Coastal Estates v Melevende [1965] VR 433

Facts: In 1960, Melevende entered into a contract to purchase a seaside property via instalments. The contract was induced by a fraudulent misrepresentation. The following year, Melevende became aware of the misrepresentation but continued to make instalments and tried to sell the land. In 1962, after seeking legal advice, Melevende became aware of his legal right to rescind. At that point, he elected to rescind.

Held: The Court upheld his election to rescind, as an innocent party cannot affirm a contract if they are not aware of their legal right to rescind.

Held (Herring CJ at 435): 'A right of election by one party to a contract to affirm ... is governed by the general principle ... namely, that an election cannot be exercised by the party concerned until [they have] knowledge of the right to elect. It follows, therefore, that in a case of fraud if the fraudulent party sets up the defence of affirmation, on the ground that the defrauded party has actually elected to affirm the contract, the burden rests on [the fraudulent party] to establish not only that the party defrauded knew the facts about the fraud but also that [they] knew of [their] right to elect.’

Questions:

1. Did Melevende’s conduct amount to affirmation?

No, because Melevende didn’t know of his legal right to rescind and therefore, his conduct in continuing to make instalments and attempt to sell the land cannot amount to affirmation.

2. In general, can affirmation take place if the innocent party wasn't aware of their legal right to rescind (as opposed to being aware of the facts justifying a right to rescind)?

In general, no. An innocent party cannot affirm a contract if unaware of their legal right to rescind. It is knowledge of the legal right itself, not just the facts that give rise to legal right to rescind.

An exception is where the innocent party goes on to act ‘adverse to’ the opposite party under the contract, for example, by further benefitting themselves or creating further determinant to the other party.

In addition, this only applies to situations where there is fraud (the vitiating factor of fraudulent misrepresentation specifically, not innocent misrepresentation or other vitiating factors).

The rule has been criticised as it requires subjective knowledge (contract law doesn’t usually care about this).