1. 3 P A R T
Contracts

2. Necessity never made a good bargain.13 C H A P T E R
Reality of Consent
Necessity never made a good bargain.
Benjamin Franklin, 1735

3. Learning Objectives
Identify the conditions under which a contract can be rescinded because of the absence of knowing or voluntary consent
Explain the elements of misrepresentation and fraud and determine whether a contract is likely to be voidable because of misrepresentation or fraud
Explain the elements of mistake and determine when mistake makes a contract voidable

4. Learning Objectives
Explain the circumstances under which duress makes a contract voidable
Distinguish undue influence from duress and explain the circumstances under which undue influence makes a contract voidable
Explain what a party who claims misrepresentation, fraud, mistake, duress, or undue influence is required to do in order to rescind a contract

5. Effect of The Five Doctrines
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
Cabot Corporation v. AVX Corporation is a case example of ratification.

6. Misrepresentation or Fraud?
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

7. Elements 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
Concealment example: if Summers offers his house for sale and paints the ceilings to conceal the fact that the roof leaks, his active concealment constitutes an assertion of fact
Nondisclosure differs from concealment in that concealment involves the active hiding of a fact, while nondisclosure is the failure to volunteer information

8. Elements (cont.) Reliance of complainant was reasonable
Reliance means that person entered the contract because of belief in the assertion
Other elements for fraud:
Scienter
Injury
Problem with justifiable reliance element is identifying the extent to which the relying party is responsible for investigating the accuracy of the statement on which he relies. Section 172 of the Restatement, which provides that a relying party’s failure to discover facts before entering the contract does not make his reliance unjustifiable unless his fault was too extreme. Most courts place a greater degree of accountability on the person who makes the assertion rather than the person who relies on the assertion.

9. Stephen A. Wheat Trust v. Sparks
Facts:
Seller filled out a Property Disclosure Statement that acknowledged that when it rains the basement occasionally becomes “damp”
Before showing the property, the Seller used fans to dry out the basement
In an to the Seller’s agent, the seller indicated that there were additional leaks
Seller’s agent advised the Seller to update the Disclosure
After closing escrow the buyers experienced extensive water damage in the basement
The buyers sued the sellers for fraud based on alleged misrepresentations and the active concealment

10. Stephen A. Wheat Trust v. Sparks
Procedural History and Holding:
The trial court granted summary judgment to the Seller, which the buyer appealed
The court of appeals examined the applicable law to establish a fraud claim
(i) a false representation made by the defendant, (ii) knowledge by the defendant that the representation was false when made, (iii) intent to induce plaintiff to act or refrain from acting, (iv) justifiable reliance on the misrepresentation by the plaintiff, and (v) damage to the plaintiff

11. Stephen A. Wheat Trust v. Sparks
The evidence of the use of fans by the seller and the in which the seller acknowledged additional leaks was sufficient to show that the seller had continued knowledge of the defects and that their disclosure was not truthful
"For purposes of summary judgment, scienter and intent to deceive are determined on the basis of the seller's knowledge of the falsity of his representations at the time made to the prospective purchaser."
The court of appeals determined that a genuine issue of material fact existed regarding the Wheats' fraud claim
Reserved and remanded for further proceedings

13. Timothy v. Keetch Facts:
Defendants wanted to start a therapeutic horse ranch as business venture, borrowed $102,000 from MSF and pledged a stallion they bought as collateral for the loan
Plaintiffs agreed to loan Defendants money, relying upon Defendants’ offer of the stallion as loan collateral and statement of ownership
The hyperlink is to the Circuit Court’s opinion on the Findlaw.com website. The photo is of a dun stallion (though a mustang rather than a Quarter Horse).
The plaintiffs did some due diligence, checking status of ownership of the horse with the trainer and the American Quarter Horse Association, but did not check Uniform Commercial Code filings.

