Chapter 13 – Reality of Consent
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Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.
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Chapter 13 – Reality of Consent
- 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 © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
- 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 13 - 4
- 5. Effect of The Five Doctrines 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 13 - 5
- 6. 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 - 6
- 7. Elements 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 13 - 7
- 8. Elements (cont.) Reliance of complainant was reasonable Reliance means that person entered the contract because of belief in the assertion Fifth element for fraud: Injury 13 - 8
- 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 13 - 10
- 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 13 - 11
- 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 13 - 12
- 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 - 13
- 14. Mistake in Contracts 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 13 - 14
- 15. Mistake 13 - 15
- 16. Duress 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. 13 - 16
- 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 13 - 17
- 18. Cabot Corporation v. AVX Corporation 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 13 - 18
- 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 - 19
- 20. Review 13 - 20
- 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 - 21
- 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) 13 - 22
- 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 13 - 23
- 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? 13 - 24
Editor's Notes
- Cabot Corporation v. AVX Corporation is a case example of ratification.
- Concealment example: if Summers offers his house for sale and paints the ceilings to conceal the fact that the roof leaks, his active concealment constitutes an assertion of fact Nondisclosure differs from concealment in that concealment involves the active hiding of a fact, while nondisclosure is the failure to volunteer information
- Problem with justifiable reliance element is identifying the extent to which the relying party is responsible for investigating the accuracy of the statement on which he relies. Section 172 of the Restatement, which provides that a relying party’s failure to discover facts before entering the contract does not make his reliance unjustifiable unless his fault was too extreme. Most courts place a greater degree of accountability on the person who makes the assertion rather than the person who relies on the assertion.
- The hyperlink is to the Circuit Court’s opinion.
- Details: Knafel counterclaimed for breach of contract, but trial court dismissed claims; both appealed. The appellate court reversed and remanded to trial court. On remand, Jordan filed an amended complaint and motion for summary judgment on Knafel’s counterclaim. After a hearing, the trial court granted Jordan’s motion for summary judgment. Knafel appealed.
- Reasonable Alternative Example: Barry, a traveling salesman, takes his car to Cheatum Motors for repair. Barry pays Cheatum the full amount previously agreed upon for the repair, but Cheatum refuses to return Barry’s car to him unless Barry agrees to pay substantially more than the contract price for the repairs. Because of his urgent need for the return of his car, Barry agrees to do this. In this case, Barry technically had the alternative of filing a legal action to recover his car. However, this would not be a reasonable alternative for someone who needs the car urgently because of the time, expense, and uncertainty involved in pursuing a lawsuit. Thus, Barry could avoid his agreement to pay more money under a theory of duress.
- AVX Corporation manufactures capacitors for electronic products. Tantalum, an elemental metal as rare in nature as uranium, is used in the manufacture of AVX’s products. Cabot Corporation is a major supplier of tantalum powder and wire and supplied AVX with tantalum products for many years. During volatile market, AVX purchased tantalum from Cabot at preferable prices without entering binding, long-term contracts. In 2000, a shortage of tantalum developed and In August 2000, Cabot notified all of its customers that, in the future, it proposed to commit its limited production capacity to those customers who were prepared to enter into binding, long-term supply contracts. Between August and November 2000, Cabot and AVX negotiated the terms of a binding, long-term supply contract. Both parties were represented by highly competent legal counsel throughout the process. Cabot and AVX memorialized the terms of a basic agreement to a binding, five-year contract, under which AVX would purchase specified quantities of tantalum powder and wire at stated prices. The prices agreed to were no higher than the then-current market prices for tantalum products. Cabot agreed to AVX’s demand of “most favored customer” protection. In addition, the parties agreed that the agreement would supersede all prior agreements (including the letters of intent) and released each other from all claims arising under any prior agreements. In July 2002, more than 20 months after the supply contract was negotiated, and more than 18 months after it was signed, AVX filed an action against Cabot in federal court. AVX alleged that the 2000 letters of intent were binding contracts and that the supply contract was void because it had been executed by AVX under economic duress. This action was dismissed for lack of jurisdiction. Cabot then filed an action for a declaratory judgment, seeking a declaration that the supply contract was a valid and binding contract, and that the 2000 letters of intent were not binding contracts, and were, in any event, superseded by the supply contract. In its answer, AVX asserted economic duress with regard to the supply contract, and filed various counterclaims. Cabot filed a motion for partial summary judgment, which the trial court granted. AVX appealed.
- Court: “Even if we were to conclude that material facts regarding the existence of economic duress remain in dispute, Cabot nonetheless would be entitled to summary judgment because AVX ratified the contract by its actions. A contract that is voidable for duress may be ratified and affirmed. A party must complain promptly of coercive acts that allegedly forced it into the contract or the defense of duress is waived, and the contract ratified. The requirement that the party claiming duress disclaim the contract or release about which he is complaining promptly or be held to have forfeited his right to do so protects the stability and reliability of such agreements by denying the weaker party the “heads I win, tails you lose” option of waiting to see how the arrangement works out and then deciding whether to seek to undo it…. The supply agreement was executed in January 2001, and the first time AVX asserted duress was in July 2002. This lengthy period of silence is powerful (if not conclusive) evidence of ratification.” Lesson : If you’re going to complain about something, get to court and resolve the situation or forget it and move on!
- Undue influence is common in familial relationships with regard to wills and trusts.
- False. The contract is voidable at the option of the person pressured. True. True. False. Unlike duress, pressure is exerted through persuasion rather than coercion .
- The correct answer is (e). If the assertion was knowingly made, the misrepresentation would be fraudulent rather than innocent.
- The correct answer is (c).
- Good question since the answer may vary from state to state. Most states, however, would hold that you have reasonable alternatives, thus duress has not occurred. Of course, this raises the issue of policy and lawmaking since laws in some states protect commercial interests (e.g., landlords) more than consumer interests (e.g., tenants).