Business Law

Chapter 8 Section 1-2Mr. Whisel

Section 8.1 Goals• Define genuine agreement and rescission

• Identify when duress occurs

• Describe how someone may exercise undue influence

• Standards– Reading and Writing

• 1.1.11 CDEFG, 1.2.11 AB, 1.3.11 C, 1.4.11 BCD, 1.5.11 ACE, 1.6.11 ACDF, 1.7.11 AC, 1.8.11 ABC

– Civics and Government• 5.1.12 ABCDEFHIJM, 5.2.12 ABCDEFG, 5.3.12 AB

HOT DEBATE• Your friend buys a digital camera for $519.97,

including a carrying case and a special lens. In her excitement, she fails to note that the case and special lens are advertised as optional equipment supplies at an additional charge. The two items cost an extra $122.94, which is listed on the contract she signs. When the bill for $642.91 plus sales tax arrives, your friend objects.

• Where do you stand?

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What’s Your Verdict?• Cameron owned a promising racehorse that

Link had offered to buy for undisclosed parties. When Cameron refused to sell, Link lowered his voice and slowly said, “Listen, the people I represent don’t take ‘No’ for an answer. If you don’t sell, they’ll hurt your family. Like a good friend, I’m telling you to sell. You’re getting a fair price, just sign the contract.” Cameron, who had secretly recorded the conversation, sold. Then he called the police.

• Can he now rescind and get his horse back?

Genuine Agreement and Rescission• Genuine Agreement

– Genuine Assent or Mutual Assent• May be lacking due to fraud, misrepresentation, undue

influence, duress, or mistake.• Absence of Genuine Agreement results in a voidable

contract.– Meaning the Injured party may rescind.

• Rescission– Backing out of a transaction by asking for the return

of what you gave in the transaction, and offering to give back what you have received.

• Must occur shortly after you discover that there is not genuine agreement.

• May occur before ratification of the contract.

Genuine Agreement and Rescission• Ratification

– Conduct suggesting you intend to be bound by the contract

• Duress– Occurs when one party uses an improper threat or

act to obtain an expression of agreement.• Resulting contract is voidable.• Law on duress focuses on nature of threat

– Threat of illegal conduct• Committing a crime, tort, violence, etc.. • Threatening to commit a crime, tort, violence, etc..

Duress Continued– Threats to report crimes

• Observation of a crime, but use it to threaten someone to contract with you

• Your duty is to report the crime to authorities, not use it in an illegal manner.

– Threats to sue• The law encourages people to settle suits before going to

trial– Frequently people threaten to sue in order to get what they want.

– Economic Threats• Use of power to get what you want.

– Factory that produces a part that another company needs to keep producing.

What’s Your Verdict?• Smith was in the hospital near death. His nurse

said she would not give him drugs for pain unless he signed a contract transferring certain stock to her for half its market value. Smith signed.

• Is Smith bound?

What is Undue Influence?• Under Influence

– Occurs when one party to the contract is in a position of trust and wrongfully dominates the other party.

– Two Key elements• Relationship• Wrongful or unfair persuasion

– Contract Voidable

Two Key Elements of Undue Influence

• Relationship– A relationship of trust, confidence, or authority

between the two contracting• Wife and Husband• Attorney and Client• Parent and Child• Etc…

• Unfair Persuasion– Unfair terms of contracts– Must prove that contract is fair to all sides– Act with honesty, disclose all facts, insist that weak

party obtain counsel

Section 8.1 Goals• Define genuine agreement and rescission

• Identify when duress occurs

• Describe how someone may exercise undue influence

• Standards– Reading and Writing

• 1.1.11 CDEFG, 1.2.11 AB, 1.3.11 C, 1.4.11 BCD, 1.5.11 ACE, 1.6.11 ACDF, 1.7.11 AC, 1.8.11 ABC

– Civics and Government• 5.1.12 ABCDEFHIJM, 5.2.12 ABCDEFG, 5.3.12 AB

End of Section 8.1 Questions• Think About Legal Concepts

• Think Critically About Evidence

Section 8.2 Goals• Describe the kinds of mistakes that can make a

contract void or voidable.• Determine when misrepresentation has

occurred.• Identify when fraud has occurred• Discuss the remedies for mistake,

misrepresentation, and fraud• Standards

– Reading and Writing• 1.1.11 CDEFG, 1.2.11 AB, 1.3.11 C, 1.4.11 BCD, 1.5.11

ACE, 1.6.11 ACDF, 1.7.11 AC, 1.8.11 ABC

– Civics and Government• 5.1.12 ABCDEFHIJM, 5.2.12 ABCDEFG, 5.3.12 AB

What’s Your Verdict?• Baglio wanted the gutters of his new house to

be free of rust. The specification in the contract he signed called for “rust-resistant steel gutters galvanized with zinc.” After the house was built, he learned that galvanized steel gutter would eventually rust and require replacement. Aluminum or copper gutters are the kind he should have contracted for because they would not rust. Baglio now sues the contractor claiming a breach of contract because he did not get what he really wanted.

