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All about vitiating factors in a contract

June 27, 2024

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This article has been written by Paras Gupta. This article provides a comprehensive understanding of the vitiating factors in a contract, their types, essential elements, legal effects and remedies along with the relevant legal provisions ascertaining the same. For the proper understanding of vitiating factors, some relevant important case laws have also been provided in this article so as to give a clear picture of their applications.

Table of Contents

Introduction

A contract is an agreement that creates mutual obligations between the parties and is enforceable by law. Contract law in the present time plays a crucial role. From laying down the building blocks for the starting of a business to the building of a relationship and completion of business transactions, contract law has a major role to play in almost all fields. However, while entering into a contract, it becomes pertinent for the contracting parties to make themselves aware of the vitiating factors so as to prevent themselves from entering into complexities of legal process in future.

The American Contract Law by Uniform Commercial Code and Restatement Second of Contracts lays down a comprehensive legal web for the contracting parties who generally take advantage of the vulnerability of the opposite parties. In order to make such contracts unenforceable and to protect the rights of the innocent parties, the American Contract Law explains the conditions under which the innocent party will be able to recover the property or money given under the contract to the other party. However, before going into the complexities of each vitiating factor, it is essential to understand what does contract vitiating factors mean and what are their effects on the contract in general.

What are vitiating factors in a contract

The factors that invalidate or cripple the contract they are concerned with are called contract vitiating factors. The orthodox account of vitiating factors especially in the contract law represents an appealingly plain “lack of consent out, consent in” picture that lacks transparency, lacks fit with the law it seeks to explain and takes a disrespectful and unrealistic view of the complainant’s rationality.

The contract vitiating factors under American Law are the factors that affect the validity of the contract, the factors which spoil the contract and render it imperfect. These are the circumstances that interfere with the enforceability of the contract and have negative effect on contracts. The effect of vitiating factors on a contract is that they make the contract either void or voidable, depending on what vitiating factors are used by the other party in order to induce a party to enter into the contract.

Under American contract law, misrepresentation, mistake, illegality, duress, undue influence, unconscionability, fraud and lack of capacity of one of the contracting parties act as vitiating factors for a contract.

Let us discuss all these factors in detail.

Misrepresentation

A misrepresentation is an untrue statement of fact made by one party so as to induce the other party to enter into the contract. It is a misleading or a false statement that is made solely with the intent to deceive. A misrepresentation is a material omission that makes the party to whom it is made to enter into a contract.

A misrepresentation through the act of making a false statement can take many forms such as innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation.

Types of misrepresentation

Innocent misrepresentation

An innocent misrepresentation is when the defendant is unaware that his statement was untrue at the time of signing the contract. Under this type of misrepresentation, the defendant or the party who made the statement can prove that he had reasonable grounds to believe and had in fact believed that, up to the time of the contract, the facts represented by him were true.

Negligent misrepresentation

A negligent misrepresentation happens when a statement is false and the defendant did not attempt to verify the statement as either false or true before putting forth the contract.

Fraudulent misrepresentation

This is the most ‘blatant’ type of misrepresentation that the defendant knowingly makes for the sole purpose of misleading the plaintiff.

Essential elements of misrepresentation

To prove one’s case for vitiating the contract for misrepresentation, one has to prove the following elements:

Untrue statement

There must be an assertion or a statement that is misleading or untrue. The statement must be a false statement of truth that should affect the party’s decision, making the party enter into the contract.

The statement must be a statement of fact

The statement made to the claimant must be a statement of fact. It must not be a mere opinion as statements of reasons, beliefs or opinion are not generally considered under misrepresentation. The statement of mere opinion though may be considered under misrepresentation if there is a context of reliance or trust between the person alleged to make the misrepresentation and the recipient and the statement is objectively false.

The statement must have induced the party to enter into the contract

The essential condition that needs to be proved by the claimant party is that it was the false statement made to it only which induced it to enter into the contract. If the party has entered into the contract taking into consideration other factors but not the statement made by the other party, the claim for misrepresentation will not succeed.

Legal effects of misrepresentation

Where a person has entered into a contract after a misrepresentation has been made to him by another party and he has suffered a loss in consequence thereof, the party making the misrepresentation shall be liable to pay damages to the injured party had the misrepresentation be made fraudulently by the party.

The party making the misrepresentation shall still be liable to pay damages had the misrepresentation not been made fraudulently by him. The party making the misrepresentation can escape his liability only when he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented by it were true.

Remedies for misrepresentation

The effect of misrepresentation is that it makes the contract voidable rather than void so that the contract continues to exist unless and until the innocent party chooses to set the contract aside by way of recession. The party can opt for the following remedies in case of misrepresentation:

Recession

It is an equitable remedy that sets the contract aside and puts the parties back to the position that they were in at the time of entering into the contract. This remedy is available for all types of misrepresentation. An injured party who decides to rescind the contract can do so by notifying the defaulting party and if it is not possible, by taking some reasonable action to indicate the intention to rescind.

The injured party can also apply to the court for a formal order of rescission which will provide that any property exchanged under the contract will be reverted back to its former owner.

Bars to rescission

There are some circumstances in which it is impossible or unreasonable to put the contracting parties back to their former position. In the following cases, the injured party may lose the right to rescission:

Impossibility to return to former position

Rescission will be ordered by the court only when it is possible for the parties to return to their original pre-contractual position. The most practical reason as to why the parties cannot be restored to their former position is that the subject matter of the contract has been destroyed or used up.

It might be possible that a substantial recession is possible if most of the subject matter of the contract can be restored. If this is the situation, then the court may order substantial recession along with the financial compensation to make good the partial loss of the value. However, this is not the case under English law as held in De Molestina v Ponton (2002). The High Court in this case held that it is not possible under English law to rescind a part of a contract or an agreement as a contract cannot be partially agreed to and the other part disregarded. Only a complete and whole contract can be rescinded and not just certain elements even if the contract has been entered into upon misrepresentation by one party.

Third party rights

A recession cannot be ordered by a court where a third party has acquired rights under the contract as, if rescinded, it will be unjust for the innocent purchaser or innocent party.

Affirmation

If an innocent party, once aware of the misrepresentation, does something that suggests its intention to continue the contract or states that it intends to continue with the contract, the party will be considered to have affirmed the contract and it will not be allowed to rescind.

Indemnity payment

It is pertinent to note here that this payment is not damages. The court can order a payment known as indemnity that will put the parties back to their former position and will only be available for obligations inevitably and necessarily created by the contract.

Damages

In some cases, it may happen that an innocent party on account of misrepresentation of the other party has suffered a loss that cannot be put right by recession, even if an indemnity payment is ordered. In such a case, the relief of damages comes into play. Where a party to a contract is induced to enter into the contract by misrepresentation, it has the right to damages for any loss, the amount of which will be at judge’s discretion.

