Remedies:
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Innocent misrepresentation
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Recission (voidable – choice between voiding, or keeping the contract “equitable remedy”)
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Question becomes the degree of culpability of the misrepresenting party
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What was the nature of the misinformation – could the misinforming party help it?
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“Innocent” if they couldn’t help it
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Fraudulent misrepresentation
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Recission + Damages
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Tort of Deceit - includes misrepresentations made “recklessly, careless whether it be true or false”
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Negligent Misrepresentation
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Recission + Damages
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If can’t claim for tort of deceit, can claim for tort of negligence
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Problem: Pure Economic Loss – establishing liability – lack of proximity? “special relationship” must exist
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Esso Petroleum (pre-contractual)
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V.K. Mason Construction
Esso Petroleum v Mardon (UK)
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Damages based on negligence – does have a contract, but even if there is no actual warrantee, the misrepresentation leads to a claim for torts
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Applicable between parties who entered a contractual relationship?
Lord Reid in Hedley Byrne: “Where there is a contract [...], the question is whether there is a warranty.”
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Note the shift in Esso: “If a man who has or professes to have special knowledge or skill makes a representation by virtue thereof to another – be it advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care” (Lord Denning)
Hedley Byrne doctrine: negligent misrepresentation can lead to a tortious liability
A B
(misrepresentation)
C (Bank)
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B made a representation to A that led A to contract with C
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Negligent misrepresentation by one of the parties to the contract can extend to damages incurred (in tort) as a result of the other contract
Esso collapses the triangle – there may be both contractual and tortious liability
CML – Esso Petroleum Co. Ltd. v. Mardon, [1976] Q.B. 80 (C.A.): CB2 89 |
Jurisdiction
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UK
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Facts
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EPC bought a site to build a service station, but the planning authority only allowed them to build it facing the back road; EPC built but did not accordingly revise its estimates. EPC found M as a tenant for the station, and dispelled M’s worries that the station could not meet the higher figure. M signed a 3-year lease, started work, did everything possible, and lost money, new agreement signed for one year at lower rent, but M still could not make money. M appealed to EPC to help; EPC did nothing, but seized his tanks; M gave up and sued for recission and damages (for breach of promise).
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Issues
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Did EPC make a collateral warranty? Did EPC make a negligent misrepresentation?
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Holding
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Yes. Yes. (K valid but $ECO)
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Reasoning
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Denning J:
THIS HINGES ON WHAT THE ACTUAL PROMISE CONTAINED. DENNING GOES THROUGH SOME COMPLICATED REASONING.
Collateral Warranty (Liability in K)
-
Innocent misrepresentation gives no right to damages, but if elevated to collateral warranty or fraudulent misrepresentation it can
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EPC submits that its figure was an opinion rather than a fact – but EPC had special knowledge to calculate accurately, made with reasonable care and skill
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If “collateral warranty” is found to exist, the damages to which M would be entitled would be restoration to the position in which he would have been if the contract had not been breached – i.e., “full expectancy” – the difference between what he actually made and what was “promised” that he would make by the collateral warranty
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Denning reads the collateral warranty not that M will sell 200,000 gallons, but rather that they have done their homework and it is a sound and reliable forecast so the damages to which M would have been entitled would have been exactly the same as with tortious liability – their “reasonable forecast” would have been 70,000 gallons, M would not have entered the contract, and he is entitled to be restored to the position he was in before the K.
Negligent misrepresentation (liability in tort)
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EPC submits that when negotiations lead to a K, relations are governed by K law and not tort – but Denning says that with professionals, the duty to use care arises not only in K, but also in law outside K, and so is actionable in tort
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Professionals giving advice in pursuance of a voluntary assumption of responsibility and is under a duty to use reasonable care
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K creates a duty, and neglect to perform that duty is grounds of action on a tort plaintiff can recover in tort or in K
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In this case, in tort, the plaintiff would be entitled to damages that restore him to the position he would have been in had the tort not have occurred – what his actual loss was. “Had I known, I would not have entered the contract” – so restoration to original position.
Damages
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M not to be compensated for loss of bargain (loss of expectation of huge profits from original figure)
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Compensation for being induced to enter into a disastrous K damages to be measured by loss
-
Must compare future if he’d never entered into K with his current position
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M acted reasonably, and should be compensated for effects of misrepresentation even after renegotiation of tenancy
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Ratio
| -
With professionals, the duty of care exists not only in but outside the K; where one party has access to special knowledge or skill, its negligent misrepresentation can lead to liability in tort
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Damages are calculated by loss relative to the position that the party would have been in without the K
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ECO liability can be found to result in similar damages to K’ual liability
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Comments
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Possibility here to find damages in tort or in K (not open in the CVL in the same way: CCQ 1458 provides that in circumstances of K, one cannot avoid K law by opting for more favourable rules)
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So: in CVL, where no K was formed because of fraud/error/etc, CCQ 1458 has no effect delictual damages available – so CCQ 1407 lists damages arising from the ordinary civil law of fault (already available under CCQ 1457)
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V.K. Mason Construction Ltd. v. Bank of Nova Scotia
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Since there is no contract, it is a torts case. Parallel to Kleinwort Benson, there is no contract or real intention to be bound (bank to Mason)
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“If it were possible in English law to construct a contract without consideration, the question would be, not whether on the facts of the case there was a special relationship [sc.: giving rise to a duty of care], but whether on the facts of the case there was a contract.” – Lord Devlin in Hedley Byrne
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Hedley Byrne Doctrine (if C with special knowledge gives a warranty for A, A contracts with B (based on this warrantee), C has a duty of care to B. Negligent Misrepresentation can lead to a tortious liability)
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Note measure of damages: profit under the contract actually made as a “reasonable estimate” of what Mason might have gained had he engaged in another project (lost opportunity) – RELIANCE DAMAGES?
