Contract: Unit 7 + 8

Question 1

Which ONE of the following statements best defines a misrepresentation?

A false statement of fact which induces a party to enter into a contract

A statement made by the other contracting party which was an inducement to enter into the contract

A false statement made by the other contracting party which was an inducement to enter into the contract

A false statement of fact made by one contracting party to the other and which induced the contract

Answer 1

There must be a false statement of fact which means Answers 2 and 3 are inaccurate.(Answer 3 refers to a false statement but does not specify that it must be a statement of fact).

It must have been made by the other contracting party and so Answer 1 is misleading.

Answer D is the best definition of a misrepresentation.

Question 2

You see a vase in an antique shop. You think it is very rare and worth far more than the price asked. The owner of the shop hears you telling your friend your views about the vase but does not say anything. You buy the vase but it turns out to be worth less than the price asked for it.

Which ONE of the following statements is CORRECT?

The owner of the shop has made a misrepresentation as she should have corrected your mistake.

The owner of the shop has made a misrepresentation as she was under a duty to disclose all material facts.

The owner of the shop has made a negligent misstatement.

The owner of the shop has not made a misrepresentation or a negligent misstatement.

Answer 2

D is the correct answer. The owner of the shop has not made a misrepresentation or a negligent misstatement as there was no false statement.

Question 3

Which ONE of the following is CORRECT?

A misrepresentation makes a contract void.

A misrepresentation makes a contract illegal.

A misrepresentation makes a contract voidable.

A misrepresentation makes a contract uncertain.

Answer 3

C is the correct answer. If there has been a misrepresentation the contract is voidable ie it is a good contract unless and until the innocent party rescinds it.

Question 4

Which ONE of the following statements is WRONG?

The court can order rescission even if the parties cannot be restored to exactly their original positions.

The court cannot order rescission if a bona fide purchaser has acquired rights in the property before the contract is avoided.

Delay is a bar to rescission if the misrepresentation is non-fraudulent but not if the misrepresentation is fraudulent.

The court cannot order rescission once the innocent party has affirmed the contract with full knowledge of the facts.

Answer 4

C is incorrect. The court may order rescission if the parties can be restored substantially to their original positions. Delay is still a bar to rescission in cases of fraudulent misrepresentation but time begins to run from the time when the innocent party discovers the misrepresentation.

Question 5

Barbara bought Simon’s hairdressing business for £50,000. Before the contract Simon told her that the business made an annual profit of about £40,000. A few months after buying the business Barbara found out that the statement was false and she sold the business for £40,000. Assume that Simon’s statement is a misrepresentation.

Which ONE of the following statements is CORRECT?

Barbara can rescind the contract with Simon.

Incorrect: If Barbara sues for damages under s.2(1) Misrepresentation Act 1967 she will have to prove that Simon did not have reasonable grounds for his belief.

If Barbara sues for damages under s.2(1) then damages will be assessed on tort principles and the usual forseeability rule will apply.

Barbara cannot rescind her contract with Simon.

Answer 5

It may help if you think about the bars to rescission and where the onus of proof lies in an action under s.2(1).

D is correct. A is not correct because Barbara has sold the business and so rescission is no longer possible as the parties cannot be restored to substantially their original positions.

B is not correct because the onus of proof is on Simon ie Simon is liable to pay damages unless he can prove that he had reasonable grounds for his belief.

C is incorrect as the usual foreseeability rules do not apply.

Question 6

Which ONE of the following is WRONG?

Under s.2(1) Misrepresentation Act 1967 damages are assessed on a contract basis.

Under s.2(1) Misrepresentation Act 1967 damages are assessed on a tort basis.

When assessing damages under s.2(1) Misrepresentation Act 1967 the usual forseeability rule does not apply.

Damages under s.2(1) Misrepresentation Act 1967 are assessed in the same way as for fraudulent misrepresentation.

Answer 6

It may help if you think about the case of Royscot Trust Ltd (1991). B, C and D are all correct. A is incorrect. When assessing damages under s2(1) the court aims to put the innocent party in the position he would have been in if the statement had not been made, which is the tort method of assessment. The case of Royscot Trust Ltd ( 1991) made it clear that damages under s2(1) should be assessed in the same way as damages for fraudulent misrepresentation in the tort of deceit. The effect of this decision is that the usual foreseeability rule does not apply.

Question 7

Adam was induced to buy a desk because Polly, an antique dealer, misrepresented that the desk was Georgian. Adam paid £5,000 for the desk.

He has now found out that it is a fake and worth only £500. Had it really been Georgian, it would have been worth £6,000.

Adam does not wish to rescind the contract.

Which ONE of the following statements is CORRECT?

Damages assessed under s.2(1) Misrepresentation Act 1967 would be £5,000.

