Chapter 13 Reality of Consent Effect of Doctrines Discussed in This Chapter Contracts induced by misrepresentation fraud mistake duress or undue influence are generally considered to be voidable o This means that the person whose consent was not real has the power to rescind cancel the contract o A person who rescinds a contract is entitled to the return of anything he have the other party also must offer to return anything he has received from the other party Necessity for Prompt and Unequivocal Rescission To rescind a contract based on any doctrine requires the person to act promptly and unequivocally Person must also avoid any behavior that would suggest that they affirm or ratify they contract ratification of a voidable contract means that a person who had the right to rescind has elected not to do so Ratification ends the right to rescind Must avoid unreasonable delay would ratify contract Should avoid sending mixed messages Misrepresentation and Fraud Relationship between Misrepresentation and Fraud Misrepresentation an assertion that is not in accord with the truth o Can be innocent not intentionally deceptive or fraudulent made with knowledge of falsity and intent to deceive Fraud type of misrepresentation that is committed knowingly with the intent to o Scienter what distinguishes fraud from innocent misrepresentation deceive knowledge of falsity knowledge of falsity o Knowledge of falsity if Knowing something is false Knowing that you do not have a basis for making the statement Making a statement without being confident that it is true o A person who commits fraud may be liable for damages possibly including punitive damages for the tort of deceit Election of Remedies In some states a person injured by fraud can either rescind the contract OR sue for damages In some states you can do both Requirements for Rescission on the Ground of Misrepresentation A person seeking to rescind a contract on the ground of innocent or fraudulent misrepresentation must be able to establish each of the following elements 1 An untrue assertion of fact was made 2 The fact asserted was material or the assertion was fraudulent 3 The complaining party entered the contract because of his reliance on the assertion 4 The reliance of the complaining party was reasonable In tort actions in which the plaintiff is seeking to recover damages for deceit the plaintiff has to establish a 5th element injury Untrue Assertion of Fact To have misrepresentation must have an untrue assertion of fact or engaged in some conduct that is the equivalent of an untrue assertion of fact o Fact asserted must be past or existing fact not an opinion promise or prediction about some future happening Concealment some active conduct intended to prevent the other party from discovering the fact is considered to be the equivalent of an assertion Nondisclosure the failure to volunteer information Materiality Actual Reliance Material likely to play a significant role in inducing a reasonable person to enter the contract or if the person asserting the fact knows that the other person is likely to rely on the fact Reliance means that a person pursues some course of action because of his faith in an assertion made to him For misrepresentation to exist there must be reliance Justifiable Reliance Reliance must be justifiable o A person does not act justifiably if he relies on an assertion that is obviously false or not to be taken seriously A relying party s failure to discover facts before entering the contract does not make his reliance unjustifiable unless the degree of his fault was so extreme as to amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing Mistake Nature of Mistake What is a Mistake Mistakes of Law The purpose of the doctrine of mistake is to prevent unexpected and unbargained for losses that result when the parties are mistaken about a fact central to their contract Mistake 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 Modern cases have granted relief even when the mistake is an erroneous belief about some aspect of law Negligence and the Right to Avoid for Mistake A person s fault in failing to know or discover facts before entering the contract will not bar relief unless his fault amounted to a failure to act in good faith Requirements for Mutual Mistake Mutual mistake exists when both parties to the contract have erroneous When there is a mutual mistake the resulting contract can be avoided if the 3 assumptions about the same fact following elements are present 1 The mistake relates to a basic assumption on which the contract was made 2 The mistake has a material effect on the agreed upon exchange 3 The party adversely affected by the mistake does not bear the risk of the mistake Mistake about a Basic Assumption Even if the mistake is mutual the adversely affected party will not have the right to avoid the contract unless the mistake concerns a basic assumption on which the contract was based Basic assumptions identity existence quality or quantity of the subject matter Requirements for Unilateral Mistake which he made the contract of the following Exists when only one of the parties makes a mistake about a basic assumption on A person trying to avoid on the ground of unilateral mistake must show either one o The nonmistaken party caused or had reason to know of the mistake o It would be unconscionable to enforce the contract Duress wrongful coercion that induces a person to enter or modify a contract Duress Nature of Duress o Ex physically by threat Requirements for Duress following elements To rescind a contract because of duress one must be able to establish both of the o The contract was induced by an improper threat A person would have to threaten to do something that they are not legally entitled to do or under the restatement improper improper to use as leverage to induce a contract o The victim had no reasonable alternative but to enter the contract Economic Duress Situations in which one person induces the formation or modification of a contract by threatening another person s economic interests Undue Influence Nature of Undue Influence Undue influence unfair persuasion Unlike duress pressure exerted through persuasion rather than coercion Determining Undue Influence 1 The relationship between the parties is either one of trust and confidence or one in which the
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