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187882 Structure: Issues, Legal rules and application Jack has signed an agreement with the bank after seeking legal advice that the contract makes him personally liable for the full amount of the company’s debt and that his house is at risk if the company defaults. However, he could avoid the liability if he can demonstrate that his signature on the document was obtained by fraud or misrepresentation, or non est factum. On the other hand if he fails to establish any such claim then it would be immaterial whether or not he had knowledge of the fact that his house is at risk and that he would be personally liable for the company’s debts. Misrepresentation “The terms of the contract are not the statements of fact but promises.” These may be about the past, present or future facts. Karen, in this case has not explained the full facts or extent of the Company’s financial situation and its dire need for further funding to pay off the liabilities it has built up to Jack. This has clearly resulted in Jack believing that she can turn the company around. The rules on misrepresentation are drawn partly from the law of tort and partly from equity and supplemented by the Misrepresentation Act 1967. In Headley Byrne & Co Ltd v Heller & Partners Ltd (1) (2) it was held that Plaintiffs Heller & Partners could not recover any damages from the bank although the bank gave a credit reference for Easipower Ltd, one of their customers. A claim for tortuous action for negligent statement was possible in principle. This was then proved in Esso Petroleum Co Ltd v Mardon (1976) (3) (4) when it was held that if one party to the contract is induced to enter into the contract by making negligent statements by the other party to the contract and that the other party has reasonably relied on it, then an action for liability in tort could be brought. Mr Mardon relied on the sales forecasts produced by Esso executives which did not materialise. The Court of Appeal held that Mr Mardon entered in to the transaction believing the sales forecasts produced by Esso and as a consequence incurred a loss therefore, he was entitled to damages. On the other hand, in the Grogan v Robin Meredith Plant Hire Ltd, (5) (6) it was held that a signature on a document which serves an administrative purpose cannot be taken as a contractual document. Similarly, in Thoroughgood (1582) (7) (8) an illiterate Landlord was owed a rent by a tenant. The tenant prepared a deed which was incorrectly read over to him by a bystander. The document he believed he signed was to waive the rent arrears by the tenant however the document actually signed his rights away to that property. Subsequently the tenant sold the land to an innocent buyer which had to be recovered by a legal action for trespass. Thoroughgood succeeded in his action as the document he signed was misrepresented to him. Similarly in Lloyds bank Plc v Waterhouse (9) (2) an illiterate farmer signed a bank guarantee for £192,163 for his son for the purchase of a farm. Although he asked the bank about the terms he did not read the guarantee document before actually signing it, he did not tell the bank that he has not read the guarantee document either. He genuinely believed that he was signing a document which would only cover the loan on the farm and not an “all monies guarantee”. It was held that he was not under any obligation to tell the bank the fact that he was illiterate. Obviously he received satisfactory answers to his question from the bank and therefore he signed the document. On this basis, the court allowed his appeal. The plea of non est factum was used to protect illiterate persons who were tricked into signing documents. Eventually it became available to literate persons signing the documents believing it to be something completely different from what they believed it was. Applying this to the current scenario, Jack is an employee and Karen is an Employer and the Courts will infer dependence from this relationship. Obviously Karen is in a stronger position than Jack and able to exert influence. This is one of the classic three party undue influence cases where Karen has failed to explain the full extent of the charge on her house. The courts have developed a doctrine where it is needed to establish whether the lender had made one party, usually the husband, its agent for the purpose of getting the other party, the wife, to sign the charge. In Barclays Bank v O’Brien (10) (11) the House of Lords held that the real issue was whether or not the bank had notice and not a question of husband being made as its agent. Although the doctrine of undue influence is applied to contracts it also applies in a same way to gifts and other transactions. In order for this doctrine to apply it is necessary to establish that on of the parties to the contract has depended on the other party to the contract. As a direct result of this the other party has taken advantage of that dependence. In L’Etrange v F Graucob Ltd (12) (6) Miss L’Estrange was the owner of a café in Llandudno. She purchased a cigarette vending machine from Graucob Ltd. The machine became defective. She claimed that Graucob Ltd were in breach of an implied term that the machine was reasonably fit for its purpose. Graucob Ltd denied that any such term could be implied. They relied upon a clause in the order form, which the plaintiff had signed, which said ‘any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded’. This clause was in ‘regrettably small print’ and Miss L’Estrange had not read it and did not know of its contents. The court decided that Miss L’Estrange’s signature on the order form containing the clause meant that her lack of awareness of the exemption clause was irrelevant. The clause prevented the term from being implied, but Graucob were not in breach of contract despite the defects in the vending machine. A