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Business Law: The Ethical, Global, and E-Commerce Environment, Langvardt, Barnes, Prenkert, McCrory, and Perry 1
PART 3
Contracts
Chapter 9 Introduction to Contracts
Chapter 10 The Agreement: Offer
Chapter 11 The Agreement: Acceptance
Chapter 12 Consideration
Chapter 13 Reality of Consent
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
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Business Law: The Ethical, Global, and E-Commerce Environment, Langvardt, Barnes, Prenkert, McCrory, and Perry 2
PART 3
Contracts
Chapter 14 Capacity to Contract
Chapter 15 Illegality
Chapter 16 Writing
Chapter 17 Rights of Third Parties
Chapter 18 Performance and Remedies
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
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Contracts: Reality of Consent
CHAPTER 13
“Necessity is never a good time to bargain.”
Benjamin Franklin
1735
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Learning Objectives 1
13-1 Identify the conditions under which a contract can be rescinded because of the absence of knowing or voluntary consent.
13-2 Explain the elements of misrepresentation and fraud and determine whether a contract is likely to be voidable because of misrepresentation or fraud.
13-3 Explain the elements of mistake and determine when mistake makes a contract voidable.
13-4 Explain the circumstances under which duress makes a contract voidable.
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Learning Objectives 2
13-5 Distinguish undue influence from duress and explain the circumstances under which undue influence makes a contract voidable.
13-6 Explain what a party who claims misrepresentation, fraud, mistake, duress, or undue influence is required to do in order to rescind a contract.
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Effect of Doctrines 1
Voidable contracts are induced by mistake, fraud, misrepresentation, duress, or undue influence.
The person claiming non-consent (usually the plaintiff) has power to rescind or cancel the contract.
A person who rescinds a contract is entitled to the return of anything he gave the other party.
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Effect of Doctrines 2
Voidable Contracts: Rescission Should be Prompt and Unequivocal.
The person wishing to rescind the contract must express her intent promptly and unequivocally, and do nothing that gives the appearance of ratification.
Otherwise, the other party may claim that she was in fact ratifying the contract.
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7
Misrepresentation and Fraud 1
A misrepresentation is a false statement and may be negligent (innocent) or fraudulent (made with knowledge of falsity and intent to deceive).
Either way, injured party may rescind the contract.
A person who commits fraud may be liable in tort for damages, including punitive damages.
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Misrepresentation and Fraud 2
Elements of misrepresentation or fraud:
In both cases there is untruth. But in fraud there is scienter, an element of intent to deceive. Concealment (not nondisclosure) can be evidence of intent.
To be a ‘fact’ it must be historical or present. Distinguished from opinions or predictions.
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Concealment: Stephen A Wheat Trust v Sparks
Fraudulent inducement may be based on claims of concealment if the seller knows of the defect but simply keeps quiet about it.
Whether the Sparks’ had knowledge as to the falsity of their representations and intentions to induce the sale are issues of fact for a jury.
The Sparks’ e-mails to their real estate agent indicated they had leaks at the time they were marketing the property but failed to disclose them.
Summary judgment to Sparks reversed.
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Misrepresentation and Fraud 3
Elements of misrepresentation or fraud:
Material Facts: Facts are material if likely to play a significant role in inducing a reasonable person to enter contract.
Actual and Justifiable Reliance:
Actual Reliance: course of action is based on representations made, plus a causal connection between the assertion and reliance.
Justifiable: reasonable under the circumstances.
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Reliance: Timothy v Keetch
Did the Timothys have a legal duty to search the state’s UCC filings to determine if there was a lien on the horse?
Failure to examine public records does not defeat an action for a false representation because there is no duty to make such an examination.
The Timothys were not required to check for prior UCC filings on the horse because the Keetches represented that they owned the horse free and clear.
Judgment for Timothys.
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Concept Review
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Mistake
A mistake is a belief about a fact that is not in accord with the truth.
Mistake must relate to facts as they exist at the time the contract is created.
Mistake not due to other party’s statements.
A person’s fault will not bar relief unless his fault amounted to a failure to act in good faith.
Right to avoid (cancel) the contract depends on whether the mistake was unilateral or mutual.
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Mutual Mistakes
Elements:
Mistake relates to a basic assumption on which the contract was made.
The mistake has a material effect on the agreed-upon exchange.
The party harmed by the mistake does not bear the risk of the mistake.
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Mutual Mistake: Hicks v Sparks 1
Background:
As a result of Sparks’s negligent driving, Hicks was injured in a car accident with Sparks.
Hicks settled with the insurance company for $4,000 and signed a Release.
Nearly a year after the accident, Hicks began to experience pain in both of her arms and tingling and numbness in her hands and later underwent surgery.
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Mutual Mistake: Hicks v Sparks 2
On appeal, Hicks alleges that her post-Release injuries are materially different from those contemplated in the Release, thus amounting to a mistake of fact.
Held:
Hicks assumed the risk of mistake. She executed a clear and unambiguous release in exchange for a settlement payment.
Grant of summary judgment to Sparks affirmed.
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Unilateral Mistakes
A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed. The mistaken can avoid the contract if the she can prove:
That the nonmistaken party caused or had reason to know of the mistake, and
It would be unconscionable to enforce the contract.
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Unilateral Mistake: Patterson v CitiMortgage
A contract can be canceled when one of the parties makes a mistake which was known to the opposite party and enforcing the contract would be unjust.
No rational person would believe that it was anything but a mistake because rational persons and mortgage companies do not counteroffer for less.
Given the parties’ negotiations and Patterson’s series of escalating offers, CitiMortgage’s mistake was obvious and Patterson knew it was a mistake.
Held: For CitiMortgage.
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Duress1
Duress is an improper (wrongful) threat or act that coerces a person to enter or modify a contract.
The victim must have had no reasonable choice but to enter the contract.
If proven, contract is voidable.
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Duress: Olmstead v St Paul Public Schools
Duress will not invalidate a contract entered into with full knowledge of all the facts, and with ample time and opportunity for investigation.
Olmsted cannot demonstrate his free will was overcome and no evidence supports his allegation that the District made an unlawful threat. Even if the District unlawfully threatened him, the threat was cured with legal advice and time to reflect.
Judgment for District. The allegation of unlawful acts was cured before submission of the resignation letter.
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Duress2
Economic Duress (or business compulsion).
One person induces the formation or modification of a contract by threatening another person’s economic interests. (Threaten to breach a contract unless the other party agrees to modify its terms.)
One of the parties offers a disproportionately small amount of money in settlement of a debt and refuses to pay more.
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Undue Influence
Involves wrongful pressure exerted on a person during the bargaining process.
Unlike duress, pressure is exerted through persuasion rather than coercion.
Keys are relationship and weakness of the person “persuaded.”
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Test Your Knowledge1
True A, False B
A contract signed under duress or undue influence is simply void.
A misrepresentation may be negligent (innocent) or fraudulent.
Mutual mistakes may be remedied by reformation.
Duress and undue influence have the same meaning.
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Test Your Knowledge2
Multiple Choice
Elements of innocent misrepresentation:
False assertion.
Knowingly made to induce a person to enter a contract.
Reasonable reliance on the assertion by complainant.
All of the above.
Both (a) and (c), but not (b).
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Test Your Knowledge3
Multiple Choice
A unilateral mistake will not render a contract void unless:
Substantial difference between contract and market price.
Fundamental error occurred.
An unequal bargaining position existed.
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Thought Question
Your landlord tells you that you will be evicted from your apartment or your rent must increase by $50 per month because your neighbors complain about your dog. If you agree to the increase, would the contract be void or voidable under the theory of duress?
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