VITIATING FACTORS

These are circumstances which interfere with the enforceability of a contract. They have a
negative effect on contracts. They may render a contract void or avoidable. A void contract is
unenforceable while avoidable contract is enforceable unless avoided. These factors include: -

1. Misrepresentation

2. Mistake

3. Duress

4. Undue influence

1. MISREPRESENTATION.

This is a false representation. It is a false statement made by a party to induce another to enter
into a contractual relationship. It renders the contract avoidable at the option of the innocent
party. However for the innocent party to avoid the contract, it must be proved that: -

1. The statement in question was false in a natural particular i.e. it was untrue in whatever it
referred to.
2. The statement was more than a mere puff or sales talk. Whether a statement is a puff or a
misrepresentation depends on what a reasonable person could deem it to be.
3. The statement was one of fact not opinion. As a general rule opinion does not amount to
misrepresentation. It was so held in Edgington v Fitzmaurice (1885) 29 Ch D 459. In
this case, directors sent shareholders a prospectus inviting subscriptions for debenture
bonds. It said money would go to alter their buildings, buy horses, vans and expand into
supplying fish. Really though, the purpose was to pay off liabilities, because the company
was in trouble. Mistakenly believing he would get a first charge on company property,
Mr Edgington bought bonds. He would have bought them anyway, had he known he
would have no charge. Mr Edgington sought to recover money for deceit. The Court of
Appeal upheld Denman J at first instance, saying that the directors were liable for deceit.
Cotton LJ held that the statement of purpose was a fraudulent misrepresentation and Mr
 Edgington had relied on that despite his admission of mistake over charges. He said: “…
It is true that if he had not supposed he would have a charge he would not have taken the
debentures; but if he also relied on the misstatement in the prospectus, his loss
nonetheless resulted from that misstatement. It is not necessary to show that the
misstatement was the sole cause of his acting as he did. If he acted on that misstatement,
though he was also influenced by an erroneous supposition, the defendants will still be
liable... It was a statement of intention, but it is nevertheless a statement of fact, and if it
could not be fairly said that the objects of the issue of the debentures were those which
were stated in the prospectus the Defendants were stating a fact which was not true…”

To fulfil the requirement that Mr Edgington relied on the statement, it is not necessary to
show the misstatement was the sole cause of acting, so long as there was an influence.
Bowen LJ said ‘the state of a man’s mind is as much a fact as the state of his digestion...
A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact...
such misstatement was material if it was actively present to his mind when he decided to
advance his money.’ Fry LJ said the ‘inquiry is whether this statement materially affected
the conduct of the Plaintiff in advancing his money.’ He pointed out the ‘prospectus was
intended to influence the mind of the reader.’

However an opinion may amount to misrepresentation if: -

a. The maker does not honestly hold that opinion
b. The opinion purports to be based on certain facts within the maker’s knowledge
but whose truthfulness he does not verify.
4. The false statement was intended to be relied upon by the representer (recipient).
5. The false statement was in fact made by the other party to the contract. As a general rule,
omission, silence or non-disclosure does not amount to misrepresentation. However it
may:-
a. In contracts of utmost good faith e.g. insurance
b. In confidential relationships
c. Where disclosure is a statutory requirement
d. Where the statement made is half true
 e. If the statement was true when made but turns false due to changes in
circumstances before the contract is concluded but the maker does not disclose its
falsity as was the case in With v O’Flanagan [1936] Ch 575. In this case, Dr
O’Flanagan said truthfully in January 1934 that his medical practice had takings
of £2000 pa. However, in May the takings were only £5 a week because
O’Flanagan had become ill. The contract was signed with Mr With to buy the
medical practice, but Mr O'Flanagan did not disclose the change in circumstances.
At trial the judge held that the contract was not made uberrimae fidei. Where a
statement is rendered false by a change in circumstances there is a duty to disclose
the change. A failure to do so will result in an actionable misrepresentation. Lord
Wright MR held that Mr With could rescind either because there was a duty to
point out the change in circumstance or because the representation continued till
the point when the contract was signed. He further stated that there is no duty to
disclose, even when someone believes facts to be operating on another’s mind. He
noted fiduciary relationships can bring an entire duty of disclosure. Uberrimae
fidei contracts, including partnership and marine insurance, do too. But also
where in negotiations a statement is false and then the representor discovers it,
though if he had said nothing he is entitled to hold his tongue throughout. He
noted that a ‘representation made as a matter of inducement to enter a contract is
to be treated as a continuing representation
6. The false statement influenced the party’s decision to enter into the contract. The party
must show that the false statement was made before or when the contract was concluded.
However the false statement need not have been the only factor the party considered. In
Andrews v. Mockford (1896) 1 Q.B 372; where the plaintiff had relied on untrue
statement in a company’s prospectus, issued by the defendants it was held that the
defendants were liable in damages for the statements as the plaintiff had relied on them
7. The false statement was innocently, fraudulently or negligently made

Types of misrepresentation

Innocent misrepresentation
A statement is deemed to be innocently misrepresented if the maker honestly believed in its truth
though it was false and had no means of ascertaining that it was false as was the case in Oscar
Chess v Williams [1957] 1 WLR 370 where the defendant had no means of ascertaining that the
year of registration of the vehicle was incorrect. In Alkerhielm v. De Mare [1959] AC 789, a
company prospectus contained the following: ‘About a third of the capital has already been
subscribed in Denmark.’ Though the directors believed this to be true, it was not true at the time
the prospectus was issued. It was held that the statement was not fraudulent having been made
with an honest belief in its truth. The court held: “…The question is not whether the defendant in
any given case honestly believed the representation to be true in the sense assigned to it by the
court on an objective consideration of its truth or falsity, but whether he honestly believed the
representation to be true in the sense in which he understood it albeit erroneously when it was
made…”

Similarly, in Derry v Peek (1889) 14 App Cas 337, In the prospectus released by the defendant
company, it was stated that the company was permitted to use trams that were powered by steam,
rather than by horses. In reality, the company did not possess such a right as this had to be
approved by a Board of Trade. Gaining the approval for such a claim from the Board was
considered a formality in such circumstances and the claim was put forward in the prospectus
with this information in mind. However, the claim of the company for this right was later refused
by the Board. The individuals who had purchased a stake in the business, upon reliance on the
statement, brought a claim for deceit against the defendant’s business after it became liquidated.
The claim of the shareholders was rejected by the House of Lords. The court held that it was not
proven by the shareholders that the director of the company was dishonest in his belief. The
court defined fraudulent misrepresentation as a statement known to be false or a statement made
recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could not claim
against the defendant company for deceit.

If innocent misrepresentation is proved, the innocent party may either: -

1. Apply for rescission of the contract

2. Sue for indemnity for any direct financial loss occasioned by the representation as was the
case in Whittington v Seale-Hayne (1900) 82 LT 49. In this case, Mr Whittington bred prize
poultry. He bought a long farm lease, induced by Seale-Hayne's representation that the premises
were sanitary and in good repair. However, the water supply was poisoned, Mr Whittington’s
manager got very ill and the poultry died. Under the lease, Mr Whittington had covenanted to
carry out repairs required by the council, which were needed after the council declared the
premises unfit for habitation and the drains needed renewing. It was undisputed that Whittington
was entitled to indemnity for rates paid or repairs costs. Whittington sought rescission and
indemnity for loss of poultry, profits and medical expenses. Farwell J held no further losses
could be claimed because it was beyond the ambit of the indemnity to which Mr Whittington was
entitled. The losses did not result in a benefit to Seale. Since the representation was not
fraudulent, there could be no damages and therefore no compensation either. It was not the case
that the rescinder should be in a position status quo ante because 'to make good by way of
compensation for the consequences of the misrepresentations is the same thing as asking for
damages'

Fraudulent misrepresentation

A statement is deemed to be fraudulently misrepresented if the maker: -

a) Has knowledge that it is false

b) Makes it carelessly and recklessly

c) Does not believe in its truth

This test of fraud was formulated in Derry v Peek and Andrews v. Mockford (above).

