Chapter 14 Mistakes, Fraud, and Voluntary Consent BUSINESS LAW: Text & Cases — Legal, Ethical, International, and E-Commerce Environment 11 th Ed. Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

2Introduction Contract may be unenforceable if the parties have not genuinely assented to its terms by: Contract may be unenforceable if the parties have not genuinely assented to its terms by: –Mistake. –Misrepresentation. –Undue Influence. –Duress.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 3 §1: Mistakes of Fact  Only a Mistake of Fact allows a contract to be canceled.  Bilateral (Mutual) Mistakes can be rescinded by either party. –CASE 14.1 Roberts v. Century Contractors, Inc. (2004).

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 4  Unilateral Mistakes cannot be canceled unless: –If other party to the contract knows or should have known that a mistake of fact was made. –If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence. Mistakes of Fact

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 5 Mistakes of Value  Generally, contract is enforceable by either party.  Exception: Mistake of value because of a mistake of material fact.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 6 §2: Fraudulent Misrepresentation  Contract Voidable by Innocent Party.  Elements: –Misrepresentation of Material Fact. –Intent to Deceive. –Reliance on Misrepresentation. –Injury to the Innocent Party.  Opinions vs Fact. CASE 14.2 Vokes v. Arthur Murray Inc. (1968).

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 7 Misrepresentation Has Occurred  Misrepresentation can be express or implied.  Misrepresentation of future facts and statements of opinion are not fraud, unless person professes to be an expert.  Misrepresentation of law is not fraud, unless person has greater knowledge of the law.  Silence is not fraud, unless serious problem or defect known or asked and person lied.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 8 Intent to Deceive  Scienter is an Intent to Deceive. –Party knowledge that fact is not as stated. –Party makes a reckless statement with disregard of the truth. –Party implies that statement is based on personal knowledge or investigation.  Gross negligence is considered intent.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 9 Reliance on Misrepresentation  Deceived party must have Justifiable Reliance. –Depends on the knowledge and experience of the party relying.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 10 Injury to the Innocent Party  No proof of injury is required when the action is to rescind contract.  Proof of injury is universally required to recover damages.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 11 Nonfraudulent Misrepresentation  Innocent Misrepresentation.  Negligent Misrepresentation. –Equal to Scienter. –Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 12 §3: Undue Influence  Contract is Voidable. –Confidential or Fiduciary Relationship. –Relationship of dependence. –Influence or Persuasion. –Weak party talked into doing something not beneficial to him or herself.  Presumption of Undue Influence.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 13 §4: Duress  Forcing a party to enter into a contract under fear or threat makes the contract voidable.  Threatened act must be wrongful or illegal.  Improper Threat. –Threat to exercise legal rights (criminal or civil suit). –Economic or physical.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 14 §5: Adhesion Contracts and Unconscionability  Standard-Form (Adhesion) Contracts. –Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract. –“Take-it-or-Leave-it” adhesion contracts. –CASE 14.3 Simpson v. MSA of Myrtle Beach, Inc. (2007).

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 15 Adhesion Contracts  Unconscionability. –One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract.