CHAPTER 7CHAPTER 7

Genuineness of AssentGenuineness of Assent

7-17-1Duress and Undue InfluenceDuress and Undue Influence

7-27-2Mistake, Misrepresentation, Mistake, Misrepresentation, and Fraudand Fraud

7-17-1 Duress and Undue Duress and Undue InfluenceInfluence

GOALSGOALS Recognize when genuine assent is Recognize when genuine assent is

not presentnot present Identify the two key elements in Identify the two key elements in

undue influenceundue influence

FOCUSFOCUSScenario Scenario The Thompsons were told that if they did not sign a The Thompsons were told that if they did not sign a

contract to repay a $2,000 loan at 40 percent interest, their contract to repay a $2,000 loan at 40 percent interest, their son would be in danger of physical harm. Afraid that their son would be in danger of physical harm. Afraid that their son would be hurt, the Thompsons signed the contract.son would be hurt, the Thompsons signed the contract.

Questions Questions Is the contract enforceable? Is the contract enforceable?

No, if the Thompsons did not want it.No, if the Thompsons did not want it. Why or why not? Why or why not?

The assent on the part of the Thompsons was not The assent on the part of the Thompsons was not genuine due to the duress elicited by the threat against genuine due to the duress elicited by the threat against the sonthe son

GENUINE ASSENT GENUINE ASSENT AND DURESSAND DURESS

Genuine assentGenuine assent – true and complete – true and complete agreement.agreement. Without this a contract typically is voidable. (if Without this a contract typically is voidable. (if

the injured party desires, that party can cancel the injured party desires, that party can cancel their obligation under the contract and get their obligation under the contract and get back what they have already put into it.)back what they have already put into it.)

The above action is called rescissionThe above action is called rescission Must be prompt shortly after discovered that there Must be prompt shortly after discovered that there

is no genuine agreement.is no genuine agreement. Must occur before contract ratification. (conduct Must occur before contract ratification. (conduct

suggesting you intend to be bound by the contract)suggesting you intend to be bound by the contract)

GENUINE ASSENT GENUINE ASSENT AND DURESSAND DURESS

DuressDuress – the use of improper threat or act to – the use of improper threat or act to obtain an expression of agreement.obtain an expression of agreement. Threats of illegal conduct – threat to engage in illegal Threats of illegal conduct – threat to engage in illegal

conduct such as a crime or tort. (Example: stabbing)conduct such as a crime or tort. (Example: stabbing) Threats to report crimes – if you observe a crime you Threats to report crimes – if you observe a crime you

have the duty to report it. If you use this to obtain a have the duty to report it. If you use this to obtain a contract you could be considered extortion.contract you could be considered extortion.

Threats to sue – when you threaten to sue is really Threats to sue – when you threaten to sue is really made for a purpose unrelated to the suit, this may be made for a purpose unrelated to the suit, this may be duress.duress.

Economic threats – threat to use economic power. In Economic threats – threat to use economic power. In these cases the courts look at both the threat and the these cases the courts look at both the threat and the alternatives available to the threatened party. If the alternatives available to the threatened party. If the threatened party had no choice but to enter into threatened party had no choice but to enter into contract then duress exists.contract then duress exists.

List the various forms of legal duress.

CheckpointCheckpoint

Threats of illegal conduct directed against a person’s immediate family, near relatives, or home, legitimate lawsuit, and threats of substantial economic harm. All of these would result in the contract being considered voidable by the party threatened.

UNDUE INFLUENCE UNDUE INFLUENCE AND ASSENTAND ASSENT

Undue influence – when one party to the Undue influence – when one party to the contract is in a position of trust and contract is in a position of trust and wrongfully dominates the other party. The wrongfully dominates the other party. The dominated party then does not exsercise dominated party then does not exsercise free will. Two key elements arefree will. Two key elements are The relationship – of trust, confidence or The relationship – of trust, confidence or

authority must exist between the parties. authority must exist between the parties. (Does not have to be a formal relationship)(Does not have to be a formal relationship)

Unfair persuasion – often found in an unfair Unfair persuasion – often found in an unfair contract.contract.

What are the key elements in undue influence?

The elements are (1) dependent relationship based on trust in, confidence in or authority of the dominating party. (2) wrongful persuasion to enter into an unfair contract.

CheckPointCheckPoint

7-27-2 Mistake, Mistake, Misrepresentation, and Misrepresentation, and

FraudFraudGOALSGOALS Recognize the types of mistakes that Recognize the types of mistakes that

can make a contract voidable or voidcan make a contract voidable or void List the criteria for a statement to be List the criteria for a statement to be

treated as a misrepresentationtreated as a misrepresentation Define fraud and describe the Define fraud and describe the

remedies for itremedies for it

FOCUSFOCUS

ScenarioScenario Jane contracts with Mike to purchase one Jane contracts with Mike to purchase one

of his two skateboards. Jane thinks she has of his two skateboards. Jane thinks she has bought the red one, a premier skateboard. bought the red one, a premier skateboard. Mike thinks Jane has bought the blue one, Mike thinks Jane has bought the blue one, his less valuable skateboard.his less valuable skateboard.