Damages assessed under s.2(1) Misrepresentation Act 1967 would be £5,500.

Damages assessed under s.2(1) Misrepresentation Act 1967 would be £4,500

Damages assessed under s.2(1) Misrepresentation Act 1967 would be £6,000

Answer 7

C is the correct answer. Remember that when assessing damages under s.2(1) the court aims to put the innocent party in the position he would have been in if the statement had not been made. If the statement had not been made Adam would still have £5,000. He has a desk worth £500, so he needs £4,500 in damages.

Question 8

Is the following statement TRUE or FALSE?

A clause in a business-to-business contract exempting liability for misrepresentation will be upheld if it satisfies the reasonableness test in the Unfair Contract Terms Act 1977.

Answer 8

The statement is true - s.3 Misrepresentation Act 1974.

Question 9

Which ONE of the following statements is WRONG?

A unilateral mistake as to identity will only render the contract void where the identity (as opposed to a specific attribute) of the other party is of fundamental importance.

In order to make a contract void, a mistake must precede the contract.

When deciding whether or not there has been a mistake sufficient to make the contract void the courts will look at the facts subjectively.

A mistake can only negate consent if it induced the mistaken party to enter the contract.

Answer 9

All the statements are correct except C. As always in contract law the courts adopt an objective test when deciding whether or not a mistake is sufficiently fundamental to void a contract.

Question 10

Is the following statement TRUE or FALSE?

Covenants in restraint of trade are prima facie void as being contrary to public policy but may be enforceable if they go no further than reasonably necessary to protect a legitimate business interest.

Answer 10

The statement is true. There must be a legitimate interest to protect (e.g. trade secrets and customers) and the restraint is reasonable in terms of geographical area, duration and scope of prohibited activities.

Question 11

A client, a sheep farmer, recently bought a farm. Before buying the farm the client had asked the seller how many sheep he believed the farm would sustain. The farm had never held sheep, but the seller said that in his judgement it would support 2,000 sheep. The client now realises the farm will only sustain 1,500 sheep maximum and wants compensation from the seller.

Which ONE of the following best describes whether the client has a cause of action against the seller for damages?

Yes, the false preliminary statement would be actionable as a misrepresentation.

Yes, the client would have an action for breach of an express term as the matter was an important factor in deciding to enter the contract.

Yes, the client could sue for breach of contract as the client reasonably relied on the seller’s judgement.

No, because the preliminary statement was neither a term of the contract nor a misrepresentation.

No, the general rule is ‘buyer beware’ so the client should have checked how many sheep the farm could sustain before entering the contract.

Answer 11

Statement D is correct. If the seller had simply expressed an honest and reasonably held opinion the false statement would not amount to breach of an express term or a misrepresentation- Bissett v Wilkinson. This also explains why Statements A, B and C are wrong.

Statement E is wrong as there is no obligation to check the accuracy of preliminary statements.

Question 12

A client saw a vase in an antique shop. The client thought it was very rare and worth far more than the price asked. The owner of the shop overheard the client telling someone this on the phone. The owner knew the vase was not rare and valuable but did not tell the client. The client bought the vase and has now discovered the vase is worth less than the price paid.

Does the client have a cause of action against the owner of the shop?

Yes, because the owner of the shop made a misrepresentation: the owner should have corrected the mistake.

Yes, because the owner of the shop would be in breach of an implied term that the sale price was a reasonable price for the vase.

Yes, because the owner of the shop made a fraudulent misrepresentation by positively deceiving the client.

No, because the general rule when selling goods is ‘buyer beware’.

No, because the client acted unconscionably in trying to buy the vase for less than it was worth.

Answer 12

D is correct The general rule when selling goods is ‘buyer beware’

A is wrong. The owner of the shop had not made a misrepresentation. Generally there is no obligation to say anything unless specifically asked.

B is wrong. The price was agreed. Consideration need not be adequate - see Chapter 3.1.1.

C is wrong as there was no positive deception; indeed there was no misrepresentation at all.

E is wrong. There is nothing wrong in trying to secure a good bargain.

Question 13

In May a buyer entered into a contract to buy a farm shop having been deliberately misled by the seller as to the gross profit made by the shop over the previous three years. The buyer made extensive alterations to the shop including the addition of a tea room. Then in August the buyer discovered the fraudulent misrepresentation and decided they no longer wanted the shop.

Could the buyer rescind the contract of sale?

No, because rescission would be barred by undue delay.

No, because rescission is an equitable remedy and damages would adequately compensate the buyer.

No, because restitution is impossible.

Yes, because rescission is potentially available for all forms of misrepresentation and the buyer has not affirmed the contract.

Yes, because rescission is always available for fraudulent misrepresentation.

