Chapter 11: Conduct Invalidating Assent 9/21/08 3:07PM

Conduct Invalidating Assent The law requires that the agreement be voluntary and knowing Duress

o The law will not enforce any contract induced by duress, which in general is any wrongful or unlawful act or threat that overcomes the free will of a party

o Physical Compulsion Physical duress occurs when one party compels another to

manifest assent to a contract through actual physical force This type of duress renders an agreement void

o Improper threats The threat may be explicit or may be inferred from words or

conduct, in either case it must leave the victim with no reasonable alternative

The type of duress makes the contract voidable at the option of the coerced party

The test is subjective and the question is : did the threat actually induce assent on the part of the person claiming to be the victim of duress?

The acts need not be criminal or tortuous in order to be wrongful, they merely need to be contrary to public policy or morally reprehensible

Ex. If the threat involves a breach of a contractual duty of good faith and fair dealing, it is improper

Contracts induced by threats of criminal prosecution are voidable, regardless of whether the coerced party had committed an unlawful act.

Threatening the criminal prosecution of a close relative is also duress.

Threats that resort to ordinary civil remedies to recover a debt due from another, it is not wrongful to threaten a civil suit against an individual to recover a debt, it is prohibited to threaten to bring a civil suit when bringing such a suit would be abuse of process

o Undue Influence Unfair persuasion of a person by a party in a dominant

position based on a confidential relationship Guardian/ward, trustee/beneficiary, agent/principal,

spouses, parent/child, attorney/client, physician/patient

A transaction induced by undue influence on the part of the dominant party is voidable

Question is whether the transaction was induced by dominating either or both the mind or emotions of a submissive party

Fraudo prevents assent from being knowingly giveno fraud in the execution

consists of a misrepresentation that deceives the defrauded person as to the very nature of the contract

occurs when a person does not know, or does not have reasonable opportunity to know, the character or essence of a proposed contract because the other party misrepresents its character or essential terms

fraud in the execution renders the transaction voido Fraud in the Inducement

generally referred to as fraud or deceit intentional misrepresentation of material fact by one party

to the other, who consents to enter into a contract in justifiable reliance on the misrepresentation

fraud in the inducement renders the contract voidable by the defrauded party

requisites for fraud in the inducement a false representation of a fact that is material that is made without knowledge of its falsity and the

intention to deceive (scienter) and which representation is justifiable relied on

o False Representation misrepresentation- misleading conduct or an assertion not in

accord with the facts, made through a positive statement concealment is an action intended or known to be likely to

keep another from learning a fact he otherwise would have learned

truth may be suppressed by concealment as much as by misrepresentation

silence or nondisclosure alone does not amount to fraud when the parties deal at arm’s length

an arm’s length transaction is one in which the parties owe each other no special duties and each is acting in his or her self-interest

most business or market transactions are arm’s length and generally have no obligation to tell the other party everything they know about the subject of the contract.

In certain situations nondisclosure does constitute a misrepresentation

When a person fails to disclose a fact known to him,

He knows that the disclosure of that fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract,

And, nondisclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

One may have duty of disclosure because of prior representations innocently made before entering into the contract, which are later discovered to be untrue

Silence may constitute fraud in a transaction involving a fiduciary.

A fiduciary is a person in a confidential relationship who owes a duty of trust, loyalty and a confidence to another

A fiduciary may not deal at arm’s length, as a party in most everyday business or market transactions may, but owes a duty to disclose fully all relevant facts when entering into a transaction with the other party to the relationship

Fact The basic element of fraud is the misrepresentation of

a material fact A fact is an event that actually took place or a thing

that actually exists Actionable fraud rarely can be based upon what is

merely a statement of opinion A representation is one of opinion if it

expresses only the uncertain belief of the representer as to the existence of a fact or his judgment as to quality, value, authenticity, or other matters of judgment

Also to be distinguished from a representation of fact is a prediction

Promissory statements ordinarily do not constitute a basis of fraud because a breach of promise does not necessarily indicate that the promise was fraudulently made

A promise that the promisor, at the time of making, had no intention of keeping is a misrepresentation of fact

Materiality In addition to the requirement that a

misrepresentation be one of fact, it must also be material

a misrepresentation is material if it would be likely to induce a reasonable person

to manifest assent or, the maker knows that it would be likely to

induce the recipient to do soo ex. In the sale of a racehorse, it may not

be material whether the horse was ridden in its most recent race by a certain jockey, but its running time for the race probably would be

the restatement of Contracts provides that a contract justifiably induced by a misrepresentation is voidable if the misrepresentation is either fraudulent or material.

Therefore, a fraudulent misrepresentation does not have to be material to retain rescission but it must be material to recover damages

Knowledge of falsity and intention to deceive The misrepresentation must have been known by the

one making it to be false and must be made with an intent to deceive

This element of fraud is knows as scienter Knowledge of falsity can consist of actual knowledge,

lack of belief in the statements truthfulness, or reckless indifference as to its truthfulness

Justifiable reliance A person is not entitled to relief unless she has

justifiably relied on the misrepresentation She is not deceived if she does not rely on the

misrepresentation Requires that the misrepresentation contribute

substantially to the misled party’s `1decision to enter into the contract

o Reed v. King 214

9/21/08 3:07 PM

9/21/08 3:07 PM