CHAPTER 7 Genuineness of Assent 4/12/2017 CHAPTER 7 Genuineness of Assent 7-1 Duress and Undue Influence 7-2 Mistake, Misrepresentation, and Fraud

7-1 Duress and Undue Influence GOALS Recognize when genuine assent is not present Identify the two key elements in undue influence

FOCUS Scenario The Thompsons were told that if they did not sign a contract to repay a $2,000 loan at 40 percent interest, their son would be in danger of physical harm. Afraid that their son would be hurt, the Thompsons signed the contract. Questions Is the contract enforceable? No, if the Thompsons did not want it. Why or why not? The assent on the part of the Thompsons was not genuine due to the duress elicited by the threat against the son

GENUINE ASSENT AND DURESS Genuine assent – true and complete agreement. Without this a contract typically is voidable. (if the injured party desires, that party can cancel their obligation under the contract and get back what they have already put into it.) The above action is called rescission Must be prompt shortly after discovered that there is no genuine agreement. Must occur before contract ratification. (conduct suggesting you intend to be bound by the contract)

GENUINE ASSENT AND DURESS Duress – the use of improper threat or act to obtain an expression of agreement. Threats of illegal conduct – threat to engage in illegal conduct such as a crime or tort. (Example: stabbing) Threats to report crimes – if you observe a crime you have the duty to report it. If you use this to obtain a contract you could be considered extortion. Threats to sue – when you threaten to sue is really made for a purpose unrelated to the suit, this may be duress. Economic threats – threat to use economic power. In these cases the courts look at both the threat and the alternatives available to the threatened party. If the threatened party had no choice but to enter into contract then duress exists.

Checkpoint List the various forms of legal duress. Threats of illegal conduct directed against a person’s immediate family, near relatives, or home, legitimate lawsuit, and threats of substantial economic harm. All of these would result in the contract being considered voidable by the party threatened.

UNDUE INFLUENCE AND ASSENT Undue influence – when one party to the contract is in a position of trust and wrongfully dominates the other party. The dominated party then does not exsercise free will. Two key elements are The relationship – of trust, confidence or authority must exist between the parties. (Does not have to be a formal relationship) Unfair persuasion – often found in an unfair contract.

CheckPoint What are the key elements in undue influence? The elements are (1) dependent relationship based on trust in, confidence in or authority of the dominating party. (2) wrongful persuasion to enter into an unfair contract.

7-2 Mistake, Misrepresentation, and Fraud GOALS Recognize the types of mistakes that can make a contract voidable or void List the criteria for a statement to be treated as a misrepresentation Define fraud and describe the remedies for it

FOCUS Scenario Jane contracts with Mike to purchase one of his two skateboards. Jane thinks she has bought the red one, a premier skateboard. Mike thinks Jane has bought the blue one, his less valuable skateboard. Question Does a contract exist? No because there is a mutual mistake of fact about the subject matter. There was no genuine Agreement

WHAT ARE THE TYPES OF CONTRACTUAL MISTAKES? Unilateral mistakes – occurs when only one party holds an incorrect belief about the facts related to a contract. (Usually this does not affect the validity of the contract.) Mutual mistakes – (bilateral) both parties have an incorrect belief about an important fact. Contract is void. Important facts also called Material facts Them both persons make mistake about the law contract is not void. Assumed that all parties know the laws.

Check Point Name the types of mistakes that can make a contract voidable or void. Of the four basic types of mistakes only a mutual mistake as to the identity of the subject matter can render a contract void. However, most courts will still rescind the contract.

Manuela rented an apartment and later discovered that the roof leaked Manuela rented an apartment and later discovered that the roof leaked. She asked the landlord to make repairs, but he refused. Manuela said that she would move out unless the landlord either made the repairs or lowered the rent. The landlord lowered the rent. Does Manuela’s conduct make the modification to the contract voidable due to duress? No. The landlord has other options, including renting to someone else.

