Void and Voidable Contracts

Formation of Contracts: Void and Voidable Contracts

Legality of object

The law may prohibit the doing of certain things, or certain acts may be contrary to public policy. If an agreement has an object which is thus contrary to law or public policy, an enforceable contract cannot result. The contract can not be enforced, damages would not be allowed for non-performance, and what has been paid under the contract may be recovered. Hence if the performance of a given contract would consist in doing such forbidden act, or an act contrary to public policy, the law will not exact performance, nor will the parties be entitled to ask the aid of the law. Such contracts are void, in that they are illegal. If the contract then involves some violation of rules of decency, morals or good manners, the law will take notice of the mischievous nature of such an agreement, to the extent of re fusing to recognize that any legal right can arise out of it. As was said in a leading case: A thing may be unlawful in the sense that the law will not aid it, and yet that the law will not immediately punish it.’ Such agreements are void as being immoral. Then there are agreements which are void as being against public policy: for example, agreements concerning matters touching the good government of the commonwealth and the administration of justice, or concerning matters affecting particular legal duties of individuals whose performance is of public importance, or concerning things which are lawful in them selves, but which are such that individual citizens cannot, without general inconvenience, be allowed to set bounds to their freedom of action in connection with them as freely as they may with regard to other things.’ An agreement is also void which provides for some act involving the commission of a civil wrong: for example, an agreement of a debtor to defraud his creditor, or an agreement to carry out some fraudulent scheme and divide the profits. A debtor in difficulties who makes a compromise with his creditors, at, say, fifty cents on the dollar, cannot secretly agree with one creditor that the latter shall get some preference over other creditors; such an agreement could be upset. (…)

Wagering contracts

Wagering contracts, tho they were at one time enforceable under the common law, are now by statute illegal. A wagering contract is one by which one party agrees to pay another money or property upon the happening of some un certain event. There is no right of action for the recovery of a bet claimed under a gaming contract, and if the losing party has paid over the money he cannot get it back, unless he proves that there has been fraud. The law thus endeavors to discharge gambling. Buying stock on margin has been held not to be a gambling contract, tho betting in a bucketshop is.. In a bucketshop transaction the broker does not buy the stock; he merely makes a bet for his client that the stock will rise or fall, and it is a gaming contract. But a broker who buys and sells shares for a client, altho on margin, actually buys the stock. The con tract is not a gaming contract, altho the broker may know that his client is not investing, but is merely speculating, and that the client has really insufficient means and should be saving rather than risking his money.

A contract of insurance, altho it is in the nature of a wagering contract, is enforceable; so also are con tracts for the sale and delivery of commodities at different prices. The actual intention of the parties will decide whether or not the contract is a gaming contract and, therefore, illegal. Thus if goods are bought subject to delivery at a future date at a fixed price, but it is agreed that the goods shall not be delivered or the price paid, with the understanding that when the time for purchase arrives, the intention is merely to make a settlement by one party paying the difference between the market price and the contract price, such a contract is a gaming contract and illegal. A note given in payment of such a settlement would be void.

Usurious contracts

By statute the legal rate of interest in Canada is fixed at five per cent, where the agreement does not fix the rate. The maximum rate is also fixed by statute, and any excess over thiS maximum is usury. The Bank Act provides that a bank may stipulate for any rate of interest or discount not exceeding seven per cent per annum, and may receive and take any advance in such rate, but no higher rate of interest shall be recoverable by a bank. By the Money Lenders Act, any lender who shall stipulate for, allow or exact on any negotiable instrument, contract or agreement concerning a loan of less than five hundred dollars, a rate of interest greater than 12 per cent per annum, is liable to one year’s imprisonment, or a penalty of one thousand dollars. If a judgment has intervened, the rate is reduced to five per cent. A bona fide holder, before the maturity of a negotiable instrument discounted by a preceding holder at more than 12 per cent, may recover the amount thereof, but the party paying may reclaim the excess from the money lender.

Contracts in restraint of general principle

Contracts in restraint of general principle is that contracts which unreasonably restrain trade are void. It is contrary to public policy for a man to contract not to engage in business at all.

