1. Mutual Assent and Defective Agreement
Chapter 9
Mutual Assent and Defective Agreement
BUSINESS LAW/MUSOLINO

2. Learning Objectives Explain the nature of mutual assent
Identify the ways that mutual assent can be destroyed
List the elements that must be proved to establish fraud
Identify those situations that can give rise to claims of passive fraud
Distinguish between fraud and misrepresentation, and contrast the remedies available for each

3. Learning Objectives
Discuss the difference between unilateral and bilateral mistakes
Judge which types of mistakes provide appropriate grounds for getting out of a contract
Explain the nature of physical and emotional duress
Explain the elements of economic duress
Explain how the existence of a confidential relationship is a key factor in establishing undue influence

4. Question?
__________ is when both parties know what the terms are, and both have willingly agreed to be bound by those terms?
Agreement
Mutual assent
Shared agreement
A firm offer
The correct answer is “B” – mutual assent. See next slide.

5. Mutual Assent Mutual assent
both parties know what the terms are, and both have willingly agreed to be bound by those terms
“meeting of the minds.”
Mutual assent may be reached quickly, as in buying an iPhone on the Apple.com
Web site, or it may result from weeks of negotiations related to a multimillion-dollar purchase
of real estate. Whatever the case, mutual assent emerges from the communication of
an offer and an acceptance between the contracting parties.

6. Mutual Assent Destruction of Mutual Assent
If one party or the other discovers that he or she has been cheated or finds out that a mutual mistake placed the party at a great disadvantage, that party is no longer bound to the terms of the agreement
Defective agreement
Terms Chicanery is a word that means “trickery.”
In terms of the law, it usually involves an artful or clever practice aiming to deceive.

7. Question?
What is a wrongful statement, action, or concealment pertinent to the subject matter of a contract knowingly made to damage the other party?
Tort
Deception
Mutual acceptance
Fraud
The correct answer is “D” – fraud. See next slide.

8. Fraud and Misrepresentation
a wrongful statement, action, or concealment pertinent to the subject matter of a contract knowingly made to damage the other party
To destroy mutual assent through a claim of fraud, the complaining or innocent party must
prove the existence of five elements.
1. The complaining party will have to prove that the other party made a false representation
about some material fact (i.e., an important fact, a fact of substance) involved in
the contract. A material fact is one that is very crucial to the terms of the contract.
2. The plaintiff must demonstrate convincingly that the other party made the representation
knowing that it was false.
3. The plaintiff must show that the false representations were made with the intent that
they be relied upon by the innocent party.
4. The complaining party must establish that there was a reasonable reliance on the false
representations.
5. The plaintiff must verify that he or she actually suffered some loss by relying on the
false representation after entering the contract.

9. Types of Fraud Fraud in the inception Fraud in the inducement
occurs when one party tricks another party into a contract by lying to the innocent party about the actual nature of the contract
Fraud in the inducement
occurs when one party tricks another party into a contract by lying about the terms of the agreement to get the innocent party to enter the contract under false pretenses
C r o s s - C u l t u r a l Notes
Britain’s Serious Fraud Office (SFO) handles large, complex cases of fraud. It has the authority to
compel witnesses to answer questions and produce papers. Critics are concerned that the SFO
abuses its power by forcing incriminating statements from accountants and bankers who have confidential
or fiduciary relationships with their clients.

10. Question?
Which type of fraud occurs when one party to a contract makes a false statement intended to deceive the other party?
Passive fraud
Active fraud
Submissive fraud
Dynamic fraud
The correct answer is “B” – Active fraud. See next slide.

11. Active Fraud Active fraud
occurs when one party to a contract makes a false statement intended to deceive the other party and thus leads that party into a deceptively based agreement.
Actions designed to deceive, such as turning back a car’s odometer or painting over rust spots,
are considered statements about the condition of the subject matter of the contract
Getting Students Involved
Have students make lists of examples of sales puffery that they see daily in media advertising. Then
have them explain why it is merely sales puffery and not a fraudulent statement.

12. Passive Fraud Passive fraud
occurs when one party does not say something about certain facts that he or she is under an obligation to reveal
Also called concealment or nondisclosure
Getting Students Involved
Direct groups of students to create lists of relevant questions about types of goods that are likely to have hidden problems,
such as used items.
The list of questions should be designed to help students avoid becoming the victims of fraud in future transactions.

