2 questions

Real Assent

We turn to the second of the four requirements for a valid contract. The requirement of real assent raises the following major questions:

1. Did the parties enter into the contract of their own free will, or was one forced to agree under duress or undue influence?

2. Did the parties enter into the contract with full knowledge of the facts, or was one or both led to the agreement through fraud or mistake?

3. Did both parties have the capacity to make a contract?

I. Duress and Undue Influence

A. Duress

When a person is forced to do something against his or her will, that person is said to have been the victim of duress—compulsion. There are two types of duress:

1. Physical duress

2. Duress by improper threat

Physical Duress

If a person is forced into entering a contract on threat of physical bodily harm, he or she is the victim of physical duress. The statement is undoubtedly correct that there are “relatively rare situations in which actual physical force” is used to compel assent to a contract.

Duress by Threat

The second kind of duress is duress by threat; it is more common than physical duress. First, the threat must be improper. Second, there must be no reasonable alternative. Third, the test for inducement is subjective. It does not matter that the person threatened is unusually timid or that a reasonable person would not have felt threatened. The question is whether the threat in fact induced assent by the victim. There are many types of improper threats that might induce a party to enter into a contract: threats to commit a crime or a tort (e.g., bodily harm or taking of property), to instigate criminal prosecution, to instigate civil proceedings when a threat is made in bad faith, to breach a “duty of good faith and fair dealing under a contract with the recipient,” or to disclose embarrassing details about a person’s private life.

Undue Influence

It is the improper use of trust or power to deprive a person of free will and substitute instead another’s objective. The Restatement of Contracts (Second) characterizes undue influence as “unfair persuasion.” [1] It is a milder form of duress than physical harm or threats. The unfairness does not lie in any misrepresentation; rather, it occurs when the victim is under the domination of the persuader or is one who, in view of the relationship between them, is warranted in believing that the persuader will act in a manner detrimental to the victim’s welfare if the victim fails to assent.

B. Misrepresentation

General Description

The two types of misrepresentation are fraudulent and nonfraudulent. Within the former are fraud in the execution and fraud in the inducement. Within the latter are negligent misrepresentation and innocent misrepresentation. 

· Misrepresentation is a statement of fact that is not consistent with the truth. If misrepresentation is intentional, it is fraudulent misrepresentation; if it is not intentional, it is nonfraudulent misrepresentation, which can be either negligent or innocent. Fraud in the inducement is more common. It involves some misrepresentation about the subject of the contract that induces assent.

Fraudulent Misrepresentation

Necessary to proving fraudulent misrepresentation (usually just “fraud,” though technically “fraud” is the crime and “fraudulent misrepresentation” is the civil wrong) is a misstatement of fact that is intentionally made and justifiably relied upon.

Misstatement of Fact

Any statement not in accord with the facts (a fact is something amenable to testing as true) is a misrepresentation. A half-truth can amount to a misrepresentation, as, for example, when the seller of a hotel says that the income is from both permanent and transient guests but fails to disclose that the bulk of the income is from single-night stopovers by seamen using the hotel as a brothel.

Concealment

Another type of misrepresentation is concealment. It is an act that is equivalent to a statement that the facts are to the contrary and that serves to prevent the other party from learning the true statement of affairs; it is hiding the truth. Concealment is always a misrepresentation.

Nondisclosure

A more passive type of concealment is nondisclosure. Although generally the law imposes no obligation on anyone to speak out, nondisclosure of a fact can operate as a misrepresentation under certain circumstances. 

Statement Made False by Subsequent Events

If a statement of fact is made false by later events, it must be disclosed as false. 

Statements of Opinion

An opinion, of course, is not a fact; neither is sales puffery. Despite this general rule, there are certain exceptions that justify reliance on opinions and effectively make them into facts. Merely because someone is less astute than the one with whom she is bargaining does not give rise to a claim of justifiable reliance on an unwarranted opinion.

Misstatement of Law

Incorrect assertions of law usually do not give rise to any relief, but sometimes they do. An assertion of the legal consequences of a given set of facts is generally an opinion on which the recipient relies at his or her peril, especially if both parties know or assume the same facts.

Assertions of Intention

Usually, assertions of intention are not considered facts. The law allows considerable leeway in the honesty of assertions of intention. To render a contract voidable, the false assertion of intention must be harmful in some way to other interests of the recipient. 

Intentionally Made Misrepresentation

The second element necessary to prove fraud is that the misrepresentation was intentionally made. A misrepresentation is intentionally made “if the maker intends his assertion to induce a party to manifest his assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion.”

Reliance

The final element necessary to prove fraud is reliance by the victim. The person who asserts reliance to avoid a contract must have acted in good faith and reasonably in relying on the false assertion. if verification is relatively easy, or if the statement is one that concerns matters peculiarly within the person’s purview, he or she may not be held to have justifiably relied on the other party’s false assertion.