Answer 13

C is correct. As the buyer made extensive alterations to the shop including the addition of a new tea room restitution would be impossible.

A is wrong as rescission would not be barred by delay. With fraudulent misrepresentation time runs from discovering the misrepresentation.

B is wrong as rescission may be awarded in addition to damages.

D is wrong. Rescission is potentially available for all forms of misrepresentation but would be barred on the facts as restitution is impossible.

E is wrong as rescission is not available as of right for any misrepresentation.

Question 14

A client bought a business for £250,000 having been deliberately misled by the seller as to the gross profit made by the business. After running the business for a few months the client discovered the fraudulent misrepresentation. The client was advised to continue running the business (albeit at a loss) and to try to sell it. The sale of the business went through last week. It sold for £170,000.

If the client sues for misrepresentation which of the following best explains how damages would be assessed?

On an expectation loss basis.

On a reliance loss basis for wasted expenditure that was not too remote.

On a tortious basis for all consequential losses.

On a tortious basis and so would not extend to any loss of profit.

For any loss that was not too remote the client would get damages to put him in the same position as if the misrepresentation had not been made

Answer 14

C is correct. Damages under s2(1) are awarded on the same basis as if the misrepresentation had been made fraudulently and so extend to all consequential losses and the measure is as if the misrepresentation had never been made.

A and B are wrong as they are ways of assessing damages for breach of contract.

D is wrong as damages for loss of profit may be assessed on a tortious basis (East v Maurer).

E is wrong as all consequential losses are recoverable – remoteness is not an issue.

Question 15

A client recently bought a tenanted house. Before buying the property he had enquired about the tenant and was told by the seller that he was ‘a most desirable tenant’. The client has now discovered that the tenant is seriously in arrears with the rent and has only ever paid under pressure.

If the client sues the seller which ONE of the following is the most likely outcome?

The contract of sale will be set aside and the client will be awarded damages for breach of contract.

The claim will fail as the seller was simply expressing an opinion which is not actionable.

The client will be awarded damages assessed on a tortious basis.

The claim will be dismissed on the basis the client should have undertaken proper due diligence.

The client will be awarded damages in lieu of rescission.

Answer 15

The most likely outcome is reflected in Statement C i.e. the client will be awarded damages on a tortious basis. The seller could not have reasonably believed the tenant was ‘most desirable’ and so the statement would be actionable as a misrepresentation. This explains too why Statement B is wrong.

The preliminary statement would not be deemed to be a term of the contract; hence Statement A is wrong. Also, the court might not order rescission which is an equitable remedy awarded at the discretion of the court and which may be barred in any event.

Statement D is wrong. There is no obligation to check the accuracy of preliminary statements.

Statement E is wrong. The statement is unlikely to have been made innocently and in any event rescission may not be available.

Question 16

A year ago a client bought a business. After 6 months they discovered the seller had misrepresented the turnover of the business and gross annual profit. The client was advised to continue running the business but to put it up for sale. Last week the client sold the business and wants advice on what, if any remedies they may have against the seller.

Which ONE of the following best explains the client’s legal position?

The client may rescind the contract and claim damages for all consequential losses including loss of profit.

Damages would be awarded in lieu of rescission if the misrepresentation had been made innocently.

The client will not be entitled to claim damages unless they can prove that the seller was fraudulent.

The client cannot rescind the contract but may be awarded damages if they can prove a misrepresentation and loss.

The client will be awarded all consequential losses except loss of profit: loss of profit is expectation loss and as such not available.

Answer 16

Statement D is correct. Rescission is barred as the business has been sold: this also explains why statements A and B are wrong. If the client sues for damages under s2(1) Misrepresentation Act all they have to prove is a misrepresentation which caused loss. The onus is then on the misrepresentor to show that thy honestly and reasonably believed what they said to be true and that is a difficult burden of proof to discharge. The reversal of the burden of proof also explains why Statement C is wrong.

Statement E is wrong as damages may be awarded for loss of profit, but they are not calculated on an expectation loss basis. If the misrepresentation had not been made the client would not have bought the particular business, but another similar one. The measure of damages would be the difference between the profit the client actually made and the profit the client would have made if the client had bought a similar business.

Question 17

A client wholesaler received a written order for goods from what appeared to be a reputable company with which the client was familiar: instead the order had been placed by a rogue company (the ‘Company’) trading from the same retail park. The client dispatched the goods to the Company but has never been paid for them. Before the client discovered the fraud the Company had sold the goods to a third party who bought them in good faith. The client wants to repossess the goods from the third party.

Which ONE of the following best describes whether, or not, the client’s action will succeed?

No, because although there had been a misrepresentation by the Company rescission would be barred.

