12.2 - Invalidating Factors of Contracts

Is it valid?

A contract may have clear offer, acceptance, and consideration, yet still be unenforceable.  The reason that this may occur is the presence of any one of the following factors that would make the contract invalid:  incapacity to contract, illegality, contrary to public policy, mistake, misrepresentation, duress, undue influence, and unconscionability.  This section will discuss these factors and how contracts might be discharged.

Invalidating Factors of Contracts

The first factor that would invalidate a contract is the incapacity to contract, which means that one of the parties does not have the capacity to enter into a contract.  In this context, capacity refers to the ability to enter into a legal contract.  Adults are free to enter into contracts at will; whereas minors and adults with mental incompetence may not.  However, a minor can make an enforceable contract if the contract was  about necessaries of life.  Necessaries are things like food, shelter, clothing, medicine, etc.  So a minor could make a legal contract for any of these elements, like legally sign a tenancy agreement for a rental suite.  For anything else, a contract that is made may be a voidable contract - a contract that can be avoided or not carried out if the minor made that decision.  Finally, it should be noted that parents are also not legally responsible for any non-necessaries contracts that their children enter into.

The second factor that would invalidate a contract is a contract that is made towards an illegal purpose (illegality).  A contract that includes an illegal act or an intentional tort are not valid.  Every legal contract must be towards a legal purpose (a purpose not forbidden by law).  A contract that includes some element of illegality would be voided by the court, and the court would likely return both parties to their original position (rescission).  Contracts are not legal if the terms in them are not completely law abiding.

The third invalidating factor for contracts is one that is drawn up contrary to public policy.  This refers to a contract that conflicts with the morals and ethics of a society.  For example, a contract that forbids the seller of a business to ever open up a similar business is not valid because it would restrict competition; and competition is valued in Canada’s market economy.

The fourth factor that would make a contract invalid is a mistake about an important term in the contract.  There are three key types of mistakes relative to contracts.  The first one is a common mistake, and this refers to when both parties make a mistake about the same term.  For example, Keith and Denise make a deal for Denise to buy Keith’s collection of rare matchbook covers.  Before the transaction can be completed, there is a fire at Keith’s home and his matchbook cover collection is destroyed.  This is a common mistake because both parties thought that Keith still had a collection to sell.  Second, a mutual mistake may occur.  This is when both parties make a mistake, but about different terms.  For example, Bridget makes a deal to buy Wanda’s car.  Bridget mistakenly thinks that the car is a 2015 Toyota Corolla with an automatic transmission; but Wanda thinks that the car is a 2005 Toyota Corolla with a manual transmission.  Both made a mistake, but about different terms.  Finally, a unilateral mistake is when one party makes a mistake, and the other party knows about it and doesn’t do anything.  For example, if Clarence is buying a house from Winifred for $580,000; but when the contract is written up, a clerical mistake was made and the price was listed as $58,000.  This lower price term would not be considered valid.

The fifth factor making a contract invalid is misrepresentation.  This is when a false or inaccurate statement is made that causes a party to enter into a contract.  A misrepresentation may be either innocent or fraudulent.  An innocent misrepresentation is when a party makes a false statement, but they believed the statement to be true.  This is essentially an innocent mistake made by that party.  On the other hand, a fraudulent misrepresentation is when a party knowingly makes a false statement, and intends for the other party to act on that false statement.

Invalidating factor number six is duress.  Duress is when unlawful threats or pressure are used to try and force someone into a contract.  This makes a contract invalid because the person being pressured would not be acting freely and willingly.  Related to duress is the seventh invalidating factor - this one being undue influence.  Undue influence is when there is pressure on a person to enter into a contract, and the pressure is coming from someone in a special relationship (family, employer, coach, teacher, etc.) to the person being pressured.

The eighth and final invalidating factor of contracts to be discussed here is called unconscionability.  This is where one party takes an unreasonable advantage of the other party in the contract.  Essentially this means when the contract is extremely lopsided because one party is taking advantage of the misfortune of the other party.

Discharging a Contract

When a legal contract comes to an end, it is said to be discharged and both parties are no longer bound by its terms.  Contracts may be discharged in one of four main ways.  First, a contract may be discharged by performance; which means that the obligations in the contract have been completed.  Similarly, a contract may be discharged if the parties have completed the essential elements of the contract.  This method is called discharge by substantial performance.  The third method of discharging a contract is a discharge by agreement.  This is simply where both parties agree to end the contract.  Finally, a contract may be discharged via discharge by frustration; where parties can’t fulfill their terms because of factors out of their control (such as a fire, flood, etc.).

Contract Breaches

While a contract is valid and the parties to the contract are still bound by its terms, what happens if one of the parties does not maintain their terms?  A breach of contract occurs when one party in a contract fails to perform what they had agreed to in the contract.  If this breach involves a very important term of the contract, then this is referred to as a breach of condition.  An example of this type of breach would be if Desiree ordered a new Chevy Corvette sports car, but a Chevy Volt electric commuter car was delivered to her.  Being delivered the wrong car is clearly a breach of a major term of the contract.  On the other hand, if the breach involved a very minor term of the contract, then it is called a breach of warranty.  An example of this type of breach would be if Desiree’s Corvette was delivered with the wrong rims - a minor error that could easily be fixed.  Correcting contract breaches might involve releasing the non-breach party from their responsibility, damages, injunction, or specific performance.

Sometimes contracts contain special terms that limit the liability of one of the parties.  Exemption clauses are such clauses that release a party in a contract from liability.  An example of such a clause is the fine print on a parking lot receipt, where the parking lot owner states that they will not assume any liability if a customer’s car is damaged while being parked there.

Summary

Contract law is a very necessary area of law.  It is vital to the workings of a free society that people have the freedom to make agreements with whomever they wish; while also being protected by the law should something go wrong while carrying out the contract. Most people don’t realize how many contractual agreements that they undertake, and do so almost everyday.