1. CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Absence of a “Meeting of the Minds” EIGHTEIGHT

2. 8-2 Definitions Meeting of the Minds –Both parties must both objectively and subjectively intend to enter into the agreement on the same terms –The parties must have the same under- standing of the contractual terms and consideration –If it is discovered that there are differing interpretations of the terms or improper reasons for entering into the bargain (flawed consideration), then the courts may allow the “innocent” party to avoid the contract

3. 8-3 Meeting of the Minds There are five types of failures to agree on the terms or reasons for entering into the agreement: 1.mistake 2.duress 3.undue influence 4.fraud and misrepresentation 5.unconscionability

4. 8-4 Unilateral Mistake –An error made by only one party to the transaction –The contract may be avoided only if the error is detectable or obvious to the other party Mistake

5. 8-5 Unilateral Mistake –Poor judgment: Contract law does not allow avoidance of performance obligations due to a mistake that was simply a bad decision on the part of one party –Poor judgment can only be known to the mistaken party and is not a basis for avoidance of the contract –The drafting party usually is held responsible for the content of the contract so, if there is a mistake, it is held against them Mistake

6. 8-6 Mutual Mistake –An error made by both parties to the transaction; therefore, neither party had the same idea of the terms of the agreement –The contract is avoidable by either party Mistake

7. 8-7 Mutual Mistake These mistakes generally relate to 1.the existence of the subject matter 2.the ownership or the right to transfer ownership, or 3.the identity or quality of the subject matter Mistake

8. 8-8 Mutual Mistake If either party wants to avoid the contract, they may, provided that: 1.the mistake relates to a material aspect of the contract 2.it has a detrimental effect on one or both parties 3.it could not have been foreseen Mistake

9. 8-9 Duress –Unreasonable and unscrupulous manipulation of a person to force him to agree to terms of an agreement that he would otherwise not agree to Duress

10. 8-10 Physical Duress –The threat of bodily harm unless the aggressor’s demands are met Economic Duress –The threat of harm to a party’s financial resources unless demands are met Duress

11. 8-11 Mental Duress –The threat of harm to a party’s overall well-being or a threat of harm to loved ones that induces stress and action on the party of the threatened party Duress

12. 8-12 Contract of Adhesion –An agreement wherein one party has total control of the bargaining process therefore the other has no power to negotiate and no choice but to enter into the contract Blackmail –The extortion of payment based on a threat of exposing the victim’s secrets Abuse of Process –Using the threat of resorting to the legal system to extract agreement to terms against the other party’s will Duress

13. 8-13 Undue Influence –Using a close personal or fiduciary relationship to one’s advantage to gain assent to terms that the party otherwise would not have agreed to Fiduciary Relationship –A relationship based on close personal trust that the other party is looking out for one’s best interests Undue Influence

14. 8-14 Fraud & Misrepresentation Fraud –A knowing and intentional misstatement of the truth in order to induce a desired action from another person Misrepresentation –A reckless disregard for the truth in making a statement to another in order to induce a desired action Intent to deceive –The party making the questionable statement must plan on the innocent party’s reliance on the first party’s untruthfulness

15. 8-15 Fraud & Misrepresentation Fraud and misrepresentation are cousins Contractual fraud-in-the-inducement has five elements: 1.the statement made to the other party 2.regarding a material fact 3.with the intent to deceive, and 4.the lie was relied upon by the innocent party 5.the reliance somehow harmed the innocent party

16. 8-16 Fraud & Misrepresentation The intent to deceive is the defining element of fraud. A person must know and intend to make a material falsehood in order to perpetrate fraud upon another party A party is culpable of negligent misrepre- sentation where that party could or should have known of the truth but did not ascertain that truth before relating the falsity to the innocent party. Negligent misrepresentation is more akin to a sin of omission rather than one of commission

17. 8-17 Nondisclosure –The intentional omission the truth Nondisclosure is a tricky area in fraud and misrepresentation –When a party has an obligation to disclose all information known to him/her, the intentional withholding of that information can rise to either fraud or negligent misrepresentation Fraud & Misrepresentation

18. 8-18 Affirmative Duty –The law requires that certain parties positively act in a circumstance and not have to wait until they are asked to do that which they are required to do –The law imposes an affirmative duty to disclose the truth about the condition of the property or item –It is only where the law imposes an affirmative duty to disclose that nondisclosure is actionable Fraud & Misrepresentation

