Reality of Consent Chapter 13 Reality of Consent It is crucial to the economy and commerce that the law be counted on to enforce contracts. However, in some cases there are compelling reasons to permit people to avoid or escape their contracts. e.g., Agreements obtained by force, trickery, unfair persuasion, or error Reality of Consent The law views agreements obtained by force, trickery, unfair persuasion, or error as to be not entered into with actual or real consent of the victim party. Hence, reality of consent 1
Effect of Doctrines Discussed in This Chapter Contracts induced by the following are voidable: Misrepresentation Fraud Mistake Duress Undue influence Effect of Doctrines Discussed in This Chapter If a contract is voidable, the protected party (person who s consent was not real) has the power to rescind the contract. Both parties must return any consideration received Protected party also has option to enforce K at her option (hence, voidable) Necessity for Prompt and Unequivocal Rescission A contract may be deemed ratified unless it is rescinded promptly and unequivocally. Ratification ends the right to rescind. To rescind, protected party must avoid any behavior that suggests affirmation or ratification. E.g., Unreasonable delay in notification of rescission; continued acceptance of benefits. 2
Relationship Between Misrepresentation and Fraud A contract may be rescinded because of misrepresentation or fraud. A contract may be rescinded whether the misrepresentation is innocent or fraudulent. A misrepresentation is an assertion that is not true. Not necessary that the misrepresentation be intentional Can be innocent Not intentionally deceptive Or fraudulent Made with knowledge of falsity and intent to deceive Fraud is a misrepresentation that is made with scienter. Scienter defendant knew it was false or acted in reckless disregard of the truth. Election of Remedies A defendant who commits fraud may also be liable for the tort of deceit. Defendant may be liable for plaintiff s economic losses and for punitive damages. Fraud is also a crime, often a felony Requirements for Rescission Because of Misrepresentation An untrue assertion of a fact. The fact was material or the assertion was fraudulent. Actual and justifiable reliance. Economic injury if suing for damages for deceit. 3
Untrue Assertion of Fact Defendant s assertion must be of a past or existing fact rather than an opinion or prediction. Concealment through some active conduct is equivalent to a fraudulent assertion. Nondisclosure when there is a duty to disclose may constitute a fraudulent assertion. Materiality Materiality is required if the misrepresentation was innocent. A fact is material if it is likely to play a significant role in inducing a reasonable person to enter the contract. Materiality is not required if the misrepresentation was fraudulent. Actual Reliance There must be a causal relation between the assertion and the decision to enter the contract. 4
Justifiable Reliance Reliance is not justifiable if the assertion is obviously false or not to be taken seriously. (e.g., secret decoder ring in Cracker Jacks) In some cases, plaintiff may have a duty to make a good faith effort to determine or discover the facts (e.g., public records; could be discovered through reasonable inspection) Modern courts: Likely wouldn t make reliance unreasonable unless degree of fault so extreme as to amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing. Today s courts tend to place greater accountability on person making assertion rather than on the person relying on the assertion. Mistake Under certain circumstances, parties may avoid their contracts because of mutual or unilateral mistake. The doctrine of mistake prevents unexpected and unbargained for losses. Mistake a belief about a fact that is not in accord with the truth. Mistakes of Law Although everyone is presumed to know the law, modern cases have granted relief for mistakes of law. Old rule held that mistake of law was not grounds for recission 5
Negligence and the Right to Avoid for Mistake Failing to know or discover facts before entering a contract will not bar relief unless plaintiff s fault amounts to failure to act in good faith. Effect of Mistake Mistakes that may allow a party to avoid a contract may be mutual (both parties) or unilateral (one party). Legal analysis will hinge on whether mistake is mutual or unilateral Mutual Mistakes in Drafting Writings The parties to an oral agreement may mistakenly transcribe one or more terms in the agreement. The remedy is reformation of the writing, rather than rescission of the agreement. 6
Mutual Mistake When both parties to a contract are mistaken, the adversely affected party may possibly, under certain circumstances, avoid the contact. Requirements for Mutual Mistake Relates to a basic assumption on which the contract was made. Basic assumption: House sale contract assumes house exists and is fit and legal for habitation Not basic assumption: A party s financial ability or market conditions. Has material effect on the agreed upon exchange. Mistake must be so severe as to make enforcement of contract unfair Adversely affected party did not bear risk of the mistake. Assumption of the risk, either expressed or implied e.g., as is clauses, Plaintiff knowing that he is ignorant of the true state of affairs. blind sales of items (safe, storage space auctions) Requirements for Unilateral Mistake Unilateral mistake: Only one of the parties is mistaken concerning a material term in the contract. It is possible for the mistaken party to avoid the contract: Prove the essential elements of mutual mistake; plus Nonmistaken party caused or knew of the mistake; or Would be unconscionable to enforce the contract. Unconscionable : unreasonably unfair to one party, marked by oppression, or otherwise unacceptably offensive to public policy 7
Duress Duress wrongful coercion that induces a person to enter or modify a contract. If duress is found, contract is voidable plaintiff may rescind the contract. But P may also enforce at her option Duress occurs when a person is forced to enter a contract through threats of physical, emotional, or economic harm. Requirements for Duress The contract was induced by an improper threat. Traditionally, a person would have to threaten to do something wrongful or illegal for the threat to constitute duress. Many courts now require that the threat must be an improper use of leverage to induce a contract whether the threatened action is legal or not. e.g., Husband divorcing wife threatens to sue for custody of children something he has right to do unless she transfers him stock that she owns in his company. The victim had no reasonable alternative but to enter the contract. Classical contract law required that the degree of coercion had to overcome the will of a person with ordinary courage. The more modern standard focuses whether the plaintiff had reasonable alternatives to entering the contract. e.g., Traveling salesman & repair shop, p. 245 Economic Duress Economic duress or business compulsion a person is induced to enter or modify a contract by a threat to his economic interests. e.g., Threatening to breach a contract the other party desperately needs if that party does not agree to modify terms or agree to another transaction. 8
Undue Influence Undue influence unfair persuasion of a susceptible individual. Undue influence involves wrongful pressure exerted through persuasion (compare: duress is through coercion). Determining Undue Influence There is a relationship of trust and confidence or dominance. The person being influenced justifiably believes that the other party is looking out for his interests. e.g., Parent-child, husband-wife, lawyer-client, or even old lady and her butler (Doris Duke case) The persuasion is unfair. Courts look at all of the surrounding facts and circumstances to determine whether unfair methods of persuasion were used. e.g., Was person rushed? Was contract discussed and entered into at unusual time and place? Was contract fair or lopsided? Reality of Consent End of Chapter 13 9