PRIVATE INVESTIGATION SERVICE

Vitiating Factors

Introduction

To vitiate means to make something legally defective or invalid. When a contract is said to be vitiated it is due to certain factors fundamental to its formation being absent. It does not operate as a technicality, but rather when there is unfairness involved in the formation and the terms of the contract. In effect there was never any contract in the first place.

 

The contract can be terminated and all that has passed between the parties has to be returned. At very least any wrongful gain must be restored. This author would suggest that it is important to act without needless delay when gross and unfair advantage is found to have been taken, because where such is knowingly tolerated and the contract goes on and on, you are signifying that you accept the unfairness and are affirming the contract. Nevertheless if you form a contract with someone it is wise to ensure they are not the type of person who would attract a ruling to vitiate. (A contract of sale or lease, rather than service or employment is of relevance here).

 

Vitiating factors include, as major headings…

 

• Misleading and deceptive conduct

• Mistake as to terms

• Abuse of power

• Unconscionable conduct

 

Misleading or Deceptive Conduct

Misleading or Deceptive Conduct is a very well known law. Misleading a customer is caught by statutory law, even if also by various case law. Section 18 of the Australian Consumer Law. The basic principle of it is that it is unlawful if a person is mislead (by passively allowing misapprehension) or deceived (by actively causing error in judgement) to induce formation of a contract. In addition to the annulment of a contract there are other penalties imposed by government.

 

Originally it was known as "Misleading and Deceptive Conduct" but the name was changed to reflect a fine technical point in that the conduct (or assertion) complained of need be both misleading and deceptive at once. The definition is accordingly treated very expansively by courts, covering statements and actions, whether there is a valid contract or not, as long as it is fraudulent in some way and in pursuit of commerce. This is because in practice many acts or omissions involve communication of some sort. Silence is still considered a form of conduct capable of misleading, when known mistakes are not corrected. Intentions do not matter. Misleading by error is illegal, even when you’re being honest and reasonable.

 

Mistake

Mutual mistakes occur when two parties are in error as to contractual terms. Where the mistake is mutual and so bad that effectively there is no agreement, then there is no contract. It is only likely for this law to be of value if one party finds that in spite of their mistake they profit from the contract and the other loses as otherwise a mutual loss should result in a private agreement to cut losses.

 

Unilateral mistakes DO NOT vitiate a contract. If one party has an intention or understanding that the other does not share, even if there is a failure of communication, the contract must go ahead.

 

Abuse of Power

Economic duress

An important area of abuse of power is economic duress. Economic duress typically arises where one party threatens to breach a contract unless the other party enters a varied or new contract with terms more favourable to the first party. It also can arise where there is very strong economic pressure to enter a contract. Ordinary economic needs frequently lead to contracts being formed, but vitiation does not arise even if such a contract turns out to be unfair. Real abuse of power leading to strong pressure is required for vitiation to be argued successfully.

 

An example of abuse of power is found in Universe Tankships of Monrovia v International Transport Workers Federation. A union black banned a ship so that it would not be tugged from a sea port, until the owners agreed to pay money to its welfare fund. To avoid being stranded the owners acquiesced, but they sued the union afterward. The court had to determine whether this was a valid contract. It was payment for a service, but there was economic duress which made it unfair and inequitable.

 

Undue Influence

A presumption exists that contracts formed in relationships of strong influence were not freely agreed to. This is especially where something of substantial value is transferred. Examples include a personal carer and an intellectually handicapped person, or a professional and a client totally reliant on their expertise. The presumption can be rebutted with evidence of the dependent party’s exercise of free will.

 

These relationships include:

• solicitor and client,

• doctor and patient,

• parent/guardian and child,

• fiancé and fiancée.

 

Unconscionable Dealing

An equitable rule exists to protect a party who, at a clear disadvantage, enters a contract. There are three categories of unconscionable dealing:

 

• Intoxication and mental incapacity: A party is not too badly affected to intend to be legally bound. But they are affected, and under the influence or manipulation of the counter-party.

• Emotional dependence: A contract is formed where the personal relationship between the parties is so highly emotional that control is possible.

• Lack of knowledge or education: A party having no understanding at all of what they are getting into can get out of a contract.

 

Commercial Bank of Australia v Amadio furnishes a good example of unconscionable dealing. In this case there was both a lack of knowledge and education. Mr & Mrs Amadio, had very limited English, were aged in their 70’s, and their son, Vincenzo, had huge business debts, although he lived opulently and his parents thought he was very successful. He compelled them into giving a guarantee for a further overdraft to the bank. He also misled them as to the financial position of his company, V Amadio Builders. They wanted to help their son. The bank was in a position to know the risk the Amadios were taking, and the branch manager was a friend.

 

The court found that Mr & Mrs Amadio’s ability to judge whether entry into the transaction was in their own best interests, was sadly lacking. They were misled as to the financial position of V Amadio Builders, but the bank well knew the perilous position Mr & Mrs Amadio were putting themselves in. Their guarantee was set aside so that the bank could not claim their assets.

 

Unconscionable Conduct

Unconscionable conduct is a protection against unfair practices in commerce. It is contained in sections 20 to 22 of the Australian Consumer Law and applies to dealings with business and individuals. To be caught by this law, conduct must be both unfair or harsh, and have an element of bad conscience. But there is no precise legal definition. Factors which courts look at to determine whether conduct is unconscionable include:

 

• Evidence of the parties acting in bad faith.

• The stronger party’s knowledge of exploitation, rather than mere negligence.

• The parties’ relative bargaining power.

• The unfair use of tactics, influence or pressure by the stronger party.

• Whether the stronger party imposed conditions on the weaker party that were not needed to protect its legitimate interests.

• Whether the weaker party found documentation comprehensible.

• Requirements of relevant industry codes.

• The willingness of the stronger party to negotiate.

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Competition and Consumer Act 2010 (Cth) See Schedules.

Universe Tankships of Monrovia v International Transport Workers Federation [1983] 1 AC 366.

Commercial Bank of Australia v Amadio (1983) 151 CLR 447.

Competition and Consumer Act 2010 (Cth) See Schedules.

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