Evelyn was 86 years old and of sound mind Evelyn was 86 years old and of sound mind. However, she relied upon her nephew Jamal, an accountant, to advise her in business matters. during one of Jamal’s visits, he persuaded her to sell him a valuable painting for about 80% of its true value. Evelyn agreed and signed a contract. Then she had the painting appraised and learned its true value. She continued with the transaction by accepting payment for the painting. About a year later she died. her estate sued for rescission at the contract Jamal defended by claiming that Evelyn had ratified by accepting payment after learning of the value of the paining. Who prevails. Evelyn’s estate or Jamal? Even though Jamal was in a position of trust, Evelyn ratified the contract by continuing with the transaction after learning of the painting’s true value. Jamal prevails.

WHAT IS MISREPRESENTATION? In both these cases the party to whom the misrepresentation is made may void the contract. Innocent misrepresentation – If the seller had no known the statement was untrue. Fraudulent misrepresentation – If the seller had know the statement was untrue.

WHAT IS MISREPRESENTATION? Statements are treated as misrepresentations by the law only if Untrue statement of fact – (cannot be opinion) When experts express Opinion it is treated as fact. Active concealment – trying to cover up Silence – remaining silent about defects. (No ½ truths) You have a duty to break silence if facts change subsequently You have to break the silence if you know the other party has made a basic mistaken assumption. Materiality – Three ways an untrue statement can be determined material If statement could cause a reasonable person to contract If defendant knew this plaintiff would rely on the statement. The defendant knew the statement was false. Reasonable reliance - Even if the statement is material there is no misrepresentation unless the victim reasonably relied on it.

Chapter 7 4/12/2017 Check Point What are the three criteria for a statement to be treated as a misrepresentation? Untrue statement of fact or active concealment material or fraudulent statement 3. Reasonable reliance by the victim.

FRAUD Based on misrepresentation. All elements of misrepresentation must be proven to show fraud plus the following two elements. The misrepresentation must be intentional or reckless Makes statement without knowing whether it is true or false. Must have intended to induce the victim to contract. The misrepresentation or concealment must injure must be prove of injury.

REMEDIES FOR FRAUD Rescission – Anything you and the other party received must be returned. Damages – available if fraud is charged. Victim can ratify the contract and then sue for damages. Punitive damages – available if fraud is proven made to punish.

Check Point What are the remedies available for fraud? Recession and damages both compensatory and punitive are available as remedies for fraud.

Anne was shopping for a used washing machine Anne was shopping for a used washing machine. She found one she thought was in good condition. She asked the seller what shape it was in and the seller replied. “It is in great shape.” In fact it needed major repairs. Is the seller’s statement a misrepresentation. No, the statement “great shape” is merely one of opinion, not fact. Therefore, it cannot be the basis for misrepresentation.

Chip was shopping for a used computer Chip was shopping for a used computer. He found one and asked the seller if the processor’s speed was greater than 2 megahertz. The seller said, “Yes, it runs at 2.5 megahertz.” In fact it was a much slower chip. Is the seller’s statement a misrepresentations? Yes, the statement is one of fact, it is material, and would likely be relied upon by a buyer.

Glenna found a computer she wanted Glenna found a computer she wanted. While describing all the components, the seller said it had a fast modem. Glenna said modem speed was very important to her and asked how fast it was. The seller said, “It’s 56K,” but she didn’t really know how fast it was. In fact it was a much slower modem. Has the seller committed misrepresentation? Has this seller committed fraud? Yes misrepresentation because the statement was one of fact and it is untrue, material and relied upon. It may also be fraud because the misrepresentation though not intentional, is probably reckless.

For years, Salazar, the lead mechanic at the Pull On In gas station, saved his money and eventually bought the business. Two weeks after the purchase, he found out that, a month previous, the Environmental Protection Agency had passed a regulation that would make the dispensing of petroleum-based fuels within a mile of a drinking water reservoir illegal. The station was only a few blocks from such a reservoir. Salazar also discovered that the previous owners knew of the regulation when they sold but did not inform him. Can he get the transaction rescinded? No, A unilateral mistake of law even with concealment of a material fact, is not a basis for rescission.