CML – V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271: CB2 93 |
Jurisdiction
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Canada (SCC)
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Facts
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Mason signed a fixed price contract with Courtot but only because he was told by the Bank that Courtot was adequately financed to meet his payments. Both Courtot and the bank knew that the bank’s loan would not meet the cost of completion, the bank failed to inform Mason that they had not included the soft costs in their loan to Courtot. The bank’s financing for Courtot was only a “bridge loan” so that they could secure other financing, which they failed to do.
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Issues
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Is D contractually liable? Is D liable for Negligent misrepresentation?
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Holding
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No. Yes, damages awarded under torts (Wilson J.)
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Reasoning
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Wilson J:
-
We are in tort because the person misrepresenting is not the contracting party
-
All requirements for negligent misrepresentation are met in this case;
3 requirements for liability for neg misrep: (1) untrue statement; (2) statement must have been made negligently; (3) special relationship = duty of care; (4) reliance which is foreseeable.
All the requirements are met in this case:
[1] Falsity - Mason sought assurance over and above terms of loan; Bank gave assurance relying solely on terms of loan.
[2] Negligence - b/c Bank made statement of assurance w/o revealing that it was based on loan arrangement which Mason had already said was not sufficient assurance.
[3] Special Relationship - Bank was inducing Mason to sign K with Courtot (distinguish this from Bank merely making representations to third party about one of its clients)
[4] Reliance - Mason relied on it and such reliance was foreseeable.
Damages: Mason gets his lost profit because he is suing for reliance interest of his loss of opportunity: had it not been for the misrepresentation he would have contracted with another lost opportunity costs. QUESTIONABLE ON EVIDENTIARY GROUNDS...
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Ratio
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Third parties may be liable through torts; negligent misrepresentation in such cases may be assessed in terms of actual loss + anticipated profit.
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Class Exercise
B collects coins. Vendor V offers him a certain piece for $1,000, stating that coins of this kind have recently been sold at auctions abroad for immense prices, and that the market here will pick up on it soon. This - as V knows – is not true. B, however, believes V and accepts the offer. To “seal the deal”, he makes a down payment of $100. When V, one week later, delivers, the coin, B refuses to pay. A friend has told him in the meantime that the information conveyed by V must have been inaccurate, and possibly intentionally so. The coin is worth its price, but B only bought it because he thought he was making a great investment.
Rights of the parties?
V B – Price
Fraudulent misrepresentation of opportunity, not of market value of coin
“But for” cause – B would not have entered into the agreement without that information
Could B have gotten the information elsewhere? “Legitimate reliance”?
Art. 1734 Obligation to take delivery of the object sold and pay the price agreed upon
-Contract formed, Art. 1385 sqq? (+)
-Nullity could be invoked, Art. 1422
Art. 1416 – if contract didn’t meet necessary conditions of formation, contract can be annulled
Art. 1417? Any reasons for absolute nullity? Against the public interest...
Art. 1419, 1420: Relative Nullity could be invoked by B – leads us to 1407 – was his consent vitiated? What are his rights if consent has been vitiated?
Art. 1422 – absolute nullity could also be invoked (returning of prestations)
Art. 1407: Right to apply for annulment if “consent was vitiated”
(Art. 1406, Art. 8. 9 Consumer Protection Act?)
Art. 1401, fraud?
* Error?
* Induced by Fraud?
* Would not have contracted but for the error? QUESTION OF CAUSALITY must be proven.
COURT SEES THE MECHANICAL EXCHANGE OF CONSENTS AS AN AGREEMENT THAT HAS BEEN REACHED.
DEFAULT: CONTRACT EXISTS, MUST BE FULFILLED, UNLESS IT CAN BE ANNULLED.
Art. 1422 (+): Contract deemed never to have existed
Art. 1734 (-): No obligation to pay the price
B V: Money back
Art. 1422 (2), 1699: Restitution (returning of prestations)
-If contract is absolutely null get back your down payment
Art. 1407: Damages
-In case of fraud restoration to position in which you would have been before entering into the contract OR expectancy? DEPENDS ON THE PROMISE – in this case, no guarantee had been made about what he would make on the coin... just an implication that the market would pick up
Therefore, restoration to pre-contract position (return of the $100)
Alternative: Quasi-contractual Liability
Section 311 German Civil Code
Obligations created by legal transaction and obligations similar to legal transactions
(1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract
between the parties is necessary, unless otherwise provided by statute.
(2) An obligation with duties under section 241(2) also comes into existence by
the commencement of contract negotiations
the initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting his rights, legal interests and other interests, or entrusts these to him or
similar business contacts.
(3) An obligation with duties under section 241 (2) may also come into existence in relation to persons who are not themselves intended to be parties to the contract. Such an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially influences the pre-contract negotiations or the entering into of the contract.
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Section 241 German Civil Code
Duties arising from an obligation
(1) By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance.
(2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party.
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Duty to Disclose
A duty to disclose is recognized in both CVL and CML jurisdictions.
In CVL, both the CCQ and statutory provisions outline the extent to which a merchant must disclose. The CVL tends to be more lenient than the CML in voiding Ks, and is increasingly becoming, as seen in Bail v. BMO, “more attentive to inequalities in terms of information.”
Conversely, the CML does not recognize any general duty to disclose. A duty to disclose will be relevant when it pertains to reliance; when it affects the object which induced the parties to contract.
Introduction
Question: “vitiation of consent” or “spontaneous mistake”?
Silence: When is it “dol” and when is it “misrepresentation”?
When does a failure to disclose give rise to a claim for damages?
