January 9, 2006BUSINESS LAW (Ms. Hawkins)1 CHAPTER 7: GENUINE AGREEMENT Chapter 7 discusses conditions that may make a contract voidable due to lack of

January 9, 2006 BUSINESS LAW (Ms. Hawkins) 1

CHAPTER 7: GENUINE AGREEMENT

Chapter 7 discusses conditions that may make a contract voidable due to lack of genuine agreement.

7-1 Duress and undue influence can result in a voidable contract.

7-2 Genuine agreement may be lacking due to mistake, misrepresentation, or fraud.



Genuine Agreement: true and complete agreement, without which a contract is voidable. This means the injured party can cancel their obligation under the contract and et back what they have already put into it.

7-1 Duress and undue influence can result in a voidable contract.

7-2 Genuine agreement may be lacking due to mistake, misrepresentation, or fraud.


Hot Debate (Page 114)

Your friend buys a digital camera for $519.97, including a carrying case and a special lens. In her excitement, she fails to note that the case and special lens are advertised as optional equipment supplied at an additional charge. The two items cost an extra $122.94, which is listed on the contract she signs. When the bill for $642.91 plus sales tax arrives, your friend objects.



Hot Debate (Page 114)…

State three reasons why it would be fair to allow your friend to withdraw from the contract.

State three reasons why it would be fair for your friend to be bound to the contract.

Which reasons are more persuasive?


(1) She thought the total price was $519.97 (2) Price was stated to be $519.97 (3) Salesperson did not draw attention to the additional charges.

(1) The case and special lens were advertised as optional, supplied at an additional charge (2) The two items and their cost were listed on the contract she signed (3) Carrying cases and special lenses are usually priced separately, so she should have known.

The legal reasons for binding the friend to the contract are strongest. She made a unilateral mistake due to failing to read.


DURESS AND UNDUE INFLUENCE

Documents may indicate a valid offer and a valid acceptance.

However, if one of the parties used physical threats to obtain the other’s signature on a contract, there isn’t really genuine assent.

Genuine agreement is also called genuine assent or mutual assent.



Terms to know…

The absence of genuine agreement will make a contract voidable. This means the injured can rescind (back out of the transaction).

Rescission is done by asking for a return of what you gave in the transaction, and offering to give back what you received.




Rescission is only effective if—• The rescission is prompt (shortly after you discover that there is no genuine agreement)• The rescission occurs before you ratify the contract. Ratification is conduct that suggests you intend to be bound by the contract.• Duress occurs when one party uses an improper threat or act to obtain an expression of agreement.




What’s Your Verdict? (Page 115

Cameron owned a promising racehorse that Link had offered to buy for undis- closed parties. When Cameron refused to sell, link lowered his voice and slowly said, “Listen, the people I represent don’t take ‘no’ for an answer. If you don’t sell, they’ll hurt you. They’ll hurt your family. Like a good friend, I’m telling you to sell. You’re getting a fair price, just sign the contract.” Cameron, who had secretly recorded the conversation, sold. Then he called the police.



What’s Your Verdict? (Page 115)…

Can he now rescind and get his horse back?

Yes. Cameron acted under duress in making the contract, and therefore couldrescind it.



In This Case (Page 115)Steven inspected a 5-year old car with the intention of buying it. He asked the owner, Allan, how many miles were on the engine. Allan said, “As you can see from the odometer, it only has 30,000 miles on it, and I’m the only one who has ever owned it.” A written contract as executed and Steven took the car to the local automobile dealer to be inspected. The dealer informed Steven that the car had often been serviced there, and that the odometer had been replaced at about 100,000 miles. This was fraud on Allan’s part, making the contract voidable by Steven. Steven continued to make his monthly payments to Allan after discovering the fraud.

Can Steven rescind the contract?


No.Why?He ratified the contract by paying.