Remedies for fraudulent misrepresentation are either: -

i. Action for rescission of contract.

ii. Damages for the tort of deceit.

Negligent Misrepresentation
A statement is deemed to be negligently misrepresented if the maker has both means and
capacity of ascertaining its falsity but fails to do so. The maker is deemed negligent as a
reasonable person in such circumstances would have so ascertained. However, for negligent
misrepresentation to be relied upon, it must be proved that: -

1. There was a special relationship between the maker and recipient of the statements
hence the maker owed the recipient a legal duty of care.

This principle was established in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd
[1964] AC 465. Hedley Byrne were a firm of advertising agents. A customer, Easipower Ltd,
put in a large order. Hedley Byrne wanted to check their financial position, and creditworthiness,
and subsequently asked their bank, National Provincial Bank, to get a report from Easipower’s
bank, Heller & Partners Ltd., who replied in a letter that was headed,

"without responsibility on the part of this bank"

It said that Easipower was,

"considered good for its ordinary business engagements".

The letter was sent for free. Easipower went into liquidation, and Hedley Byrne lost £17,000 on
contracts. Hedley Byrne sued Heller & Partners for negligence, claiming that the information
was given negligently and was misleading. Heller & Partners argued there was no duty of care
owed regarding the statements, and, in any case, liability was excluded.

The court found that the relationship between the parties was "sufficiently proximate" as to
create a duty of care. It was reasonable for them to have known that the information that they had
given would likely have been relied upon for entering into a contract of some sort. That would
give rise, the court said, to a "special relationship", in which the defendant would have to take
sufficient care in giving advice to avoid negligence liability. However, on the facts, the
disclaimer was found to be sufficient to discharge any duty created by Heller's actions. There
were no orders for damages, because:
“…A man cannot be said voluntarily to be undertaking a responsibility if at the very moment
when he is said to be accepting it he declares that in fact he is not…”

Lord Morris of Borth-y-Gest wrote, “ …I consider that it follows and that it should now be
regarded as settled that if someone possessing special skill undertakes, quite irrespective of
contract, to apply that skill for the assistance of another person who relies upon such skill, a duty
of care will arise. The fact that the service is to be given by means of or by the instrumentality of
words can make no difference. Furthermore, if in a sphere in which a person is so placed that
others could reasonably rely upon his judgment or his skill or upon his ability to make careful
inquiry, a person takes it upon himself to give information or advice to, or allows his information
or advice to be passed on to, another person who, as he knows or should know, will place
reliance upon it, then a duty of care will arise. ...in my judgment, the bank in the present case, by
the words which they employed, effectively disclaimed any assumption of a duty of care. They
stated that they only responded to the inquiry on the basis that their reply was without
responsibility. If the inquirers chose to receive and act upon the reply they cannot disregard the
definite terms upon which it was given. They cannot accept a reply given with a stipulation and
then reject the stipulation. Furthermore, within accepted principles... the words employed were
apt to exclude any liability for negligence…”

2. That the party suffered loss of a financial nature

In Kirimu Estate (UG) Ltd. v. K.G. Korde, the plaintiff company instructed the defendant, a
lawyer, to value a piece of land for it. The defendant gave a figure without the assistance of a
proper valuation of the estate. The figure was far above the market value and the company sued
in damages for negligent misrepresentation. It was held that the defendant was liable to pay the
difference in value by reason of negligence

2. MISTAKE

There are two types of mistakes viz:

-Mistake of law
-Mistake of fact

As a general rule a mistake of law does not affect a contract however, a mistake of foreign law
may affect a contract. Mistakes of facts affect contractual relationships. A mistake is said to be
misapprehension of a fact or factual situation. It is an erroneous assumption. Mistakes of fact that
affect contracts are generally referred to as operative mistakes and the law recognizes various
types of operative mistakes:

a) Common

b) Mutual

c) Unilateral

d) Mistakenly signed documents

e) Mistake as to quality of subject matter

Common mistake

This is a mistake as to the existence or ownership of the subject matter. Both parties make the
same mistakes. Each party understands the others intention but both are mistaken about some
underlying fundamental fact. Common mistake rendered void in two circumstances:

Cases of Res Extincta: These are circumstances in which parties are mistaken about the subject
matter. This circumstance is contained in sec 8 of the sale of goods Act which provides where
there is a contract for the sale of specific goods which without the seller’s knowledge have
perished the contract is void.

In Couturier v Hastie (1856) 5 HLC 673, Couturier agreed with Hastie to deliver some corn.
They thought it was in transit between Salonica (now Thessaloniki) and the UK. But the corn
had already decayed. The shipmaster had sold it. Couturier argued that Hastie was liable for the
corn because Hastie had already bought an ‘interest in the adventure’, or rights under the
shipping documents. The House of Lords held that because the corn effectively did not exist at
the time of the contract, there was a total failure of consideration and the buyers were not liable
to pay the price. Lord Cranworth L.C. said: "The whole question turns upon the construction of
the contract... Looking to the contract... alone it appears to me clearly that what the parties
contemplated... was that there was an existing something to be sold and bought."

A similar holding was delivered in Lessie Anderson V. Vallabdos Khalidas Company 21,
where parties had contracted to buy and sell a quality of gunny bags but unknown to them the
bags had been destroyed by fire. It was held that the contract was void for common mistake.

Case of Res Sua: These are circumstances in which parties are mistaken about the ownership of
the subject matter. The party purporting to buy is the legal owner but both are unaware of the
fact. The purported seller has no title to pass hence the purported contract is void.

Mutual mistake

This is a mistake to the subject matter of contract. It arises when parties misunderstand each
other or at cross purposes. No agreement arises between them for lack of conse

Mutual mistake

This is a mistake to the subject matter of contract. It arises when parties misunderstand each
other or at cross purposes. No agreement arises between them for lack of consensus ad idem.
However, not every misunderstanding constitutes a mutual mistake; it depends on what a
reasonable person would deem the circumstances to be. In Raffles v Wichelhaus [1864] EWHC
Exch J19, often called "The Peerless" case, the claimant entered into a contract to sell "125
bales of Surat cotton, guarantied middling fair merchant's Dhollorah" to the defendant at the rate
of 17 1⁄4 d. per pound. The contract specified that the cotton would be arriving in Liverpool on
the ship Peerless from Bombay ("to arrive ex Peerless from Bombay"). It so happened that there
were two British ships named Peerless arriving in Liverpool from Bombay, one departing in
October and another departing in December. The defendant, according to statements presented in
court, thought the contract was for cotton on the October ship while the claimant thought the
contract was for the cotton on the December ship. When the December Peerless arrived, the
claimant tried to deliver it, however the defendant repudiated the agreement, saying that their
contract was for the cotton on the October Peerless. The claimant sued for breach of contract,
arguing that the date of the ship was not relevant and the only purpose of specifying the name of
the ship is that in the contingency that the ship sink en route, the contract could be voided. The
issue before the Court was whether the defendant should be bound by the agreement to buy the
cotton of the claimant's Peerless. Though courts will strive to find a reasonable interpretation in
order to preserve the agreement whenever possible, the court in Raffles could not determine
which ship named Peerless was intended in the contract. Consequently, as there was no
consensus ad idem (as defendant alleged), the two parties did not agree to the same thing and
there was no binding contract. Therefore, the defendants prevailed, and did not have to pay.

Unilateral mistake

This is a mistake as to the identity of one of the parties to the contract. Only one party is
mistaken and the mistake is induced by the other party. Unilateral mistake arises where a
fraudulent person misrepresents his identity to another so as to obtain goods on credit or other
favourable terms which he then sells to a bona fide 3rd party who takes without notice of the
fraud. The dispute is usually between the original owner of the goods and the bonafide
purchaser. The original owner is entitled to the goods or their value by establishing that the
contract between him and the fraudulent person was void for unilateral mistake.

