CHAPTER 14
VOLUNTARY CONSENT
Outline
I. Introduction
A. The Need for Real Consent
An agreement must be entered into voluntarily.
B. The Parties’ Duty of Care
People who enter into contracts are required to exercise reasonable caution and judgment. Rarely do the courts allow a party to avoid responsibility for careless mistakes.
C. The Remedy
Contracts entered into as a result of misrepresentation, fraud, duress, undue influence, or mistakes are voidable. The contract may be rescinded (cancelled) or if no performance has taken place, it may be disaffirmed.
D. Ratification
A person may ratify an agreement if he waits an unreasonable time after discovery to rescind the contract.
II. Misrepresentation
A. Misrepresentation as a legal action is not just identifying an untrue assertion. It is a material fact justifiably relied on to the detriment of the person relying on the assertion, and it is a basis for contract rescission.
B. Knowledge of Falsity
Proof that a person guilty of a misrepresentation knew that his statement was untrue is not needed.
C. Materiality
A material fact is one that would contribute to a reasonable person’s decision to enter the contract.
D. Fact versus Opinion
The subject of the misrepresentation must be knowable. Opinion and puffery do not serve as basis for rescission.
Example: Morehouse v. Behlman Pontiac-GMC Truck Service, Inc.: The court found that a used car salesman’s representation about the condition of a minivan constituted material misrepresentations of fact.
E. Justifiable Reliance
There must be causal connection between a misrepresentation and a party’s entry into a contract. Also, parties who enter a contract must take reasonable steps to discover the facts about the contract.
F. Detriment
The complaining party must have suffered a legal detriment in order to cancel a contract based on misrepresentation.
III. Fraud
Fraud is a misrepresentation made knowingly and with intent to deceive (scienter).
A. What is a Knowingly Made Misstatement?
If the defendant knew or should have known the statement was false, a knowingly made misstatement is proven.
B. Intent to Deceive
Scienter refers to the mental state of the defendant. The defendant’s motive is irrelevant.
Example: Jordan v. Knafel: The agreement was unenforceable due to Knafel’s fraudulent presentation of a material fact.
C. Fraud by Silence
Today, many courts have relaxed the doctrine of caveat emptor and placed an affirmative duty to disclose on sellers if the facts were not discoverable by the buyer.
Example: Columbia/HCA Healthcare Corp., et al v. Cottey: The court finds that the hospital’s failure to disclose its discretion to rescind the Top Hat Plan is sufficient to find that the hospital misrepresented the contract by silence.
D. Fraud in the Execution
If the signer of a document was prevented or discouraged from reading the document before signing, fraud in the execution has occurred.
E. Remedy for Fraud
A party who can prove fraud may choose to rescind the contract or affirm the contract and sue for damages.
IV. Duress and Undue Influence
A. General Nature
Duress and undue influence describe situations in which one party interfered with the other party’s ability to resist entering in the agreement.
B. Duress
Duress is wrongful. "Hard bargaining" constitutes economic duress when the act left the other person with no reasonable alternative but to enter the contract.
C. Undue Influence
Undue influence is wrongful persuasion. In most cases, it involves a special relationship of trust or confidence between the parties.
Example: Compton v. First National Bank of Monterrey: Although Scott had the power of attorney he used an attorney to draw up the contracts. There was no evidence of undue influence.
V. Mistake
A. The Nature of Mistake
Mistake prevents the "meeting of the minds," and requires proof of an untrue belief about a material fact.
B. Mutual Mistake
Mistake can be mutual if both parties were acting under a mistaken belief about a material fact. It is generally easier to rescind a contract for mutual mistake.
Example: Jordan v. Knafel: If in naming Jordan as the father of her child was made in good faith, both Knafel and Jordan were mistaken in the paternity. The mutual mistake of a material fact allows Jordan to rescind the agreement.
C. Unilateral Mistake
If one party to a contract acts under a mistaken belief about a material fact, then a unilateral mistake has occurred. Courts usually only grant rescission on the grounds of a unilateral mistake if a grave injustice has occurred.
Learning Objectives
1. You should understand the difference between a contract that is voidable and one that is void.
2. You should be able to define misrepresentation and explain the difference between innocent, negligent, and fraudulent misrepresentation.
3. You should be able to distinguish undue influence from duress.
4. You should understand the difference between the traditional definition of duress and the modern approach permitting rescission in cases involving economic duress.
5. You should understand the difference between unilateral and mutual mistake, and to explain why it is generally easier to rescind in cases involving mutual mistake of fact.
6. You must know the remedies available to the injured party (or parties) when a contract is voidable.
7. You must know the elements of misrepresentation, and the two additional elements of fraud.
8. You should understand the different remedies the plaintiff may get in a fraud case which are not available in a misrepresentation case.
9. You should be familiar with the typical situations where undue influence occurs.
10. You should understand the concept of "justifiable reliance" in misrepresentation and mistake cases.
Learning Hints
1. Misrepresentation, mistake, duress, and undue influence are legal theories supporting a finding that a contracting party did not, in reality, consent to the terms of an agreement. Generally, if a contracting party can establish the elements of one of these theories, he/she may rescind the contract. However, he is not required to do so, and may choose not to rescind.
2. Generally, courts today are more willing to permit rescission under these theories than in the past, when the doctrine of caveat emptor was a central theme in contract law.
