Mistakes, Fraud, and Voluntary Consent

Voluntary Consent

• Definition: Knowing and voluntary agreement to the terms of a contract.
• Lack of Voluntary Consent: If lacking, the contract is voidable.
• Reasons for Lack of Consent:
  • Mistake
  • Misrepresentation
  • Undue influence
  • Duress

Mistakes

• To make a contract voidable, a mistake must:
  • Be a mistake of fact
  • Involve some material fact—a fact that a reasonable person would consider important when determining his or her course of action
• Mistakes of value or quality do not make a contract voidable.
• Mistakes of fact occur in two forms:
  • Bilateral
  • Unilateral

Unilateral Mistakes of Fact

• Definition: A mistake that occurs when one party to a contract is mistaken as to a material fact.
• General Rule: A unilateral mistake does not give the mistaken party any right to relief from the contract; normally, the contract is enforceable.
• Exceptions:
  • The contract may not be enforceable if the other party knows or should have known that a mistake of fact was made.
  • The contract may not be enforceable if the error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence.
  • In both situations, the mistake must still involve some material fact.

Bilateral (Mutual) Mistakes of Fact

• Definition: A mistake that occurs when both parties to a contract are mistaken about the same material fact.
• Rescission: When both parties are mistaken about the same material fact, the contract can be rescinded by either party.
• Differing Interpretations: If the parties attach materially different meanings to a word or term in a contract that is subject to more than one reasonable interpretation, a court may allow the contract to be rescinded because there has been no true “meeting of the minds.”

Mistakes of Value

• If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable.
• Value is variable—depending on the time, place, and other circumstances, the same item may be worth considerably different amounts.
• When parties form a contract, their agreement establishes the value of the object of their transaction—for the moment.
• Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what he or she thought.
• Without this rule, almost any party who did not receive what he or she considered a fair bargain could argue mistake.

Fraudulent Misrepresentation

• When an innocent party is fraudulently induced to enter into a contract, the contract usually can be avoided, because that party has not voluntarily consented to its terms.
• Options for the Innocent Party:
  • Rescind the contract and be restored to her or his original position
  • Enforce the contract and seek damages for any harms resulting from the fraud
• Elements of Fraudulent Misrepresentation:
  • A misrepresentation of a material fact must occur.
  • There must be an intent to deceive.
  • The innocent party must justifiably rely on the misrepresentation.
  • To collect damages, the innocent party must have been harmed as a result of the misrepresentation.

Misrepresentation Has Occurred

• Means of Occurrence:
  • Words (e.g., stating a sculpture was created by Michelangelo when it was not)
  • Actions (e.g., leading a customer to paintings not done by the artist they requested)
• Misrepresentation by Conduct: Occurs when a party takes specific action to conceal a fact that is material to the contract.
• Statements of Opinion: Generally not subject to claims of fraud, unless a naïve purchaser relies on an opinion from an expert, potentially entitling the innocent party to rescission or reformation.
  • Reformation: Occurs when a court alters the terms of a contract to prevent undue hardships or burdens.
• Misrepresentation of Law: Ordinarily does not entitle a party to relief from a contract, except when the misrepresenting party is in a profession that is known to require greater knowledge of the law than the average citizen possesses.
• Misrepresentation by Silence:
  • Neither party typically has a duty to disclose facts.
  • Exceptions:
    • If a seller knows of a serious potential problem that the buyer cannot reasonably be expected to discover, the seller may have a duty to speak; usually, the seller must disclose only latent defects.
    • Latent defect: A defect that is not obvious or cannot readily be ascertained.
    • When the parties are in a fiduciary relationship—one of trust, such as physician and patient, attorney and client, or partners—they have a duty to disclose material facts; failure to do so may constitute fraud.

Intent to Deceive

• Scienter: Knowledge by the misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive.
• Scienter exists if a party:
  • Knows that a fact is not as stated
  • Makes a statement that he or she believes is not true
  • Makes a statement recklessly, without regard to whether it is true or false
  • Says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not
• Innocent Misrepresentation:
  • Definition: A false statement of fact or an act made in good faith that deceives and causes harm or injury to another.
  • Remedy: The aggrieved party can rescind the contract but usually cannot seek damages.
• Negligent Misrepresentation:
  • Definition: Any manifestation through words or conduct that amounts to an untrue statement of fact made in circumstances in which a reasonable and prudent person would not have done that which led to the misrepresentation.
  • A misrepresentation made with an honest belief in its truth may still be negligent due to:
    • A lack of reasonable care in ascertaining the facts
    • The manner of expression
    • The absence of the skill or competence required by a particular business or profession

Justifiable Reliance on the Misrepresentation

• The deceived party must have a justifiable reason for relying on the misrepresentation.
• Reliance is not justified if the innocent party either:
  • Knows the true facts
  • Relies on obviously extravagant statements

Injury to the Innocent Party

• Most courts do not require a showing of injury in an action to rescind a contract, because rescission returns the parties to their original positions.
• To recover damages caused by fraud, proof of harm is universally required.
• The measure of damages is ordinarily equal to the property’s value had it been delivered as represented, less the actual price paid for the property.
• Courts may also sometimes award punitive damages, which are not ordinarily available in contract actions, because fraud actions necessarily involve wrongful conduct.

Undue Influence

• Definition: Persuasion that is less than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party.
• A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.

One Party Dominates the Other

• Fiduciary relationships where one party may dominate and unfairly influence another:
  • Physician and patient
  • Parent and child
  • Husband and wife
  • Guardian and ward
• The essential feature of undue influence is that the party being taken advantage of does not exercise free will in entering into a contract.

Presumption of Undue Influence in Certain Situations

• When a contract enriches the dominant party in a fiduciary relationship, the court will often presume that the contract was made under undue influence.

Duress

• The use of threats, blackmail, or extortion to force a party to enter into a contract constitutes duress.
• Definition: Unlawful pressure brought to bear on a person, causing the person to perform an act that he or she would not otherwise perform (or refrain from doing something that he or she would otherwise do).
• Duress is both:
  • A defense to the enforcement of a contract
  • A ground for the rescission of a contract

The Threatened Act Must Be Wrongful or Illegal

• To establish duress, there must be proof of a threat to do something that the threatening party has no right to do.
• Generally, for duress to occur, the threatened act must:
  • Be wrongful or illegal
  • Render the person who is threatened incapable of exercising free will

Economic Duress

• Economic need generally is not sufficient to constitute duress, even when one party exacts a very high price for an item that the other party needs.
• If the party exacting the price also creates the need, however, economic duress may be found.

Adhesion Contracts and Unconscionability

• Adhesion contracts raise questions concerning voluntary consent.
• Adhesion contract: A “standard-form” contract, such as that between a large retailer and a consumer, in which the stronger party dictates the terms.
• Adhesion contracts are typically presented to the weaker party on a take-it-or-leave-it basis.
• The standard forms that are used give the adhering party no opportunity to negotiate the contract terms.

Standard-Form Contracts

• Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other.
• Examples: Life insurance policies, residential leases, loan agreements, and employment agency contracts
• To avoid enforcement of the contract or of a particular clause, the plaintiff normally must show that the contract or the clause is unconscionable.

Unconscionability and the Courts

• Technically, unconscionability under Section 2-302 of the Uniform Commercial Code (UCC) applies only to contracts for the sale of goods.
• However, because the UCC gives courts a great degree of discretion to invalidate or strike down a contract or clause as being unconscionable, many courts have applied the concept of unconscionability in situations other than contracts for the sale of goods.