The party must prove that: -

i. It dealt with a person other than the one it intended to deal with.
ii. The person it dealt with was aware of that fact.
iii. The identity of the person, the party intended to deal with was fundamental to the
contract.

By proving these facts the party establishes that the contract was void.

In Cundy v Lindsey (1878) 3 App Cas 459, Lindsay & Co were manufacturers of linen
handkerchiefs, amongst other things. They received correspondence from a man named
Blenkarn. He had rented a room at 37 Wood Street, Cheapside, but purported to be 'Blenkiron &
Co'. Lindsay & Co knew of a reputable business of this name which resided at 123 Wood Street.
Believing the correspondence to be from this company, Lindsay & Co delivered to Blenkarn a
large order of handkerchiefs. Blenkarn then sold the goods – 250 dozen linen handkerchiefs – to
an innocent third party, Cundy. When Blenkarn failed to pay, Lindsay & Co sued Cundy for the
goods. The Divisional Court held that Lindsay could not recover the handkerchiefs from Cundy.
The Court of Appeal, with Mellish LJ, Brett J and Amphlett JA overturned the Divisional Court,
holding that Lindsay could recover the handkerchiefs, since the mistake about the identity of the
rogue voided the contract from the start. Cundy appealed.

The House of Lords held that Lindsay & Co had meant to deal only with Blenkiron & Co. There
could therefore have been no agreement or contract between them and the rogue. Accordingly,
title did not pass to the rogue, and could not have passed to Cundy. They were forced to therefore
return the goods. Lord Cairns explained the mistake to identity, and the consequences: “ Now,
my Lords, stating the matter shortly in that way, I ask the question, how is it possible to imagine
that in that state of things any contract could have arisen between the Respondents and Blenkarn,
the dishonest man? Of him they knew nothing, and of him they never thought. With him they
never intended to deal. Their minds never, even for an instant of time rested upon him, and as
between him and them there was no consensus of mind which could lead to any agreement or
any contract whatever. As between him and them there was merely the one side to a contract,
where, in order to produce a contract, two sides would be required. With the firm of Blenkiron &
Co. of course there was no contract, for as to them the matter was entirely unknown, and
therefore the pretence of a contract was a failure.”

A similar holding was delivered in Ingram v Little [1961] 1 QB 31. In this case, two sisters
Hilda and Elsie Ingram sold their car to a rogue calling himself Mr. Hutchinson. They agreed a
price for cash, but when the rogue offered a cheque, Elsie said the deal was off. She wanted cash
or no sale. The rogue then gave them his full name and address and Hilda went to the post office,
which was two minutes down the road, to check the details out. When she returned she informed
Elsie that the details checked out and the sisters agreed to let Mr. Hutchinson take the car. The
cheque was dishonoured and the car was sold on to Mr. Little. The sisters brought an action to
recover the car. Held: The contract was void for mistake. The Court of Appeal held that the
sisters only intended to deal with Mr. Hutchinson at the address given because they were not
willing to offer a sale for payment by cheque from anyone else. This case has received
widespread criticism and has not been followed since.
These two decisions should however be contrasted with Phillips v Brooks Ltd [1919] 2 KB 243.
209. In this case, on 15 April 1918, a man named North entered Phillip's jewellery shop and said,
"I am Sir George Bullough". He wrote a dud cheque for £3000 to pay for some pearls and a ring.
He said he lived in St. James's Square. Mr Phillips checked the phone directory and found there
was someone there by that name. Mr Phillips asked if he would like to take the jewellery with
him and Mr North said he would leave the pearls but take the ring 'for his wife's birthday
tomorrow'. Mr North then pawned the ring to Brooks Ltd for £350. When the false cheque was
dishonoured, Phillips sued Brooks Ltd to get the ring back. Note that there are conflicting reports
showing that Mr North identified himself after the ring was sold, as Viscount Haldane said in
Lake v Simmons, but others say that North identified himself straight away.

The earlier judgement of Cundy v Lindsay had established that contracts could be automatically
void for mistake to identity. Where this is the case, title does not pass to the fraudulent buyer,
and the third party loses out in the entirety. This principle is different where parties contract face
to face; Horridge J stated: “…I have carefully considered the evidence of the plaintiff, and have
come to the conclusion that, although he believed the person to whom he was handing the ring
was Sir George Bullough, he in fact contracted to sell and deliver it to the person who came into
his shop…”

This outcome can be explained by putting it as such: Mr Phillips hoped he was contracting with
Sir George Bullough, but in reality he agreed to contract with whoever came into his shop, taking
a risk that he was not who he said he was. It had the mere effect of making the contract voidable
for fraud, meaning that title passed to the rogue and subsequently to the third party buyer: “…
The following expressions used in the judgment of Horridge J seem to me to fit the facts in this
case: "The minds of the parties met and agreed upon all the terms of the sale, the thing sold, the
price and time of payment, the person selling and the person buying. The fact that the seller was
induced to sell by fraud of the buyer made the sale voidable, but not void. He could not have
supposed that he was selling to any other person; his intention was to sell to the person present,
and identified by sight and hearing; it does not defeat the sale because the buyer assumed a false
name or practised any other deceit to induce the vendor to sell…"

Documents mistakenly signed

This is a mistake as to the nature of the contract; it arises when a party to a contract signs the
wrong document. Such a mistake does not render the contract void but avoidable at the option of
the party. To avoid the contract, the party must prove that: -

a. The document signed was fundamentally different from the one the party thought it was
signing.

b. The party was neither careless nor negligent when it signed the document.

By proving these facts, the party establishes the plea of non-est factum which literally means this
is not my deed. Unless these facts are proved, the contract cannot be avoided as was the case in
Gallie v Lee CA ([1969] 2 Ch 17 (CA)). In this case, it was held that a deed bearing a false
signature is a forgery and creates no rights at all. ‘If the deed was not his deed at all (non-est
factum), he is not bound by his signature any more than he is bound by a forgery. The document
is a nullity just as if a rogue had forged his signature. No one can claim title under it, not even an
innocent purchaser who bought on the faith of it, nor an innocent lender who lent his money on
the faith of it. No matter that this innocent person acted in the utmost good faith, without notice
of anything wrong, yet he takes nothing by the document.

Mistake as to the quality of the subject matter

This mistake arises when one of the parties to the contract is mistaken about the quality of the
subject matter of the contract. Such a mistake renders the contract voidable at the option of the
innocent party.

Summary

This topic has introduced the topic of vitiating factors. These are factors that negatively affect the
performance of a contract. When, for example, a contract was entered on the basis of a mistake
as to the existence of the subject matter, that contract cannot be performed. If, for example, it is a
sale of goods contract and the seller had misrepresented to the buyer that the goods exist and the
buyer later realises that the goods do not exist, that contract is void. It cannot be performed. This
is an on-going topic and in the next class we will discuss another set of vitiating factors.
Activity

Debate: “Mistake and misrepresentation should not, all other factors constant, vitiate a contract”

Discussion questions

Consider the following question:

Nancy offers to sell her bicycle to Olive. She tells Olive that it is two years old and has hardly
been used. Olive asks if she can go for a ride on it but Nancy refuses, afraid that Olive might ride
away on it. Nancy tells her, “You don’t need to worry. The bike is fast, comfortable and
reliable.” Olive points out that the tyres are worn and Nancy assures her that, if she decides to
buy the bicycle, she will replace them. She also tells Olive that, although there is no front light,
there is no law requiring bicycles to have front lights in the dark. This is incorrect. Olive spends
the rest of the day checking on bicycle prices and that evening accepts Nancy’s offer telling her
that at Kshs 7500 the bicycle is by far the best value that she has seen. Olive finds the bicycle
uncomfortable from the start. The day after buying it she also realises that Nancy has not
replaced the worn tyres. Three weeks later Olive finds out that the bicycle is five years old
(although there is no evidence that Nancy knew this) and belonged to Pat before Nancy. Six
months later Olive is involved in an accident on the bicycle and finds out from a bicycle repairer
that the frame (which was not damaged in the accident) has been welded together from two
different bicycles, so that the bicycle is unsafe and not worth repairing. Advise Olive
 DURESS

