P A R T P A R T Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

P A R T P A R T Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Reality of Consent PA E TR HC 13 “Necessity never made a good bargain.” Benjamin Franklin, 1735

Learning Objectives  Five doctrines that permit people to avoid their contracts because of the absence of real consent:  Misrepresentation  Fraud  Mistake  Duress, and  Undue influence

 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 contract Effect of Doctrines

 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 damages Misrepresentation or Fraud?

 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 assertion  Reliance means that person entered the contract because of belief in the assertion Elements

 Innocent or fraudulent misrepresentation:  Reliance of complainant was reasonable  Fifth element for fraud:  Injury Elements (cont.)

Remedies

Rodi v. Southern New England School of Law  Facts :  Rodi went to Southern New England School of Law (SNESL) which claimed that the ABA accreditation committee had recommended SNESL for “provisional accreditation”  Disclaimer about accreditation in catalogue  Rodi intended to take New Jersey bar exam and the law requires bar applicants to hold law degrees from ABA accredited law schools  Accreditation critically important to Rodi

Rodi v. Southern New England School of Law  Facts :  ABA denied accreditation during Rodi’s first year; Dean urged Rodi to remain  Rodi graduated, SNESL remained unaccredited, and Rodi was ineligible to sit for the New Jersey bar examination  Rodi filed suit against SNESL and others alleging fraudulent misrepresentation  Court granted SNESL motion to dismiss

Rodi v. Southern New England School of Law  Issue and Legal Reasoning:  Had Rodi failed to state a claim?  Despite catalogue disclaimer, if SNESL representatives knew of non-accreditation probability, then positive statements about the likelihood of SNESL’s accreditation were actionably misleading  Reversed and remanded in favor of Rodi

 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 reformation 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 paintings Mistake in Contracts

Mistake

 Duress is wrongful threat or act that coerces a person to enter or modify a contract  Physical, emotional, or economic harm  Given the duress, victim must have no reasonable alternative but to enter the contract  Example: Radford v. Keith Duress

Radford v. Keith  Facts :  Contract for Keith to build house for Radford  Keith accused Radford of fraud; threatened to block closing unless additional payment made  Had guard at door during the meeting  Relying on closing date, Radford had entered into other contracts and under threat of suit, thought she had no choice but to make the payment  Radford filed suit against Keith under theory of duress; jury found for Radford & Keith appealed

Radford v. Keith  Issue :  May Radford rescind agreement for additional payment under theory of duress?  Law Applied to Facts :  Substantial evidence, especially the guard at the door, indicated to jury that duress occurred  Affirmed, favor of Radford

 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” Undue Influence

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 meaning

Test Your Knowledge  Multiple Choice  The elements of innocent misrepresentation are:  (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  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 existed

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?