No, because it would have been reasonable for the client to have checked the name and address of the Company before accepting the order.

No, because the client’s mistake was not fundamental enough to get the contract avoided: it was only a mistake as to the creditworthiness of the buyer.

Yes, because the client had made a unilateral mistake and the contract with the Company would be void.

Yes, because the Company had made a fraudulent misrepresentation: the contract with the Company would be set aside and title to the goods would revert to the client.

Answer 17

Statement D is the correct one. Based on Cundy v Lindsay, the contract would be void for mistaken identity (unilateral mistake) in which case title will have reverted to the client before the Company sold to the third party. This explains too why Statement C is wrong- the cases seem to draw a distinction between cases of mistaken identity made in a face-to-face situation and those made at a distance as here.

Statement A – there had been a fraudulent misrepresentation and rescission would be barred (by the bona fide third party) but the contract would no doubt be void for mistake in which case the action would succeed.

Statement B- no obligation on the client to check and so this statement is wrong.

Statement E - there had been a fraudulent misrepresentation but rescission would be barred (by the bona fide third party). The contract would no doubt be void for mistake.

Question 18

A client advertised her valuable violin for sale. Last week a man visited her and agreed to buy the violin. When he asked to pay by cheque the client hesitated and said she would prefer cash. The man said he was a famous violinist and produced photographic identification. On that basis the client accepted the cheque and let the man take the violin. Yesterday the cheque was not honoured and the man cannot be traced. Today the client saw the violin in the shop window of a musical instrument supplier who had bought the violin in good faith three days ago.

Which ONE of the following statements best describes the client’s legal position?

The client can rescind the contract of sale with the man based on fraudulent misrepresentation.

The client can recover the violin from the musical instrument supplier.

The client can sue the man for damages in the tort of deceit and recover the violin from the musical instrument supplier.

The client cannot recover the violin from the musical instrument supplier.

The client cannot recover the violin from the musical instrument supplier but can sue the man for damages for mistaken identity.

Answer 18

The correct statement is D.

A is wrong as the fact that the musical instrument supplier had purchased the violin would be a bar to rescinding the contract.

B is likely to be wrong as the client’s mistake appears to be one as to attributes rather than identity.

C is wrong as rescission will be barred.

E is wrong as damages are not available for mistaken identity. The only remedy is for a court to declare the contract void.

Question 19

Which ONE of the following statements is WRONG?

For duress there must be some sort of illegitimate threat, force or pressure.

Duress must have been the only reason why the innocent party entered into the contract.

Traditionally duress was limited to illegitimate threats, force or pressure to the person or property.

In the case of traditional duress, once the victim has established duress the onus is on the wrongdoer to show that it did not in any way induce the contract.

Answer 19

With traditional duress the onus of proof is as in Statement D (Barton v Armstrong). B is wrong because duress does not have to be the only reason why the innocent party entered the contract, although for economic duress it must be a significant cause.

Question 20

In Carillion Construction Ltd v Felix, Dyson J listed three things needed for actionable duress.

Which one of the following did he NOT include in the list?

Illegitimate threat or pressure.

Compulsion of the will so as to vitiate the consent of the victim.

Compulsion on, or a lack of practical choice for the victim.

Threat/pressure was a significant cause inducing the contract.

Answer 20

Statement B comes from a phrase used in an earlier case.

Question 21

Which ONE of the following statements amounts to an illegitimate threat of commercial pressure?

If you don’t increase your order by 50% we will stop giving you a discount.

If you don’t agree to pay us an extra £200 for the goods you’ve ordered we won’t deliver them to you.

If you don’t agree to pay us an extra £200 for the goods you’ve ordered, we won’t accept any more orders from you.

As demand for our goods is very high we are going to increase the cost of them by 60% starting immediately.

Answer 21

Statements A, C and D simply amount to ordinary commercial pressure as there is no threat to do anything wrong.

Question 22

What barred rescission in The Atlantic Baron?

Restitution impossible.

Bona fide purchaser for value.

Restitution impossible and affirmation.

Undue delay and affirmation.

Answer 22

Undue delay as the innocent party had left it 8 months before purporting to rescind. Also payment of the extra after the pressure was removed could be seen as affirmation. The delay could also be seen as implied affirmation.

Question 23

The principle established in Williams v Roffey was that performance of an existing public duty may be consideration if it confers a real practical benefit and there is nothing contrary to public policy.

True or false?

Answer 23

False. The statement is based on what Denning LJ said in Ward v Byham. Williams v Roffey was to do with performance of an existing contractual duty owed to the other party. If it confers a practical benefit or obviates a disbenefit it will be good consideration but if there’s duress any contract/variation will be voidable.

Question 24

In Atlas Express v Kafco the court decided that the renegotiated contract was voidable due to economic duress.