The calculation of the damages is done using the tort measure rather than the contract measure. The difference between the tort and contract measure lies in the fact that the tort measure aims to put the claimant back in the position as was held by it before the false statement was made for the contract, making good any losses that are caused by the misrepresentation whereas the contract measure is designed to put the claimant back in the position which they would have held if the contract had been performed as agreed. Hence, the aim of providing the remedy of damages here is to put the party back in the position as would have been held by it before it had entered into the contract under the pretext of misrepresentation committed by the opposite party.

Mistake

A mistake is either a misconception or error in general. In the legal world, this definition applies to a great extent but the circumstances surrounding it and the type of mistake decides what implications the mistake will have. A mistake may arise as to the nature of transaction, subject matter or terms of the contract and identity of the other party. It is an erroneous belief held by either one or both parties to a contract at the time of its formation.

In contract law, a mistake does not mean a misunderstanding that arises due to an ambiguity in the terms where two interpretations are reasonable but it is based on having an incorrect belief about a basic assumption that the contract is based on rather than just being about a term that have multiple meanings or that could be interpreted in multiple ways. A mistake in contract law generally refers to a situation where the parties did not mean the same thing when they have agreed to a provision or a term at the time of the formation of a contract.

A Mistake can be either of fact or of law.

Mistake of fact

A mistake of fact is a mistake about an essential material factual element or a mistaken belief other than a mistake of law. A mistake of fact may be a ground for modifying or rescinding a contract. A party to the contract that interprets a term in one way and has reason to believe that the other party has interpreted the term differently should bring the issue to light before the closing of the contract failing which the court will construe the meaning of the term against the party which had knowledge of the possible erroneous interpretation.

Mistake of law

A mistake of law (also known as an error of law or an error in law) is a mistake about the legal effect of a factual situation. Under a mistake of law, a contract is made by the parties in ignorance of the law. For the ‘mistake of law’, a contract can also be rescinded.

General principles in mistake

There are several general principles regarding mistakes that apply to unilateral, common and mutual mistakes. These are as following:

Objective principle

While deciding whether there has been a mistake sufficient enough to make a contract void, the courts will look at the facts objectively as they do not ask what the parties themselves believed while they were agreeing to but what an onlooker would have thought as they were agreeing to.

The mistake must precede the contract

The mistake in order to make the contract void must precede the contract. If the mistake is made after the completion of the contract or after entering into the contract, then there will exist no operative mistake and hence the contract will not be void under mistake.

The mistake must induce the contract

The validity of a contract will not be affected if the affected party thought at the time of the formation of the contract that there is a possibility that it may be mistaken but still took the risk or was indifferent about that particular matter. The mistake will only affect the contract or will negate the consent if it induces the mistaken party to enter into the contract. Where there exists any doubt in the mind of the party that it may be mistaken, and the party voluntarily consents to enter into the contract, it will not affect the contract.

Unilateral mistake

Unilateral mistake addresses misunderstandings between the parties that relates to the identity of parties to the contract or the terms of contract. In a unilateral mistake, only one party is mistaken while the other party knows about it and takes advantage of the error(intentionally or unintentionally).

A unilateral mistake is the mistaken belief that is held by only one of the parties and is not shared by the other party to the contract. A unilateral mistake occurs when only one of the parties misinterprets the meaning of the terms or the subject matter. The cases of unilateral mistake often involve a ‘rogue’ who represents himself as someone else and deceives the other party into entering into a contract with him.

A unilateral mistake is much more common than any other type of mistake such as common mistake or mutual mistake. Since only one party holds a mistaken belief, this could give the other party an unfair advantage in the bargaining power that they hold during the contract formation stage. If a contract is entered based on a unilateral mistake, it could result in a lawsuit that provides the mistaken party with several remedies such as contract reformation and contract recession.

Most unilateral mistakes in a contract involve the parties wrongly assuming the meaning of a word or a phrase in a contract. For example, in a contract for a sale of screws, one party may incorrectly believe that the word “screw” refers to a specific brand of screws such as Fastener Expert. The term can actually mean any standard type of screw. If one party to the contract holds this mistaken belief, while the other is clear on the meaning of the “screw”, it could result in a unilateral mistake.

Essential elements for unilateral mistake

§ 153 of the Restatement Second of Contracts provides that the following elements must be present in order to make a contract voidable for unilateral mistake:

Material mistake

For making the contract voidable under unilateral mistake, one must prove that the mistake must concern one or more basic assumptions to which the contract was made which has material effect on the agreed exchange of performances

Party should be adversely affected

To make the contract voidable under unilateral mistake, it is essential that a party must be adversely affected by the mistake, for there arises no action under US contract law if the mistake committed does not affect the party adversely.

Enforcement of contract would be unconscionable

For making the contract voidable for unilateral mistake, it is essential that the effect of the mistake must be such that the enforcement of the contract would become unconscionable.

Party does not bear the risk of mistake

For taking relief under unilateral mistake, it is essential that the party adversely affected must not bear the risk of the mistake as provided under § 154 of the Restatement Second of Contracts

Awareness of the other party

For the contract to be voidable for unilateral mistake, it is necessary that the fault of the other party caused the mistake or the other party had no reason to know the mistake.

Legal effects of unilateral mistake

If a unilateral mistake is made during the contracting process, it would be unjust if only one party understood the true meaning implied by the contract. Hence, the court will generally provide the affected party one of the following remedies in order to correct the unilateral mistake:

Recession of contract

Recession of contract means cancellation of the contract. The purpose of this remedy is to restore the parties to the position that they were in before the contract was made. The recession of a contract due to unilateral mistake generally applies when an unfair position in the bargaining power is present or when there is a technical error in the contract.

Though §503 of the Restatement of Contracts provides that a mistake of only one party does not itself render the transaction voidable. However, the recession of contract is available for unilateral mistake only if the mistake was recognizable by the other party and the mistake was concerning a fact that was too vital that the mistake, had it been mutual, would have made the contract voidable.

Reformation of contract

Contract reformation means the reformation of the contract or amending the contract so as to reflect the parties’ original intention or understanding of the terms of the contract. Reformation is generally reserved for mutual mistake, but is granted in the case of unilateral mistake when one party is mistaken and the non-mistaken party is unaware of the other party being mistaken.

Mutual mistake

§152 of the Restatement Second of Contracts provides the condition when the mistake of both the parties makes a contract voidable. It states that where a mistake, that was made by both the parties at the time when the contract was made, has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party. It further provides that in determining whether the mistake has a material effect on the agreed exchange of performances or not, the account should be taken of any relief by way of restitution, reformation or otherwise.

Essential elements of mutual mistake

According to §152 of the Restatement Second of Contracts, the following are the essential elements for proving that the contract is voidable under mutual mistake:

Material mistake

For making the contract voidable under mutual mistake, one must prove that the mistake must concern one or more basic assumptions to which the contract was made

Party should be adversely affected

To make the contract voidable under mutual mistake, it is essential that a party must be adversely affected by the mistake, for there arise no action under US contract law if the mistake committed does not affect the party adversely.