14. Timothy v. Keetch Affirmed in favor of plaintiffs
Issue: Is it reasonable to rely on representation that an asset is owned “free and clear” when public record check would show otherwise
Holding: plaintiff may justifiably rely on positive assertions of fact without independent Investigation since nothing in the transaction suggested anything that would “serve as a warning” that they were being deceived
Affirmed in favor of plaintiffs

15. Mistake in Contracts
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

16. Hicks v. Sparks
Facts:
As a result of Sparks’s negligent driving, Hicks was injured in a car accident with Sparks
Hicks settled with the insurance company for $4,000 and signed a Release
Nearly a year after the accident, Hicks began to experience pain in both of her arms and tingling and numbness in her hands and later underwent surgery

17. Hicks v. Sparks Procedural History:
Based on the Release, the trial court granted Sparks’s motion for summary judgment
Hicks appealed to the Delaware Supreme Court
Hick’s alleges that her post-Release injuries are materially different from those contemplated in the Release, thus amounting to a mistake of fact

18. Hicks v. Sparks
Rule:
To establish a mutual mistake of fact, the plaintiff must show by clear and convincing evidence that (1) both parties were mistaken as to a basic assumption, (2) the mistake materially affects the agreed-upon exchange of performances, and (3) the party adversely affected did not assume the risk of the mistake

19. Hicks v. Sparks Reasoning and Holding:
Hicks assumed the risk of mistake. She executed a clear and unambiguous Release in exchange for a settlement payment
She assumed the risk that her injuries were more serious than she believed and that her symptoms could worsen and require further treatment
Grant of summary judgment to Sparks affirmed

20. Mistake in Contracts
A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed
Sumerel v. Goodyear Tire & Rubber Company in which plaintiffs attempted to exploit defendants’ mathematical or clerical error and failed
Hyperlink is to the Colorado Supreme Court’s opinion in pdf.
Court: “In short, the record demonstrates that Brooks did not seek an agreement through conscious ignorance. Rather, the record shows that he sought further dialogue because he knew of the discrepancy in the parties’ calculations. In our view, plaintiffs’ efforts to exploit Goodyear’s obvious mathematical or clerical error, thereby obtaining a windfall of over $550,000, were clearly inequitable. For these reasons, we hold that even if Brooks’s November 2, 2006, and charts could be characterized as an offer and that offer was accepted, Goodyear may properly avoid the resulting agreement on the facts presented here.”

21. Duress
Duress is wrongful threat or act that coerces a person to enter or modify contract
Physical, emotional, or economic harm
Given duress, victim must have no reasonable choice but to enter the contract
Cabot Corp. v AVX Corp.
Reasonable Alternative Example: Barry, a traveling salesman, takes his car to Cheatum Motors for repair. Barry pays Cheatum the full amount previously agreed upon for the repair, but Cheatum refuses to return Barry’s car to him unless Barry agrees to pay substantially more than the contract price for the repairs. Because of his urgent need for the return of his car, Barry agrees to do this. In this case, Barry technically had the alternative of filing a legal action to recover his car. However, this would not be a reasonable alternative for someone who needs the car urgently because of the time, expense, and uncertainty involved in pursuing a lawsuit. Thus, Barry could avoid his agreement to pay more money under a theory of duress.