On what other ground, if any, did the court say that the new contract was not binding on Kafco?

Lack of consideration as Atlas Express had simply been performing an existing public duty.

Lack of consideration as Atlas Express was simply performing their contractual obligation to Woolworths to deliver the goods to them.

Lack of consideration as Atlas Express was simply performing its contractual obligation to Kafco to deliver the goods.

There was no alternative ground.

Answer 24

Option C

Question 25

If there has been duress, but rescission is barred, the court has a discretion to award damages in lieu of rescission if in all the circumstances it would be equitable to do so. True or false?

Answer 25

False. The only remedy for duress is rescission (compare misrepresentation).

Question 26

Which ONE of the following statements is CORRECT? The doctrine of undue influence is based on inequality of bargaining power. The doctrine of undue influence is always based on someone deliberately abusing a dominant position for personal gain. In order to have a contract set aside a claimant must prove, on the balance of probabilities, that the claimant entered the contract as a result of undue influence. A contract may be set aside because of undue influence exerted by a third party.

Answer 26

Option D is correct. A is false – there must be an abuse of position by the ‘dominant’ party. B may be true in most cases, but not all of them. C is false – in some circumstances there will be a presumption of undue influence. D is true – an authority is Credit Lyonnais v Burch (1997).

Question 27

Is the following statement TRUE or FALSE? If a party can prove that it has entered into a contract because of undue influence then that party may rescind the contract (provided none of the bars to rescission apply) and sue for damages for any further loss suffered.

Answer 27

FALSE. The statement is false because it is not possible to obtain damages for undue influence. The only remedy is rescission.

Question 28

A client entered into a contract with a decorator to paint the outside of the client’s house which was in urgent need of attention. The agreed price was £3,000. Not long after the decorator had started painting the house, he explained to the client he had underestimated the cost and would need another £500 in order to finish the job. The client was outraged, but as the client could not find another decorator to complete the painting agreed to pay the extra money. The work was completed but the client only paid the decorator £3,000. The decorator is now suing the client for the extra £500. Which ONE of the following best explains whether, or not, the decorator’s action will succeed? No, because the decorator was simply performing an existing duty owed to the client and so gave no consideration for the promise of extra money. No, because although the decorator conferred a practical benefit by completing the work the client could raise duress as a defence. No, because although the decorator conferred a practical benefit the variation would be void as the promise to pay more was made under duress. Yes, because the decorator conferred a practical benefit and it would be inequitable for the client to renege on her promise to pay the extra money. Yes, because the decorator gave consideration and the promise to pay the extra money was made as a result of hard but legitimate bargaining.

Answer 28

Statement B is correct. Performance of an existing duty owed to the other party is consideration if it confers a real practical benefit. There appears to have been an illegitimate threat though which left the client with no practical choice but to concede. Consequently, the client could rely on economic duress as a defence if sued by the decorator. Statement A is wrong. Performance of an existing duty owed to the other party is consideration if it confers a real practical benefit. The client appears to have got the practical benefit of having the urgently needed work completed without having to find someone else to do it. Statement C is wrong. Duress makes a variation voidable, not void. Statement D is wrong as equity is not a relevant factor. Statement E is wrong as there appears to be duress rather than just hard-bargaining.

Question 29

A manufacturer had agreed with a carrier for the carrier to deliver products to the manufacturer’s main customer on Friday last week for £3,000 to be paid after delivery. Last week, the carrier told the manufacturer that it could not deliver the products unless the manufacturer paid an extra £2,000. When the manufacturer protested, the carrier replied that if he refused to pay the extra it would not deliver the products. The manufacturer could not find another carrier to deliver the goods on time. On Thursday last week, the manufacturer told the carrier that he had no choice but to agree to their terms. The carrier then delivered the products on time. Which of the following statements best describes whether or not the manufacturer is obliged to pay the extra £2,000? The manufacturer can refuse to pay the extra £2,000 because the promise to pay the extra £2,000 is voidable due to economic duress. The manufacturer can refuse to pay the carrier any sum because the carrier had breached the original contract. The manufacturer can refuse to pay the extra £2,000 because there is no practical benefit for the promise of extra money. The manufacturer has to pay the extra £2,000 because he had agreed to do so. The manufacturer has to pay the extra £2,000 because the carrier did more than it had originally agreed to do.

