A contract that seems to meet all requirements mentioned in the last chapter may still be unenforceable if there was not genuine agreement or some other defense to contract formation. We sometimes analyze contract formation by asking if the minds really met as to the terms of the agreement. If one party was mistaken or coerced, there would be no true meeting of the minds and courts may refuse to enforce the terms of the contract. In this chapter, we'll review various reasons why a contract may not be valid.
The law recognizes that there should be a way to void a contract when there is such a fatal defect. If one of the parties did not give true consent when entering the contract, that party should have the ability to rescind the contract.
As such, courts will typically find that the contract is voidable at the election of that party. However, the party must prove that it lacked consent. We will focus on the following situations: mistake, duress, misrepresentation, undue influence, and adhesion contracts.
Because we are all imperfect, we make mistakes. The law recognizes this and in certain circumstances, allows contracts to be rescinded because of some material (serious) mistake that one or both parties made. However, to fully analyze the issue, we have to distinguish between mistakes of fact and mistakes of value.
Only mistakes of fact may allow the contract to be canceled or avoided. As a result, it's important to figure out whether the mistake is one of fact or value. Let's say you buy an old violin from a garage sale. Both you and the seller can see that it is old. You buy it for $25 and later find out that because of its age, it's actually worth $2,000. As you might imagine, the seller feels that this mistake is severe and wants the violin back. However, this was a mistake of value rather than fact. Therefore, the seller cannot unwind the contract.
However, suppose that unbeknownst to either party, the violin was once owned by Niccolò Paganini. Now the mistake is one of fact (as to former ownership) rather than value. As a result, the contract may be rescinded by either party. You may be confused because the mistake of fact is to blame for the underlying value of the violin. While true, the mistaken fact is what created the value discrepancy, therefore the contract can still be avoided.
But what happens if only one party is mistaken as to a material fact? In such cases, the contract is still enforceable unless 1) the other party knew or should have known that the mistake was made, or 2) the mistake was due to substantial mathematical error that was inadvertent. A common example involves one party typing the wrong number when making an offer. If I offer to sell you my new Tesla Model S for $8,000 rather than $80,000 (which is the fair market value), you can see that courts would be unlikely to enforce the agreement even though you give your acceptance to my offer in great haste. You probably knew that I made a mistake when typing, hence your eagerness to accept my offer.
This diagram will assist with your understanding:
A contract is voidable if one party has been induced and injured by the misrepresentation of a material fact by the other party. This is true whether the misrepresentation was intentional or not. If the misrepresentation was not intentional, either negligent or innocent, the other party may elect to rescind or void the contract. On the other hand, if the misrepresentation was intentional (known as fraudulent misrepresentation), the victim may be entitled to additional damages beyond ability to rescind/void the contract.
Although fraud is a tort, it can also negate a party's consent to a contract because there was no meeting of the minds. As a result, the innocent party can usually rescind the contract if fraud is involved. As applied to misrepresentations, fraud refers only to misrepresentations that are consciously false and intended to mislead another. The person making the fraudulent misrepresentation knows that the assertion is false or knows that he or she does not have a basis for the assertion. The elements for this include:
- A misrepresentation of a material fact,
- Intent to deceive, and
- The innocent party justifiably relied on the misrepresentation.
To prove the first element, a party must prove that misrepresentation of a material fact occurred. This misrepresentation can occur through both words or actions. An example of fraudulent actions may include such examples as painting over rotted wood on a deck or concealing the fact that a home is famous for being haunted (this was an actual case, by the way). An opinion, however, is not a statement of fact and therefore cannot constitute misrepresentation. Claiming that your hot dogs are the "world's greatest," is known as sales puffery and a reasonable person would know that this is not an actual objective claim.
The second element requires an intent to deceive (notice that this is an intentional tort). This means that the party knew that the statement was incorrect or was made recklessly by not exercising reasonable care in uncovering or disclosing the facts.
The final element requires that the victim justifiably relied on the misrepresentation. In other words, the victim must be reasonable when relying on the misrepresentation. Thus, if you have indications that the victim should have had reservations about the claims made by the other party, you may not have a true case of fraudulent misrepresentation. For example, suppose you arrive at a car dealership and the salesperson tells you that all the cars there are brand new despite all of the vehicles showing signs of age. You pick out a car believing it to be new, but in fact it's actually 6 years old. The documents you sign verify that the car is not new and you simply didn't read the purchase contract. As a result, you will not have a claim for fraudulent misrepresentation because your reliance was not justified, or in other words, it wasn't reasonable for you to believe that the car was new.
On the other hand, if the dealership takes steps to conceal the true age of the vehicle, then you can see that it looks more like fraud and you would likely be able to rescind the contract and seek damages.
Our sense of fairness will permit a party to rescind a contract that was not voluntarily entered. This lack of free will may take the form of undue influence. Undue influence may occur when one person overpowers the will of another by use of moral, social, or domestic force as contrasted with physical force.
Keep in mind that all contracts have some form of persuasion and perhaps even serious pressure. It is only when the pressure reaches a point of unfairness that courts will allow one party to rescind the agreement. When dealing with undue influence, we usually find one party is in a position of trust. This relationship could be a family member or close confidant such as an accountant or attorney. In these cases, the professional or family member influences the other party to enter a contract that unfairly benefits the professional or family member. These cases tend to involve the elderly or infirm.
Forcing someone to do something against their will is an example of duress. Individuals lose free will due to threats to his/her person, family, or property. As you might imagine, contracts entered into with a gun to your head are not enforceable. This is because contracts entered into as a result of physical duress are voidable.
More common is the possibility that you are coerced to enter into a contract as a result of some threat other than physical injury or death. Similar to extortion or blackmail, duress involves threats of reprisal should the threatened party not enter the agreement. The threatened act must be wrongful or illegal and renders the threatened person incapable of exercising free will.
Adhesion Contracts and Unconscionability
Until recently, contracts that were extremely unfair were still upheld as valid because the courts assumed that the parties negotiated the terms of the contract as equals. Modern courts, however, recognize that this is not always the case. In some circumstances, one party has a great deal of influence over the other, having substantially more bargaining power. In such circumstances and where there has been no negotiation, the court may question whether it should enforce the contract.
If a party can show that it was subject to such a contract (known as an adhesion contract), it may be allowed to void the contract by also showing the terms are unfair or oppressive (known as an unconscionable contract). In practice, proving unconscionability can be difficult because it is a subjective standard and has been applied inconsistently.