Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 11 Reality of Consent and Writing

11 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction A contract may not be enforced even if all the required elements of a legal contract are met This can happen when the party against whom the enforcement is sought raises certain defenses against its enforcement genuiness of assent i.e., genuiness of assent Statute of Frauds i.e., the contract did not meet the requirements of the Statute of Frauds

11 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Mistakes mistake A mistake occurs where one or both of the parties has an erroneous belief about the subject matter, value, or some other aspect of the contract unilateral mutual Mistakes may be either unilateral or mutual recission The law permits recission of some contracts made in mistake

11 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Unilateral Mistakes Occur when only one party is mistaken about a material fact regarding the subject matter of the contract In most cases the mistaken party will not be permitted to rescind the contract The contract will be enforced on its terms

11 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Mutual Mistakes Mutual Mistake of Fact A mistake made by both parties concerning a material fact that is important to the subject matter of the contract In Raffles v. Wichelhaus, the court held that a mutual mistake of fact excused performance of the contract Mutual Mistake of Fact A mistake made by both parties concerning a material fact that is important to the subject matter of the contract In Raffles v. Wichelhaus, the court held that a mutual mistake of fact excused performance of the contract Mutual Mistake of Value A mistake that occurs if both parties know the object of the contract but are mistaken as to its value The contract remains enforceable by either party because the identity of the subject matter of the contract is not at issue Mutual Mistake of Value A mistake that occurs if both parties know the object of the contract but are mistaken as to its value The contract remains enforceable by either party because the identity of the subject matter of the contract is not at issue

11 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Fraudulent Misrepresentation When a person intentionally makes an assertion that is not in accord with the facts. fraud Also called fraud.

11 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Elements of Fraud 1.The wrongdoer made a false representation of material fact 2.The wrongdoer intended to deceive the innocent party 3.The innocent party justifiably relied on the misrepresentation 4.The innocent party was injured 1.The wrongdoer made a false representation of material fact 2.The wrongdoer intended to deceive the innocent party 3.The innocent party justifiably relied on the misrepresentation 4.The innocent party was injured

11 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Legal Consequence if Fraudulent Misrepresentation is Found The innocent party may: 1.Rescind the contract and obtain restitution, or 2.Enforce the contract and sue for damages

11 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Common Types of Fraud (1 of 2) Fraud in the inception Fraud in the inception An innocent person is deceived as to the nature of his or her act Fraud in the inducement Fraud in the inducement The wrongdoer fraudulently induces another party to enter into a contract Fraud by concealment Fraud by concealment The wrongdoer takes specific action to conceal a material fact from the other party

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Common Types of Fraud (2 of 2) Silence as misrepresentation Silence as misrepresentation The wrongdoer remains silent when he or she is under a legal obligation to disclose a material fact Misrepresentation of law Misrepresentation of law A professional who should know what the law is intentionally misrepresents the law to a less sophisticated party

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Innocent Misrepresentation Occurs when a person unintentionally makes an assertion that is not in accord with the facts The innocent party may rescind the contract but cannot recover damages Innocent misrepresentation is not fraud

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Summary: Types of Misrepresentation Type of MisrepresentationSue for DamagesRescind Contract Fraud in the inceptionYes Fraud in the inducementYes Fraud by concealmentYes Silence as a misrepresentationYes Misrepresentation of lawUsually no Innocent misrepresentationNoYes Legal Consequences – Innocent Party May:

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Undue Influence (1 of 2) Occurs when one person takes advantage of another person’s mental, emotional, or physical weakness and unduly persuades that person to enter into a contract The persuasion by the wrongdoer must overcome the free will of the innocent party

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Undue Influence (2 of 2) The following elements must be shown to prove undue influence: 1.A fiduciary or confidential relationship must have existed between the parties 2.The dominant party must have unduly used his or her influence to persuade the servient party to enter into a contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duress Occurs when one party threatens to do some wrongful act unless the other party enters into a contract A contract entered into under duress cannot be enforced Types of duress: Physical duress Physical duress Extortion Extortion

