CHAPTER 7 Genuineness of Assent

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Chapter 7
Genuineness of Assent
7-1
7-2
Duress and Undue Influence
Mistake, Misrepresentation,
and Fraud
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 1
7-1 Duress and Undue Influence
GOALS
 Recognize when genuine assent is not
present
 Identify the two key elements in undue
influence
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 2
GENUINE ASSENT AND DURESS
 Due to a variety of causes, genuine assent
(true and complete agreement) is at times
shown to be lacking in court.
 Without genuine assent a contract is typically
voidable. This means that, if the injured party
desires, that party can cancel the contractual
obligation.
 The party then has the legal right to get back
what has already been put into the contract. This
action is referred to rescission.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 3
GENUINE ASSENT AND DURESS
 Genuine assent (cont.)
 To be effective, an avoidance must be prompt. It
must occur shortly after discovering there is no
genuine agreement
 Avoidance must occur before the contract is
ratified. Ratification is conduct that confirms one
intends to be bound by the contract.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 4
GENUINE ASSENT AND DURESS
 Duress – The law only allows a contract to
be undone because of apprehension and
pressure in a few instances. Actionable or
legal duress only occurs when one party
uses an improper threat to act or obtain an
expression of agreement. The resulting
contract is voidable. Much of the law of
duress focuses on the nature of the threat.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 5
GENUINE ASSENT AND DURESS
 Duress (cont.)
 Threats of illegal or tortious conduct – The threat
to engage in illegal or tortious conduct, such as a
crime or tort, to win agreement is always duress.
The threat may be to the physical life, liberty, or
property of the victim.
 Threats to report crimes – If one uses the threat
of reporting a crime to force the criminal to
contract, this is duress and may be the crime of
extortion.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 6
GENUINE ASSENT AND DURESS
 Duress (cont.)
 Threats to sue – When the threat to sue is made
for purpose unrelated to the suit, this may be
duress and the resulting contract may be voidable.
 Economic threats – Parties may be tempted to use
the economic power they have over one another to
negotiate a favorable modification or settlement.
The courts look at both the threat and the
alternatives available to the threatened party. It is
duress if the threatened party had no other choices
but to enter into or modify the contract.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 7
List the various forms of legal duress.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 8
UNDUE INFLUENCE AND ASSENT
Undue influence occurs when one party to the
contract is in a position of trust and wrongfully
dominates the other party. The dominated
person then does not exercise free will in
accepting the contractual terms. The two key
elements in undue influence are the relationship
and the wrongful or unfair persuasion. When a
contract arises because of undue influence, it is
voidable by the victim.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 9
UNDUE INFLUENCE AND ASSENT
 The relationship – A relationship of trust,
confidence, or authority must exist between
the parties to the contract. Examples include
attorney/client, husband/wife, physician/
patient.
 Unfair persuasion – Often the best evidence
of unfair persuasion is found in the terms of
the contract.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 10
UNDUE INFLUENCE AND ASSENT
To prevent a claim of undue influence, the
stronger party should act with total honesty,
fully disclose all important facts, and insist that
the weaker party obtain independent counsel
before contracting.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 11
What are the key elements in undue
influence?
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 12
7-2
Mistake, Misrepresentation,
and Fraud
GOALS
 Recognize the types of mistakes that can
make a contract voidable or void
 List the criteria for a statement to be treated
as a misrepresentation
 Define fraud and describe the remedies for it
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 13
WHAT ARE THE TYPES OF
CONTRACTUAL MISTAKES?
 Unilateral mistakes – A unilateral mistake
occurs when only one party holds an
incorrect belief about the facts or law related
to a contract. Generally, this does not affect
the validity of the contract. Common
unilateral mistakes include:
 Failure to read a contract before signing
 Hurried or careless reading of a contract
 Signing a contract in a language one does not
understand
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 14
WHAT ARE THE TYPES OF
CONTRACTUAL MISTAKES?
 Mutual mistakes – When there is a mutual
mistake (also called a bilateral mistake) both
parties have an incorrect belief about an
important fact or the applicable law.
Important facts that influence the parties’
decisions about a contract are called
material facts.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 15
WHAT ARE THE TYPES OF
CONTRACTUAL MISTAKES?
 Mutual mistakes (cont.)
 If a mutual mistake of fact occurs, the contract is
void (without legal effect).
 When the mutual mistake is about the applicable
law, the contract is still valid.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 16
Name the types of mistakes that can
make a contract voidable or void.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 17
WHAT IS MISREPRESENTATION?
