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Copyright © 2004 McGraw-Hill Ryerson Limited 1 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 2 FAILURE TO CREATE AN ENFORCEABLE CONTRACT Mistake Misrepresentation Undue Influence Duress
Copyright © 2004 McGraw-Hill Ryerson Limited 3 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
Copyright © 2004 McGraw-Hill Ryerson Limited 4 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
Copyright © 2004 McGraw-Hill Ryerson Limited 5 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
Copyright © 2004 McGraw-Hill Ryerson Limited 6 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
Copyright © 2004 McGraw-Hill Ryerson Limited 7 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)
Copyright © 2004 McGraw-Hill Ryerson Limited 8 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
Copyright © 2004 McGraw-Hill Ryerson Limited 9 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%
Copyright © 2004 McGraw-Hill Ryerson Limited 10 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
Copyright © 2004 McGraw-Hill Ryerson Limited 11 UNILATERAL AND MUTUAL MISTAKE 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
Copyright © 2004 McGraw-Hill Ryerson Limited 12 UNILATERAL AND MUTUAL MISTAKE 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
Copyright © 2004 McGraw-Hill Ryerson Limited 13 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
Copyright © 2004 McGraw-Hill Ryerson Limited 14 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
Copyright © 2004 McGraw-Hill Ryerson Limited 15 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
Copyright © 2004 McGraw-Hill Ryerson Limited 16 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
Copyright © 2004 McGraw-Hill Ryerson Limited 17 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)
Copyright © 2004 McGraw-Hill Ryerson Limited 18 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
Copyright © 2004 McGraw-Hill Ryerson Limited 19 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
Copyright © 2004 McGraw-Hill Ryerson Limited 20 CONTRACTS OF UTMOST GOOD FAITH Partnership Fiduciary relationship Special relationship contracts Special trust or confidence exists between parties
Copyright © 2004 McGraw-Hill Ryerson Limited 21 UNDUE INFLUENCE A state of affairs whereby a person is so influenced by another that the persons judgment is not his or her own Reduces free will to bargain Voidable contracts Presumed in certain relationships
Copyright © 2004 McGraw-Hill Ryerson Limited 22 UNDUE INFLUENCE Special Relationships solicitor – client doctor – patient trustee – beneficiary parent – child spiritual advisor – parishioner
Copyright © 2004 McGraw-Hill Ryerson Limited 23 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
Copyright © 2004 McGraw-Hill Ryerson Limited 24 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 spouses indebtedness
Copyright © 2004 McGraw-Hill Ryerson Limited 25 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 persons goods or chattels
Copyright © 2004 McGraw-Hill Ryerson Limited 26. LAW OF CONTRACT FAILURE TO CREATE A LEGAL RELATIONSHIP FLAW EFFECT ON AGREEMENT ADDITIONAL RIGHTS OF INJURED PARTY AGREEMENT Mistake Innocent Misrepresentation Fraudulent Misrepresentation Undue Influence Duress Void/Voidable Voidable Also Tort of Deceit
Copyright © 2004 McGraw-Hill Ryerson Limited 27 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
Copyright © 2004 McGraw-Hill Ryerson Limited 28 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
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