19. 8-19 Active Concealment –Knowingly hiding a situation that another party has the right to know and, being hidden from them, assumes that it does not exist Fraud & Misrepresentation

20. 8-20 Unconscionability –So completely unreasonable and irrational that it shocks the conscience –May be found where none of the other defects in formation apply, but the court cannot permit the oppressing party to escape some liability for taking unscrupulous advantage of another Unconscionability

21. 8-21 Unconscionability –The court can choose a variety of remedies to either release the innocent party from her contractual obligations or to level the playing field and enforce the contract but without the offensive term so that a fair result is accomplished Unconscionability

22. 8-22 Four Corners Doctrine –A principle of contract law that directs the court to interpret a contract by the terms contained within the pages of the document Four Corners Doctrine

23. 8-23 Four Corners Doctrine Courts follow certain general rules when reviewing a contract; these are arranged hierarchically The hierarchy is based on the idea that the most certain evidence of the agreement is considered first and the least reliable last

24. 8-24 Four Corners Doctrine The four corners doctrine examines: −the writing as a whole, −then any modifications to the contract itself, −then any oral explanations of the terms (parol evidence)

25. 8-25 Plain Meaning Rule –Courts will use the traditional definition of terms used in a contract if those terms are not otherwise defined in the agreement –Every word in the contract is given its ordinary meaning and counts toward the interpretation of the contract Four Corners Doctrine

26. 8-26 “Last in time = first in right” –A principle in law that favors the most current activity or change with respect to the transaction as it is most likely the most reflective of the intent of the parties Four Corners Doctrine

27. 8-27 The cliché “ actions speak louder than words ” applies in contract interpretation –Where parties may express one intention in words and another in the way they act in carrying out their required performance under the contract (or in previous transactions), their actions will influence a court’s interpretation of the contract more than the actual words (or lack thereof ) Business Custom & Trade Usage

28. 8-28 The cliché “ actions speak louder than words ” applies in contract interpretation –This rule applies to dealings between merchants —persons or businesses who “ hold [themselves] out as having expertise peculiar to the goods in which [they] deal and [are] therefore held by the law to a higher standard of expertise than that of a nonmerchant. ” BLACK’S LAW DICTIONARY (8th ed. 2004). Business Custom & Trade Usage

29. 8-29 There are three distinct actions that will bind parties to a commercial contract: 1.Course of performance 2.Course of dealing 3.Usage of the trade They are listed in the order of preference as well. Courts like to look to how the parties have acted on the contract in question prior to the dispute Business Custom & Trade Usage

30. 8-30 Course of Performance –The parties’ actions taken in reliance on the particular transaction in question Course of Dealing –The parties’ actions taken in similar previous transactions Usage of the Trade –Actions generally taken by similarly situated parties in similar transactions in the same business field Business Custom & Trade Usage

31. 8-31 Parol Evidence –There are instances where the contract cannot speak for itself due to inconsistencies, illogical interpretations, or omissions –Where the contract’s voice is uncertain, another voice must tell the court what the language of the contract means. This “outside voice” is parol evidence Parol Evidence

32. 8-32 Parol Evidence Rule –A court evidentiary doctrine that excludes certain types of outside oral testimony offered as proof of the terms of the contract Parol Evidence

33. 8-33 Explanatory Evidence –Oral testimony is permitted to clarify the terms of the contract Contradictory Evidence –Evidence which is in conflict with the terms of the contract and inadmissible under the parol evidence rule Parol Evidence

34. 8-34 Partial Integration –A document that contains the essential terms of the contract but not all the terms that the parties may have or need to agree upon Complete integration –A document that contains all the terms of the agreement and the parties have agreed that there are no other terms outside the contract Parol Evidence

35. 8-35 Parol evidence is allowed to explain: –Defects in formation Errors or omissions made during the negotiations that function as a bar to creating a valid contract Parol Evidence

36. 8-36 Parol evidence is allowed to explain: –Consideration to show that the subject matter of the contract as received was not as it was bargained for Parol Evidence

37. 8-37 Parol evidence is allowed to explain: –Technical terms, specifications, or trade/business custom to explain the meaning of special language in the contract as the parties understood it if the plain ordinary meaning of the language was not intended or was ambiguous Parol Evidence