At common law duress means actual violence or threats thereof. It exists where a contractual
relationship is procured by actual violence on the person or threats thereof. The party is
compelled or coerced to contract. For the most part, duress consists of threats. Duress was
developed by the common law with a very narrow scope. It renders a contract voidable at the
option of the innocent party. For the contract to be avoided, the innocent party must prove that: -

• The threat was intended to cause fear, injury or loss of life

• The threat was directed to his person or body as opposed to his property. It was so held in Atlee
v Backhouse [1838] 3 M & W 633. A threat directed at the body of a member of the party’s
household amounts to duress

• The threat was illegal e.g. a threat to sue, prosecute or cause imprisonment for no reasonable
cause. A threat to enforce one’s legal rights does not amount to duress. It was so held in
Hassanali Issa and Co. v Jeraj Produce Store 1967 E.A. 55 where the defendant had alleged that
the cheque had been written under duress in that the plaintiff had threatened to sue if repair and
storage charges were not paid. It was held that the threat did not amount to duress. In
Friedeberg-Seeley v Klass (1957) 101 S.J. 275 the defendants gained access to the plaintiff’s
house and threatened not to leave unless she sold her jewels to them.

Duress in contract law relates to where a person enters an agreement as a result of threats. Where
a party enters a contract because of duress they may have the contract set aside. Originally, the
common law only recognised threats of unlawful physical violence, however, in more recent
times the courts have recognised economic duress as giving rise to a valid claim. Where the
threat is to goods, the courts have been less willing to intervene, although analogous claims in
restitution suggest that this position of the law may change. The basis of the duress as a vitiating
factor in contract law is that there is an absence of free consent. Duress operates at common law.
Pressure not amounting to duress may give rise to an action for undue influence in equity. The
effect of a finding of duress and undue influence is that the contract is voidable. The innocent
party may rescind the contract and claim damages. The normal bars to rescission operate
Duress can be placed under a number of categories as outlined below:

Duress to the person

Where a person enters a contract as a result of threats of physical violence, the contract may be
set aside providing the threat was a cause of entering the contract. There is no need to establish
that they would not have entered the contract but for the threat. In Barton v Armstrong [1976]
AC 104 for example, Barton was the managing director of a company, whose main business was
property development, its projects passing through 'Paradise Waters (Sales) Pty Ltd'. Barton
executed a deed whereby the company would pay $140,000 to Alexander Armstrong, a NSW
state politician, and buy his shares for $180,000. Armstrong was the chairman of the board.
Street J found Armstrong had indeed threatened to have Barton killed. But the NSW Court of
Appeal said Barton failed to discharge the onus that the threat had caused him to make the
contract. The Privy Council, however, advised that Barton could avoid the contract for being
under duress, and it did not matter that he may have agreed to the deal anyway. Lord Cross, Lord
Kilbrandon and Sir Garfield Barwick held that physical duress does not need to be the main
reason, it must merely be one reason for entering an agreement. Lord Cross said the same rule
should apply for duress as in misrepresentation, 'that if Armstrong's threats were 'a' reason for
Barton’s executing the deed he is entitled to relief even though he might well have entered into
the contract if Armstrong had uttered no threats to induce him to do so...' Lord Wilberforce and
Lord Simon, dissenting jointly, held that while in substantial agreement on the law, there was no
duress on the facts, but the threats needed to be at least "a" reason for entering the contract. They
held the case:

“…involves consideration of what the law regards as voluntary or its opposite… Absence
of choice… does not negate consent in law; for this the pressure must be one of a kind
which the law does not regard as legitimate. Thus, out of the various means by which
consent may be obtained - advice, persuasion, influence, inducement, representation,
commercial pressure - the law had come to select some which it will not accept as a
reason for voluntary action: fraud, abuse of relation of confidence, undue influence,
duress or coercion. In this the law, under the influence of equity, has developed from the
old common law conception of duress - threat to life and limb - and it has arrived at the
 modern generalisation expressed by Holmes J - 'subjected to an improper motive for
action' (Fairbanks v Snow)…”

The three tests for physical duress....... are to, first, 'show that some illegitimate means of
persuasion was used' and second that ‘the illegitimate means used was a reason (not the reason,
nor the predominant reason nor the clinching reason)' and third that his evidence is 'honest and
accepted'

Duress to goods

Duress to goods is not recognised as giving rise to grounds for having the contract set aside. In
Skeate v Beale [1840] 11 Ad & El 983, a landlord threatened a tenant that he will levy duties if
the tenant failed to pay the debt owed. The tenant proceeded to pay part of the amount and
further gave a promise to pay the balance in a period of one month. The tenant was unable to
keep the promise when the period lapsed. The landlord therefore proceeded to bring a suit
against the tenant and the tenant pleaded duress. The court declined and refused to set aside the
contract. The court held the position that the threat was not to the person but to the goods and
therefore the Defendant cannot sustain the defense of duress.

Effect of finding duress

Since duress operates to deflect the will of the party rather than vitiate consent, the effect of a
finding of duress is always to make the contract voidable not void. The case of IFR ltd v
Federal Trade Spa [2001] EWHC 519 is authoritative in this regard. In 1998 an agreement was
entered in to between IFR (English company) and Federal (Italian company) whereby IFR were
to distribute and give sole right of resale of certain specified items including radio, electronic and
telecommunication equipment. The agreement was to last for 2 years. This succeeded an earlier
agreement and contained a jurisdiction clause (stating the agreement would be governed by
English law) and an arbitration clause which were not in the earlier agreement. Three months
before the contract was due to expire IFR gave notice in writing that they would not be renewing
the contract when it expired. Under Italian law this termination would give rise to compensation.
However, no such compensation was payable under English law. Federal sought to raise duress
to render the 1998 agreement void so as to take advantage of the Italian right to compensation.
The effect of a finding of duress has always been to render a contract voidable as opposed to
void, however, a voidable contract would not have aided Federal as they had acted on the
contract without protest for nearly 2 years so would most certainly have lost their right to
rescind. In their argument they raised the earlier case law relating to vitiating consent (The
Sibeon & Sibotre, The Atlantic Baron and Pao On) and stated that where there is no consent the
contract must be void ab initio as oppose to voidable. It was held that following later case law
(Universe Sentinel etc) the basis of duress is not the absence of consent; when acting under
duress the actor will give consent for the contract. The contract is therefore initially valid. It is
the absence of choice that renders the contract voidable.

UNDUE INFLUENCE

Undue influence in contract law is the inappropriate pressure (or the unlawful intensity of
persuasion) applied by a trusted, more powerful party on a trusting, less powerful party to enter
into (or refrain from entering into) a legally binding agreement (written or oral) against their will,
which falls slightly short of duress. It is said to exist where a party dominates the other’s will
thereby inhibiting its exercise of an independent judgement on the contract. One party thus
exercises overwhelming influence over the other. Undue influence was developed by equity with
a fairly wide scope. It renders a contract voidable at the option of the innocent party.

Forms and Elements of Undue Influence

To provide evidence for undue influence in a contract, an entity has to prove that the victimized
party is someone with disadvantages, which makes them prone to be affected by such pressure,
and that the influencing party is a person in a special relationship with their victim, which gives
them an advantage over their victim.

Undue influence can take several forms such as:

 Importuning (insistently bothering someone to do something).

