Definition of Inducement in Contract Law
Inducement is a term used in contract law. Inducement often refers to the thing that motivates someone to enter into a contract. The inducement can take the form of an offer or a promise. It can also take the form of a representation or a misrepresentation.
1. Inducement of a contract
The inducement is what finally causes a person to enter an agreement. In order for a binding agreement to be formed, there must be an agreement. Just because parties manifest mutual assent does not mean that a binding agreement is formed. For instance, an agreement will not be binding if it was based on a mistake. The parties must also have legal capacity to enter into the agreement. Also, there must be consideration for the agreement. If either party entered the agreement because of fraud, undue influence, duress, or misrepresentation, an agreement will not be binding.
2. Promise or Offer as Inducement
Inducement may refer to the terms of the agreement. When considering the bargaining that leads into an agreement, we refer to offer and acceptance or invitation to offer and acceptance. (A "offer" invokes a power of acceptance in a party. An "acceptance" is an unqualified manifestation of assent to the terms of an offer.) The inducement may be an offer, which is an indication that one is willing to form a contract. The inducement may also be an offer, which is a manifestation by an offeree that he is willing to accept an offer. A contract does not exist unless it was accepted. When there is an offer, acceptance and consideration, the result is a binding agreement. An exception would be if the parties contemplated a further act to occur before the agreement would become binding.
3. Representation or Misrepresentation as Inducement
Misrepresentation has been defined as: "an expression that embodies a fact that is untrue , unless the speaker has done his or her best to find out whether or not the fact is true." If the misrepresentation is fraudulent, the innocent party may have a right to rescind the agreement. The right to rescind an agreement is an equitable remedy. An agreement will not be rescinded if the innocent party was, or could have been, aware of the real truth and did not make an inquiry. If the fraudulent misrepresentation led a party into an agreement, and the lied party did not know the truth, a court may rescind the agreement. However, a court may not award rescission if the lied party could have discovered the truth by making an inquiry.
Misrepresentation may also be a statement of opinion. There are several rules surrounding the use of statements of opinion in contracts. The statement of opinion may be deemed a statement of fact. A court may have the power to set aside the contract. Misrepresentation of a future state of affairs may also be a type of misrepresentation within the context of a contract. If the misrepresentation of an anticipated future event is deliberate, a court may have the authority to set aside the contract.
4. Inducement as the "Concurrence of the Mind"
An agreement involves a meeting of the minds. The parties must both understand the terms of the contract. When parties agree to terms of an agreement, they have met the concurrence of the mind. The concurrence of the mind is necessary to the validity of the agreement. An agreement will not be binding if one of the parties misunderstood the terms of the agreement.
Elements of Inducement
From a legal perspective, inducement involves three specific elements that must be present to successfully prove a claim. The first element is representation. Representation is a statement made by one party upon which another party relies in order to comply with a contract. There must be a material representation that is clearly intended to induce the other party to enter into a contract. The second legal element of inducement is intention. Intention is the intent of a party to make another party rely on the inducement. Intention is either expressed or presumed depending on the actions of the parties and the context of the inducement. The third legal element of inducement is reliance. Reliance is the engagement in an action because of the inducement. The action must be a reasonable reliance on the inducement and it must be the kind of action that was intended by the inducement.
Inducement Versus Misrepresentation
Distinguishing inducement from misrepresentation is important because the two concepts are sometimes confused, even by lawyers. The distinction is important because the law will generally set aside an entire contract if it was induced by a misrepresentation. Contract law says that if a party to a contract involved a misrepresentation in seeking to get the other to contract, the contract is voidable at the option of the person who was deceived into entering it. Thus, the whole deal goes out the window, including benefits received by the party making the misrepresentations. Inducing a misrepresentation may subject the inducing party to damages for breach of warranty. On the other hand, in the relatively unusual situation where there is a misrepresentation which does not induce the deal-for example, if the misrepresentation appeared in negotiations among the parties months before a contract was entered into-the fact of the misrepresentation will be of little or no help to the misled party. If there was inducement, the contract may be avoided; but absent inducement, the misrepresentation will be actionable perhaps only as a tort. It will not be a breach of contract. An exception to this rule applies in the case of fraud. Fraud is an intentional misrepresentation, but is also essentially a tort rather than a breach of contract in a more careful analysis. Nonetheless, if a party to a contract is guilty of fraud, that party cannot prevent the other party from avoiding the contract. The defrauded party has no obligation to give up the benefits of the contract in order to bring a fraud action.
