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MUTUAL ASSENT AND DEFECTIVE AGREEMENT

Key Terms:

Offer: Proposal freely made by offeror

Acceptance:  Free acceptance by offeree

Mutual Assent: Offer freely made, freely accepted

Meeting of the minds:  Simple concept with complex application in terms of contracts; Parties need to be of like mind as to what the terms and conditions of the contract are.  Therefore, the contract needs to be specific enough to spell out the nature of the agreement (this applies whether the contract is written or oral)

Void:  Contract is invalid and unenforceable

Voidable:  Contract may be canceled if either party wishes to do so, but contract may be renegotiated or left as is if the parties so choose.

5 Ways to destroy mutual assent:

Ex. Offer made and accepted, then something happens causing one party to want to break contract without penalty to party wishing to break the contract.

  • Fraud
  • Misrepresentation
  • Mutual Mistake
  • Duress
  • Undue Influence

 Fraud and Misrepresentation

Often considered together though there are distinct differences in legal terms.

Fraud – may be active or passive (act of commission or omission)

Definition: Wrongful statement, action or concealment pertinent to subject matter of a contract; knowingly made to damage the other party.

Result:  Makes contract voidable and makes wrongdoer liable to injured party for all losses that result

Elements of Fraud:

To prove a claim of fraud, a party must prove beyond a preponderance of the evidence:

  • A representation was false regarding some material element of the agreement
    1. Material Fact or Element = something crucial to terms of contract
  • That representation was made with knowledge that it was false
  • That representation was made with intent that it be relied upon by complaining party
  • That complaining party relied upon the representation
  • Demonstrate that complaining party suffered actual loss either by reliance or by contract

Active Fraud – One party to contract makes false statements intended to deceive

(Ex. A offers to sell B a stove; B agrees to price and accepts offer; A provides the stove in exchange for check which B knows is written on an account containing insufficient funds)

Puffing – Sales statements made to encourage purchase of a product (“best car on the market”) or

(“Excellent opportunity to make money”)

Passive Fraud – also called “concealment” or “nondisclosure” – one party does not say something about certain facts that he or she is under an obligation to reveal

“Must intend to deceive the other party and must do so”

Hidden Problems:  If product has hidden defect or problem which other party could not reasonably be expected to discover, offeror is obligated to reveal problem – IF problem involves some material fact opportunity to try it but elects not to – does seller have obligation to disclose?

Fiduciary Relationship:  Relationship based upon trust

Remedy for Active Fraud:  Rescission and money damages

            Rescission = Both parties are returned to their original positions before contract was entered into (refund, but no damages)

Punitive Damages:  N.C. Gen. Stat. § 1D-15.  Standards for recovery of punitive damages

  • Punitive damages may be awarded only if the claimant proves that the defendant is liable for compensatory damages and that one of the following aggravating factors was present and was related to the injury for which compensatory damages were awarded:
    1. Fraud
    2. Malice
    3. Willful wanton misconduct
  • The claimant must prove the existence of an aggravating factor by clear and convincing evidence.
  • Punitive damages shall not be awarded against a person solely on the basis of vicarious liability for the acts or omissions of another. Punitive damages may be awarded against a person only if that person participated in the conduct constituting the aggravating factor giving rise to the punitive damages, or if, in the case of a corporation, the officers, directors, or managers of the corporation participated in or condoned the conduct constituting the aggravating factor giving rise to punitive damages.
  • Punitive damages shall not be awarded against a person solely for breach of contract

Fraud, duress, mistake, condition of mind – In all averments of fraud, duress or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.  Malice, intent, knowledge, and other condition of mind or a person may be averred generally.

 Misrepresentation:  False statement made without intent to deceive

Makes agreement voidable and complaining party may demand rescission

If a party discovers after the fact that it made a false statement upon which the other party relied, the first party has a duty to disclose the misrepresentation (ex. A sells book to B as an autographed original then discovers that the book is a reprint and the autograph a forgery.  A must tell B immediately.  The book still has value, so the parties may simply re-negotiate the priced based upon the changed circumstance or the book may be returned and the money refunded.  If A does not tell and B later discovers the truth and learns of A’s subsequent knowledge, this becomes actionable as fraud.

Mistake:  Belief not in accord with facts (no true meeting of the minds = no true agreement, so rescission is appropriate remedy)

Unilateral Mistake: Only one party made mistake – not sufficient grounds for rescission or renegotiation

Bilateral Mistake: Both parties are mistaken = mutual mistake = rescission or renegotiation allowed by either offeror or offeree

Ex. A owns two industrial sites, one by airport, other out in the countryside; B makes bid believing he is making bid on the airport property, while A believes bid is for country site; contract entered into, the parties discover mistake – no meeting of the minds – so either party can rescind contract or parties can renegotiate the deal

Mistake as to Description: where both parties are mistaken in the identification and description of subject matter – rescission will be granted (ex. Cow sold as infertile, found to be pregnant, court held that rescission appropriate since fertility of cow went to the heart of price and therefore impacted material fact – also mistake as to value)

Mistake as to Existence: Proof that subject matter had been destroyed before the agreement was made give grounds for rescission

(Ex. Both parties agree to price for car only to learn that car was totaled in accident day before)

Mistake as to Value: Rescission will not be granted since value is matter of opinion (absent misrepresentation)

Mistake through failure to read document:  Rescission will not be granted unless the failure to read involves conditions printed on tickets and stubs (think ballpark or amusement park)

Mistake of Law:  Rescission may be granted when the mistake relates to law of another state.  This is interpreted as a mistake of fact. Some states have adopted statutes allowing rescission for mutual mistake of laws.

 

Duress and Undue Influence – Instances where person “robbed” of ability to make an independent decision to enter into a contract

Duress – Action by one party that forces another party to do what need not otherwise be done

Physical Duress – Violence or the threat of violence against individual, family, household or property; If threats only, then must be so intense and serious that a person of ordinary prudence would be forced into the contract without real consent

Emotional Duress – Acts or threats that would create emotional distress in one on whom they are inflicted; exposure to public ridicule, threatened attacks on one’s reputation, or efforts to prevent employment might constitute emotional distress

Economic Duress – (aka Business Compulsion) – Threats of a business nature that force another party without real consent to enter a commercial agreement:

To prove, must show all three elements:

  • The complaining party must first show that the other party was responsible for placing the complainant in a precarious economic situation and that the other party acted wrongfully in doing so;
  • The complainant must show that there was no alternative other than to submit to the wrongful contractual demands of the party; and
  • The innocent party must also show that he/she acted reasonably in entering the contract

If all three elements are proven, then the contract is voidable

 

Undue Influence – Dominant party in a confidential relationship uses excessive pressure to persuade weaker party to enter into a contract that greatly benefits the dominant party

 

To prove undue influence, party must establish confidential relationship between the parties

A “Confidential Relationship” involves trust and dependence between the parties

Subtle inducement or encouragement or persuasion is not sufficient to legally establish undue influence.