Understanding Contract Law Defences: Safeguarding Your Rights

Defences to Contract Law

Contract Law Defences are several and may include a challenge to the legality of the contract or challenge the current enforceability of the contract in accordance with its terms.
Successful reliance upon a defence may render the contract null and void, or may entitle the party establishing the defence to be relieved of their obligations under the contract.
Some of the more common Contract Law Defences include:
Coercion: Coercion is a threat made to a party to a contract in order to compel that party to act against their own interests. Often a party will threaten to expose the other party to embarrassment or ridicule in order to bring that other party to comply with an improper demand. Coercion must involve a threat of an unlawful act either comprised of some type of physical, moral, or economic threat to the allegedly coerced party. Coercion vitiates consent and renders a contract void.
Undue Influence: Undue influence is used when one of the parties to the contract has great influence on the other party, by reason of position maintained , which is exercised against the other party whereby the other party is induced to enter into the contract. Undue Influence vitiates consent and renders a contract void. Varieties of Undue Influence include:
Misrepresentation: A misrepresentation of material facts that induces a contract includes a statement of an untrue fact upon which the other party relied in making its decision to enter into the contract. Misrepresentation may be by a statement or conduct. A contract induced by a misrepresentation of fact is voidable at the option of the aggrieved party who may rescind the contract or affirm performance thereof in accordance with its terms. Varieties of Misrepresentation include:
Mistake: A mistake occurs when both parties are mistaken in their assumption as to the state of facts. A mistake may either be unilateral or mutual.
Capacity: Failure to establish the capacity of a contracting party constitutes a defence. A person who contravenes the statutory provisions of legislation prescribes his or her capacity is precluded from enforcing or taking benefit of the contract. Varieties of incapacity most commonly include:

Typical Defences to a Breach of Contract

Whether it is a contract for the sale of goods, services to be provided or any other kind of contract, for a Court to decide if a breach of contract has occurred there must be defences available to the alleged breach, these include the following;
Mistake
A mistake in a contract may be found to exist if both parties have a misapprehension about a fundamental fact of the agreement; if the parties are at cross purposes and each party is unaware they have made a mistake; or if one party is mistaken as to a fundamental fact due to the artifice (deceitful scheme) of the other party.
Misrepresentation (including negligence misrepresentation)
One party is induced to act to its detriment having based its actions on a misrepresentation or wrongly believing that the other party has conducted itself in accordance with a promise. In this case, it is the misled party that suffers harm.
Duress
One party is subjected to economic or physical pressure or threats to act to its detriment, usually by agreeing to a particular term of the contract.
Undue Influence
Characterised by a relationship in which one party (the stronger, dominant party) unduly benefits from its influence over the other party (the weaker, submissive party). Here, the dominant party’s unfairly unbalanced bargaining power gives it the ability to abuse that power and take advantage of a situation to its benefit and let the weaker party suffer the consequences.

Misrepresentation as a Contract Law Defence

For a contract to be binding and enforceable, there are certain criteria that must be met. For example, there needs to be capacity, consideration, and lawful purpose. Also, the parties must have freely consented to the terms and conditions.
When a party does not freely consent to the terms of a contract, misrepresentation may be used as a defence. Misrepresentation is an untrue statement made by one of the parties to the other before the contract was entered into. It therefore induces the other party to enter the contract.
The fact that a false statement has been made does not mean that if you enter into a contract that contains this statement, that it is void or voidable. In some cases, it may be material and lead you to request that the contract be rectified before entering into it or exercise your right to being an action for misrepresentation within the statutory time limits. Similarly, if you have signed the contract, you cannot reject it on the grounds of misrepresentation.
The contract is voidable in cases of innocent misrepresentation, fraudulent misrepresentation, and negligent misrepresentation.
Innocent Misrepresentation
Where the misrepresentation is made without any intent to deceive, the contract is voidable at the option of the aggrieved party. The aggrieved party is entitled to rescission of the contract but he is not entitled to damages. If you nurture the belief that the representation is true, then you have the right to rescind the contract.
Fraudulent Misrepresentation
If a party knowingly or with reckless disregard induced the other party to enter into the contract by giving a positively false statement, fraud was committed and the party committing an actionable fraud is liable for damage sustained by the misrepresentation.
Negligent Misrepresentation
This arises where the misrepresentation was carelessly made and a duty of care was owed.
In the case of negligent misrepresentation, a statement that was in fact false but believed to be true and therefore inducing the other party to the contract is considered to be a negligent misrepresentation. The person making the representation does not have to intend that the other party will rely upon his erroneous statement. The mere reasonable reliance must be established.
Other requirements for all types of misrepresentation to hold are that the misrepresented statement must relate to a "material (or essential) fact", it must be a statement of past or existing fact, and there must be reliance by the other party on the misrepresentation.

