Contract Law—Reality of Consent

1. Contract Law—Reality of Consent • Several related concepts causing contracts to be “voidable” • Each provides a defense to a breach of contract suit • The rationale for each is that, despite the objective appearance of an agreement, there was a lack of completely voluntary consent by one party. • Contracts induced by fraud, innocent misrepresentation, mistake about basic facts, duress, undue influence (this one is rare)

2. Fraud & Innocent Misrepresentation • Misrepresentation of “fact” • What is Not a fact? • (1) • (2) • (3) • (4) • Ways to make a misrepresentation? • (1) • (2) • (3) • (4)

3. Misrepresentation, cont. • Intent to deceive (“scienter”) • How to prove it • (1) • (2) • What difference does it make? • (1) • (2) • Reliance • Ex. of when there’s no reliance • What about a victim who wasn’t sufficiently vigilant? Deceit_______________Negligence

4. Misrepresentation, cont. • Sarvis v. Vermont State College, p. 358 • Facts • Compare these facts to each requirement for proving fraud. How does it come out? • Conclusion & rationale? • In this case, did it matter whether scienter was proved by the college?

5. Misrepresentation, cont. • Darst v. Illinois Farmers Insurance Co., Ind. Ct. App., 1999 While driving, Bert Sloan was rear-ended by Weger. Sloan was insured by Illinois Farmer’s Ins. Co., & Weger by Sagamore Ins. Co. Sloan had several conversations with Kelly, the adjuster for Weger’s ins. co. (Sagamore). In one phone conversation, Kelly asked Sloan what he though would be a fair settlement for his personal injuries. Poor stupid Sloan said that $15K would “take care of him and anything that would pop up later on.” Kelly said that $4K was the most he could offer. Sloan said he would discuss with his wife Lavonna and call Kelly back. Sloan did, & his wife told him to see an attorney. Sloan didn’t do that, but then spoke with a rep. from his own ins. co. (Ill. Farmer’s), who told him that it wouldn’t do any good to talk to an attorney, because the atty. would get a cut & Sloan wouldn’t end up with any more $$ in his pocket. Then, Sloan asked his ins. co. rep. if he thought that the $4K offer was a fair settlement, and the rep. said yes. Sloan then accepted the $4K offer from Weger’s ins. co. as a settlement of all claims for personal injuries, including any that might manifest themselves later (as injuries from accidents sometimes do, or sometimes injuries later turn out to be worse than first thought by the physicians). Sloan’s injuries did turn out to be a lot worse. He & his wife went bankrupt, & the trustee for the bankruptcy estate (Darst) sued Ill. Farmers for fraud (Sloan’s release of Weger & Sagamore had the effect of relieving Sloan’s own ins. co. (Ill. Farmers) from liability on its uninsured/underinsured coverage of Sloan. Was there either fraud or innocent misrepresentation?

6. Misrepresentation, cont. • Steinberg v. Chicago Medical School, Ill. Sup. Ct., 1977 The Chicago Medical School’s (CMS) bulletin (i.e., its catalog) stated that applicants would be selected “on the basis of academic achievement, Medical College Admission Test (MCAT) results, personal appraisals by a pre-professional advisory committee or individual instructors, and the personal interview, if requested by the committee on Admissions.” In response to this bulletin, Steinberg sent his application (& complied with all application requirements) and non-refundable application fee. (Steinberg thus made an offer.) CMS accepted his application & fee. (Contract—what were the contractual obligations?) Steinberg was denied admission. Because of his qualifications, he was very suspicious-he got a lawyer & sued. The evidence showed that, over a period of years, CMS had accepted applicants more on the basis of how much money they and their families had donated than on objective qualifications—actually, much more on the basis of $$ than qualifications. The trial judge dismissed the claim because CMS had merely made a promise about how they would evaluate applicants, not a misrepresentation of existing fact. Thus, the trial court held, there could have been a breach of contract, but not fraud and its much greater damage award possibilities (punitive damages, particularly) than breach of contract. Steinberg appealed. Conclusion & rationale? [Note: Was Steinberg seeking rescission of the contract or was he suing for the tort of fraud?]