 Exhortation (strongly urging someone to do something).
 Flattery (excessively and insincerely complimenting someone to gain advantage).
 Deception (misleading someone).
  Insinuation (cunningly making indirect suggestions to gain advantage).
 Trickery.

Relationships Prone to Undue Influence

Undue influence typically occurs when parties relate in a certain way such as in the special
relationships between the following set of people:

 A husband and wife.

 A parent and child.
 A fiancé and fiancée.
 A guardian and ward.
 A doctor and patient.
 A lawyer and client.
 A pastor and parishioner.

Undue influence operates where there exists a relationship between the parties which has been
exploited by one party to gain an unfair advantage. Undue influence is divided into actual undue
influence and presumed undue influence. Where a contract is found to be entered into as a result
of undue influence, this will render the contract voidable. This will enable the person influenced
to have the contract set aside as against a party who subjected the other to such influence. In
addition, in some instances the party influenced may be able to have a contract set aside as
against a party who was not the person inflicting the influence or pressure.

Classes of undue influence

There are three classes of undue influence which were set out in the case of Bank of Credit &
Commerce International v Aboody [1990] 1 QB 923.

In this case, a husband exerted actual undue influence over his wife in order to get her to sign a
charge securing the family home on the debts owed by the company in which the husband and
wife owned shares. The couple were unable to repay the mortgage and the bank sought to
repossess the home. The wife sought to have the mortgage set aside on the grounds that it was
procured by actual undue influence of the husband. It was held that the husband had exerted
actual undue influence on the wife. However, the transaction was not to the manifest
disadvantage of the wife since she owned shares in the company. In considering whether a
transaction was to the manifest disadvantage the court was to have regard to any benefits
received in addition to the risks undertaken. Therefore the bank were granted possession.

NB - it is no longer necessary to establish manifest disadvantage in cases involving actual undue

influence. The Court of Appeal set out the classes of undue influence:

Class 1 - Actual undue influence (requires proof of the influence)

Class 2a - presumed undue influence (relationship as a matter of law gives rise to presumption
that influence was exerted)

Class 2b - presumed undue influence (requires proof of relationship of trust and confidence if
established the presumption of influence arises)

Class 1 – Actual undue influence

As the name suggests, requires proof that the contract was entered into as a result of actual
influence exerted. The claimant must plead and prove the acts which they assert amounted to
undue influence. This may include such acts as threats to end a relationship, continuing to badger
the party where they have refused consent until they eventually give in. There is no precise
definition of undue influence. Lord Nicholls, in Royal Bank of Scotland plc v Etridge (No 2)
[2001] UKHL 44 described the concept as:

"Undue influence is one of the grounds of relief developed by the courts of equity as a
court of conscience. The objective is to ensure that the influence of one person over
another is not abused. In everyday life people constantly seek to influence the decisions
of others. They seek to persuade those with whom they are dealing to enter into
transactions, whether great or small. The law has set limits to the means properly
employable for this purpose. The law will investigate the manner in which the intention
to enter into the transaction was secured: If the intention was produced by an
 unacceptable means, the law will not permit the transaction to stand. The means used is
regarded as an exercise of improper or 'undue' influence, and hence unacceptable,
whenever the consent thus procured ought not fairly to be treated as the expression of a
person's free will. It is impossible to be more precise or definitive. The circumstances in
which one person acquires influence over another, and the manner in which influence
may be exercised, vary too widely to permit of any more specific criterion."

Originally it was a requirement that the claimant seeking to find relief through actual undue
influence must also establish that they had suffered a manifest disadvantage (See Bank of Credit
& Commerce International v Aboody above). However, it was held in CIBC Mortgages v
Pitt [1994] 1 AC 200 that manifest disadvantage was not required in cases of actual undue
influence. In this case, Mr Pitt wished to purchase some shares on the stock market. He pressured
his wife into signing a mortgage of £150,000 securing the family home. The stated purpose of
the loan was to purchase a holiday home and pay off the existing mortgage. The husband used
the money to purchase shares and then used those shares as collateral to purchase further shares.
For a time the shares did very well and he was a millionaire on paper. The wife saw no benefit
from these shares as any income was always used to purchase more shares. In 1987 the stock
market crashed. The bank sought to enforce the security under the mortgage which at the time
exceeded the value of the home. The wife raised actual undue influence in defence. It was held,
overruling Bank of Credit & Commerce International v Aboody that it is not necessary for a
claimant to demonstrate manifest disadvantage where a defence is based on actual undue
influence. However, as the transaction on its face did not seem to the manifest disadvantage of
the wife, because the stated purpose was to purchase a holiday home, the bank was not put on
enquiry and therefore could not be fixed with constructive notice.

Class 2a - Presumed undue influence

Under class 2a, there is no requirement to prove that improper influence was actually exerted.
Instead it must be established:

1. There was a relationship which as a matter of law gives rise to a presumption of undue
influence
2. The transaction is one which cannot readily be explained by the relationship of the parties.

1. Relationships capable of giving rise to an automatic presumption of undue influence are

those of a fiduciary nature and include:

 Parent: child
 Solicitor: Client
 Religious advisor: disciple
 Doctor: Patient
 Trustee: beneficiary

2. The transaction is one which cannot readily be explained by the relationship of the
parties: Where the transaction is obviously not to the benefit of the vulnerable party but confers
a great advantage to the party in a fiduciary position, the law will raise a presumption that the
transaction was entered as a result of some sort of abuse of the relationship. This requirement
used to be expressed in terms of manifest disadvantage. However, this lead to confusion
particularly where a wife had an interest in the husband's business

For example, in Natwest Bank v Morgan [1985] AC 686, the family home was subject to a
mortgage for the purchase price (with Abbey National) and a second charge securing a loan of
the husband's business. The couple were unable to meet the payments and got into arrears.
Abbey obtained a possession order. Natwest offered a rescue package to help the couple save the
home whereby they would pay off the existing mortgages and give a bridging loan which was to
last 5 weeks for the purposes of aiding the husbands business. The manager called at the couples'
home in order to explain the effect of the charge and to obtain the signatures of both parties. He
was at the house for 20 minutes and spent 5 minutes alone with the wife. The husband was
reluctant to leave them alone and was said to be hanging around close by at all times. The
manager told the wife the charge was to pay off the existing debt and to provide a bridging loan
for a period of 5 weeks which was what the bank had intended to provide, however, the actual
document did not limited the amount or time. Mrs Morgan had told the manager that she did not
want to be exposed to any extra risks of her husband’s business as she had no faith in his ability
as a business man. The manager assured her that the risks were limited in the way he had
described. At no time did the manager advise her to get independent legal advice. She signed the
charge. The bank later called in the charge. In her defence the wife stated that the bank manager
had exercised undue influence over her in procuring her signature. It was held that the normal
relationship between a customer and banker was not one so as to give rise to a relationship of
trust and confidence. Lloyds Bank v Bundy was confined to its facts but not expressly
overruled. The wife had not established a relationship of trust and confidence and therefore no
presumption of undue influence could arise.

Given the difficulties in relation to manifest disadvantage, the House of Lords in Royal Bank of
Scotland v Etridge [2001] 3 WLR 1021 held that the term should no longer be used and
replaced with the requirement that the transaction must be one which cannot be readily explained
by the relationship of the parties. This is intended to exclude trivial gifts but bring within its
realm substantial benefits even where the vulnerable party also receives a benefit. The court
should consider the transaction as a whole.

Class 2b - Presumed undue influence

Establishing the presumption

Under class 2b there is no automatic presumption arising as a matter of law. Here it must be
established that there is a relationship of such a kind that one party in fact placed their trust and
confidence in the other to safeguard their interest. Any relationship is capable of amounting to
this examples include husband and wife, cohabitees, employer and employee. The important
distinction between class 2a and 2b is the fact that the trust and confidence relationship must be
proved. In modern times it is no longer the case that wives will generally place all their trust in
their husbands to deal with the financial matters although in some marriages this may be the
case. If the wife exercises independence of mind in financial matters then no presumption will be
established.

