Ch 15 Mistakes, Fraud, and Voluntary Consent PDF

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Instructor: Birnbaum ...

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Voluntary Consent - may be lacking b/c of a mistake, misrepresentation, undue influence, or duress “no true meeting of the minds” Mistakes of fact vs. mistakes of value/quality ● Only a mistake of fact makes a contract voidable ● Mistake must also involve some material fact -- a fact that a reasonable person would consider important when determining his course of action Mistakes of fact occur in two forms -- bilateral and unilateral ● A unilateral mistake is made by only one of the parties ● A bilateral, or mutual mistake is made by both of the contracting parties Unilateral Mistakes of Fact - made by only one of the parties; does not give the mistaken party any right to relief from the contract ● The contract is enforceable ● EX:) when Jen offers a jet skii at $1,500 in an email but means to sell if for $2,500 she is still bound by the contract to sell it for $1,500 General rule has two exceptions: 1. The other party to the contract knows or should know that a mistake of fact was made. 2. The error was due a substantial mathematical mistake in addition, subtraction, division or multiplication and was made without extreme negligence Bilateral (Mutual) Mistakes of Fact ● If both parties make a mistake of fact, then the contract can be rescinded. ● Mutual misunderstanding ● A word or term in a contract may be subject to more than one reasonable interpretation -- where this occurs Mistakes of Value ● If the mistake concerns the future market value or quality of the object, the mistake is one of value and the contract is enforceable ● Items are variable according to time, place, etc. ● Important to keep in mind the bargain in the contract for that moment - must be respected ● EX:) Sarah sells an old violin for $100 to me, however, finds out that it’s worth thousands b/c it’s an antique, she must follow through w/ the contract Fraudulent Misrepresentation ● When an innocent party is fraudulently induced to enter into a contract, the contract can be avoided b/c that party has not voluntarily consented to it. ● The innocent party could rescind the contract and return to original position or enter contract and seek damages from any harm resulting from fraud.

Fraudulent misrepresentation consists of the following elements: 1. Misrepresentation of the material fact must occur 2. Must be intent to deceive 3. Innocent party must justifiably rely on the misrepresentation 4. To collect damages, a party must have been harmed as a result of misrepresentation When Misrepresentation has Occurred: ● Can occur by words or actions ● Also occurs when a party takes specific action to conceal a fact that is material to the contract ● EX:) when you buy a horse for competition and it was concealed that he is sick and unhealthy ● Statements of opinion and representation of future facts don’t count ○ EX:) “This house will be worth twice as much next year” Misrepresentation of Law - does not entitle a party relief from a contract ● Exception to to this rule: misrepresenting party is in a profession that is known to require knowledge of the law than the average citizen possesses. Misrepresentation by Silence ● Neither party has to come forward and disclose facts ● EX:) if you are selling a car, you don’t have to disclose that it’s been in an accident unless the other party asks. If you lie → fraud ● Latent defects - facts that could not readily be ascertained must be disclosed if a seller knows of a potential problem that the buyer wouldn’t typically discover Intent to Deceive: ● Scienter - “guilty knowledge” signifies that there was an intent to deceive ● Scienter clearly exists if a party knows a fact is not as stated as well as if a party makes a statement that he believes is not true or recklessly, w/o regard if it’s T or F ● If a party says or implies that statement is made on some basis such as personal knowledge or personal investigation when it isn’t. ● EX:) ex inmate is hired as a business law professor and claims he has taught business law at another college. His probation officer alerted the school about his criminal history → fired b/c of intent to deceive Innocent misrepresentation - If a person makes a statement that he believes to be true but actually misrepresents material facts ● The aggrieved party can rescind the contract but not seek damages Negligent misrepresentation - if a party did not exercise reasonable care in uncovering or disclosing facts or use of the skill and competence that his business/profession requires ● Equal to scienter

Reliance on the Misrepresentation ● The deceived party must have a justifiable reason for relying on the misrepresentation ● Misrepresentation must also be an important factor in inducing the deceive party to enter the contract ● Reliance is not justified if the deceived party went along w/ obvious extravagant statements ● The same rule applies to defects in property sold: the defects that are obvious on inspection, the buyer can’t justifiably rely on seller’s representations. Injury to the Innocent Party ● Most courts do not require a showing of injury when the action is to rescind the contract ● Rescission - returns the parties to the position they held before the contract was made ● However to recover damages, proof of harm is universally required ● Courts may also reward punitive damages or exemplary damages Undue Influence - one party can greatly influence another party, thus overcoming that party’s free will; lacks voluntary consent One Party Dominates the Other ● 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 ● The party being taken advantage of does not exercise free will in entering into a contract ● When the dominant party in a fiduciary relationship (attorney + client) benefits from that relationship, a presumption of undue influence arises. ○ The dominant party must exercise utmost good faith in dealing w/ the other party Duress - if one of the parties is forced into the agreement by threats ● Both a defense to enforcement of a contract or rescission for a contract ● The threatened act must be wrongful or illegal 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, economic duress may be found Adhesion Contracts and Unconscionability ● Adhesion contracts are written exclusively by one party and presented to the other party on a take-it-or-leave-it basis ● Give the adhering party no opportunity to negotiate the terms Standard Form Contracts ● Contain fine print provisions that shift a risk ordinarily borne by one party to the other ● To avoid enforcement of the contract or of a particular clause, the plaintiff normally must

show that the contract or term is unconscionable....