Contractual Defects

This section considers how, despite having created a valid contract and adhered to the requirements of writing, the parties may still not have an agreement that both parties may enforce because of a contractual defect in the form of mistake, misrepresentation, or unfairness during bargaining.

Contractual defects may either render a contract void (as though it never happened, with no legal effect from the beginning) or voidable (valid unless and until it is rejected at the option of one of the parties).

Although these notes have dealt with capacity and legality as essential parts of a valid contract and have given separate consideration to the requirement of writing, the lack of capacity, illegality, and the absence of writing could also be viewed, instead, as types of defects.

Mistake

The courts may grant relief when a party enters into a contract under a basic misunderstanding, although not in every case. The maxim "mistake of law is no defence" applies because all parties are presumed to know the law. Furthermore, a mistake in judgment is not a basis for escaping contractual liability. For example, a contract that proves to be more onerous than anticipated will not provide a basis on which to have the contract set aside.

Remedies may be available to a party who makes a factual error, but a party cannot escape contractual obligations for all factual mistakes. Contracts negotiated on the basis of a factual mistake may be void, voidable or, in certain cases, valid, depending on the type of mistake.

A. Mistakes About the Terms

When it comes to mistakes about terms, the issue is really whether there is consensus ad idem, or a meeting of the minds. A unilateral mistake occurs when, prior to the formation of a contract, one party is mistaken with respect to the meaning of a contract term, and the other party is aware of that mistake. In such cases, the courts tend to treat the contract as unenforceable. A mutual mistake occurs when both parties are unaware of the mistake at the time the contract was formed. In that case, the remedy afforded depends on the type of mistake, as discussed below.

(i) Words used inadvertently

If one party inadvertently uses the wrong words in stating the contract, and the court concludes that it was reasonable for the second party to rely on the inadvertent words and enter into the contract (e.g., a price of $354 instead of $345), the contract will be binding on the first party. Conversely, if the court concludes that a reasonable bystander would know that the first party had made a mistake in expressing the terms of the contract (e.g., a price of $350 instead of $3,500), the contract is voidable by the first party since the second party will not be allowed to "snap up" an offer that is obviously mistaken. The courts will also consider the potential hardship to each of the parties.

(ii) Misunderstandings about the meaning of words

When the parties to a contract put differing interpretations on words correctly recorded in the contract, the court will try to arrive at and enforce the most reasonable interpretation. In the very rare situation where neither interpretation is more reasonable than the other, and the words form a major term of the contract, the court will hold that no contract had been formed.

In the case of standard form contracts, if a vague contract is held to be enforceable, the contra proferentum rule would result in the courts using the meaning that is least favourable to the author.

If two equally careless parties use an ambiguous phrase, the court will refuse to decide between their two conflicting interpretations with the result that the defendant's position becomes stronger than the plaintiff's since the latter did not succeed in proving his or her interpretation.

B. Mistaken Assumptions

Mistaken assumptions can be defined as mistakes concerning a matter relevant to the decision to enter into a contract. They relate to the motive to enter into a contract as well as to assumptions about events at the time of contract.

(i) About the existence of the subject matter of a contract

When the subject matter of a contract does not exist, but both parties thought it did when they made the contract (for instance, when the goods being sold are unknowingly destroyed in transit), the contract is void.

(ii) About the value of the subject matter: allocation of risk

When both parties find that the quality of the subject matter of a contract is substantially different from what they contemplated, the court will first decide who should bear the risk of loss or damage. The court will grant relief only when it decides that the party adversely affected should not be the one to bear the risk. The injured party may be allowed to repudiate the contract.

The guiding principle is whether a party could reasonably have foreseen the consequences of a particular risk at the time of making the contract. When both parties were aware at the time of the contract that the value of the subject matter might rise or fall quickly, the agreement will bind them.

(iii) The challenge of achieving a fair result

Where one or both of the parties change their position or forego an opportunity because of a mistake in a contract, the court gives relief where it can achieve results reasonably fair to both parties. Solutions may require ingenuity or imagination in the exercise of discretion. Where no remedy appears available, the loss will often be left to lie where it fell.

C. Errors in recording an agreement: Mistakes in integration

Often parties will reach an oral or informal written agreement and later record the agreement in a formal written contract. When a mistake is made in recording an agreement, the court may rectify the mistake in the written document only when it is satisfied that a final, unambiguous, and unconditional agreement had been reached, and there were no further negotiations, i.e., that this really was just an error in recording. The credibility of the parties often becomes an issue in this context because one party may well assert that the written form actually reflects the true agreement. In such circumstances, strong evidence is required to move the court to order rectification.

D. Mistake and Innocent Third Parties

In some situations, a “rogue” may deceive a gullible or imprudent second party and thereby gain possession of goods or valuable signed documents. Whether the mistake is about assumptions (the victim is misled about the identity of the rogue) or about the terms (the victim is misled about the terms of the document), by the time the victim discovers he has been “duped,” the rogue is usually long gone, and the victim is left dealing with an innocent third party who has paid to receive the goods or documents.

(i) Mistake about the identity of a party to the contract

For contracts not negotiated in person, if the party whose identity was mistaken assumed the name of some person or business known to the seller, as was the case in Cundy v. Lindsay, the contract would be void.107 Consequently, if the purchaser has since sold the goods to an innocent third party, the duped seller would be able to recover the goods from that third party as if the goods were stolen rather than purchased in good faith.

On the other hand, if the party whose identity was mistaken assumes the name of someone completely non-existent, as was the case in King's Norton, the contract would be voidable since the court holds there is no one else with whom the seller could have intended to contract. In such a case, the vendor could not recover the goods from an innocent subsequent purchaser. It is arguable that the King's Norton case reflects a general dissatisfaction with the earlier Cundy precedent, where the more innocent rather than the more careless of the two parties bore the loss. In general, the courts tend to protect the innocent third party rather than the original seller who took the risk of selling on credit without checking the rogue's identity.

(ii) Mistake about the nature of a signed document

Since the decision of the Supreme Court of Canada in MarvcoColor Research Ltd. v. Harris, a signer can avoid the consequences of a document he or she has signed only if a) the mistake is a serious one and b) the signer has not been careless of his or her own interests.

People who are blind, illiterate, or unable to read the language the contract was written in are usually protected under the plea of non-est factum (it is not my deed) since these people must ultimately rely on the integrity of other people. The relevant contract would be void. However, it is now unlikely that other people who sign documents can avoid liability to innocent third parties except in extraordinary circumstances.

E. Mistakes in Performance

When a party to a contract mistakenly gives a benefit to the other party (e.g., pays too much), the recipient will be required to restore the benefit to the mistaken party if that recipient knows of the mistake. Where the recipient honestly believes she is entitled to the benefit, the remedy is more difficult. The courts have been moving gradually toward imposing an obligation based on the concept of unjust enrichment: if in all circumstances the recipient would be unjustly enriched by keeping the benefit, she will be ordered to make restitution to the mistaken party.