The third element of contract deals with the consent or understanding of the parties regarding the proposed contract. The consent or assent of a party to an agreement must be genuine and voluntary. This assent will not be genuine or voluntary in certain cases of mistake, deception or undue pressure
The agreement of parties may be affected by the fact that one or both of them made a mistake. A unilateral mistake is a mistake made by one party to the agreement. A mistake that is unknown to the other party usually does not affect the enforceability of the agreement. A unilateral mistake regarding a fact does not affect the contract. For example, if a customer orders a water-resistant coat thinking that this means waterproof, the customer cannot get out of the contract unless the sale was made with some sort of misrepresentation as to the meaning of those words. An exception to this would be if the seller knew that the buyer misunderstood those terms, but went ahead and sold the coat anyway.
Adam claimed that Bill owed him money. Adam was under the impression that Bill did not have much money. On the basis of this impression, Adam made a settlement agreement with Bill for a nominal amount. When Adam later learned that Bill was in fact reasonably wealthy, Adam sought to set the agreement aside. Was Adam entitled to do so? No. A unilateral mistake of fact does not affect the binding character of an agreement. Bill made no misrepresentation and therefore was not guilty of fraud. There was no obligation on Bill to volunteer any information as to his financial condition.
Failure to read a document before signing it can cause the signer to be liable under the terms of the document. For example, suppose the president of ABC Corporation signs a promissory note in two places without reading it. In one place he was signing as president of the corporation. However, in the other place, he signed under a statement that said that if the corporation defaulted on the loan, the president would personally pay for the debt. In such a situation, unless there was misrepresentation involved, the president could be held personally liable due to his negligence in not carefully reading the document.
A person who has the ability and the opportunity to read a document before signing it is contractually bound by the terms of the document even if the person signed it without reading it. The signer cannot avoid liability based on the argument that no explanation was given to him as to the terms of the contract.
Even if a person is unable to read or understand the terms of the agreement, he is still bound by the terms of the agreement since he should have tried to obtain an explanation of the agreement. The exception to this rule is that if the other party knows, or has reason to know, that the signer cannot read or has a limited education, some courts would hold that the contracting party should have read the document to the other party or explained the terms.
If a party relies on the explanation of another party as to the contents of the agreement, the contract may be avoided under two circumstances:
- The party was justified in relying on the explanation of the other party; and
- The explanation was fraudulent.
The party making the explanatory statements does not have to be a lawyer, but can be any person who handles this type agreement on a regular basis and therefore has a greater knowledge of the content than the other person. This rule would not apply if the agreement was negotiated between the two parties and therefore both parties had an understanding of the terms as evidenced by the negotiation.
If both parties to an agreement make the same mistake regarding a key factual matter, the agreement is void. For example, a contract is void if both parties mistakenly believe that the contract can be performed when, in fact, it is impossible to perform it. For example, suppose Smith promises over lunch to sell Jones an antique car in Smith’s garage. Assume both parties believe the automobile is in Smith’s garage. However, the car had been destroyed by fire an hour before the agreement and Smith had not learned of this. Since this fact was unknown to both parties, there is a mutual mistake as to the possibility of performing the contract. The agreement is therefore void.
When parties to an agreement make a mistake as to the legal effect of the contract, the contract is still binding. For example, suppose Smith sold Jones a vacant lot and Jones planned to build an office on the lot. Both Smith and Jones assume that this would be a lawful use of the property. However, if after purchasing the property and applying for a building permit, Jones is told that the property is zoned for residential use, the contract is still binding. However, if the contract had represented that the property could be used for the building of an office, it could be rescinded by Jones.