For example, in Barclays Bank v O Brien [1994] 1 AC 180, Mr O'Brien was a chartered
accountant and he also had a shareholding in a company in which he was an auditor. The
company was experiencing financial difficulty and the bank wished to find security for the
company debts. Mr O'Brien offered the matrimonial home as security. He told his wife that the
charge was limited to £60,000 and that it was only to last for a few weeks. Initially the wife
refused to sign but was later persuaded to sign as the husband told her that the company would
fail if she did not and that her son, who also had an interest in the company, would lose his
home. In fact the charge was not limited in the amount or time. The wife agreed to sign the
charge. The manager of the bank had left sent the documents to their local branch with
instructions that the wife was to be advised of the full extent of the liability and that the wife
should be advised to take independent advice before signing. However, the bank clerk got the
wife to sign and failed to carry out the instructions. The bank sought to enforce the charge and
the wife raised undue influence and misrepresentation in her defence to have the charge set aside.
It was held that the defence based on undue influence failed because the wife was supposed to
exercise independence of thought on financial matters and was used to dealing with the family
finances whilst her husband was working away. The wife was successful with regards to
misrepresentation. The charge was set aside as the bank had constructive notice of the
misrepresentation and failed to take reasonable steps to ensure that the charge had been obtained
without influence or that Mrs O'Brien was aware of the full extent of liability.

Lord Brown Wilkinson introduced the concept of constructive notice and set out the steps
required to be taken by banks to avoid being fixed with constructive notice:

"…Therefore in my judgment a creditor is put on inquiry when a wife offers to stand

surety for her husband's debts by the combination of two factors:

(a) the transaction is on its face not to the financial advantage of the wife; and

(b) there is a substantial risk in transactions of that kind that, in procuring the wife to act
as surety, the husband has committed a legal or equitable wrong that entitles the wife to
set aside the transaction.

It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy
himself that the wife's agreement to stand surety has been properly obtained, the creditor
will have constructive notice of the wife's rights. What, then are the reasonable steps
which the creditor should take to ensure that it does not have constructive notice of the
wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with
 constructive notice consist of making inquiry of the person who may have the earlier
right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require
of banks and other financial institutions that they should inquire of one spouse whether he
or she has been unduly influenced or misled by the other. But in my judgment the
creditor, in order to avoid being fixed with constructive notice, can reasonably be
expected to take steps to bring home to the wife the risk she is running by standing as
surety and to advise her to take independent advice. As to past transactions, it will depend
on the facts of each case whether the steps taken by the creditor satisfy this test. However
for the future in my judgment a creditor will have satisfied these requirements if it insists
that the wife attend a private meeting (in the absence of the husband) with a
representative of the creditor at which she is told of the extent of her liability as surety,
warned of the risk she is running and urged to take independent legal advice. If these
steps are taken in my judgment the creditor will have taken such reasonable steps as are
necessary to preclude a subsequent claim that it had constructive notice of the wife's
rights. I should make it clear that I have been considering the ordinary case where the
creditor knows only that the wife is to stand surety for her husband's debts. I would not
exclude exceptional cases where a creditor has knowledge of further facts which render
the presence of undue influence not only possible but probable. In such cases, the creditor
to be safe will have to insist that the wife is separately advised..."

Exceptionally, it has been held that a relationship of trust and confidence existed between a bank
manager and his client. In Lloyds Bank v Bundy [1975] QB 326, for example, a father secured
the debts of his son's business on his farm which had been in the family for generations. The
father and son had both banked at the branch for many years and relied on advice given. The
son's company also banked at the same branch and the bank manager was aware of the dire
financial position of the company. The bank had allowed the son to run up an overdraft
exceeding security given thus far and was fearful that the company would go under leaving them
with an unsecured debt. The bank manager and the son called at the farm with the forms already
filled in. The father was told of the amount of the charge which was £11,000 and exceeded the
value of the farm and he was also required to give a guarantee. The father agreed to sign in order
to help his son. He was not given the opportunity to think it over or to obtain legal advice. It was
held that there was a relationship of trust and confidence between the father and the bank
manager giving rise to a presumption of undue influence under class 2 b. The charge and
guarantee were therefore set aside.

NB the normal relationship between a banker and customer is not one of trust and confidence but
a business relationship whereby the bank is looking out for its own interest (See Natwest v
Morgan) however, the bank manager in giving evidence admitted that the father relied implicitly
and solely on the advice given by him and the father stated that he had trusted the bank and had a
long relationship with the bank and generally acted on advice given.

However, it has been held that the normal relationship between banker and client is not one of
trust and confidence. In Natwest Bank v Morgan [1985] AC 686, for example, the family home
was subject to a mortgage for the purchase price (with Abbey National) and a second charge
securing a loan of the husband's business. The couple were unable to meet the payments and got
into arrears. Abbey obtained a possession order. Natwest offered a rescue package to help the
couple save the home whereby they would pay off the existing mortgages and give a bridging
loan which was to last 5 weeks for the purposes of aiding the husbands business. The manager
called at the couples' home in order to explain the effect of the charge and to obtain the
signatures of both parties. He was at the house for 20 minutes and spent 5 minutes alone with the
wife. The husband was reluctant to leave them alone and was said to be hanging around close by
at all times. The manager told the wife the charge was to pay off the existing debt and to provide
a bridging loan for a period of 5 weeks which was what the bank had intended to provide,
however, the actual document did not limited the amount or time. Mrs Morgan had told the
manager that she did not want to be exposed to any extra risks of her husband’s business as she
had no faith in his ability as a business man. The manager assured her that the risks were limited
in the way he had described. At no time did the manager advise her to get independent legal
advice. She signed the charge. The bank later called in the charge. In her defence the wife stated
that the bank manager had exercised undue influence over her in procuring her signature. It was
held that the normal relationship between a customer and banker was not one so as to give rise to
a relationship of trust and confidence. Lloyds Bank v Bundy was confined to its facts but not
expressly overruled. The wife had not established a relationship of trust and confidence and
therefore no presumption of undue influence could arise.
A relationship of trust and confidence has also been seen in employer and employee relationship.
In Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, Miss Burch started
working for her employer at the age of 18. She became close to the director, Mr Pelosi, who was
an Italian business man 10 years older and trusted him implicitly. She often visited his home to
do babysitting and went on holiday with the family to Italy. At the age of 21 she purchased a flat.
5 years later, she was still working for him but the company was experiencing financial
difficulty. Mr Pelosi asked her to put her flat up as security for a loan taken out by the company.
He told her that his home and villa in Italy were also secured on the debt but they would not
accept 100% mortgage on these properties and needed another £20,000. She agreed to allow her
home to be used as security believing that it was only £20,000 and that Mr Pelosi's properties
would first be sold which would release the debt so that there was no risk to her. The bank had
written to her and informed her that the charge was unlimited in amount and time and advised
her to seek independent advice. She at no time was told of the extent of the company's
borrowings which stood at £270,000 neither did the bank satisfy themselves that she had in fact
received independent advice. It was held that the agreement of Miss Burch had been obtained by
undue influence and the bank had notice of this as the transaction was so obviously to her
disadvantage. The bank had taken insufficient steps to avoid constructive notice. Therefore the
transaction could be set aside.

