Business law - Chapter 6: Contract law part 2 (defensive contracts)

Contractual defect

Occurs when an essential element is absent or flawed, rendering the contract incomplete or invalid

Pre-contractual representations

Statements made by one party to another before a contract is formed that are intended to be relied upon by the other party in deciding whether to enter into the deal

Misrepresentation

When pre-contractual representations turn out to be false

Recission

The unwinding of a contract

Innocent misrepresentation

When a party makes a false statement without knowing it to be untrue, and without intending to deceive the other party.

Innocent misrepresentation (con’t)

A party who innocently misrepresents the facts can be liable even though there was no intent to mislead or even carelessness on their part

Legal Test for Innocent Misrepresentation

1. A positive misrepresentation of an existing fact by the other party;

2. Made with the intention that the plaintiff should act on it;

3. The representation must have induced the plaintiff to enter into the subject agreement;

Legal Test for Innocent Misrepresentation (con’t)

4. The plaintiff must have acted promptly after learning of the misrepresentation to disaffirm the contract;

5. No innocent third parties must have acquired rights for value with respect to the contract property; and

6. It must be possible to restore the parties substantially to their pre-contract position.

Innocent Misrepresentation (con’t)

A person selling a used car honestly believes that the car has never been in an accident; however, they later discover that it was, in fact, involved in a minor accident. The seller has still committed an innocent misrepresentation even if they truly believe the car wasn’t in a crash

Negligent misrepresentation

A false statement or representation made by a party who knew the statement was untrue, and was made with the intention of inducing another party to enter into a contract or take a particular action

Legal Test for Negligent Misrepresentation

1. Is there a duty of care based on a “special relationship” between the representor and representee?

2. Is the representation in question inaccurate, untrue, or misleading?

3. did the representor act negligently in making that representation?

4. did the representee rely, in a reasonable manner, on that representation?

5. did the representee incur damages as a result of that reliance?

Negligent Misrepresentation

A real estate agent doesn’t do appropriate diligence in searching the property records and incorrectly represents to the buyer that the property is free of liens and encumbrances. The buyer moves forward with the purchase and later discovers charges or liens on the property; they could sue the real estate agent for negligently misrepresenting the clean title of the property

Fraudulent misrepresentation

When a party makes a false statement intentionally, with the intent to deceive the other party, and the misled party relies on it to their detriment

Legal Test for Fraudulent Misrepresentation

1. The defendant made a representation of fact to the plaintiff.

2. The representation was, in fact, false.

3. The defendant knew the representation was false when it was made, or made the false representation recklessly, not knowing if it was true or false.

4. The defendant intended the plaintiff to act on the representation

5. The plaintiff relied upon the false representation and thereby suffered a detriment.

Fraudulent Misrepresentation example

A company’s CEO falsely tells six high-worth individuals that the company has secured a large contract with a major corporation. Relying on his representation, the six individuals invest $1,000,000 each into the company. The six investors then discover that the contract did not exist and the company has no real prospects for generating profits.

Common mistake

A situation where both parties to a contract make the same fundamental error or share a mistaken assumption regarding a material aspect of the contract

Common mistake (con’t)

This mistake must relate to a basic assumption upon which the contract was made, and it must be a mistake that would have a significant impact on the obligations and performance of the contract.

Common mistake example

A buyer’s interested in a painting and goes to a seller to buy it. Both parties think it’s authentic and settle on a $100 price. Afterwards, they learn it’s fake, and because the buyer and the seller were unaware of this fact at the time of entering into the contract; as a result of this common mistake, the contract would be void

Mutual mistake

When both parties to a contract make a different mistake about a fundamental aspect of the contract.

e.g. 2 parties enter into a contract for the sale of a painting. The parties later discovered that they were each mistaken about the transaction: one party believed the painting was from painter “Artist A” and the other believed it was from “Artist B”. The contract would be void as a result

Unilateral mistake

When only one party to a contract makes a mistake about a fundamental aspect of the contract

e.g. A seller agrees to sell a painting to a buyer for $1,000, believing that the painting is a copy of an original work by a famous artist. The buyer, however, knows that the painting is the original work and is worth $1,000,000

Mistaken identity

When one party to the contract is under the mistaken belief that they are entering into a contract with a different person

Legal Test for Unilateral Mistake

1. A thinks they have agreed with C because they believe B, with whom they are negotiating, is C;

2. B is aware that A did not intend to make any agreement with them; and

3. A has established that the identity of C was a matter of crucial importance.

Non est factum (This is not my deed)

A legal defence that is used in cases where an individual who has entered into a contract claims that they did not understand the terms or nature of the agreement at the time that it was signed and thus shouldn’t be held accountable for it.

Legal Test for Non Est Factum

1. The person invoking non est factum must show that the document signed is fundamentally different from what the person believed they were signing; and

2. The court must examine whether the signer was careless in failing to take reasonable precautions in the execution of the document.

Unconscionability

A contract or contract term is so one-sided or oppressive that it is considered commercially, morally, or ethically wrong,

e.g. A car dealership that offers someone a loan to buy a car, but the interest rate is 70%, and if the buyer misses a payment, the dealership can repossess the car immediately without any notice or chance to cure the default

Legal test for unconscionability

1. There must be an inequality of bargaining power between the contracting parties (e.g. if a consumer is dealing with a large corporation that has extensive legal resources)

2. The contract must be an “improvident” (unfair) bargain.