Nonfraudulent Misrepresentation

Nonfraudulent misrepresentation may also be grounds for some relief. There are two types: negligent misrepresentationand innocent misrepresentation.

Negligent Misrepresentation

Where representation is caused by carelessness, it is negligent misrepresentation. To prove it, a plaintiff must show a negligent misstatement of fact that is material and justifiably relied upon.

Negligent

As an element of misrepresentation, “negligent” here means the party who makes the representation was careless. Negligence: failure to use appropriate care.

Misstatement of Fact

Whether a thing is a fact may be subject to the same general analysis used in discussing fraudulent misrepresentation. (A person could negligently conceal a fact, or negligently give an opinion, as in legal malpractice.)

Materiality

A material misrepresentation is one that “would be likely to induce a reasonable person to manifest his assent” or that “the maker knows…would be likely to induce the recipient to do so.” We did not mention materiality as an element of fraud; if the misrepresentation is fraudulent, the victim can avoid the contract, no matter the significance of the misrepresentation. 

Justifiable Reliance

Negligent misrepresentation implies culpability and is usually treated the same as fraudulent misrepresentation; if the representation is not fraudulent, however, it cannot be the basis for rescission unless it is also material.

Innocent Misrepresentation

The elements necessary to prove innocent misrepresentation are, reasonably enough, based on what we’ve looked at so far, as follows: an innocent misstatement of fact that is material and justifiably relied upon. 

Remedies

Remedies will be taken up in Chapter 16 "Remedies", but it is worth noting the difference between remedies for fraudulent misrepresentation and remedies for nonfraudulent misrepresentation. The burden of proof for fraudulent misrepresentation is that it must be proved not just “by a preponderance of the evidence,” as in the typical civil case, but rather “by clear, cogent, and convincing evidence”; the fact finder must believe the claim of fraud is very probably true.

C. Mistake

We now examine the ways in which the parties might “trick” themselves by making assumptions that lead them mistakenly to believe that they have agreed to something they have not. A mistake is “a belief about a fact that is not in accord with the truth.”

Mistake by One Party- Unilateral Mistake

Where one party makes a mistake, it is a unilateral mistake. The rule: ordinarily, a contract is not voidable because one party has made a mistake about the subject matter (e.g., the truck is not powerful enough to haul the trailer; the dress doesn’t fit).

Exceptions

A person who makes the mistake of not reading a written document will usually get no relief, nor will relief be afforded to one whose mistake is caused by negligence (a contractor forgets to add in the cost of insulation) unless the negligent party would suffer unconscionable hardship if the mistake were not corrected. Courts will allow the correction of drafting errors in a contract (“reformation”) in order to make the contract reflect the parties’ intention.

Mutual Mistake

In the case of mutual mistake—both parties are wrong about the subject of the contract—relief may be granted. The Restatement sets out three requirements for successfully arguing mutual mistake. [3] The party seeking to avoid the contract must prove that 1. the mistake relates to a “basic assumption on which the contract was made,” 2. the mistake has a material effect on the agreed exchange of performances, 3. the party seeking relief does not bear the risk of the mistake.

Material Effect on the Agreed-to Exchange of Performance

“Material effect on the agreed-to exchange of performance” means that because of the mutual mistake, there is a significant difference between the value the parties thought they were exchanging compared with what they would exchange if the contract were performed, given the standing facts.

D. Capacity

A contract is a meeting of minds. If someone lacks mental capacity to understand what he is assenting to—or that he is assenting to anything—it is unreasonable to hold him to the consequences of his act.

Minors (or “Infants”) - The General Rule

The general rule is this: minors (or more legalistically “infants”) are in most states persons younger than seventeen years old; they can avoid their contracts, up to and within a reasonable time after reaching majority, subject to some exceptions and limitations. The rationale here is that infants do not stand on an equal footing with adults, and it is unfair to require them to abide by contracts made when they have immature judgment. An infant’s contract is voidable, not void. An infant wishing to avoid the contract need do nothing positive to disaffirm. The defense of infancy to a lawsuit is sufficient; although the adult cannot enforce the contract, the infant can (which is why it is said to be voidable, not void).

Exceptions and Complications

There are exceptions and complications here. We call out six of them.

Necessities

First, as an exception to the general rule, infants are generally liable for the reasonable cost of necessities (for the reason that denying them the right to contract for necessities would harm them, not protect them).

Nonvoidable Contracts

Second, state statutes variously prohibit disaffirmation for such contracts as insurance, education or medical care, bonding agreements, stocks, or bank accounts. In addition, an infant will lose her power to avoid the contract if the rights of third parties intervene.

