BLAW CH.15

Mistakes of Value (or Quality)

A mistake about the future market value or quality of the object of the contract. Contracts cannot be rescinded due to mistakes of value. When parties form a contract, their agreement establishes the value of the object of their transaction—for that moment. Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what he or she thought.

Bilateral (Mutual) Mistakes of Fact

A mistake by both contracting parties about one or more material facts generally entitles (but does not compel) either party to rescind.

Unilateral Mistakes of Fact

A mistake made by only one of the parties that does not generally give the mistaken party any right to relief from the contract. The other party to the contract knows or should have known that a mistake of fact was made. The error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. In both situations, the mistake must still involve some material fact.

Fraudulent Misrepresentation

An innocent party induced to enter into a contract by a misrepresentation of material fact may avoid the contract because she or he did not genuinely consent to its terms. Fraudulent misrepresentation usually refers to misrepresentation that is consciously false and is intended to mislead another. Typically, it consists of the following elements: A misrepresentation of a material fact must occur. There must be intent to deceive. The innocent party must justifiably rely on the misrepresen- tation. To collect damages, a party must have been harmed as a result of the misrepresentation. A cause of action based on fraud can be subject to a statute of limitations.

Economic Duress

Economic need on its own is generally not sufficient enough to constitute duress. However, if a party creates a need for an item and then exacts a very high price for the item from another party, economic duress may be found.

Misrepresentation of Law

Generally, this will not excuse the innocent party, unless the speaker is a member of a profession that requires greater knowledge of the law than possessed by the average citizen.

Exception

If a naïve purchaser relies on an opinion from an expert, the innocent party may be entitled to a rescission or reformation (when a court alters the terms of a contract to prevent undue hardships or burdens).

Innocent Misrepresentation

If a person makes a statement that she or he believes to be true but that actually misrepresents material facts, then that person is guilty of an innocent misrepresentation and not fraud. When an innocent misrepresentation occurs, the aggrieved party can rescind the contract but usually cannot seek damages.

When the Parties Reasonably Interpret a Term Differently

If the parties to the contract attach materially different meanings to the term, a court may allow the contract to be rescinded.

One Party Dominates the Other

In various types of relationships, one party may have the opportunity to dominate and unfairly influence another party. Undue influence can arise from a number of fiduciary relationships such as physician-patient, parent-child, husband-wife, or guardian-ward situations. The essential feature of undue influence is that the party being taken advantage of does not really exercise free will in entering into a contract. There must be clear and convincing evidence that the person did not act out of her or his free will. It is not enough that a person is elderly or suffers from some physical or mental impairment.

Injury to the Innocent Party

Most courts do not require the innocent party to prove an injury in order to rescind the contract. However, if the innocent party seeks to recover damages, she or he must prove that the misrepresentation caused economic harm.

Misrepresentation by Silence

Neither party to a contract has a duty to come forward and volunteer facts unless the other party asks. However, common and statutory law create a duty to speak in certain situations (e.g., where one is aware of a serious defect or serious risk of injury). Usually, the seller must disclose only latent defects (those that could not readily be seen or ascertained by the buyer). When the parties are in a fiduciary relationship—one of trust, such as physician and patient—they have a duty to disclose material facts. Failure to do so may constitute fraud.

Statements of Opinion

Statements of opinion and representations of future facts (predictions) generally are not subject to claims of fraud.

Misrepresentation by Conduct

The conduct of a party—particularly a party's concealment of some material fact from the other party—will support an excuse of misrepresentation.

Mistake of Fact

The parties entered into a contract with different understandings of one or more material facts relating to the contract's performance. Only a mistake of fact makes a contract voidable.

Intent to Deceive

The second element of fraud is knowledge on the part of the misrepresenting party that facts have been falsely represented. This element, called scienter (or "guilty knowledge"), signifies that there was an intent to deceive. Scienter exists if a party: knows that a fact is not as stated; makes a statement that she or he believes is not true; makes a statement recklessly, without regard to whether it is true or false; or says (or implies) that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Justifiable Reliance on the Misrepresentation

The third element of fraud is reasonably justifiable reliance on the misrepresentation of fact. The deceived party must have a justifiable reason for relying on the misrepresentation and it must be an important factor (but not necessarily the sole factor) in inducing the deceived party to enter into the contract. Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements. The same rule applies to defects in property sold. If the defects are obvious on inspection, the buyer cannot justifiably rely on the seller's representations. If the defects are hidden or latent, the buyer is justified in relying on the seller's statements.

The Threatened Act Must Be Wrongful or Illegal

To establish duress, there must be proof of a threat to commit an act—usually a wrongful or illegal one—that the threatening party has no right to do. It also must render the person who is threatened incapable of exercising free will. A threat to exercise a legal right ordinarily does not constitute duress.

Misrepresentation Has Occurred

To prove fraud, the innocent party must show that misrepresentation of a material fact has occurred. This misrepresentation can occur by words or actions.

Unconscionability and the Courts

Unconscionability under Section 2-302 of the Uniform Commercial Code (UCC) technically applies only to contracts for the sale of goods but many courts have broadened the concept and applied it in other situations. The UCC lets courts invalidate or strike down a contract or clause as being unconscionable at their discretion. Some states have not adopted Section 2-302 of the UCC and rely instead on traditional notions of fraud, undue influence, and duress.

Presumption of Undue Influence in Certain Situations

When a contract enriches the dominant party in a fiduciary relationship, the court will often presume that the contract was made under undue influence.

Either Party Can Rescind the Contract

When both parties are mistaken about the same material fact, the contract can be rescinded by either party.

Adhesion contracts

are written exclusively by one party and presented to the other party on a take-it-or-leave-it basis. These contracts often use standard forms, which give the adhering party no opportunity to negotiate the contract terms.

Undue influence

arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.

Duress

is both a defense to the enforcement of a contract and a ground for the rescission of a contract.

Negligent misrepresentation

occurs if the party does not exercise reasonable care in uncovering or disclosing facts or use the skill and competence required by his or her business or profession. In nearly all states, such negligent misrepresen- tation is equal to scienter and culpable ignorance of the truth supplies the intention to mislead.

Standard-form contracts

such as those used for residential leases or loan agreements often contain fine-print provisions that shift a risk ordinarily borne by one party to the other. To avoid enforcement of the contract (or of a particular clause), the plaintiff normally must show that the contract or particular clause is unconscionable (contains terms that are unfairly burdensome and that unfairly benefit the dominating party).