CVL Duty to Disclose
Art. 1401 CCQ explicitly mentions “silence” – difficult in negotiations to reveal everything, but not saying something might amount to dol
“(1) Error on the part of one party induced by fraud committed by the other party or with his knowledge vitiates consent whenever, but for that error, the party would not have contracted, or would have contracted on different terms. (2) Fraud may result from silence or concealment.”
More lenient to voiding contract that CML
Statutory provisions (i.e. Consumer Protection laws)
Article 218 of CPA
To determine whether or not a representation constitutes a prohibited practice, the general impression it gives, and, as the case may be, the literal meaning of the terms used therein must be taken into account.
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Article 219 of CPA
No merchant, manufacturer or advertiser may, by any means whatever, make false or misleading representations to a consumer.
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Article 220, CPA
No merchant, manufacturer or advertiser may, falsely, by any means whatever,
(a) ascribe certain special advantages to goods or services;
(b) hold out that the acquisition or use of goods or services will result in pecuniary benefit;
(c) hold out that the acquisition or use of goods or services confers or insures rights, recourses or obligations.
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Article 228 of CPA
No merchant, manufacturer or advertiser may fail to mention an important fact in any representation made to a consumer.
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Comments
Good Faith means information must be provided during negotiation (even if there no K (recall Soucisse and Houle c. CNB vs. Martel Building v. Canada)
In Soucisse, the P was in an ongoing contractual relationship so needed to disclose
Houle – the Bank knew that brothers were going to sell, but foreclosed it anyway, thus affecting the cost of shares, even though there was no contract between parties limiting when the Bank could seize assets, there was an obligation to act in good faith (an extra-contractual case)
Bail is also a torts case, not a contracts case, Martel there was no duty to negotiate with the other party’s interest in mind (do not have disclose info.)
CVL - Bail v. Bank of Montreal, [1992] SCC CB2: 103 |
Jurisdiction
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Quebec
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Facts
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Duty of Hydro, as the owner, to disclose information in its possession concerning soil conditions to a subcontractor Laprise in its request for tender. Laprise, who, in consequence suffered great financial damage (bankruptcy) by continuing the work. Here, Laprise is a third party (his contract was with Bail, not Hydro) represented by the bank post bankruptcy. He sues extra-contractually, tortiously, delictually.
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Issues
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Was there a duty to disclose the info to the third party (subcontractor in this case)?
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Holding
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Yes – gets reliance damages (Gonthier J)
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Reasoning
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Gonthier J:
(Cites the CCQ which is soon to be enforced – like Doughboys)
Hydro took advantage of its position of strength to induce the continuance of the work. Farther along the spectrum of misrepresentations than mere silence.
Third case in the Soucisse-Houle-Bail trilogy that adds an obligation of good faith in the pre-contractual stage in the form of a duty to disclose.
3 necessary element for a duty to disclose:
1. Knowledge of the information (actual or presumed)
2. Information has to be important
3. Impossible for the other party to get it or he has legitimately relied on it
Parties to a K are extra-K’ually liable for the damage the may cause to 3rd parties in the context of their K’ual relationship. Standard of reasonableness: the duty to act reasonably encompasses a duty to disclose in certain circumstances otherwise you are in breach of Art 1375.
Expansion of the pre-contractual sphere of obligations that already contains duress, fear, misrepresentation etc.
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Ratio
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A duty to disclose comes up when the three conditions set up in this test are present. Failure to disclose amounts to dol when there is bad faith.
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Comments
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DEDEK’s Questions
Who wants what from whom?
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Duty to disclose? In which relationship?
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Significance of contractual relationship for Hydro’s relationship to Laprise?
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Significance of Good Faith?
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“Shift in the Civil Law”: “more attentive to inequalities in terms of information”
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Significance of the possibility to obtain information regardless of being informed by Hydro Quebec?
In Soucisse – court will imply an obligation of good faith in performance. Add an obligation.
In Houle – Allows court to override a positive obligation for the reason of good faith in performance (recalling a loan)
Here, in Bail, extends concept of good faith to formation of the K. Translated into art 1375
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CML Duty to Disclose
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“Statement of material fact” also includes half-truths: partial disclosure of true facts creating a misleading impression, i.e., Sarvis v. Vermont BUT: No general duty to disclose.
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Sense of good faith doesn’t exist in CML, as seen in Martel – no duty to negotiate in good faith, seen as too far in CML
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“The common law in Canada has yet to recognize that in the negotiation of a contract, there is a duty to have regard to the other party’s interests, namely, to act in good faith.” (978011 Ontario Ltd. v. Cornell Engineering)
BUT there is a willingness to make exceptions: the law might require more than just self-interested dealing where,
(1) a party “relies on the other for information necessary to make an informed choice and
(2) the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party” (978011 Ontario Ltd. v. Cornell Engineering)
Legitimate reliance + Inducement Duty to Disclose
Duty to Disclose in CML
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Where a party is obviously relying, and the other party has valuable information – withholding information leads to vitiation of consent
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In U.S. Restatement §161 Non-Disclosure is equivalent to an assertion (idea of vulnerability of one party because of lesser possibilities to access info which the other party can)
Restatement
§161. When Non-Disclosure is Equivalent to an Assertion
A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:
(a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation of from being fraudulent or material.
(b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.
(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.
