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

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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)

16. 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

17. 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

18. 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

19. 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