Misrepresentation of Age

A third exception involves misrepresentation of age. Certainly, that the adult reasonably believed the infant was an adult is of no consequence in a contract suit. In many states, an infant may misrepresent his age and disaffirm in accordance with the general rule. But it depends. If an infant affirmatively lies about his age, the trend is to deny disaffirmation.

Ratification

Fourth, when the infant becomes an adult, she has two choices: she may ratify the contract or disaffirm it. She may ratify explicitly; no further consideration is necessary. She may also do so by implication—for instance, by continuing to make payments or retaining goods for an unreasonable period of time.

Duty to Return Consideration Received

Fifth, in most cases of disavowal, the infant’s only obligation is to return the goods (if he still has them) or repay the consideration (unless it has been dissipated); he does have to account for what he wasted, consumed, or damaged during the contract.

Tort Connected with a Contract

Sixth, the general rule is that infants are liable for their torts (e.g., assault, trespass, nuisance, negligence) unless the tort suit is only an indirect method of enforcing a contract.

Persons Who Are Mentally Ill or Intoxicated

Mentally Ill Persons

The general rule is that a contract made by person who is mentally ill is voidable by the person when she regains her sanity, or, as appropriate, by a guardian. If, though, a guardian has been legally appointed for a person who is mentally ill, any contract made by the mentally ill person is void, but may nevertheless be ratified by the ward (the incompetent person who is under a guardianship) upon regaining sanity or by the guardian.

Intoxicated Persons

If a person is so drunk that he has no awareness of his acts, and if the other person knows this, there is no contract. The intoxicated person is obligated to refund the consideration to the other party unless he dissipated it during his drunkenness. If the other person is unaware of his intoxicated state, however, an offer or acceptance of fair terms manifesting assent is binding. 

Consideration

I. General Perspectives on Consideration

The Purpose of Consideration

In American law, a binding contract, must contain consideration:  a set of mutual promises in which each party agrees to give up something to the benefit of the other. This chapter will explore the meaning and rationale of that statement.

A. A Definition of Consideration

Consideration is said to exist when the promisor receives some benefit for his promise and the promisee gives up something in return; it is the bargained-for price you pay for what you get. Consideration is a legal concept, and it centers on the giving up of a legal right or benefit. 

Consideration has two elements. (1) is whether the promisee has incurred a legal detriment—given up something, paid some “price,” though it may be, for example, the promise to do something, like paint a house. (Some courts—although a minority—take the view that a bargained-for legal benefit to the promisor is sufficient consideration.) (2) whether the legal detriment was bargained for: did the promisor specifically intend the act, forbearance, or promise in return for his promise?

B. Legal Sufficiency

The Concept of Legal Sufficiency

As suggested in Section 11.1 "General Perspectives on Consideration", what is required in contract is the exchange of a legal detriment and a legal benefit; if that happens, the consideration is said to have legal sufficiency.

Actual versus Legal Detriment

 This is a legal detriment; consideration does not require an actual detriment.

Adequacy of Consideration

Courts are not generally concerned with the economic adequacy of the consideration but instead with whether it is present. To go further and ask whether the consideration is adequate would require the court to do what…it is less well equipped to do than the parties—decide whether the price (and other essential terms) specified in the contract are reasonable.”

Applications of the Legal Sufficiency Doctrine

This section discusses several common circumstances where the issue of whether the consideration proffered (offered up) is adequate.

Threat of Litigation: Covenant Not to Sue

Every person has the legal right to file suit if he or she feels aggrieved, a promise to refrain from going to court is sufficient consideration to support a promise of payment or performance. A promise to forebear suing in return for settlement of a dispute is called a covenant not to sue (covenant is another word for agreement).

Accord and Satisfaction Generally

Frequently, the parties to a contract will dispute the meaning of its terms and conditions, especially the amount of money actually due. When the dispute is genuine (and not the unjustified attempt of one party to avoid paying a sum clearly due), it can be settled by the parties’ agreement on a fixed sum as the amount due. This second agreement, which substitutes for the disputed first agreement, is called an accord, and when the payment or other term is discharged, the completed second contract is known as anaccord and satisfaction.

Settling an Unliquidated Debt

An unliquidated debt is one that is uncertain in amount. Such debts frequently occur when people consult professionals in whose offices precise fees are rarely discussed, or where one party agrees, expressly or by implication, to pay the customary or reasonable fees of the other without fixing the exact amount. 

Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but subsequently get into a dispute about its fairness, and then settle. When this dispute is settled, the parties have given consideration to an agreement to accept a fixed sum as payment for the amount due.

