Prepared by Douglas Peterson, Prepared by Douglas Peterson, University of AlbertaUniversity of Alberta 11-11-11

Part 3 – The Law of ContractPart 3 – The Law of Contract

Chapter 11Chapter 11Failure to Create an Failure to Create an

Enforceable Enforceable ContractContract

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OverviewOverview

MistakeMistake Mistake of lawMistake of law Mistake of factMistake of fact Non est factumNon est factum Unilateral and mutual mistakeUnilateral and mutual mistake

MisrepresentationMisrepresentation Innocent, fraudulent, negligentInnocent, fraudulent, negligent

Undue InfluenceUndue Influence DuressDuress

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IntroductionIntroduction

Requirements for a valid contractRequirements for a valid contract Essential elements such as offer, acceptance, intention, Essential elements such as offer, acceptance, intention,

consideration, capacity may all exists but contract may consideration, capacity may all exists but contract may still not be enforceablestill not be enforceable

Situations which may render a contract unenforceableSituations which may render a contract unenforceable Mistake, misrepresentation, undue influence, duressMistake, misrepresentation, undue influence, duress

Also determines who bears the brunt of the lossesAlso determines who bears the brunt of the losses

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MistakeMistake

MistakeMistake A state of affairs in which a party (or both parties) has A state of affairs in which a party (or both parties) has

formed an erroneous opinion as to identity of subject formed an erroneous opinion as to identity of subject matter, or some other important termmatter, or some other important term

Contract does not express their true intentionsContract does not express their true intentions Types of MistakeTypes of Mistake

Mistake of lawMistake of law Mistake of factMistake of fact

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MistakeMistake

Mistake of LawMistake of Law Presumed to know the lawPresumed to know the law Usually no relief providedUsually no relief provided Exception: if statute provided for recoveryException: if statute provided for recovery

Mistake of FactMistake of Fact Mistake as to the existence of the subject matter of the Mistake as to the existence of the subject matter of the

contract or the identity of a partycontract or the identity of a party

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Mistake of FactMistake of Fact

Court may provide reliefCourt may provide relief Mistake as to subject matter of contractMistake as to subject matter of contract

General rule contract is voidGeneral rule contract is void Mistake as to identity of the PartyMistake as to identity of the Party

Depends if the identity of the person is an essential Depends if the identity of the person is an essential element of the agreementelement of the agreement

If essential may not be enforceableIf essential may not be enforceable If not essential – it will be enforceableIf not essential – it will be enforceable

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Mistake of FactMistake of Fact

Non Est FactumNon Est Factum A defense that may allow illiterate or infirm persons to A defense that may allow illiterate or infirm persons to

avoid liability on a written agreement if they can establish avoid liability on a written agreement if they can establish that they were not aware of the true nature of the that they were not aware of the true nature of the document, and were not careless in executiondocument, and were not careless in execution

Narrow form of mistakeNarrow form of mistake Applies only to type of agreement being signed not to the Applies only to type of agreement being signed not to the

terms of the agreementterms of the agreement

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Unilateral and Mutual MistakeUnilateral and Mutual Mistake

Unilateral MistakeUnilateral Mistake A mistake by one party to the agreementA mistake by one party to the agreement

Mutual MistakeMutual Mistake A mistake where both parties have made mistaken A mistake where both parties have made mistaken

assumptions as to the subject matter of the agreementassumptions as to the subject matter of the agreement Can be same mistake or different mistakesCan be same mistake or different mistakes

Courts will not enforce agreements when the other party Courts will not enforce agreements when the other party is aware of the mistake being madeis aware of the mistake being made

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Mutual MistakeMutual Mistake

RulesRules If both parties make the same mistake:If both parties make the same mistake:

as to subject matter then the contract is unenforceableas to subject matter then the contract is unenforceable As to identity of the partiesAs to identity of the parties

– Deal with on a case by case basisDeal with on a case by case basis RectificationRectification

The correction of a mistake in an agreement that would The correction of a mistake in an agreement that would have rendered the agreement impossible to performhave rendered the agreement impossible to perform

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MisrepresentationMisrepresentation

CharacteristicsCharacteristics A statement or conductA statement or conduct Induces the other party to enter into the contractInduces the other party to enter into the contract Must be a material matterMust be a material matter Must be a statement of fact and not opinionMust be a statement of fact and not opinion

Exception: expert opinionException: expert opinion Statement made before contract entered intoStatement made before contract entered into

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MisrepresentationMisrepresentation

Result of misrepresentationResult of misrepresentation Voidable at the option of the injured partyVoidable at the option of the injured party Must rescind or lose the right if accept benefits under Must rescind or lose the right if accept benefits under

the contractthe contract RescissionRescission

The revocation of a contract or agreementThe revocation of a contract or agreement

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MisrepresentationMisrepresentation

3 Types3 Types TypeType RemedyRemedy Innocent Innocent rescission onlyrescission only Negligent Negligent rescission and damagesrescission and damages Fraudulent Fraudulent rescission and damagesrescission and damages Remedy depends on type of misrepresentationRemedy depends on type of misrepresentation