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Statutory necessities to reveal information
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In special relationships – utter most fides or trust (i.e. doctor and patient)
Theorists on Economic Efficiency and the Duty to Disclose in CML and CVL
CML Example: Kronman, “Mistake, Disclosure, Information and the Law of Contracts” (1978): CB 122
K’ual agreements are predicated on factual assumptions that might be mistaken; mistakes represent cost
“Information is the antidote to mistake”; rational action will assign risk or mistake to party that is the cheaper information-gatherer; where risk is assigned it must be respected, but where not assigned, courts should impose it on the cheaper gatherer
Socially desirable that information about a change in circumstances reaches market ASAP (allocative efficiency)
Thus we should encourage people gaining more information, 2 distinctions for duty of disclosure
“Deliberately acquired information” – this information was found through cost, because it was costly, the party who has found it should have property right over it and should not be denied any benefits for disclosing his information, to deny the benefit would discourage parties to look for information (and information is beneficial to the market and society in general)
“Casually Acquired information” – this information did not incur expenses and so the party should disclose, because he didn’t incur any expense to get the info
Denying buyer a property right in deliberately acquired information discourages both buyer and seller from searching for information
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1.1.4.1.1French CVL: Fabre-Magnan, Muriel, “Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis” CB 126
argues that Duty to Disclose and good faith can be economically efficient – if information is not disclosed there might be problems in the future which is more expensive for everyone
should disclose if it is your prestation because you know more about it (i.e. you know your own house better than the buyer, and it is cheaper for you to do the research)
we should honour due diligence (let the party with more resources pay)
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Issues with the Duty to disclose
-
What are the economic considerations?
-
Mistaken factual assumption poses RISK
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Allocation of Risk
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Deliberate v. casual acquisition of information
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Information concerning one’s own or the other party’s “prestation”
Error (CVL)/Mistake (CML)
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General Issues to consider when voiding a contract due to mistake (not misled, influenced by the other party)
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Autonomy of Will v. Stability of Contracts
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Reliance of the other party (in the absence of undue influence, fraud etc.)
Error (CVL)
CVL Error Concept is broader than CML’s concept of mistake (CML reluctant to grant relief grounded on (unilateral) mistake)
-
Error can give rise to a right to apply for annulment (even if unilateral), as long as it is
-
Significant; and,
-
Excusable.
Art. 1400 CCQ
Error vitiates consent of the parties or of one of them where it relates to the nature of the contract, the object of the prestation or anything that was essential in determining that consent.
An inexcusable error does not constitute a defect of consent.
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3 types of error based on:
-
Nature of contract: A wants to conclude a contract of sale, B wants to conclude a lease (Rawleigh)
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Object of Prestation: A wants to buy X, B wants to sell Y
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“Anything that was essential in determining that consent” (Huot v. Ouelette)
See Huot v. Ouelette – other party shouldering the risk as to some motive for entering the K
Sheer mistakes as to motive are not enough to pass as an error in terms of the Civil Code – example of the wedding ring, and then the wedding falls through
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Inherited from French CVL, Roots in Roman Law
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Ulpian, Sabinus, book 28, On wine and vinegar, “I think that there is no sale by reason of the error over the material.”
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i.e. any “essential quality” of a person or a thing
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HD argues this opens the Floodgates
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DIFFERENCE BETWEEN Old French “Erreur obstacle” – a mistake that means there was no contract in the first place
Error regarding qualities of a person:
-
Not only identity (which is the approach of the CML) but also personal attributes, qualities, if these qualities are essential within the particular contractual relationship – which is the case in contracts “intuitu personae”
-
If they’re a professional, you want them actually to be a professional
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Identity – if they are who you think they are
Error regarding qualities of a thing:
-
Any essential quality but not VALUE
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Coherence with the regulation of lesion
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Problem: MOTIVE – example – X buys a wedding ring; what happens if the wedding falls through?
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How subjective can an error be – at which point do we say: this must not, to the detriment of the relying party, interfere with the contractual obligation
Attempt at distinction by Baudouin & Jobin:
Does the error pertain to:
Characteristic of the object
Does the characteristic objectively amount to a “substantial” characteristic?
Or is it unrelated to a quality of the object?
E.g. You buy a house in Sherbrooke because you think you’ll get a job there; turns out you don’t!
What can you do as a party if you want your motives to be taken into account? specify these motives in the contract and allow for them so that both parties are aware!
Consequences of an Error in substantia
Classical French (and Quebec) doctrine distinguished between
Erreur-obstacle (no consent at all):
Nature of contract, identity of object
Erreur-vice de consentement (consent, but vitiated)
Error regarding substance or quality of person
** Modern Quebec law does not make this distinction any more – erased from the new Code: “Uniformity of Sanction”
Burden of proof that the error was “inexcusable” and therefore not grounds for annulment is on the other party (who does not want annulment)!
Limiting Factors in CVL and Error
State of the mind of the other party? Error does not have to be known to the other party
Error inexcusable?
Which standard applies?
“L’erreur inexcusable [est] un exception à la nullité pour erreur”
Restrictive interpretation (Baudouin/Jobin); personal circumstances (age, intelligence, professional experience, etc.) taken into account
Evidentiary Standards: Substantiated proof (this is difficult to do when you say “I just made a mistake” – it pertains to a psychological process)
Judges often find it necessary to look at all of the external evidence (testimony of third parties, evidence of mindset)
Unilateral or Subjective Error/Mistake
It is only one party which is mistaken.
How does this matter? Is it more justified if both parties are mistaken?
Civil law sees it as a defect of consent. Your consent is not free and enlightened. Can get out regardless of whether it is unilateral or bilateral error. (In Rawleigh unilateral or bilateral is good enough)
Art 1400 where it says both parties or one of them…..
Common Law (as in Smith v. Hughes which is not decided as offer and acceptance – go to CBp. 110). There is no doctrine of unilateral mistake in the Common law. Whether or not you think A, it is how you conduct yourself – the objective manifestation of your consent. Smith v. Hughes buyer took the sample for 24 hours and said “I want these” but did not make ‘old oats’ a part of the obligational content. How do you appear to the world?
