1.3 How Contracts May Be Voided
Fraud
By definition, fraud means misrepresentation of a material fact or concealment of a significant defect. Fraud also includes a falsified appraisal by an expert but does not include a non-expert’s opinion. Examples of fraud include the rollback of an automobile’s odometer prior to sale or an altered appraisal of a diamond ring. On the other hand, if you are looking to buy a 1965 Mustang and the owner tells you that he predicts its value will double within five years, this does not constitute fraud.
To prevail in a suit to have a contract set aside on account of fraud, the plaintiff must prove three things:
1. There was intent to mislead. The term that reappears often in this business law course and on the IQEX Exam is “scienter” which a Latin word denoting intent to mislead is and or reckless disregard for the truth.
2. Reasonable reliance by the plaintiff (i.e. the injured party).
3. Injury resulted (in a financial sense).
Fraud may occur in the inducement to enter into a contract during negotiations or in the execution of the contract. An example of the former is a representation that a car has only been driven 10,000 km whereas the actual distance is 50,000. An example of the latter is a lawyer representing to a client that the client is signing a will, while, in reality, the document is a promissory note in favour of the lawyer.
Remedies for fraud include rescission (voiding) the contract or a reduction in compensation (e.g. a price reduction to compensate for the inaccuracy of a car’s odometer).
Innocent misrepresentation may give rise to the same resolution, but damages would not likely be awarded.
Duress
Duress means threats of violence or extreme pressure against a party or a family member. It may involve social or economic coercion. Extreme duress causes an agreement to be void while ordinary duress creates a voidable agreement.
Undue Influence
Undue influence occurs when a dominant person (parent, employer, advisor) persuades a weaker person to enter into a contract to the latter’s detriment.
A good example is a situation where an individual is hired to work in a remote area and is required to sign a lease for company housing. If the individual quits or is fired, he or she would probably use the undue influence argument to void the lease.