Canadian Business Contracts Handbook. Nishan Swais
you can also cease having to perform your obligations under the contract (i.e., because the obligation to pay for something is an essential term of a contract). For example, you may be required to deliver an owner’s manual upon final payment for the forklift. If that payment is not received, your obligation to deliver the manual no longer applies.
Needless to say, relying on another party’s anticipatory breach in order to cease having to perform yourself can be a tricky matter. The courts are filled with disputes about whether an anticipatory breach really existed and which party breached first. For example, the buyer acts contrary to what he or she said and actually pays you on the 25th. If you are not ready, willing, and able to deliver the manual at that time, then you will be the one in breach of your contractual obligation and may, as a consequence, find yourself on the wrong side of a lawsuit. The table will very quickly have turned. That is why you must exercise caution whenever you are intending to rely on an anticipatory breach in order to avoid your obligations under a contract.
4. Exceptions
In Chapter 1, we identified the circumstances in which a court might find that a contract did not exist (was void ab initio); for example, where an agreement is contrary to law or there is a lack of mutuality.
Let’s now consider the circumstances in which a court might find that a contractual relationship never existed. These include mistake, misrepresentation, frustration, and unconscionability. In each of these circumstances, a court may invalidate a contract (or one or more terms of it) and refuse to enforce it (i.e., set it aside or rescind it). In other words, the court will find that the contract (or a term of it) is void (as opposed to void ab initio). Among other things, that means that compensation could not be obtained against the party in breach of the contract (or the particular term in question).
It is worth briefly examining each of these circumstances more closely.
4.1 Mistake
In Chapter 1, we discussed the importance of mutuality when contracting. We said that if there is no “meeting of minds,” there is no contract. So how does the law approach a situation where there is a meeting of minds, but the parties to the contract simply made a mistake?
If the mistake concerns an essential term of the contract, a court will determine that no contractual relationship existed and invalidate the contract.
For example, if I offer to sell you my “axe” for $50 and you accept, believing that I mean to sell you my vintage electric guitar, when what I really mean is the old hatchet in my garage, then there is a mutual mistake. Moreover, that mistake is a mistake concerning an essential term of the contract, meaning, it goes to the very heart of the contract (indeed, the very thing contracted for). Neither party would — nor should they, logically speaking — be able to seek compensation if the other party fails to perform.
In other words, I could not legally compel you to buy my old hatchet for $50 and you could not obtain my vintage electric guitar for that price. Effectively, a court will determine that, despite our intention to contract for an axe, no contractual relationship will have been found to exist and the contract will be invalidated.
What happens in the case where a mistake does not concern an essential term? Returning to our earlier example, suppose that you agreed with the buyer to deliver the forklift on September 31? Of course, no such date exists. Clearly, someone made a mistake. The mistake may even have been mutual. You both may have thought that there is a September 31.
In this case, it is reasonable for a court not to invalidate a contract because the mistake does not concern an essential term of the contract. It concerns only a relatively minor aspect of the deal to purchase the forklift (the delivery date) and one that can be easily corrected without unfairly prejudicing either party. Specifically, the forklift could be delivered either on September 30 or October 1 with (presumably) neither party having been particularly injured by that decision. A court would simply correct the mistake by choosing one of those dates and “reading it into” the contract in the case of a dispute. The court would not invalidate the contract.
4.2 Misrepresentation
Misrepresentation is another basis on which a court may invalidate a contract. Misrepresentation occurs when one party makes a statement to the other party that turns out to be wrong, that is, turns out to be a misstatement, not a mistake. Misrepresentation differs from a mistake in that a mistake is usually unintentional or concerns a matter outside of the mistaken party’s control.
Not every misstatement in a contract results in a misrepresentation. To be considered a misrepresentation, at law, a statement must be false, concern a matter of fact (not opinion), be addressed to the party who was misled by the statement, and must have actually induced the party to whom it was addressed to enter into the contract.
Inducement is the key. If a party did not rely on the statement of another party in entering a contract, it is unlikely that it will be able to seek compensation from that other party if that statement turns out to be a misstatement.
Returning to our example: Suppose you had told the buyer that the forklift could lift several tons of cargo? Suppose also that that was a misstatement. Now suppose finally that the buyer merely meant to move boxes of cotton balls with the forklift and, therefore, wasn’t concerned about the forklift’s load capacity. In other words, the buyer wasn’t induced into buying the forklift based on how much you said it could lift. In that case, the buyer will not be able to successfully claim that your misstatement amounted to a misrepresentation compensable at law. The reason is she was not induced into buying the forklift on the basis of the misstatement. She would have bought it anyway.
One could fill volumes with a discussion of misrepresentation. For our purposes, it is enough to know something about four of the most commonly encountered types of misrepresentation:
• Pre-contractual misrepresentation occurs when a statement leading up to the formation of a contract turns out to be false. Typically, pre-contractual misrepresentation takes place during contractual negotiations. For example, if the buyer had, in our example, been induced into buying the forklift on the basis of its stated load capacity (it was needed to move truck parts, not cotton), then your misstatement will have amounted to a pre-contractual misrepresentation.
• Negligent misrepresentation arises where a party making a statement is careless about whether the statement is true. For example, if you never even bothered to determine the forklift’s load capacity but carelessly stated to the buyer that it could lift several tons of cargo, your statement amounted to negligent misrepresentation if the buyer was induced by that statement to purchase the forklift. Note that negligent misrepresentation differs from a mistake in that your statement was not unintentional. You didn’t mistakenly believe what you said to be true. Rather, you never sought out the truth of what you were saying, in the first place. In short, you didn’t care if what you said was true.
• Fraudulent misrepresentation is the most serious form of misrepresentation in the eyes of the law and can even lead to an award of punitive damages. Fraudulent misrepresentation occurs when, as an inducement, a party deliberately and knowingly misleads another party about a contractual matter. For instance, you know that the forklift cannot lift even one ton of cargo but you tell the buyer that it can lift several.
• Innocent misrepresentation is a kind of legal catch-all that is applied to any misrepresentation that is not fraudulent, negligent, or fits the profile of a mistake. For example, you may have checked the number of tons the forklift could carry and you had no intention of misleading the buyer, but it just so happens that you weren’t aware of the difference between metric and imperial tons and innocently misrepresented the forklift’s capabilities.
In each of these cases of misrepresentation, a court is likely to invalidate a contract (or the relevant term of it).
4.3 Frustration
Cases may arise