CVL – Rawleigh v. Dumoulin, [1926] S.C.R. 551: CB2: 97 |
Jurisdiction
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Quebec
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Facts
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D and another signed a K of guarantee for all moneys due or owing by Charland to R, who sold Charland goods for resale. Charland told D that he was only signing a reference; D did not understand the English K. Charland’s indebted account was closed, then he declared bankruptcy; R pursues D for the guarantee.
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Issues
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Is the K void for fraud (CCLC 993)? Is the K void for error (CCLC 992)?
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Holding
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(5-0): No. Yes. Dumoulin
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Reasoning
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Mignault J:
-
Fraud cannot be maintained here because R wasn’t party to the fraud
-
The document actually at issue is K of suretyship between D and R, so R is not a third party to anything, and D is entitled to raise an error his not having understood the K (error as to K’s nature)
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Fin de non-recevoir (similar to estoppel) was suggested by lower courts because D didn’t read before signing
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CCLC 992 holds error as a cause of nullity, regardless of cause of error and judged subjectively
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Usually, if a K is vitiated for error, a party that acted imprudently must indemnify the other party that acted in good faith
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R wasn’t really a third party, but a party to the K of guarantee made in his favour
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No authority admitting a fin de non-recevoir with regards to an action or defence based in error
-
Fins de non-recevoir can only be created by law – none listed in CCLC, but rather implicitly excluded
-
English law has no estoppel for this circumstance
-
D signed contract because of error as to nature of the K, so can’t be made to pay money to R
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Concerns that unscrupulous people will use this idea to escape Ks can be avoided by legislation and skilled trial judges
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Ratio
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Fraud is relational. Damage to one party is no reason to maintain a K otherwise vitiated by error.
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Comments
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Today, the question is whether not reading a K would be an excusable or inexcusable error
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Once K is nullified, there never was a K – door is opened to an ECO remedy
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Test for Rawleigh v. Dumoulin
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There was an error
-
The error was not inexcusable
-
Seen though evidence
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Code says non-inexcusable errors lead to relative nullity
-
Court struggles with if there was never a contract, or if it is null
-
consequence is nullification – and restitution (money goes to notaries)
-
damages – there is no claim because there was no fault, even though seller relied and lost opportunity closes, the law is trying to balance both sides (thus both lose due to subjective error)
CVL – Huot v. Ouellette, [1981] C.S. 872: CB2 : 141 |
Jurisdiction
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Quebec
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Facts
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H (plaintiff) signs an offer to buy O’s property. A few days later, a notary informs H that there is a gas line (servitude) under the property, but H signs the mortgage in the meantime because the notary suggested that Gaz Metropolitain would probably be able to cancel the servitude. H’s wife has a certified phobia of gas, and the notary cannot arrange to have the gas line moved, so H refuses to buy the property. H claims return of his deposit (restitutionary claim) and damages (claiming that they should have been told); O counterclaims damages (because they had bought another house, and had sold this house at a loss – needed money quickly to finance their new house), wants K upheld.
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Issues
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Was O obliged to tell H about the existence of the gas line? Does the existence of the gas line constitute a sufficient reason to nullify the K?
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Holding
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No. Yes. Huot.
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Reasoning
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Bourgeouis J:
-
The servitude appeared in the public registers and was never hidden; both parties acted in good faith
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H knew or ought to know about the servitude
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The only public utility servitudes (which as a class were mentioned in the offer) that were visible were for water and phones
-
If the gas line were not there, H would buy the property immediately
-
Judge takes the psychiatrist’s evidence that the wife said she would have no hesitation about the sale if the gas line was not there
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Given his wife’s phobia, impossible for H to undertake the mortgage to buy the property
-
Impossible for the Court to conclude that H or his wife knew or were presumed to know about the gas line before the notary told them
-
QC law can provide for subjective reasons not to follow through on an offer to buy: here, H cannot have given valid consent to the K (lack of an essential element)
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Even if there was a K, it was executed in error
-
Where the error is absolute, the K is nullified (never existed), and the court must apply RII in assigning damages (torts)
-
Both parties lost out, so O only condemned to pay back H’s deposit
-
Damages claim falls through – because no dol – no inducement on the sellers’ part
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Ratio
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Substantial subjective error can vitiate consent.
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Comments
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The mistake is subjective, and protects an individual’s consent (in the QC regime), one person’s purely idiosyncratic concern is seen as cause to nullify a K
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CCQ 1400 does give people margin to make a mistake if sufficiently linked to the
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Huot v Ouellette under New Code
-
Under Art. 1400, error needs to be in the object of the contact, here the error was not to the physical place, but to the change in quality
-
Thus we don’t go with error
-
Instead we look at the residual category of “anything essential”
-
The P claims that had they known about the gas line, they would not have signed the contract
-
Disposition says it wasn’t fraud, that the D had done all he needed to disclose
-
To see if the error is essential must fall into one of two categories
-
Erreur sur la substance
-
Erreur sur la personne
-
Note the importance of the evidence: who knew what at what point?