Much of the law of duress focuses on the nature of the threat:

• Threats of Illegal Conduct• Threats to Report Crimes• Threats to Sue• Economic Threats




• Threats of Illegal ConductThis is the threat to engage in illegal conduct to win agreement.The illegal conduct can be an act of violence, a threat to commit a crime, or committing or threatening to commit a tort (unlawful detention).




• Threats to Report CrimesIf you observe a crime, you have a duty to report it.If you use a threat of reporting to coerce a criminal to contract with you, this is duress.




• Threats to SueMany may threaten to sue if the other side doesn’t settle.BUT, if the threat to sue is made for a purpose unrelated to the suit, this may be duress.Example: During divorce negotiations, a husband threatens to sue for custody of the children if the wife doesn’t sign over valuable stocks. He doesn’t really want custody—voidable




• Economic ThreatsIf a party to a valid contract seeks to modify it (e.g. raise the price of goods with the threat of withholding goods), this may be duress if the injury to the manufacturer is substantial.In such cases, the courts look at both the threat and the alternatives available to the threatened party.



Undue influence occurs when one party to the contract is in a position of trust and wrongfully dominates the other party. There are two key elements:

• The Relationship• Unfair Persuasion



Undue influence occurs when one party to the contract is in a position of trust and wrongfully dominates the other party.

• The RelationshipA relationship of trust would include:Attorney and clientWife and husbandPhysician and patientHousekeeper and elderly


Attorney and client

Teacher and student*

Minister and congregation

Neighbor and the disabled


Undue influence occurs when one party to the contract is in a position of trust and wrongfully dominates the other party.

• Unfair PersuasionThe best evidence of unfair persuasion is found in unfair terms of the contract.Example: An elderly person who is dependent on a child’s daily care sells their home to a child for half its value.



I. Mistakes

A. unilateral 1. recognized 2. induced

B. mutual1. mistake about subject matter2. mistake of law3. materiality4. reasonable reliance


MISTAKE, MISREPRESENTATION, AND FRAUD


II. Fraud

A. misrepresentation must be intentional or reckless

B. misrepresentation must cause injury

C. remedies1. rescission2. damages3. punitive damages




A unilateral mistake occurs when one party holds an incorrect belief about the facts related to a contract.

A mistake due to: • failure to read a contract before signing• signing a contract written in a language you don’t understand




A unilateral mistake occurs when one party holds an incorrect belief about the facts related to a contract.

Recognized Unilateral Mistake This is when the mistake is major and the other party to the contract is aware of it.Induced Unilateral MistakeThis is when one party has encouraged the other to make the mistake.




A mutual mistake (also called bilateral mistake) is when both parties have an incorrect belief about an important fact.

Important facts that influence the parties’ decisions about a contract are called material facts.




There are two types of mutual mistakes:

Mutual Mistake About Subject Matter This is when the mistake is made as to the existence of the subject matter.Mistake of LawThis involves a mutual mistake in the application of the law.




A misrepresentation is when the parties make statements that turn out not to be true in contract negotiations.

There are two defenses to misrepresentation: Innocent misrepresentation-a seller does not knowingly make a false statement.Fraudulent misrepresentation-a seller knowingly makes a false statement.Both of these defenses make the contract voidable.




Statements are treated as misrepresentations only if:

1. The untrue statement is one of fact or there is active concealment, and…2. The statement is material to the transaction or is fraudulent, and… 3. The victim reasonably relied on the statement.





Untrue Statement of FactThe statement must be about a past or existing fact. It cannot be a statement of opinion.

When experts express an opinion, the law will treat the statement as a statement of fact.





Untrue Statement of Fact…Active Concealment-this is a non-verbal substitute for a false statement (e.g., painting over stains to conceal leaks).Silence- this is failure to disclose information such as a leaky roof.





MaterialityAn untrue statement is material if (1) it would cause a reasonable person to contract (2) if the defendant knew the plaintiff would rely on the statement (3) if the defendant knew the statement was false.





Reasonable RelianceEven though a statement is material, there is no misrepresentation unless the victim reasonably relied on it.

