Chapter 15- Mistakes, Fraud, and Voluntary Consent

Bilateral (Mutual) Mistakes of Fact

"Mutual misunderstanding concerning a basic assumption on which the contract was made" When both parties are mistaken about the same material fact, the contract can be rescinded by either party If the parties to the contract attach materially different meanings to the term, a court may allow the contract to be rescinded because there was no true "meeting of the minds" P: mistake by both contracting parties that have made a mistake of one or more material facts; generally entitles either party to rescind

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. 4. To collect damages, a party must have been harmed as a result of the misrepresentation.

Negligent Misrepresentation

A party will make a misrepresentation through carelessness, believing the statement is true If the party does not exercise reasonable care in uncovering or disclosing the facts or use the skill and competence that her or his business or profession requires Treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful Culpable ignorance of the truth supplies the intention to mislead, even if the defendant can claim, "I didn't know"

Justifiable Reliance

A reasonable person would rely Justifiable reason to rely To their determent: have to prove an injury; actually caused economic harm

Unconscionability and the Courts

Applies only to contracts for the sale of goods UCC gives courts a great degree of discretion to invalidate or strike down a contract or clause as being unconscionable P: A court may invalidate a clause or contract, substantial unconscionability, the product of unconscionability, or both

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 undue influence lacks voluntary consent and is therefore voidable P: If one party can influence the other party to the point of overcoming the other persons free will Elder abuse Other party doesn't genuinely assent but have been forced If one of the parties is a fiduciary, the law presumes undue influence Grounds for cancellation rescission Becomes voidable

General Rule for Unilateral Mistakes of fact

Contract may be enforceable if: 1. The other party to the contract knows or should have known that a mistake of fact as made. 2. The error was due to a substantial mathematical mistake and was made inadvertently and without gross (extreme) negligence P: if the mistake was purely mathematical and made inversely, adding an extra zero unintentionally; has to be based on fact not opinion

Scienter (sci-en-ter)

Exists if a party knows a fact is not as stated Also 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 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 P: When defendant acts with the intent to deceive 1. know the statement is false 2. make a statement and knows it is reasonably false

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 is enforceable When parties form a contract, their agreement establishes the value of the object of their transaction--for the moment

Innocent Misrepresentation

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

Mistakes

In certain circumstances, contract law allows a contract to be avoided on the basis of mistake Important to distinguish between mistakes of fact and mistakes of value or quality; only mistake of fact makes a contract voidable Mistake must involve some material fact--a fact that a reasonable person would consider important when determining his or her course of action Mistakes of fact occur in two forms--bilateral and unilateral P: When parties enter a contract with different understandings with one or more material facts

Voluntary Consent

May be lacking because of a mistake, misrepresentation, undue influence, or duress There is no true "meeting of the minds" P: Everyone has to know what is going on and agree on what is going on

One party dominates the other

Minors and elderly people are often under the influence of guardians (persons who are legally responsible for another) If a guardian induces a young or elderly ward to enter into a contract that benefits the guardian, the guardian may have exerted undue influence Can arise from a number of fiduciary relationships, such as physician-patient, parent-child, husband-wife, or guardian-ward situations There must be clear and convincing evidence that the person did not act out of her or his free will

Unilateral Mistakes of Fact

Mistake made by only one of the parties Generally, unilateral mistake does not give the mistaken party any right to relief from the contract Contract is enforceable P: Mistake by one contracting party about one or more material facts and will not excuse; generally, law will not excuse the mistaken party unless the mistaken party knew or should have known of the mistake

Injury to the Innocent Party

Most courts do not require a showing of injury when the action is to rescind the contract To recover damages caused by fraud, proof of harm is universally required

Misrepresentation by silence

Neither party to a contract has a duty to come forward and disclose facts Courts typically do not set aside contracts because a party did not volunteer pertinent information If a seller knows of a serious potential problem that the buyer cannot reasonably be expected to discover, the seller may have a duty to speak When parties are in a fiduciary relationship (one of trust such as partners, physician and patient, or attorney and client) they have the duty to disclose material facts P: Neither party has to come forward and disclose facts unless asked Exception: based on common law and statutory law; in some situations they may be obligated to come forward if serious injury

