Understanding Contract Mistakes, Misrepresentation, and Duress
Contract Law: Mistakes, Misrepresentation, and Duress
Setting Aside a Contract
A contract may be set aside due to mistake, misrepresentation, undue influence, or duress. A legal mistake is a mistaken belief about a factual situation, not the law itself.
Types of Mistakes
- Unilateral Mistake: One party is mistaken about the facts.
- Common/Mutual Mistake: Both parties are mistaken about the facts.
Only certain kinds of mistakes will make a contract void or voidable by equitable relief of the courts.
Meaning of a Mistake
A mistake in law is an error with respect to:
- Terms of the contract
- Subject matter of the contract
- Identities of the parties
- Nature of a signed document
Void vs. Voidable Contracts
- Void: The contract never comes into existence, and no rights or title pass to anyone.
- Voidable: The contract exists until set aside by a court; rights may pass to third parties before it is set aside.
Equitable Relief: A discretionary remedy first developed by the Court of Equity to undo an injustice.
Rescind/Set Aside: Undo or revoke a contract and return the parties as nearly as possible to their original position.
Rescission: An equitable remedy that rescinds/undoes a contract, putting both parties in their original situation.
In situations where a mistake is found, the contract is said to be void or voidable. The contract may still be rescinded, and title and/or possession will return to the seller.
The difference between void and voidable contracts is important if goods have been conveyed to an innocent third party for value (who paid) for the goods prior to the contract being set aside.
Equity determines that the innocent third party for value (ITPV) can usually keep the goods even though the original contract is rescinded.
Whether any given contract is void/voidable depends on three things:
1. The type of mistake (meaning of the words, subject matter and its existence or value, error in recording, identity of the parties, nature of the signed document)
2. The reasonableness of the behavior
3. The understanding of the parties
Specific Types of Mistakes
Words Used Inadvertently
Mistakes about the terms of the contract may arise because one party may inadvertently use the wrong words in stating the terms (unilateral mistake). Relief is granted if the reasonable person would have recognized that a mistake was made (price absurdly low or unrelated to the range of prices in negotiation).
Errors in Recording an Agreement
Sometimes a contract contains an error, but one party does not wish to be released from the obligation. Instead, they want the corrected deal enforced. It is not easy to seek rectification, and courts will not correct an error in judgment or lack of due diligence. Parties must be in complete agreement = the situation is just an error in writing down the agreement.
Courts will also grant relief (rectify a contract) if five conditions exist:
1. The court is satisfied there was a complete oral agreement between the parties.
2. The parties did not engage in further negotiations to amend the contract.
3. The mistake in the written document may have, but does not have to have, occurred from fraud.
4. When the written document was signed, the defendant knew/should have known of the mistake, but the plaintiff did not.
5. Any further attempt to enforce the inaccurate written document would be equivalent to fraud.
Misunderstanding About the Meaning of Words
Both parties may put forward certain words, deliberately, but have different interpretations of an ambiguous term = mutual mistake, so usually, the contract is void. The court will apply the most reasonable interpretation in light of all the circumstances based on the subject matter of the contract and intentions of the parties.
Mistakes About the Existence of the Subject Matter of a Contract
A party may make a mistake about the very existence of the subject matter of the contract (did not know the goods in the hold of the ship were destroyed at sea, perishable goods sold prior to delivery). If the subject of the contract was destroyed prior to contract formation, the contract is void. The court will remedy the situation about the buyer paying for goods not delivered and the seller being liable for breach of non-delivery.
Mistake About the Value of the Subject Matter
The subject matter of the contract still exists, but the parties may have radically different ideas about its qualities or quantity affecting its value. For example, a party may make a mistake about the value of goods in the contract: paying too much and the other party receives a windfall, wide price fluctuation, quantity or quality does not equal value expected. The court will determine if key characteristics of the subject matter accurately reflect its dollar value. If so, then relief may be granted by finding the contract voidable.
TEST: Mutual intention of the parties, reasonableness of the parties’ expectations, and if it would be unfair or unconscionable not to grant relief.
TEST: Rescission may also be available if three things are present: 1. The seller made a misrepresentation. 2. Discovery of which was impossible. 3. Both parties believed the same mistaken characteristics. Delay works against relief. Often involves fraud (the innocent party is deliberately tricked into believing the party is someone they are not). Where a party assumes an identity: the contract = void. If parties deal in person, then the contract = voidable.
Mistake About the Nature of a Signed Document
Defense of Non Est Factum (not my doing). When one party may have been illiterate and relied upon a literate party to describe the nature of a document. If misrepresentation occurred, they could rely upon the doctrine of non est factum.