In many contract negotiations, the parties make
statements that turn out to be untrue. This is an
innocent misrepresentation. If a party
knowingly makes an untrue statement, the party
has engaged in fraudulent misrepresentation.
In both of these situations, the contract that
results is voidable by the party to whom the
misrepresentation is made.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 18
WHAT IS MISREPRESENTATION?
Statements are treated as misrepresentations
by the law only if:
1. The untrue statement is one of fact or there
is active concealment
2. The statement is material to the transaction
or is fraudulent
3. The victim reasonably relied on the
statement
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 19
WHAT IS MISREPRESENTATION?
 Untrue statement of fact – In misrepresentation, the statement must be one of fact rather
than opinion. Therefore, the statement must
be about a past or existing fact. Opinions
also can be distinguished from facts based
on how concrete they are.
 When an expert expresses an opinion, the law
will treat the statement as a statement of fact
which can be the basis for misrepresentation.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 20
WHAT IS MISREPRESENTATION?
 Untrue statement of fact (cont.)
 Active concealment – Active concealment is a
substitute for a false statement.
 Silence – While in many situations the seller may
remain silent about defects, there are three
important situations where disclosure is required:
1. A statement about a material fact omits important
information (half truths).
2. A true statement is made false by subsequent events.
3. One party knows the other party has made a basic
mistaken assumption.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 21
WHAT IS MISREPRESENTATION?
 Materiality – There are three ways an untrue
statement can be determined to be material:
1. The statement would cause a reasonable person
to contract.
2. The defendant knew this plaintiff would rely on
the statement.
3. If the defendant knew the statement was false,
this makes the statement material.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 22
WHAT IS MISREPRESENTATION?
 Reasonable reliance – Even though the
statement is material, there is no
misrepresentation unless the victim
reasonable relied on it.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 23
What are the three criteria for a statement
to be treated as a misrepresentation?
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 24
FRAUD AND REMEDIES FOR
FRAUD
Fraud is based on misrepresentation. All the
elements of misrepresentation must be proven
to show fraud plus two additional elements:
intent and injury.
 The misrepresentation must be intentional or
reckless
 Person deliberately lies or conceals a material
fact
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 25
FRAUD AND REMEDIES FOR
FRAUD
 The misrepresentation must be intentional or
reckless (cont.)
 Person recklessly makes a false statement of fact
without knowing whether it is true or false.
 Misrepresentation must be intended to induce the
victim to contract.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 26
FRAUD AND REMEDIES FOR
FRAUD
 The misrepresentation or concealment must
injure – To establish fraud, there must be
proof of injury. If there is an intentional
misrepresentation, but no injuries, there is no
liability for fraud.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 27
REMEDIES FOR FRAUD
 Rescission – Contracts entered into as a
result of misrepresentation or fraud are
voidable by the injured party and can be
rescinded. Normally when one rescinds,
anything received must be returned.
 A deceived party who has performed part of the
contract may recover what has been paid or
given.
 A deceived party who has done nothing may
cancel the contract with no further obligation.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 28
REMEDIES FOR FRAUD
 Damages – Damages are available if fraud is
proven. Should a defrauded party
nonetheless choose to ratify the contract, the
defrauded party may seek damages for loss
created by the fraud.
 Under UCC, damages are available when there is
only an innocent misrepresentation in a sale of
goods.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 29
REMEDIES FOR FRAUD
 Punitive damages – Punitive damages are
also available as a way to punish the party
who committed fraud.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 30
What are the remedies available for fraud?
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 31
PREVENT LEGAL DIFFICULTIES
In making contracts . . .
 Research important transactions before entering into
them. Verify claims of the seller by outside means or
through firsthand personal experience.
 Do not rush into a decision. Take time to review and
understand the advantages and disadvantages of
the proposed contract. Legitimate proposals will
usually survive a delay.
Continued on the next slide
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 32
PREVENT LEGAL DIFFICULTIES
 Do not hesitate to ask questions about vague or
uncovered issues. Forcing the other party to make
statements about them may lay the groundwork for
proving fraud or misrepresentation later.
 If the other party does not properly answer your
questions, proceed with great caution or abandon
the negotiations.
 If you believe you have been defrauded, act
promptly to rescind the contract.
Law for Business and Personal Use
Chapter 7
© South-Western, a part of Cengage Learning
Slide 33
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