There is no need to establish that the party subject to the influence would not have entered into
the contract but for the influence. There is also no need to establish a causal link in relation to
misrepresentation beyond reliance. In UCB v Williams [2002] EWCA Civ 555, the Williams
family (Mr & Mrs Jack Williams and their three grown up children) ran a garage business as a
partnership with the benefit of a franchise from Toyota. Toyota threatened to withdraw the
franchise unless the showrooms were extended and improved. The cost for this was £500,000.
The Williams approached the bank for a loan which asked for security by way of a charge on the
three showrooms in addition to a charge on each of the partners' homes. The defendant, Mrs
Williams, was the wife of one of the sons. She had signed the charge without having been told
the full extent of the liability. The signature was executed in the presence of all the other partners
and witnessed by Mr. Howells, the solicitor of the partnership. The charge secured all debts
present and future of the partnership and provided for joint and several liability of all the
partners. The business was unable to repay the loan and became bankrupt. UCB sought to
enforce the charge and Mrs Williams raised undue influence and misrepresentation in her
defence. The trial judge, HHJ Hickinbottom, held that undue influence and misrepresentation
were established. However, he held that Mrs Williams would have signed the charge in any
event had she known the full facts and also that UCB were not fixed with constructive notice as a
solicitor had witnessed the signature therefore they could assume Mrs Williams had been advised
accordingly. Mrs Williams appealed to the Court of Appeal. The Court of Appeal held that Mrs
Williams was successful on both grounds.

For both undue influence and misrepresentation there is no requirement to establish that a person
would not have entered the contract but for the influence or misrepresentation. It was sufficient
for undue influence, that an equitable wrong has been committed. For misrepresentation it is
sufficient to demonstrate the party relied on the false statement. UCB were fixed with
constructive notice. The fact that the signature was witnessed by a solicitor does not necessarily
mean that they would have advised her. The role of a solicitor will depend upon what they had
been instructed to do. If there were no instructions to advise Mrs Williams they would not be
expected to do so and it was wrong of UCB to assume this had taken place. They were under a
duty to check if she had in fact been advised

Rebutting the presumption in class 2a and class 2b

The party accused of exercising undue influence may rebut the presumption by demonstrating
that the vulnerable party exercised free will in entering the transaction. This is most commonly
established by demonstrating that they were fully aware of the risks involved and had received
legal advice before agreeing to the transaction.

ILLEGALITY AS A VITIATING FACTOR IN CONTRACTS

As a general rule, the courts will not enforce an illegal contract or provide for any other remedies
that arise out of it. However, in determining the consequences of illegal acts carried out pursuant
to a contract, the courts will distinguish between those contracts that are said to be illegal at their
formation, and those that are illegal through performance.
CONTRACTS CONSIDERED ILLEGAL AT FORMATION

A contract will be considered illegal at its formation when it is incapable of performance without
an illegal act. Contracts falling into this category cannot be enforced. Where a contract is illegal
when formed, neither party will acquire rights under that contract, regardless of whether there
was any intention to break the law. The contract will be void and treated as if it was never
entered into. The case of David Taylor & Son v Barnett Trading Co [1953] provides us with
an example of a contract that was deemed illegal at its formation. In that case, Barnett Trading
agreed to sell David Taylor Irish steak for delivery between April and July for a set price. At the
date the contract was entered into, an order was in force preventing the buying or selling of meat
over a certain price (which the contract exceeded). When Barnett Trading did not make delivery,
Mr Taylor claimed damages. At first instance, the arbitrators ordered that Barnett Trading pay
Mr Taylor compensation for non-delivery. On appeal, the Court of Appeal held that the contract
had been illegal at its formation due to the provision of set prices that exceeded the legal limits
and accordingly set aside the award as it was based on an illegal contract.

In the case of Anderson Ltd v Daniel [1924], the Fertiliser Act 1906 required every person that
sold for use as a fertiliser any soil that had been subject to an artificial process, to provide the
purchaser with an invoice stating the respective percentages of certain chemicals. The court held
that the effect of non-compliance did not merely render the vendor liable to pay a penalty, but
made the sale illegal and precluded the vendor for suing for the price of the contract.

CONTRACTS ILLEGAL AS PERFORMED

A contract which need not necessarily be performed in an illegal manner, but which is ultimately
performed illegally by one of the parties, will be considered slightly differently from those that
are illegal at formation. In these circumstances, all rights are withheld from the party that
committed the illegal act, but the appropriate remedies will still be available to an innocent party
that was not aware of the illegality. If, however, the innocent party has been privy to, or taken
part in, the illegality they will not be able to enforce or rely on the contract.

In Colen v Cebrian [2003], a husband and wife claimed commission that was owed prior to
their dismissal from the company for whom they worked. The husband had evaded tax, by giving
to his wife commission to which he alone was contractually entitled. The company claimed that
they should not have to pay the commission because the contract was tainted by illegality and the
employment tribunal ruled that they did not have to pay the commission. The Court of Appeal,
however, overturned the tribunal’s decision, ruling that there was a clear distinction between the
method of calculating the commission and the ultimate destination of that commission. The
Court of Appeal upheld the contract, providing that illegality as to performance will not always
result in the unenforceability of the contract. Lord Justice Carnwath said that: ‘… if at the date of
the contract the contract was perfectly lawful and it was intended to be performed lawfully, the
effect of some illegal performance is not automatically to render the contract unenforceable’.

The nature of illegality

The term illegality does not necessarily mean that a criminal offence is involved. It means that
the contract in question is unenforceable as it is injurious to the public or is inconsistent with the
public good. An illegal contract is un-enforceable. This is because for an agreement to be
enforceable, it must have been entered into for a lawful purpose. A contract may be declared,
illegal by statutes or a court of law

a) Contracts declared illegal by Statutes.

Under the employment act, wages or salaries are payable in money or money’s worth. A contact
to pay wages or salary in kind is illegal and void. Such a contract is said to be illegal as formed
and is unenforceable.

b) Contracts declared illegal by courts of law (contracts illegal at common law)

Long before statutory intervention, courts had declared money contracts illegal for being
contrary to public policy e.g.

A contract to commit a crime, tort, or fraud: Such a contract is illegal and unenforceable as it is
a contrary to public policy to commit crimes, torts or fraud. In Bigos v Bousted [1951] 1 All ER
92, the plaintiff agreed to make available £150 worth of Italian currency for the defendant's wife
and daughter during their stay in Italy, the money to be repaid to the plaintiff in England in
English currency. The agreement, as both parties were aware, contravened the provisions of the
Exchange Control Act 1947. As security for the repayment of the money, the defendant
deposited a share certitificate. His wife and daughter went to Italy but the plaintiff failed to
supply any currency, but sued for the payment of £150. The defendant counterclaimed for the
return of the share certificate on the ground that the contract had not been performed and that he
had repented of it. But it was held that this was not a case of repentance. The contract was illegal
and its performance was prevented not by the defendant's repentance but by the refusal on the
part of the plaintiff to lend the money.

Contracts prejudicial to public safety: These are contracts which promote harmful activities in a
country or its neighbours. E.g. a contract to finance rebels in a country or coup plotters, assisting
alien enemies

Contracts prejudicial to the administration of justice: These are contracts which interfere with
the judicial process e.g.

a. A contract to stifle prosecution of an alleged crime.

b. Champerty agreements: This is a contract whereby a party provides financial assistance to

another involved in a civil case so as to share the amount awarded by the court. Such a contract
is illegal and unenforceable.

c. Maintenance: this is a contract whereby a party provides financial assistance to another to

enable him sue a 3rd party for no reasonable course. Such a contract facilitates the harassment of
a party by another through the courts. It is illegal and unenforceable.