Misrepresentation by conduct

Occurs when a party takes specific action to conceal a fact that is material to the contract If a seller, by her or his actions, prevents a buyer from learning of some fact that is material to the contract, such behavior constitutes misrepresentation by conduct P: If they conceal something

Standard-Form Contracts

Often contain fine-print provisions that shift risk ordinarily borne by one party to the other Life insurance policies, residential leases, loan agreements, and employment agency contracts To avoid enforcement of the contract or a particular clause, the plaintiff normally must show that the contract or particular term is unconscionable

Misrepresentation of Law

Ordinarily does not entitle a party to relief from a contract Exceptions to this rule occur when the misrepresenting party is in a profession that is known to require greater knowledge of the law than the average citizen possess P: Doesn't excuse the innocent unless the speaker is a judge, legislator, or attorney, someone with the knowledge superior of the law than a reasonable person

Intent to deceive

Second element of fraud is knowledge on the part of the misrepresenting party that facts have been falsely represented This element, normally called scienter, or "guilty knowledge", signifies that there was an intent to deceive

Misrepresentation has occurred

The first element of proving fraud is to show that misrepresentation of a material fact has occurred Misrepresentation can occur by words or actions

Duress

The use of threats to force a party to enter into a contract Blackmail or extortion to induce consent to a contract Duress is both a defense to the enforcement of a contract and a ground for the rescission of a contract P: Compelling an innocent party with threats of harm Threats can be threats to the person, family members, or ruin career Grounds for rescission but can chose to also perform the contract

Threatened Act must be wrongful or illegal

There must be proof of a threat to do something that the threatening party has no right to do threatened act must be illegal or wrongful, and it must render the person incapable of exercising free will

Reliance on the Misrepresentation

Third element of fraud is reasonably justifiable reliance on the misrepresentation of fact Deceived party must have a justifiable reason for relying on the misrepresentation Misrepresentation must be an important 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

Fraudulent Misrepresentation

When an innocent party is fraudulently induced to enter into a contract, the contract normally can be avoided because that party has not voluntarily consented to its terms Innocent party can either rescind the contract and be restored to her or his original position or enforce the contract and seek damages for any harms resulting form the fraud Generally fraudulent misrepresentation refers only to misrepresentation that is consciously false and is intended to mislead another Person making the fraudulent misrepresentation knows or believes that the assertion is false or knows that she or he does not have a basis (stated or implied) for the assertion P: Induce to enter a contract by misrepresentation of fact To avoid a contract: one party knowingly had the intent to deceive that they misstated or omitted a material fact at which a reasonable party would rely and the innocent party did rely to their determent; knowingly or with the intent to deceive

Presumption of Undue Influence in Certain Situtations

When the dominant party in a fiduciary relationship benefits from the relationship, a presumption of undue influence arises When a contract enriches the dominant party, the court will often presume that the contract was made under undue influence

Adhesion Contracts and Unconscionability

Written exclusively by one party and presented to the other party on a take-it-or-leave-it basis, in which the buyer has no choice but to agree to the seller's dictated terms if the buyer is to procure certain goods and services Often use standard forms, which give the adhering party no opportunity to negotiate the contract terms P: A contract written exclusively by one party (dominant) and presented to the adhering party and presented on the take it or leave it Ex: contract for buying your phone No opportunity to negotiate The parties had substantially unequal bargaining positions and enforcement in the adhering party Apple vs. you

Economic 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 If the party exacting the price also creates the need, however, economic duress may be found

Statements of Opinion

statements of opinion and representations of future facts (predictions) generally are not subject to claims of fraud Law will not come to aid of one who simply makes an unwise bargain A fact is objective and verifiable, whereas an opinion is usually subject to debate P: Prediction or expression of an opinion but won't disregard the party from fraud but if the other party has superior knowledge and know that the innocent party would rely on it; don't believe their selves