Mistake must be mutual

This means that both the parties had the same mistaken belief. The belief, if not the same, must relate to the same fact in order to make the mistake come under mutual mistake.

Party does not bear the risk of mistake

For taking relief under mutual mistake, it is essential that the party adversely affected must not bear the risk of the mistake as provided under §154 of the Restatement Second of Contracts

Mutual mistake as a ground for recession

§502 of the Restatement of Contracts provides that if both the parties are mistaken about a fact that vitally affects the basis upon which the contract was made, it will become a ground for recession. §503 further provides that although the mistakes need not be the same, they must relate to the same matter so as to make the contract voidable.

Under mutual mistake, however, the contract will be voidable by either party to the contract.

Common mistake

Common mistake arises when the parties are in agreement but that agreement assumes some fact to be true when it is not. It is also known as an identical or shared mistake.

A common mistake will render the contract voidable only if it amounts to a fundamental mistake. A mistake will be fundamental only if it renders the performance of the contract radically and essentially different from what the parties had supposed it to be.

There are two specific situations where the contract will find a fundamental mistake i.e. where the parties have made a mistake about the existence of a subject matter and where a party has made a mistake as to title. In exceptional circumstances, a mistake as to the quality may also be sufficient.

Common mistake as to the existence of subject matter of the contract (Res Extincta)

This type of mistake usually concerns the goods to be sold. The contracts in Res Extincta are void as there is nothing to contract about. However, it is not always the case that the non-existence of the subject matter will render a contract void, as it is usually possible through some construction techniques to find some alternative contractual subject matter either in one party’s promise that the subject matter of the sale exists or by construing the contract as one to provide financial support on the breakdown of a relationship in cases like Galloway v Galloway (1967).

Common mistake as to the ownership of the subject matter of the contract (Res Sua)

Under this type of common mistake, two parties contract for the purchase of some kind of property but unknown to the fundamental fact that the purchaser of the property already owns the property. Here the purchaser of an interest in property already owns an interest in it greater than or equal to what is being sold.

Res Sua, like Res Extincta is a case, where though the sell of a contract is apparent on the face of the contract but on examination it turns out that there is no content to sell.

Common mistake as to the attributes or quality of the subject matter of the contract

At common law, a common mistake as to the quality of the subject matter generally does not vitiate the contract and the contract remains enforceable and valid. However, Lord Atkin and Lord Thankerton have provided conditions under which a common mistake as to the quality of the subject matter of the contract can lead to the contract being declared void and non-enforceable.

According to Lord Atkin, the common law will hold a contract to be void for mistake as to the quality or attribute of the subject matter to the contract only when it is the mistake of both the parties and the mistake be such that is to the existence of the quality that it makes the thing without quality materially different from the thing as it was believed to be. Treital further explaining the words of Lord Atkin said that the mistake nullifies the consent where the parties have reached to an agreement and negates the consent where it prevents the parties from reaching an agreement but the mistake should be based on a fundamental mistaken assumption.

Lord Thankerton further clarified the concept of common mistake and said that the common mistake must relate to the essential element of the subject matter of the contract which both parties must necessarily accept in their minds.

Abolition of common mistake in equity

The English Court of Appeal in Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd. (2002) held that there is no longer any doctrine of common mistake in equity. The court pronounced this decision holding Solle v. Butcher (1950) inconsistent with the House of Lords decision in Bell v. Lever Brothers Limited (1932).

Facts of the case

The case relates to a ship ‘Cape Providence’ which was sailing from Brazil to China with a cargo of iron. In the South Indian Ocean, the ship suffered serious structural damage due to which, fearing the safety of the crew, the defendants sought another ship ‘The Great Peace’ to assist which was the ship of the claimants. Both contracting parties were under the wrong belief that the ships are only 35 miles away from each other while in reality they were 410 miles apart. Negotiations between the claimants and the defendants resulted in the hire contract under which the claimant’s ship is to stand by and escort the Cape Providence for a minimum of five days for the purpose of saving life. When it was discovered that the vessels were 410 miles and not 35 miles apart, the defendants canceled the contract and found an alternative ship and refused to pay the claimants for the hire of the Great Peace.

As a result of the above, the claimants brought an action against the defendants claiming $82,500, for the five days’ hire and as a damage for wrongful repudiation. The defendants argued that the contract had been entered into because of a fundamental mistake as it was erroneously believed that the two ships were near to each other. The mistake either rendered the contract void at common law or voidable in equity.

Issues of the case

Whether the contract is valid or void at common law or voidable in equity?

Whether the mistake as to the distance apart of the two vessels meant that the services which Great Peace was in a position to provide were essentially different from those to which the parties had agreed?

Judgment

The trial judge ruling in favor of the claimants awarded them the sum claimed. The Court of Appeal also held in favor of the claimants and rejected the appeal. In regard to the second issue at hand, the Court of Appeal held that the performance of the contract was still possible at that time though the Great Peace was at some distance from Cape Providence as the Great Peace could have still arrived in time to provide several days of escort service to Cape Providence. Thus, it was held that the mistake was not sufficiently fundamental to satisfy the doctrine of common mistake in common law. Most importantly, it was held that there is no separate doctrine of common mistake in equity which could soften the tough stance taken by the common law. Thus, the contract that was entered between the claimants and the defendants was valid and the defendants were required to pay the money due under it.

Legal effects of common mistake

If the mistake is due to the fault of one of the parties to the contract, the contract will not be void for common mistake. In addition, if the contract allocates the risk of the mistake occurring to one of the parties, then the doctrine of common mistake will also not apply. A common mistake will make a contract void only if the contract is silent on a point fundamental to the mistake.

When a party bears the risk of a mistake

§ 154 of the Restatement Second of Contracts provides the circumstances when party bears the risk of a mistake which are as follows:

Risk allocated by the agreement

Where the risk is allocated to the party by the agreement itself that is made between the parties, that party bears the risk of a mistake

Party treats its limited knowledge as sufficient

Where a party to the contract is aware at the time when the contract was made that he only has limited knowledge as to the facts to which the mistake is related and still agrees to treat his limited knowledge as sufficient, then that party bears the risk of a mistake.

Risk allocated by the court

Where the risk is allocated to the party by the court on the ground that it is reasonable in the circumstances to do so, that party bears the risk of a mistake.

Illegality

As a general rule, the American courts will not enforce an illegal contract or provide for any other remedies that arise out of it. However, the courts will distinguish between those contracts that are illegal through their performance and those contracts that are illegal at the time of their formation so as to determine the consequences of illegal acts carried out pursuant to a contract.

Contracts illegal at the time of formation

A contract may be illegal when entered into as it cannot be performed in accordance with its terms without the commission of an illegal act. In this case, the contract is unenforceable by either party as it will be void and treated as if it was never entered into. When a contract is illegal at the time of its formation, neither party to it acquires any right under that contract, regardless of whether they have an intention to break the law or not.