There may be circumstances, however, which make it reasonable that a man should undertake not to engage in a particular business for a certain length of time. Thus if a man sells a business and be under takes not to carry on any business which will compete with that which he has sold, he may obtain a better price, and such a contract, if not otherwise unreasonable, will be maintained. Even then, however, the restraint must not be wider than is reasonably necessary. A restraint of this kind may be more reason able now, with our modern means of transportation, than would have been the case fifty years ago. Such a restraint is not necessarily unreasonable because it is unlimited as to space. (…)

In Quebec, an injunction has been refused to re strain a bread driver from employing himself with a competing firm, altho he had bound himself to his employer for a certain period, and had agreed that he would not engage in the bread business or in the soliciting of orders for bread for a certain period in the City of Montreal. It was held that his services were not of such a unique and unusual character that he could not be replaced, and that any loss that might be caused by his leaving could be reasonably and adequately compensated for,- in damages. Apparently, however, it is not a restraint of trade for a dealer in liquors to bind himself to sell only the liquors of a certain firm.’ The general rule, as laid down in the Nordenfelt case, is that the restraint must not be greater than is reasonably necessary for the protection of the parties, and so as to be contrary to public policy.

Unlawful in restraint of trade are unlawful and criminal

Thus combinations between dealers in staple commodities to control and increase the price by decreasing the production or competition are illegal and void. The law may be stated as follows: Everyone is guilty of an indictable offence and liable to a penalty not exceeding $4,000 and not less than $200, or to two years’ imprisonment, or if a corporation, to a penalty not exceeding $10,000, who conspires, combines, agrees or arranges with any other person or with any railway, steamship, steamboat or transportation company; (a) to unduly limit the facilities for transporting, producing, manufacturing, supplying, storing or dealing in any article or commodity which may be a subject of trade or commerce; (b) to restrain or injure trade or commerce in relation to any such article or commodity; (c) to unduly prevent, limit or lessen the manufacture or production of any such article or commodity, or to unreasonably enhance the price thereof; (d) to unduly prevent or lessen competition in the production, manufacture, purchase, barter, sale, transportation or supply of any such article or commodity, or in- the price of insurance upon person or property. This rule, however, is not construed to apply to combinations of workmen or employees for their own reasonable protection as such workmen or employees. As combination in restraint of trade is illegal, the Supreme Court of the United States has held that parties to it have no standing in court, and the court will not assist in enforcing such contracts. In the United States, however, it has been held illegal for workmen to combine to enhance the price of their labor. For example, it was said in an Illinois case: 1 All of the members of the association are engaged in the same business within the same territory, and the object of the association is purely and simply to silence and stifle all competition as between its members. No equitable reason

for such restraint exists, the only reason put forward being that, under the influence of competition as it existed prior to the organization of the association, prices for stenographical work had been reduced too far, and the association was organized for the purpose of putting an end to all competition, at least as between those who could be induced to be come members. True, the restraint is not so far-reaching as it would have been if all the stenographers in the city had joined the association, but so far as it goes it is precisely of the same character, produces the same results and is subject to the same legal objection.

Greenhood, on Public Policy, points out, how ever, that where the means contemplated and the objects sought are not unlawful, combinations of workmen to control the price of their labor or skill are not necessary illegal. He says: Combinations of artisans for their common benefit, as for the development of skill in their trade, or to prevent over crowding therein, or to encourage those belonging to their trade to enter their fold, or for the purpose of raising the prices of labor, are valid, provided no force or other unlawful means be employed to carry out their needs, or their object be not to impoverish third persons, or to extort money from employers, or to encourage strikes or breaches of contract, or to restrict the freedom of members for the purpose of compelling employers to conform to their rules.’

In an American case, where a wallpaper company sued to recover the price of wallpapers which it bad supplied, the defendant pleaded that the company was a combination in restraint of trade.’ It was clear from the evidence that the company had a monopoly, and that it was really an illegal combination of factories in the wallpaper trade. The Supreme Court pointed out that to give judgment in favor of the company would be to legalize and make effective the illegal agreement constituting the monopoly, and the court said: Such a judgment cannot be granted without departing from the salutary rule long established in the jurisprudence of both this country and England, that a court will not lend its aid in any way to enforce or to realize the fruits of an agreement which appears to be tainted with illegality, although the result of applying that rule may sometimes be to shield a defendant who had got something for which, as between man and man, he ought perhaps to pay, but for which he is unwilling to pay. In such cases the aid of the court is denied, not for the benefit of the defendant, but be cause it should be denied without regard to the interests of individual parties.

