RESCISSION
After running an online clothing store for two months, Miranda decided that it wasn’t for her. She sold it to a young woman named Bonnie, telling her that the business typically made $25,000 per week. Since purchasing the store, Bonnie has struggled to make $10,000 each week, despite working more hours than Miranda ever did and cutting down on external costs as much as possible. Bonnie has spoken to one of Miranda’s former workers and discovered that the typical weekly sales figure had previously actually been around $7,000, and no higher than $9,000. Bonnie has re-read the contract but there is no clause specifying the turnover. The contract contains a term that it is the whole contract and that no oral statements have been relied upon. Bonnie has become distressed and this has led to a lackluster (unconvincing) approach to her management of the online store. There have been no updates to the website in the past fortnight, and this has severely damaged the goodwill in an industry that relies on fast pace and regular change. Advise Bonnie whether she can set the contract aside and get her money back.
ISSUE
The question raises the issue of whether Bonnie can set the contract aside and get her money back.
PRINCIPLES
Rescission applies to cases in which a party to a contract, upon breach by the other party, elects to treats the contract as no longer binding on him/her: Shevill v Builders Licensing Board (1982).
The remedy of rescission operates retrospectively and restores both parties to their original positions: Cheese v Thomas [1994].
A party who is entitled to rescind a voidable contract must either elect to affirm the contract or elect to void (rescind) the contract: Immer (No145) Pty Ltd v Uniting Church in Australia Property Trust (1992).
The remedy of rescission requires three elements to be satisfied:
- The presence of a vitiating factor in the formation of the contract;
- Generally, rescission is based upon vitiating factors; some element which makes it unconscionable for the contract to continue or to be in force. Vitiating factors include:
| Vitiating Factor | Reference | Effect |
| Misrepresentation | Covell 5.5 | A contract can be voidable for misrepresentation if the representor has made a misrepresentation of fact that induced the representee to enter into the contract.
Common Law – Common law has only afforded relief for fraudulent misrepresentation. – In order to sustain an action for deceit, there must be proof of fraud and fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or reckless (careless whether it is true): Derry v Peek (1889) Equity – In equity, you don’t have to prove that the misrepresentation is fraudulent. All you have to show is that it is false. – The leading case is Redgrave v Hurd (1881). In this case, the court set out the requirements for misrepresentation in equity and made it clear that innocent misrepresentation will constitute grounds for recission and there was no necessary for intention to deceive, whereas common law in order to constitute fraud the misrepresentation must be made with the knowledge of falsity and recklessly in whether it is true |
| Mistake | Covell 5.19 | Three categories of mistake:
Common – Here, both parties share the same mistake Mutual – Here, both parties are mistaken, but their respective mistakes are not the same. – Unilateral – Here, only one of the parties is mistaken. |
| Duress | Covell 5.30 | A transaction is voidable for duress if it was induced by the application of illegitimate pressure. Duress can be to the person (physical threat or kidnapping or wrongful detention), to goods (where actual or threatened damage is made in regard to the goods of someone) and economic duress (if D threats to breach a contract then that is economic duress) |
| Undue influence | Covell 5.40 | Arises out of a relationship between two persons where one has acquired over another a measure of influence, or ascendancy of which the ascendant person then takes unfair advantage: Roayl Bank of Scotland plc v Etridge (No2) [2002] |
| Unconscionable dealing | Covell 5.51 | Extends to circumstances where a party to a transaction was under a special disability in dealing with another with the consequence that there was an absence of any reasonable degree of equality between then and that the disability was evident to the stronger party to make it unfair that he procure or accept the weaker party’s assent to the impugned transaction: Commercial Bank of Australia Ltd v Amadio (1983) |
- An election to rescind the contract; and
- The party with the right to rescind must make a choice to elect between rescission and affirmation of the contract. These are mutually exclusive choices: Immer (No145) P/L v Uniting Church in Australia Property Trust (1992)
- Restituio in integrum, the restoration of both parties to their respective pre-contractual positions
- The objective of rescission is to restore the parties to their original position: Brown v Smitt (1924).