Duress and Undue Influence as a Contract Law Defence

Duress and undue influence are two defenses that can be used to render a contract, or part of a contract, unenforceable.
The law of duress exists in order to prevent one party from coercing another party into agreeing to a contract by threatening that person with physical or economic harm. There are two types of threat which will result in a finding of economic duress: Where the acquiring company coerces shareholders of the target company into selling their shares by threatening to undertake a course of action such as a hostile takeover bid or a compulsory acquisition of the shares, which it would not otherwise undertake; or Where the acquiring company coerces the target company into granting a consent to amalgamate it with the acquiring company. The defence of undue influence may also render a contract, or right in a contract, unenforceable. Undue influence may be found to exist where: Where an element of trust or authority is found to exist between the parties in relation to a particular transaction and it is plainly unconscionable for one party to take advantage of that relationship to the prejudice of the other, undue influence will lie. The defence applies to both positive and ommissive conduct. A classic example is where a parent convinces his or her adult child upon whom they are wholly or predominantly dependent to change his or her will. An example of undue omission is where a fiduciary agent or lawyer sits by whilst his or her principal or client, as the case may be, is making a bad investment. If undue influence exists, a court may refuse to enforce the particular contract, even though there has been no breach. Undue influence is often said to be equivalent to economic duress, although the form of coercion must be more subtle in this case. The defence will not lie where a party takes advantage of a mere unequal bargaining position. The defence of duress to a contract is closely connected with the law of duress in tort, and in that context it is able to give rise to a legally recoverable loss to the victim for which the perpetrator may be sued.

Illegality in a Contract as a Defence

Universally unenforceable contracts are those which the law cannot ever enforce. The very nature of these contracts is such that courts do not recognise their existence. Courts will not enforce a contract entered for an illegal purpose for any amount of damages. This is misleading however, in that both parties involved in an illegal contract can be held responsible for their actions in an offence. For example, in actus reus, both parties can be charged with conspiracy to further a crime. Contract law does not bring into force the agreement; it is the criminal act which initiates the agreement. In Baker v Williams the defendant approached the claimant for assistance in buying his son a motorcycle. The ultimate aim was to steal a motorcycle from a garage, which they did. The claimant gave a false name and address when purchasing the vehicle so as not to be caught, and the claimants were charged with conspiracy to theft. They entered a plea of not guilty but were convicted. The claimant’s brought a civil action against the defendant claiming money spent by them on the motorcycle as money had changed hands during the transaction , despite the claimant not actually gaining possession. The money was originally paid to the defendant as the claimant had agreed to do this role in exchange for a share of the future proceeds. It was held that the defendant did owe the money, and whilst it would not have awarded damages to the claimant for the claimant’s own expenses as it would be contrary to public policy, it would award them any expenses paid by the defendant. The claimant was able to claim, as it could be shown, the defendant was under the obligation to pay as promised in contract. However, the claimant was not entitled to receive any profits from the trade as he would be profiting from the benefit of the stolen property. In the law of contract, the illegality of a contract, whether it be prohibition or restraint, will always be enforced. However public policy dictates that if one party has engaged and relied on the illegal act, or if both have been engaged and the act is complete, then neither party will be able to recover damages for breach of contract.

