Chapter 5: ConTRACTUAL DEFECTS Emond Montgomery Publications Chapter 5: ConTRACTUAL DEFECTS

Chapter 5: Contractual Defects Emond Montgomery Publications Chapter 5: Contractual Defects Learning Outcomes Define “contractual defect” and list at least three examples. Explain the distinction between an innocent and a fraudulent misrepresentation. Understand which defects render a contract void (void ab initio) and which render it merely voidable. Distinguish between duress and undue influence. Explain what is meant by “unconscionability” in the context of transactions. Describe the consequences of various kinds of mistakes on the part of contract parties.

Emond Montgomery Publications Introduction A contractual defect is a defect in one of the elements of a valid contract A contractual defect can result in the contract being: Void ab initio, or Voidable

Misrepresentation Definitions Emond Montgomery Publications Misrepresentation Definitions A misrepresentation is a false statement that induces someone to entire into a contract. Misrepresentations can be either “innocent” or “fraudulent” A material inducement is a statement that influences a party to enter into a contract Rescission is a remedy that can be used in some circumstances of misrepresentation that results in the cancellation or “unmaking” of the contract

Misrepresentation (cont’d) Emond Montgomery Publications Misrepresentation (cont’d) INNOCENT MISREPRESENATION The misrepresentation of a material fact that the person making it believes to be true The innocent party must show that they were induced by the statement and that the statement was material Innocent misrepresentations can give rise to the following remedies depending on the circumstances: An action for breach of contract An action for the tort of negligent misrepresentation Restitution

Misrepresentation (cont’d) Emond Montgomery Publications Misrepresentation (cont’d) FRAUDULENT MISREPRESENTATION A misrepresentation of a statement of fact which is made without any belief that it is true and with the intent to induce the other party to enter into the contract The statement must be about a present or past event The following remedies are available for fraudulent misrepresentation depending on the circumstances: Tort damages where the fraudulent claim amounts to the tort of deceit Contract is voidable at the option of the victim

Misrepresentation (cont’d) Emond Montgomery Publications Misrepresentation (cont’d) MISREPRESENTATION BY OMISSION If a failure to disclose a piece of information makes a statement untrue or fraudulent, then it can give rise to an action of fraudulent misrepresentation Uberrimae fidei contracts: class of contracts where full disclosure is required For these contracts there is a positive duty to disclose and knowing silence can amount to fraudulent misrepresentation

Emond Montgomery Publications Duress Definition: Duress is an unlawful threat or coercion used by one person to induce another to perform some act against his or her will Contracts made under duress are voidable A threatened party will loose their right to rescind if they do not take immediate steps to void the contract or affirm the contract To determine whether there has been duress the courts look at: Is there commercial pressure that amounts to coercion, which vitiates consent? Are there alternative ways to avoid the coercion, or Is the pressure exerted legitimate

Emond Montgomery Publications Undue Influence Definition: Undue influence is persuasion, pressure or influence short of actual force that overpowers a weaker party’s judgment and free will and imposes the will of the stronger party The focus is on the conduct that affects consent The doctrine of undue influence applies in two situations: Actual undue influence Example: moral pressure to obtain a contractual result Presumed undue influence Example: in a fiduciary relationship Undue influence results in the contract being set aside

Emond Montgomery Publications Unconscionability The focus is on the reasonableness of the transaction and the party’s behaviour during the bargaining process Not every “unfair” contract is unconscionable There is no clear-cut method to determine if an agreement is unconscionable Example of an unconscionable contract is where one party is illiterate and the other party takes advantage of this to reach an agreement (See Jones v. Jenkins, 2011 ONSC 1426)

Unconscionability (cont’d) Emond Montgomery Publications Unconscionability (cont’d) UNCONSCIONABLE LEGISLATION Legislation to protect people from unconscionable contracts Two types of unconscionable transaction legislation in Canada Unconscionable Loan Transaction Legislation Example: Unconscionable Transaction Relief Act Unfair Practices Legislation Example: Consumer Protection Act

Emond Montgomery Publications Mistake OVERVIEW Sometimes, if the parties are mistaken over something fundamental to the contract the courts will hold that the contract is void or voidable or subject to rescission or rectification The courts will not intervene for all mistakes Mistakes based on stupidity will not be rectified by the courts

Mistake (cont’d) PRINCIPLES OF THE LAW OF MISTAKE Emond Montgomery Publications Mistake (cont’d) PRINCIPLES OF THE LAW OF MISTAKE The courts have applied the following principles to determine the relief that will be applied in situations of a mistake: What was offered was an error  no meeting of the minds The mistake is fundamental to the contract  contract may be void or voidable or subject to rescission or rectification Mistake in motive or intention  irrelevant

Mistake (cont’d) PRINCIPLES OF THE LAW OF MISTAKE (CONT’D) Emond Montgomery Publications Mistake (cont’d) PRINCIPLES OF THE LAW OF MISTAKE (CONT’D) One party is mistaken and the other party knows but says nothing  contract may be void or void or subject to rescission or rectification Both parties are mistaken  contract may be void or voidable or subject to rescission or rectification The mistake is due to one party’s carelessness  the careless party has to live with the consequences

Treatment of Mistakes at Equity and Common Law Emond Montgomery Publications Treatment of Mistakes at Equity and Common Law Canada has moved more toward the equity approach More focus on fairness, less on the enforceability of the contract TYPES OF MISTAKES Canadian law recognizes the following types of mistakes: Mistakes of Law Mistakes of Fact Mistakes of the identity of the subject matter Mistakes as to the existence of the subject matter Mistake as to the identity of the party Mistake as to the nature of the contract (non es factum)

Treatment of Mistakes at Equity and Common law (cont’d) Emond Montgomery Publications Treatment of Mistakes at Equity and Common law (cont’d) THE MISTAKEN PARTY Who makes the mistakes can impact the consequence. The law recognizes the three such categories of mistakes Unilateral Mistake Mutual Mistake Common Mistake

Treatment of Mistakes at Equity and Common Law (cont’d) Emond Montgomery Publications Treatment of Mistakes at Equity and Common Law (cont’d) Unilateral Mistake: where one party to a contract is mistake about some fundamental element of the contract If the other party is unaware of the mistake the contract is valid If the other party should have been aware of the mistake the contract is voidable If other party is aware of the mistake the contract is voidable Remedies Usually rescission or rectification

Treatment of Mistakes at Equity and Common Law (cont’d) Emond Montgomery Publications Treatment of Mistakes at Equity and Common Law (cont’d) Mutual Mistake is when both parties to a contract are mistaken but each makes a different mistake Test: Whether a reasonable person would believe that the parties agreed to the contract The subjective beliefs of the parties are irrelevant If the parties did not reach consensus, there is no contract

Treatment of Mistakes at Equity and Common Law (cont’d) Emond Montgomery Publications Treatment of Mistakes at Equity and Common Law (cont’d) Common mistake occurs where both parties are mistaken and make the same mistake. The parties have not reached consensus and there is no enforceable contract