- However, sometimes it is not possible to place the parties to their position because of change of circumstances. For example:
Alati v Kruger (1955)
Facts
- K purchased business from A
- Before K bought it he examined accounts and looked at profits and loss and number of customers
- K did not know that A had cooked the books, A had reconstructed a set of books which were fraudulent
- Unfortunately, the inevitable happens K relaises that his business is not profitable and lost money heavily
- K applies to court to have the contract rescinded on the basis of misrepresentation
- Before the matter came to court, K had to close the business and sell of his stocks and the landlord took possession of premise because K could not keep up with payments
Procedural History
- At first instance it was held that K was entitled for rescission on the ground of fraudulent misrepresentation
- A appealed to high Court
Outcome
- It was held that where a contract of sale is rescinded the P must return to D whatever property was acquired as intact as possible
- When K bought business there was a lease over the shop and there was stock and of course paid for good will and closed business and landlord took possession of the premises
- The HC said that K cannot return to A what they purchased from them, however, because of A’s behaviour K were entitled to have the contract rescinded
- So in such a case, rescission will be granted but equity will need to make allowances for any property that no longer exists in an attempt to restore what is called: the status quo ante (position of parties before the transaction) – in this situation, A was aware that K had to close the business however, neither A nor K had taken any steps to try to mitigate the loss but the Court considered that A could have done!
- Even though K was unable to return A to the status quo anti, rescission was still granted – although the objective of rescission to place parties in status quo anti, sometimes that can be difficult, however, where P is entitled to rescission then a court will make allowances necessary because it would be unconscionable to allow A to profit at the expense of K
- Had A acted bona fide then the position of A might be different but A acted mala fide!
APPLICATION
It is arguable that the contract between M and B can be rescinded due to the presence of misrepresentation as a vitiating factor. The facts suggest that M has represented to B that the business typically made $25,000 turnover. However, B has been struggling to make $10,000 each week and later discovers that the weekly sales figure had been around $7,000, and no higher than $9,000.
Rescission of contracts procured by fraudulent misrepresentation is available at both the common law and at equity. At common law, In order to sustain an action for deceit, there must be proof of fraud and fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or reckless (careless whether it is true): Derry v Peek (1889). The common law position seems to be harsh because there must be proof of fraud. To ameliorate the harshness of common law, misrepresentation at equity does not require proof that the misrepresentation is fraudulent. All that is required is that the representation is false. The leading case on this proposition is Redgrave v Hurd (1881). In this case, the court permitted rescission for innocent misrepresentation on the basis that intent to deceive was not necessary so long as there was equitable fraud. Thus, a person who makes a representation and subsequently realizes that the representation is false cannot have the benefit of it even though it was innocent made: With v O’Flanagan [1936].
Rescission at common law for innocent misrepresentation
- At common law, typically remedies have only been available for misrepresentation that is fraudulent and not innocent. Meaning of fraud: “Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” Derry v Peek Lord Herschell.
- In the absence of common law fraud, there is no remedy of damages for innocent misrepresentation at common law.
Rescission in equity for innocent misrepresentation
- All misrepresentations that are not fraudulent in the common law sense
- Fraud in equity does not require an actual intention to cheat Nocton v Lord Ashburton
- Based upon the equitable concept of fraud, equity exercises an auxiliary jurisdiction to rescind contracts induced by innocent misrepresentation Redgrave v Hurd
In this case, it seems as though the false representations were made fraudulently, since the owner of a business would, arguably, know or ought to know what the financial position of their store would be.
- Right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term S Pearson & Son Ltd v Dublin Corp
- However, can exclude rescission of contract in equity for any innocent misrepresentation that induced the contract Life Insurance Co of Australia Ltd v Phillips
In this case, although “the contract contains a term that it is the whole contract and that no oral statements have been relied upon” in accordance with the principle laid in S Pearson & Son Ltd v Dublin Corp, this term is not enforceable since the right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term. Therefore, since it can be argued that the misrepresentation was a fraudulent one, the contract cannot exclude the availability for rescission on this basis.
It seems on the facts that the representation was a false one since the former workers discovered that the store only made $7000 per week. Furthermore, Bonnie acted upon it while it was a false representation, since the fact never changed before she acted upon it. it is not particularly clear whether the false representation was actually relied upon by Bonnie in coming to the decision to enter into the contract to purchase the store. However, it could be argued that the amount of revenue a store makes would be a huge consideration which any purchaser would normally have and rely on before deciding to purchase the store or not. In this case, therefore, it could be safe to assume that Bonnie relied on this representation. Further, if Melinda actually calculatedly presented Bonnie with the false representation, then it could be inferred that Bonnie was induced to do so by the representation. The facts are unclear on this point, however since Melinda had found out that running the store “wasn’t for her”, this may have urged her to sell the store at all costs regardless of the means.
