Chapter 13 – Reality of Consent

Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Reality of Consent

Necessity never made a good bargain.

Benjamin Franklin, 1735

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Five doctrines that permit people to avoid their contracts because of the absence of real consent: Misrepresentation Fraud Mistake Duress, and Undue influence

13 - 4

Contracts induced by mistake, fraud, misrepresentation, duress, or undue influence are generally considered to be voidable Person claiming non-consent has power to

rescind (cancel) the contract Person claiming non-consent must not act

in a manner to ratify (affirm) the contract

Effect of The Five Doctrines

13 - 5

A misrepresentation is a false statement and may be negligent (innocent) or fraudulent (made with knowledge of falsity and intent to deceive) Either way, injured party may void

(rescind) the contract A person who commits fraud may be

liable in tort for damages, including punitive damages

Misrepresentation or Fraud?

13 - 6

Innocent or fraudulent misrepresentation: Defendant made an untrue assertion of fact

Includes active concealment or non-disclosure Fact asserted was material or was fraudulent

Fact is material if likely to play significant role in inducing reasonable person to enter the contract

Complaining party entered the contract because of reliance on the assertion

Elements

13 - 7

Reliance of complainant was reasonable Reliance means that

person entered the contract because of belief in the assertion

Fifth element for fraud: Injury

Elements (cont.)

13 - 8

Remedies

13 - 9

Jordan v. Knafel

Facts: Knafel claimed she was pregnant with

Jordan’s child and Jordan offered a settlement: Knafel agreed to keep the situation confidential

and to refrain from filing a paternity suit Jordan would pay Knafel $5 million upon his

retirement from professional basketball After child’s birth, paternity test revealed

child was not Jordan’s

13 - 10

Jordan v. Knafel

Procedural History & Issue: Jordan filed suit for declaratory

judgment that if an agreement had been made, it was unenforceable for fraud and mutual mistake

On appeal, issue was what impact the paternity evidence had on enforceability of alleged agreement

13 - 11

Legal Reasoning & Holding: Fraud in the inducement of a contract is

a defense rendering the contract voidable at the election of injured party Jordan’s paternity was a material fact in

settlement of Knafel’s paternity claim Agreement premised on fraud or mutual

mistake and thus voidable by Jordan

13 - 12

A mistake is a belief about a fact that is not in accord with the truth Mistake must relate to facts as they

exist at the time the contract is created Mistake not due to other party’s

statements Mutual mistakes may be remedied by

reformation

Mistake in Contracts

13 - 13

A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed Example: Estate of Nelson

v. Rice in which the sellers sued buyers after buyers recognized a profit on the sale of estate sale paintings

Mistake in Contracts

13 - 14

Mistake

13 - 15

Duress is wrongful threat or act that coerces a person to enter or modify contract Physical, emotional, or

economic harm Given duress, victim must

have no reasonable choice but to enter the contract See Cabot Corp. v AVX Corp.

Duress

13 - 16

Cabot Corporation v. AVX Corporation

Facts: After long negotiation of a long-term supply

contract, parties disputed whether contract was valid and binding contract (Cabot’s claim) or void due to economic duress (AVX’s claim)

The Law: To establish economic duress, party must

show he has been the victim of a wrongful or unlawful act or threat, and such act or threat must be one which deprives the victim of unfettered will

13 - 17

Law Applied to Facts: AVX and Cabot are sophisticated and

substantial commercial parties represented by highly competent counsel

Cabot was in stronger position than AVX, but “hard bargaining is not unlawful”

No evidence of coercion, but there is evidence of AVX’s ratification

Holding: Judgment affirmed in favor of Cabot

13 - 18

Cabot Corporation v. AVX Corporation

Undue influence involves wrongful pressure exerted on a person during the bargaining process

Unlike duress, pressure is exerted through persuasion rather than coercion

Key is the weakness of the person “persuaded”

Undue Influence

13 - 19

13 - 20

Review

Test Your Knowledge

True=A, False = B A contract signed under duress or

undue influence is simply void. A misrepresentation may be

negligent (innocent) or fraudulent. Mutual mistakes may be remedied by

reformation Duress and undue influence have the

same meaning13 - 21

Test Your Knowledge

Multiple Choice Elements of innocent

misrepresentation: (a) False assertion(b) Knowingly made to induce a person to

enter a contract(c) Reasonable reliance on the assertion by

complainant(d) All of the above(e) Both (a) and (c), but not (b)

13 - 22

Test Your Knowledge

Multiple Choice A unilateral mistake will not render a

contract void unless: (a) Substantial difference between

contract and market price(b) Fundamental error occurred(c) An unequal bargaining position

existed

13 - 23

Thought Question

Your landlord tells you that you will be evicted from your apartment or your rent must increase by $75 per month because your neighbors complain about your dog. If you agree to the increase, would the contract be void or voidable under the theory of duress?

13 - 24