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Innocent MisrepresentationInnocent Misrepresentation

A false statement of a material fact made by a party A false statement of a material fact made by a party that honestly believed the fact to be truethat honestly believed the fact to be true

Courts attempt to put the parties back into position they Courts attempt to put the parties back into position they were before the contract was entered intowere before the contract was entered into

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Fraudulent MisrepresentationFraudulent Misrepresentation

Fraudulent MisrepresentationFraudulent Misrepresentation A false statement of fact made by a person who knows, A false statement of fact made by a person who knows,

or should know, that it is false, and made with the or should know, that it is false, and made with the intention of deceiving anotherintention of deceiving another

DeceitDeceit A tort that arises when a party suffers damage by acting A tort that arises when a party suffers damage by acting

upon a false representation made by a party with the upon a false representation made by a party with the intention of deceiving the otherintention of deceiving the other

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Fraudulent MisrepresentationFraudulent Misrepresentation

Contractual vs. Tort remedyContractual vs. Tort remedy Contract: rescission is contractual remedy Contract: rescission is contractual remedy

If courts can restore parties to position they were before If courts can restore parties to position they were before entering into the contractentering into the contract

Tort: Deceit – allows for damagesTort: Deceit – allows for damages can award punitive damagescan award punitive damages

DeceitDeceit Made knowinglyMade knowingly Without belief in its truthWithout belief in its truth Recklessly or carelessly without regard for its truthRecklessly or carelessly without regard for its truth

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Misrepresentation by Non-DisclosureMisrepresentation by Non-Disclosure

General ruleGeneral rule No obligation to discloseNo obligation to disclose Exception: Exception:

certain types of relationships or contracts (Contracts of certain types of relationships or contracts (Contracts of utmost good faith)utmost good faith)

Partial disclosure of facts has effect of rendering the part Partial disclosure of facts has effect of rendering the part disclosed as falsedisclosed as false

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Misrepresentation by Non-DisclosureMisrepresentation by Non-Disclosure

Contracts of Utmost Good FaithContracts of Utmost Good Faith InsuranceInsurance Partnership (fiduciary obligation)Partnership (fiduciary obligation) Contracts with special trust or confidence between the Contracts with special trust or confidence between the

partiesparties

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Negligent MisrepresentationNegligent Misrepresentation

NegligenceNegligence Newer form of misrepresentationNewer form of misrepresentation Statements that are sufficiently reckless but not quite Statements that are sufficiently reckless but not quite

fraudulentfraudulent

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Undue InfluenceUndue Influence

Undue InfluenceUndue Influence A state of affairs whereby a person is so influenced by A state of affairs whereby a person is so influenced by

another that the person’s judgment is not his or her ownanother that the person’s judgment is not his or her own Not in a fair bargaining positionNot in a fair bargaining position

2 Scenarios2 Scenarios Special Relationship existsSpecial Relationship exists Special Relationship does not existSpecial Relationship does not exist

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Undue InfluenceUndue Influence

Special RelationshipsSpecial Relationships Types: lawyer/client; doctor/patient; trustee/beneficiary; Types: lawyer/client; doctor/patient; trustee/beneficiary;

parent-child; spiritual advisor/parishionerparent-child; spiritual advisor/parishioner Does not apply to spousal relationshipDoes not apply to spousal relationship Undue influence alleged onus shifts to dominant party to Undue influence alleged onus shifts to dominant party to

prove otherwiseprove otherwise

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Undue InfluenceUndue Influence

No undue influence if No undue influence if agreement was fair and reasonable in the circumstancesagreement was fair and reasonable in the circumstances Full disclosure is made prior to the formation of contractFull disclosure is made prior to the formation of contract Weaker party free to seek independent legal adviceWeaker party free to seek independent legal advice

Contract is voidable at option of weaker party Contract is voidable at option of weaker party

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DuressDuress

DuressDuress The threat of injuring or imprisonment for the purpose of The threat of injuring or imprisonment for the purpose of

requiring another to enter into a contract or carry out requiring another to enter into a contract or carry out some actsome act Threat can be to person directly or to person’s family (or a Threat can be to person directly or to person’s family (or a

close relative)close relative) Contract is voidable at option of person once they come Contract is voidable at option of person once they come

out from under duressout from under duress Threat to person and not person’s goodsThreat to person and not person’s goods

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SummarySummary

MistakeMistake Requires meeting of the mindsRequires meeting of the minds No meeting of the minds if certain mistakes madeNo meeting of the minds if certain mistakes made

MisrepresentationMisrepresentation Type determines remedyType determines remedy Party is free to get out of the contract since they would Party is free to get out of the contract since they would

not have entered into it but for the misrepresentationnot have entered into it but for the misrepresentation Duress and Undue InfluenceDuress and Undue Influence

Party can avoid the contractParty can avoid the contract