consumer Law ss 20-22. This legislation is discussed more fully below. In addition, s 70 of the Uniform Consumer Credit Code regulates unjust credit transactions.

Illegal Contracts

The law will not enforce all contracts. There are some categories of contract to be wary of.

Where a contract is illegal, this may affect its enforceability. Contracts may be illegal under common law principles or they may be illegal under legislation.

Contracts illegal under common law

The law regards some kinds of contracts as illegal because they involve moral wrongdoing or reprehensible conduct. Examples are contracts to commit a crime, to jeopardise the revenue, which are a danger to public safety or international relations, which undermine the administration of justice, which are corrupt and so forth. If a party to such a contract seeks a court's help to enforce, the court will simply refuse to do so.

Contracts illegal under statute

Contracts that are illegal by statute may be regulated as to enforceability by the legislation, so the statute will need to be read and interpreted. Contracts absolutely prohibited by statute will be void, whether the parties know of the illegality or not. However, where one party performs an otherwise legal contract in a manner that breaches legislation, the other party, if having no knowledge of the facts giving rise to the illegality, may still be able to enforce the contract or recover damages for breach of it. Or a court may decide that the contract is unenforceable because of the illegality.

The law about illegal contracts is complex and often difficult to apply. Because there are so many legislative provisions affecting very many aspects of life, it is possible for a contract to be tainted by illegality (perhaps even unknown to the parties). Whether such a contract will or will not be enforced by the courts has generated a great deal of contradictory case law. See Seddon and Ellinghaus, chapter 18.