A case was recently decided by the Supreme Court of Canada, on an appeal from Manitoba. Two junk dealers, who had practically a monopoly of this trade in Manitoba and elsewhere in the West, agreed to fix the price which they would pay for junk of various kinds. The agreement rendered their business more profitable than ever, and under it they were to divide the profits. One sued the other to account for profits, but it was held that no action would lie, because the agreement was really an illegal combination under the statute.’ 6. Contracts made on common law rule is that contracts made on Sunday are valid. In England, the United States and certain of the Canadian provinces, however, contracts are generally illegal if made on Sunday. The Bills of Exchange Act, for instance, provides that a bill is not invalid by reason only that it bears date of a Sunday, or other non-juridical day; but apparently if the bill were given in pursuance of a contract which under the statute may be illegal if made on a Sunday, it would be void as between the immediate parties, and as to any person who takes it with notice; but the mere fact that it is dated on a Sunday would not be such a notice.

Under a Dominion statute 2 it was made unlawful for any person to carry on or to transact any business of his ordinary calling, except works of necessity or mercy, on the Lord’s day, but this act goes on to provide that it shall not affect any existing provincial law on the subject. The act apparently would not apply in a particular province where, under the provincial law, druggists, tobacconists and fruit dealers kept open on Sunday. What may be a work of necessity or charity is a question of fact in each case, but any thing done to save life or preserve health or property, which must be done on a Sunday or not at all, would probably be considered a work of necessity. So also any act, the object of which is to relieve distress or suffering, or which relates to religious worship, would be an act of charity.

It has been held.in American cases that notes, deeds and mortgages which are signed on a Sunday, but which are not delivered on that day, are valid; but that on the contrary, if signed on a secular day and delivered on a Sunday, they are void, saving the rights of a bona fide holder for value of a negotiable instrument.

Contracts in restraint of in restraint of marriage

Contracts in restraint of in restraint of marriage are generally held to be against public policy, and are therefore void. A con tract not to marry a certain person; or not to marry anyone before attaining the age of twenty-one, or perhaps twenty-five, may be valid, in that it does not restrain marriage in general; but a contract not to marry anyone but a particular person would be void.

A widow or widower may contract not to marry a second time, but a person may not contract to remain unmarried. A contract not to marry without the consent of parents, or during minority, would be valid, be cause the restraint is not unreasonable. A contract not to marry a Hebrew or a Roman Catholic would be valid. A contract not to marry until one has attained the age of forty would be invalid, because it discourages matrimony. A bet by one person that he will not marry within a certain time is a wager, ar.d void.

Agreements to procure or negotiate marriage for reward, known as marriage brokerage contracts, are held to be contrary to public policy, and therefore void. Pollock remarks that all such agreements are void, whether for procurement of marriage with a specified person, or of marriage generally, and services rendered without request in procuring or forward ing a marriage (at all events a clandestine or improper one) are not merely of no consideration, but an illegal consideration for a subsequent promise of reward. (…)

Contracts against liability

Contracts against liability for is difficult to express a rule of universal acceptance in Canada upon this subject. According to French law, it is very doubtful whether a man may stipulate for freedom from the consequences of his ordinary negligence. Against his wilful negligence, which is assimilated to fraud, it is said that he cannot stipulate. A person may stipulate, of course, that he will not be liable for loss under circumstances. Thus if a repairer of antiques is asked to repair some very fragile article, he may stipulate that he will not be responsible if the article goes to pieces in the course of repair. The effect of the various Workmen’s Compensation Acts, whatever may have been the law before, is to prevent employers stipulating against liability as toward workmen. (…)

In Quebec, under the authority of a decision of the Supreme Court, a carrier may stipulate by express contract that he shall not be liable for the negligence of his employees or servants.’ The rule laid down by the Dominion Railway Act is, however, that a railway, that is, a Dominion rail way, cannot contract itself out of liability for its negligence or that of its servants by any notice, condition or declaration.. A company may, however, with the approval of the Railway Board, stipulate that its liability be limited to a fixed sum, even in case of negligence. It may also stipulate that unless notice of claim is given to it within a certain delay, it shall not be liable. Ordinarily, carriers are liable as insurers of goods carried. In other words, a carrier is bound to deliver in good condition articles received and carried by it, tho there be no negligence on its part. It is evident that the carrier may contract against this liability.

