Business Law Chapter 17

Negligent Misrepresentation

A false statement of material fact made by a person who thinks it is true but who would have known the truth about the fact had he or she used reasonable care to discover or reveal it. In some contract negotiations, one party makes a statement of material facts that he things is true. If he could have known the truth by using reasonable care to discover or reveal it, his statement is a negligent misrepresentation.

Rescinded

A voidable contract can be rescinded, or canceled, permitting the person who canceled the contract to require the return of everything she gave the other party. She must herself return whatever she has received. An enormous waste of time and an unnecessary cost of doing business may be the result. Rescind- To cancel a contract.

Legal Principle

The effect of both a negligent misrepresentation and a fraudulent misrepresentation is that the victim can either rescind the contract or keep the contract and sue for damages, whereas if the mistake is innocent, the victim can seek only rescission.

Misrepresentation

is an untruthful assertion by one of the parties about that material fact; it prevents the parties from having the mental agreement necessary for a legal contract. The only *appeared* to agree, so their contract lacked legal assent. The courts insist on a meeting of the minds for a valid contract. Thus, they might rescind a contract even though the person making the false assertion was entirely innocent of any intentional deception.

Innocent Misrepresentation

results from a false statement about a fact material to an agreement that the person making it believed to be true. The person had no knowledge of the claim's falsity. We say he or she lacked *scienter* (from the Latin root of the word meaning "knowledge"). Innocent misrepresentations permit the misled party to rescind the contract. However, because the other party had no intent to mislead, the aggrieved party cannot sue for damages.

Best-practice firms aim for legal assent in their contracts.

Chapter explains the major obstacles to legal assent: mistake, misrepresentation, undue influence, duress, and unconscionability.

Mistake of fact

In contract law a mistake of fact is an erroneous belief about the facts of the contract *at the time the contract is concluded.* Legal assent is absent when a mistake of fact occurs. (1) A mistake that is not caused by the neglect of a legal duty by the person committing the mistake but, rather, consists of unconscious ignorance of a past or present material event or circumstance. (2) An affirmative dense in which the defendant tries to prove that she or he made an honest reasonable mistake that negates the guilty-mind element of a crime.

Voidable

Jamal may think he has sold his tutoring services to Harrison. However, without legal assent the contract may be voidable, a circumstance that can cost a business large profits when the transaction is significant. A term applied to a contract that one or both parties have the ability to either withdraw from or enforce.

Mutual

Or mistakes can be mutual, shared by both parties to the agreement. For a mutal mistake to interfere with legal consent, all the following must be present: 1. A basic assumption about the subject matter of the contract. 2. A material effect on the agreement. 3. An adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement. Courts will not void contract for reason of mutual mistake if even one of these conditions is missing.

Unilateral

The result of an error by one party about a material fact, that is, a fact that is important in the context of the particular contract. Any of the following conditions would permit a court invalidate a contract on grounds of unilateral mistake: 1. One party made a mistake about a material fact, and the other party knew or had reason to know about the mistake. 2. The mistake was caused by a clerical error that was accidental and did not result from gross negligence. 3. The mistake was so serious that the contract is unconscionable, that is, so unreasonable that it is outrageous.

Legal Assent

To make business transactions smoother and more dependable, courts have developed rules about when an assent to do something is *legal assent*, that is, a promise the courts will require the parties to obey. A promise to buy or sell that the courts will require that the parties obey.

Fraudulent Misrepresentation

is a consciously false representation of a material fact intended to mislead the other party. It is also referred to as *intentional misrepresentation*. Here scienter is clear: The party making the misrepresentation either knows or believes that the factual claim is false or knows there is no basis for it. Three elements: (1) A false statement about a past or existing fact that is material to the contract. (2) Intent to deceive, which can be inferred from the particular circumstances. (3) Justifiable reliance on the false statement by the innocent party to the agreement: Justifiable reliance is generally present unless the injured party knew, or should have known by the extravagance of the claim, that they false statement was indeed false. For example, a homeowner could not justifiably rely on a claim by a gardener that if she will pay him to apply a special fertilizer to her trees once a week, the trees would never die. Finally, if damages are sought, the defrauded party must have been injured by the misrepresentation.

Nondisclosure

is a failure to provide pertinent information about the projected contract. Courts will now find nondisclosure as having the same legal effect as an actual false assertion under certain conditions. 1. Relationship of trust exists between the parties to the contract. In this situation the relationship provides a reasonable basis for one person's expectation that the other would never act to defraud him or her. 2. There is failure to correct assertions of fact that are no longer true. Caroline's failure to inform Vito of the recent outbreak of rusk on her "rust-free" car that Vito agreed to purchase next month is nondisclosure. 3. A statue requires the disclosure, such as mandatory disclosures under residential real estate sales laws. 4. The nondisclosure involves a dangerous defect, such as bad brakes in a car that is being sold. Nondisclosure is especially likely to provide the basis for rescission .

Concealment

is the active hiding of the truth about a material fact, for example, removing 20,000 miles from the odometer on your car before selling it.

Duress

occurs when one party is forced into the agreement by the wrongful act of another. Any of the following would trigger a successful request for rescission on grounds of duress: - One party threatens physical harm or extortion to gain consent to a contract. - One party threatens to file a criminal lawsuit unless consent is given to the terms of the contract. (Threats to bring civil cases against a party to a lawsuit do not constitute duress unless the suit is frivolous.) - One party threatens the other's economics interest (this is known as economic duress). For instance, a person refuses to perform according to a contract unless the other person either signs another contract with the one making the threat or pays that person a higher price than specified in the original agreement. The injured party makes the case for duress by demonstrating that the threat left no reasonable alternatives and that the free will necessary for legal consent was removed by the specifics of the threat.

Undue influence

refers to those special relationships in which one person takes advantage of a dominant position in a relationship to unfairly persuade the other and interfere with that person's ability to make his or her own decision. Factors that enter into the finding of undue influence are the following: 1. Was the dominant party rushing the other party to consent? 2. Did the dominant party gain undue enrichment from the agreement? 3. Was the nondominant party isolated from other advisers at the time of the agreement? 4. Is the contract unreasonable because it overwhelmingly benefits the dominant party? Legal Principle: The essential element of undue influence is the existence of a dominant-subservient relationship, so if you are going to enter into a contract with someone with whom you have such a relationship, to ensure that the agreement will be enforced in the future, make sure that the person in the subservient position has independent advice before entering into the contract.