QuestionQuestion Does a contract exist?Does a contract exist?

No because there is a mutual mistake of fact No because there is a mutual mistake of fact about the subject matter. There was no about the subject matter. There was no genuine Agreementgenuine Agreement

WHAT ARE THE TYPES OF WHAT ARE THE TYPES OF CONTRACTUAL MISTAKES?CONTRACTUAL MISTAKES?

Unilateral mistakes – occurs when only Unilateral mistakes – occurs when only one party holds an incorrect belief about one party holds an incorrect belief about the facts related to a contract. (Usually the facts related to a contract. (Usually this does not affect the validity of the this does not affect the validity of the contract.) contract.)

Mutual mistakes – (bilateral) both parties Mutual mistakes – (bilateral) both parties have an incorrect belief about an have an incorrect belief about an important fact. Contract is void.important fact. Contract is void. Important facts also called Material factsImportant facts also called Material facts Them both persons make mistake about the Them both persons make mistake about the

law contract is not void. Assumed that all law contract is not void. Assumed that all parties know the laws.parties know the laws.

Name the types of mistakes that can make a contract voidable or void.

Check PointCheck Point

Of the four basic types of mistakes only a mutual mistake as to the identity of the subject matter can render a contract void. However, most courts will still rescind the contract.

Manuela rented an apartment and later Manuela rented an apartment and later discovered that the roof leaked. She asked discovered that the roof leaked. She asked the landlord to make repairs, but he refused. the landlord to make repairs, but he refused. Manuela said that she would move out Manuela said that she would move out unless the landlord either made the repairs unless the landlord either made the repairs or lowered the rent. The landlord lowered or lowered the rent. The landlord lowered the rent. Does Manuela’s conduct make the the rent. Does Manuela’s conduct make the modification to the contract voidable due to modification to the contract voidable due to duress?duress?

No. The landlord has No. The landlord has other options, including other options, including renting to someone renting to someone else.else.

Evelyn was 86 years old and of sound mind. Evelyn was 86 years old and of sound mind. However, she relied upon her nephew Jamal, an However, she relied upon her nephew Jamal, an accountant, to advise her in business matters. accountant, to advise her in business matters. during one of Jamal’s visits, he persuaded her to sell during one of Jamal’s visits, he persuaded her to sell him a valuable painting for about 80% of its true him a valuable painting for about 80% of its true value. Evelyn agreed and signed a contract. Then value. Evelyn agreed and signed a contract. Then she had the painting appraised and learned its true she had the painting appraised and learned its true value. She continued with the transaction by value. She continued with the transaction by accepting payment for the painting. About a year accepting payment for the painting. About a year later she died. her estate sued for rescission at the later she died. her estate sued for rescission at the contract Jamal defended by claiming that Evelyn contract Jamal defended by claiming that Evelyn had ratified by accepting payment after learning of had ratified by accepting payment after learning of the value of the paining. Who prevails. Evelyn’s the value of the paining. Who prevails. Evelyn’s estate or Jamal?estate or Jamal?

Even though Jamal was in a position of Even though Jamal was in a position of trust, Evelyn ratified the contract by trust, Evelyn ratified the contract by continuing with the transaction after continuing with the transaction after learning of the painting’s true value. learning of the painting’s true value. Jamal prevails.Jamal prevails.

WHAT IS WHAT IS MISREPRESENTATION?MISREPRESENTATION?

In both these cases the party to In both these cases the party to whom the misrepresentation is made whom the misrepresentation is made may void the contract.may void the contract. Innocent misrepresentation – If the Innocent misrepresentation – If the

seller had no known the statement was seller had no known the statement was untrue.untrue.

Fraudulent misrepresentation – If the Fraudulent misrepresentation – If the seller had know the statement was seller had know the statement was untrue.untrue.

WHAT IS WHAT IS MISREPRESENTATION?MISREPRESENTATION?

Statements are treated as misrepresentations by the Statements are treated as misrepresentations by the law only iflaw only if Untrue statement of fact – (cannot be opinion)Untrue statement of fact – (cannot be opinion)

When experts express Opinion it is treated as fact.When experts express Opinion it is treated as fact. Active concealment – trying to cover upActive concealment – trying to cover up Silence – remaining silent about defects. (No ½ truths)Silence – remaining silent about defects. (No ½ truths)

You have a duty to break silence if facts change subsequentlyYou have a duty to break silence if facts change subsequently You have to break the silence if you know the other party has You have to break the silence if you know the other party has

made a basic mistaken assumption.made a basic mistaken assumption. Materiality – Three ways an untrue statement can be Materiality – Three ways an untrue statement can be

determined materialdetermined material If statement could cause a reasonable person to contractIf statement could cause a reasonable person to contract If defendant knew this plaintiff would rely on the statement.If defendant knew this plaintiff would rely on the statement. The defendant knew the statement was false.The defendant knew the statement was false.