-
Note how court finds that an agreement never existed – compare modern regulation which leaves no doubt as to “relative nullity”
-
THIS IS NOT HOW THIS WOULD BE HANDLED TODAY – today, the Code provides that relative nullity can always be invoked when there is error, except when the error is inexcusable
-
Restitution? YES
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Damages? NO the other party has not benefited from the additional loss of money, and they were not at fault
-
In CML, unilateral mistake is not grounds for annulment
Analysis
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Essential quality of substance – they though they were bargaining for a house without a gas line – it is essential because of the phobia
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French and Quebec law lenient for allowing recourses to subjective motivation because the protection of consensus is paramount in CVL
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If there is an error, it must be not inexcusable
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Assumption that the seller will disclose servitudes, didn’t say specifically that were was a gas line, but notary said the it will be removed, this could not be done
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As a buyer looking at the object, could not have seen the gas line (underground), therefore the error was not inexcusable
CVL – Yoskovitch v. Tabor, [1995] R.J.Q.1397 (Sup. Ct.). |
Jurisdiction
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Quebec
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Facts
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Plaintiff, Yoskovitch sold her baking business to Mrs Tabor for 50,000. Payable at $500 a week with the balance after 1 yr. Defendant Tabor was a cleaning lady earning 250-300$ a week, could not read or write English and was uneducated. The assets of the business consisted of: a small used stove (D-3); two small used hand mixers; 14 aluminium trays, whose cost new was less than $1 each; two recipes for the two products (P-4); and a list of 12 customers (D-4). The financial reporting were suspected of being overstated and understated.
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Issues
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Was there a problem of consideration? Was there lesion? Was there fraud/artifice? Did error vitiate Mrs. T’s consent? Was the obligation to pay $50,000 an “abusive clause”?
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Holding
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No. No. No. Yes. Yes. Tabor.
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Reasoning
| -
Cause exists, for Mrs. Tabor's obligation to pay the price, namely the sale and delivery of the business, and a cause for the contract, namely the sale of a business, which was not illegal or contrary to public order.
Lesion? No
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Mrs. Tabor was neither a minor, nor a person under protective supervision, when the agreement was signed. Her attorney has not invoked any express provision of law which would permit the Court to apply the concept of lesion as a ground of nullity of the agreement.
Fraudulent representation? No
-
The Court is unable to conclude that there were any express fraudulent representations made by plaintiffs or by Mr. Yoskovitch to Mrs. Tabor to induce her to sign the agreement P-1.
Did Error Vitiate Mrs. Tabor's Consent? Yes
[1] Error as to the Nature of the Contract
In the present case, the proof does not establish that Mrs. Tabor was unaware she was signing a sale agreement, i.e. that there was error on her part as to the nature of the contract.
[2] Error to the Object of the "Prestation"
-
Could be the object of the vendor's obligation, namely the transfer and delivery of the baking business,
-
There was no error proved here as to the nature of the baking business.
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‘and’
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Could be the object of the purchaser's obligation, namely the price payable.
-
However, as regards the second object, defendant claims to have misunderstood the amount of the price.
[3] Error as to an Essential Element Required for Consent
-
Plaintiffs and Mr. Yoskovitch took undue advantage of Mrs. Tabor's
-
lack of business experience
-
her limited education and understanding of the English language,
-
and their relation as employers to her
-
As a result, her consent to the agreement was not fully informed. Through her failure to understand the value of the business sold, the price to be paid, and its manner of payment, her consent was vitiated by an error as to an essential element of the contract.
-
Under the circumstances mentioned above under (i) to (viii), the Court believes that Mrs. Tabor's error was excusable.
Abusive clauses? Yes, but irrelevant
-
Contract of Adhesion? (1437 CCQ)
-
In the Court's opinion, the agreement P-1 was clearly a "contract of adhesion".
-
It was entirely prepared by the Yoskovitchs, without any significant prior consultation or discussion with Mrs. Tabor.
-
No changes were made to the draft submitted to her by plaintiffs.
-
She was unable to obtain the advice of her son thereon prior to its signature, because of plaintiffs' requirement that it be signed immediately or never.
-
Because of her limited education, her inadequate knowledge of English, her lack of business experience, and the pressure placed on her by plaintiffs to sign, Mrs. Tabor was effectively unable to negotiate the terms of the agreement.
-
The first question which arises from art. 1437 Q.C.C. is whether it was merely intended to permit the annulment of a specific clause which imposed excessive and unreasonable obligations upon the adhering party, or whether it can also be applied as against an essential clause in the contract, such as the price, the annulment of which would prevent the contract from being performed?
-
In view of the conclusions under V-C above, the Court need not decide this question.
Dismisses plaintiffs' action, with costs; Grants defendant's cross-demand and annuls the agreement between the parties dated July 27, 1990 (P-1), and confirms defendant's tender of the stove and other equipment received thereunder back to plaintiffs, with costs.
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Ratio
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Mistake (CML)
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Subjective misgiving should not destroy a contract when someone has made a contract, and there is reliance
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Common law focuses on promises, in CVL the focus is sanctity of consent
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Reluctance to grant relief grounded on (unilateral) mistake
“The most important feature to understand about the law of mistake is that it is a residual category, i.e., it is the argument that counsel falls back on when all else fails. […] This feature results in its failure to develop a principle analysis of the cases and problems and in there being no consistency even in the kinds of cases that will be regarded as “mistake” cases.
John Swan, Canadian Contract Law, p. 565
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Problem is that mistake is conceptually underdeveloped, hard to find commonalities that are in residual categories, hard to have consistent rules, many rules are not crystallized like codal provisions
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“Assuming that fraud, duress, or any wrongdoing, why does the existence of a mistake ever justify a court in releasing from their obligations?”
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“This suggestion does not account for the common law’s refusal to give relief for unilateral mistakes – if consent is the concern, it should be sufficient to show that one party made a mistake.” Atiyah/Smith, Law of Contract, p. 175
Two Categories (for our purposes):
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Misunderstandings: mutual or unilateral mistake, mistakes negativing consent
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No “consensus ad idem”, contract void
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Mistaken Assumptions: common or shared mistake, mistakes nullifying consent
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Consent vitiated: Consequences?
CML Contract void in certain cases (not “voidable”)
Fundamental mistake shared by both parties
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Res sua
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Res extincta
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“existence of the subject matter”
Voidability in Equity beyond those classes of cases?
