CHAPTER 13

1. CHAPTER 13 Voluntary Consent

2. Introduction • An agreement must be voluntary to be enforceable • Remedy • Voidable (Rescind or Disaffirm) • Unless ratify

3. Lack of Voluntary Consent • Knowing Misrepresentation • of a material fact • based on the circumstances • fact, not opinion, speculation or puffing • Morehouse v. Behlman-Pontiac, p. 222 • The court finds that a used car salesman’s representations about the condition of a minivan were material misrepresentations of fact. The court takes the modern approach of construing the statements in favor of the party with less knowledge. Bogosian was a veteran used-car salesman with more than forty-two years experience.

4. Lack of Voluntary Consent • Knowing Misrepresentation • of a material fact • Question 6 at end of chapter • Sperau v. Ford Motor Co. • An African-American businessman who was recruited by Ford to open a dealership is successful in his claim that race‑based figures regarding return on investment and losses, which were not revealed by Ford, were material facts. • Sperau sued for fraudulent misrepresentation in tort. However, the issues discussed would be the same whether in tort or contract. The court construes the statements in favor of the party with less knowledge.

5. Lack of Voluntary Consent • Knowing Misrepresentation • justifiably relied on • after reasonable investigation • Griesi v. Atlantic General Hospital, p.223 • The court finds that an applicant for a job justifiably relied on the statement of the acting CEO that he had been hired. • Griesi is not trying to get out of a contract due to misrepresentation (the usual case). He is suing for negligent misrepresentation. However, the issue of justifiable reliance is the same. Note that the fact that the representations were made by the head of the institution was important to the court’s decision regarding whether the reliance was justifiable. If the CEO can’t be relied on, who can? Since Griesi was being hired as an employee at will, he could not sue for the lack of a job, per se.

6. Lack of Voluntary Consent • Knowing Misrepresentation • to the detriment of the party relying (i.e. actual injury) • not an “honest mistake”

7. Fraud • Intentional Misrepresentation • “Knowingly Made” • Or should have known • Or Reckless • With Intent to Deceive- Scienter • Courts often infer • May include intent to conceal material fact(s)

8. Fraud • By Silence • Common law: Caveat Emptor • Modified by disclosure laws • Columbia v. Cottey, p.226 • 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. Cottey sued for fraudulent misrepresentation in tort. However, the issues discussed would be the same whether in tort or contract. Including Cottey’s other claims, he was awarded close to $500,000. Note that the hospital argued that Cottey ratified the contract by continuing to perform his duties even after he learned of the recission of the plan. However, the court looked to the intent of the parties and held that acts done in affirmance of the contract can amount to a waiver of the fraud only where they are done with full knowledge of the fraud and of all material facts, and with the intention, clearly manifested, of abiding by the contract and waiving all right to recover for the deception. Acts which, although in affirmance of the contract, do not indicate any intention to waive the fraud, cannot be held to operate as a waiver. Cottey continued to complain about the rescission of the plan. He did not ratify the fraud or waive his right to complain about it.

9. Fraud • By Silence • Question 5 at end of chapter • Stambovsky v. Ackley • The court, in a humorous opinion, finds that failure to disclose that a house is haunted when the seller has advertised that fact in the past, is sufficient for rescission. • The court found that, as a matter of law, the house was haunted. Courts normally require the disclosure of material facts. The court said, “no divination is required to conclude that it is defendant’s promotional efforts in publicizing her close encounters with these spirits which fostered the home’s reputation in the community.” Ackley clearly made money on his ghosts. The court stresses that buyers have a duty to inspect for usual problems. Defendant inserted an “as is” clause in the contract, but the court found that it applied only to tangible or physical matters and not to paranormal phenomena. The dissent in the case felt that if caveat emptor was to be discarded, it ought to be “for a reason more substantive than a poltergeist.”

10. Fraud • Hord v. Environmental Research Institute of Michigan, p.225 • An employee who is shown a misleading financial statement in order to induce him to work for the company is allowed to sue for fraud. • Hord sued both for fraudulent misrepresentation and “silent fraud” (the failure to disclose information). The jury awarded him $175,000 without indicating which theory it relied on. • Do you think Hord had a duty to ask for the latest financial information if he considered it crucial to his decision about whether to take the job? • Would it matter to the outcome if the company believed that the reversal in its fortunes was only temporary?

11. Fraud • In Execution - involves misstatements about the content or legal effect of something, usually in a preprinted contract. • Rely without reading = no claim for fraud • Unless prevented or discouraged from reading or • special trust relationship • Effect: prevents creation of a contract

12. Fraud • Remedy • Rescind • Affirm and sue in tort for deceit

13. Duress/Undue Influence • Involves interference with ability to resist entering into an agreement • At time of contract • Duress = Wrongful Threat (or Force) • Of physical harm(common law) • Of disastrous economic harm • Cross Talk Productions, Inc. v. Jacobson, p. 228 • Employees who reveal extortion payments they felt economically compelled to make are allowed to sue for economic distress when their contract is cancelled. • The court here viewed the facts “with a view to doing substantial justice between the parties.” • Defendant demurred to plaintiffs’ claims of economic duress, and intentional and negligent infliction of emotional distress because of the “unclean hands” defense, and was successful at the trial level. The appeals court finds that the defendant “instigated the misconduct and that the moral blame attributable to him far outweighs any attributable to plaintiffs.” Plaintiffs did not obtain the contract through bribery and they did not admit to commercial bribery since they had no intent to injure or defraud CBS.