As such types of contracts remain unenforceable, the money or property handed over under such an illegal contract cannot be recovered under general rule. However, there exist two following main exceptions to this general principle under which the party can recover its property:

If a party relied on some other cause of action which does not involve an illegal contract, such as by relying on an independent tort, it will be able to recover the property.
If one party to the contract is more at fault than the other one i.e. they are not in pari delicto, the courts will see a less guilty party as victim of the transaction and will allow it to recover the property transferred to the more guilty party.

Contracts illegal as performed

In some cases, it may happen that a contract may be perfectly legal when it is made but may be performed in a manner that is illegal. In such a case, the contract will become void and unenforceable. It is, however, customary to distinguish between the situation when the illegality as to the performance of the contract was known to both the parties and where it was known to only one of them.

Where both parties are aware of illegal performance

Where both parties are aware that the performance of the contract is illegal, the consequences will be the same as for a contract that is illegal at the time of its formation.

Where one party is aware of illegal performance

Where only one party is aware of the illegal performance and the other party is unaware of the same, the innocent party can enforce the contract. In such a case, all the usual contractual remedies are at the disposal of the innocent party as to whether it wants to refuse to continue with it or repudiate the contract as soon as it comes to know of the illegality.

Where one party is completely innocent, the guilty party in such a case cannot sue on the contract to recover any property handed over or for damages unless this can be done without relying on the illegal contract.

Contracts that amount to illegal contracts

Generally the following contracts fall under illegal contracts:

Contracts in restraint of trade

These contracts are generally seen in practice. Restraint of trade concerns contracts which limit an individual’s right to trade freely or to use his or her skills for payment. Such contracts fall into the following groups:

Contracts between businesses by which output or prices are regulated.
Contracts in which an employee agrees that on leaving a company, he will not be employed or set up a business to compete with that employer. This is common in businesses where reputation attracts custom or where personal skills are involved such as advertising or hairdressing.
Contracts where a person agrees to restrict their mode of trade such as accepting orders from a particular company such as a solus agreement.
Contracts for sale of a business where the vendor promises not to compete with the purchaser

Though the contracts mentioned above are not illegal, their illegality depends on the restrictions imposed to prevent competition. The restrictions imposed in such contracts must be reasonable. In considering reasonableness, the court must be satisfied that the period of time and the area it covers and the scope of restraint must be balanced against each other and the court must be satisfied that the agreement is not wider than is necessary to protect those interests.

Contracts in breach of legislation

Where the contract entered into is in breach of the legislations in force in America such as contracts in breach of competition law or contracts in breach of gambling act, such contracts amount to illegal contracts and hence are void and unenforceable.

Contracts against public policy

There are wide range of contracts that are considered illegal under this sub-head such as contracts promoting sexual immorality, contracts prejudicial to the status of marriage, contracts prejudicial to public safety, contracts prejudicial to the administration of justice, contracts to oust the jurisdiction of the courts and the contracts tending to encourage the corruption in public life. Where the parties enter into any of the mentioned contracts, the contracts are held as against public policy and are void and unenforceable.

Legal effect of illegality

The illegality of a contract makes it void and unenforceable. However, depending upon the circumstances, one or more of the parties may enforce the contract on occasions where only part of the contract will be unenforceable. The following categories can be taken into consideration in order to understand the circumstances under which the effect of illegality will be different under different circumstances:

Collateral contracts

A collateral contract is one for which the consideration is that the parties to the contract will enter into another contract. A collateral contract is a contract that depends upon the main contract for its existence. While making a collateral contract it is essential that the party making the representation or promise intended it to be legally binding and the person to whom the representation or promise was made entered into the main contract in reliance of that representation or promise which is a binding term of a collateral contract.

So, where there is one illegal contract and there is a collateral contract that allows for recovery of all or part of a contract, it may be enforceable but only if the collateral contract provides for a remedy that is equal to enforcing the illegal contract.

Severable illegal contracts

If the contract entered into is an illegal contract, the courts have the power to enforce the legal part of the contract if it can be severed from the illegal one. To make it more clear, there comes ‘blue-pencil test’ into consideration which can be divided into three steps:

Under the first one, it is seen whether the illegal provision can be separated from the legal one without modifying the words of the remaining terms. It is pertinent to note here that when we are talking of the severance of the illegal part without the modification of the remaining terms, the remaining terms must be verbally and grammatically separated. If the remaining terms make sense after the severance of the illegal part, then the illegal provision can be removed.

Under the second step, it is seen that the remaining terms separated from the illegal part must be supported by a consideration as a consideration is an essential element of a valid contract.

Under the third step, it is seen that the contract must continue to be the same sort of contract that was entered into by the contracting parties before the severance of the illegal part. A contract cannot be changed to the extent that it changes the character of the contract.

If the severability stands strong on the above mentioned three steps, then the illegal part of the contract can be severed from the legal one, and the legal severable contract will then be valid and enforceable.

Remedies for illegality

The affected party may opt for recovery of the property or money subject to the following circumstances:

Where one party unfairly induced the other one to enter into a contract:

Where both the parties have entered into an illegal contract but one party to the contract has been unfairly induced to enter into a contract as a result of undue influence or duress, the contract will remain void and unenforceable but the party that has been so induced can successfully recover the property or money that have been passed subject to the contract.

Where one party withdraws from the contract:

Under this part, there can come two conditions i.e. where a party withdraws from the contract after the illegal part of a contract comes into effect and where a party withdraws from a contract before the illegal part of a contract comes into effect.

In the former, the contract will be void and unenforceable whereas in the latter the doctrine of locus poenitentiae comes into effect. The result of this doctrine coming into effect is that it enables the party who withdrew to retrieve any property or money passed subject to the contract.

Where both parties are guilty:

Where both the parties are guilty in relation to the illegal act, there can be no recovery of any kind of property or money.

Duress

Duress refers to a situation where one person engages himself in coercive behavior or makes unlawful threats that causes another person to commit acts that he would not have otherwise committed. Duress exists where illegitimate pressure is exerted on a contracting party that induces that party to enter into a contract.

Types of duress

Physical duress

Physical duress can be induced either on goods or a person. Physical duress on a person occurs when he is forced to enter into a contract on threat of bodily harm.

Comment (a) to Section 174 of the Restatement Second of Contracts provides that ‘the essence of this type of duress is that a party is compelled by physical force to do an act which it has no intention to do. The contract entered into under such duress is no contract at all and hence, is a ‘void contract’.

A physical duress to goods occurs when one party to the contract withholds the goods of the other party, until that other party enters into a contract with the former one. This leaves the party with no other alternative but to give in to the coercion.

The following elements must be demonstrated before the court in order to make the court set aside the contract for physical duress:

A threat to do physical harm to the person or the goods was made by the other party;
The threat so caused made the party to enter into the contract.

Economic duress

Economic duress is when one party is forced to enter into a contract owing to some economic pressure. It is a very common instance in contracts formed in the present time as very few contracts are made without any economic pressure at all. To constitute economic duress, it is essential that the economic pressure must go a great deal ahead than the ordinary pressure of the market.

