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Case Study: Contract

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Case Study: Contract

A contract exists as an agreement between two parties, offeror and offeree, which is legally binding. For a contract to be considered valid, some elements have to be present. These elements include offer and acceptance, an intention between the parties to form a binding agreement; the parties must have the legal capacity to enter into such contracts; the parties must genuinely consent to the formation of such a contract, and the contract must be legal. In case any of the elements mentioned above do not exist, there is no valid contract and the parties are not bound to it.

In our case, some of the elements necessary for the existence validity of a contract are present. For instance, John made a lawful offer to Nathan by telling him about the phone contracts he was selling. Nathan, on the other hand, having the need for a phone, accepted to enter into a contract with Nathan even though he was not aware of all the material facts regarding the contract he was entering into. Both parties, John and Nathan, had the capacity to enter into that contract. In addition, the subject matter of the contract, which is, selling telephones, was legal.

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However, one of the elements necessary in the formation of a valid contract between John and Nathan was absent. This is the genuine consent of one of the parties, Nathan, to be bound by the terms of the contract. John, on the other hand, was fully determined to enter into the contract with Nathan, as he had to meet his sales quota. Nathan can be said to have not genuinely consented to enter into a contract with John for a number of reasons. First, he knew nothing about contracts, a fact that was well known by John. Despite this knowledge, John went ahead to explain the terms together with the conditions of the contract to Nathan. This was done again without the help of an interpreter, yet Nathan had very little understanding of the English language, something that Nathan knew about too. Nathan was left with the impression that he was lucky to have met John since he was able to get a telephone for himself and that he could simply return the phone and terminate the contract any time he wanted. He was not made aware of the consideration that exists in every contract and the consequences of some of the contract's terms. For this and more other reasons discussed below, it is evident that no valid contract existed between Nathan and John.

Consent is crucial if the contract is meant to be binding, as it was in our case. Consent involves the aspects of free will and the proper understanding of what each party to the contract is doing. The consent of each party must be genuine. Proper consent may be affected by some matters, which include mistake, duress, undue influence, and false statement. In this case, undue influence and false statements are applicable to the fact that Nathan did not genuinely consent to enter into an agreement with John.

A false statement may result from statements or terms in the contract that exist because one of the parties made a false statement. In our case, it was the provision of one of the terms of the contract that if the contract was terminated before it came to an end, that is after three years, Nathan had to pay the full contract price of $3120 and an additional $800 that was the price of the phone he had acquired. This fact was unknown to Nathan who was under the impression that he would now own a free telephone because of the special promotion that was running that day, as expressed by John. This information was critical in influencing the decision Nathan was to make regarding entering into that contract or not. Failure of John to disclose this material fact led to a misrepresentation that was fraudulent in nature. John owed Nathan a duty of disclosure, which he had failed to exercise. It is a fraudulent misrepresentation on the part of John because he made the statement knowing it was false and having no belief in its truth. He might have also made the statement recklessly, without caring whether it was true or not.

On a clear look at the facts stated above, it can be seen there is a misrepresentation. This is evident through John's omission to disclose to Nathan what the actual terms of the contract were. The terms, which John had failed to disclose to Nathan, formed an important part of the contract and would, therefore, be an essential factor in the willingness for both parties to enter into the contract.

It has been provided by the statutory prohibition the Consumer Law of Australia that an individual ought not to engage in misleading or deceptive conduct in trade or business. This has been extended further to deal with those conducts of trade that are also likely to be misleading or deceptive. This is a statutory provision having been provided for under the Competition and Consumer Act of 2010 (Australia) Section 18. It is generally considered that silence cannot amount to misrepresentation. The general law on misrepresentation sets out the rules and conditions required for misrepresentation to have occurred and to have it relied on. First, there is the burden placed upon the aggrieved party to prove that they relied on the misrepresentation, or omission, to enter into the said contract as was held in the Horsfall v Thomas (1862) 1 H&C 90.

In addition, there is the requirement that the misrepresentation is related to a statement of fact. Finally, there is a need to prove that the party making the misrepresentation, in this case, has a duty of disclosure to the aggrieved party.

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Nathan, in this case, bears the burden of proof to show that he relied on John's omission to enter into the contract with Dubious Connections Pty Ltd. There can be no doubt that John failed to disclose some facts regarding the contract to John. Whether Nathan relied on the omissions made calls for the consideration of whether such omission by John was, in fact, material or not. This means that had the facts been disclosed to Nathan, Nathan would not have considered the contract. It can be seen that Nathan relied on John's statement that the contract was a special promotion by the company only for that day. This is also accompanied by John representing to Nathan that he was entitled to a free telephone, the iOS7, in the event he signed the contract. To Nathan, the contract could be easily terminated by the simple returning of the phone, and anytime he felt the need. This was, however, not so, because the contract’s term was three years, with the provision that the full price of the contract, $3120, was to be paid together with the phone’s price. To show that Nathan relied on John's omission is the fact that his meager allowances from the Red Cross were incapable of managing the monthly phone bill. Had he known that the contract was way over his ability to comply with the terms, he would have a reason not entered into the contract.

