Vitiating Factors in Contract Law: A Case Study Analysis of Liam

This case study analyzes the legal issues faced by Liam concerning several transactions potentially affected by vitiating factors. The analysis focuses on whether Liam can rescind agreements made under duress with Malcolm regarding the sale of his car, under undue influence with Pastor Jane regarding investment in her business, and under potential unconscionable conduct by Fatima concerning the repayment of her loans. Each scenario is evaluated based on relevant legal principles, including duress, undue influence, unconscionable conduct, and misrepresentation, to determine the likelihood of Liam successfully rescinding each transaction. The analysis considers factors such as the legitimacy of threats, the presence of fiduciary relationships, awareness of weaknesses, and the fairness of the contracts. The conclusion provides advice on whether Liam can recover his assets or withdraw from the agreements.

Vitiating Factors (Avoiding a Legal Transaction)
Long problem: Liam
Liam’s aunt recently passed away, and he has been left with a large inheritance. Liam’s wife Fatima
wants him to use the money to pay off her loans from when she was a student. Liam is not so sure.
Fatima becomes frustrated with him and she says, ‘How can you be so selfish? If you don’t do
something sensible with the money like pay off those loans, I’ll have to go to your parents and tell
them about that gambling problem you had a few years ago. Maybe they could talk some sense into
you.’ Fatima knows that Liam is terrified of his family finding out about his gambling addiction. She
hopes that this fear will make him do the right thing with the money.
Later that week, Liam is speaking with his pastor, Pastor Jane, about the inheritance. Pastor Jane
suggests, ‘How about you use your inheritance to invest in my catering business? It’s been doing
very well over the past few years. You would then get a share in the business, so you could receive
some of the profits each year.’
Liam responds, ‘Well, that’s a tempting offer. I’ll have to think about it.’
Finally, Liam has a tenant, Malcolm, renting an apartment from him. Malcolm has always admired
Liam’s car. He says to Liam, ‘Now that you have more money, you will be getting a new car. Why
don’t you sell the old one to me?’
Liam is not keen to sell Malcolm his car, but Malcolm insists. In fact, he threatens to ‘trash the
apartment’ if Liam doesn’t sell him the car. Liam doesn’t want the hassle and cost of dealing with
damage to the apartment, so he agrees to sell Malcolm his car, and he buys a new one.
When Fatima sees that Liam has bought a new car, she is furious. She goes to Liam’s parents and
tells them about his gambling problem. Concerned not to worsen his family’s impression of him,
Liam agrees to use his inheritance to pay off Fatima’s loans. Fatima takes him to her lawyer, who
prepares the paperwork. Liam sits silently and signs the papers presented to him.
Liam is seeking your advice. He regrets selling Malcom his old car. When he calls Malcolm to tell him
he has changed his mind, Malcolm explains that he has already re-sold the car to someone else. Liam
also regrets agreeing to spend the money on Fatima’s loans. He wants to get his money back, and
invest in Pastor Jane’s business. But he is worried about the risk involved. He wants to know whether
he can invest in the business, but then change his mind later if the business isn’t going well.
1. Can Liam rescind the agreement with Malcolm and get his car back? Why or why not?
2. Can Liam invest in Pastor Jane’s business, but then rescind the agreement later if the
business does not perform as expected? Why or why not?
3. Can Liam rescind the transaction of spending his money to pay off Fatima’s loans?

1.Issue: Can Liam rescind the agreement with Malcolm and get his car back? Why or why not?
Relevant law
Duress refers to the application of pressure or acts of violence against a person, their
property of economic interests, which forces that person to enter into a contract against
their will. Duress need not be the only inducement to contract, provided it was a
contributing factor in the decision to contract.
The critical question the court may consider this pressure illegitimate(North Ocean Shipping
v Hyundai Construction).
Application
On the facts, Malcolm has threatened to ‘trash’ Liam’s apartment, which is a threat of
property damage. This raise the issue of duress. In order to be duress which makes an
agreement voidable, the threat must have been illegitimate(North Ocean Shipping v
illegitimate, because it would be illegal, and we can assume it would also be a breach of the
lease agreement between Liam and Malcolm.
The facts tell us that the threat is the main reason why Liam enters the agreement to sell
the car. This makes the agreement voidable.
However, rescission is unavailable here, because a third party has acquired rights in good
faith(when Malcolm re-sold the car).
Conclusion
Liam cannot rescind the agreement with Malcolm and get his car back.
2.Issue: Can liam invest in Pastor Jane’s business, but then rescind the agreement later if the
business does not perform as expected? Why or why not?
Relevant law
Undue influence occurs where one party uses their strong influence over another to
persuade them to enter a contract that provides the person withe stronger influence with a
direct or indirect benefit. Consequently, genuine consent is missing.
Usually, there must be a fiduciary relationship between the parties. This means that the
person with stronger influence occupied a position of trust in regard to another and was
obliged to act in that person’s best interests(Allcard v Skinner)
The common law automatically recognises parties with ‘special relationship’ as a fiduciary
relationship. There is a presumption that undue influence has occurred and the defendant
has the onus of proof. They must disprove the presumption by showing, on balance of
probabilities, that they did not influence the plaintiff to enter the contract. The relationship
between a religious leader and a believer is regarded as ‘special’ by the courts.
Application