Inducement Case Law
Case Study 1: The Case of the Misleading Employment Contract Clause
A recent landmark case dealing specifically with inducement in contract law is the Supreme Court of Canada’s decision in Bhasin v. Hrynew in 2014. In this case, a commercial contract between two parties containing a "non-competition" clause was said to have been breached when one party hired an employee belonging to the other party. The employer thought that it had the right to hire this employee even if it breached the non-competition clause as long as it paid the employer the requisite damages. However, the Supreme Court held that the willful breach of a specific contractual provision constituted a breach of the agreement as whole, and no monetary compensation would repair the salient rift in the parties’ relationship. This decision set a new precedent, with the court allowing for contractual damages even if the party who induced the breach did not benefit from the breach .
Case Study 2: The Case of the Hired Security Guard
Another notable case dealing with inducement can be found in the decision from the British Columbia Court of Appeal in British Columbia (Securities Commission) v. Thompson in 1984. In this case, an investor approached a hired security guard at his workplace seeking information about a mutual fund that the investor had shares in. The investor sought the information on the security guard’s knowledge that he had been a previous bank manager. The security guard gave the investor the information, but did not tell him that he was no longer a bank manager or that he now worked as a security guard. Subsequently, the investor sold his shares and purchased new shares in other mutual funds based on the information he received from the security guard, which turned out to be fraudulent. The British Columbia Court of Appeal found that, although the investment was fraudulent, the investor could still sue the security guard for his losses, on the basis that he obtained the information from the security guard directly following a willful inducement of the investor to invest in the securities in question.
Inducement Legal Remedies
Once a contract has been based on inducement, the question of how to remedy the misrepresentation is a key consideration for the aggrieved party. The law offers a number of remedies for misrepresentation, as follows:
- Rescission is the process of retrospective termination of the contract and restoring the parties to the positions which they would have been in had they not entered into the contract. In order to rescind the contract, the misrepresentation must be serious, or material and have induced the innocent party to enter into the contract (some errors as to details do not matter).
- The parties may agree to terminate the contract, and if this happens then the parties will be placed in their pre-contractual positions without having to go through a court process. This usually involves the return of any payments made by the innocent party. Particularly in more straightforward contracts, parties may agree that if a misrepresentation comes to light, they shall return, or rescind, the contract and refund any payments due to the other party.
- If the innocent party is unable to rescind the contract for misrepresentation, or chooses not to, it may claim compensatory damages against the other party. This is intended to put the innocent party in the position they would have been had the original misrepresentation or inducement never occurred. The amount claimed in damages is usually the difference between the value that was received under the contract and the value of the contract had the misrepresentation not been made.
Avoiding Inducement
An important step in preventing inducement in contracts is to be certain that the terms are not ambiguous. Inducement requires proof that the false representation, if made, would have resulted in a different or better contract had it been clear. An ambiguous term is ineffective to show that the false statement would have made a difference (because it is not proven that the innocent party actually relied on the alleged false statement over other terms of the contract).
With respect to due diligence and disclosure, the best approach to the risk of inducement is to provide full and complete disclosure of all issues . Not only should the parties disclose everything they know about the business or situation – your agreement should also contain specific representations and warranties concerning the condition of the business or situation. If you are currently contemplating entering into an agreement whereby you are relying on representations concerning a third party’s business or person, you should consider a pre-contract due diligence review to ensure that you have all of the facts before you enter the agreement.