There, however, could arise a twist to Nathan's claim of having relied on the omissions made by John. It could be considered that Nathan's main incentive to enter the contract as presented to him by John was the fact that he had been recently having considerations about his need for a phone as he needed to have connections with his family back in Sri Lanka. Besides, he has never owned a telephone before or entered into a telephone contact before, and this could be taken as what really motivated him to enter into the contract. He might have just wanted to seize the opportunity offered to him by the moment.

The omissions by John can also be seen as statements of fact. This fact was in relation to the existing terms of the contract. These statements of fact could be oral, written, or implied. Whatever the nature of the statements, they were connected to the terms. This shows how vital these terms were to be disclosed to Nathan. These could not be considered as mere puffs or statements of opinion as they were directly put to Nathan in a move to induce him to enter into the contract.

The other factor is that there was a duty of disclosure owed to Nathan by John. This was as a result of the positions of the two parties. John was aware of Nathan's lack of knowledge regarding phone contracts, and with such awareness came the duty for him to disclose all the necessary information about the contract to Nathan, such as the terms of the contract. Due diligence cannot be imposed on Nathan as there is not much he could do than to rely on John's representation, as he lacked the knowledge about contracts. This is additionally caused by the fact that he had made it clear to John that he had never owned a phone or entered into a telephone contract, leaving it to John to assume all the responsibility of enlightening him about the contract.

Undue influence, as stated earlier, can affect proper consent. Undue influence may be exercised by taking improper or unfair advantage of the weakness of the other party. This is to the extent that the other party cannot be said to have voluntarily intended to enter into a contract. In our case, John evidently used undue influence on Nathan to get him into entering into a contract with him. Firstly, John was aware that Nathan had not owned a phone before, nor entered into an agreement or contract. John was, therefore, aware that Nathan was at a disadvantaged position if not well explained to into detail the terms of the contract and the implications of a breach of those terms. Nathan was, therefore, bound to accept any explanation given to him by John since he had no idea of that, which was expected of him and relied solely on the information he received from John. In addition, since John and Nathan were engaging in a conversation, it was obvious to John that Nathan had very little knowledge of English since he could not speak it fluently. John, therefore, took advantage of this weakness and explained the terms of the contract to Nathan without any interpretations. John ought to have taken reasonable steps to ensure that Nathan understood the terms of the contract he was entering into. Undue influence or reliance cannot be claimed if the party misrepresented to was aware of the false statement as was held in the case of Horsfall. In our case, however, Nathan did not know that John was taking advantage of him.

Rescission is one of the remedies that may be availed to Nathan. Rescission aims at restoring the parties to their position before the formation of the contract. Each party returns what they had gained or received under the contract. In our case, Nathan will give back the phone to John and no more legal obligations will be faced by him towards John and the fulfillment of the contract. In the case of Museprime Properties v Adhill Properties, the court held that misrepresentation, which makes one contract should be held ground for rescission of the contract. If a reasonable man had been induced by such misrepresentation to enter into a contract, the court considers that as a ground for rescission. It is for other contracting parties to prove that the misrepresentation, or in this case, non-disclosure or undue influence was not material enough to make the claimant enter into the said contract.

Additionally, Nathan is entitled to damages as a remedy. The damages that may be awarded will not be based on the principles of the contract but the damages that are offered in the tort of deceit. Nathan may claim damages from John and not from Dubious Connections Pty Ltd because of the agency relationship. John was acting as an agent of Dubious Connections Pty Ltd in selling the telephone contracts. Although his actions may have benefited the company by increasing its total number of telephones sold, he acted negligently and, thus, he is personally liable for his actions. He is supposed to have foreseen the consequences of his non-disclosure and avoided it altogether. His determination to meet his sales quota blinded him into taking advantage of Nathan by concealing the material facts of the consequences that would face Nathan in the event of him prematurely terminating the contract. Therefore, the company cannot be forced to pay damages for actions that resulted from the recklessness and negligence of their agent, Nathan.

In the event one opts to apply for damages, they cannot also seek to rescind the contract. Another importance lies in the fact that if the parties are not restored to their state before entering into the contract, the rescission right is lost. This was the position held in Clarke v Dickson, where property subject to the contract had experienced a total change in nature and the partnership that had existed at the time of contracting had been replaced by a company.

In conclusion, as discussed above, the element of genuine consent of the contracting parties to enter into a given contract is very essential in proving the validity of a contract. The element of genuine consent was not present in this case since Nathan was not fully aware of the terms he was to be bound by in the event of him breaching the contract. John had taken advantage of Nathan who had never owned a telephone before nor entered into a contract. His little understanding of English also disadvantaged him, and John failed to take reasonable measures of providing an interpreter to enable Nathan to understand his obligations under the contract. Nathan has the right to claim for rescission or damages as remedies.

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