PPT 18: Contracts - Defenses to Contract Enforceability - Voluntary Consent

Level of Proof needed to establish Undue Influence?

Clear and Convincing Evidence If this occurs the contract is voidable at the option of the influenced party

Voluntary Consent: Fraudulent Misrepresentation

Consequences of Fraudulent Misrepresentation = Contract is voidable at the option of the innocent party. Fraudulent Misrepresentation: Is a misrepresentation that is consciously false and intended to mislead an innocent party. 4 Elements of Fraudulent Misrepresentation: 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) Innocent party suffers damage/injury

Mistake of Value

Contract is still enforceable if there is simple a mistake of the value of the item/s

Lack of Voluntary Consent Remedies (Innocent & Negligent Misrepresentation) Impact on Contract

Innocent Misrepresentation = Aggrieved party may RESCIND the contract, but MAY NOT seek damages. Negligent Misrepresentation = Aggrieved party may RESCIND the contract, AND MAY seek damages if innocent party can prove she suffered damage. (Treated the same as fraudulent misrepresentation

No Intent to Deceive: Innocent Misrepresentation & Negligent Misrepresentation

Innocent Misrepresentation: Person makes statement and BELIEVES statement is true, but statement is false Negligent Misrepresentation: Person makes a misstatement of fact believing statement is true, but did not exercise reasonable care in discovering or disclosing facts relevant to his/her misstatement.

Elements of Fraudulent Misrepresentation: 2) Intent to Deceive

Intent to Deceive requires the element "scienter" (knowledge) on the part of the misrepresenting party that material facts have been falsely represented or omitted w/ intent to deceive Scienter exists if: 1) Misrepresenting party states a fact he knows is false OR 2) Makes a statement he believes is false OR 3) Makes a statement recklessly (w/o regard to truth or falsity) OR 4) Implies that a statement is made on basis of personal knowledge when it is not

Elements of Fraudulent Misrepresentation: 3) The innocent party must justifiably rely on the misrepresentation

Justifiable Reliance: 1) Innocent party must have a justifiable reason for reliance on the misrepresentation AND 2) The misrepresentation must have been a material (important) factor inducing the innocent party's reliance

Voluntary Consent may NOT exist because of:

Mistake Fraudulent Misrepresentation Undue Influence Duress

Two Types of Mistakes

Mistakes of FACT Mistakes of VALUE

Question: Misrepresentation Joe is selling his home "FSBO" ("For sale by owner"). Mitsy is interested in purchasing the home. The roof of the home has missing shingles, has obviously rotted sections, and the interior walls and ceiling of the home are water stained beneath the areas where the roof is in disrepair. Joe knows the roof has leaked, but Mitsy never asks Joe about water leakage or roof issues, and Joe does not mention the leak to her. If Mitsy buys the home and later learns of the leaky roof, could she claim Joe's silence constituted fraudulent misrepresentation and avoid/rescind the contract?

No because the defect was open and obvious

Mistakes of FACT

Only type of "mistake" that MAY ALLOW contract avoidance/rescission Two Forms: 1) Unilateral - If one party makes a mistake about a material fact the contract is usually enforceable against the mistaken party -- A material fact is a fact important and central to the subject matter of the contract - Contract that includes a unilateral mistake may be unenforceable if the other party KNEW or SHOULD HAVE KNOWN of the mistake or the mistake was MATHEMATICAL and made without intentional gross negligence 2) Bilateral - If both parties make a mistake about the same material fact, either party may rescind the contract and the contract is usually unenforceable

mistake of value example

Paco buys a violin from Beverly for $250. After the contract is finished, an antique dealer tells the parties that the vilin is extremely rare and worth thousands of dollars. Both parties were mistaken as to how much the violin was worth, and their mistake was a mistake of value not fact. The result is that Beverly cannot rescind the contract and it is enforceable between Paco and Beverly.

Question: Undue Influence Rupert is 95 years old, in a weakened mental state, and bedridden. He requires assistance with most of his daily activities. Rupert's niece and nephew, with whom he was never particularly close, have been living with him for the past 5 months and have not permitted any of Rupert's actual family members to visit. Last week, Rupert gave his niece and nephew a very large financial gift, made them his sole heirs, and gave them powers of attorney. Rupert was not represented by legal counsel, and Rupert's grandchildren contest the actions Rupert has taken. (The grandchildren were Rupert's heir under his "old" will.) If Rupert's grandchildren challenge the gift to Rupert's niece and nephew, is it likely that a court would hold that the niece and nephew exerted undue influence over Rupert?