3. Materiality is tested by an objective standard. Material facts are generally those that would induce a reasonable contracting party to enter into the contract. Materiality is determined on a case-by-case basis, and the standard varies with the needs, interests, and expertise of the contracting party.
4. The requirement that there be a causal connection between the misrepresentation and a party's entry into the contract in fraud and misrepresentation cases is not the same thing as the requirement of materiality. The causal connection requirement is concerned with whether the party actually relied on the statement, not with whether a reasonable person would have thought the information was important to his or her decision. Often, people entering a contract actually rely on nonmaterial misrepresentations, or fail to rely on clearly material misrepresentations. For fraud or misrepresentation to exist, both materiality of and actual reliance on the misstatement must be present. If one or the other requirement cannot be proved, fraud or misrepresentation does not exist.
5. The "justifiable reliance" element that is required in fraud and misrepresentation cases is not as big a bar to relief as it used to be. Very stringent duties of investigation were once imposed on the relying party, whereas today this is often not the case. Also, the standard varies with the relative expertise of the parties. For example, "justifiable reliance" does not mean the same thing in the sale of a used car to an auto mechanic as it would in the sale of a used car to a novice driver.
6. A newly emerging form of duress is economic duress (sometimes called "business compulsion"). This concept refers to the various forms of economic pressure, such as threats of economic harm, which can be applied in the business context. Generally, the threatened harm must be such that a serious economic loss would occur if the threat were carried out. Courts usually make a distinction between situations in which the party applying duress takes advantage of the other party's difficult financial condition and situations in which the party applying duress actually created the other party's bad financial situation and then took advantage of it. Despite the fact that the conduct sounds unacceptable in both situations, most courts would find economic duress only in the second case.
7. You should notice that fraud and misrepresentation share several elements in common, with fraud including the two additional elements of knowledge and intent to deceive. The distinction between fraud and misrepresentation is important because the victim of fraud has more remedies available to him.
8. Keep in mind that lack of capacity to contract, which was the subject of the previous chapter, is not the same thing as undue influence. Victims of undue influence usually have legal capacity to contract, but the stronger party to the transaction, with whom they are in a confidential relationship, overwhelm their powers of judgment and common sense.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False.
_____ 1. In order to rescind a contract for misrepresentation, the plaintiff must prove fraud (that is, intent to deceive).
_____ 2. A person may not be entitled to rescind a contract for misrepresentation if he waits too long to do so after discovering the misrepresentation.
_____ 3. A person can recover damages for undue influence as well as rescind the contract.
_____ 4. “This is the best computer on the market” is an example of misrepresentation.
_____ 5. Some courts today may determine that a seller of real estate committed fraud by not disclosing certain facts about the home to the buyer.
_____ 6. If the injured party to a voidable contract rescinds the contract, he returns what he has received and recovers what he has given under the contract.
_____ 7. Modern courts hold that a threat of physical injury must exist before they find duress.
_____ 8. A key element in undue influence cases is that a dominant person in a confidential relationship took advantage of the other party.
_____ 9. A mutual mistake is a basis for rescinding the contract.
_____ 10. Fraud in the execution allows a party who has been misled about the content of a contract or its legal effect to rescind the contract.
Multiple Choice
Circle the best answer.
1. Which of the following is not a required element of misrepresentation?
a. Scienter
b. Justifiable reliance
c. A material fact is involved
d. Other party can show detriment
2. Chick sold Alison a television set he knew no longer worked. However, in order to make the sale, he told her it was in good condition. Under these circumstances:
a. Either party may rescind the contract.
b. Only Alison may rescind the contract.
c. Alison cannot rescind the contract, but she is entitled to damages for fraud.
d. Alison can rescind the contract, and she also may be entitled to additional damages for fraud.
3. Which of the following is a required element of fraud?
a. Scienter
b. Misrepresentation was knowingly made
c. A material fact was involved
d. All of the above
4. In order to rescind a contract for undue influence:
a. The plaintiff must prove the other party intentionally deceived him.
b. The plaintiff must prove he lacked the capacity to contract.
c. The plaintiff must prove the other party took unfair advantage of him in persuading him to enter into the contract.
d. The plaintiff must prove he was mistaken about an important fact in entering into the contract.
5. Gail goes to Friendly Finance Co. for a loan. Fred, the loan officer, tells Gail the interest rate is 16%. Fred prepares the loan papers and tells Gail, “The note just repeats everything we talked about.” Fred persuades Gail to sign the note. Gail was not aware that Fred had changed the interest rate in the note to 30%. Which of the following is most true?
a. Gail should have read the note. She is stuck with the 30% rate.
b. Friendly is liable for misrepresentation.
c. Friendly is liable for fraud in the execution.
d. Scienter was not present in this situation.
6. Nathan is a 12-year-old baseball card collector. While browsing at JD’s Collectibles, Nathan spots a Jackie Robinson baseball card that is marked with a $5 price. Nathan knows that the card is worth much more than that. Nathan buys the card for $5. Later, JD’s Collectibles demands that Nathan return the card because a JD employee had mistakenly priced the card at $5 instead of $500. Which of the following statements is most true?
a. This is a mutual mistake, so the contract should be rescinded.
b. This is fraud because Nathan is guilty of scienter.
c. The court may grant rescission even though this is a unilateral mistake because Nathan knew of the mistake.