Chapter 13 – Reality of Consent

Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.

1. Introduction to Contracts
The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. Capacity to Contract
Illegality
Writing
Rights of Third Parties
Performance and Remedies
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3. Reality of Consent
Necessity never made a good bargain.
Benjamin Franklin, 1735
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

4. Learning Objectives
Five doctrines that permit people to
avoid their contracts because of the
absence of real consent:
Misrepresentation
Fraud
Mistake
Duress, and
Undue influence
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5. 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
Effect of The Five Doctrines
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6. 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
Misrepresentation or Fraud?
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7. 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
Elements
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8. Reliance of complainant
was reasonable
Reliance means that
person entered the
contract because of
belief in the assertion
Fifth element for fraud:
Injury
Elements (cont.)
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9. Remedies
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10. Jordan v. Knafel
Facts:
Knafel claimed she was pregnant with
Jordan’s child and Jordan offered a settlement:
Knafel agreed to keep the situation confidential
and to refrain from filing a paternity suit
Jordan would pay Knafel $5 million upon his
retirement from professional basketball
After child’s birth, paternity test revealed
child was not Jordan’s
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11. Jordan v. Knafel
Procedural History & Issue:
Jordan filed suit for declaratory judgment that
if an agreement had been made, it was
unenforceable for fraud and mutual mistake
On appeal, issue was what impact the
paternity evidence had on enforceability of
alleged agreement
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12. Legal Reasoning & Holding:
Fraud in the inducement of a contract is a
defense rendering the contract voidable at
the election of injured party
Jordan’s paternity was a material fact in
settlement of Knafel’s paternity claim
Agreement premised on fraud or mutual
mistake and thus voidable by Jordan
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13. 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
Mistake in Contracts
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14. A unilateral mistake will
not render a contract
unenforceable unless
unequal bargaining position
existed
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 in Contracts
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15. Mistake
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16. 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
See Cabot Corp. v AVX Corp.
Duress
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17. Cabot Corporation v. AVX
Corporation
Facts:
After long negotiation of a long-term supply
contract, parties disputed whether contract was
valid and binding contract (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
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18. 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
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Cabot Corporation v. AVX
Corporation

19. 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
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20. 13 - 20
Review

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
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22. Test Your Knowledge
Multiple Choice
Elements of innocent misrepresentation:
(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)
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23. Test Your Knowledge
Multiple Choice
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
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24. 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?
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