Legal Contract: Vitiating Factors And Misrepresentations

Vitiating Factors in Legal Contracts

James owns a shop that specialises in new and second hand musical equipment. Several months ago Max came into his shop with an Ibanez guitar for sale. Max said that he had inherited the guitar from his uncle who used to play in a heavy rock band many years ago. He also said that he had no idea of its value. The guitar appeared to be a rare vintage genuine Ibanez Serpent like the one that Ozzie Manson plays in the heavy metal band, Doomsday, and James knew he could easily sell it for up to $20,000. Before buying any second hand musical equipment James would normally have an expert examine the piece to determine its authenticity, however, this time he was sure that the guitar was an original Ibanez Serpent. James offered Max $1500 for the guitar which Max eagerly accepted. James then advertised the guitar in Guitar Hero magazine as follows:

Classic Vintage Guitar – the original Serpent Ibanez – the same one as played by Ozzie Manson in Doomsday – price negotiable
Kim, the proprietor of a local night club, inquired about the guitar. As his club supported the live music industry Kim thought that such a guitar on display in his club would be a welcome attraction for both artists and patrons. Kim offered $10,000 for it which James rejected saying: “This guitar is a genuine Serpent Ibanez which I could easily sell for $20,000; however, I am prepared to sell it to you for $15,000 and that includes having it serviced before sale”. Kim said that he needed to
sort out his finances so could he let James know by the end of the week? James agreed.
During the week James took the guitar to All Guitars – Services and Repairs to have it serviced in readiness for sale. This was when he discovered that the guitar was not an original Ibanez Serpent, but a clever copy. The manager of All Guitars informed James that about the same time that the Ibanez Serpent was made in Japan a number of imitations were also made in the United States. He also said that only a few of them were made and that it would now be extremely rare to find an original Serpent Ibanez for sale in Australia.

Kim returned at the end of the week to buy the guitar for $15,000. James failed to mention that he had recently discovered it was a fake.
Kim displayed the guitar on the wall in his club proudly explaining to anyone who inquired that “it was an original Ibanez Serpent just like the one that Ozzie Manson plays in Doomsday”. The guitar did generate a good deal of interest and Kim had many offers to buy it. One such inquirer was Robbie, the lead guitarist of a band called The Rebellion. Robbie thought that the guitar would provide a good look for the band, so he offered Kim $20,000 for it. Although Kim was sorry to part with it he could not afford knock back such a generous offer.

Misrepresentations in Pre-contractual Negotiations

Soon after purchasing the guitar several of the strings broke so Robbie had to take it to All Guitars to have them replaced. The manager of All Guitars told Robbie that he had only recently serviced the guitar, however, was not at all surprised that the strings had broken. He told Robbie that the guitar was not an original Ibanez Serpent, but an imitation, and was therefore of inferior quality. He told Robbie that it was not suitable for heavy duty use and probably only worth around $800.
Robbie is now demanding that Kim return his money, however, Kim is refusing because it is not his fault that the guitar is not an authentic Ibanez Serpent as this is what he was told when he bought it from Max.

ANSWER ALL OF THE FOLLOWING QUESTIONS

1. Advise Robbie whether he is entitled to get his money back from Kim?

2. Advise Kim whether he has any cause of action against James?

3. Assuming that James never took the guitar to All Guitars for a service (so that he never found out that it was not an original) would Kim still have any cause of action against James upon discovering that the guitar was not an original Ibanez Serpent?

1) Even when it is established that the essential elements required for a legally binding contract are present, and at the same time, the terms of the contract can be identified clearly, the agreement may still not be legally enforceable due to the reason that some vitiating factors are present (Curtis v Chemical Cleaning and Dyeing Co, 1951). Therefore when fraud is present or a fundamental mistake has been made regarding the contract by one or both parties to the contract, the contract can be either totally void or it can be voidable at the option of the innocent party. In the present case, both Kim and Robbie were mistaken regarding the identity of the guitar. They both believed it to be an original Ibanez Serpent guitar while in reality it was a clever copy of the original. Due to the reason that the guitar was an imitation and of an inferior quality it was not suitable for heavy-duty use. At the same time, although Robbie had paid $20,000 for the guitar, in reality the guitar was only worth $800. But at the same time, it also needs to be noted that Kim was also not aware of the fact that the guitar was an imitation. He too believed the guitar to be an original Ibanez Serpent guitar and as a result he had paid $15,000 to James.

However, Kim had made a representation that the guitar was an original Ibanez Serpent while in fact it was only an imitation. As a result, although the contract between Kim and Robbie is not void, still Robbie can claim damages from Kim due to reason that the guitar was only an imitation and not the real one.

2) Pre-contractual statements amounting to terms also constitute representations. Although, sometimes they are not intended to be promissory in nature and as a result, do not constitute the terms of the contract however in case they proved false, the party to whom such false representation has been made, may have remedies under the common law and also under the statute. In this regard, the common law provides that when the opposite party has induced to enter into the contract by a false representation, the party to whom such representation has been made can rescind the contract (Hedley Byrne v Heller, 1964).

Legal Actions for Fraudulent and Innocent Misrepresentations

At the same time, the consumer law also provides a wide range of remedies related with misleading conduct that takes place in trade or commerce. An action for misrepresentation provides a remedy to a party that has entered into the contract by relying on a false statement of fact made by the other party even if the false statement has not been made a part of the contract.

In the present case, James had purchased the guitar from Max, believing it to be a rare vintage genuine Ibanez Serpent and accordingly he advertised the guitar for sale as the original. However when he took the guitar for servicing to All Guitars - Service and Repairs, he was told by the manager that it was a clever copy and not an original one. However when Kim came back to purchase the guitar for $15,000, James did not mention that the guitar was not an original Ibanez Serpent and he allowed Kim to purchase the guitar under the belief that it was an original Ibanez Serpent guitar.

In this regard, the law provides that when a contract is based on unconscionable misrepresentation, the remedy available to the innocent party is that of the recession of the contract and such a contract is voidable. This means that the contract is valid only until the same has been avoided by the innocent party. An actionable misrepresentation can be described as a false statement of fact that has been made by one party during pre-contractual negotiations and as a result of which the other party is induced to enter into the contract (Derry v Peek,1889).

At the same time, according to the general rule remaining silent does not amount to misrepresentation. However, in the present case, James had advertised the guitar as an original Ibanez Serpent it was the duty of James to inform Kim that he had been told by the manager of All Guitars that it is a clever imitation. As a result, in the present case, it can be said that James had made a false representation to Kim and as a result, Kim has a cause of action against James.

3) On the other hand, if James had not taken the guitar for service to All Guitars and as a result, would not have come to know that the guitar was not an original but it was only a clever imitation, Kim could not have the cause of action against James for fraudulent misrepresentation. However in such a case, due to the reason that both the parties would have been under the mistaken belief that the guitar was an original, Kim cannot claim that a fraudulent misrepresentation has been made by James. In such a case, it can be said that James had made a wholly innocent misrepresentation.

The reason is that in such a case, James would not be aware of the fact that the guitar was a clever imitation and not the original. Therefore, in such a case, Kim cannot be allowed to rescind the contract however; certain damages may be claimed by Kim. The word innocent can be used to describe a statement that has been made by a person who has reasonable grounds to believe that the statement is true. In the present case, if James would not have taken the guitar for service, he would not have come to know that the guitar was an imitation and therefore as a result, he had reason to believe that the guitar was a genuine Ibanez Serpent.

Case law

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805

Derry v Peek (1889) 14 App Cas 337

Hedley Byrne v Heller [1964] A.C