Effect of an illegal stipulation in a contract

Effect of an illegal stipulation in a contract will void the contract as a whole or only in part will depend upon the circumstances.

It is not sufficient to assert merely that an unlawful agreement cannot be enforced. Where there is a lawful promise made for a lawful consideration, the con tract is not necessarily void because there is an unlawful promise made at the same time for the same consideration.

It is well established that if in a deed, for instance, there are certain covenants or conditions which are good and lawful, and others which are contrary to law, the latter will be struck out and the former will stand good. That is, where there are distinct engagements in a contract by which a party binds him self to do certain acts, some of which are legal and some illegal, at common law the performance of those which are legal may be enforced, tho the performance of those which are illegal also been laid down that where a transaction which is partly valid and partly invalid is deliberately separated by the parties into two agreements, one ex pressing the valid and the other the invalid part, the party who is called upon to perform his part of the agreement, which is on the face of it valid, will not be allowed to urge that the transaction as a whole is unlawful and void. If the illegal cannot be separated from the legal part of the covenant, the contract is entirely void, but if they can be severed, the bad part may be rejected and the good part retained.

Thus Kent lays down that “if the part which is good depends upon that which is bad, the whole is void ; and so I take the rule to be, if any part of the consideration be malum in se, or the good and the void consideration be so mixed, or the contract so en tire, that there can be no apportionment, the contract is void.” Where any part of a single consideration for a promise or set of promises is unlawful, and the consideration cannot be severed so as to assign a lawful consideration to any of the promises, the contract as a whole is void. The immediate object or consideration may not be unlawful, but the intention of one or both parties in making the contract may be unlawful, in which case there are two possibilities: if the unlawful intention when the contract is made is shared by both parties, or is entertained by one to the knowledge of the other, then the contract is void; if one of the parties, unknown to the other, has an unlawful intention when the contract is made, it may be voided by the innocent party, if he discovers the intention be fore the contract is executed.

Thus if the lessee of a house, which he knows is used by the tenants for immoral purposes, assigns the lease, and he knows that the person to whom he assigns it in tends to continue the same use, he will not be allowed to recover on a contract made by the person to whom he assigns the lease to indemnify him against the covenants of the original lease.

A person who owns a property and who has undertaken to sell or lease it, but who finds that the purchaser or lessee intends to use it for unlawful purposes, is entitled and may even be bound to rescind the contract. It has been laid down that lie need not even give his reasons for doing so, as he may justify his refusal later. But where a contract has been completely executed, as for example by the transfer of property, the consideration may be paid or the trans fer may have been made for some unlawful purpose of which both parties were aware, but once executed it cannot be set aside. (…)

If a school teacher who has not the proper license undertakes to teach and does teach in a school for a number of months at a good salary, be will not be entitled to recover for his services. A doctor who practises without the necessary license or qualification would be in the same position. The sale of tobacco may be prohibited by statute on a Sunday; a tobacconist who sold tobacco on a Sunday on credit would not be entitled to collect.

A director of a railway company cannot have a private interest in a contract with the company. Thus if a director of a railway company which is put ting up a building makes a secret partnership with the contractor who is doing the work, his contract is il legal, and he could not sue his partner for a division of profits.

It is illegal to pay money or undertake to pay money to avoid or prevent the prosecution of a criminal. Thus the Court of Appeals of the Province of Quebec has held that where a bank clerk embezzled money and his father gave the bank a note to cover the amount stolen, on the condition that the bank would drop the prosecution, and the bank accepted the note and went no further with the case, the note could not be collected.

A contract by which a Member of Parliament accepted money in return for his promise to vote as he might be directed by another person would be illegal.

Contracts between a lawyer and his client which stipulate that the lawyer, if the action is successful, will accept for his services a share of the money recovered, are illegal. Such contracts are deemed illegal because the lawyer, tho entitled to a reasonable fee, is able to judge of the outcome of the case, and hence the client is at a disadvantage.