• Will he win?

What is a Unilateral Mistake?• Unilateral Mistake

– Occurs when one party holds and incorrect belief about the facts related to a contract.

• Does not affect the validity of the contract

– Recognizing a Unilateral Mistake• If a major mistake is made, the other party must be aware

of the mistake, and a court may grant rescission to the injured party.

– Induced Unilateral Mistake• One party encouraging or inducing the other to make a

mistake in the contract, becomes voidable

What’s Your Verdict?• In a large Midwestern city, there were two

streets named “Highland.” Fisher owned the lot at 231 Highland Avenue. Neece, who lived in New York City, wanted to buy the lot at 231 Highland Boulevard. He wrote to Fisher, offering “to buy your lot of Highland” on specified terms. Fisher promptly mailed her acceptance of the offer.

• Is the Contract void?

What are Mutual Mistakes?• Mutual Mistake

– Bilateral Mistake• Both parties have an incorrect belief about an important

fact.• Contract becomes void

• Material Facts– Important facts that influence the parties decision

about a contract.

What are Mutual Mistakes?• Mistake about subject matter

– Mutual Mistake may occur as to the existence of the subject matter.

• Mistake of Law– Some states mutual mistakes allow the contract to

still be valid• Once again assume that all people know the law

– Other state allow mutual mistakes in contracts to have one party or both parties rescind or void contract.

What’s Your Verdict?• Nutri-Life offered a dietary supplement for sale.

The package contained a statement that clinical studies at Harvard University had shown the drug reduced the risk of cancer by more than 30 percent if taken regularly. This statement was untrue.

• Can customers get their money back if they learn of the deception?

What is Misrepresentation?• In many negotiations' parties state things that

are untrue.

• Innocent Misrepresentation– If the seller didn’t know the truth and you found out

that it wasn’t true.

• Fraudulent Misrepresentation– IF the seller knew that what they told you was

untrue and you found out.

• Both defenses make contract voidable

Statements of Misrepresentation• The untrue statement is one of fact or there is

active concealment

• The statement is material to the transaction or is fraudulent

• The victim reasonably relied on the statement

Untrue Statements of Fact• Must be fact and not an opinion

• Active Concealment– A substitute for a false statement of fact

• Painting the ceiling to cover up stains from roof leaks

• Silence– Seller remaining quiet about facts

• Three important situations where disclosure is required– Statement about a material fact omits important information– A true statement is made false by subsequent events– When one party knows the other party has made a basic

mistaken assumption

What is Misrepresentation?• Materiality

– Three ways an untrue staement can be determined to be material

• A statement would cause a reasonable person to contract• If the defendant knew this plaintiff would rely on the

statement• If the defendant knew the statement was false, that

makes the statement material

– Reasonable Reliance• Even though a statement is material there is no

misrepresentation unless the victim reasonably relied on it.

What’s Your Verdict?• Graffter sold a used car to Camacho for

$16,000. Graffter told her that the car had been driven only 50,000 miles, had never been in an accident, and had the original paint. In fact, Graffter had stolen the car, set back the odometer from 90,000 miles, and repainted the exterior in the original color. Graffter stood between Camacho and the right rear end of the car to prevent her from seeing a crudely repaired fender that had been damaged in an accident. Later Camacho learned the truth.

• Can Camacho rescind?

Fraud and Remedies for Fraud• Fraud

– Based on misrepresentation– All elements of misrepresentation must be present

to have fraud– Misrepresentation must be intentional or reckless– Misrepresentation or concealment must injure

Fraud and Remedies for Fraud• Remedies

– Rescission• When you rescind you must return what you receive and

you receive what you gave

– Damages• Available if fraud is proven• Party may ratify instead of rescind• Seek damages for loss created by the fraud

– UCC, damages are available for innocent misrepresentation by the subject of the contract must be goods, tangible personal property

– Punitive Damages• Fraud must be proven to receive punitive damages• Form of punishment to seller/plaintiff/defendant

Section 8.2 Goals• Describe the kinds of mistakes that can make a

contract void or voidable.• Determine when misrepresentation has

occurred.• Identify when fraud has occurred• Discuss the remedies for mistake,

misrepresentation, and fraud• Standards

– Reading and Writing• 1.1.11 CDEFG, 1.2.11 AB, 1.3.11 C, 1.4.11 BCD, 1.5.11

ACE, 1.6.11 ACDF, 1.7.11 AC, 1.8.11 ABC

– Civics and Government• 5.1.12 ABCDEFHIJM, 5.2.12 ABCDEFG, 5.3.12 AB

End of Section 8.2 Questions• Think About Legal Concepts

• Think Critically About Evidence

• Chapter in Review