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Chapter 8

BUS 393 Chapter Notes - Chapter 8: Uberrima Fides, Caveat Emptor, Rescission

Business Administration
Course Code
BUS 393
Richard Yates

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Chapter 8 – Factors Affecting the Contractual Relationship
Misunderstanding that destroys consensus voids contract
Bad bargain (or bad advice) is simply error in judgment, not void
Courts will try give effect to the reasonable expectations of the parties
Mistake must be serious and a central issue, go to the nature of the
agreement or existence of the subject
Courts less likely to remedy a mistake in law than mistake in facts
Shared Mistake
Shared mistake – both parties agree but make the same mistake
Most common: subject matter of contract no longer exists at time of contract;
or purchaser of property already owns it
Mistake will only void contract if fundamental to contract – not just the value
Courts will correct/rectify if clear that both understood agreement, but
wrote something different from that understanding
If one party intended something different, court will not rectify
If agreement is only improperly recorded, courts will correct it
Misunderstanding – each party has different idea of the meaning of the terms
Court will adopt the more reasonable position of interpretation
Only where equally reasonable interpretations and the error is serious will it
be void
One-Sided Mistake
Unilateral mistake – only one party makes mistake with respect to contract
If there was no misrepresentation or misleading information => no remedy
When offeror makes obvious error, purchaser not allowed to snap up offer
If one-sided mistake is profound (eg. identity) => contract void; otherwise,
caveat emptor (buyer beware) applies
Non Est Factum (“It is not my act”)
If one party is unaware of nature of the document being signed =>
void (but not if contract was not read – negligence)
Rules of Interpretation
Court applies reasonable person test to interpret contract – apply literal
meaning to specific wording, ambiguous wording interpreted reasonably
Parol Evidence Rule – when terms are clear and unambiguous, outside
evidence cannot be used to contradict clear wording in the contract itself
oExceptions: fraud, duress, undue influence, condition precedent,
collateral contract, subsequent agreement, absence of intention
Courts will imply terms reasonably, where appropriate; statues may also
imply terms
Misrepresentation – misleading statement that induces a contract
oMay be fraudulently (on purpose), negligently (person should have
known), or completely innocently (without fault)
Allegation of Fact
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Statement must be factual, not opinion or promise. Exceptions:
oIf it is a future promise, only misrepresentation if clearly shown that
promiser had no intention of honouring the promise when it was made
oIf it is opinion, only misrepresentation if it is an expert’s opinion
Silence or Non-disclosure
Silence or non-disclosure by itself usually not actionable, unless there is duty
to disclose
Exceptions: insurance contracts require disclosure of information;
corporations selling new shares have obligation to disclose information in
prospectus; professionals required to act in utmost good faith; actively hiding
important information
Misrepresentation must have misled the victim
False Statement
Fact must be incorrect and untrue; withholding parts of truth may also be
Statement Must Be Inducement
Victim must show he/she was induced into contract by the false statement
If victim knew statement was false and entered anyway (b/c he/she did not
believe or did not think it made a difference) => misrepresentation not
If victim thought it was true but would have entered even if false, not
misrepresentation either
As a Term of the Contract
Breach of contract actionable may be appropriate if misrepresentation is part
of contract
Even if not in contract, consumer protected contains special provisions (eg.
Innocent Mispresentation
Innocent misrepresentation – false statement made honestly and without
carelessness, by someone who believed it to be true => remedy is rescission
Rescission – attempt to return both parties to original positions –
property and monetary benefit (minus expenses) returned
Not available in certain situations:
1. Affirmation – if victim affirms contract after knowledge of
2. Impossibility of restoring – if subject matter has been
3. Third-party involvement – if it adversely affects third party
4. Failure on the part of the victim – if plaintiff not blameless – also
misled/cheated, or caused unreasonable delay
Fraudulent Misrepresentation
Fraud is committed 1) knowingly, 2) without belief in its truth, or 3)
recklessly, careless whether it was true or false
Victim can sue for damages under the tort of deceit, and/or rescission
If person innocently makes false statement and then discovers mistake (or
true statement becomes false), he must inform other person without delay
=> if not, it turns into a fraud
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