If a person sells a grocery business and contracts that he will not, during a period of five years, engage in the grocery business in the same town, such an agreement is reasonable, is not in restraint of trade, and is, therefore, valid; but if the seller •agreed that he would not engage in the grocery business for the same period in any place in Canada, the contract would be unreasonable and void.

A loan to a person to enable him to run a bucket shop, it being agreed that the lender is to receive a share of the profits, would be illegal.

In certain jurisdictions, steamboat excursions may be prohibited on a Sunday. The captain or engineer or other person who assisted in running the excursion would be unable to collect his wages.

Consent of the parties to a contract

Reality of we have seen, the consent of the parties to a contract must be expressed in some way. The minds of the parties must meet, but there must be something which indicates the fact. In other words, the consent must be real. The consent may, therefore, be unlawful or defective owing to mistake, misrepresentation, fraud, undue influence or duress.

Where a party to a contract can show that he gave his consent without understanding the nature of the contract, or the thing about which he was contracting, or something which was the principal consideration for making the contract, he may have it set aside. He may be able to prove fraud or misrepresentation by the other party, or show that by some form of violence lie was coerced into making the contract. In a sense the contract is good, but a person who has been led into it by error or fraud may have it declared void if he takes steps to do so before his right is prescribed.

If a person, who has made a contract under any of the above circumstances, ratifies the contract or acquiesces in it, he will not then be allowed to set it aside. In certain cases, however, as for example in the case of a promissory note, the maker may have signed in error, or as a result of some fraud or misrepresentation, but if the note gets into the hands of a third party who in good faith without notice of the defect gives value for it, the maker will be bound toward such third party.

12. Mistake or mistake may be one of fact or of law. A mistake of fact may be either of intention or expression. If the parties to a con tract do not mean the same thing, or one of them forms an untrue conclusion as to the subject matter of the contract, there has been a mistake of intention and the contract is void, because the minds of the par ties have not met.

Thus A may lend a horse to B, and B may think that A is giving it to him: there is no contract of gift. A man may sign a paper by which lie purports to sub scribe for shares in a company, and he pays $500. At the time he thought that he was subscribing for five fully paid-up shares. In the contract as drawn up he appears to subscribe for fifty shares of $100 upon which lie pays $10 each, or $500 on account. Such a contract has been set aside. Or if a man signs a promissory note and thinks it is merely an order for certain goods, he will not be bound by his mistake.

Where one party is ignorant of the subject matter of the contract, the law requires the other to disclose all the material facts of which he has knowledge. So also .if goods are bought in reliance upon the judgment of the seller, and the buyer finds that goods are shipped to him which he did not intend to buy, he is not bound by his contract. If a man buys a quantity of goods and he intends to buy one hundred pieces, and the other party thinks that he is buying five hundred pieces, or the buyer thinks that he is paying $1 and he is actually charged $2, there has been no consent as to the subject matter of the contract, and the contract is voidable. So if a man buys plated goods in mistake for silver, or buys a modern reproduction which he thinks is an antique, he may have the contract set aside. If a person pays down a sum of money for some secret process, say, for the manufacture of ginger ale, and it turns out that there is no secret, he will not be bound. It is different if a man buys a picture from a dealer by some unknown painter, and he believes it to be a Rembrandt, with out the dealer’s declaring it to be a picture by Rembrandt. The buyer will then be bound. There was no guarantee, and the buyer bought in doubt. His purchase was really a speculation.

A contract is not necessarily invalid because there has been a mistake of expression. The expression may be corrected, where the minds of the parties have met, but their intention has not been exactly set out. A mistake of law does not void a contract. Thus a man may make a contract by which he sells a certain thing, and by law the sale of it carries with it its accessories; he cannot have the contract set aside on the ground that he did not intend that the accessories should go with the thing sold. He may accept a succession, ignorant of the fact that by accepting it he accepts also the liabilities attached thereto.

Misrepresentation

Constitute misrepresentation or fraud sufficient to set aside a contract, there must be proof of an intention to deceive; there must be proof that artifice was used by one party, or with his knowledge, to induce the other to contract. An innocent misrepresentation in most cases will not be sufficient, tho in a contract of insurance, and sometimes as between persons who stand in a confidential relation, the innocent misrepresentation, if material, will render the contract null. Fraud generally includes misrepresentation. If there is present a dishonest intention on the part of the person who makes the misrepresentation, or recklessness equivalent to dishonesty, fraud will be easily found, because the mistake of the one party has been induced by the deliberate words or conduct of the other.