Economic Duress occurs when one party uses unlawful economic pressure to coerce another party to enter into a contract that they would not have otherwise agreed to enter into. When one party threatens to cancel the contract unless the other party agrees to enter into another contract, there also the economic duress can occur.

The following elements must be demonstrated before the court in order to make the court set aside the contract for economic duress:

There must be an existing contract involved between the two parties;
One party to the contract must have threatened to terminate the existing contract;
The other party agrees to enter into the new contract under the duress that the other party will refuse to abide by or will cancel the terms of an existing contract if it does not enter into the new contract.

Essential conditions for duress

Pressure was exerted on the contracting party

The first and foremost condition to prove the committal of duress on a contracting party is that a pressure must have been exerted on the innocent contracting party which amounted to the compulsion of the will. Traditionally, the doctrine of duress only extended to making of a contract voidable where it has been induced by unlawful constraint, physical violence or the threats of it. Over a period of time, it has been extended to economic duress also.

The pressure exerted was illegitimate

The pressure that is exerted on the opposite contracting party must be illegitimate. A threat to do an unlawful act will always be illegitimate. However, it is pertinent to note that a threat to do a lawful act can also be illegitimate if the threat exerted is unreasonable, which will depend on the circumstances of the case.

The pressure induced the claimant to enter into the contract

The pressure exerted must have induced the claimant to enter into the contract. If the party has entered into the contract and the reason for entering into the contract is not duress alone, then also the pressure will be treated as inducing the party to enter into the contract. In other words, the duress must be one of the reasons for entering or modifying the contract but it does not have to be the main or only reason for the party to enter into the contract.

The claimant had no real choice but to enter into the contract

The duress exerted must be such that there is compulsion of the will to the extent that the party under its influence had no choice or alternative but to comply with it and enter into the contract.

The protest by the claimant

To succeed in the claim of duress, it is essential that the claimant must have protested against the duress so induced on him at the time or shortly after the contract was made. If he doesn’t do so within a reasonable time, his claim for duress will not succeed.

Legal effect of duress

Where it is proved that duress has a role to play for a party to enter into a contract, that contract is voidable on the part of that party who has been so induced to enter into the contract.

Undue influence

The undue influence is an equitable doctrine where one party uses its influence over the other to persuade it to make a contract. The use of undue influence leads to a contract being made voidable and unenforceable by the victim party as it puts the free will of one of the parties entering into the contract in question. However, to prove undue influence, it must be shown that the party on whom it is exercised is a party with weakness which makes it more likely to be affected by such persuasion. Moreover, the party exercising such influence cannot be any person; he must be a person having a special relationship with the victim that makes him especially susceptible to such persuasion.

Types of undue influence

There are two types of undue influence:

Actual undue influence

Under this influence, the influence exercised must be of a kind similar to but falling short of duress. It arises when the claimant proves that he entered into the transaction as a result of undue influence from the other party. Though rare in practice, this type of undue influence falls short of duress as it cannot be said here that there is no practical alternative but to comply and that the pressure implied is illegitimate but it might still be considered inequitable to hold promise.

Presumed undue influence

Undue influence is presumed where there is a pre-existing relationship of confidence between two parties to the contract. As a result of this pre-existing relationship of confidence, one places trust in the other and the contract becomes manifestly disadvantageous to the party who places its trust in the other. The pre-existing relationship that exists between the parties is called fiduciary relationship and it may exist in two ways:

Firstly, it may fall into any one of the following categories in which a relationship of trust is already presumed to exist. These categories are as follows:

Solicitor and client;
Parent and child;
Trustee and beneficiary;
Guardian and ward;
Religious advisor and beneficiary; and
Doctor and Patient

Secondly, it may fall under a relationship of trust that may be established on the facts. Generally, any relationship can be regarded as that of trust if it is justified by the circumstances of the case. Contracts between cohabitants and married couples can fall within this category.

Burden of proof

As a general rule, the burden of proof lies on the party which claims any relief from the court. However, under presumed undue influence, the burden of proof shifts from claimant to the defendant. It is for the defendant to disprove the existence of undue influence. The presumption of undue influence does not mean that the undue influence exists but rather the burden of proof falls on the alleged wrongdoer to show that the transaction was not caused by undue influence. He may, however, satisfy this burden of proof and show that there did not exist any undue influence over the claimant party.

Elements of undue influence

The injured party must give the evidence of the existence of these four elements in order to prove that the undue influence has occurred:

Vulnerability of the victim

For the claim of undue influence to succeed, it is important to prove that the victim is susceptible to the manipulations of the other party. If this cannot be shown, the claimant cannot win the battle. The vulnerability of the victim, however, can be shown through his or her disability, dependency or psychological condition.

The influencer’s supposed authority

There must be some sort of pre-existing relationship between the contracting party such as doctor-patient, patterns or spouses, parent-child or employer-employee. The relationship existing between the contracting parties must show that one party to the contract trusted the other so much so as to enter into the contract despite its own hesitation or unwillingness to enter into the contract.

Tactics used by the influencer

The influencer can use a number of tactics such as controlling basic life necessities like medication, food, sleep or information so as to utilize one’s power over the other. The influencer can also use non-physical manipulatory tactics of isolation, affection, intimidation or coercion so as to influence the vulnerable party to enter into the contract.

The resulting equity

The vulnerable party to the contract must show that the results of the influence were inequitable which can be through changes in intent or economic losses.

Remedies

The remedy for undue influence is that the party which has been subjected to such an influence will have the right to make the party at fault to recuperate any money or property that has been given to it under undue influence.

Unconscionability

Unconscionable is an adjective that means unscrupulous, without a conscience or so unjust or unfair that it shocks the conscience. Unconscionability is a defense against the enforcement of a portion of a contract or of a contract itself as the contract is oppressive or unfair to one party in a way that suggests abuses during its formation. A contract is mostly likely to be found unconscionable if there is a combination of unfair contract terms and deficient bargaining. The principle of unconscionability came for the prevention of oppression and unfair surprise for the parties to the contract.

The origin of the concept of unconscionability is primarily in equity and it has been adopted in common law primarily through the merger of common law and equity and partly through the enactment of the Uniform commercial code and its § 2-302.

Types of unconscionability

Under American contract law, the unconscionability can be of following two types:

Procedural unconscionability

To determine whether a contract is procedurally unconscionable or not, the courts will examine the factors related to how the contracts came to be made. In particular, the courts will examine the following factors:

Sophistication, status and bargaining power of the parties

A reasonable starting point as to the examination of the procedural unconscionability is who the parties are, especially with regard to the experience, education and other factors related to sophistication.

Lack of education, illiteracy or inability to understand the language of a contract and the fact that the other party is impoverished or belong to the strata of poor people who are unable to understand and negotiate a contract are the factors that the courts consider while examining the procedural unconscionability.