22. Cabot Corporation v. AVX Corporation
Facts:
After long negotiation of a long-term supply contract, parties disputed whether contract was valid and binding (Cabot’s claim) or void due to economic duress (AVX’s claim)
The Law:
To establish economic duress, party must show he has been the victim of a wrongful or unlawful act or threat, and such act or threat must be one which deprives the victim of unfettered will
AVX Corporation manufactures capacitors for electronic products. Tantalum, an elemental metal as rare in nature as uranium, is used in the manufacture of AVX’s products. Cabot Corporation is a major supplier of tantalum powder and wire and supplied AVX with tantalum products for many years. During volatile market, AVX purchased tantalum from Cabot at preferable prices without entering binding, long-term contracts.
In 2000, a shortage of tantalum developed and In August 2000, Cabot notified all of its customers that, in the future, it proposed to commit its limited production capacity to those customers who were prepared to enter into binding, long-term supply contracts. Between August and November 2000, Cabot and AVX negotiated the terms of a binding, long-term supply contract. Both parties were represented by highly competent legal counsel throughout the process.
Cabot and AVX memorialized the terms of a basic agreement to a binding, five-year contract, under which AVX would purchase specified quantities of tantalum powder and wire at stated prices. The prices agreed to were no higher than the then-current market prices for tantalum products. Cabot agreed to AVX’s demand of “most favored customer” protection. In addition, the parties agreed that the agreement would supersede all prior agreements (including the letters of intent) and released each other from all claims arising under any prior agreements.
In July 2002, more than 20 months after the supply contract was negotiated, and more than 18 months after it was signed, AVX filed an action against Cabot in federal court. AVX alleged that the 2000 letters of intent were binding contracts and that the supply contract was void because it had been executed by AVX under economic duress. This action was dismissed for lack of jurisdiction. Cabot then filed an action for a declaratory judgment, seeking a declaration that the supply contract was a valid and binding contract, and that the 2000 letters of intent were not binding contracts, and were, in any event, superseded by the supply contract. In its answer, AVX asserted economic duress with regard to the supply contract, and filed various counterclaims. Cabot filed a motion for partial summary judgment, which the trial court granted. AVX appealed.

23. Cabot Corporation v. AVX Corporation
Law Applied to Facts:
AVX and Cabot are sophisticated and substantial commercial parties represented by highly competent counsel
Cabot was in stronger position than AVX, but “hard bargaining is not unlawful”
No evidence of coercion, but there is evidence of AVX’s ratification
Holding:
Judgment affirmed in favor of Cabot
Court: “Even if we were to conclude that material facts regarding the existence of economic duress remain in dispute, Cabot nonetheless would be entitled to summary judgment because AVX ratified the contract by its actions. A contract that is voidable for duress may be ratified and affirmed. A party must complain promptly of coercive acts that allegedly forced it into the contract or the defense of duress is waived, and the contract ratified. The requirement that the party claiming duress disclaim the contract or release about which he is complaining promptly or be held to have forfeited his right to do so protects the stability and reliability of such agreements by denying the weaker party the “heads I win, tails you lose” option of waiting to see how the arrangement works out and then deciding whether to seek to undo it…. The supply agreement was executed in January 2001, and the first time AVX asserted duress was in July This lengthy period of silence is powerful (if not conclusive) evidence of ratification.”
Lesson: If you’re going to complain about something, get to court and resolve the situation or forget it and move on!

24. Undue Influence
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 is common in familial relationships with regard to wills and trusts.

26. 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
False. The contract is voidable at the option of the person pressured.
True.
False. Unlike duress, pressure is exerted through persuasion rather than coercion.

27. Test Your Knowledge Multiple Choice
Elements of innocent misrepresentation:
False assertion
Knowingly made to induce a person to enter a contract
Reasonable reliance on the assertion by complainant
All of the above
Both (a) and (c), but not (b)
The correct answer is (e). If the assertion was knowingly made, the misrepresentation would be fraudulent rather than innocent.

28. Test Your Knowledge Multiple Choice
A unilateral mistake will not render a contract void unless:
Substantial difference between contract and market price
Fundamental error occurred
An unequal bargaining position existed
The correct answer is (c).

29. Thought Question
Your landlord tells you that you will be evicted from your apartment or your rent must increase by $50 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?
Good question since the answer may vary from state to state. Also, it might depend on whether the landlord knew about the dog and required a security deposit at the lease beginning. Most states, however, would hold that you have reasonable alternatives, thus duress has not occurred. Of course, this raises the issue of policy and lawmaking since laws in some states protect commercial interests (e.g., landlords) more than consumer interests (e.g., tenants).