Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 3 – THE LAW OF CONTRACTS Chapter 10 – Failure to Create an Enforceable Contract Prepared by Douglas

Copyright © 2004 McGraw-Hill Ryerson

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PART 3 – THE LAW OF CONTRACTS

Chapter 10 – Failure to Create an Enforceable Contract

Prepared by Douglas H. Peterson, University of Alberta


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FAILURE TO CREATE AN ENFORCEABLE CONTRACT

Mistake Misrepresentation Undue Influence Duress


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INTRODUCTION

Even if a contract contains all the essential requirements of a contract it may fail for other reasons

Contract may be defeated due to: Mistake Misrepresentation Undue Influence Duress


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MISTAKE

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 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

Types of Mistake Mistake of Law Mistake of Fact

Mistake of Law Generally cannot recover for a mistake of

law One is bound to know the law

Only if statute provided for recovery of money paid


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MISTAKE OF FACT

Mistake about the existence of the subject matter 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

Mistake as to identity of one of the parties May allow a party to avoid contractual

liability Depends if the identity of the person is an

essential element of the contract Personal services contract

Mistaken party must prove both: 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

Mistake as to true nature of contract Non Est Factum – “it is not my doing”

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

Non Est Factum 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

Show were not careless Some infirmity prevented examination of the

document Not apply if mistake is to a matter of degree of

a term 25% interest instead of 10%


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UNILATERAL AND MUTUAL MISTAKE

Unilateral mistake – mistake made by one party to the agreement Usually when one party misleads the other

or is a aware of the mistake Akin to misrepresentation

Allows it to exist or actively encourages the false assumption


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Mutual mistake – mistake made by both parties

Mistake common to both parties Usually with respect to:

Existence of the subject matter Mistakes as to identity

Mutual mistake Courts use rules of interpretation Will chose the reasonable interpretation


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Rectification Mistake that renders performance

impossible Can correct mistakes or errors in written

contracts when they are obvious When verbal agreements reduced to writing Written agreement does not reflect true

agreement Must show

Obvious mistake No intervening negotiations or changes


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MISREPRESENTATION

A statement or conduct which is false at the time it is made

Types Innocent Fraudulent By means of Non-disclosure

Remedy – injured party can Rescind the contract (equitable remedy) Sue for damages (tort remedy)

Rescission – the revocation of a contract


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MISREPRESENTATION

Must be a statement of fact and not opinion

Must be material Induced the party to enter into the contact

Reliance Party relied on the misrepresentation

Pre-contractual If placed in the contract it is a term


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INNOCENT MISREPRESENTATION

Representation of a material fact a party honestly believes to be true but discovered to be false after the formation of the contact If material injured party may avoid the contract Courts attempt to put parties back into the

positions they were before the contract 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

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

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 Proof of fraud False representation made knowingly, without

belief in its truth or Made with reckless disregard (carelessness)


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MISREPRESENTATION BY NON-DISCLOSURE

General rule – no duty to disclose material facts

Exception: contracts of utmost good faith 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

One of the parties is presumed to have means of knowledge which are not assessable to the other

Insurance 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

non-disclosure to disallow insurers from avoiding liability on the contract


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CONTRACTS OF UTMOST GOOD FAITH

Partnership Fiduciary relationship

Special relationship contracts Special trust or confidence exists between

parties


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UNDUE INFLUENCE

A state of affairs whereby a person is so influenced by another that the person’s judgment is not his or her own Reduces free will to bargain Voidable contracts Presumed in certain relationships


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UNDUE INFLUENCE

Special Relationships solicitor – client doctor – patient trustee – beneficiary parent – child spiritual advisor – parishioner


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UNDUE INFLUENCE

Presumption of undue influence if special relationship exists Onus shifts to dominant party to show lack

of undue influence Satisfy onus by showing

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

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 Spouses Court looks to degree of domination and

fairness of bargain struck Guarantees given for another spouse’s

indebtedness


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DURESS

The threat of injury or imprisonment for the purpose of requiring another to enter into a contract or carry out some act 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

FLAWEFFECT ON

AGREEMENT

ADDITIONAL RIGHTS OF INJURED PARTY

AGREEMENT

Mistake

Innocent Misrepresentation

FraudulentMisrepresentation

Undue Influence

Duress

Void/Voidable

Voidable

Voidable

Voidable

Voidable

Also Tort of Deceit


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SUMMARY

Contract requires true meeting of minds In spite of essential elements of a contract

being present contract may be invalid due to other reasons

Mistake – contract may be void/voidable Identity of parties Existence of subject matter Nature of agreement


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SUMMARY

Misrepresentation 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

Contract voidable Injured party must rescind and not

continue to take benefits under the contract

Documents

Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 3 – THE LAW OF CONTRACTS Chapter 10 – Failure to Create an Enforceable Contract Prepared by Douglas