Adhesion contracts and bargaining procedure

Bargaining procedure involves the process leading up to the contract formation. It is often a matter of fair haggling when the parties are on equal footing, with each party understanding the agreement and agreeing after adequate reflection and with due care. In the context of procedural unconscionability, it is the employment of sharp bargaining practice or performing a cunning sales pitch by one party to the contract rather than offering a form of contract to the surprised consumer.

Adhesion contracts are scrutinized by the court for procedural unconscionability as in them, the parties are of such disproportionate bargaining power that the party of weaker bargaining power could not have negotiated for variations in terms of the contract.

Language of the contract

The language of the contract plays an important role in determining if an important term has been hidden in a maze of fine print of the contract. Some agreements are designed in such a way so as to suppress the attempts to read them by using fine print and other tactics that discourage the reading of the contract. If a tough and unusual clause has been effectively hidden in the contract, there will be a good case for procedural unconscionability.

Substantive unconscionability

Under this type of unconscionability, the contract is viewed in isolation from surrounding circumstances which are generally a matter of contract that are excessively one sided. The following elements can be seen in order to examine the existence of substantive unconscionability in the contract:

Price

These cases generally involve the existence of some kind of credit arrangement, commonly with the payment in installments at a higher rate. The courts generally emphasize procedural aspects together with the price term but they have on occasion deemed the total price alone to be enough for an unconscionable decision.

Disclaimer of warranties and limitations of remedies

The disclaimer of warranties and limitations of remedies have in the past been prone to invalidation based on unconscionability. In the present also, they continue to give rise to a vast amount of litigation. § 2-316 of the uniform commercial code regulates the disclaimer of warranties thereby forbidding courts from giving operation to words that are in fine print if they limit or negate express warranties. The courts will forbid from giving operation to such words only if they unreasonably conflict with the express warranties stated in the main body of the contract.

§ 2-719 of the Uniform Commercial Code regulates the limitation of remedies. The limitation of remedies though are by implication generally permissible, but if a clause provides for a limited or an exclusive remedy or if the latter circumstances make it to fail its essential purpose, the clause will be considered as an unconscionable one and hence the contract will be refused to be enforced.

Arbitration

The arbitration clauses have lately been the most common kind in unconscionability cases and the courts in California have a major role to play in these as they are the ones who have started refusing to enforce the arbitration agreements for they were unconscionable. The rationale behind adjudicating an arbitration clause as unconscionable is that it sometimes includes lack of consent, lack of mutuality, the preclusion of class representation and the prohibitive expense of arbitration.

Legal effect of unconscionability

§ 208 of the Restatement Second of Contracts provides that where a contract or a term thereof is unconscionable at the time when the contract was made, the court may refuse to enforce the contract or may enforce the remainder of the contract without unconscionable term or may so limit the application of any unconscionable term so as to avoid any unconscionable result.

§ 2-302 of the Uniform Commercial Code also provides that if a court finds a contract or any clause of it to be unconscionable at the time when the contract was made as a matter of law, the court may refuse to enforce the contract or it may enforce the remainder of the contract without the unconscionable clause or it may so limit the application of the unconscionable clause so as to avoid any unconscionable result.

Lack of capacity

A contract entered into by a party who is not legally capable of entering into a contract such as a minor or by a party lacking mental capacity to understand the contract such as an intoxicated person is voidable at the instance of the party lacking the capacity to enter into a contract. The doctrine of contractual incapacity allows people with mental disabilities to avoid their contractual liability as the law has an obligation to protect the people with lack of mental capacity or contractual capacity both from themselves and from unscrupulous people who can take advantage of them.

The people lacking capacity to enter into the contract can be divided into the following three categories:

Minors

Minor means a person under 18 years of age. Minors lack the capacity to enter into a contract. So the contracts entered into by a minor are voidable i.e. the minor can either void the contract or can honor the deal. However, he will be liable to do so only when he attains the age of majority. In most US states, if a minor turns 18, and does nothing to void the contract, the contract can no longer be avoided by him then.

There, however, exists a few exceptions where the minor cannot void a contract such as a contract for necessities like clothing, food and lodging. For such a contract, under common rule, when the minor attains majority, the person who did all the expenses relating to the minor’s upbringing can get the same from the minor’s property, if there is any.

Disaffirmance by a minor

A minor can set aside a contract or “disaffirm” the same by stating that he does not intend to honor the contract. This intention, though, can be stated verbally or through actions that show that the minor does not intend to honor the contract.

However, it is pertinent to note here that the disaffirmation must happen before the minor comes of age and the minor can’t pick which part of the contract he wants to set aside and which he wants to keep as enforceable. Furthermore, if the minor has paid a consideration to the other party so as to enter into the contract, the other party must give the consideration back to the minor following disaffirmation.

Individuals with psychological disabilities

The contracts entered into by individuals with psychological disabilities are voidable owing to their state of mind. Different states of the US have different tests so as to determine whether a person has a mental capacity to enter into a contract or not. These tests are as follows:

The affective test

Under this test, a contract can be voided if a party to the contract is unable to act in a reasonable manner and the other party has reason to know of the mental condition of the former party.

The cognitive test

In most states of the USA, the standard for mental capacity is that whether the party to the contract understood the meaning of the contract and effects of the words comprising the contract. If the same is not understood, the contract can be declared void and vice-versa.

The motivational test

The courts of some states apply this test so as to determine the mental capacity of a party and measure the mental capacity by the person’s ability to judge whether or not to enter into the contract.

These tests, however, sometimes produce different results when applied to different mental conditions such as bipolar disorder.

Intoxicated persons

The persons who are voluntarily intoxicated are not allowed to avoid their contractual obligations but rather they have to take the responsibility for the results of their self-induced alter state of mind.

The people who are intoxicated by alcohol or drugs are usually not considered as one lacking the mental capacity to enter into the contract. However, they will be taken as one lacking mental capacity if the party under the influence of alcohol or drugs is unable to understand the consequences and nature of the agreement and the other party takes advantage of the person’s condition. In such a case, the contract may be voided by the inebriated party.

Fraud

§ 471(c) of the Restatement of Contracts provides that fraud means a non-disclosure where it is not privileged. A contract fraud happens when a party knowingly makes an intentional misrepresentation of a fact with an intent that the other person will rely on that fact and will make a contract based on that. Hence, the fraud is generally based on an intentional misrepresentation with the purpose that it may be reasonably relied on by the opposite party.

Based on how a contracting party makes others enter into the contract, a contract fraud may be divided into fraud in the inducement and fraud in the factum.

Types of contract fraud

Fraud in the inducement

Fraud in the inducement involves a party who bases its decision on misleading information. This generally occurs when one party tricks another into signing an agreement to one’s disadvantage by using fraudulent representations or statements.

Under California law, the plaintiff can make a contract voidable for fraudulent inducement by showing that there was a mutual assent and one party knew that he was consenting by agreement but the defendant had induced the consent by fraud. Under Texas law, there must be a material misrepresentation which was without knowledge of its truth or which one knew was false and the same intended the inducement to cause reliance by the aggrieved party.