Contract Law Defence of Frustration

Frustration of contract is a defence to an action on a contract when performance of the contract becomes impossible for reasons beyond the control of the parties and can not fairly be blamed on them. The test is a strict one and requires an act of God or perhaps a supervening illegality before a court would consider frustration as being made out. Care should be exercised in its application as a party will not be able to refuse to perform their part of the contract just because it will turn out to be more expensive to do so.
In Teheran-Roodepoort Estates v Kagan Ltd 1928 TPD 116 at 122, Murray J explained the doctrine as follows:
"…the contract must be performed if at all possible, even though such performance may be attended with hardship, inconvenience, or even disaster to one of the parties, and the doctrine of frustration does not apply, unless all possibility of performance is completely removed…".
For example, a contract to purchase a piece of land will not be frustrated simply because the land has become too expensive or uneconomical to purchase.
Rather, the performance of the contract must become physically or legally impossible.
The doctrine of frustration was explained and illustrated in the case of Ex parte Rabinowitz NO 1937 CPD 515 at 520-521 and these facts are worth having regard to:
"A contract may be discharged by frustration caused by some event (whether intended or not, and whether foreseeable or not) which radically affects the substratum of the contract. A good everyday example is that of an agreement to buy and sell a fixed quantity of fruit, such as rice of a particular variety, which is grown in a particular country, within a certain period of the year. Now, if that particular variety of rice is destroyed in the particular country which it grows for an unforeseeable reason due to circumstances beyond the control of the seller, then he cannot be reasonably expected to fulfil his agreement and he is released from his obligation to do so without any liability whatsoever. It is not to be confused with the mere fact that he does not happen to have the rice available at the time (which is not commonly the situation covered by the doctrine), but with the fact that he cannot obtain it from elsewhere on account of some unexpected occurrence of circumstances beyond his control."
It is clear from the above that a party will not be freed from performing their contractual obligations simply because it has become more burdensome or costly to perform them. Rather, the impossibility of performance must be total.
The judgement of Schutz JA in Lenta Property Investments (Pty) Ltd v ATC International Ltd 2007 SCA 49 at para 20-22 provides further clarity on the issues set out above where the following is stated:
"The test for determining whether circumstances have rendered the performance of an agreement impossible is not one of mere physical impossibility but rather whether from the nature of the impossibility it is reasonable to hold the defaulting party liable for damages. In Bacaril SA Ltd and another v Sirkka, Milner AJ reiterated the principle enunciated in Teheran-Roodepoort Estates v Kagan that there is no instance where a party to a contract can say when it becomes economically more onerous to continue with performance that it is entitled to put a stop to performance of the contract. Frustration of a contract may take place whenever the whole purpose of the contract has been destroyed. But this does not mean that if a party to a contract cannot fulfil his side of the bargain without incurring loss, he may put a stop to performance merely for that reason. Much less does it prevent a party who has contracted to fulfil an undertaking which is administratively tantamount to the imposition of a monopoly from having to fulfil that undertaking merely because he may incur a loss in doing it. Such agreements are entirely lawful. It seems to me to be equally important to keep in mind in considering the question of frustration, that in an agreement between contracting parties one party surely cannot claim to have a greater claim to escape performance of the bargain than the other."
The above authority reaffirms the fact that the mere fact that performance of a contract becomes more onerous does not mean that it has become economically impossible.
On the contrary, a court will only be prepared to entertain the application of the doctrine of frustration where the performance becomes completely impossible, either as a result of some act of God or a supervening illegality.

Contract Law Defence of Lack of Capacity to Contract

When an individual lacks the capacity to enter into a contract, they may have a defence to any breach of contract proceedings against them. A party alleging that a person lacked capacity must prove, on the balance of probabilities, that the person did not understand the nature and effect of the contract at the time it was entered into.
It is compulsory that a minor be represented by a parent or guardian in all legal matters. Any legal practitioner representing either a minor defendant or minor plaintiff must submit an affidavit to the Court according to s 92(4) of the Family Law Act 1975. The Court may direct that a minor’s parent or guardian be appointed as next friend or litigation guardian of the minor (s 60CA(1) of the Family Law Act 1975).
There are other categories of persons who also lack capacity to contract, and these categories include: insolvent debtors under the Bankruptcy Act 1966, legally insane individuals and persons deemed mentally incapable.
These individuals are incompetent to contract and so may raise a defence of incapacity to a plaintiff’s breach of contract proceeding against them. These categories of individuals include insolvent debtors, legally insane individuals and persons deemed mentally incapable. While these individuals may lack capacity to enter into a contract, this lack of capacity will not invalidate the contract, although such parties are given the right to avoid the contract where the contract is prejudicial to them.

Defence of Statute of Limitations in Contract Law

While competition law can give rise to serious issues for businesses, they cannot all be resolved through competition law complaints. Often an issue can also be reasonably described as a contractual dispute and therefore governed by contract law. Without wading into the merits of the various claims that can be brought, it is useful to be aware of the different defences that may apply. This sets out the basics of the available defences and explains a little about how they can be applied in practice. Of course, always ensure that the particular facts of your situation are reviewed by a suitably competent lawyer.
Statutes of limitation (also known as limitation periods or just longstop periods) are provisions that prohibit a claim in tort or contract if proceedings are not issued within a set time period of the cause of action arising. Their purpose is to prevent claims that are brought too late, for example, where evidence cannot be gathered for either party due to the passage of time. Different limitation periods apply to different types of contracts and torts, but a standard limitation period that applies to a contractual dispute is six years . For some contracts the limitation period is shorter and in some situations the period can be extended.
The starting point for determining whether a statute of limitations or longstop period can be used as a defence is to consider when the cause of action arose. There can be more than one cause of action in a contract, for example, where there is a separate claim for breach of contract and a claim for misrepresentation. Once the deadline for the claim has passed, a court will generally not examine the merits of the underlying claim. This gives an additional reason to consider the limitation period carefully when preparing legal action.
It is worth noting that a limitation period can be destroyed if the wrongdoer conceals or effectively conceals his wrongdoing from the other party. In this case, the period for action will only start from the date where the claimant becomes aware of the wrongdoing, or ought reasonably to have become aware of it. One way of stopping the clock for limitation is therefore to alert the other party to the wrongdoing (for example, through a letter), as this will start a fresh limitation period.