When and how vitiating factors render contracts unenforceable.
Even the most carefully drafted contract can be unenforceable if a vitiating factor applies. These are factors that, had they been known by all parties at the time of the contract, an agreement may have never been reached and the contract never formed. What then are the main vitiating factors which contracting parties must be aware of and effects do they have on a contract? Read on to find out.
A misrepresentation is an untrue or misleading statement which induces a party into a contract. It can be distinguished from opinions shared by the other party or sales talk, such as stating something is “the world's best”. In its purest form, a misrepresentation will be a material statement of law or fact, but what is most important is that this representation, however it was made, actually caused someone to enter into the contract.
There are 3 types of misrepresentation and, according to the Misrepresentation Act 1967, there are different consequences for each:
- Where the party who made the statement can prove that they had reasonable grounds to believe and did in fact believe, up to the time of the contract, that the facts represented were true. The remedy is either rescission or damages calculated on normal contractual principles.
- Where the party making the statement either knows it is false, does not believe it, or is reckless as to whether it is true or not. The remedy is rescission and/or damages calculated by including all losses stemming from the misrepresentation, even consequential ones.
- Where none of the first two options apply. It is usually found when the party who made the statement cannot prove that they had reasonable grounds to believe that the statement was true, and the remedy is the same as for fraudulent misrepresentation. Negligent misrepresentation can also be found at common law when there is a special relationship between the parties which gave rise to a duty of care, and the remedy is damages based on the tort of negligence.
When it comes to mistakes in contracts, there are 3 scenarios which can arise:
- Where both parties make the same mistake as to the subject matter (res extincta), the ownership of a property (res sua), or the quality of the subject matter.
- Where the parties are at cross-purposes, but each believes that the other is in agreement about the terms of the contract or the subject matter of the contract.
- Where one party is mistaken about the identity of another party, the terms of the contract, or the nature of a signed document (non est factum). The other party will usually know of the other’s mistake and take advantage of it.
The effect of the mistake depends on its nature and whether it goes to the core of the contract. If the mistake fundamentally changes the nature of the contract, then it is likely to be void (invalid from the start) and the remedy will likely be restitution. However, if the mistake is voidable (valid until a party chooses to treat it as unenforceable), then one of the following equitable remedies may be appropriate: rectification, rescission or specific performance.
Have you ever wondered why criminals do not file lawsuits against their co-conspirators when someone breaks an agreement? Far from simply having a low opinion of legal institutions, criminals may also be aware that contracts which are made for an illegal purpose or contain illegal terms are unenforceable and therefore an illegal contract. This is also the case for contracts whose purposes are contrary to public policy such as a contract for the purchase of stolen goods —they are simply invalid.
Duress is the use of threats or illegitimate pressure to force a party into a contract. The effect of duress is to render a contract voidable. Historically, duress was concerned with physical violence, but it is now accepted that it can also be economic e.g. a threat to strike if a certain contract isn’t signed. Economic duress differs from commercial pressure (which is acceptable) because it unlawfully leaves a party with no choice but to sign the contract. The line between the two can be difficult to draw, but the general rule is: to establish the tort of economic duress, the victim needs to prove that “illegitimate pressure” was applied to them by the perpetrator and that such pressure “caused” them to enter into the contract in question. The effect of duress is to render a contract voidable, and the remedy will be rescission and/or damages.
In 2019, the Court of Appeal held that where only lawful acts have been committed, economic duress will not be available as a defence unless bad faith can be proved. This is known as Lawful Act Duress, and essentially means that a party which uses lawful pressure (e.g. the lawful use of a monopoly position) to get another party to agree to a contract will not be guilty of economic duress if they acted in good faith.
Undue influence is the improper use of a position of power to pressure a party to enter into a contract. The pressure exerted falls short of duress but it is enough to vitiate a party's free and informed consent. It will be presumed in certain relationships of trust and confidence where it is widely accepted that there is an imbalance of power e.g. doctor-patient or solicitor-client relationships. This is especially true where the contract created is unfavourable to the “weaker” party. On the other hand, where there is evidence that there has been the abuse of a position of power but the parties do not have a relationship where undue influence is presumed, then there will be actual undue influence. The effect of undue influence is to render a contract voidable, and the remedy is rescission.
The doctrine of unconscionably can be explained as the unfair exploitation of unequal power to induce a party into a contract. The terms of the contract may be so unjust, or favour the party with the higher bargaining power so greatly, that enforcing the contract would be contrary to good conscience and morally reprehensible. Courts are generally ready to set aside unconscionable transactions where one of the parties is mentally or financially weak, and they did not receive independent advice before entering the contract. Where unconscionable conduct is suspected, the party with the higher bargaining power must show that the contract is actually fair, just and reasonable. If they cannot, then the courts have the discretion to do what they see fit, making the effect of unconscionability hard to predict.
The effects of vitiating factors for contracting parties cannot be overstated, but awareness of how they arise can be helpful in ensuring the contracts you create are enforceable. Legislate streamlines the contracting process and makes agreements easy to understand, thus reducing the risk of vitiating factors arising. Book a demo of Legislate to find out more. Sign up here to start legislating today.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.