11-2 Chapter 11 Case Hypothetical and Ethical Dilemma John Hammonds recently purchased a used Fjord Mastodon sedan from Square Deal Pre-Owned Auto Sales, Inc. During contract negotiations, John did not ask any questions related to the fuel efficiency of the car, and Square Deal’s sales representative, Wink Eubanks, did not volunteer any information about the Mastodon’s gas mileage. John had saved for a car for five (5) years, and he paid ten thousand dollars cash for the vehicle. After his purchase, John kept meticulous records regarding the fuel consumption of the Mastodon, and he calculated that the Mastodon was getting approximately twelve (12) miles per gallon. He immediately returned to Square Deal (John thought the dealership should be renamed “Raw Deal”), found Wink Eubanks in front of one of the store’s vending machines, and stated “You should have told me that Mastodon only gets twelve miles per gallon. I am the victim of fraud, and I want my money back. Here are the keys to your Mastodon with the mammoth appetite!” Do you agree with John Hammonds? Is John the victim of fraud? Is he entitled to a rescission of the contract based on Square Deal’s nondisclosure of the Mastodon’s gas mileage?
11-3 Chapter 11 Case Hypothetical and Ethical Dilemma For Greta Harrington and her husband Robert, it was love at first sight. The two were married for 52 years until cancer took her husband at the age of 84. Greta is currently 83 years old, and her marriage produced three offspring: Samuel, 50 years old; Katherine, 45 years old; and Benjamin, 40 years old. In his will, Robert left all of his financial interests, a considerable sum valued at $5 million, entirely to his wife; in his will, he also expressed love and affection for his three children, as well as the desire that Greta devise the remainder of the couple’s estate to their children, in equal portions, upon her death. Greta has recently been “keeping company” with Gary Watson, a twice-divorced, 65-year-old bachelor with a reputation for “womanizing.” While visiting her mother one weekend, Katherine is shocked to see a fully-executed will on the desk in the living room, devising all of her mother’s estate to Gary Watson. She immediately calls Samuel and Benjamin, schedules an emergency “sibling meeting” for Sunday, and wonders what to do about her mother’s ill-advised decision. She has noticed in recent months that her mother is often forgetful, frequently calls her “Sharon” (her aunt’s name,) and often confuses the days of the week. Do the children have any legal rights in terms of successfully invalidating Greta Harrington’s will? From a legal and/or ethical standpoint, should a mother (even of adult children) be allowed to “disinherit” her offspring?
11-4 Legal Assent Definition: Voluntary, willing promise to transact the law will require contracting parties to obey Without assent, contract may be avoided/rescinded Cancellation of contract due to lack of assent means party with power of avoidance can require return of consideration given to other party; similarly, party with rescission right must return consideration received from other party Major “obstacles” to legal assent: Mistake, misrepresentation, undue influence, duress, and unconscionability
11-5 Mistake Definition: Misunderstandings regarding material facts of contract at time agreement made Unilateral Mistake: Mistake made by one contracting party; generally, contract still binding Mutual (Bilateral) Mistake: Mistake made by both parties; if mutual mistake of material (significant) fact, either party can rescind contract
11-6 For a mutual mistake to interfere with legal consent, it must involve: A basic assumption about the subject matter of the contract; A material effect on the agreement; and An adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement
11-7 Negligent or Fraudulent Misrepresentation Negligent Misrepresentation (Definition): Negligent, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages -Contrast with “innocent misrepresentation”, when party making false assertion believes it to be true, and is not negligent in making false assertion; although innocent misrepresentation permits misled party to rescind contract, he/she cannot sue for damages Fraudulent Misrepresentation (Definition): Intentional, untruthful assertion of material fact by contracting party; aggrieved party can rescind contract, and sue for damages Courts permit contract rescission for negligent or fraudulent misrepresentation, assuming: -False assertion -Negligence resulting in deception, or intent to deceive -Justifiable reliance on false assertion by innocent party
11-8 Undue Influence Definition: Persuasive efforts of dominant party, who uses special relationship to unduly persuade the other party Any relationship involving one party’s unusual degree of trust in another can give rise to undue influence -Examples include attorney-client relationship, and doctor-patient relationship
11-9 Questions Affecting Determination of Undue Influence Did dominant party “rush” the other party to consent? Did dominant party gain unjust enrichment from the agreement? Was non-dominant party isolated from other advisers at time of agreement? Is contract unreasonable, in that it overwhelmingly benefits dominant party?
11-10 Duress Definition: Occurs when one party threatens other with wrongful act unless assent given Duress is not legal assent, since coercion interferes with contracting party’s free will For courts to rescind agreement, injured party must prove duress left no reasonable alternatives to contractual agreement
11-11 Situations Involving Duress One party threatens physical harm or extortion to gain consent to contract One party threatens to file criminal lawsuit unless consent given to terms of contract One party threatens to file frivolous civil lawsuit unless consent given to terms of contract One party threatens the other’s economic interests (although in many jurisdictions, recovery based on economic duress/pressure rarely granted)