After establishing that M has falsely misrepresented to B that the business turnover was $25,000 and that B has acted on M’s representation, B must elect to rescind the contract. Once B has elected to rescind the contract, rescission will place B and M in the position they were in before the contract: Brown v Smitt (1924). The present scenario is analogous to Alati v Kruger. In Alati’s case, Kruger purchased business from Alati. Kruger did not know that Alati had cooked the books and had reconstructed a set of books which were fraudulent. Kruger had purchased the business on the belief that the business was profitable. The inevitable happen and Kruger realizes that the business is not profitable and lost money heavily. The High Court held that Kruger was entitled to have the contract rescinded. Even though Kruger was unable to return to Alati to the status quo anti, rescission was still granted.
Therefore and in accordance with Kruger’s case, rescission of contract means that M would be ordered to pay B for her moneys lost in the purchase and running of the store and title of the store would go back to M. In this case, rescission of the contract would allow Bonnie and Melinda to be placed in their pre contractual positions.
CONCLUSION
It is advisable to B that she can set the contract aside and get her money back.
Sample Answer:
To satisfy the remedy of rescission, the three elements to be satisfied are:
- A presence of a vitiating factor in the formation of the contract
- An election to rescind the contract and
- Restitutio in integrum, the restoration of both parties to their respective pre-contractual positions.
- Vitiating factor:
- At common law, the scenario at hand could be rescinded for fraudulent misrepresentation. In equity, this scenario at hand could be rescinded for fraudulent misrepresentation or unconscionable dealing.
- Misrepresentation:
- Contract can be voidable for misrepresentation if the representor has made a misrepresentation of fact that induced the representee to enter into the contract.
- There must be a representation of fact:
- Representations or statements of fact may be express or implied
- They may be inferred from ‘a single word, or… a nod or a wink, or a shake of the head, or a smile’ Walters v Morgan Lord Campbell
- Mere silence is not actionable at common law W Scott Fell & Co v Lloyd
- Statements of fact must be distinguished from mere words of puffery Mitchell v Valherie
- Further, distinction must be made between statements of fact and statements of opinion or belief. Bisset v Wilkinson: Distinction between the two may lie in the knowledge held by the parties.
- Rescission allowed in fraudulently stated opinions on matters of law, but not if done honestly West London Commercial Bank Ltd v Kitson
- In this case, it is clear from the fact scenario that there has been a representation of fact given by Miranda to Bonnie since she specifically states that the store “typically makes $25000 per week”. Arguably, however, it could be seen to simply be ‘mere words’ since the fact that she says ‘typically’ appears to seem that there is no assurance in the matter. However, in this case it seems the usage of the words does not point to such an assumption since there is nothing outlandish, on the facts, about the statement. It seems as though Melinda has represented to Bonnie that the store typically makes $25000 per week.
- The representation must be false when acted uponInducement:
- Question of fact, that is normally judged when the representation was made
- Where the representation is a continuing representation that has become false to the knowledge of the representor, a duty arises to inform the representee of the changed circumstances before the representation is acted upon With v O’Flanagan.
- In this case, it seems on the facts that the representation was a false one since the former workers discovered that the store only made $7000 per week. Furthermore, Bonnie acted upon it while it was a false representation, since the fact never changed before she acted upon it.
- Principles restated in Gould v Vaggelas:
- Notwithstanding that a representation is both false and fraudulent; if the representee does not rely upon it he has no case.
- If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.
- The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true fact and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the misrepresentation.
- The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.
- In this case, it is not particularly clear whether the false representation was actually relied upon by Bonnie in coming to the decision to enter into the contract to purchase the store. However, it could be argued that the amount of revenue a store makes would be a huge consideration which any purchaser would normally have and rely on before deciding to purchase the store or not. In this case, therefore, it could be safe to assume that Bonnie relied on this representation. Further, if Melinda actually calculatedly presented Bonnie with the false representation, then it could be inferred that Bonnie was induced to do so by the representation. The facts are unclear on this point, however since Melinda had found out that running the store “wasn’t for her”, this may have urged her to sell the store at all costs regardless of the means.