7. Misrepresentation, cont. • Cousineau v. Walker, Alaska Sup. Ct., 1980 Devin & Joan Walker owned approx. 9 acres of land in Eagle River, Alaska. One yr. after acquiring it, they put it up for sale through a realtor. Their description of the property, which was in the advertised listing, stated that the property had 580 feet of highway frontage and further stated that an engineer’s report revealed the property as having over 1 million cubic yards of gravel (pretty valuable stuff). After this listing agreement w/the realtor expired, the signed another one restating the 580 ft. of frontage, but stated that the land had a minimum of 80,000 cubic yds. of gravel. They had gotten the original info. about the engineer’s report of 1 million cu. yds. from the people they had bought it from, but they had never seen the report. The evidence didn’t show why they then changed it to 80,000 cu. yds. Cousineau was a building contractor who was also in the gravel extraction business. He was interested in the property, and investigated the amt. of frontage road. He tried to measure it but there was a lot of snow on the property & he couldn’t find any stakes. An appraiser hired by Cousineau also couldn’t find any stakes at the time. Cousineau contracted to buy the property for $380K, and started digging for gravel. The gravel ran out when he had removed only 6,000 cubic yards. A subsequent survey showed that the actual road frontage was 410 ft., not 580 ft. He sued the Walkers to rescind the contract and get back his $380K minus the value of the gravel he had extracted. The trial court held for the Walkers because Cousineau had made very inadequate efforts before buying to determine the road frontage or to get a reasonable estimate of the actual amount of gravel (such as by core samples). Cousineau appealed. Result?

8. Misrepresentation, cont. • When silence (nondisclosure) can be fraud • Latent . . . • Fiduciary • Superior . . . . (objective, not subjective) • Change in the facts after statement & bef. contract

9. Misrepresentation, cont. • Stambovsky v. Ackley, p. 362 • Facts • Court viewed these facts as showing • Nondisclosure of a material fact by someone with superior knowledge, and • Nondisclosure of a material fact that amounted to a “latent defect” in the real estate. • Duty to disclose by one with “superior knowledge” normally doesn’t apply to someone like the homeowner; the real estate agent, perhaps, but not the owner. But, the court seemed to treat the claim against both the owner and the realtor the same way. • Also, this is really stretching the idea of a latent defect. • What the law is in most states re ghosts, axe murders, etc.

10. Mistake of Fact • Again, “fact” & “material” • Mistakes about value? • Mistakes about law? • Mutual (book says “bilateral”) vs. Unilateral Mistakes • General rule regarding unilateral mistakes? • Exceptions—when a unilaterally mistaken party may be able to rescind a contract. • Non-mistaken party knew . . . • Example • Or should have known . . . • Example • Some courts have become more lenient in recent years, when performance hasn’t begun & other party won’t be hurt.

11. Mistake, cont. • Beachcomber Coins v. Boskett, Superior Ct. of NJ, 1979 • Facts • Conclusion & rationale • Why did the trial court dismiss Boskett’s attempt to rescind the contract & get his money back from the seller? • Why did the app. ct. reverse? • In what types of situations would the trial court’s decision about assumption of risk have been correct?

12. Mistake, cont. • Bank One v. Beckey, TX. Dist. Ct., 1996 Beckey made a deposit of $2,140.45 in Bank One, here in Austin. An employee of the Bank mistakenly inserted an extra zero when crediting her account, thereby making the deposit $21,040.45, a total of $18,900 more than it should have been. Only later did the Bank learn of its clerical mistake. The Bank asked Beckey for the money back. She refused. The Bank sued, claiming the right to rescind the transaction on grounds of unilateral mistake. Conclusion & rationale?

13. Mistake, cont. • Irmen v. Wrzesinski, Illi. Sm. Cl. Ct., 1990 In his second or third day in the baseball card business, Irmen was swamped with customers and asked a woman from the shop next door to help him. Twelve-year-old Brian Wrzesinski, owner of 40,000 baseball cards that he had collected over a period of several years, walked into the store and noticed a 1968 Nolan Ryan rookie card on display in mint condition. The card carried a price sticker of “$1200/.” Brian asked the substitute clerk if the price was $12. She said “yes,” and he bought it. However, the sticker was supposed to indicate a price of twelve hundred dollars, the card’s approximate market value. When Irmen discovered the sale, he tried to get the card back. Brian refused to return it. Irmen sued to rescind the sale on grounds of mistake, get the card back, & give Brian his $12 back. Conclusion & rationale?

