PART 3 – THE LAW OF CONTRACTS

Chapter 10 – Failure to
Create an Enforceable
Contract
Prepared by Douglas H. Peterson, University of
Alberta
Copyright © 2004 McGraw-Hill Ryerson Limited
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FAILURE TO CREATE AN ENFORCEABLE
CONTRACT
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Mistake
Misrepresentation
Undue Influence
Duress
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INTRODUCTION
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Even if a contract contains all the essential
requirements of a contract it may fail for
other reasons
Contract may be defeated due to:
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Mistake
Misrepresentation
Undue Influence
Duress
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MISTAKE
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A state of affairs in which a party (or both
parties) has formed an erroneous opinion as
to the identity or existence of the subject
matter, or of some other important term
An error that destroys consensus
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Contract does not express parties true intentions
Untrue impression of an essential element
Failed to reach a true meeting of the minds
Legal perspective has a narrow
interpretation
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MISTAKE
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Types of Mistake
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Mistake of Law
Mistake of Fact
Mistake of Law
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Generally cannot recover for a mistake of law
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One is bound to know the law
Only if statute provided for recovery of money
paid
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MISTAKE OF FACT
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Mistake about the existence of the subject
matter
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Mutual mistake by the parties
Generally renders the contract void because
impossible to perform
Subject matter of contract did not exist at time
the contract was formed
Usually based on a false assumption
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MISTAKE OF FACT
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Mistake as to identity of one of the parties
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May allow a party to avoid contractual liability
Depends if the identity of the person is an
essential element of the contract
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Personal services contract
Mistaken party must prove both:
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The mistake was known to the other contractual
party; and
The mistake was material (one that matters to the
mistaken party in an important way)
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MISTAKE OF FACT
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Mistake as to true nature of contract
Non Est Factum – “it is not my doing”
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A defense that may allow illiterate or infirm
persons to avoid liability on a written agreement
if they can establish that they were not aware of
the true nature of the document, and were not
careless in its execution
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MISTAKE OF FACT
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Non Est Factum
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Very narrow form of mistake
Radical difference between what person thought
they were signing and what they signed
Must have been led to believe that document
was of a different nature than what was signed
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Show were not careless
Some infirmity prevented examination of the
document
Not apply if mistake is to a matter of degree of a
term
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25% interest instead of 10%
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UNILATERAL AND MUTUAL MISTAKE
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Unilateral mistake – mistake made by one
party to the agreement
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Usually when one party misleads the other or is
a aware of the mistake
Akin to misrepresentation
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Allows it to exist or actively encourages the false
assumption
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UNILATERAL AND MUTUAL MISTAKE
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Mutual mistake – mistake made by both
parties
Mistake common to both parties
Usually with respect to:
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Existence of the subject matter
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Mistakes as to identity
Mutual mistake
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Courts use rules of interpretation
Will chose the reasonable interpretation
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UNILATERAL AND MUTUAL MISTAKE
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Rectification
Mistake that renders performance impossible
Can correct mistakes or errors in written
contracts when they are obvious
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When verbal agreements reduced to writing
Written agreement does not reflect true
agreement
Must show
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Obvious mistake
No intervening negotiations or changes
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MISREPRESENTATION
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A statement or conduct which is false at the
time it is made
Types
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Remedy – injured party can
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Innocent
Fraudulent
By means of Non-disclosure
Rescind the contract (equitable remedy)
Sue for damages (tort remedy)
Rescission – the revocation of a contract
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MISREPRESENTATION
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Must be a statement of fact and not opinion
Must be material
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Reliance
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Induced the party to enter into the contact
Party relied on the misrepresentation
Pre-contractual
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If placed in the contract it is a term
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INNOCENT MISREPRESENTATION
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Representation of a material fact a party
honestly believes to be true but discovered
to be false after the formation of the contact
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If material injured party may avoid the contract
Courts attempt to put parties back into the
positions they were before the contract
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Sometimes not possible
Goods consumed, value declines, sold to a third party
Innocent misrepresentation can become
fraudulent if mistake is discovered and not
disclosed
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FRAUDULENT MISREPRESENTATION
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A false statement of fact made by a person
who knows, or should know,, that it is false,
and made with the intention of deceiving
another
Deceit – a tort that arises when a party
suffers damage by acting upon a false
representation made by a party, with the
intention of deceiving the other
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FRAUDULENT MISREPRESENTATION
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In addition to right of rescission injured party can
sue for damages under tort of deceit
Lose right to rescission and damages if take
benefits under the contract
Right of rescission may be defeated by third party
rights
Requirements
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Proof of fraud
False representation made knowingly, without belief in its
truth or
Made with reckless disregard (carelessness)
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MISREPRESENTATION BY NONDISCLOSURE
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General rule – no duty to disclose material
facts
Exception: contracts of utmost good faith
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Active concealment of facts
Partial disclosure renders the part disclosed as
false
Treated as fraud or intention to deceive
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CONTRACTS OF UTMOST GOOD FAITH
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One of the parties is presumed to have
means of knowledge which are not
assessable to the other
Insurance
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Require full disclosure by insurance applicant
Insurer knows very little
Need proper disclosure to asses risk and set
premium
Statutes have imposed limits on innocent nondisclosure to disallow insurers from avoiding
liability on the contract
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CONTRACTS OF UTMOST GOOD FAITH
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Partnership
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Fiduciary relationship
Special relationship contracts
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Special trust or confidence exists between
parties
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UNDUE INFLUENCE
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A state of affairs whereby a person is so
influenced by another that the person’s
judgment is not his or her own
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Reduces free will to bargain
Voidable contracts
Presumed in certain relationships
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UNDUE INFLUENCE
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Special Relationships
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solicitor – client
doctor – patient
trustee – beneficiary
parent – child
spiritual advisor – parishioner
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UNDUE INFLUENCE
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Presumption of undue influence if special
relationship exists
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Onus shifts to dominant party to show lack of
undue influence
Satisfy onus by showing
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Fairness of bargain (price paid)
Full disclosure was made prior to formation of
contract
Weaker party free to get independent advice
Weaker party may avoid the contract and
courts grant rescission
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UNDUE INFLUENCE
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Weak party must seek rescission within
reasonable period of time after coming out
from influence or right may be lost
Where presumption does not exists
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Spouses
Court looks to degree of domination and fairness
of bargain struck
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Guarantees given for another spouse’s indebtedness
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DURESS
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The threat of injury or imprisonment for the
purpose of requiring another to enter into a
contract or carry out some act
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Threat to person or close relative
Threat to person and not person’s goods or
chattels
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LAW OF CONTRACT
FAILURE TO CREATE A LEGAL RELATIONSHIP
FLAW
AGREEMENT
EFFECT ON
AGREEMENT
Mistake
Void/Voidable
Innocent
Misrepresentation
Voidable
Fraudulent
Misrepresentation
Voidable
Undue Influence
Voidable
Duress
Voidable
.
Copyright © 2004 McGraw-Hill Ryerson Limited
ADDITIONAL
RIGHTS OF
INJURED
PARTY
Also
Tort of
Deceit
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SUMMARY
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Contract requires true meeting of minds
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In spite of essential elements of a contract being
present contract may be invalid due to other
reasons
Mistake – contract may be void/voidable
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Identity of parties
Existence of subject matter
Nature of agreement
Copyright © 2004 McGraw-Hill Ryerson Limited
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SUMMARY
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Misrepresentation
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If party induced and it is a material matter
contract voidable at option of injured party
If fraudulent may sue for damages under tort of
deceit
Undue influence or Duress
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Contract voidable
Injured party must rescind and not continue to
take benefits under the contract
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