A Variety of Business Risks
When concluding a business contract, parties expect it to be performed as both of them need it for some reason. However, even if an agreement includes all essential elements and is valid, in some cases it is not enforceable. These cases are referred to as defenses to contract enforceability and could take place if one or both parties lack voluntary consent to enter into an agreement due to a mistake, fraudulent misrepresentation, duress or undue influence.
The most obvious risk for the business deals is a mistake. It can be unilateral, when only one of the parties is wrong about the content of the agreement, or bilateral, when both parties were expecting their contract to be something else.
The unilateral mistake is dangerous as it does not normally entail the unenforceability of the agreement, and a mistaken party may voluntary accept the obligations, performance of which would be harmful to itself. For instance, a person decides to sell his/her house for a price of $20 000 without the furniture inside. Although he/she did not discuss the latter with a buyer, the seller mentions it in the written contract but, due to a misprint in the text of the agreement, a relevant clause states, “with all the furniture inside.” In this situation, the contract will be enforceable regardless the unilateral mistake made by the seller, and he/she will suffer a sufficient loss as the price agreed is for the empty house only and, hence, unreasonably low for the house with furniture.
Nonetheless, there are exceptions to the general rule. The unilateral mistake can lead to the cancelation of the contract, for instance, if it was a result of a mathematical miscalculation. In such a case, not only the mistaken party may be at stake of damage when the mistake becomes evident after some time. For example, a construction company agreed to build a house for a certain price. After the receiving the advance payment and even commencing the construction, it appeared that the price was a subject to a mistake in calculation of the estimate costs. In a case of court dispute, this contract is likely to be held void, and the only way for the parties to avoid losses and still get some profit would be to agree on a new price. However, the constructor will probably receive less than he expected while the client will spend more than he planned to.
In case a bilateral or mutual mistake exists, it usually entitles the parties to rescind the contract. For instance, two companies conclude a contract of purchase of goods and agree on the price of $10 000. Upon delivery, the buyer pays $10 000 to the seller since the company understood the price as the value of a lot of the goods. The seller, however, thinks the price accepted was for one item from the lot and claims that the buyer breached the contract. Although such a contract would not be enforceable, the major risks could be faced later on. The seller, for instance, might need to return the goods while the buyer could want to have his money back, what involves logistics costs and bank fees. The situation may become even more aggravated if the goods were already resold by the buyer and the seller seeks for damages.
Thus, to avoid unnecessary expenses and risks, the contracting parties should be very attentive to the content of their agreement and make sure they understand ambiguous terms in the same way.
Another risk-bearing defense to contract enforceability is a fraudulent misrepresentation, which is a false statement made by one party with an aim to induce the other party to enter into a contract. To establish whether a party’s misrepresentation was fraudulent, and, thus, enabling the innocent party to rescind the contract, one must prove several points. These are that the misrepresentation of a material to the contract fact was made and that it involved an intention of inducing the other party, who relied on this statement on reasonable grounds. That is why, the risks of the concept of fraudulent misrepresentation are connected mostly with the difficulties of proving it actually took place.
A good illustration of such obstacles can be a situation when a seller of the goods represented them to the buyer as those that were special or even unique. In case the goods appear to be common and mass-produced, the buyer might claim that he/she was subject to fraudulent misrepresentation, and, if not for this, he/she would not enter into this contract. However, to his/her defense, the seller can claim that the description given to the buyer was only a subjective opinion or even a mere puff, which could not be normally relied on. Consequently, the seller is not involved in indented inducement but rather just tries to sell the goods.
In addition, a tense situation could arise when the seller makes a false statement in relations to the goods for sale having reasonable grounds to believe that the statement is true. An example of this may be a reselling of a used car. The seller might assure the buyer that, as far as he/she is concerned, the car has never been seriously damaged or repaired. In fact, he/she may have bought this car few days ago and did not clarify that issue with the previous owner. Hence, being unaware, the seller is involved in misrepresentation as the car has been repaired several times after the traffic accidents. In this case, the seller who did not intend to mislead the other party may become a subject to a claim.
That is why, to avoid litigation or even consequent unenforceability of the agreement, the contractual parties should disclose as much information about the contract as it is necessary. Where additional attraction for the clients is needed, it is preferable to convey this information with a warning that it is just a subjective perception.
Duress and undue influence
Two more factors that may vitiate the consent of the parties to enter into a contract are duress and undue influence of one party over another. The danger in the legal concept of duress is connected with its application not only as to the violence or its threat to a person but rather when one party uses its superior economic power to coerce the other contracting party to agree to obviously unfair contractual terms.
This situation is especially relevant to the business sphere. In relations to pre contract negotiations connected with commercial dealings, the statements of the parties, which were primarily intended to encourage the other party to enter into a contract and are a common part of business life, might be interpreted as a duress. For instance, one party may claim that in case the deal is not settled, it is a competitor of the other party who they will enter into the agreement with. As the threatened act is of a legal nature, the duress would not be normally established. Nevertheless, the other party may claim that its will for entering into the contract was limited, and, depending on the circumstances of the negotiations, the contract may be held void.
Undue influence is a more subtle form of pressure if compared to duress. It is connected with the well-established categories of relations, such as those between a solicitor and a client, between a doctor and a patient or between a parent and a child. Risks in this respect are associated both with the actual abuse of the power of influence and the claim of the undue influence existence by the weaker party to set aside a burdensome agreement.
The application of the abuse of the concept of undue influence may be illustrated by a situation when a member of the flock decides to sell his or her property to a religious adviser. Even in case the contract was entered with a free will, and the vendor just changed his/her mind, to rescind the contract, he/she still could claim being unduly influenced.
Hence, to limit risks connected with duress the parties of the business deals should avoid statements, which can be interpreted as threats. Also, it is necessary to take into account that undue influence concept can be used to avoid even contracts concluded with a genuine consent.
In conclusion, the concept of the defenses to contract enforceability is connected with a variety of business risks since the party who reveals being under the influence of a mistake, fraudulent misrepresentation, duress or undue influence can either perform the contract or avoid it acting at own will. In case the latter takes place, one or both parties could be at stake of additional expenses connected with the cancelation of the contract and litigation. In addition, the defenses to contract enforceability may be applied even when they did not actually affect the consent of the parties.