Contractual Defects

• Author: Carolyn MacLean/Alex Colangelo
• Pages: 241-271

241

Misrepresentation ...................... 242

Overview .......................... 242

Misrepresentation Generally ............ 242

Innocent (“Pure”) Misrepresentation ...... 243

Fraudulent Misrepresentation ........... 245

Misrepresentation by Omission

or Silence ....................... 246

Negligent Misrepresentation ............ 248

Duress ................................ 249

Undue Influence ....................... 251

Unconscionability ...................... 252

Unconscionability Legislation ........... 255

Mistake ............................... 256

Overview .......................... 256

Principles of the Law of Mistake ......... 257

Treatment of Mistake at Common

LawandEquity ..................... 258

Types of Mistake ..................... 258

The Mistaken Party ................... 265

Chapter Summary ...................... 270

Key Terms ............................. 270

Review Questions ...................... 270

Exercises .............................. 271

Learning Outcomes

After completing this chapter, you should be able to:

• Define “contractual defect” and list at least three

examples.

• Explain the distinction between an innocent and a

fraudulent misrepresentation.

• Understand which defects render a contract void

(void ab initio) and which render it merely voidable.

• Distinguish between duress and undue influence.

• Explain what is meant by “unconscionability” in the

context of transactions.

• Describe the consequences of various kinds of

mistakes on the part of contract parties.

Contractual Defects

14

© [2023] Emond Montgomery Publications. All Rights Reserved.

242 PART II CONTRACT LAW

Misrepresentation

Overview

A misrepresentation is a false statement that induces someone to enter into a contract.

It generally occurs as part of the bargaining process. For example, you are considering

ordering a carload of tomatoes, and while you examine them, you ask the seller, “Are

these grade A tomatoes?” If the seller replies “Yes,” then the “Yes” may be a state -

ment made to induce you to enter into the contract. If you enter into the contract

because of the answer, then the inducement is a material inducement. However,you

may not rescind the contract because of the false statement if you are aware that the

statement is a misrepresentation and enter into the contract anyway or if you are not

influenced by the statement but enter into the agreement for other reasons; you must

have been induced to enter into the contract by the statement. Ifthe statement is false

and the seller is not aware that it is false, it is an innocent misrepresentation. If the

statement is false and the seller knows it is false, it is a fraudulent misrepresenta-

tion. If the seller later learned that the statement was incorrect and did not take rea-

sonable steps to correct that statement, this omission and lack of action may give rise

to an action for fraudulent misrepresentation.

At common law, the party who has suffered a loss cannot obtain a remedy unless

the untrue statement can be construed as a term of the contract or the untrue state-

ment was made negligently. If it is a term of the contract, then the victim can sue for

breach of what is a perfectly valid contract and obtain damages for whatever losses

they sustained. If the false statement was negligently made even though the maker

thought it was true, the innocent party could sue the other party for negligent mis-

representation in tort and the maker of the statement would be liable for all the

foreseeable damage actually sustained; there would be no contractual remedy at

common law. The specific remedies available are discussed in detail in Chapter 17.

Misrepresentation Generally

A statement that is a misrepresentation must be a statement of fact, not an opinion.

The words themselves do not always make it easy to decide whether a statement is a

fact or statement of opinion. In our example, the seller’s answer “Yes” to a question

could be seen as a statement. However, if the seller had instead said “I think these are

grade A tomatoes,” this would be their opinion and no more than that. The case law

indicates that an opinion is not seen as being sufficient inducement to enter into a

contract because it lacks the certainty and emphasis of a statement. This may be an

impractical and illogical distinction because the opinion of a knowledgeable seller,

though a misrepresentation, might very well induce you to enter into a contract.

If the misrepresentation induces you to enter into the agreement but is not related

to a material fact that goes to the heart of the contract, then you may not rely on the

misrepresentation to rescind the contract. For example, the seller says “Tomatoes are

necessary for health.” This general statement about tomatoes may be a misrepresenta-

tion because of course you can enjoy good health and never eat a tomato, but it is not

the kind of statement that has anything directly to do with material concerns that

affect buying a carload of tomatoes.

carload

the amount carried by a car,

especially a freight car

material inducement

a statement made before

a contract is struck that

influences a party to

enter into the contract

rescind

to abrogate, annul, avoid,

or cancel a contract;

particularly, nullifying a

contract by the act of a party

innocent

misrepresentation

a false statement that the

maker of the statement

does not know is false,

made to induce a party

to enter into a contract

fraudulent

misrepresentation

a false statement that

the maker knows is false,

made to induce a party

to enter into a contract

© [2023] Emond Montgomery Publications. All Rights Reserved.