Chapter 17 Legal Assent Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17-2 Chapter 17 Case Hypothetical and Ethical Dilemma Sara Jameson believes she is close to achieving her version of the “American Dream.” She has just purchased from Dan Salazar an empty lot on 1534 Oak Drive in her hometown of Omaha, Nebraska, and is ready to build her first house, a 1,500-square-feet ranch. She has borrowed $225,000 from First Omaha National Bank, the maximum loan amount for which she qualifies. This morning, Sara was on location at 1534 Oak Drive with her contractor, establishing the foundation parameters for her new home. Her curious (and gossipy) new neighbor, Anna Frederickson, stopped by to chat. In their conversation, Anna asked Sara what size home she was planning to build, and Sara responded “1,500 square feet.” Anna immediately proclaimed “Sara, you can’t build a home of that size in our neighborhood. The restrictive covenants in our neighborhood require houses of 1,800 square feet or larger.” Sara and her contractor rush down to the Douglas County Register of Deeds, and upon researching the public record, find the restrictive covenants for the subdivision. Sara’s worst fears are confirmed- -The restrictive covenants indeed dictate a larger home, and Sara does not have access to the additional proceeds necessary (approximately $35,000) to build one. Sara would like to “undo” the contract for purchase of the lot at 1534 Oak Drive, returning title and ownership to seller Dan Salazar, and receiving as reimbursement from him the purchase price she paid for the lot. Dan is unwilling to rescind the contract. Who would win in a lawsuit for rescission of the contract: Sara Jameson, or Dan Salazar?

17-3 Chapter 17 Case Hypothetical and Ethical Dilemma John Hammonds recently purchased a used Fjord Mastodon sedan from Square Deal Pre-Owned Auto Sales, Inc. During contract negotiations, John did not ask any questions related to the fuel efficiency of the car, and Square Deal’s sales representative, Wink Eubanks, did not volunteer any information about the Mastodon’s gas mileage. John had saved for a car for five (5) years, and he paid ten thousand dollars cash for the vehicle. After his purchase, John kept meticulous records regarding the fuel consumption of the Mastodon, and he calculated that the Mastodon was getting approximately twelve (12) miles per gallon. He immediately returned to Square Deal (John thought the dealership should be renamed “Raw Deal”), found Wink Eubanks in front of one of the store’s vending machines, and stated “You should have told me that Mastodon only gets twelve miles per gallon. I am the victim of fraud, and I want my money back. Here are the keys to your Mastodon with the mammoth appetite!” Do you agree with John Hammonds? Is John the victim of fraud? Is he entitled to a rescission of the contract based on Square Deal’s nondisclosure of the Mastodon’s gas mileage?

17-4 Chapter 17 Case Hypothetical and Ethical Dilemma For Greta Harrington and her husband Robert, it was love at first sight. The two were married for 52 years until cancer took her husband at the age of 84. Greta is currently 83 years old, and her marriage produced three offspring: Samuel, 50 years old; Katherine, 45 years old; and Benjamin, 40 years old. In his will, Robert left all of his financial interests, a considerable sum valued at $5 million, entirely to his wife; in his will, he also expressed love and affection for his three children, as well as the desire that Greta devise the remainder of the couple’s estate to their children, in equal portions, upon her death. Greta has recently been “keeping company” with Gary Watson, a twice-divorced, 65-year-old bachelor with a reputation for “womanizing.” While visiting her mother one weekend, Katherine is shocked to see a fully-executed will on the desk in the living room, devising all of her mother’s estate to Gary Watson. She immediately calls Samuel and Benjamin, schedules an emergency “sibling meeting” for Sunday, and wonders what to do about her mother’s ill- advised decision. She has noticed in recent months that her mother is often forgetful, frequently calls her “Sharon” (her aunt’s name,) and often confuses the days of the week. Do the children have any legal rights in terms of successfully invalidating Greta Harrington’s will? From a legal and/or ethical standpoint, should a mother (even of adult children) be allowed to “disinherit” her offspring?