Answer 29

Option A is correct. The promise to pay the extra £2,000 is voidable due to economic duress. Under the guidelines in Carillion v Felix [2001] BLR 1 there must be an illegitimate threat whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim which is a significant cause inducing the claimant to enter the contract. There is a range of factors as to whether pressure is illegitimate. These include actual or threatened breach of contract; has the person allegedly exerting the pressure acted in good or bad faith; whether the person has any realistic practical alternative but to submit to the pressure; whether the victim protested at the time; and whether he affirmed and sought to rely on the contract. In this case, the carrier threatened to breach contract, there was no realistic practical alternative available to the manufacturer and the manufacturer protested at the time. It is likely therefore that this is a case of economic duress. Option B is wrong. The original contract remains binding and has been performed. The manufacturer must pay the original contract price. Option C is wrong. The promise to pay an extra £2,000 did secure a practical benefit for the manufacturer – namely that the carrier would carry the goods. It is economic duress that renders the promise unenforceable. Option D is wrong. The manufacturer did agree to pay the extra £2,000 but this agreement can be vitiated because of economic duress. Option E is wrong. The promise to pay the extra sum would not be supported by extra consideration as the carrier only did what it had agreed to do in the original contract. This question is similar to what happened in Atlas v Kafco [1989] 1 All ER 641.

Question 30

A client manufactures precision parts for the aeronautical industry. Six months ago it won a large contract with a major aeroplane manufacturer. To fulfil this contract the client reached agreement with a tool making company (the ‘Company’) to supply certain equipment by the end of last week. Two months ago the Company told the client that it had underestimated costs and would have to charge an extra £6,000 if it was to carry on. The client protested but reluctantly agreed as it could not find another manufacturer to do the job. The equipment was made on time and the client paid the Company £16,000 (ie the original contract price plus the extra £6,000) on delivery. Which one of the following statements best describes the legal position? The client’s promise to pay more would not be binding as the Company had given no consideration for it. The contract with the Company could be set aside and the client would be refunded £16,000 because the promise to pay extra was made under duress. The contractual variation would be binding because the Company had conferred a practical benefit and exerted no duress, just hard commercial bargaining. The Company had provided consideration for the extra £6,000 but the variation would be voidable because of duress. The promise to pay more money would be voidable because of duress but rescission would be barred.

Answer 30

The correct statement is D. A is wrong because performance of an existing duty owed to the other party may be consideration if it confers a practical benefit. B is wrong because even if the promise to pay more was made under duress it is only the variation that could be set aside in which case our client would be entitled to have £6,000 refunded. C is wrong because the Company most likely exerted duress ie made an illegitimate threat which left our client with no practical choice and was a significant reason for promising to pay more. Finally, E is wrong because on the facts there is nothing to suggest that rescission would be barred eg by delay. Affirmation would not apply as it appears the client had to pay the total price (including the extra) in order to take delivery of the goods.

Question 31

A businessman contracted with a company to build a supermarket. Payment by instalments was agreed but no provision for price adjustments made. Higher than expected costs caused the company to demand a price increase, threatening to break the contract. Under protest, the businessman paid the remaining instalments at the higher level. The supermarket was completed nine months ago. The businessman now wants to rescind the variation (under which the higher-priced instalments were paid), based on an allegation of economic duress, and recover from the company the additional sums paid. Consideration is not an issue in the claim. Which statement best describes the businessman’s ability to secure rescission of the variation? He will succeed. Rescission can be based on economic duress arising from a threat to break a contract, even if (as here) there was good consideration for the variation. He will not succeed. Rescission cannot be based on economic duress arising from a threat to break a contract regardless of whether there was good consideration for the variation. He will succeed. The variation was made under economic duress so it is voidable, and by suing for rescission the businessman is electing to avoid that variation. He will not succeed. The variation was made under economic duress so it is voidable, but rescission cannot be claimed as one or more bars to rescission are present. He will succeed. The variation was made under economic duress so it is voidable, and rescission is available as no bars to rescission are present.

Answer 31

Option D is the best answer. Where a party is entitled to rescind, it can choose whether to enforce that right or elect to affirm the contract. But if a party affirms a contract it will lose its right to rescind (The Atlantic Baron [1979] QB 705, 721 per Mocatta J). Undue delay in asserting the right to rescind will also be a bar to rescission. On the facts there is evidence of undue delay (the businessman has only started to think about rescinding the variation nine months since completion) which might also be taken by the courts to signal apparent affirmation of the variation. Option A is wrong. Although duress can include threats to economic interests, a claim for rescission will not succeed if one of the bars to it has arisen. On the facts, success is not guaranteed due to apparent affirmation and delay. Option B is wrong. Duress can include threats to economic interests (as above). Option C is wrong. Although the commencement of proceedings to enforce rescission can amount to communication of an election to rescind the answer does not take into account the probable pre-existing bars to rescission. Option E is wrong. One or more bars to rescission are present.