Contracts to defraud state revenue: A contract whose object is to deny the state whether central
government or local government revenue by way of evading tax is illegal and unenforceable. In
Miller v Karlinski (1945) 62 TLR 85 the plaintiff who was an employee of the defendant a ₤10
per week had agreed that the amount deducted from the salary as tax was refundable as an
allowance. In an action to recover the refund, it was held that it was irrecoverable as the object of
the contract was to defraud the state revenue.
Contracts liable to promote corruption in public: Such a contract is unenforceable as corruption
is contrary to public policy. In Parkinson v College of Ambulance Ltd [1925] 2 KB, Colonel
Parkinson was approached by the secretary to the College of Ambulance who fraudulently told
him that if he made a contribution to the College (a charity), it would be able to obtain a
knighthood for him. Parkinson made a contribution of £3,000, but no knighthood was
forthcoming. He brought an action to recover his money. It was held that the contract was illegal,
as being contrary to public policy. Parkinson could not sustain his action without disclosing this,
and his own complicity. The donation was on its face a gift, and therefore irrecoverable. It could
only be explained as being part of a contract by disclosing the consideration alleged to have been
given for it, that is, the promise of the knighthood. The plaintiff's action could only have any
force as being for breach of this contract, but since the contract was illegal, the action had to fail.

Contracts liable to promote sexual immorality: These are contracts contra bonos mores
(contrary to good morals). Such a contract is unenforceable on account of illegality. The contract
may be illegal as performed. In Pearce v Brooks (1865) LR 1 Ex 213, there was a contract
under which the claimants supplied the defendant with an ornamental broughman (a type of
carriage) which was to be paid for by installments. After one installment has been paid, the
broughman was returned in a damaged condition. The claimants sued for £15 compensation
which was payable under a forfeiture clause in the agreement if the broughman was returned
damaged. The defendant, however, was a prostitute, and there was evidence that she intended to
use the broughman to attract customers. Moreover, it seems at least one partner in the claimant’s
firm was aware of this. On this basis, the court held that this would be an illegal contract, so that
the claimants would be unable to recover either under the contract or for the damage. The
knowledge of the claimants was relevant here, but not every contract with a known prostitute
will be illegal. In Appleton v Campbell, the action was for the recovery of board and lodging in
relation to a room rented from the claimant. The court held that the plaintiff could not recover if
he knew that the defendant was a prostitute, and that she was using the room to entertain her
clients. But: ‘…if the defendant had her lodgings there, and received her visitors elsewhere, the
claimant may recover, although she be a woman of the town, because persons of that description
must have a place to lay their heads.’ There are thus two factors necessary for the contract to be
unenforceable. First, there must be knowledge that the other party is a prostitute and, second,
knowledge that what was supplied under the contract is to be used for the purposes of
prostitution.

One might expect that the same approach would apply to other ‘immoral contracts.’ The extent
to which the other contracts are likely to be treated as ‘immoral,’ however, must now be
considered in the light of the decision in Armhouse Lee Ltd v Chappell (1996). In this case, the
publishers of a magazine sought to recover payment for advertisements which had been placed
by the defendants. The defendants resisted the claim on the basis that the content of the
advertisements was illegal or immoral, since they related to telephone ‘sex lines.’ The trial judge
found for the claimants. On appeal, the Court of Appeal considered a range of ways in which the
advertisements could be said to be illegal, including prostitution, obscenity, and conspiracy to
corrupt public morals. All were rejected. In addition, the court refused to find that ‘public policy’
required the contracts to be treated as unenforceable. There was no evidence that any ‘generally
accepted moral code condemned these sex lines’. Moreover, ‘it was undesirable in such a case,
involving an area regarded as the province of the criminal law, for individual judges exercising a
civil jurisdiction to impose their own moral attitudes’. The decision of the trial judge was
therefore upheld, and the contracts were enforceable by the plaintiffs. This case suggests it is
unlikely that there will be any significant extension of the range of contracts that will be struck
down on the basis of sexual ‘immorality.’ In the light of the Court of Appeal’s decision, it would
seem likely that illegality will only operate to prevent the enforcement of a contract where the
behaviour concerned amounts to, or involves, a criminal offence.

A contract based on an illegal contract is also an illegality of the other contract

Effects of illegality

An illegal contract is said to be ‘beyond the pale of law’. Such a contract is unenforceable as it
creates no rights and imposes no obligations on the parties. Neither party is bound to perform.
Money or assets changing hands under an illegal contract is irrecoverable as gains and losses
remain where they have fallen.

However such money or assets may be recovered in certain circumstances;

 i. Where either party repents/ regrets the illegality before the contract is substantially
performed.

ii. Where the parties are not in pari delicto (not equally to blame for the illegality), the less
blameworthy party may recover.

If the owner of the money or asset establishes title thereto without relying upon the illegal
contract. As was the case in Mistry Amar Singh v. Serwano Wofunira Kulubya [1963] 3
W.L.B.. 513 (P.C.), where a piece of land had changed hands under an illegal; contract but the
plaintiff established his title. The judgment of Lord Morris of BORTH-Y-GEST of the Privy
Council summarised the several authorities which hold that a Plaintiff cannot rely on his own
illegality to found a cause of action against the Defendant and the court will not aid the Plaintiff
where he relies on his own illegality to sue the Defendant. Lord Morris of BORTH-Y-GEST
said:

“In his judgment in Scott v Brown, Doering, McNab & Co, Slaughter and May v Brown,
Doering, McNab & Co Lindley LJ ([1891–94] All ER Rep at p 657, [1892] 2 QB at p 728) thus
expressed a well-established principle of law:

“Ex turpi causa non oritur action (Latin for "from a dishonorable cause an action does not arise".
It is a legal doctrine which states that a plaintiff will be unable to pursue legal remedy if it arises
in connection with his own illegal act). This old and well-known legal maxim is founded in good
sense, and expresses a clear and well-recognised legal principle, which is not confined to
indictable offences. No court ought to enforce an illegal contract or allow itself to be made the
instrument of enforcing obligations alleged to arise out of a contract or transaction which is
illegal, if the illegality is duly brought to the notice of the court, and if the person invoking the
aid of the court is himself implicated in the illegality. It matters not whether the Defendant has
pleaded the illegality or whether he has not. If the evidence adduced by the Plaintiff proves the
illegality the court ought not to assist him.”

Lindley LJ added ([1891–94] All ER Rep at p 657, [1892] 2 QB at p 729): “Any rights which he
may have irrespective of his illegal contract will, of course, be recognised and enforced”. A L
Smith LJ ([1891–94] All ER Rep at p 660, [1892] 2 QB at p 734), said:
“If a Plaintiff cannot maintain his cause of action without showing, as part of such cause of
action, that he has been guilty of illegality, then the courts will not assist him in his cause of
action.”

In the earlier case of Taylor v Chester it was said ((1869), LR 4 QB at p 314):

“The true test for determining whether or not the Plaintiff and the Defendant were in pari delicto,
is by considering whether the Plaintiff could make out his case otherwise than through the
medium and by the aid of the illegal transaction to which he was himself a party.”

In the Kenyan case of Kenya Airways Limited versus Satwant Singh Flora [2013] eKLR, the
Court set out the following guidelines when determining rights and obligations of parties where
one party pleads alleged illegality of the contract as justification for refusal to be bound under
such a contract:-

(i) No person can claim any right or remedy whatsoever under an illegal transaction in
which he/she has participated. The Court is bound to veto the enforcement of a
contract once it knows that it is illegal whether that knowledge comes from the
statement of the guilty party or from outside.
(ii) If the statute prohibits the contract, it is unenforceable whether the parties meant to
break the law or not.
(iii) No Court ought to enforce an illegal contract or allow itself to be made the instrument
of enforcing obligations alleged to arise out of the contract or transaction which is
illegal, if the illegality is duly brought to the notice of the Court, and if the person
invoking the aid of the Court is himself implicated in the illegality. It matters not
whether the defendant has pleaded the illegality or whether he has not. If the evidence
adduced by the plaintiff proves the illegality, the Court ought not to assist him.”
(iv) No Court ought to enforce an illegal contract where the illegality is brought to its
notice and if the person invoking the aid of the Court is himself implicated in the
illegality.
(v) In order for the doctrine to act as a defence to the claim, there must be illegal
performance of the contract by one party to the contract and knowledge that illegal
performance and participation in it by the other party to the contact.”