14. Mistake, cont. • Konic Inter’l v. Spokane Computer Serv., Id Ct. App., 1985 David Young, an employee of Spokane Computer Services (SCS), was instructed by his employer to investigate the possibility of purchasing a piece of electrical equipment. Young's investigation turned up several units priced from $ 50 to $ 200, none of which, however, were appropriate for his employer's needs. Young then contacted Konic. After discussing SCS’s needs with a Konic engineer, Young was referred to one of Konic's salesmen. Later, after deciding on a certain unit, Young inquired as to the price of the selected item. The salesman responded, "fifty-six twenty." The salesman meant $ 5,620. Young thought he meant $ 56.20, ordered the item, & Konic shipped it to SCS, where it was installed. SCS’s president was out of the country when the item was shipped to SCS & installed; upon his return one day after the shipment & installation, he immediately recognized that the item was of a much higher level than SCS needed, and was far more expensive than SCS could afford. SCS received an invoice for $5,620. SCS’s president offered to return the item to Konic—it could be uninstalled & returned without damaging it. Konic said no & demanded payment. SCS refused to pay & Konig sued for breach of contract. Should SPS be able to rescind the contract?

15. Mistake, cont. • Wilkin v. First Source Bank, Ind. Ct. App., 1990 Olga Mestrovic, the widow of internationally known sculptor & artist Ivan Mestrovic, owned a large number of works of art created by her deceased husband. Olga died, leaving a will in which she directed that all the works of art by her husband were to be sold & the proceeds distributed to surviving family members. She also owned a large old home, which was also to be sold. First Source Bank (FSB) was the executor of her estate, and contracted to sell the home to Mr. & Mrs. Wilkin. Before the contract was made, there were many discussions between the Wilkins & bank representatives about the many items that remained in the house. They agreed that, in addition to the house, the Wilkins would buy a number of items of furniture, appliances, etc. for a certain price. In their discussions, everything else was referred to by both parties as “junk, rubbish, etc.”, of which there apparently was a lot. After taking possession of the house, the Wilkins complained to the bank about all of the “junk” in the attic. The bank rep. gave them 2 choices: The bank would either hire a rubbish removal service to clean the attic, or the Wilkins could do it themselves & keep anything they wanted from the attic. The Wilkins chose the latter, and when they cleaned out the attic, they found several very valuable works of art hidden under and behind the junk. In the probate of Olga Mestrovic’s estate, the Wilkins claimed ownership of the art under their contract with the bank. Conclusion & rationale?

16. Duress • Traditional Duress • Economic Duress: • Totem Marine v. Alyeska Pipeline, Alaska Sup. Ct., 1978 • Facts • Conclusion & rationale? • How did these facts meet the requirements of economic duress? • (1) • (2) • (3) • Could the court have reached the same result using a different rationale?

17. Duress • Hall v. Ochs, U.S. Ct. of App., 1st Cir., 1987 Hall, a black man, drove to pick up his daughter who had spent the night at a friend’s house after the two girls had competed together at a track meet. It was a sleepy Sunday morning in Milton, Mass., an all-white suburb south of Boston. A suspicious neighbor (and obviously a bigoted moron) called the police, who arrived, prevented the Halls from getting into their car, and arrested Mr. Hall. Obviously, bigoted moron police officers, too. The officers took Hall to the police station where they started to realize that there might be a small problem with the arrest since Hall had done absolutely nothing wrong. An officer told Hall that he could leave immediately if he signed a release promising not to sue the police, but that he would be held for a bail hearing if he refused. He signed & was released. Then he sued in federal court for a violation of civil rights laws and for the tort of false imprisonment. The City of Milton and the police officers raised the release as a defense. Was Hall legally bound by the contract of release? Conclusion, rationale, and result?