1. Prepared by Douglas Peterson, University of Alberta 11-1 Part 3 – The Law of Contract Chapter 11 Failure to Create an Enforceable Contract

2. © 2006 McGraw-Hill Ryerson Limited 11-2 Overview  Mistake  Mistake of law  Mistake of fact  Non est factum  Unilateral and mutual mistake  Misrepresentation  Innocent, fraudulent, negligent  Undue Influence  Duress

3. © 2006 McGraw-Hill Ryerson Limited 11-3 Introduction  Requirements for a valid contract  Essential elements such as offer, acceptance, intention, consideration, capacity may all exists but contract may still not be enforceable  Situations which may render a contract unenforceable  Mistake, misrepresentation, undue influence, duress  Also determines who bears the brunt of the losses

4. © 2006 McGraw-Hill Ryerson Limited 11-4 Mistake  Mistake  A state of affairs in which a party (or both parties) has formed an erroneous opinion as to identity of subject matter, or some other important term  Contract does not express their true intentions  Types of Mistake  Mistake of law  Mistake of fact

5. © 2006 McGraw-Hill Ryerson Limited 11-5 Mistake  Mistake of Law  Presumed to know the law  Usually no relief provided  Exception: if statute provided for recovery  Mistake of Fact  Mistake as to the existence of the subject matter of the contract or the identity of a party

6. © 2006 McGraw-Hill Ryerson Limited 11-6 Mistake of Fact  Court may provide relief  Mistake as to subject matter of contract  General rule contract is void  Mistake as to identity of the Party  Depends if the identity of the person is an essential element of the agreement  If essential may not be enforceable  If not essential – it will be enforceable

7. © 2006 McGraw-Hill Ryerson Limited 11-7 Mistake of Fact  Non Est Factum  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 execution  Narrow form of mistake  Applies only to type of agreement being signed not to the terms of the agreement

8. © 2006 McGraw-Hill Ryerson Limited 11-8 Unilateral and Mutual Mistake  Unilateral Mistake  A mistake by one party to the agreement  Mutual Mistake  A mistake where both parties have made mistaken assumptions as to the subject matter of the agreement  Can be same mistake or different mistakes  Courts will not enforce agreements when the other party is aware of the mistake being made

9. © 2006 McGraw-Hill Ryerson Limited 11-9 Mutual Mistake  Rules  If both parties make the same mistake:  as to subject matter then the contract is unenforceable  As to identity of the parties –Deal with on a case by case basis  Rectification  The correction of a mistake in an agreement that would have rendered the agreement impossible to perform

10. © 2006 McGraw-Hill Ryerson Limited 11-10 Misrepresentation  Characteristics  A statement or conduct  Induces the other party to enter into the contract  Must be a material matter  Must be a statement of fact and not opinion  Exception: expert opinion  Statement made before contract entered into

11. © 2006 McGraw-Hill Ryerson Limited 11-11 Misrepresentation  Result of misrepresentation  Voidable at the option of the injured party  Must rescind or lose the right if accept benefits under the contract  Rescission  The revocation of a contract or agreement

12. © 2006 McGraw-Hill Ryerson Limited 11-12 Misrepresentation  3 Types  TypeRemedy  Innocent rescission only  Negligent rescission and damages  Fraudulent rescission and damages  Remedy depends on type of misrepresentation

13. © 2006 McGraw-Hill Ryerson Limited 11-13 Innocent Misrepresentation  A false statement of a material fact made by a party that honestly believed the fact to be true  Courts attempt to put the parties back into position they were before the contract was entered into

14. © 2006 McGraw-Hill Ryerson Limited 11-14 Fraudulent Misrepresentation  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

15. © 2006 McGraw-Hill Ryerson Limited 11-15 Fraudulent Misrepresentation  Contractual vs. Tort remedy  Contract: rescission is contractual remedy  If courts can restore parties to position they were before entering into the contract  Tort: Deceit – allows for damages  can award punitive damages  Deceit  Made knowingly  Without belief in its truth  Recklessly or carelessly without regard for its truth

16. © 2006 McGraw-Hill Ryerson Limited 11-16 Misrepresentation by Non-Disclosure  General rule  No obligation to disclose  Exception:  certain types of relationships or contracts (Contracts of utmost good faith)  Partial disclosure of facts has effect of rendering the part disclosed as false

17. © 2006 McGraw-Hill Ryerson Limited 11-17 Misrepresentation by Non-Disclosure  Contracts of Utmost Good Faith  Insurance  Partnership (fiduciary obligation)  Contracts with special trust or confidence between the parties

18. © 2006 McGraw-Hill Ryerson Limited 11-18 Negligent Misrepresentation  Negligence  Newer form of misrepresentation  Statements that are sufficiently reckless but not quite fraudulent

19. © 2006 McGraw-Hill Ryerson Limited 11-19 Undue Influence  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  Not in a fair bargaining position  2 Scenarios  Special Relationship exists  Special Relationship does not exist

20. © 2006 McGraw-Hill Ryerson Limited 11-20 Undue Influence  Special Relationships  Types: lawyer/client; doctor/patient; trustee/beneficiary; parent-child; spiritual advisor/parishioner  Does not apply to spousal relationship  Undue influence alleged onus shifts to dominant party to prove otherwise

21. © 2006 McGraw-Hill Ryerson Limited 11-21 Undue Influence  No undue influence if  agreement was fair and reasonable in the circumstances  Full disclosure is made prior to the formation of contract  Weaker party free to seek independent legal advice  Contract is voidable at option of weaker party

22. © 2006 McGraw-Hill Ryerson Limited 11-22 Duress  Duress  The threat of injuring or imprisonment for the purpose of requiring another to enter into a contract or carry out some act  Threat can be to person directly or to person’s family (or a close relative)  Contract is voidable at option of person once they come out from under duress  Threat to person and not person’s goods

23. © 2006 McGraw-Hill Ryerson Limited 11-23 Summary  Mistake  Requires meeting of the minds  No meeting of the minds if certain mistakes made  Misrepresentation  Type determines remedy  Party is free to get out of the contract since they would not have entered into it but for the misrepresentation  Duress and Undue Influence  Party can avoid the contract