Business Law Chapter 12

For a mutual mistake to interfere with legal assent, it must involve:

A basic assumption about the subject matter of the contract; A material effect on the agreement; and An adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement * Note that mutual uncertainty means that the parties have agreed to share the risk of the mistake and have not made a basic assumption that could result in this defect of assent.

Misrepresentation in any form requires that there be:

A material false assertion/statement Justifiable reliance on that assertion that caused the complaining party to enter into the contract

Justifiable Reliance

A person does not act justifiably if he relies on an assertion that is obviously false or not to be taken seriously. Courts tend to place a greater degree of accountability on the person making the assertion. I.e. The right to investigate does not mean that a party has a duty to investigate.

"Negligent" Misrepresentation

Definition: False assertion/statement about material fact that person who made statement believed true but who would have known the truth about the fact had he or she used reasonable care to discover or reveal it Typically only applies when the party making the false assertion/statement should have known the truth had he/she used the skills and competence required of a person in his or her position or profession There's no intent to deceive, but there is carelessness Courts permit contract rescission and damages

"Innocent" Misrepresentation

Definition: False assertion/statement about material fact that person who made the statement believed true Person who made innocent misrepresentation lacked "scienter"; i.e., had no knowledge of falsity of claim Courts permit contract rescission but no damages

"Fraudulent" Misrepresentation

Definition: Intentional, untruthful assertion of material fact by contracting party. Courts permit contract rescission and damages for fraudulent misrepresentation (including potential punitive damages possible)

Mistake

Definition: Misunderstandings regarding a material fact material to the contract at time agreement made Unilateral Mistake: Mistake made by one contracting party; generally, contract still binding. Exceptions: Other party knew of the mistake Other party caused the mistake Mistake so serious that it's unconscionable Mutual (Bilateral) Mistake: Mistake made by both parties; if mutual mistake of material (significant) fact, either party can rescind contract if required elements are satisfied Simulation : building an apartment complex, built a property but there was an easement on it. Mutual mistake about a material fact

Duress

Definition: Occurs when one party threatens other with wrongful act unless assent given Duress is not legal assent since coercion interferes with contracting party's free will For courts to rescind agreement, injured party must prove duress left no reasonable alternatives to contractual agreement If I hold a gun to your head and said sell me your bar for $500, you can rescind the contract because I made a threat against you.

Undue Influence

Definition: Persuasive efforts of dominant (accountant, doctor, professional) party, who uses special relationship to unduly persuade the other party Any relationship involving one party's unusual degree of trust in another can give rise to undue influence -Examples include attorney-client relationship and accountant-client relationship The goal is to protect the vulnerable party ON EXAM: You're an accountant, client that trusts you wants to sell his property. Did you rush him, not let him get advice from someone else, tell them false information. Courts will look for undue influence. Someone is taking advantage in a special relationship

Factors Affecting Determination of Undue Influence

Dominant party "rushed" the other party to consent Dominant party gained unjust enrichment from the agreement Non-dominant party was isolated from other advisers at time of agreement Contract is unreasonable in that it overwhelmingly benefits dominant party?

voidable

If there is a defect in the reality of assent forming "the agreement element" to contract, a contract is generally voidable (may be avoided/rescinded by the party whose consent was affected by the defect) and may result in liability for damages

Common Situations Involving Duress

One party threatens physical or emotional harm or extortion to gain consent to contract One party threatens to file a criminal complaint with proper authorities unless consent is given to terms of contract One party threatens the other's economic interests (although in some jurisdictions, recovery based on economic duress/pressure rarely granted) *Note: Threatening to file a non-frivolous civil lawsuit against another party does NOT constitute duress for this purpose.

Material False Assertion

The assertion/statement must be "false," "fact," and "material" An opinion would not qualify as a factual assertion Concealment of a fact through some active conduct or failure to volunteer information intended to prevent the other party from discovering the fact is considered the equivalent of an assertion

Ratification

When a contract is adversely affected by one of these defects in assent, prompt and unequivocal rescission (exercise of power of avoidance) is required. If no prompt and unequivocal rescission, there may be "ratification" of the contract. Ratification of a voidable contracts means that a person who had the right to rescind has elected not to do so. Ratification ends the right to rescind. If we have duress, misrepresentation, mistake of fact (Any of them), the party might lose the right to rescind if they ratify the contract. Must be done within a reasonable amount of time.

Rescission

is the cancellation of the contract and requires that the each party return any consideration already received from other party