Rescission at common law for innocent misrepresentation
- At common law, typically remedies have only been available for misrepresentation that is fraudulent and not innocent. Meaning of fraud: “Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” Derry v Peek Lord Herschell.
- In the absence of common law fraud, there is no remedy of damages for innocent misrepresentation at common law.
Rescission in equity for innocent misrepresentation
- All misrepresentations that are not fraudulent in the common law sense
- Fraud in equity does not require an actual intention to cheat Nocton v Lord Ashburton
- Based upon the equitable concept of fraud, equity exercises an auxiliary jurisdiction to rescind contracts induced by innocent misrepresentation Redgrave v Hurd
In this case, it seems as though the false representations were made fraudulently, since the owner of a business would, arguably, know or ought to know what the financial position of their store would be.
- Right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term S Pearson & Son Ltd v Dublin Corp
- However, can exclude rescission of contract in equity for any innocent misrepresentation that induced the contract Life Insurance Co of Australia Ltd v Phillips
In this case, although “the contract contains a term that it is the whole contract and that no oral statements have been relied upon” in accordance with the principle laid in S Pearson & Son Ltd v Dublin Corp, this term is not enforceable since the right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term. Therefore, since it can be argued that the misrepresentation was a fraudulent one, the contract cannot exclude the availability for rescission on this basis.
- Election
- The innocent party must elect to either affirm or to rescind a voidable contract.
- An election to affirm a voidable contract extinguishes the right to rescind.
- Conversely, an election to rescind a voidable contract extinguishes the right to enforce the contract according to its terms, including any accrued right to damages or specific performance.
- Sargent v ASL Developments Ltd
In this case, Bonnie must elect to rescind the contract.
- Restitutio In Integrum
- Under this principle, the rescission of the contract must be able to place the parties back to their pre-contractual positions.
- Equity merely requires substantial restitution to achieve effective rescission. Alati v Kruger
In this case, rescission of the contract would allow Bonnie and Melinda to be placed in their pre contractual positions. Melinda would be ordered to pay Bonnie for her moneys lost in the purchase and running of the store and title of the store would go back to Melinda.
DAMAGES IN TORT
At 7.45 am on the 27 August 2010, Toby Tyler, a self-employed accountant, was on his way to work. As he waited at the bus stop on the corner of Cambridge Street and Enmore Road, Enmore, he looked to his left and noticed that a flat-top truck carrying a load of cardboard boxes and travelling at speed, had just run the red light at a nearby intersection.
The truck proceeded towards the bus stop at a speed obviously above the 50 kmph. Then, without slowing down, the truck turned into Cambridge Street at very high speed with tyres squealing. As it did so, a large cardboard carton weighing approximately 3.5 kgs flew off the back and struck Toby on the side of the head. Toby did not have time to take evasive action and was knocked unconscious. The truck did not stop.
The police were called and an ambulance, which took Toby to the RPAH. A quick thinking by-stander had taken the truck’s registration number and this was given to the police, who were able to trace both the truck and its owner, Roy Rogers. Roy was charged with negligent driving and failing to properly secure the load on the tray of the truck.
Meanwhile, on 28 August Toby was discharged from hospital, sent home with a few paracetamol tablets and told to “take things easy for the next few days.” However, over the next couple of weeks, Toby became increasingly depressed and began to suffer from the following symptoms:
– Severe headaches
– Nausea
– Sleeplessness
– Nightmares
– Feelings of disorientation and panic
– Reluctance to leave the house
– Lethargy
On 20 September 2010, Toby went to see his GP, who referred him to a neurologist. After a series of tests and scans, the neurologist could find no brain injury. Toby went back to his GP who then referred him to a psychologist.
The psychologist diagnosed Post Traumatic Stress Disorder caused by the accident and told Toby that he would be unable to work for a few weeks.
Does Toby have any common law cause of action against Roy? If so, what damages can he claim?
Does Roy have any defence?
ANSWER:
Business & Accounting Resources (useful for buyers/sellers)
- ASIC business names, searches & director checks: asic.gov.au
- ACCC guidance on misleading & deceptive conduct (Australian Consumer Law): accc.gov.au
- NSW Fair Trading – buying a business & small business resources: NSW Fair Trading
- NSW Small Business Commission – dispute support & mediation: smallbusiness.nsw.gov.au
- Chartered Accountants ANZ – find a CA: charteredaccountantsanz.com
- CPA Australia – business advisory directory: cpaaustralia.com.au
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