VITIATING FACTORS IN CONTRACT LAW:WHEN CAN A CONTRACT BE SET ASIDE?

In contract law, the principle of freedom of contract allows parties to enter into legally binding agreements. However, not all contracts remain enforceable. Certain vitiating factors can undermine the validity of a contract, making it void or voidable. This blog examines these vitiating factors, exploring when and how a contract may be set aside. 

A vitiating factor is one that may operate to invalidate an otherwise validly formed contract, that is a contract that conforms to all the rules of formation that I had already identified for you in one of my previous blog. (See UNDERSTANDING CORE ELEMENTS OF A VALID CONTRACT) To vitiate, basically means to impair the quality of, to corrupt or to debase. The role of law is to provide a remedy to the party who may not have wished to enter the contract given the full knowledge of the vitiating factor at the time of formation. 

There can be two effects if a contract is vitiated: it may be void or voidable. Whether the contract is void or voidable in a given case depends on the type of vitiating factor that is complained of. 

• Void contracts- stating the contract is void is in many ways the same as stating the contract does not exist
• Voidable contracts- the vitiating factor is identified and acknowledged but this does not necessarily mean that the contract is at an end. A party who has entered a contract that is voidable for a vitiating factor can continue with the contract if that is to his benefit. On the other hand, that party can avoid their responsibilities under the contract and in effect set the contract aside. 

 CLASSES OF VITIATING FACTORS 

There are 4 classes of vitiating factors: 

        1. MISREPRESENTATION 

This is where a contract has been formed but as a result of false information about its substance, the innocent contracting party who is the victim of the misrepresentation can avoid the contract. In order for misrepresentation to be actionable, therefore, the statement must not only be false but have acted to induce the other party to enter the contract. 

Misrepresentation may refer to the false statement itself or may be the action of making the false statement. The consequence of a contract having formed on the basis of a misrepresentation is for the contract to be voidable at the request of the party who is the victim of the misrepresentation. 

Inevitably, there are a number of essential elements that must be satisfied in order to claim this false statement as an actionable misrepresentation. Misrepresentation can therefore be defined according to these essential elements:

• A statement of material fact- the statement cannot therefore have been offered as a mere opinion or merely expressing a future intention. 
• Made by one party to a contract to the other party to the contract
• During the negotiations leading up to the formation of a contract
• Which was intended to operate and did not operate as an inducement to the other party to enter the contract
• but which was not intended to be a binding obligation under the contract
• and which was untrue or falsely or at least incorrectly stated.

If each element above cannot be identified in the statement then it cannot be said to give rise to a misrepresentation. 

There are 3 classes of misrepresentation: 

• Fraudulent misrepresentation- this occurs when one party knowingly makes a false statement to deceive another into entering a contract. If proven, the contract can be set aside, and the innocent party may claim damages for any losses suffered.
• Negligent misrepresentation- this happens when a party makes a false statement without reasonable care to ensure its accuracy, leading another party to enter a contract based on incorrect information. The affected party can seek damages if they suffer a loss due to the misrepresentation.
• Innocent misrepresentation- this occurs when a party unknowingly provides false information, believing it to be true, which then influences the other party to enter a contract. While the contract can be set aside, damages are usually not awarded unless provided for by statute.
  

        2. MISTAKE     

Where the contract has been formed on the basis of mistakes about contracting terms made by either party or both parties. A contract is based on an agreement, meaning both parties must willingly and clearly understand the terms (consensus ad idem or 'meeting of the minds'). If one party enters into contract due to a mistake, it means there was no true agreement because their understanding of the contract was incorrect. In such cases, the contract may be set aside, as the agreement was not genuinely reached. 

Mistake in contract law is closely linked to misrepresentation because a party might claim they made a mistake due to false information even if he the other party did not intend to deceive. This can lead to legal disputes where both mistake and misrepresentation are argued together. 

Courts have been traditionally reluctant to void contracts due to mistake, as it can lead to unfair consequences. For a mistake to invalidate a contract under common law, it must be operative, meaning it was so fundamental that the contract would not have been made without it. If a mistake was not operative, then the contract is void from the beginning (void ab inito), meaning it never legally existed and all rights disappear. 

If a mistake is not operative, common law does not apply, but sometimes equity (fairness, based on legal principles) can offer a solution. In such cases, the contract is voidable. 

There are 3 classes of mistake:

• Common mistake- this is where both parties make the exact same mistake
• Mutual mistake- this involves both parties being mistaken. However, with mutual mistake the parties are not making the same mistake but are cross-purposes and have a different interpretation of the substance of the contract. If the parties are genuinely at cross- purposes then the contract is void. 
• Unilateral mistake- In cases of unilateral mistake, one party is mistaken about a key aspect of the contract, while the other party usually knows about the mistake and tries to benefit from it. This can sometimes involve fraud. A unilateral mistake can occur in two ways: Mistake about contract terms – One party misunderstands an important term of the agreement or mistake about the other party’s identity – One party is mistaken about who they are contracting with. If the mistake is fundamental to the contract, the court may declare the contract void, meaning it never legally existed. However, if the mistake is not essential, the contract remains valid and enforceable.
  

Vitiating factors in contract law are extensive and broad, and in this blog, I have only explored misrepresentation and mistake. These factors can significantly impact the validity of a contract, making it void or voidable in certain circumstances. However, there are still other important vitiating factors to consider, such as duress, undue influence, and illegality. To get a full understanding of how these factors affect contracts, stay tuned for my next blog, where I’ll break down the remaining vitiating factors in detail!

 

 

Disclaimer- The information provided is for general informational purposes only and should not be considered as professional advice. Please consult a qualified professional for specific guidance. 

 REFERENCES 

Chris Turner, Unlocking Contract Law, Routledge, 2014