Reasonable reliance - Even if the statement is material Reasonable reliance - Even if the statement is material there is no misrepresentation unless the victim there is no misrepresentation unless the victim reasonably relied on it. reasonably relied on it.

What are the three criteria for a statement to be treated as a misrepresentation?

Check PointCheck Point

1. Untrue statement of fact or active concealment

2. material or fraudulent statement

3. Reasonable reliance by the victim.

FRAUDFRAUD

Based on misrepresentation. All elements Based on misrepresentation. All elements of misrepresentation must be proven to of misrepresentation must be proven to show fraud plus the following two elements.show fraud plus the following two elements. The misrepresentation must be intentional or The misrepresentation must be intentional or

reckless reckless Makes statement without knowing whether it is true or Makes statement without knowing whether it is true or

false.false. Must have intended to induce the victim to contract.Must have intended to induce the victim to contract.

The misrepresentation or concealment must The misrepresentation or concealment must injure injure

must be prove of injury.must be prove of injury.

REMEDIES FOR FRAUDREMEDIES FOR FRAUD

RescissionRescission – Anything you and the – Anything you and the other party received must be other party received must be returned. returned.

DamagesDamages – available if fraud is – available if fraud is charged. Victim can ratify the charged. Victim can ratify the contract and then sue for damages.contract and then sue for damages.

Punitive damagesPunitive damages – available if fraud – available if fraud is proven made to punish.is proven made to punish.

What are the remedies available for fraud?

Check PointCheck Point

Recession and damages both compensatory and punitive are available as remedies for fraud.

Anne was shopping for a used washing machine. Anne was shopping for a used washing machine. She found one she thought was in good condition. She found one she thought was in good condition. She asked the seller what shape it was in and the She asked the seller what shape it was in and the seller replied. “It is in great shape.” In fact it seller replied. “It is in great shape.” In fact it needed major repairs. Is the seller’s statement a needed major repairs. Is the seller’s statement a misrepresentation.misrepresentation.

No, the statement “great shape” No, the statement “great shape” is merely one of opinion, not fact. is merely one of opinion, not fact. Therefore, it cannot be the basis Therefore, it cannot be the basis for misrepresentation.for misrepresentation.

Chip was shopping for a used computer. He found Chip was shopping for a used computer. He found one and asked the seller if the processor’s speed one and asked the seller if the processor’s speed was greater than 2 megahertz. The seller said, was greater than 2 megahertz. The seller said, “Yes, it runs at 2.5 megahertz.” In fact it was a “Yes, it runs at 2.5 megahertz.” In fact it was a much slower chip. Is the seller’s statement a much slower chip. Is the seller’s statement a misrepresentations?misrepresentations?

Yes, the statement is one of fact, Yes, the statement is one of fact, it is material, and would likely be it is material, and would likely be relied upon by a buyer.relied upon by a buyer.

Glenna found a computer she wanted. While Glenna found a computer she wanted. While describing all the components, the seller said it had describing all the components, the seller said it had a fast modem. Glenna said modem speed was very a fast modem. Glenna said modem speed was very important to her and asked how fast it was. The important to her and asked how fast it was. The seller said, “It’s 56K,” but she didn’t really know seller said, “It’s 56K,” but she didn’t really know how fast it was. In fact it was a much slower how fast it was. In fact it was a much slower modem. Has the seller committed modem. Has the seller committed misrepresentation? Has this seller committed misrepresentation? Has this seller committed fraud?fraud?

Yes misrepresentation because the Yes misrepresentation because the statement was one of fact and it is statement was one of fact and it is untrue, material and relied upon. untrue, material and relied upon. It may also be fraud because the It may also be fraud because the misrepresentation though not misrepresentation though not intentional, is probably reckless.intentional, is probably reckless.

For years, Salazar, the lead mechanic at the Pull On For years, Salazar, the lead mechanic at the Pull On In gas station, saved his money and eventually In gas station, saved his money and eventually bought the business. Two weeks after the bought the business. Two weeks after the purchase, he found out that, a month previous, the purchase, he found out that, a month previous, the Environmental Protection Agency had passed a Environmental Protection Agency had passed a regulation that would make the dispensing of regulation that would make the dispensing of petroleum-based fuels within a mile of a drinking petroleum-based fuels within a mile of a drinking water reservoir illegal. The station was only a few water reservoir illegal. The station was only a few blocks from such a reservoir. Salazar also blocks from such a reservoir. Salazar also discovered that the previous owners knew of the discovered that the previous owners knew of the regulation when they sold but did not inform him. regulation when they sold but did not inform him. Can he get the transaction rescinded?Can he get the transaction rescinded?

No, A unilateral mistake of law No, A unilateral mistake of law even with concealment of a even with concealment of a material fact, is not a basis for material fact, is not a basis for rescission.rescission.