Introduction

Have you ever asked yourself whether the contract you signed could find its way into the hands of a Dallas business attorney who would litigate a case in court challenging its enforceability or validity? Under what circumstances could this happen? This article discusses the concept of vitiating factors and how if demonstrated to have existed, may lead to rescinding of that contract or relieving of the other party from performance of its obligations!

What then are vitiating factors?

Vitiating factors are factors or circumstances which when proved in a court of law have the effect of rendering a contract invalid, hence relieving the complaining party from performance of its obligations under a contract. They include factors such as illegality of the contract, undue influence exerted on a party prior to entering the contract, mistake about the subject matter of the contract, unconscionability or unreasonableness of terms of the contract and misrepresentation. In this article, I discuss the last two of these factors.

Unconscionability

In simple terms, an Unconscionable Contract is one that is so one-sided that it is unfair to one party and therefore unenforceable under law. It is a type of contract that leaves one party with no real, meaningful choice, usually due to major differences in bargaining power between the parties.

According to Black’s Law Dictionary, 9th Edition, an unconscionable contract is defined in the following terms:-

‘’Traditionally, a bargain is said to be unconscionable in an action at law if it was ‘’such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other..’’

What would best describe an unconscionable contract is a contract where one party is an experienced dealer in a type of business, while the other party is an average consumer.  Imagine if the dealer requires the consumer to sign a contract. Within the contract, they have buried very complicated, technical language that most people wouldn’t understand or recognize. Further imagine that the business dealer used very small font and inserted the clause in a way that would purposefully mislead the consumer into signing on unfair terms. Such a contract may be enforceable for containing unconscionable terms.

Courts all over the world have previously interfered with or refused to enforce contracts which are unconscionable, unfair or oppressive due to a procedural abuse during formation of the contract, or due to contract terms that are unreasonably favourable to one party and would preclude meaningful choice for the other party. American courts  have previously interfered with the unconscionable contracts, often citing from the Halsbury’s Laws of England Volume 22 (2012) 5th Edition to the effect that there has long been jurisdiction for courts to interfere with harsh and unconscionable transactions in several different areas of the law. The jurisdiction of the courts to set aside a contract is based on the unconscientious conduct by the stronger party, such that relief will not be granted solely on the grounds that the transaction is unfair or improvident.

In proving  that a contract contained these unfair terms, whoever seeks to rely on it has to show how weak or vulnerable it was in the transaction under a general doctrine of inequality of bargaining power. The respondents would ordinarily argue that the agreement was negotiated on equal terms and they did not have a higher bargaining power.

If successful in a claim for unconscionability of the contract, a claimant may be relieved from performing his or her duties under the contract, they may be given the option whether or not to perform the legal obligations or the court may order that the contract be rectified accordingly to remove the unfairness.

Misrepresentation

Misrepresentation is a concept in contract law referring to a false statement of fact made by one party (”representor”) to another party (“representee”), which has the effect of inducing that party into the contract.  

For one to successfully rely on this doctrine to defeat the terms of a contract, courts have decided over time, certain ingredients that have to be established. These include:

    1. The representation must be a statement of fact, past or present (as distinct from a statement of opinion, or of intention, or of law) which turns out to be false. An exception to this first requirement is, if one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact. In the case of Hedley Byrne v Heller & Partners Case [1964] A.C. 465, the court found that a statement made negligently that was relied upon can be actionable in tort.
    2. It should have operated on the mind of the representee, so that if the misrepresentation did not affect the representee’s mind because he was unaware that it had been made, or because he was not influenced by it or because he would have entered into the contract even had he known the true facts or because he knew that it was false, he has no remedy [see decision in the case of Horsfall v Thomas (1862) 1 H. & C.90.
    3. It must have been material in the sense that a reasonable man would have been influenced by it in deciding whether to enter into the contract. To displace the argument that any facts were misrepresented, the defendants ordinarily demonstrate that the facts alleged to have been misrepresented were known factors and were in existence at the point when the contract was entered into. A party that is successful in a claim for misrepresentation may be granted orders rescinding the contract. In the alternative, the court can order that they be compensated by way of damages.

Conclusion

In summary, as a party entering into a contract, it is important to seek legal advice from a Westchester business attorney in New York County to ensure that the terms of the contract are valid and sound, to forestall any future challenge to the contract. In the same vein, if you are a victim of unfair terms or misrepresented facts in a contract, it is important to ensure that all available options are explored to settle the matter, before moving opting to take the matter before the courts to challenge the contract.