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These attempts have now been rejected – forget about this...
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Misunderstandings – Contract is VOID
No real agreement has been reached on the contract (compare the CVL idea of the erreur-obstacle!)
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Ambiguity: there is no reasonable interpretation that prevails over the other (Raffles v. Wichelhaus – ambiguity of which Peerless ship was meant in contract)
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Perspective of the “reasonable objective observer” – no objective interpretation that would take one party’s interpretation over the other, so ambiguity
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Mistake as to Terms: One party is mistaken as to a contractual stipulation, and the other party is aware of that mistake (corrective to the reasonable-man-standard) – if the mistake is known by the other party – cannot use the reasonable standard to enforce the reasonable interpretation (eg. With the Swiss man making a deal with francs –he thinks it is swiss francs, even though the reasonable interpretation would be of French francs; person at an auction waving hello to someone – if the auctioneer knows you’re waving, you can’t be bound, even though the reasonable observer may think you were bidding)
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In this case, knowledge of the mistake means that both parties are not bound
-
“You cannot invoke the reasonable man if you know better”
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Mistake as to Identity: A is induced by B to enter into a contract with B, believing that B is someone else
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Erreur de la personne does not enter into CML at all – only the IDENTITY of the co-contractor is important
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This seems superfluous – fraud would be claimed instead
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Depends on whether or not you want the contract to be “void” (never existed) or “voidable” (can be annulled) – This sort of mistake would be claimed in contracts involving a third person – someone else was fraudulent, and the mistake carries on (recovery of title for property from a third person – calling something void from the start means that title did not pass; calling it voidable means that the title actually passed and the original titleholder has no recourse)
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Non est factum: as signature was a forgery – only in extreme cases, applied to illiterate/blind people now also invoked if someone is fraudulently induced into signing a document they don’t know the contents of. Again, mistake is invoked to render the contract VOID, so that Ks involving third parties are not enforceable
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This has been extended to literate people who have signed things by mistake, but it has to be proven that the signature was not the result of a careless error on the part of the signer
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Mistaken Assumptions (“Common Mistake”)
Lord Denning “The parties, whatever their inmost state of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter…” but the parties err as to underlying assumptions
BUT
The parties reach an agreement on the terms of their contract, but share an error with respect to some important contextual circumstance that has motivated one or both parties to enter the agreement.
Basic Rule
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Mistake must be fundamental and
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Shared by both parties (different from CVL!)
Contract is VOID in two “classical” types of cases
Unbeknownst to the parties, the sold goods have ceased to exist before the contract was made
Purchase already owned the subject matter of the sale
This is taken care of by the doctrine of consideration (thank you Joey!)
“Beyond these two categories, the scope of the common law has been and, indeed, remains rather unclear.” McCamus, The Law of Contracts, p. 527
These categories are very unlikely, but these categories are more a stepping stone to where the CML is now.
This doctrine is very limited in its scope of application.
CML – Sherwood v. Walker and Extension of Res Extincta
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This case stretches the res extincta doctrine (mistaken assumption) – “The thing sold and bought had in fact no existence”
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“There was no contract to sell or sale of the cow as she actually was”
-
Contract referred to a different object altogether: Remember the reasoning employed by the Roman jurists – when is a thing different in kind, when just of different (lesser) quality? Is this wine that has gone sour (difference in quality), or is it just vinegar (different kind)?
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Particulary given the fact that one cow had been singled out and chosen: “Rose 2nd of Aberlone” was sold and delivered
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Dissenting opinion: “It if be only a difference in some quality or accident, [the contract] will remain binding.”
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Focus is not on the subjective ideas of the parties, but interpret the object of sale as the “barren cow” – reflective of the court spinning the facts
CML – Sherwood v. Walker (1887), 22 NW 919 (Mich S.C.): CB2: 99 |
Jurisdiction
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USA
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Facts
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S called W to buy a cow and didn’t find one that suited him; W told S to visit W’s other farm, where the cows were barren, and choose one; S did so, and W agreed to telephone a price. S and W agreed to the price, and the deal was confirmed in writing. S went to W’s farm to pick up the cow, but the employees wouldn’t deliver it; S sued for replevin and obtained the cow. Cow was sold for small (non-breeder) sum, but soon had a calf; W sues to recover the cow.
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Issues
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Is the K void for error?
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Holding
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(3-1-?) Yes Walker.
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Reasoning
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Morse J:
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Both parties believed cow to be barren: misapprehension went to whole substance of agreement, which wouldn’t have been made except upon the understanding they had
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Mistake wasn’t as to quality but as to very nature – if the cow had been known to be fertile, there wouldn’t have been a K – they were bargaining for a barren cow, this is not a difference in quality or kind – but in substance
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No K for the sale of the cow as she actually was
[Dissent]:
-
Neither party knew cow’s condition at time of sale; S thought she could be made to breed; each party entered into the K on their own understanding
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No conditions attached to the K; “as absolute as it could well be made”
-
Courts’ duty is not to destroy Ks when called on to enforce them
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No difference/misapprehension as to thing bargained for – each party took a chance
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Ratio
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When a misapprehension goes to the substance of a K (“but for”), K is nullified.
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Comments
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Like Raffles, but here mistake was mutual (so why shouldn’t S have the windfall?)
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Majority and dissent have different concepts of what is a K of sale and why people sell things
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Majority chose a moral fascia of sale (likely drawn from the 17th/18th c.-style sale of land) whereby K applies to thing with fixed value about which there’s 100% certainty – static, assumes perfect information – no risk allocation (who should have known, who should bear risk, etc.)
