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What common situations give rise to a voidable contract?
Fraud – Fraud involves an intentional misstatement of the material (important) fact that induces one to rely justifiably to his or her injury. If a person is defrauded into entering a contract, the defrauded party may void the contract upon learning of the fraud. Voiding the contract is at the option of the defrauded party, as she may wish to remain in the contract. The party committing fraud may not void the contract. If the defrauded party fails to void the contract upon learning if the fraud, she is deemed to have ratified it and is bound.
Misrepresentation – Misrepresentation is a material misstatement of fact that induces one to rely on the statement. The difference with misrepresentation and fraud is that misrepresentation does not involve the intent to mislead. As in the case a fraud, a party who enters a contract as a result of a material misrepresentation may void the contract upon learning of the false representation. The misrepresenting party may not void the contract. If a party fails to void the contract upon learning of the misrepresentation, she is deemed to ratify the agreement.
Duress – Duress means the use or threat of force to convince a person to act according to one’s wishes. If a party enters into a contract due to the physical or economic duress imposed by the other party, the contract is voidable at any time by the party subject to duress.
Undue Influence – Undue influence arises when one party unfairly takes advantage of another party by using a position of trust, influence, or confidence.
- Example: A psychiatrist who enters into a contract with her patient that is not related to medical services may be deemed to have exercised undue influence. The influenced party may have been pressured to enter into the agreement or felt unduly obligated to enter into the agreement for fear of destroying the doctor-client relationship.
Mutual Mistake – A mistake by both parties regarding “material” facts or circumstances relevant to the contract may make a contract voidable. In such a situation, either party may void the contract upon learning of the mutual mistake. The standard for whether the mistake of fact is material is whether a reasonable person would have entered into the agreement if the true facts were known. A mutual mistake of law may make a contract voidable if it caused the parties to not have a “meeting of the minds” with regard to the core aspects of the contract. If no meeting of the minds exists, there is never a valid agreement between the parties.
Unilateral Mistake – Generally, unilateral mistake by one party to the contract does not make the contract voidable. A unilateral mistake about the basic assumptions of the contract will only make the contract voidable when the non-mistaken party knew or had reason to know of the other party’s mistake. In such a case, the effect of enforcing the contract against the mistaken party must be unconscionable and the non-mistaken party would not suffer a substantial hardship by voiding the contract. If the non-mistaken party did not know about the other party’s mistake, the standard for voiding the contract is even higher. In such a case, the contract must not yet have been performed or the parties must be easily restored to their pre-performance positions. The mistake must be substantial, and the mistake must directly relate to some computational or clerical error in the construction of the terms of the agreement.
- Note: No defense exists if the mistaken party knowingly assumed the risk of the mistake; is grossly negligent in making the mistake; violates a legal duty; fails to act within her duty of good faith and fair dealing; or intentionally fails to read the contract.
Discussion: How do you feel about the idea that both parties may hold the right to void a contract? Is there any justification for holding that the contract is void rather than voidable? Do you agree with the scenario under which a unilateral mistake if voidable? Why or why not?
Practice Question: Constance enters into an agreement to purchase Gerald’s business. The contract contains a calculation for the business’s cash on hand at the time of sale to be added to the purchase price. Constance and Gerald did not pick up on the calculation error at the time of signing the agreement. The week prior to closing, Constance’s attorney caught the error, which causes a huge increase in the calculated value of the business. Gerald wants to hold Constance to the dramatically increased price, as she signed the contract containing the calculation error. What are Constance’s options?
- Where a mutual mistake arises during the performance of the contract, the contract automatically becomes invalid. This is because the mistake affects the basis of the agreement and the actual fundamental facts of the contract. In consideration of the fact that the contract has been changed by the mistakes, the party that notices the mistake must inform the other party so that the mistake is rectified. However, in the event that one party refuses to change the terms of the original agreement, the court shall rely on the principle of contract-implied-in-law to remedy the situation so as to ensure one party is not unjustly enriched from the contract. In this case, Constance will not have to pay the higher price for Gerald’s business as there was a mutual mistake and no meeting of the minds.