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 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.

January 9, 2006BUSINESS LAW (Ms. Hawkins)2 CHAPTER 7: GENUINE AGREEMENT 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.

January 9, 2006BUSINESS LAW (Ms. Hawkins)3 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 $ plus sales tax arrives, your friend objects. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)4 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? CHAPTER 7: GENUINE AGREEMENT (1) She thought the total price was $ (2) Price was stated to be $ (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.

January 9, 2006BUSINESS LAW (Ms. Hawkins)5 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 others signature on a contract, there isnt really genuine assent. Genuine agreement is also called genuine assent or mutual assent. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)6 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. CHAPTER 7: GENUINE AGREEMENT DURESS AND UNDUE INFLUENCE

January 9, 2006BUSINESS LAW (Ms. Hawkins)7 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. CHAPTER 7: GENUINE AGREEMENT DURESS AND UNDUE INFLUENCE

January 9, 2006BUSINESS LAW (Ms. Hawkins)8 Whats 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 dont take no for an answer. If you dont sell, theyll hurt you. Theyll hurt your family. Like a good friend, Im telling you to sell. Youre getting a fair price, just sign the contract. Cameron, who had secretly recorded the conversation, sold. Then he called the police. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)9 Whats Your Verdict? (Page 115)… Can he now rescind and get his horse back? Yes. Cameron acted under duress in making the contract, and therefore could rescind it. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)10 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 Im 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 Allans 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? CHAPTER 7: GENUINE AGREEMENT No.Why?He ratified the contract by paying.

January 9, 2006BUSINESS LAW (Ms. Hawkins)11 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 CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)12 Much of the law of duress focuses on the nature of the threat: Threats of Illegal Conduct This 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). CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)13 Much of the law of duress focuses on the nature of the threat: Threats to Report Crimes If 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. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)14 Much of the law of duress focuses on the nature of the threat: Threats to Sue Many may threaten to sue if the other side doesnt 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 doesnt sign over valuable stocks. He doesnt really want custodyvoidable CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)15 Much of the law of duress focuses on the nature of the threat: Economic Threats If 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. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)16 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 CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)17 Undue influence occurs when one party to the contract is in a position of trust and wrongfully dominates the other party. The Relationship A relationship of trust would include: Attorney and client Wife and husband Physician and patient Housekeeper and elderly CHAPTER 7: GENUINE AGREEMENT Attorney and client Teacher and student* Minister and congregation Neighbor and the disabled

January 9, 2006BUSINESS LAW (Ms. Hawkins)18 Undue influence occurs when one party to the contract is in a position of trust and wrongfully dominates the other party. Unfair Persuasion The best evidence of unfair persuasion is found in unfair terms of the contract. Example: An elderly person who is dependent on a childs daily care sells their home to a child for half its value. CHAPTER 7: GENUINE AGREEMENT

January 9, 2006BUSINESS LAW (Ms. Hawkins)19 I. Mistakes A. unilateral 1. recognized 2. induced B. mutual 1. mistake about subject matter 2. mistake of law 3. materiality 4. reasonable reliance CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)20 II. Fraud A. misrepresentation must be intentional or reckless B. misrepresentation must cause injury C. remedies 1. rescission 2. damages 3. punitive damages CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)21 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 dont understand CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)22 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 Mistake This is when one party has encouraged the other to make the mistake. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)23 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)24 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 Law This involves a mutual mistake in the application of the law. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)25 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)26 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)27 Statements are treated as misrepresentations only if: Untrue Statement of Fact The 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)28 Statements are treated as misrepresentations only if: 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)29 Statements are treated as misrepresentations only if: Materiality An 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)30 Statements are treated as misrepresentations only if: Reasonable Reliance Even 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)31 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. CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 119)

January 9, 2006BUSINESS LAW (Ms. Hawkins)32 Will Baglio win? Why? CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 119)… No. Baglio made a unilateral mistakehe did not do his homework and do research on gutters galvanized with zinc.

January 9, 2006BUSINESS LAW (Ms. Hawkins)33 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 architects estimate of $3 million. However, the bid from New Horizon Builders was $800,000 below the architects estimate. New Horizons chief estimator had made a math error. This error reduced New Horizons bid far below those of all other competitors. Genetics recognized this. CHAPTER 7: GENUINE AGREEMENT In This Case (Page 119)…

January 9, 2006BUSINESS LAW (Ms. Hawkins)34 Can Genetics Products take advantage of New Horizons unilateral mistake and demand performance at the bargain price created by the mistake? Why not? CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 119)… No. New Horizon Builders made a recognized unilateral mistakeGenetic Products recognized or knew of the mistake.

January 9, 2006BUSINESS LAW (Ms. Hawkins)35 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. CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 120)…

January 9, 2006BUSINESS LAW (Ms. Hawkins)36 Is the contract valid? Why not? CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 120)… No. The law treats a unilateral mistake about the identity of the subject matter of a transaction as a mutual mistake. The buyers mistake as to the identity of the lot made the contract void.

January 9, 2006BUSINESS LAW (Ms. Hawkins)37 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. CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 120B)…

January 9, 2006BUSINESS LAW (Ms. Hawkins)38 Can customers get their money back if they learn of the deception? Why not? CHAPTER 7: GENUINE AGREEMENT Whats Your Verdict? (Page 120B)… Yes. The packaging of the Nutri-Life dietary supplement involved an experts opinion that constitutes misrepresentation.

January 9, 2006BUSINESS LAW (Ms. Hawkins)39 CHAPTER 7: GENUINE AGREEMENT Grounds for Avoiding Contract ElementsRemedies Misrepresentation 1.Untrue statement of fact or concealment or silence when disclosure is requiredUntrue statement of fact 2.MaterialityMateriality 3.Reasonable relianceReasonable reliance Rescission (and for sale of goods, damages)

January 9, 2006BUSINESS LAW (Ms. Hawkins)40 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. Intent 2. Injury CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)41 Fraud is based on misrepresentation. 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)42 Fraud is based on misrepresentation. Injury To establish fraud, there must be proof of injury. If there is intentional misrepresentation, but no injury, there is no liability for fraud. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)43 There are three remedies available for fraud. Rescission Damages Punitive Damages CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)44 There are three remedies available for fraud. Rescission Contracts entered into as a result of misrepresentation or fraud are voidable by the injured party. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)45 There are three remedies available for fraud. 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. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)46 There are three remedies available for fraud. Punitive Damages Punitive damages are available if fraud is proven. CHAPTER 7: GENUINE AGREEMENT MISTAKE, MISREPRESENTATION, AND FRAUD

January 9, 2006BUSINESS LAW (Ms. Hawkins)47 CHAPTER 7: GENUINE AGREEMENT Grounds for Avoiding Contract ElementsRemedies Fraud 4.Intent to deceive or reckless statements intended to induce victim to contract 5.Injury Rescission, Compensatory Damages, Punitive Damages

January 9, 2006BUSINESS LAW (Ms. Hawkins)48 CHAPTER 7: GENUINE AGREEMENT When making contracts, remember… 1. Carefully investigate before entering, and consult a trustworthy independent expert. 2. Dont rush into a decisionlegitimate proposals will usually survive a delay. 3. Learn to distinguish between fact and opinion 4. If you suspect deception, run! 5. If you have been defrauded, act promptly.

January 9, 2006BUSINESS LAW (Ms. Hawkins)49 CHAPTER 7: GENUINE AGREEMENT