chapter 14 mistakes, fraud, and voluntary consent business law: text & cases — legal, ethical,...

Chapter 14 Chapter 14 Mistakes, Fraud, and Mistakes, Fraud, and

Voluntary ConsentVoluntary Consent

BUSINESS LAW: Text & Cases — BUSINESS LAW: Text & Cases — Legal, Ethical, International, and Legal, Ethical, International, and

E-Commerce Environment 11E-Commerce Environment 11thth Ed.Ed.

Copyright © 2009 South-Western Legal Studies in Business,

a part of South-Western Cengage Learning.



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IntroductionIntroduction

Contract may be unenforceable if the Contract may be unenforceable if the parties have not genuinely assented parties have not genuinely assented to its terms by:to its terms by:– Mistake. Mistake.

– Misrepresentation.Misrepresentation.

– Undue Influence.Undue Influence.

– Duress.Duress.



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§1: §1: Mistakes of FactMistakes of Fact

Only a Mistake of Only a Mistake of FactFact allows a contract allows a contract to be canceled. to be canceled.

BilateralBilateral (Mutual) Mistakes can be (Mutual) Mistakes can be rescinded by either party.rescinded by either party.– CASE 14.1CASE 14.1 Roberts v. Century Roberts v. Century

Contractors, Inc.Contractors, Inc. (2004). (2004).



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UnilateralUnilateral Mistakes cannot be canceled Mistakes cannot be canceled unlessunless::– If other party to the contract knows or should If other party to the contract knows or should

have known that a mistake of fact was made.have known that a mistake of fact was made.– If mistake was due to mathematical mistake in If mistake was due to mathematical mistake in

addition, summation, subtraction, division, or addition, summation, subtraction, division, or multiplication and was made inadvertently and multiplication and was made inadvertently and without gross negligence.without gross negligence.

Mistakes of FactMistakes of Fact



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Mistakes of ValueMistakes of Value

Generally, contract is enforceable by Generally, contract is enforceable by either party.either party.

Exception: Mistake of value because of a Exception: Mistake of value because of a mistake of material fact.mistake of material fact.



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§2: §2: Fraudulent Fraudulent MisrepresentationMisrepresentation

Contract Voidable by Innocent Party.Contract Voidable by Innocent Party. Elements:Elements:

– Misrepresentation of Material Fact.Misrepresentation of Material Fact.– Intent to Deceive.Intent to Deceive.– Reliance on Misrepresentation.Reliance on Misrepresentation.– Injury to the Innocent Party.Injury to the Innocent Party.

Opinions vs Fact. Opinions vs Fact. CASE 14.2 CASE 14.2 Vokes v. Vokes v. Arthur Murray Inc.Arthur Murray Inc. (1968). (1968).



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Misrepresentation Misrepresentation Has OccurredHas Occurred

Misrepresentation can be express or Misrepresentation can be express or implied.implied.

Misrepresentation of future facts and Misrepresentation of future facts and statements of opinion are not fraud, unless statements of opinion are not fraud, unless person professes to be an expert.person professes to be an expert.

Misrepresentation of law is not fraud, unless Misrepresentation of law is not fraud, unless person has greater knowledge of the law.person has greater knowledge of the law.

Silence is not fraud, unless serious problem or Silence is not fraud, unless serious problem or defect known or asked and person lied.defect known or asked and person lied.



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Intent to DeceiveIntent to Deceive

ScienterScienter is an Intent to Deceive. is an Intent to Deceive.– Party knowledge that fact is not as stated.Party knowledge that fact is not as stated.– Party makes a reckless statement with Party makes a reckless statement with

disregard of the truth.disregard of the truth.– Party implies that statement is based on Party implies that statement is based on

personal knowledge or investigation.personal knowledge or investigation.

Gross negligence is considered intent.Gross negligence is considered intent.



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Reliance on Reliance on MisrepresentationMisrepresentation

Deceived party must have Justifiable Deceived party must have Justifiable Reliance.Reliance.– Depends on the knowledge and experience of Depends on the knowledge and experience of

the party relying.the party relying.



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Injury to the Innocent Injury to the Innocent PartyParty

No proof of injury is required when the No proof of injury is required when the action is to rescind contract.action is to rescind contract.

Proof of injury is universally required to Proof of injury is universally required to recover damages.recover damages.



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Nonfraudulent Nonfraudulent MisrepresentationMisrepresentation

Innocent Misrepresentation.Innocent Misrepresentation. Negligent Misrepresentation.Negligent Misrepresentation.

– Equal to Scienter.Equal to Scienter.– Is treated as fraudulent misrepresentation, Is treated as fraudulent misrepresentation,

even though the misrepresentation was not even though the misrepresentation was not purposeful.purposeful.



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§3: §3: Undue InfluenceUndue Influence

Contract is Voidable.Contract is Voidable.– Confidential or Fiduciary Relationship.Confidential or Fiduciary Relationship.– Relationship of dependence.Relationship of dependence.– Influence or Persuasion.Influence or Persuasion.– Weak party talked into doing something not Weak party talked into doing something not

beneficial to him or herself.beneficial to him or herself.

Presumption of Undue Influence. Presumption of Undue Influence.



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§4: §4: DuressDuress

Forcing a party to enter into a contract Forcing a party to enter into a contract under fear or threat makes the contract under fear or threat makes the contract voidablevoidable..

Threatened act must be wrongful or illegal.Threatened act must be wrongful or illegal. Improper Threat.Improper Threat.

– Threat to exercise legal rights (criminal or civil Threat to exercise legal rights (criminal or civil suit).suit).

– Economic or physical.Economic or physical.



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§5: §5: Adhesion Contracts Adhesion Contracts and Unconscionabilityand Unconscionability

Standard-Form (Adhesion) Contracts.Standard-Form (Adhesion) Contracts.– Preprinted contract in which the adhering Preprinted contract in which the adhering

party has no opportunity to negotiate the party has no opportunity to negotiate the terms of the contract.terms of the contract.

– ““Take-it-or-Leave-it” adhesion contracts.Take-it-or-Leave-it” adhesion contracts.– CASE 14.3 CASE 14.3 Simpson v. MSA of Myrtle Simpson v. MSA of Myrtle

Beach, Inc.Beach, Inc. (2007). (2007).



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Adhesion ContractsAdhesion Contracts

Unconscionability.Unconscionability.– One sided bargains in which one party has One sided bargains in which one party has

substantially superior bargaining power and substantially superior bargaining power and can dictate the terms of the contract.can dictate the terms of the contract.

chapter 14 mistakes, fraud, and voluntary consent business law: text & cases — legal, ethical,...

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