Essentials of fraud in the inducement

In order to have a successful claim for fraud in the inducement, the following elements must be proven:

Omission of an important fact

To be successful in the inducement claim for fraud, one must prove that there was a misrepresentation or omission of an important fact by the defendant.

Knowledge of the defendant:

It is important to prove that the defendant knew that the statement was false at the time when he made the same in order to be successful in one’s claim.

Statement was made to rely

The statement must be made in order to cause the plaintiff to rely on it when making the decision.

Plaintiff relied on the false statement

The plaintiff must have reasonably relied on the false statement or omission of the defendant at the time of entering into the contract. ‘Reasonably’ here means what a prudent person would have believed under similar circumstances.

Justifiable or Reasonable reliance must be the direct cause of legal injury

To be successful in one’s claim of making the contract voidable for fraud in the inducement claim, it is pertinent to prove that the reasonable reliance on the false statement of the defendant is the direct cause of the valid legal injury to the plaintiff such as losing valuable possession or money which they would not have given up otherwise.

Damage or detriment

The final part of a fraud claim is damage or detriment. The injury generally involves some financial loss to the aggrieved party.

Fraud in the factum

The literal meaning of factum is “doing” or “done”. It is a non-disclosure or deliberate concealment of existing facts that results in a party entering into an agreement assuming that it is having all the facts available with him. A fraud in the factum occurs when the plaintiff enters into an agreement without knowing what actually he was signing. In fraud in the factum, there lacks mutual assent as the plaintiff does not know what he is signing. The injured party may not have understood the purpose or content of the contract due to false information that he has been given by the other party in fraud in the factum.

A fraud in the factum is a misrepresentation that makes one party enter into a contract without clearly understanding the obligations, duties and risks to be incurred. In fraud in the factum, a party signs or makes an agreement not realizing that it is supposed to be a contract.

Legal consequences of fraud

The contract is considered to be no longer enforceable when it is found to be fraudulent. If one or more contracting parties commit fraud in the contract, the contract is considered to be void.

Remedies available to the aggrieved party

The aggrieved or injured party has following remedies available to it under the US contract law:

Damages

The injured party is liable to the damages that generally include monetary damages so as to compensate the victim with any money that he may have given to the defendant.

Recovery of the property

This remedy is available to the plaintiff in addition to the remedy of damages. Someone who fell victim to the fraud of the defendant may be allowed to recover any property which he may have given to the defendant at the time of the contract.

Important Case laws

Couturier v. Hastie (1856)

Facts of the case

In the present case, while a cargo of corn was in transit, being shipped to England from the Mediterranean, the owner of the goods made a contract with a buyer in London to sell the corn to him. However, the cargo perished and was disposed of even before the contract was made. The seller sought to enforce the payment on the ground that the purchaser had attained title to the goods and therefore, the purchaser should bear the risk of the goods being lost, damaged or stolen. The agent, however, argued that he had never entered into a valid contract with the buyer as the subject matter of the agreement between the buyer and the agent did not exist at the time of the contract.

Issue of the case

Did the agent enter into a valid contract with the buyer?

Judgment

The court held the contract to be void as the subject matter of the contract did not exist at the time when the contract was made. The agreement between the buyer and the agent presumed that there was a cargo of corn on board the relevant ship which is presumed to have existed at the time the contract was made. Since the cargo was not existing at the time the agreement was entered into, the court held in favor of the agent.

Sherwood v. Walker (1887)

Facts of the case

In this case, the defendant Walker owned breeding cows worth between $750.00 and $1,000.00 and barren cows worth about $80.00. The plaintiff Sherwood inspected an apparently barren cow, Rose 2nd of Aberlone, and decided to buy her. A price was agreed on for her i.e. 5.5 cents per pound but before the exchange of cow and money, Walker found that Rose was pregnant and he refused to part with her. Sherwood later on sued Walker for enforcement of the contract.

The district court held that the contract should be performed at the agreed upon price to which the defendants appealed.

Issue of the case

Whether two parties should be held to an agreement regarding a thing if the nature of the thing changes entirely or not.
Whether the contract is voidable for mutual mistake or not.

Judgment

On appeal, the decision of the district court was reversed. The court found that the parties’ misapprehension regarding the barren nature of the cow went to the substance of the agreement. As such, the agreement was void. Due to the pregnancy of the cow, it ceased to be the animal that was originally deemed to be and hence there occurred material mistake as to the contract making it voidable at the consent of the parties.

Bell v. Lever Bros (1932)

Facts of the case

In this case, Lever Bros was a company who owned 99% of the shares in another company Niger which traded in cocoa commodities. It contracted one Bell and another Snelling to act as the chairman and vice-chairman of Niger’s board of directors at £8,000 and £6,000 respectively. As the Niger company was not doing well, Lever Bros decided to merge it into another company. On its merger, the requirement of Bell and Snelling became redundant, as a result of which, they were offered £50,000 as compensation if they agreed to end the contract to which they agreed. After some time, Lever Bros found that they were secretly speculating on the cocoa market with their own money. Hence, Lever Bros sued Bell and Snelling to rescind the compensation agreement and seek repayment of the money.

Issues of the case

Whether the compensation contract is voidable for misrepresentation or not.
Whether the contract is void for mistake or not.

Judgment

The House of Lords held that there is no operative mistake as Lever Bros got exactly what they wanted (i.e. defendants ending the contract) and the fact that the same could have been done without them paying compensation to the defendants does not matter. Lord Atkin here held that the contract will be void as to the quality or attribute of the subject matter of the contract only when the thing without quality is materially different from the thing as it was believed to be.

The House of Lords further freed the defendants from the charge of the misrepresentation holding that the defendants had no duty to disclose their activities to the Lever Bros.

Williams v. Walker-Thomas Furniture Co. (1965)

Facts of the case

In this case, the plaintiff had made a number of purchases from Walker-Thomas Furniture Co. between 1957 and 1962 whose payment was to be made in installments. The printed form of contract that was used by the defendant contained provisions stipulating that Walker-Thomas would retain ownership until an item was fully paid and any payment that was made would be credited to towards each outstanding debt in proportion to its size and in the default of any monthly payment, the item could be repossessed. Thus, a new purchase would thus be secured by all the items previously purchased.

The last purchased item by Williams was a stereo that she purchased in 1962 for $514. Her balance at that time was $164. The total amount of goods that she bought were for $1,800 and the total of her payments was $1,400. Shortly after she bought the stereo, she defaulted in her payment and as a result Walker-Thomas sought to replevy all items in accordance with the terms of the contracts. Williams asserted that the contract or at least some of them were conscionable. Walker-Thomas Furniture Co. brought a suit to recover the amount of the stereo as well as all other items that were previously purchased by her.

The trial court granted judgment for Walker which the appellate court affirmed. Hence Williams and the other defendants appealed to the district of Columbia Court of Appeals.

Issue of the case

Whether the contracts were unconscionable due to boiler plate language on the back of the installment contract and thus unenforceable or not.

