LE Lecture 6

Lecture 6
Void, Mistake and Misrepresentation

6.0 Void and Voidable Contracts

Void Contract
a. A void contract is a contract that lacks legal validity from the outset. It is unenforceable in
law.
b. A contract is only void in certain circumstances, e.g. when the contract is illegal and when a
very exceptional mistake is made in respect of a contract.
c. Any property transferred under a void contract is ineffective and the property must go back
to the original owner.
d. Key characteristics of void contract:
1. has no legal effect
2. has no remedy
3. involves illegal or impossible terms
e. Common Reasons for Void Contracts
1. Illegal Subject Matter
2. Incapacity of Parties
3. Lack of Consideration

Voidable Contract
a. A voidable contract is a valid contract where the innocent party (the party not at fault in
respect of the contract) can choose either to terminate the contract or to continue with the
contract.
b. Any transfer of property based on this contract is valid before the termination.
c. If the property falls into the hand of a third party, the original owner may be unable to recover
the property.
d. Key Characteristics of Voidable Contracts:
1. Valid until voided
2. Grounds for voiding – defects in the formation process of the contract
3. Remedies available – suffered party can seek rescission or damages
e. Common Reasons for Voidable Contracts
1. Misrepresentation or Fraud
2. Duress or Undue Influence
3. Mistake
4. Lack of Free Consent

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6.1 Vitiating factors

Vitiating factors may make a contract invalid:
a. Mistake
b. Misrepresentation
c. Duress
d. undue influence
e. illegality

6.2 Mistake
Mistake may render a contract void/voidable.
There are two main principles of mistake:
1. Mistake of law
a. Ignorance of law is no excuse
2. Mistake of fact
a. caveat emptor
b. Let the buyer beware
c. the buyer has to bear the consequence of the mistake
d. Mistakes of fact including:
1. Mistake of identity
2. Mistake of subject matter
3. Mistake of signing a contract (non est factum- that is not my deed)

6.2.1 Mistake of identity

a. Mistake of identity of the contracting party
b. If one party enters into a contract with another mistaken party, the contract is void.

Case
Cundy v Lindsay (1878)
a. A rogue’s name looked similar to another famous large company
b. The rogue ordered goods from D, who thought that the rogue was the famous large
company and sold the goods to it.
c. The rogue took the goods from D and re-sold them to P.
d. The rogue did not pay D. D wanted to get back the goods from P.

Held
a. The contract between D and the rogue was void.
b. P was an innocent buyer but did not have a good title to the goods.

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Case
Lewis v Avery (1971)
a. P sold his car to a rogue who impersonated a famous actor.
b. P met the rogue in person and saw some admission pass to Pinewood Studios.
c. The rogue gave a worthless cheque to P and re-sold the car to D.
d. P claimed that the contract between him and the rogue was void because there was
mistake of identity.

Held:
a. The contract between P and the rogue was voidable, but not void.
b. Mistake as to the identity of rogue only made the contract voidable but not void.
c. That is, the contract between P and rogue was valid until it is terminated by the innocent
party, P.
d. However, P did not terminate the contract before the rogue re-sold his car to D.
e. D obtained a good title to the car.

Case
Shogun Finance Ltd v Hudson (2004))
a. P sold a car to a fraudster who impersonated a Mr. Patel by using a stolen driving licence.
b. The fraudster forged the signature of Mr. Patel and signed an agreement.
c. The fraudster then re-sold the car to D.
d. P wanted to get back the car from D.

Held
a. Identity of the purchaser was fundamental to the whole transaction.
b. It is essential for credit checking.
c. There was no face to face dealings between P and the fraudster.
d. The signature on the agreement was not Mr. Patel’s.
e. The contract was void and D had not obtained good title to the car.

6.2.2 Mistake of subject matter

i. If the contracting parties make a mistake as to the subject matter, the contract is void.

Case
Couturier v Hastie (1856)
a. P and D signed a contract for a cargo of corn.
b. Both parties did not know the corn deteriorated and were sold to other party before
they signed the contract.

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Held
a. Both parties made a mistake as to the subject matter.
b. The corn were no longer in existence.
c. The contract was void.

ii. There is no meeting of minds and no contact can be formed for mistake of subject
matter.

