Business Law Chapter 9

Innocent misrepresentation

A false statement made in belief is it true

Misrepresentation

A false statement of a material fact

A party who actually does something or takes steps to cause a fraud commits

Active fraud

One who intends to, and does, induce another to enter into a contract as a result of an intentionally or recklessly false statement of a material fact commits

Fraud

Express misrepresentation

Fraud as a result of express misrepresentation, consists of four elements, each of which must be present to constitute fraud

Even if offer and acceptance have been made, agreements can be defective

Mistakes that make agreements defective: 1) fraud 2) Duress 3) Undue influence

Undue influence

Person in special relationship causes another's action contrary to free will

If one actively conceals material facts for the purpose of preventing the other contracting party from discovering the, then fraud occurs

Silence can constitute passive fraud

Key element is that the dominated party is helpless in the hands of the other

Some mistakes such as fraud in the inducement, duress and undue influence, render contracts voidable

When these mistakes exist, some courts say a contract is void - no genuine agreements was ever made

Some say they are voidable - does not have to be carried out

Passive fraud:

results form failure to disclose information when there is a party guilty of fraud without engaging in any activity at all

Sometimes the enforceability of the contract can be impaired: - if the non mistaken party caused the mistake - if the non mistaken party should have known of the other partys mistake and the mistaken party exercised ordinary care

A small number of states allow a party who has made a unilateral mistake of fact to raise the mistake as a defense when sued on the contract

Victim unknowingly signs the contract

Contract is void in this case

Normally, the parties assume the risk that their assumptions regarding these matters can be incorrect

Could require a warranty from the seller as to the quality of the value of the articles they are buying, if the buyer does not trust judgment

Duress contracts are voidable

Duress is classified as: 1) physical 2) emotional 3) economical

The defrauded party might be tricked into signing a contract under circumstances in which the nature of the writing could be understood:

Fraud in the execution

The innocent party justifiably relies on the false statement and makes a contract

If all four are present, a party who is harmed is entitled to relief in court

In no case can the wrongdoer set the contract aside and thus profit from the wrong

If the agreement is void, neither party may enforce it, so no special act is required for setting the agreement aside

If a party in a confidential or fiduciary relationship to another induces the execution of a contract against the other persons free will, the agreement is voidable because of undue influence

If, under any relationship, one is in a position to take undue advantage of another, undue influence many render the contract voidable

This will put the parties in the position they were in before the contract was made

In order to rescind, you must first return, or offer to return what you received under the contract

Must be made by one who knew it to be false or made it in reckless disregard of its truth or falsity

Must be made with the intent to induce the innocent aparty to act

Duress

Obtaining consent by means of a threat

Emotional Duress:

Occurs when one party's threats of something less than physical violence results is such psychological pressure that the victim does not act under free will

Unilateral mistake

Occurs when only one party makes a mistake regarding the contract

If it was reasonable for the misled party to have relied on the innocent representation, the contract is voidable

Statements of opinion do not constitute fraud

The contract could indicate which party assumes the risk that the facts are not believed

The contract could make the realization of certain expectations as a condition of the contract * if not realized, the contract is not binding

There are no threats to harm the person or property of another as in duress

The relationship of the two parties must be such that one relies on the other so much that he or she yields because it is not possible to hold out against the superior position, intelligence, or personally of the other party

A means of destroying another's free will by one party obtaining consent to a contract as a result of a wrongful threat do the other person or family members some harm

The threat must be made by the other arty and must be illegal or wrongful

For a party to receive relief, the mistake must be of fact, no opinion

When a mistake occurs, parties may specific a different outcome in their contract than what the law provides

Mutual mistake

When both parties to a contract make the same mistake

Economic Duress:

When one party wrongly threatens to injure another person financially in order to get agreement to a contract

Mutual mistakes: the rule is that a mutual mistake will normally make a contract defective, however not true in the case of a mistake as to: - value, quality or price - the terms of the contract - the law - expectations

A contract is not affected by the fact that the parties made mistaken assumptions as to the value, quality or price of the subject matter of the contract

Mistakes as to the terms of the contract: usually results form a failure to understand a contract's meaning or significance or from failure to read a written contract

Again do not affect the validity

After you affirm or ratify the contract, you are fully bound by it as if there had been no mistake, fraud, duress or undue influence - you can still then sue for whatever damages you have sustained

If the contract is voidable, you might elect to rescind it or set the contract aside

Reformation

Judicial correction of a contract

With mutual mistakes of law, the contract is fully binding

Parties are expected to have knowledge of the law when making a contract

Fraud in the inducement

Party intended to make a contract based on false statement of terms or obligations of transaction

Unilateral mistakes has no effect on the validity of the contract, if it happens at the time it was made

Sometimes the mistaken party will receive relief, if there was a mistake of fact

If an oral contract goes to writing and there is a keyboard error, then the contract does not bind the agreement, the oral contract stands

Unilateral mistakes have no effet on invalidate contracts

For a mistake to invalidate a contract, it usually must be a mutual one about a material fact

Very rarely a unilateral mistake will invalidate a contract

Court recognizes to types of fraud: 1) fraud in the inducement 2) fraud in the execution

When the party defrauded intended to make the contract, fraud in the inducement occurs

Physical duress:

when one party makes a threat of violence to another person who then agrees to contract to avoid injury Example: holding a gun to another's head