The “In-Full-Payment” Check Situation

If unliquidated, or if there is a dispute, then “payment in full” can serve as accord and satisfaction when written on a check that is accepted for payment by a creditor. But if the debt is liquidated and undisputed, there is no consideration when the check is for a lesser amount. (However, it is arguable that if the check is considered to be an agreement modifying a sales contract, no consideration is necessary under Uniform Commercial Code (UCC) Section 2-209.)

Unforeseen Difficulties

An unforeseen difficulty arising after a contract is made may be resolved by an accord and satisfaction, too. Difficulties that no one could foresee can sometimes serve as catalyst for a further promise that may appear to be without consideration but that the courts will enforce nevertheless. The parties either have modified their original contract (which requires consideration at common law) or have given up their original contract and made a new one (called a novation).

Creditors’ Composition

A creditors’ composition may give rise to debt settlement by an accord and satisfaction. It is an agreement whereby two or more creditors of a debtor consent to the debtor’s paying them pro rata shares of the debt due in full satisfaction of their claims. A composition agreement can be critically important to a business in trouble; through it, the business might manage to stave off bankruptcy.

Preexisting Duty

Not amenable to settlement by an accord and satisfaction is the situation where a party has a preexisting duty and he or she is offered a benefit to discharge it. When the only consideration offered the promisor is an act or promise to act to carry out a preexisting duty, there is no valid contract. 

Illusory Promises

Not every promise is a pledge to do something. Sometimes it is an illusory promise, where the terms of the contract really bind the promisor to give up nothing, to suffer no detriment. 

Exclusive Dealing Agreement

In an exclusive dealing agreement, one party (the franchisor) promises to deal solely with the other party (the franchisee)—for example, a franchisor-designer agrees to sell all of her specially designed clothes to a particular department store (the franchisee). The UCC follows the same rule. In the absence of language specifically delineating the seller’s or buyer’s duties, an exclusive dealing contract under Section 2-306(2) imposes “an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

Outputs Contracts and Needs Contracts

A similar issue arises with outputs contracts and needs contracts. In an outputs contract, the seller—say a coal company—agrees to sell its entire yearly output of coal to an electric utility. 

C. Promises Enforceable without Consideration

For a variety of policy reasons, courts will enforce certain types of promises even though consideration may be absent. Some of these are governed by the Uniform Commercial Code (UCC); others are part of the established common law.

Promises Enforceable without Consideration at Common Law

Past Consideration

Ordinarily, past consideration is not sufficient to support a promise. By past consideration, the courts mean an act that could have served as consideration if it had been bargained for at the time but that was not the subject of a bargain. However, a valid consideration, given in the past to support a promise, can be the basis for another, later contract under certain circumstances. These occur when a person’s duty to act for one reason or another has become no longer binding. If the person then makes a new promise based on the unfulfilled past duty, the new promise is binding without further consideration. Three types of cases follow.

Promise Revived after Statute of Limitations Has Passed

A statute of limitations is a law requiring a lawsuit to be filed within a specified period of years. For example, in many states a contract claim must be sued on within six years; if the plaintiff waits longer than that, the claim will be dismissed, regardless of its merits.

Voidable Duties

Some promises that might otherwise serve as consideration are voidable by the promisor, for a variety of reasons, including infancy, fraud, duress, or mistake. But a voidable contract does not automatically become void, and if the promisor has not avoided the contract but instead thereafter renews his promise, it is binding.

Promissory Estoppel

Promissory estoppel means that the courts will stop the promisor from claiming that there was no consideration. The doctrine of promissory estoppel is invoked in the interests of justice when three conditions are met: (1) the promise is one that the promisor should reasonably expect to induce the promisee to take action or forbear from taking action of a definite and substantial character; (2) the action or forbearance is taken; and (3) injustice can be avoided only by enforcing the promise. (The complete phraseology is “promissory estoppel with detrimental reliance.”)

Moral Obligation

It provides as follows in Section 86, “Promise for Benefit Received”: A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. A promise is not binding under Subsection (1) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or to the extent that its value is disproportionate to the benefit.

Promises Enforceable without Consideration by Statute

We have touched on several common-law exceptions to the consideration requirement. Some also are provided by statute.

Under the UCC

The UCC permits one party to discharge, without consideration, a claim or right arising out of an alleged breach of contract by the other party. This is accomplished by delivering to the other party a signed written waiver or renunciation.

Bankruptcy

Bankruptcy is, of course, federal statutory law. The rule here regarding a promise to pay after the obligation is discharged is similar to that governing statutes of limitations. Traditionally, a promise to repay debts after a bankruptcy court has discharged them makes the debtor liable once again. The federal Bankruptcy Act includes certain procedural protections to ensure that the debtor knowingly enters into a reaffirmation of his debt.

International Contracts

Contracts governed by the Convention on Contracts for the International Sale of Goods (as mentioned in Chapter 8 "Introduction to Contract Law") do not require consideration to be binding.