Absence of a “Meeting of the Minds” McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Objectives Chapter Objectives: • Use vocabulary regarding mistake, duress, undue influence, fraud, misrepresentation, and unconscionability properly • Determine if there has been a “meeting of the minds” • Discuss difference between unilateral & mutual mistake • Evaluate the ramifications of each kind of formative defect on the enforceability of a contract 8-2 Objectives Chapter Objectives: • Identify the three different kinds of duress • Determine the intention and reasoning of the parties entering into a contract • Identify the differences between a finding of fraud or negligent misrepresentation • Evaluate whether a court might find a contract unconscionable 8-3 Definitions • Meeting of the Minds – A theory holding that both parties must both objectively and subjectively intend to enter into the agreement on the same terms – The parties must have the same understanding of the contractual terms and consideration – If it is discovered that there are differing interpretations of the terms or improper reasons for entering into the bargain (flawed consideration), then the courts may allow the “innocent” party to avoid the contract 8-4 Meeting of the Minds • There are five types of failures to agree on the terms or reasons for entering into the agreement: 1. mistake 2. duress 3. undue influence 4. fraud and misrepresentation 5. unconscionability 8-5 Mistake • Unilateral Mistake – An error made by only one party to the transaction – The contract may be avoided only if the error is detectable or obvious to the other party 8-6 Mistake • Unilateral Mistake – Poor judgment: Contract law does not allow avoidance of performance obligations due to a mistake that was simply a bad decision on the part of one party – Poor judgment can only be known to the mistaken party and is not a basis for avoidance of the contract – The drafting party usually is held responsible for the content of the contract so, if there is a mistake, it is held against them 8-7 Mistake • Mutual Mistake – An error made by both parties to the transaction; therefore, neither party had the same idea of the terms of the agreement – The contract is avoidable by either party 8-8 Mistake • Mutual Mistake These mistakes generally relate to 1. the existence of the subject matter 2. the ownership or the right to transfer ownership, or 3. the identity or quality of the subject matter 8-9 Mistake • Mutual Mistake If either party wants to avoid the contract, they may, provided that: 1. the mistake relates to a material aspect of the contract 2. it has a detrimental effect on one or both parties 3. it could not have been foreseen 8-10 Duress • Duress – Unreasonable and unscrupulous manipulation of a person to force him to agree to terms of an agreement that he would otherwise not agree to 8-11 Duress • Physical Duress – The threat of bodily harm unless the aggressor’s demands are met • Economic Duress – The threat of harm to a party’s financial resources unless demands are met 8-12 Duress • Mental Duress – The threat of harm to a party’s overall well-being or a threat of harm to loved ones that induces stress and action on the party of the threatened party 8-13 Duress • Contract of Adhesion – An agreement wherein one party has total control of the bargaining process therefore the other has no power to negotiate and no choice but to enter into the contract • Blackmail – The extortion of payment based on a threat of exposing the victim’s secrets • Abuse of Process – Using the threat of resorting to the legal system to extract agreement to terms against the other party’s will 8-14 Undue Influence • Undue Influence – Using a close personal or fiduciary relationship to one’s advantage to gain assent to terms that the party otherwise would not have agreed to • Fiduciary Relationship – A relationship based on close personal trust that the other party is looking out for one’s best interests 8-15 Undue Influence These seemingly kind actions belie the wrongful intent to deceive and control someone who is not in a position to think reasonably or independently for herself in this powerful situation. 8-16 Fraud & Misrepresentation • Fraud – A knowing and intentional misstatement of the truth in order to induce a desired action from another person • Misrepresentation – A reckless disregard for the truth in making a statement to another in order to induce a desired action • Intent to deceive – The party making the questionable statement must plan on the innocent party’s reliance on the first party’s untruthfulness 8-17 Fraud & Misrepresentation • Fraud and misrepresentation are cousins • Contractual fraud-in-the-inducement has five elements: 1. the statement made to the other party 2. regarding a material fact 3. with the intent to deceive, and 4. the lie was relied upon by the innocent party 5. the reliance somehow harmed the innocent party 8-18 Fraud & Misrepresentation • The intent to deceive is the defining element of fraud. A person must know and intend to make a material falsehood in order to perpetrate fraud upon another party • A party is culpable of negligent misrepresentation where that party could or should have known of the truth but did not ascertain that truth before relating the falsity to the innocent party. Negligent misrepresentation is more akin to a sin of omission rather than one of commission 8-19 Fraud & Misrepresentation • Nondisclosure – The intentional omission the truth • Nondisclosure is a tricky area in fraud and misrepresentation – When a party has an obligation to disclose all information known to him/her, the intentional withholding of that information can rise to either fraud or negligent misrepresentation 8-20 Fraud & Misrepresentation • Affirmative Duty – The law requires that certain parties positively act in a circumstance and not have to wait until they are asked to do that which they are required to do – The law imposes an affirmative duty to disclose the truth about the condition of the property or item – It is only where the law imposes an affirmative duty to disclose that nondisclosure is actionable 8-21 Fraud & Misrepresentation • Active Concealment – Knowingly hiding a situation that another party has the right to know and, being hidden from them, assumes that it does not exist 8-22 Unconscionability • Unconscionability – So completely unreasonable and irrational that it shocks the conscience – May be found where none of the other defects in formation apply, but the court cannot permit the oppressing party to escape some liability for taking unscrupulous advantage of another 8-23 Unconscionability • Unconscionability – The court can choose a variety of remedies to either release the innocent party from her contractual obligations or to level the playing field and enforce the contract but without the offensive term so that a fair result is accomplished 8-24 Summary • • An “agreement” in contract law means that there has been a meeting of the minds with respect to all material terms of the contract There are five general types of such failures to agree on the terms or reasons for entering into the agreement: 1. 2. 3. 4. 5. mistake duress undue influence fraud and misrepresentation unconscionability 8-25 Summary • Where one party has forced or coerced the other into making the contract, contract law will allow avoidance on the basis of duress. Duress can be physical, economical, or mental • An unconscionable term is one that no reasonable person would freely agree to as it is so unfair and one-sided. It shocks the conscience of the court that anyone would actually make that type of offer or a person could accept it 8-26