6.2.3 Mistake as to signing of contract

a. non est factum
means that the signature on the contract was signed by mistake, without knowledge of
its meaning.
b. a special defense allowing an individual not to fulfill the terms in a contract they have
signed.
c. To claim non est factum, there are 3 conditions:
1. one must be induced by fraud to sign the contract
2. the nature of contract is fundamentally different from what one intended to sign
3. one must not be careless

Case
Saunders v Angelia (1970)
a. An old woman was induced by her nephew to sign a deed to transfer her landed
property to a third party.
b. She in fact had intended to transfer her property to her nephew.
c. She wanted to claim non est factum to void the contract.

Held
a. She satisfied the first condition because she was induced.
b. However, she failed the second and third conditions.
c. The second condition refers to the nature of contract which was to transfer her
landed property, which was not fundamentally different from what she intended.
d. For the third condition, she was careless and did not read the deed herself.

Case
Cheung Pik-wan v Tong Sau-ping (1986)
a. P was induced to sign an authorization to a clerk of a law firm.
b. P was told that the signing is for a guarantee only.
c. P was illiterate and relied on the clerk’s advice.
d. The clerk obtaining the authorization and sold P’s property.

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Held
a. The contract was void.
b. the principle of non est factum can be applied
c. P satisfied all the 3 conditions
d. P could recover her landed property and the third party could claim compensation
against the legal clerk and the law firm.

6.3 Misrepresentation
a. It is a false statement of material facts.
b. made by one party (“Representor”) to another (“Representee”) to induce another to enter
into a contract.
c. not part of a contract. (so, no breach of contract, but classified under the doctrine of
misrepresentation)
d. rendering a contract voidable.
e. if the Representor possesses special knowledge or greater expertise or skill than the
Representee, then those expressions of opinions may be implied representations which are
tantamount (等如) to a statement of fact.
f. To claim misrepresentation, there are 2 conditions:
1. The false statement must be a statement, not an opinion
2. The innocent party must rely on the false statement to enter into the contract

6.3.1 Distinguishing opinions and facts

a. Opinion
◇ There is no objective criteria to measure the statement of opinion.
◇ e.g. “this sport car is excellent for showing your social status”
b. Facts
◇ Can be tested by objective means
◇ e.g. “this sport car is made in Germany”
c. One cannot rely on the opinions to claim damages if the opinion is not correct unless the
opinion is given by a party with particular knowledge and skills relating to his opinion.

Case
Bisset v Wilkinson (1927)
a. D sold a piece of land to P
b. P wanted to use the land for sheep farming.
c. D told P that the land can hold 2,000 sheep, though the land was never used for sheep
farming
d. D’s statement was untrue

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Held
a. The statement made by D was just an expression of opinion
b. The contract is valid

6.3.2 Reliance on the statement (representation)

There are two conditions for establishing misrepresentation:
a. a false statement (of material facts)
b. Reliance on the false statement to enter into a contract

6.3.3 Silence amount to misrepresentation

a. In general, silence dose not amount to misrepresentation.
b. However, some half-true statement may amount to misrepresentation

Case
Dimmock v Hallett (1866)
a. A purchaser asked the landlord whether his farm was let
b. The landlord told the purchaser that the farm was let
c. but did not tell him that the tenant had given notice to terminate.

Held
If a statement is technically true but in reality misleading, this form of silence on the truth of the
matter will be a misrepresentation.

6.3.4 Types of misrepresentation

There are 3 types of misrepresentation:
1. Fraudulent misrepresentation 欺詐 (FM)
2. Negligent misrepresentation 疏忽 (NM)
3. Innocent misrepresentation 無知 (IM)

6.4 Fraudulent misrepresentation

a. a false statement is made by a person with dishonestly intent.
b. There is fraud if it is made
1. knowingly or
2. without belief in its truth or
3. recklessly.
c. The innocent party can claim rescission of the contract and damages.
d. It is difficult as the innocent party must prove the wrongful party has the intention to
deceive. (P bears the burden of proof)

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Case
Polaroid Far East Ltd. v Bel Trade Co Ltd (1990)
a. P sold films to D at a discount
b. D made representation to P that they would only re-sell those films in China,
c. but in fact D re-exported and sold those films to North America and Europe.

Held
a. The court held that D was liable for their fraudulent misrepresentation.
b. P was entitled to damages and rescission (撤銷合約) of the contract for future supply of
films.