Judgment

The court held that such a contract may be set aside where there is lack of meaningful choice on the part of one of the parties together with the terms of the contract that are unreasonably favorable to such party. The court, however, remanded the case so as to determine whether the installment contract was so extreme as to appear unconscionable and render the contract unenforceable.

Lewis v. Averay (1972)

Facts of the case

In this case, the complainant Mr. Lewis was a post graduate who wanted to sell his car. He came in contact with a rogue who impersonated himself as famous actor Richard Green. When asked if he had anything to prove his identity, the rogue produced an admission pass to the Pinewood Studios bearing an official stamp with the name of “Richard A Green” and a photograph of the man. The man also signed a cheque in the name of “R.A.Green” in order to purchase the car. The car was sold for £450. When Lewis presented the cheque in the bank, the cheque bounced. By that time, the rogue had sold the car to a bona fide purchaser Averay for £200.

The complainant argued that there was a mistake as to the identity of the buyer because of which the contract with the rogue did not exist and since the possession of the car had not been passed, the car is still his property. The defendant, on the other hand, argued that since he was not aware that the seller was a rogue and had purchased the car bonafidely, he acquired a good title to the car.

Issues of the case

Is the contract between Mr Lewis and the Rouge valid?
Whether Averay acquired a good title to the car or not.

Judgment

Lord Denning held that there is a contract made with the very person (rogue) there who was present in person. No doubt that the contract is liable to be avoided for fraud and impersonation but the same could have been done for any third party who had acquired the interest in the contract in good faith. Hence, the contract is not set aside for Mr. Averay who purchased the car in good faith.

Gary K. Wallenta v. Michael L. Moscowitz (2004)

Facts of the case

In this case, the plaintiff twice visited the premises with her real estate agent in the year 1992 in order to purchase it. On both occasions, she was told that the premises extend to the area of cut grass/ where the grass had been cut. On August 19, 1992, the plaintiff signed a contract to purchase the premises for $105,000 in which it was agreed to pay $35,000 in cash and to mortgage the property for the rest of the purchase price. The contract was closed on October 30,1992 wherein the defendant presented a signed affidavit attesting that there was no survey of the premises and that there are no encroachments of structure or other improvements onto the adjoining land or any easement and that no structures or other improvements encroach onto the subject premises and the affidavit is made for the purpose of inducing the said purchase.

In 1995, when the plaintiff engaged the services of a contractor with the intention of building a three season room on the footprint of a deck, she was told by a neighbor that the deck encroached on the land of another. On further investigation by the contractor, it was revealed that the deck extended beyond the bounds of the premises which was not told to the plaintiff by the defendant in spite of having obtained the survey of the premises in 1987. The plaintiff, therefore brought a suit against the defendant.

Issue of the case

Whether the defendant be held liable for fraudulent representation or not.

Judgment

The Supreme Court of Connecticut held the defendant to be liable for fraudulent misrepresentation as Michael L. Moscowitz didn’t own all the land on which he built the deck and he never gave Wallenta the 1987 survey that he had along with all other documents.

Larson v. Burton Construction Ltd. (2018)

Facts of the case

In this case, Justin Larson contracted with Burton Construction, Inc. to purchase a new mobile home, however, the contract was a form contract designed for selling used mobile homes rather than new units. Larson signed the document and paid earnest money for the sale which Burton took and countersigned the contract. Burton was a reseller of mobile homes and delivered a manufacturer’s certificate of origin which could later be used by a buyer to gain title after paying taxes.

Wyoming sales tax was charged only on the first sale of a mobile home. Burton’s realtor, however, erroneously assured the escrow agent that the title to Larson will be delivered only after closing by Burton which refrained Larson’s from paying the additional sales tax. When Burton failed to provide title at closing, Larson was obligated to pay the sales tax due to which Larson canceled the closing.

As a result, Burton filed a suit in the Wyoming Circuit Court for breach of contract. The court found that the parties made a mutual mistake and ordered Burton to return Larson’s earnest money and cancel the contract. Against this decision of Circuit Court, Burton appealed to Wyoming District Court which reversed Circuit Court’s finding and held Larson liable for breaching the contract against which Larson appealed to the Wyoming Supreme Court.

Issue of the case

Whether the contract should be canceled for mutual mistake or not.

Judgment

The Wyoming Supreme Court affirmed the district court’s reversal of the circuit court’s finding of mutual mistake of both the parties, holding Mr. Larson in breach of contract. The court further opined that Mr. Larson ignored the plain language in the contract stating Mr. Larson to be responsible for sales tax, if any.The clear intention of the parties was that Burton would provide Mr. Larson with the necessary documentation so that Mr. Larson could obtain a certificate of title, free and clear and Mr. Larson would pay any sales tax associated with the transaction. The evidence clearly establishes that Mr. Larson breached the contract.

Conclusion

The effects of vitiating factors on contracting parties cannot be overstated. A vitiating factor to the contract makes either the contract void or voidable depending on what factor the party has used in order to induce the other party to enter into the contract. Though contract vitiating factors make the contract void or voidable, however, the injured party has an option to recover the property or money given to the other party under the deception of such a factor. The awareness of how the vitiating factors arise and what are their effects and remedies can be helpful in ensuring that the contracts that the parties create are enforceable. In this era of rat race, where everyone is concerned with only making money, the American contract laws are made to keep check on the inducements made on the contracting parties so as to make them enter into the contract which they are successful in preventing and prohibiting to a great extent.

Frequently Asked Questions (FAQs)

What is the difference between mutual and common mistakes?

A common mistake is where the mistake is shared by both the parties which is fundamental and directly affects the basic definition of what the parties are contracting for. The mistake will render the contract void if it robs it of all substance. A mutual mistake is when the parties are at cross purposes with one another.

How can unilateral mistakes in a contract be prevented?

A unilateral mistake in a contract can be prevented by drafting of the contract as clearly as possible. The parties should clarify each other’s interpretations of each clause that is included in the contract and should review the contract thoroughly during contract negotiations. Any ambiguous or vague language should be rectified then and there in order to avoid future disputes. If possible, the parties should use an identification number instead of general description of the product and a contract should never be signed if either party is unclear about any term used in the contract.

What is the difference between fraud in the inducement and fraud in the factum?

A fraud in the factum is a legal defense while the fraud in the inducement can be described as an equitable defense. In fraud in the factum, a party signs or makes an agreement not realizing that it is supposed to be a contract whereas in fraud in the inducement, a party enters into an agreement knowing that it is making a contract and understanding its purpose but makes or signs an agreement on false information given to them. In fraud in the inducement, there is a mutual assent which fraud in the factum lacks.

What is the difference between duress and undue influence?

Duress is when one party intentionally manipulates the other party to enter into a contract either in pressure or by force. Undue influence is when one party uses its power to manipulate the other party into signing a contract. The main difference between duress and undue influence is that in the former there is a direct threat while in the latter there is an excessive misuse of power.

References

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