Because Pastor Jane is Liam’s pastor, a court will presume that undue influence was
involved and that this why Liam entered the agreement(Allcard v Skinner). Under Pastor
Jane can rebut the presumption by showing that Liam got independent legal advice about
investing in the business, his investment would be voidable on the grounds of undue
influence.
However, the contract cannot be set aside if Liam has affirmed the contract, knowing of the
problem as in the case of Allcard v Skinner. So rescission is not simply a remedy that he can
demand if he changes his mind later on. In addition, as an equitable remedy, it is at the
court’s discretion. If the court thinks he is seeking rescission for some other reason, they are
unlikely to grant it.
Conclusion
Liam may rescind the contract on grounds of undue influence.
3.Issue: Can Liam rescind the transaction of spending his money to pay off Fatima’s loans?
Relevant law
Duress refers to the application of pressure or acts of violence against a person, their
property or economic interests, which forces that person to enters into a contracts against
their will. Duress need not be the only inducement to contract, provided it was a
contributing factor in the decision to contract.
The critical question the court may consider this pressure illegitimate(North Ocean Shipping
v Hyundai Construction).
Application
This situation in the facts appears like duress because it involves threats.
However, the threatened harm is just to Liam’s reputation or relationship with his parents,
which is not a kind of threat or harm that will constitute duress.
Conclusion
Liam cannot rescind the agreement with Malcolm and get his car back because duress is not
applicable here.
3.(Option 3)
Issue: Can Liam rescind the transaction of spending his money to pay off Fatima’s loans?
Relevant law
under common law, a contract may be voidable on the grand of unconscionable conduct.
The plaintiff who enters a contract must prove three requirements:
1. They suffered from a ‘disability’ that made them the ‘weaker party’ in the contact,
2. The stronger party was aware of the weaker party’s disability; and

3. The stronger party took unfair advantage of this disability and prevented the plaintiff from
making independent decisions about the contract.
The courts have interpreted ‘disability’ as a strong disadvantage and have recognised many
categories including illiteracy, limited education, illness, poverty, age and lack of legal
advice(Commercial Bank of Australia v Amadio; Blomley v Ryan) as well as ‘love
sickness’(Louth v Diprose).
Application
The circumstances on the facts may involve unconscionable conduct by Fatima. Applying the
3 elements from Commercial Bank of Australia v Amadio: 1) Liam had a disadvantage or
weakness(his gambling addiction and fear of his family finding out); 2) Fatima knew of this
weakness; and 3) Fatima took advantage of the weakness, to get a benefit for herself(paying
off her loans). It is unlikely that Fatima can show that the contract was fair, just and
reasonable. Hence, it will probably be voidable.
Additionally, Fatima cannot show that Liam got his own independent legal advice. Fatima
took Liam to her own lawyer, not to get independent legal advice, but for Liam to make the
gift to her.
Conclusion
The transaction probably can be rescinded by Liam.
Issue: Can Liam rescind his original investment and get his money back?
Relevant law
A misrepresentation is a false statement about a past or present fact made with the
intention of persuading someone to enter a contract and the false statement induces the
person enters the contract. In other words, the false statement must be reason, or one of
the reasons, why the other person enters the contract.
Misrepresentation can be fraudulent, innocent and negligent. Innocent misrepresentation is
relevant and is said to have occurred when the representor did not know the statement was
false.
Application
As in the case of Derry v Peek, this misrepresentation by Jeffrey was not fraudulent, because
it was not intentional or reckless.
Rather, it was an innocent misrepresentation as he expected that getting the approval
would be easy, and that it was a technicality. An innocent misrepresentation makes an
agreement voidable, so this would make the agreement voidable by Liam.
When Liam discovers the truth and if he chooses to continue with the contract, he cannot
change his mind later.

Conclusion
Rescission is no longer available because Liam has affirmed the contract.
Common mistake
Occurs when both parties are mistaken and they make the same mistake
Prichard v Merchant’s and Tradesman’s Mutual Life
Assurance Society -’void’
McRae v Commonwealth Disposals Commission -’valid’
a salvage firm won a Federal Government contract to raise a sunken oil tanker from a reef
but could not find because both the ship and the reef never existed
the firm sued for breach of contract but the government argued the contract was void on
the grounds of common mistake because both parties mistakenly believed the tanker was in
the sea
the High Court held that there had not been a common mistake because the firm had
reasonably relied on the government’s promise that there was a tanker on the specified reef
and was entitled to damaged
Negligent misrepresentation
Consists of statements that are incorrect and untrue.
It is made by one party to the other honestly but carelessly, without checking the accuracy
of the statement.
The innocent party affected by negligent misrepresentation can rescind the contract and
sue for damages(in negligence).
Innocent misrepresentation
Occurs where the person making the statement did not intend to deceive anyone and was
unaware that the statement was untrue.
The element of dishonesty is absent in innocent misrepresentation.