Transcript Chapter 13
P A R T 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved. P A R T 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved. C H A P T E R 13 Reality of Consent “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: 13 - 5 Misrepresentation Fraud Mistake Duress, and Undue influence Effect of Doctrines Contracts induced by mistake, fraud, misrepresentation, duress, or undue influence are generally considered to be voidable 13 - 6 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 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 13 - 7 Elements Innocent or fraudulent misrepresentation: Defendant made an untrue assertion of fact 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 13 - 8 Includes active concealment or non-disclosure Reliance means that person entered the contract because of belief in the assertion Elements (cont.) Innocent or fraudulent misrepresentation: Reliance of complainant was reasonable Fifth element for fraud: 13 - 9 Injury Remedies 13 - 10 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” Rodi intended to take New Jersey bar exam and the law requires bar applicants to hold law degrees from ABA accredited law schools 13 - 11 Disclaimer about accreditation in catalogue 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 13 - 12 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 13 - 13 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 13 - 14 Mistake in Contracts A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed 13 - 15 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 13 - 16 Duress 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 13 - 17 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 13 - 18 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 13 - 19 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” 13 - 20 13 - 21 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 13 - 22 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 13 - 23 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? 13 - 24