Probably Yes

Voluntary Consent Is:

Required for valid AGREEMENT

Elements fo Fraudulent Misrepresentation: 1) A misrepresentation of a material fact must occur

This occurs if: 1) A party's actions indicate an incorrect answer to an innocent party's inquire OR 2) A party takes specific action to conceal a fact that is material to the contract

Lack of Voluntary Consent: Duress

Use of threat of an illegal or wrongful act to force a party to enter into a contract. Elements of Duress: 1) Party A's assent to be bound to the contract is induced by improper physical threat (duress) or economic threat (economic duress) AND 2) Party A has "no reasonable alternative" and must assent to the contract

Elements of Fraudulent Misrepresentation: 4) Innocent party suffers damage/injury

When is "proof" of damages/injury required? 1) Action to Rescind (cancel) the contract = NO PROOF of damage/injury is required 2) Action to recover DAMAGES caused by fraud = PROOF of damage/injury is required - Compensatory damages (value of property minus amt actually paid) - Punitive Damages MAY be awarded

Question: Fazio v. Cypress Cypress offers a commercial property for sale to Fazio. A store named "Garden Ridge" is the primary tenant in the property. Garden Ridge's tenancy currently pays Cypress $805,040/year in net income. Fazio is concerned about Garden Ridge's finances, and is only interested in purchasing the property if Garden Ridge continues to provide $805,040/year in net income. Fazio sends Cypress a letter of intent to purchase the commercial property for $7.67 million "based on the currently reported net income of $805,040." In response, Cypress agrees to provide all financial information in its possession. Cypress sends Fazio some documentation, but fails to disclose 1) that Garden Ridge asked for a $240,000 rent reduction as part of a restructuring of the company's leases, and 2) that Cypress's bank was so concerned about Garden Ridge's ability to continue paying rent that it required a personal guaranty of the property's loan. Fazio entered into a purchase agreement with Cypress, Garden Ridge went into bankruptcy shortly thereafter, and Fazio was forced to sell the property for $3.75 million. Did the court hold Cypress liable for fraudulent misrepresentation?

Yes

Question: Intent to Deceive Joe is selling his home "FSBO" ("For sale by owner"). Mitsy is interested in purchasing the home. During their negotiations, Mitsy SPECIFICALLY asks Joe if the roof has ever leaked. Joe KNOWS the roof leaks, BUT he responds, "No, the roof has never leaked." If Mitsy buys the home and later learns of the leaky roof, could she claim Joe's answer constituted fraudulent misrepresentation and avoid/rescind the contract?

Yes because in this case Joe had the intent to deceive Mitsy by saying the roof has never leaked even though he KNEW it had

Question: Mistake of Fact Dru is a contractor. He has submitted a bid to Candace for the construction of a pool, but he made a few mathematical errors when he totaled his estimated costs. Because of these errors, Dru's bid is about $75,000 lower than his actual estimated costs. If Candace accepts Dru's offer, can Dru later rescind the contract?

Yes he can rescind the contract because the errors were mathematical and made inadvertently w/o gross negligence

Question: Mistake of Fact Xin intends to sell her motor home for $17,500. She sends Devam an e-mail offering her motor home for sale, but she mistakenly types $15,700 as her price. (This is the first time Xin has supplied Devam with information on the sale price.) Devam reads Xin's e-mail and immediately accepts. Is Xin bound to the contract (is the contract enforceable)?

Yes, the contract is enforceable because Xin made a Unilateral mistake of fact

A contract may be unenforceable because:

- Voluntary consent is missing - The contract is not in correct form

If theres is proof of "Duress"

1) Contract will be unenforceable; 2) Contract may be rescinded (cancelled).

Justifiable Reliance DOES NOT EXITS IF:

1) Innocent party KNEW OR SHOULD HAVE KNOWN the misrepresentation was false OR 2) Innocent party relied on fantastic/unbelievable/extravagant statements.

Questions: Duress 1) If you do not sign this contract, I will disclose embarrassing information about you to the press. 2) If you do not sign this settlement agreement, I will sue you in court.

1) Yes this is duress, it is blackmail 2) No this is not duress, you have a legal right to sue

General Rules of Misrepresentations

1st General Rule: Statements of Opinion ARE NOT subject to claims of fraud - Exception: Statements of opinion given by "experts" may entitle the innocent party to rescind or reform the contract 2nd General Rule: Misrepresentations of LAW usually do not provide grounds for contract avoidance (but ordinary citizens are presumed to know state and local laws - Exception: Misstatements of law by a a party in a profession requiring greater knowledge of law than that of an avg citizen may entitle innocent party to avoid a contract 3rd General Rule: Misrepresentations by SILENCE usually do not provide grounds for contract avoidance - Exceptions: Seller must disclose LATENT defects. A party in a FIDUCIARY RELATIONSHIP have an affirmative duty to disclose material fact

Lack of Voluntary Consent: Undue Influence

A relationship in which one party can greatly influence another party, thus overcoming that party's free will Relationships in which Undue Influence may occur: 1) Confidential or fiduciary relationships; - Examples: Attorney-client; physician-patient; trustee-beneficiary; husband-wife 2) Relationships of dependence - Examples: Elderly, young, or mentally incompetent persons can be dominated (influenced) by guardians