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Reality of Consent

PA ET RHC 13

Necessity never made a good bargain.

Benjamin Franklin, 1735

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Learning Objectives

• Explain five doctrines that permit people to avoid their contracts because of the absence of real consent and identify elements:– Misrepresentation– Fraud– Mistake– Duress, and – Undue influence

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• 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

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• 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?

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• 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

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• 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.)

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Timothy v. Keetch

• Facts: – Defendants wanted to start a therapeutic

horse ranch as business venture, borrowed $102,000 from MSF and pledged a stallion they bought as collateral for the loan• Financing statement filed in UCC database

– Plaintiffs agreed to loan Defendants money, relying upon Defendants’ offer of the stallion as loan collateral and statement of ownership

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• Issue: Is it reasonable to rely on representation that an asset is owned “free and clear” when public record check would show otherwise

• Holding: plaintiff may justifiably rely on positive assertions of fact without independent Investigation since nothing in the transaction suggested anything that would “serve as a warning” that they were being deceived

– Affirmed in favor of plaintiffs

Timothy v. Keetch

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• 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

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• A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed– Sumerel v. Goodyear Tire & Rubber Company in

which plaintiffs attempted to exploit defendants’ mathematical or clerical error and failed

Mistake in Contracts

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• 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– Cabot Corp. v AVX Corp.

Duress

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Cabot Corporation v. AVX Corporation

• Facts: – After long negotiation of a long-term supply

contract, parties disputed whether contract was valid and binding (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

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• 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

Cabot Corporation v. AVX Corporation

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• 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

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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 meaning

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• Multiple Choice– Elements of innocent misrepresentation:

a) False assertionb) Knowingly made to induce a person to

enter a contractc) Reasonable reliance on the assertion

by complainantd) All of the abovee) Both (a) and (c), but not (b)

Test Your Knowledge

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• Multiple Choice– A unilateral mistake will not render

a contract void unless: a) Substantial difference between

contract and market priceb) Fundamental error occurredc) An unequal bargaining position

existed

Test Your Knowledge

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Thought Question

• Your landlord tells you that you will be evicted from your apartment or your rent must increase by $50 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?