signed document is governed by very strict legal rules, generally. A person who signs the document is bound by it if there is no fraud or misrepresentation. Jack would be able to rescind the contract if he can prove that he was induced by Karen to sign it by not giving him accurate information about the company’s prospect of recovery from its financial troubles. However, the bank who is in this case the bona fide third party has acquired rights to repossess his property to realise its debt. The only possible defence he could have is to claim that the contract is void by claiming non est factum and that his mind was completely occupied by the thought that Karen would turn the company around. Foster v Mackinnon (1869) LR 4 CP 704 (13) (14) In this case a bill of exchange was signed by an elderly gentleman. He was told that the document contained the same guarantee as the previous guarantee document he had signed. Only the back of the document where he signed was shown to him instead of the full document. It was held that a new trial should be conducted and Byles J stated: "It seems plain, on principle and on authority, that if a blind man, or a man who cannot read, or who, for some reason (not implying negligence) forbears to read, has a written contract falsely read over to him, the reader misreading it to such a degree that the written contract is of a nature altogether different from the contract pretended to be read from the paper which the blind or illiterate man afterwards signs; then at least if there be no negligence, the signature obtained is of no force. And it is invalid not merely on the ground of fraud, where fraud exists, but on the ground that the mind of the signer did not accompany the signature; in other words, he never intended to sign and therefore, in contemplation of law, never did sign the contract to which his name is appended. In the present case, he was deceived, not merely as to the legal effect, but as to the actual contents of the instrument." Section 2(1) of the Misrepresentation Act provides a plaintiff with damages for negligent misstatement unless the other party can prove that the facts presented were true. The party who made the misrepresentation has to show that they acted reasonably. In Howard Marine and Dredging Co. Ltd v A. Ogden and Sons (Excavations) Ltd (15) (16), contractors wanted to hire some barges. The capacity of the barges was important because that would determine how soon the job could be done. They got an oral reply which was incorrect. Hence the work took longer and so Ogden refused to pay the hire charges for the extra time required. Howard Marine sued Ogden but they claimed negligent misstatement. The Court of Appeal held in majority that the person who made the inaccurate statement was liable under section 2(1) of the 1967 Act. Bridge L.J. stated: “the statute impose an absolute obligation not to state facts which the representator cannot prove he had reasonable ground to believe.” On the further claim for common law negligence, the court was divided. So Ogden did not succeed in tort for damages for negligent misstatement. Conclusion Jack was advised to seek independent legal advice by the bank and recommended a lawyer for him to advice on this issue. However, despite clear advice from the lawyer that his house could be at risk if Karen’s company fails to make repayments to the bank, Jack decides to go ahead with the charge and signs the document. Therefore, the bank is in a strong position to argue that they have taken all the necessary steps to prevent Jack from signing the document without understanding the risks involved especially when he has taken legal advice. Therefore, in this circumstances if Jack decides to make an application to set aside the transaction claiming he entered into this transaction under undue influence would most certainly be unsuccessful. It should be noted at this point that as a general rule a person is bound by a document he signs unless he had been induced to sign by fraud or misrepresentation, in which case it would be voidable. However, it may be possible to file for indemnity against the Director, Karen, for misrepresentation and offer the bank a certain amount of money every month to pay off the debt to the bank if she wants to save the house. He could take an action against Karen the Managing Director of the Company for obtaining a charge on his house to secure company’s overdraft facility by misleading him and putting him under pressure. If on the other he claims that 'it is not my deed' then, a successful plea would render the document void. Bibliography 1. Hedley Byrne & Co Ltd v Heller & Partners (1964) AC 465 2 Lawtel [Homepage on the Internet]. [cited 2006 05 05]; Available from http://www.lawtel.com 3 Esso Petroleum Co Ltd V Mardon (1976) 2 A11 ER 5, CA 4 Misrepresentation. In: Koffman L, Macdonald E. The Law of Contract. 5th ed. London: Lexis Nexis; 2004. 341 at 345 5 Grogan v Robin Meredith Plant Hire (1996) 15 Tr LR 371 6 Exemption clauses. In : Koffman L, Macdonald E. The Law of Contract. 5th ed. London: Lexis Nexis; 2004. 165 at 170 7 Thoroughgood’s Case, Thoroughgood v Cole (1582) 1 and 129 8 Mistake. In: Koffman L, Macdonald E. The Law of Contract. 5th ed. London: Lexis Nexis; 2004. 306 at 338 9 Lloyds bank Plc v Waterhouse 10 Barclays Bank plc v O’Brian [1994] 4 All ER 417 11 Duress and Undue Influence In: Koffman L, Macdonald E. The Law of Contract. 5th ed. London: Lexis Nexis; 2004. 384 at 410 12 L’Estrange v Graucob [1934] 2 KB 394 13 Foster v Mackinnon (1869) LR 4 CP 704 14 Lawteacher [homepage on the Internet].[cited 2006 05 05]; Available from http:// www.lawteacher.net 15 Howard Marine and Dredgining Co Ltd v Ogden (A) & Sons (Excavatins) Ltd (1978) QB 574, CD 16 Misrepresentation. In: Hogan B, Seago P, Bennett G. “A” level law. 4th edition. London: Sweet & Maxwell Ltd: 1996
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