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Statute of Frauds (1 of 2) State statute that requires the following types of contracts to be in writing: 1.Contracts involving the transfer of interests in real property 2.Contracts that cannot be performed within one year of their formation 3.Collateral contracts where one person promises to answer for the debts or duties of another person

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Statute of Frauds (2 of 2) 4.Promises made in consideration of marriage, such as prenuptial agreements 5.Agents’ contracts to sell real property 6.Contracts for the sale of goods costing $500 or more

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Part Performance Exception A doctrine that allows the court to order an oral contract for the sale of land or transfer of another interest in real estate to be specifically performed if it has been partially performed and performance is necessary to avoid injustice

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Original and Guaranty Contracts DebtorCreditor Guarantor Guarantor agrees to pay the debt if the debtor fails to pay the creditor Contract No. 1 Contract No. 2 Original Contract Guaranty Contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Promissory Estoppel Statute of Frauds Equitable doctrine that prevents the application of the Statute of Frauds Statute of Frauds It permits the enforcement of oral contracts that should otherwise be in writing under the Statute of Frauds to prevent injustice or unjust treatment

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sufficiency of the Writing (1 of 2) Formality of the writing Formality of the writing A written contract does not have to be formal or drafted by a lawyer to be enforceable Informal contracts are enforceable contracts Required signature Required signature The party against whom enforcement of the contract is sought must have signed the contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sufficiency of the Writing (2 of 2) Integration of several writings Integration of several writings Several writings may be integrated to form a contract Express reference Express reference – one document incorporates another document Implied reference Implied reference – documents are physically attached by staple or by paper clip or are placed in the same envelope

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Interpreting Contract Words and Terms (1 of 2) Ordinary words are given their usual meaning according to the dictionary Technical words are given their technical meaning, unless a different meaning is clearly intended Specific terms are presumed to qualify general terms If both parties are members of the same trade or profession, words will be given their meaning as used in the trade (i.e., usage of trade ) Ordinary words are given their usual meaning according to the dictionary Technical words are given their technical meaning, unless a different meaning is clearly intended Specific terms are presumed to qualify general terms If both parties are members of the same trade or profession, words will be given their meaning as used in the trade (i.e., usage of trade )

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Interpreting Contract Words and Terms (2 of 2) Where a preprinted form contract is used, typed words in a contract prevail over preprinted words Handwritten words prevail over both preprinted and typed words If there is an ambiguity in a contract, the ambiguity will be resolved against the party who drafted the contract Where a preprinted form contract is used, typed words in a contract prevail over preprinted words Handwritten words prevail over both preprinted and typed words If there is an ambiguity in a contract, the ambiguity will be resolved against the party who drafted the contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Parol Evidence Rule Parol evidence Parol evidence – any oral or written words that are outside of the four concerns of a written contract Parol evidence rule Parol evidence rule – provides that if a written contract is a complete integration, any prior contemporaneous oral or written statements are inadmissible as evidence to alter or contradict the terms of the written contract

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Exceptions to the Parol Evidence Rule Parol evidence Parol evidence may be admitted in court to: Prove mistake, fraud, misrepresentation, undue influence, or duress Explain ambiguous language Explain a prior course of dealing or course of performance between the parties or a usage of trade Fill in the gaps of a contract Correct obvious clerical or typographical errors Parol evidence Parol evidence may be admitted in court to: Prove mistake, fraud, misrepresentation, undue influence, or duress Explain ambiguous language Explain a prior course of dealing or course of performance between the parties or a usage of trade Fill in the gaps of a contract Correct obvious clerical or typographical errors

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Merger, or Integration, Clause parol evidence The parties to a written contract may include a clause stipulating that the contract is a complete integration and the exclusive expression of their agreement and that parol evidence may not be introduced to explain, alter, contradict, or add to the terms of the contract parol evidence rule This type of clause expressly reiterates the parol evidence rule