Contractual Defects: Incapacity, Mistakes, and Unfairness

Posted on Mar 7, 2025 in Galician and Spanish Studies

Contractual Defects

Incapacity to Contract

Capacity is the legal power to give consent. Capacity depends on the ability to understand the consequences of a contract.

Six groups of persons with limited capacity:

  • Minors
  • Mentally Disabled
  • Intoxicated Persons
  • Corporations
  • Associations
  • Indigenous Persons and Public Authorities

Minors

The law states that everyone under the age of majority lacks capacity. A contract with a minor is voidable; the minor is entitled to avoid their legal obligations and may be relieved of future liability under the contract.

Exceptions (Cannot Avoid): Contracts for education, medical treatment, and employment are generally not voidable.

Mental Incapacity

If a court deems a person mentally incompetent, contracts they enter into may be void and unenforceable. Even if not formally deemed incompetent, a contract can be voidable if the other party should have recognized the mental incapacity.

Intoxication

A contract entered into while intoxicated can be voidable if:

  1. The person was so intoxicated that they did not understand the contract.
  2. The other party was aware of the intoxication.

To set aside the contract, the intoxicated person must make a prompt election to avoid it once sober. (e.g., Britney Spears’ 55-hour marriage, McLaren v. McMillan, Bawlf v. Ross)

Business Corporations

Corporations are treated as legal persons.

  • Chartered Corporations: Treated the same as a person of the age of majority.
  • Statutory Corporations: Have limited capacity, often defined by legislation (e.g., representations and warranties).

If a corporation acts ultra vires (beyond its authority), the contract may be unenforceable.

Associations

Unincorporated business organizations that lack contractual capacity. They do not enjoy an independent legal existence.

  • Legislation may grant contractual capacity to certain associations (e.g., educational, religious, or charitable associations, and sometimes trade unions).
  • If an association enters into a contract outside its limits, the contract is ineffective.
  • A member may sign a contract in their personal capacity, but they will be held solely liable.

Indian Bands and Reserves

Indian Bands have contractual capacity similar to corporations (can sue and be sued). Property on a reserve cannot be sold to another member of the band without the Crown’s consent.

Indian Act 1985 defines a “Band” as a body of Indians for whose collective benefit:

  1. Lands are held by Her Majesty.
  2. Monies are held by Her Majesty.
  3. Declared by the Governor in Council to be a band.

Public Authorities

Public authorities acting on behalf of the government have the capacity to contract. The only limit is the division of powers outlined in the Constitution Act, 1867. The action must be consistent with that division of power.

Absence of Writing

Certain contracts must be evidenced in writing.

The Statute of Frauds requires written evidence to prevent perjury in legal proceedings.

Types of Contracts Requiring Writing:

  • Guarantees: A promise by a third party (guarantor) to satisfy a debtor’s obligation if the debtor fails. This is a conditional promise.
  • Indemnity: An unconditional promise to assume another’s debt completely.

Form and Content of Written Document:

  1. Must provide a description of the essential elements of the contract (name, subject, price).
  2. Must be signed by the party against whom it is being enforced.

Consumer Protection: Legislation often requires written contracts to prevent exploitation (e.g., personal care contracts).

Mistakes Preventing Contract Creation

Mistaken Identity

A contract can be rendered defective due to mistaken identity only if:

  1. The mistake was known to the other party.
  2. The mistake was material (important to the contract).

Mistake about Subject Matter

Both parties are mutually mistaken about the subject matter of the agreement. (e.g., Shogun Finance v. Hudson – car purchase with false identity)

Impossible Contracts

Both parties make a mistake about the subject matter, making the contract impossible to perform. Businesses often include a “force majeure” clause to address such situations.

Doctrine of Frustration

A contract is frustrated when an event makes performance impossible (e.g., a beach house burns down). It does not apply if performance is merely more expensive or difficult.

  1. Applies only if neither party is responsible; if one party is responsible, they bear the loss.
  2. Even if neither party is at fault, the contract may specify who bears the loss.
  3. Common law traditionally used an “all or nothing” rule.

Mistakenly Signed Documents

Generally, a signed contract is binding. Exceptions: If unusual terms were not brought to the signer’s attention, or under the doctrine of “Non Est Factum” (“this is not my deed”).

Non Est Factum applies when there is a radical difference between what was signed and what the signer believed they were signing.

Unfairness During Bargaining

Duress

A contract signed under the threat of violence (duress) is voidable.

Economic Duress

A person enters a contract after being threatened with financial harm. It is harder to determine and may be voidable if:

  1. The economic pressure was illegitimate (made in bad faith).
  2. The victim could not reasonably resist.
  3. Legal proceedings were initiated promptly after the pressure ceased.
  4. The victim protested at the time.
  5. The victim did not have legal advice before agreeing.

Undue Influence

Occurs when one person dominates another, making the contract voidable. This can arise from:

  1. A fiduciary relationship (one person dominates the other).
  2. A relationship where the parties are equally dominant.

Unconscionable Transaction

An agreement that no right-minded person would make or accept. To prove, one must show:

  1. An improvident bargain (one that disregards the future).
  2. Inequality in the bargaining position of the two parties.

Illegality

Agreements expressly prohibited by law are void.

Agreements Prohibited by Statute:

  1. Regulatory Statute: A statute that regulates a particular activity.
  2. Common Law Illegality: Agreements that go against public policy or are aimed at committing a crime.