Question 32

An IT company entered into a contract to sell computers abroad. In order to complete the manufacture of those computers, the IT company agreed to purchase specialist circuit boards from a supplier for the sum of £20,000. A day before the supplier was due to supply the circuit boards, it contacted the IT company to demand an additional £10,000 and advised that it would not supply the circuit boards unless that additional sum was paid. Worried that it would lose its contract to sell its computers abroad, the IT company felt that it had no alternative but to agree and advised that it would, under protest, pay the additional sum. The supplier delivered the circuit boards and, five days later, the IT company paid the sum of £30,000. Which of the following best describes whether the IT company can demand money back from the supplier? The IT company can demand repayment of the full £30,000 because of the supplier’s economic duress. The IT company can demand repayment of the sum of £10,000 because of the supplier’s economic duress. The IT company can demand repayment of the sum of £10,000 as it did not receive sufficient consideration for that sum. The IT company cannot demand repayment of any sum because it voluntarily agreed to pay the supplier £30,000. The IT company cannot demand repayment of any sum because the agreement to pay the supplier £30,000 has been affirmed.

Answer 32

Option E is correct. The facts suggest that the agreement to pay the additional sum of £10,000 was caused by the supplier’s economic duress. The supplier threatened to breach contract (thereby applying illegitimate pressure) and the IT company had no practical choice but to agree. The variation to pay the supplier the additional sum of £10,000 therefore was initially voidable and could have been set aside by the IT company. However, paying the supplier the additional sum demanded after the supplier had delivered the circuit boards suggests that the IT company has affirmed the variation. Having supplied the circuit boards, the supplier no longer had the ‘upper hand’. The IT company could have simply refused to pay the additional sum at that point and there would have been nothing the supplier could have done. The IT company may therefore be taken to have freely agreed to pay the additional sum of £10,000 and cannot now set aside the variation to recover that sum. Option A is wrong. Even if it was still open to the IT company to take action as a consequence of the supplier’s economic duress, it would have only been able to set aside the agreement to pay the additional sum of £10,000. There is nothing to suggest that the original agreement to pay £20,000 was entered into as a result of economic duress and therefore that agreement would still stand. Option B does not represent the best answer. While there was economic duress, the IT company’s ability to recover the additional sum of £10,000 is likely barred by affirmation. As a result, the IT company cannot now demand any money back. Option C does not represent the best answer. Ordinarily, the promise to pay an additional sum in exchange for a promise to perform an existing contractual duty is not binding for want of consideration. However, in this case, the IT company presumably obtained a practical benefit in securing the supply of the circuit boards, namely the fact that it could honour its contractual obligation to sell its computers abroad. This would be valid consideration under the principle of Williams v Roffey. Option D is wrong. The facts make it clear that the IT company did not at the time voluntarily agree to pay the additional sum of £10,000.

Question 33

A client, an elderly widow, consulted her bank manager (the Manager’) over the sale of her house which had been valued by two different estate agents. The client had often sought advice from the Manager on financial matters and the Manager offered to buy it for the lower of the two valuations. The client accepted the offer and the sale was completed six months ago. House prices have now risen by 25% and the client wants the sale to the Manager set aside. Which ONE of the following best explains the legal position of the client? The sale would be set aside because there was actual undue influence. The relationship between the client and the Manager was based on trust and confidence and as the sale calls for an explanation it might be set aside. Your client would be able to raise a presumption of undue influence but rescission would be barred as the Manager was a bona fide purchaser. The sale would be set aside because it would be irrebuttably presumed that there had been undue influence exerted by the Manager. For the sale to be set aside the client would have to prove undue influence and that an award of damages would be inadequate.

Answer 33

The correct statement is B. A is wrong because it is unlikely on the facts that your client could establish actual undue influence. C is wrong because for rescission to be barred by a bona fide purchaser, the bona fide purchaser must be a third party who has subsequently acquired rights in the property. D is wrong because undue influence is never irrebuttably presumed. Some relationships are irrebuttably presumed to be fiduciary in nature eg solicitor and client. E is wrong for two reasons – firstly undue influence does not necessarily have to be proved (it may be presumed) and secondly, the only remedy for undue influence is rescission (not damages too).

Question 34

A client and her husband jointly own the family house (‘the house’) which is mortgaged to a bank (‘the bank’). The client is disabled and cannot work but manages the family finances. The husband owns a small business. To expand the business the husband approached the bank for a loan. The bank agreed on condition it had a second charge on the house. The client was loathe to re-mortgage the house but was eventually persuaded by her husband. The bank manager went to the house to see the couple. The client said she understood the risks and signed the necessary paperwork. The husband defaulted on the loan and the bank is seeking to repossess the house. Would the client have any ground(s) for arguing that the re-mortgage should be set aside? Yes, because undue influence by the husband would be presumed and the bank had actual notice of it. Yes, because undue influence would be presumed and the bank did not insist the client took independent advice. Yes, because the client may be able to establish actual undue influence by the husband and that the bank had constructive notice of it. No, because the bank was not put on inquiry of any undue influence and the client understood the risks. No, because the wife managed the couple’s finances and was aware of the risks involved in re-mortgaging the house.