If a car dealer says that the tires are new, and the buyer responds, “Two are as bald as you,” there is no reliance and therefore no misrepresentation.




Baglio wanted the gutters of his new house to be free of rust. The specifications in the contract he signed called for “rust-resistant steel gutters galvanized with zinc.” After the house was built, he learned that galvanized steel gutters would eventually rust and require replacement. Aluminum or copper gutters are the kind he should have contracted for because they would not rust. Baglio now sues the contractor claiming a breach of contract because he did not get what he really wanted.


What’s Your Verdict? (Page 119)


Will Baglio win?

Why?



No.

Baglio made a unilateral mistake—he did not do his homework and do research on gutters galvanized with zinc.


Genetic Products, Inc., asked for construction bids (offers to build) for its new office building. Eight bids were received. Seven of them were within $100,000 of the architect’s estimate of $3 million. However, the bid from New Horizon Builders was $800,000 below the architect’s estimate. New Horizon’s chief estimator had made a math error. This error reduced New Horizon’s bid far below those of all other competitors. Genetics recognized this.


In This Case (Page 119)…


Can Genetics Products take advantage of New Horizon’s unilateral mistake and demand performance at the bargain price created by the mistake?

Why not?



No.

New Horizon Builders made a recognized unilateral mistake—Genetic Products “recognized” or knew of the mistake.


In a large Midwestern city, there were two streets named “Highland.” Fisher owned the lot at 231 Highland Avenue. Neece, who lived in New York City, wanted to buy the lot at 231 Highland Boulevard. He wrote to Fisher, offering “to buy your lot on Highland” on specified terms. Fisher promptly mailed her acceptance of the offer.




Is the contract valid?

Why not?



No.

The law treats a unilateral mistake about the identity of the subject matter of a transaction as a mutual mistake. The buyer’s mistake as to the identity of the lot made the contract void.


Nutri-Life offered a dietary supplement for sale. The package contained a statement that clinical studies at Harvard University had shown the drug reduced the risk of cancer by more than 30 percent if taken regularly. This statement was untrue.


What’s Your Verdict? (Page 120B)…


Can customers get their money back if they learn of the deception?

Why not?


What’s Your Verdict? (Page 120B)…

Yes.

The packaging of the Nutri-Life dietary supplement involved an expert’s opinion that constitutes misrepresentation.



Grounds for Avoiding Contract

Elements Remedies

Misrepresentation

1. Untrue statement of fact or concealment or silence when disclosure is required

2. Materiality

3. Reasonable reliance

Rescission (and for sale of goods, damages)


Fraud is based on misrepresentation.

All 3 of the elements of misrepresentation must be proven or there is no fraud. In addition, two more elements must be proven to show fraud:

1. Intent2. Injury





Intentional & Reckless

• Fraud clearly exists when a person deliberately lies or conceals a material fact.• Fraud also exists if a person recklessly makes a false statement of fact without knowing whether it is true or not.• There must be intent to induce the victim to contract.





Injury

• To establish fraud, there must be proof of injury.• If there is intentional misrepresentation, but no injury, there is no liability for fraud.




There are three remedies available for fraud.

• Rescission• Damages• Punitive Damages





• Rescission Contracts entered into as a result of misrepresentation or fraud are voidable by the injured party.





• Damages

Damages are available if fraud is proven. Under the UCC, damages are also available for

innocent misrepresentation, but the subject of the contract must be goods.





• Punitive Damages Punitive damages are available if fraud is proven.





Grounds for Avoiding Contract

Elements Remedies

Fraud

4. Intent to deceive or reckless statements intended to induce victim to contract

5. Injury

Rescission, Compensatory Damages, Punitive Damages



When making contracts, remember…1. Carefully investigate before entering, and consult a trustworthy independent expert.2. Don’t rush into a decision—legitimate proposals will usually survive a delay.3. Learn to distinguish between fact and opinion4. If you suspect deception, run!5. If you have been defrauded, act promptly.