Case
Smith New Court Securities Ltd v Citibank NA (1977)
a. D persuaded P to buy shares in a company.
b. D said there were other 3 potential buyers interested in buying the shares.
c. P bought the shares and eventually lost money on the shares
d. P found that D’s statement was wrong and there were in fact, no interested buyers at all

Held
a. D knowingly made a fraudulent misrepresentation to P
b. P could claim the damages from D.

Case
Derry v Peek (1889)
a. A company’s directors said in their prospectus that the company had the authority to run
trams by steam or mechanical power.
b. P bought the company’s shares on the faith of this statement
c. The company was in fact just applying for the government licence. But the directors
believed that to obtain government approval was just a formality in such circumstances
d. Eventually, no government approval was obtained by the company.

Held
a. P could prove that the director of the company was dishonest in his belief. (i.e. no
dishonest intent)
b. There was no fraudulent misrepresentation as to:
1. knowingly,
2. without belief in its truth and
3. recklessly.

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6.5 Negligent misrepresentation

a. a party making a misrepresentation has no reasonable grounds to believe its truth
b. easier for the representee (the innocent party) to rely on this type of misrepresentation.
c. The representee can claim rescission, damages and/or indemnity.
d. Section 3(1) Misrepresentation Ordinance (Cap. 284) shifts the burden of proof from the
innocent party to the wrongful party (D bears the burden of proof)
e. the wrongful party must prove that he has reasonable ground to believe it is true

Case
Yili Concepts (HKG) Ltd v Lee Wai Chuen (2000)
a. P signed an agreement and paid a deposit to buy a property from D
b. D said the property was 1,200 square feet
c. In fact, the property was much less than 1,200 square feet

Held
a. There was no fraudulent misrepresentation made by D
b. P could apply s3(1) of the Misrepresentation Ordinance (Cap. 284) to shift the burden of
proof to D.
c. D could not prove he had reasonable grounds to believe the fact he had told P was true.
e. P was entitled to rescind the contract and claim damages from D.

6.6 Innocent misrepresentation

a. where a person makes a false statement of fact but he has some reasonable ground to believe
that it is true.
b. The innocent party is entitled to rescission
c. The court may also grant damages instead of rescission.

6.7 Section 3(2) of the Misrepresentation Ordinance

a. The court has an equitable jurisdiction to grant damages instead of rescission, if the
circumstances rendered such a ruling appropriate.
b. Both for negligent misrepresentation and innocent misrepresentation
c. In this regard, the innocent party may not return the subject matter to the wrongful party and
recover the payment.
d. Rescission, that is to go back to the position just before the formation of the contract (in
other words, one returns the goods and the other pays the money back in a sale transaction),
is not always feasible.

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e. If the goods have already been partly sold or used, there is no way to return the goods to the
seller (wrongful party) so as to recover the purchase price.
f. As a result, damages for compensation is the only solution
g. Damages in the FM and NM are assessed on the tortious basis of reliance, i.e. the plaintiff is
put back to the position he would have been in had the contract not been entered into.
(Restore to the situation where no contract was formed)

6.8 Damages for each type of misrepresentation

a. For all FM, NM and IM, the innocent party may avoid the contract.
b. The representee must give notice by words or conduct to the representor informing him/her
that the contact would be set aside.
c. Order of rescission.
This order ends the contract and restores the parties to the position they were in before the
contract was made. This remedy, however, is equitable and is thus discretionary.
d. The following remedies are available:
1. FM
The representee will have the right to sue in damages as well as rescinding the contract.
These damages are in the tort of deceit

2. NM
There is also a right of rescission and damages for the aggrieved party.

3. IM
The court may award damages in lieu of rescission if the court feels that this is
appropriate

Case
Long Year Development Ltd v Tse Fuk Man Norman (1991)
a. D bought a flat with a car park from a third party.
b. The third party made representation that the car park was with cover.
c. The third party just saw once the tenant of the flat used a covered car park and believed
the car park used by the tenant belonged to the flat.
d. D claimed damages against the third party under s3(1) of Misrepresentation Ordinance.

Held
a. The third party did make a misrepresentation to induce D to enter into the contract.
b. The representation was not a fraudulent misrepresentation.
c. The casual observation by the third party was not a reasonable ground to believe the car
park belonged to the flat under s3(1) of the Misrep. Ord.
d. D could recover damages from the third party.