Law of Contract: Free Consent Commercial Law

Free Consent: Points to Ponder How can we be sure that the agreement is made without ‘free consent’? Agreements made without free consent = voidable agreements NOTE the term ‘voidable’! What does ‘voidable’ means COMPARED with ‘void’ agreements? What are the laws that govern these matters?

Free Consent & Elements of Contract S.10 (1) CA: ‘all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void….’ What are the other elements of contract?

Free Consent: Definition S.13 CA : Two or more persons are said to consent when they agree upon the same thing in the same sense. S. 14 CA : Consent is said to be free when it is not caused by – Coercion, Undue influence, Fraud, Misrepresentation, Mistake. NOTE: Mistake is grouped differently due to its effect.

Free Consent: Effects In any of the circumstances listed above, the validity of an agreement will be impaired- the agreement shall be void or voidable s.2(i)CA: A voidable contract is a contract which is enforceable by law at the option of one or more of the parties to the contract but not others (i.e. not enforceable by third parties s.19(1)CA When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused.

Free Consent: Voidable Contract Agreements entered without free consent is voidable. Without free consent may occur with the existence of either COERCION, UNDUE INFLUENCE, FRAUD and MISREPRESENTATION in the VOIDABLE contract. Authority: See S.19 CA

Voidable Contract: Effects S.19(1) CA – when a consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Voidable Contract: Effects S.19(2) CA – If the innocent party in cases of fraud or misrepresentation may, if he thinks fit, insist that the contract be performed, and that he shall be put in the position in which he would have been if the representation made had been true. S.65 CA – the party rescinding a voidable contract shall, if he has received any benefit from the other party to such contract, restore the benefit to the person from whom it was received.

Coercion S.15 CA – Kesarmal s/o Letchman Das v Valiappa Chettiar (1954) 20 MLJ 119 It was held that a transfer executed under the orders of the Sultan, issued in the ominous presence of two Japanese officers during the Japanese Occupation of Malaya, was invalid. The court held that consent was not freely given and the agreement was voidable at the option of the party whose consent was so caused.

Undue Influence S.16 CA There are a few circumstances that need to be fulfilled to prove ‘domination’

Undue Influence Domination, the 3 circumstances: A person is deemed to be in position to dominate the will of another where: He hold a real or apparent AUTHORITY over the other He stands in a fiduciary relation to the other He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily stress.

Undue Influence Inche Noriah v Shaik Allie bin Omar [1929] AC 127 An old and illiterate woman executed a deed of gift a landed property for her nephew who had been managing her everyday life. She took an advice from a lawyer She signed the deed. Property transferred to the nephew. Court set aside the agreement on the ground of undue influence because of the relationship in existence between the parties.

Fraud S.17 CA Fraud includes certain acts which are committed with the intention to induce another party to enter into a contract. There are 5 situations of fraud.

Fraud The 5 acts of fraud: The suggestion as to a fact of that which is not true by one who does not believe it to be true The active concealment of fact by one having knowledge of belief of the fact. A promise made without any intention of performing it Any other act fitted to deceive Any such act or omission the law declares to be fraudulent.

Fraud Note: Fraud demands ‘act’ to be done. How about silence? See illustration to S.17 CA

Misrepresentation S.18 CA Misrepresentation is confined to innocent misrepresentation. Innocent misrepresentation is an untrue statement that the speaker believes is accurate. Silence in situation where there is duty to disclose may amount to misrepresentation under S.18(b) CA.

Fraud v Misrepresentation The difference between the two… The basic difference between fraud and misrepresentation is that in fraud, the maker does not believe the truth of the statement made, while in misrepresentation, the maker believes that the statement is true.

Mistake What is mistake? S.21 CA – mistake of fact S.22 CA – mistake of law

Mistake of Fact S.21 CA – Where both parties to the contract are under mistake as to the matter of fact essential to the agreement, the agreement is void. What kind of ‘mistake’? Answer: One that is a matter of fact essential to the agreement. By who? Answer: Both parties to the agreement (mutual) What will happen to the contract? Answer: VOID

Mistake of Fact What is ‘a matter of fact essential to the agreement’? Answer: The mistaken fact is so important that it will cause impossibility to the contract itself. Such as the (i) existence, (ii) identity of the subject matter of the contract. Example: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. (see illustration (b) S.21 CA)

Mistake of Fact What kind of mistake that will not be considered under S.21 CA? Answer: See Explanation of S.21 - An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. Example: A bought an antique dagger from B. A thought that the dagger is so expensive so he paid a high price for it. Later he was told that the value is not that high. His mistake as to the value of the subject matter will not be deemed as mistake under S.21.

Mistake of Fact Mistake of fact must be a mutual mistake. Mistake by both parties. What if the mistake is suffered by one party only? Answer: S.23 CA – A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.

Mistake of Law S.22 CA - A contract is not voidable because it was caused by a mistake as to any law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact. Illustration: A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.

Mistake: Effect The effect is different from those mentioned above. Here, mistake will cause the Contract to be VOID rather than voidable. S.2(g) CA – the contract will be unenforceable What to do if the contract is void? Answer: Remedy of restitution - Look at S.66 CA

Mistake: Effect S.66 CA – When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. It imposes a legal duty on the contracting parties to resolve the matter. If not resolve? “See you in Court!”

Free Consent: Conclusion What are the 5 circumstances that negate FC? Answer: S.14 If there are coercion, fraud or misrepresentation the contract will be voidable under S.19 If under undue influence the contract may be set aside under S.20 If there is mistake of fact, the contract is void under S.21. Remedies: Ss.19(2), 65, & 66 CA

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