Misrepresentations in Contracts an Examination

¶ … Misrepresentations in contracts An Examination of the Implications of Mistakes and Misrepresentations in Contracts Generally speaking, a contract is an agreement that is enforceable through the courts. Clearly, in order for all of the parties to any given contract to achieve the desired goals of the agreement, everyone involved must be informed of the circumstances and facts surrounding the agreement, and it is important to capture all of the elements required for its execution when crafting the instrument.

People - even lawyers - are only human, though, and intentional and unintentional mistakes and misrepresentations are sometimes made in contracts that can have profound implications for all of the parties involved. To gain a better understanding of what these implications might be, this paper provides an overview of contract law, and what the authorities have to say about contracts containing mistakes and misrepresentations. A summary of the research is provided in the conclusion. Review and Discussion Background and Overview.

Black's Law Dictionary defines a contract as "An agreement between two or more parties which creates an obligation to do or not to do a particular thing. As defined in Restatement, Second, Contracts, Section 3, 'A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty'" (p. 322).

Even if parties strongly desire to be bound by a contract, though, the law does not automatically give effect to such mutual assent. According to Beatson and Friedman, "Each system may impose additional conditions for the validity of a contract, e.g., the requirement of consideration or that of a formal document. These rules impose a limitation on the positive notion of freedom of contract. If such requirements are not complied with, the contract does not exist or is unenforceable" (p. 27).

Because a contract is an agreement that establishes enforceable legal relationships between the parties thereto, it is essential that the instrument be free of mistakes, of course, but mistakes are something that can usually be fixed after a contract has been executed; the parties to such a contract can mutually agree, for example, that a mistake has been made and appropriate revisions made to the contract.

Of course, an arbiter or judge could also enforce a contract that contains a mistake, even if the party making such mistake objects depending on the circumstances; for example, "Where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud it is wholly immaterial that he has not read the agreement and does not know its contents" (emphasis added) (Waddams, 1993). According to F.H.

Buckley, "The sanctity of signed agreements was reinforced by the so-called parol evidence rule -- the rule that when a contract has been reduced to writing, extrinsic evidence of verbal understandings is inadmissible to modify the writing" (p. 83). Misrepresentations, though, represent a different matter entirely since they potentially relate to fraudulent acts that might contain criminal elements of unlawful gain and would easily be grounds for nullifying the legal effect of the contract. These issues and the requisite elements of a contract are discussed further below.

Mistakes and Misrepresentations in Contracts. Black's defines "misrepresentations" as "Any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts. An untrue statement of fact. An incorrect or false representation"; by contrast, a "mistake" is "Some unintentional act, omission, or error arising from ignorance, surprise, imposition, or misplaced confidence" (emphasis added) (p. 1001).

Clearly, then, if a party to a contract makes a mistake based on a misrepresentation of the facts by one or more other parties to the contract, the contract would likely not be enforceable in any court of law.

According to Avery Katz, "Courts and commentators who view contract formation law primarily as a coordination device spend most of their time on 'convention maintenance'; [these are] activities such as describing and promulgating the prevailing conventions; protecting the reliance investments of those who operate according to them; providing newcomers with incentives to learn them; and assisting everyone in applying them in ambiguous and novel situations -- all for the sake of averting misunderstandings" (emphasis added) (p. 1249).

Because the legal implications of each contract are unique, it is clearly important for the parties to come to a "meeting of the minds" in arriving at the terms of their specific agreement; Katz points out that common law doctrine maintains that, absent special circumstances, an offeree's silence in the face of an offer does not constitute assent to a contract; the typical explanation provided for this rule is based on conventional understanding: "Ordinarily, silence does not warrant an inference of consent, since there are too many other reasons to remain silent" (emphasis added) (Katz, p.

1250). According to this author, one commonly offered justification for promissory estoppel is misrepresentation, in other words, that the promise made by one party either intentionally or unintentionally tended to mislead the promisee.

In most cases, all of the parties to a contract will not have equally good information upon which to base their decision to proceed with the agreement; even if the offeree enjoys all the gains from the exchange and pays all the losses from such wasted reliance, Katz suggests that an offeree without accurate information about costs, benefits, and risks is unlikely to be the least-cost avoider, however.

Katz points out that, "If he [the offeree] mistakenly thinks that the probability of nonperformance is lower than it really is, he will rely earlier than he should from a social viewpoint. if, conversely, he thinks the probability is higher than it really is, he will rely too late" (p. 1250).

The implications of this decision to proceed or not, again, devolve to the unique circumstances of each contract, but the primary impact would be to provide the misled party with grounds for canceling the contract without further legal obligations as to performance (Howell, Allison & Jentz, 1978).

The various types of contracts, such as implied, express, quasi- and so forth, all have their own specific requirements and precedential case law; however, there are certain elements required for any type of contract to be enforceable in the courts and these are discussed further below. Elements Required for a Contract to be Valid. According to Howell et al., "A contract is a special sort of agreement - one that the law will enforce in some manner in the event of a breach.

Some agreements are not enforceable because their terms are too indefinite, or they are entered into in jest, or they involve obligations that are essentially social in nature" (p. 160). Even if a contract is seriously intended by all of the parties, though, most courts will not enforce such an agreement unless there are three key elements present: 1) consideration; 2) capacity; and 3) legality (Howell et al., 1978). Therefore, even if the first two elements are satisfied, in order for any type of contract to be enforceable, the legality element must also be met.

If one or more parties to a contract are determined to have misrepresented something that would have inordinately influenced the other party or parties to the contract, then the courts would likely determine that the contract did not exist since it did not meet the legality requirement. For example, according to Buckley, "The excuses which promisors may invoke to excuse performance [include] unconscionability, misrepresentation, duress, mistake, and breaches of promisee duties of good faith" (p. 9).

If a mistake is suspected in a contract, it should be pointed out and addressed as soon as possible in the contract negotiation process, even if this occurs.