Misrepresentation
Contract vs. Tort: A court may rescind a contract for any material misrepresentation.
Misrepresentation: A false statement of fact which induces the other party to enter into a contract. If made fraudulently or negligently = a tort.
If made innocently, must notify the other party of the error ASAP.
A statement of opinion or silence is not misrepresentation.
Types of Misrepresentation
1. Innocent: The person making the statement honestly believed it to be true.
2. Fraudulent: An innocent misrepresentation becomes fraudulent if not corrected when discovered.
3. Negligent: The person making the statement was careless in not ascertaining the truth.
Remedies for Misrepresentation
When the party relied upon misrepresentation learns of the truth, they must perform rescission. The remedy is indemnity/compensation: a dollar award given as a supplement to rescission for loss sustained in performing a contract.
Misrepresentation by Silence or Omission
Conduct/silence may also be misrepresentation (as in torts). Will be voidable if discovered. If there is a duty not met due to silence or omission, then misrepresentation exists.
Duty of Utmost Good Faith: Duty of disclosure owed when a special relationship of trust exists between the parties.
That duty almost always exists in:
Continuing business relationships
Partnerships
Directors and officers toward their corporation
Contracts of insurance
Contracts involving the sale of securities
Contracts involving the sale of goods
Contracts with consumers
Rescission is not available where the contract is affirmed and where bona fide third parties would be prejudiced. The remedy is rescission and/or damages.
Signed Documents and Misrepresentation by Omission
Legal presumption = signing a document indicates acceptance of terms. If the contract requires utmost good faith due to the type of relationship between the parties, then there is a positive obligation to disclose material information.
Types of Contracts Requiring Disclosure
Contracts of utmost good faith require disclosure of all pertinent information.
Partnership agreements
Contracts of insurance
Contracts involving the sale of securities
Contracts involving the sale of goods
Contracts with consumers
Undue Influence
Undue Influence: Domination of one party over the mind of another to such a degree as to deprive the weaker party of the ability to make independent decisions. Undermines presumed freedom of contract. The contract will be voidable if the victim acts promptly – delay will hinder the court’s assistance. When parties stand in a special relationship to one another, trust is involved (lawyer/client).
The importance of independent legal advice received by the weaker party will rebut the presumption.
Unconscionable Contracts
Unconscionable Contracts: Contracts with unequal bargaining power between the parties. The powerful party gets an extremely advantageous deal. Example: loan transactions.
Duress
Duress: Actual or threatened violence or imprisonment as a means of coercing a party to enter into a contract. The threat of violence renders the contract voidable. Includes coercion: improperly forced payment under protest.
Discharge of Contracts
Methods of Discharge
When a contract comes to an end (discharged), neither party has further obligations under it.
A contract may be terminated in four ways:
1. Discharge by Performance: Both parties perform their contractual obligations.
2. Discharge by Agreement: Parties agree to end the contract.
3. Discharge by Frustration: External events make performance impossible.
4. Discharge by Operation of Law: The law deems that a contract is discharged.
Breach of Contract
Implications of Breach
Any breach of a term of a contract entitles the non-breaching party to claim damages. However, usually, only serious breaches may discharge a contract and release the non-breaching party from further performance of it.
Insurance and Guarantee
The best way of purchasing protection against a possible loss and transferring risk to another party. The insured enters into a contract with an insurer to be compensated for a specified loss, in return for payment of insurance premiums.
Contract of Employment
Traditionally based on the common law of master and servant.
Definition: The contractual relationship between an employer “master” and an employee “servant.”
Landlord and Tenant
Tenancy: Definition: Interest in land for a definite period (term) under a lease (both the interest and the agreement between landlord and tenant creating the leasehold interest).
Nature of a Corporation and Formation
A corporation is a separate legal “person” in law.
Legal Person: An entity recognized at law as having its own legal rights, duties, and obligations.
Corporation: A legal person formed by incorporation according to prescribed legal procedure.
Corporate Governance
The CBCA and SBCA (provincial statutes) distinguish between two aspects of corporate activities which state that the directors shall “manage or supervise the management of:
The business of the corporation
The affairs of the corporation
Purpose: To meet a corporation’s internal objectives and external responsibilities.
STMLR (Short Term Medium Long Range)
Throughout the document, various STMLR (Short Term Medium Long Range) recommendations are provided for different legal scenarios and business contexts. These recommendations offer practical advice and strategies for managing legal risks and optimizing business operations.