13. Fiduciary Relationships
a relationship based on trust.
Exist between attorneys and clients, guardians and wards, trustees and beneficiaries, and boards of directors and corporations
If one party is in a fiduciary relationship with another party, then an obligation arises to reveal what otherwise
might be withheld when the two parties enter an agreement.
Terms Fiduciary is from the Latin fiduciarius , meaning confidence and trust,
and the French fidere , “to trust.” Fidere is also the origin of the pet’s name
Fido , which reflects the quality of loyalty associated with dogs.

14. Agreements Made Defective by Falsehood

15. Question?
What is a false statement made innocently with no intent to deceive?
Rescission
Recession
Misrepresentation
Representation
The correct answer is “C” – Misrepresentation. See next slide.

16. Misrepresentation Misrepresentation Rescission
a false statement made innocently with no intent to deceive
Rescission
both parties are returned to their original positions, before they entered into the contract
If a party to an agreement makes an innocent misrepresentation and then later discovers
that it is false, that party must reveal the truth. If the party does not reveal the truth, the
innocent misrepresentation becomes fraud.

17. Mistake Unilateral mistake Bilateral mistake
A mistake made by only one of the contracting parties is a and not offering sufficient grounds for rescission or renegotiation
Bilateral mistake
both parties are mistaken, and may permit a rescission by either the offeror or the offeree
Terms Mistake, when used in the law of contracts, refers to a belief that is not in accord with
the facts.
State Variations In Georgia, if the consideration to a contract is given as a result of a mutual mistake of
fact or law, the contract cannot be enforced.

18. The Nature of Mistakes Mistakes as to Description
Mistakes as to Existence
Mistakes as to Value
Mistakes Through Failure to Read Document
Mistakes of Law
Teaching Tips Students may not understand that value is relative. Discuss how disagreements over the monetary value of
an item could be influenced by opinions about its artistic or sentimental value, for example, in contracts involving art or heirlooms.
In such cases, a legally authorized and independent party, such as an assessor or appraiser, could set a price for the
contested items on the basis of their fair market value.

19. Agreements Made Defective by Mutual Mistake

20. Question?
What forces a person into a contract through the use of physical, emotional, or economic threats?
Stress
Eustress
Duress
Coercion
The correct answer is “C” – duress. See next slide.

21. Duress and Undue Influence
an action by one party that forces another party to do what need not otherwise be done
forces a person into a contract through the use of physical, emotional, or economic threats
Background Information
Extortion is an illegal means of forcing a person into a contract. It is a lay term for duress. The
term “extortion” comes from the Latin extorquere , meaning “to wrench out.”

22. Question?
Which type of duress consists of threats of a business nature that force another party without real consent to enter a commercial agreement?
Physical duress
Emotional duress
Economic duress
Undue influence
The correct answer is “C” – economic duress. See slide 9-24.

23. Physical and Emotional Duress
Physical duress
involves either violence or the threat of violence against an individual or against that person’s family, household, or property
Emotional duress
arises from acts or threats that would create emotional distress in the one on whom they are inflicted
It is generally necessary that the action threatened be either illegal or illicit.
Wrongful exposure to public ridicule, threatened false attacks on one’s reputation,
or unjust efforts to prevent employment might constitute emotional
duress. It might also create duress to threaten a person with criminal charges
or a civil lawsuit if there are no grounds for using such intimidating tactics.
However, it is not duress to promise to exercise a legal right, such as bringing a justified lawsuit,
should someone not comply with a reasonable request.

24. Economic Duress Economic duress
consists of threats of a business nature that force another party without real consent to enter a commercial agreement
also known as business compulsion
To establish economic duress, the complaining party must demonstrate the existence of three elements:
1. The plaintiff must prove that the other party wrongfully placed the plaintiff in a precarious
economic situation.
2. The plaintiff must show that he or she had no alternative other than to submit to the
contractual demands of the wrongful party.
3. The plaintiff must demonstrate that he or she acted reasonably in entering the contract.

25. Undue Influence Undue influence
occurs when the dominant party in a special relationship uses excessive pressure to convince the weaker party to enter a contract that greatly benefits the dominant party
A plaintiff who wants to demonstrate that he or she was enticed into a contract by
undue influence must prove the existence of two elements.
First, the plaintiff must show that a special relationship existed between the parties. A
special relationship can generally be characterized as one that is fiduciary in nature or one
that involves domination.
Second, the plaintiff must show that the other party used excessive pressure to take advantage
of him or her to enter a contract that greatly benefits the party applying the pressure. In
most cases involving undue influence, one party in the special relationship has enough strength
and leadership to dominate the other party, who is obviously weaker and dependent.

26. Agreements Made Defective by Force or Pressure