14. Duress/Undue Influence • Economic Duress • Question 7 at end of chapter • No. Economic duress occurs when, due to a wrongful act, a party involuntarily accepts the terms of an agreement because the circumstances permit no other reasonable alternative. A person may not have a reasonable alternative when a delay caused by pursuing a legal remedy would cause immediate or irreparable serious loss or financial ruin. Defendant’s offering plaintiff a choice of resigning or being fired did not rise to such a level as to deprive Blubaugh of the exercise of free will. Blubaugh could have allowed defendant to fire him and then sought relief from the courts, or resigned and taken the severance pay to which he was entitled without signing the release. There is no evidence that walking away with $31,382 instead of $35,943 placed such an economic hardship on him as to obliterate his exercise of free will. There is no evidence he would face immediate financial ruin if he pursued a remedy in court instead of signing the agreement. The fact that he was upset is insufficient to invalidate the agreement; emotional distress is not equivalent to economic duress. The fact that he didn’t negotiate the agreement or seek counsel also does not amount to duress. What we apparently have here is someone who was initially satisfied with the settlement but who, upon subsequent reflection, concluded he could have gotten more out of the deal and attempted to renege on it. Blubaugh v. Turner, 842 P.2d 1072 (Sup. Ct. Wyo. 1992).

15. Duress/Undue Influence • Involves interference with ability to resist entering into an agreement • Of criminal prosecution • Not of well-found civil suit • Undue Influence • Based on confidential/special relationship • Question 8 at end of chapter. • Yes. Wyers was a widow with limited abilities who was strongly influenced by a young man who offered to help her and care for her. She was also on medication at the time of the mortgage signing. When United asked her if she understood what was happening, Gilreath hit her under the table and she nodded yes. He had earlier brandished a loaded gun and told her not to give him any trouble at the closing or answer any questions and to do what she was told. This is sufficient for undue influence. United Companies Financial Corp. v. Wyers, 518 So.2d 700 (Sup. Ct. Ala. 1988). • Effect: Voidable

16. Mistake • One or more parties acted upon a sincere but untrue belief about a material existing or past fact • Mutual = a basis for recission by either party • Unintentional ambiguous term • About subject matter • State of Alaska v. Carpenter, p. 169 • A man who bought land and borrowed money from the state in order develop a working farm is not allowed to use the doctrine of mistake when all attempts at farming failed. • Since the government was selling the land and making the loan to be used as farmland, is this something Carpenter was justified in relying on despite the disclaimers?

17. Mistake • Mutual = a basis for recission by either party • Question 9 at end of chapter. • No. Judicial relief from a contract on the basis of mutual mistake is proper where there was a mistake of both parties at the time of contracts as to a basic assumption on which the contract was made, the mistake had a material effect on the performance, and the party seeking relief did not bear the risk of the mistake. Where there is a conscious uncertainty, there is an assumption of the risk that the resolution of the uncertainty may be unfavorable. The detailed disclaimers in the contracts made Carpenter aware that there were uncertainties regarding the condition of the land. Although both parties may have intended for the land to be developed for agricultural purposes, they were uncertain that this was possible. Additionally, Carpenter contractually bore the risk of that uncertainty. He is not excused from his contractual obligations. State of Alaska v. Carpenter, 268 P.2d 1181 (Alaska Sup. Ct. 1994).

18. Mistake • Mutual = a basis for recission by either party • Question 10 at end of chapter • Yes. Mutual assent is a prerequisite to the creation of a contract. Where both parties share a common assumption about a vital fact on which they based their bargain, and that assumption is false, the transaction may be avoided if the mistake caused quite a different exchange of values than that contemplated by the parties. The parties shared a common presumption that proved false. Both considered the property to be cluttered with “junk” “stuff” and “trash”. Neither party suspected that Mestrovic works remained on the premises. The resultant gain to the Wilkins and loss to the bank were not contemplated by the parties when the bank agreed to let the Wilkins clean the premises and keep the personal property. There was no agreement for the disposition of the art because there was no meeting of the minds. Wilkins v. 1st Source Bank, 548 N.E. 2d 170 (Ct. App. Ind. 1990).

19. Mistake • Unilateral = not a basis for recission (Though courts sometimes grant anyway) • Lehrer v. State of Washington, p. 230 • A psychiatrist who agreed to resign from a hospital in return for the removal of personal conduct records from his files is not allowed to use the doctrine of mistake when the disciplinary board continued to pursue complaints levied against him.