17-5 Legal Assent Definition: Promise to buy or sell courts will require parties to obey Definition: Promise to buy or sell courts will require parties to obey Without assent, contract may be avoided/rescinded Without assent, contract may be avoided/rescinded Cancellation of contract due to lack of assent means party with power of avoidance can require return of consideration given to other party; similarly, party with rescission right must return consideration received from other party Cancellation of contract due to lack of assent means party with power of avoidance can require return of consideration given to other party; similarly, party with rescission right must return consideration received from other party Major “obstacles” to legal assent: Mistake, misrepresentation, undue influence, duress, and unconscionability Major “obstacles” to legal assent: Mistake, misrepresentation, undue influence, duress, and unconscionability

17-6 Mistake Definition: Erroneous beliefs regarding material facts of contract at time agreement made Definition: Erroneous beliefs regarding material facts of contract at time agreement made Unilateral Mistake: Mistake made by one contracting party; generally, contract still binding Unilateral Mistake: Mistake made by one contracting party; generally, contract still binding Mutual (Bilateral) Mistake: Mistake made by both parties; if mutual mistake of material (significant) fact, either party can rescind contract Mutual (Bilateral) Mistake: Mistake made by both parties; if mutual mistake of material (significant) fact, either party can rescind contract

17-7 Fraudulent or Negligent Misrepresentation Fraudulent Misrepresentation (Definition): Intentional, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages Fraudulent Misrepresentation (Definition): Intentional, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages Negligent Misrepresentation (Definition): Negligent, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages Negligent Misrepresentation (Definition): Negligent, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages Contrast with “innocent misrepresentation”, when party making false assertion believes it to be true, and is not negligent in making false assertion; although innocent misrepresentation permits misled party to rescind contract, he/she cannot sue for damages Contrast with “innocent misrepresentation”, when party making false assertion believes it to be true, and is not negligent in making false assertion; although innocent misrepresentation permits misled party to rescind contract, he/she cannot sue for damages Courts permit contract rescission for fraudulent or negligent misrepresentation, assuming: Courts permit contract rescission for fraudulent or negligent misrepresentation, assuming: False assertion False assertion Intent to deceive, or negligence Intent to deceive, or negligence Justifiable reliance on false assertion by innocent party Justifiable reliance on false assertion by innocent party

17-8 Undue Influence Definition: Persuasive efforts of dominant party, who uses special relationship to interfere with other’s free choice of terms Definition: Persuasive efforts of dominant party, who uses special relationship to interfere with other’s free choice of terms Any relationship involving one party’s unusual degree of trust in another can give rise to undue influence Any relationship involving one party’s unusual degree of trust in another can give rise to undue influence

17-9 Questions Affecting Determination of Undue Influence Did dominant party “rush” the other party to consent? Did dominant party “rush” the other party to consent? Did dominant party gain unjust enrichment from the contract? Did dominant party gain unjust enrichment from the contract? Was non-dominant party isolated from other advisers at time of contract? Was non-dominant party isolated from other advisers at time of contract? Is contract unreasonable, in that it overwhelmingly benefits dominant party? Is contract unreasonable, in that it overwhelmingly benefits dominant party?

17-10 Duress Definition: Occurs when one party threatens other with wrongful act unless assent given Definition: Occurs when one party threatens other with wrongful act unless assent given Duress is not legal assent, since coercion interferes with contracting party’s free will Duress is not legal assent, since coercion interferes with contracting party’s free will For courts to rescind agreement, injured party must prove duress left no reasonable alternatives to contractual agreement For courts to rescind agreement, injured party must prove duress left no reasonable alternatives to contractual agreement

17-11 Situations Involving Duress One party threatens physical harm or extortion to gain consent to contract One party threatens physical harm or extortion to gain consent to contract One party threatens to file criminal lawsuit unless consent given to terms of contract One party threatens to file criminal lawsuit unless consent given to terms of contract One party threatens to file frivolous civil lawsuit unless consent given to terms of contract One party threatens to file frivolous civil lawsuit unless consent given to terms of contract One party threatens the other’s economic interests (although in many jurisdictions, recovery based on economic duress/pressure rarely granted) One party threatens the other’s economic interests (although in many jurisdictions, recovery based on economic duress/pressure rarely granted)

17-12 Unconscionability Definition: Occurs when one party has so much relative bargaining power that he/she effectively dictates terms of contract, resulting in situation where dominated party, in essence, lacks free will Definition: Occurs when one party has so much relative bargaining power that he/she effectively dictates terms of contract, resulting in situation where dominated party, in essence, lacks free will Unconscionable contract is an “adhesion contract,” and cannot be basis for avoiding contract Unconscionable contract is an “adhesion contract,” and cannot be basis for avoiding contract