Chapter 14 Mistakes, Fraud, and Voluntary Consent

What are the 4 problems of assent (agreement))?

1) Mistakes 2) Fraudulent misrepresentation 3) Undue influence and duress 4) Adhesion contracts and Unconscionability

What are the 3 elements are necessary to establish fraudulent misrepresentation?

1. A misrepresentation of a material fact has occurred. 2. There has been an intent to deceive. 3. The innocent party has justifiably relied on the misrepresentation.

What are the 2 possible mistakes involved with voluntary consent?

1. Bilateral (mutual) mistake—If both parties are mistaken about a material fact, such as the identity of the subject matter, either party can avoid the contract. If the mistake relates to the value or quality of the subject matter, either party can enforce the contract. 2. Unilateral mistake—Generally, the mistaken party is bound by the contract, unless the other party knows or should have known of the mistake, or the mistake is an inadvertent mathematical error in addition, subtraction, or the like that is commit- ted without gross negligence.

Agency contracts are often standard-form contracts. To avoid enforcement of the contract or of a particular clause, the aggrieved party must show that the parties had substantially unequal bargaining positions and that enforcement would be manifestly unfair or oppressive. If the required showing is made, the contract or particular term is deemed unconscionable and is not enforced. What type of contract is the scenario describing?

Adhesion contract

Fraudulent Misrepresentation

Any misrepresentation, either by misstatement or by omission of a material fact, knowingly made with the intention of deceiving another and on which a reasonable person would and does rely to his or her detriment.

What type of mistake of fact is this? Gilbert contracts to sell Magellan three tracts of undeveloped land for $6 million on the basis of a surveyor's report showing the layout and acreage. After agreeing to the price, the parties discover that the surveyor made an error and that the tracts actually contain 10 percent more acreage than reported.

Bilateral because both the seller and purchaser were mistaken so Gilbert can seek rescission (cancellation) of the contract based on mutual mistake

CONTRACT CAN BE RESCINDED BY EITHER PARTY

Bilateral mistake

Material Mistake of Fact

Bilateral mistake (both parties) or Unilateral mistake (one party)

Adhesion Contracts and Unconscionability

Concerns one-sided bargains in which one party has substantially superior bargaining power and can dictate the terms of a contract. Unconscionability typically occurs as a result of the following: 1. Standard-form contracts—In which a fine-print provision purports to shift a risk normally borne by one party to the other (for example, a liability disclaimer). 2. Take-it-or-leave-it adhesion contracts—In which the buyer has no choice but to agree to the seller's dictated terms if the buyer is to procure certain goods or services.

Example of unilateral mistake where contract can be nullified

DeVinck intends to sell his motor home for $32,500. When he learns that Benson is interested in buying a used motor home, DeVinck faxes Benson an offer to sell the vehicle to him. When typing the fax, however, DeVinck mistakenly keys in the price of $23,500. Benson immediately sends DeVinck a fax accepting DeVinck's offer. Even though DeVinck intended to sell his motor home for $32,500, his unilateral mis- take falls on him. He is bound in contract to sell the motor home to Benson for $23,500

Economic need and duress

Economic need generally is not sufficient to constitute duress, even when one party exacts a very high price for an item that the other party needs. HOWEVER, If the party exacting the price also creates the need, how- ever, economic duress may be found. EX: The Internal Revenue Service (IRS) assesses a large tax and penalty against Weller. Weller retains Eyman, the accountant who pre- pared the tax returns on which the assessment was based, to challenge the assessment. Two days before the deadline for filing a reply with the IRS, Eyman declines to represent Weller unless he signs a very high contingency-fee agreement for the services. In this situation, a court might find that the agreement was unenforceable because of economic duress.

True or False Mistakes of fact and mistakes of value and quality make a contract voidable

False Only a mistake of fact makes a contract voidable

True or false Statements of opinion from EXPERTS do NOT qualify as fraud

False In certain situations, such as when a naïve purchaser relies on an opinion from an expert, the innocent party may be entitled to rescission or reformation. (Reformation is an equitable remedy granted by a court in which the terms of a contract are altered to reflect the true intentions of the parties. EX: Audrey E. Vokes, a widow without family, attended a dance party at an Arthur Murray dance school in 1961. The dance instructor praised Vokes's grace and poise, and convinced her that she had the potential to become an accomplished dancer. Over a period of sixteen months, the instruc- tor sold her 2,302 hours of dancing lessons for a total amount of $31,090.45 (equivalent to $140,000 in 2011). When it became clear to Vokes that she did not, in fact, have the potential to be an excellent dancer, she filed a suit against the school, alleging fraudulent misrepresentation. The court held that because the dance school had superior knowledge about a person's dance potential, the instructor's statements could be considered statements of fact rather than opinion

Unilateral Mistake of Fact

Generally, a unilateral mistake does not afford the mistaken party any right to relief from the contract. Normally, the contract is enforceable. CONTRACT ENFORCEABLE UNLESS— ● Other party knew or should have known that mistake was made or ● Mistake was due to substantial mathematical error, made inadvertently and without gross negligence

duress

Generally, for duress to occur, the threatened act must be wrongful or illegal and it must render the person incapable of exercising free will.

Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable. The reason that mistakes of value or quality have no legal significance is that value is variable

scienter

Knowledge by the misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive. "guilty knowledge," signifies that there was an intent to deceive. 1) Scienter clearly exists if a party knows a fact is not as stated. 2) Or if a party makes a statement that he or she believes is not true or makes a statement recklessly, without regard to whether it is true or false. 3) this element is met if a party says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Injury to the Innocent Party

No proof of injury is required when the action is to rescind contract. Proof of injury is universally required to recover damages.

Example of Scienter

Robert Sarvis, a convicted felon, applied for a position as an adjunct professor two weeks after his release from prison. On his résumé, he lied about his work history by representing that he had been the president of a corporation for fourteen years and had taught business law at another college. After he was hired and began work- ing, Sarvis's probation officer alerted the school to his criminal history. The school immediately fired Sarvis, and he brought a lawsuit against the school for breaching his employment contract. The court held in the school's favor because Sarvis had not fully disclosed his personal history, he clearly had an intent to deceive, and the school had justifiably relied on his misrepresentations.

voluntary consent

The knowing and voluntary agreement to the terms of a contract. If voluntary consent is lacking, and the contract will be voidable.

Misrepresentation of Law

The misrepresentation will be allowed as grounds for rescission of the contract: If one party to the contract is a professional who should know what the law is and intentionally misrepresents the law to a less sophisticated contracting party

True or false A word or term in a contract may be subject to more than one reasonable interpretation. If the parties to the contract attach materially different meanings to the term the contract can be rescinded. EX: In 1864, Wichelhaus agreed to buy a shipment of Surat cotton from Raffles, "to arrive 'Peerless' from Bombay." There were two ships named Peerless sailing from Bombay, India, however. Wichelhaus was referring to the Peerless that sailed in October; Raffles meant a different Peerless that sailed in December. When Raffles tried to deliver the goods in December, Wichelhaus refused to accept them, and a lawsuit followed.

True

True or false Statements of opinion do NOT qualify as fraud

True

True or false In almost all states, negligent misrepresentation is equal to scienter, or knowingly making a misrepresentation.

True In effect, negligent misrepresentation is treated as fraudulent misrepresentation, even though the misrepresentation was not pur- poseful. In negligent misrepresentation, culpable ignorance of the truth supplies the intention to mislead, even if the defendant can claim, "I didn't know."

True or false Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements.

True If a used-car dealer says, "This old Cadillac will get fifty miles to the gallon," the potential buyer normally will not be justified in relying on the statement.

True or false A threat to exercise a legal right, such as the right to sue someone, ordinarily does not constitute duress

True Saying you will sue someone does not mean that the person experienced duress

What are the 3 factors of fradulent misrepresentation?

Typically, fraudulent misrepresentation consists of the following elements: 1. A misrepresentation of a material fact must occur. 2. There must be an intent to deceive. 3. The innocent party must justifiably rely on the misrepresentation (EX false driver license when renting a car).

Undue influence and duress

Undue influence—Arises from special relationships, such as fiduciary relationships, in which one party's free will has been overcome by the undue influence of another. Usually, the contract is voidable. 2. Duress—Defined as the use of threats to force a party to enter into a contract out of fear; for example, the threat of violence or economic pressure. The party forced to enter into the contract can rescind the contract. If either occur then voluntary consent comes into question.

adhesion contract

Written exclusively by one party with strong power and presented to the other party on a take-it-or-leave-it basis. often use standard forms, which give the adhering party no opportunity to negotiate the contract terms. Questions concerning voluntary consent may arise when the terms of a contract are dictated by a party with overwhelming bargaining power and the signer must agree to those terms or go without the commodity or service in question.

A seller tells a buyer that the basement foundation covered by paneling is sound, and the buyer later finds out it is not. Did misrepresentation occur?

Yes because If the defects are of the kind that would be obvious on inspection, the buyer cannot justifiably rely on the seller's representations. If the defects are hidden or latent, as was the foundation behind paneling, the buyer is justified in relying on the seller's statements.

Negligent Misrepresentation

misrepresentation made without due care in ascertaining its truthfulness; renders agreement voidable

innocent misrepresentation

misrepresentation made without knowledge of its falsity but with due care; renders contract voidable but cannot seek damages EX: Parris tells Roberta that a tract of land contains 250 acres. Parris is mistaken—the tract contains only 215 acres—but Parris had no knowledge of the mistake. Roberta relies on the statement and contracts to buy the land. Even though the misrepresentation is innocent, Roberta can avoid the contract if the misrepresentation is material.

Misrepresentation by Conduct

occurs when a party takes specific action to conceal a fact that is material to the contract

Undue Influence

occurs when one party to a contract is in a position of trust and wrongfully dominates and takes advantage of the other party (Dr. patient/parent-child/husband-wife/guardian-ward of the state)

Misrepresentation by Silence

ordinarily neither party has duty to disclose facts, however, seller will be liable if she knows of material defect that cannot be reasonably discovered by the buyer