Answer 34

C is correct. The client may be able to show actual undue influence (Daniel v Drew). The bank should have been put on inquiry as the relationship between the client and debtor was non-commercial and the loan was not for their joint benefit. The bank does not appear to have had a private meeting with the client to explain the risks and she did not take independent advice: so the bank would have constructive notice of the undue influence. A and B are wrong. Undue influence would not be presumed as the relationship between client and husband was not by its nature or in fact one of trust and confidence. She managed the finances, had been loathe to re-mortgage the house and said she understood the risks. Also there is no evidence the bank had actual notice of undue influence. D is wrong. The bank should have been put on inquiry as the relationship between the client and debtor was non-commercial and the loan was not for their joint benefit. E is wrong because there appears to have been undue influence of which the bank had constructive notice.

Question 35

A client entered into an agreement to grant a mortgage with a bank over her house for a loan made to the client’s husband’s business. She and her husband and their young children live in the house and the client is a full time housewife and mother. The client is not involved in the husband’s business. The client tells the solicitor that she signed the mortgage at home after her husband had explained it to her. She had not seen a representative of the bank or a solicitor. The business has now failed and the bank wishes to repossess the client’s house. Which of the following statements best describes the basis on which the client can set aside the mortgage to the bank? The husband exercised undue influence over her. The bank was on inquiry of risk of undue influence and failed to take reasonable steps. The client has a relationship of trust and confidence with her husband because this is presumed as a matter of law between husband and wife. The mortgage called for an explanation. The client failed to obtain confirmation from a solicitor acting for her that there was no undue influence.

Answer 35

Option B is correct. It is not sufficient to prove undue influence by the husband. That undue influence must ‘taint’ the bank. See the case of RBS v Etridge. The client is a surety because she is granting security for another’s debts. The relationship between the surety and the debtor, the husband, is non-commercial. The client is not involved in the husband’s business so this is not a contract for joint benefit. This would put the bank on “inquiry” so it has to take reasonable steps either by holding a private meeting with the surety or obtaining a certificate from a solicitor acting for the surety that the solicitor has explained the risks. On the facts the bank did not hold a private meeting nor did a solicitor explain the risks. Option A is wrong because if undue influence is shown this would be insufficient to set aside the mortgage. It must also be shown that the bank was put on inquiry and failed to take reasonable steps as a result. Option C is wrong because it is not presumed as a matter of law that there is a presumption of undue influence between husband and wife. A relationship of trust and confidence where the surety relies on the debtor has to be shown on the facts. It must also be shown that there is a transaction calling for an explanation. Option D is wrong because while the transaction to grant security for another’s business calls for an explanation, there might be a valid explanation for the mortgage given the facts (for instance, the client relies on the husband’s business for income). However, if there appears no valid explanation for the mortgage, that by itself is insufficient to enable the client to set aside the mortgage. It would need to be shown that the bank failed to take reasonable steps to ensure that the client appreciated the legal implications of what she was signing. Option E is wrong because it is not necessary for the solicitor to confirm that there was no undue influence, only that the solicitor had explained the risks.

Question 36

An elderly woman, consulted her solicitor about selling her house. She had obtained valuations for the property ranging from £675,000 to £625,000 but as yet had received no offers for it. The solicitor offered to buy her house for £650,000 and the woman accepted the offer. The sale was completed eight months ago but the woman now wants the sale to the solicitor set aside. Which of the following best explains the legal position of the woman? The sale would be set aside because there was actual undue influence The sale would be set aside because it would be irrebuttably presumed that there had been undue influence exerted by the solicitor. The woman would be able to raise a presumption of undue influence but rescission would be barred as the solicitor was a bona fide purchaser. The relationship between the woman and the solicitor was based on trust and confidence and as the sale calls for an explanation the sale would be voidable. For the sale to be set aside the woman would have to prove undue influence and that an award of damages would be inadequate.

Answer 36

The best option is D. A is wrong because it would be very difficult on the facts for the woman to prove actual undue influence and the sale might not be set aside. Rescission may be barred by time. B is wrong because undue influence is never irrebuttably presumed. Some relationships are irrebuttably presumed to be fiduciary in nature eg solicitor and client. C is wrong because for rescission to be barred by a bona fide purchaser, the bona fide purchaser must be a third party who has subsequently acquired rights in the property. E is wrong for two reasons – firstly undue influence does not necessarily have to be proved (it may be presumed) and secondly, the only remedy for undue influence is rescission (not damages too).