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Dissent thinks that one reason for people to buy/sell is that not all information is known, and situations may change (more similar to today’s conception)
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CML – Bell v. Lever Bros
Recital of the Law of Mistakes:
Mistakes nullifying consent – res extincta/res sua
Mistake as to quality: “As to the existence of some quality which makes the thing essentially different from the thing it was believed to be.”
Is the agreement actually concluded “different in kind” from the agreement as it was believed to be?
Different theory: implied term? Implication only if “new state of facts makes contract something different in kind from the contract in the original state of facts.”
Dissent: Broader formulation of the test
CML - Bell v. Lever Bros., [1932] A.C. 161 (H.L.) CB2: 138 |
Jurisdiction
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UK
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Facts
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Bell is contracted with Lever to work as director of company. During employment, he engages in profiteering (with insider info). Company merges and cancels the first work contract replaces it with a severance contract. Lever Bros (Pl) uncover profiteering and claim back severance based on mutual mistake – ie, had they known of profiteering, would not have given severance.
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Issues
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Was there mutual mistake?
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Holding
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No Bell
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Reasoning
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Lord Atkin:
Mistake will only get a party out of a K when the truth actually destroys the identity of the subject matter as it was in the original state of facts. That is, mistake as to the quality of the subject matter of the thing K-ed for will not affect assent unless it is MUTUAL and is as to the existence of some quality which makes the thing essentially different from the thing as it was believed to be. ASK did the mistaken parties get what they bargained for (more or less) or something fundamentally different?
-
Mistake existed prior to the severance contract: both parties believed that they were entitled to severance.
-
The employers bargained for a severance k & got exactly what they bargained for.
-
In this case, the identity of the subject-matter was not destroyed by the mutual mistake. And it is perfectly normal that the employees did not disclose their wrongful behaviour.
Dissent:
-
Erroneous assumption (that the employees were entitled to severance) was fundamental to the bargain – it would not have been made without the erroneous assumption – this is reasoning along the lines of the CVL error.
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Ratio
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Comment
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Def’n of Mistake: “The parties must be mistaken in the identity of the K’ing parties, or in the existence of the subject-matter of the K at the date of the K, or in the quality of the subject-matter of the K.
-
Note also that there is no Legal consideration for the severance there was no reason to give him severance. But…there is factual consideration - had bona fide belief that they owed severance like Stott v. Meritt where no real obligation for Stott to actually pay back the money.
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Also: there was no misrepresentation on the part of the employees
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Jukier on Bell v. Lever Bros.
-
Application of Lord Atkin’s test is practically impossible to meet. The doctrine exists but is very difficult to satisfy. When is it so substantially different that it changes the subject matter of the thing?
Risk Assumption
-
Applying the rules established by the doctrine of mistake presupposes that the parties have not made a stipulation – explicit or implied – as to the allocation of risk of their assumptions being incorrect.
-
Example: Warranty regarding the existence of the “subject matter” (that there was a shipwreck to be salvaged) – no recourse to the doctrine of the “non-existent subject matter” McRae v. Commonwealth Disposals Commission – assumption of risk that the shipwreck existed was on the party that said there was one
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CIVIL LAW
A condition of A condition of formation
formation related to protecting an individual
the general interest interest
Defects of consent
Absolute Nullity Relative Nullity
* May be invoked by any * Generally may only be invoked by a
interested party or judge protected person
* May not be confirmed * May be confirmed; some discretion
for judge (1408)
K Unenforceable + Restitution
* Contract deemed never to have existed, Art. 1422
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ANGLO AND CANADIAN LAW – VOID AND VOIDABLE
Common Law Equity
(strict rules) (discretion)
Void ab initio Voidable
Unenforceable
+
Restitution
* Contract may be confirmed
* Remedy subject to terms
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Classroom Exercise
B collects coins. Vendor V offers him a certain piece for $ 1,000, B accepts. B pays the price and V hands over the coin.
1) Both V and B had assumed the coin was an original. It now turns out that it is fake.
CVL
1) B is making a claim in restitution. Must apply for annulment.
No problem with formation of contract.
No problem with objective nullity. Prove that the contract is relatively null.
Error vitiates consent?
Art. 1400 – nature of contract and object of the prestation (which specific coin) is ok; problem is with an essential element (erreur sur la substance, erreur sur la personne); inexcusable error
Subjective nature of the error – but-for test – if B had known it was fake, he would not have bought the coin
Is it an error on the price? Not technically – both parties knew it was $1000
Is it an error on the value? Yes – the fact that the coin is fake means it is not worth $1000
What about lesion? Questions of value bring in questions of lesion
Was error inexcusable? Burden of proof is on the vendor.
CML
1) B is making a claim for resiliation of the contract. Must prove mutual mistake.
This is not a misunderstanding – both parties agreed on what was being sold and for how much. The question is whether or not there were shared false assumptions.
This is an extension of res extincta – does the thing bargained for exist at the time of formation of the contract? no. The thing bargained for is radically different from that which is actually received.
Question from cow case – is it different merely in quality, or is it a different thing altogether?
2) B believed that coins of this kind had recently been sold at auctions abroad for immense prices, and that the market here would pick up on it soon. B was hoping for future profits. V did not know about B’s expectations. It turns out that B was mistaken as to the identity of the coins sold abroad.
CML
2) B’s expectations have been inflated by his own misunderstanding of the facts abroad. This leads him to make a bad investment, but it has no bearing on the contract whatsoever. This is not a mutual error either TOO BAD FOR B.
CVL
2) Claim for annulment of the contract basis on error on an essential element of the consent given. Too subjective and far removed from the responsibilities of the vendor/subject matter of the bargain. Also – this is not a question of value, but just of a miscalculation of the investment.
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