Fraud has been defined as a false misrepresentation of a material fact, made with knowledge of its falsity, or in reckless disregard of its truth or falsity, intending that it be acted upon by another who relies upon the statement, acts to his injury. The failure to dis close material facts, where there was a plain duty to disclose them, may amount to fraud.

The representation may be made by express words or by conduct. It may be a positive assertion, or merely a suggestion of what is false, and relate to a particular fact or a general state of things.

It is characteristic of a misrepresentation tainted with fraud or deceit, that it is made without positive belief in its truth; there may not be positive knowledge of its falsehood. Thus a person may, in ignorance of its truth or falsehood, make a material representation which proves to be false. In such case, his ignorance will be treated as equivalent to knowledge of falsehood. (…)

A person who complains of fraud or misrepresentation must not only prove it, but also that it was false in fact; that the person who made it knew that it was false, or made it recklessly without knowing whether it was true or false; that he was induced by the misrepresentation to make the contract; and that within a reasonable time after he discovered the fraud, he repudiated the contract. He cannot act under the contract after he has knowledge of the fraud, and then demand to have the contract set aside.

Undue consent of the parties to a contract must be given freely

If it is obtained otherwise, the contract may be set aside, if the person, whose consent has been forced, so desires. Such con tract is voidable, not void ; tho if a person were seized and his hands were forcibly guided to sign his name, say, to a promissory note, it is probable that this contract would’be void, because there would be no con sent.

To secure consent by undue influence would mean that another’s weakness of mind, his necessities or dis tress, have been taken advantage of in order to induce his consent. It has been said in a case decided in the United Influence obtained by modest persuasion, and arguments addressed to the understanding, or by mere appeals to the affections cannot be properly termed undue influence in a legal sense; but influence obtained by flattery, importunity, superiority of will, mind, character, or by what art soever that human thought, ingenuity, art or cunning may employ which would give dominion over the will to such an extent as to destroy the free agency or constrain a person to do against his will what he is unable to refuse, is such an influence as the law condemns as undue.

What may be undue influence in a particular case it is difficult to say. In attempting to discover whether a person gave his consent freely and deliberately, the courts will take into consideration the age and capacity of the person, the nature of the transaction, and all the other circumstances of the case. It may be that the parties stand in such a relation that from habit the one dominates the other, or that under the circumstances one is in a position to use some undue influence. (…)

Duress, violence and fear

A person may give his consent to a contract, but that consent may be induced or extorted by fear. If actual violence is used, or violence is threatened, the party consenting under such influence may have his contract set aside. A distinction may be drawn between duress which involves actual compulsion, and menace which means the threat of actual compulsion. The term duress, however, covers both, as would also the terms violence and fear. If a man holds a pistol to another man’s head and threatens to shoot unless that other sign some deed in his favor, the deed is signed as the lesser evil. (…)

The courts will consider the age, sex, character and constitution of the party who is threatened. Thus a threat made against a business man might have no effect, whereas it might induce an ignorant country man to enter into a contract. The threat or violence that might terrify a woman into signing might be held insufficient to bring a man to the same result.

Physical violence may be used, as for example where a girl was beaten by her father until she consented to marry a certain person. It may consist of threats of injury in the future—threats to do physical injury, or to injure the fortune or honor of the victim or even of a relative or friend. In France it has been held to be a case of violence, where the manager of a company which was in financial difficulties threatened several of the employees with dismissal unless they signed bills for it. Again, a young partner in a firm was informed by his co-partners that the books showed him to be $9,000 short in his accounts ; they threatened him with criminal proceedings and refused to let him see the books. Believing that what they said was true he paid them $6,000. On examining the books it was found that he did not owe them any thing, and the judge held that he was entitled to get his money back.

It is not violence if a creditor threatens his debtor with suit, but it would be violence if he threatened the debtor that unless he paid some sum in excess of the debt he would sue him. If A has stolen money from B, B can threaten to have him arrested unless he re turns it. But if A admits that he has stolen $50 from the bank which employs him, and the bank asserts that he has stolen much more, and induces his mother to sign a note for $400, this is held to be a case of violence. The person who alleges and proves duress, violence or fear may have his contract set aside.