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Chapter 13 – Reality of Consent


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Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.

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Chapter 13 – Reality of Consent

  1. 1. Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Capacity to Contract Illegality Writing Rights of Third Parties Performance and Remedies© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  3. 3. Reality of ConsentNecessity never made a good bargain. Benjamin Franklin, 1735© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  4. 4. Learning Objectives Five doctrines that permit people to avoid their contracts because of the absence of real consent:  Misrepresentation  Fraud  Mistake  Duress, and  Undue influence13 - 4
  5. 5. Effect of The Five Doctrines 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 contract13 - 5
  6. 6. Misrepresentation or Fraud? 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 damages13 - 6
  7. 7. Elements 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 assertion13 - 7
  8. 8. Elements (cont.) Reliance of complainant was reasonable  Reliance means that person entered the contract because of belief in the assertion Fifth element for fraud:  Injury13 - 8
  9. 9. Remedies13 - 9
  10. 10. 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’s13 - 10
  11. 11. 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 agreement13 - 11
  12. 12.  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 Jordan13 - 12
  13. 13. Mistake in Contracts 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 reformation13 - 13
  14. 14. Mistake in Contracts  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 paintings13 - 14
  15. 15. Mistake13 - 15
  16. 16. Duress 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.13 - 16
  17. 17. 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 will13 - 17
  18. 18. Cabot Corporation v. AVX Corporation 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 Cabot13 - 18
  19. 19. Undue Influence 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”13 - 19
  20. 20. Review13 - 20
  21. 21. 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
  22. 22. 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
  23. 23. 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 existed13 - 23
  24. 24. 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