Mattingly "AI & Prompt Design: The Basics of Prompt Design"
Chapter 13 – Reality of Consent
1. C H A P T E R
13
Reality of Consent
Necessity never made a good
bargain.
Benjamin Franklin, 1735
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2. Learning Objectives
• Explain five doctrines that permit
people to avoid their contracts
because of the absence of real
consent and identify elements:
– Misrepresentation
– Fraud
– Mistake
– Duress, and
– Undue influence
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3. Effect of The Five Doctrines
• Contracts induced by mistake, fraud,
misrepresentation, duress, or undue
influence are generally considered to
be voidable
– Person claiming non-consent has power
to rescind (cancel) the contract
– Person claiming non-consent must not act
in a manner to ratify (affirm) the contract
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4. Misrepresentation or Fraud?
• A misrepresentation is a false statement
and may be negligent (innocent) or
fraudulent (made with knowledge of
falsity and intent to deceive)
– Either way, injured party may void
(rescind) the contract
• A person who commits fraud may be
liable in tort for damages, including
punitive damages
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5. Elements
• Innocent or fraudulent misrepresentation:
– Defendant made an untrue assertion of fact
• Includes active concealment or non-
disclosure
– Fact asserted was material or was fraudulent
• Fact is material if likely to play significant role
in inducing reasonable person to enter the
contract
– Complaining party entered the contract
because of reliance on the assertion
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6. Elements (cont.)
• Reliance of
complainant was
reasonable
– Reliance means that
person entered the
contract because of
belief in the assertion
• Fifth element for fraud:
– Injury
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8. Timothy v. Keetch
• Facts:
– Defendants wanted to start a therapeutic
horse ranch as business venture, borrowed
$102,000 from MSF and pledged a stallion they
bought as collateral for the loan
• Financing statement filed in UCC database
– Plaintiffs agreed to loan Defendants money,
relying upon Defendants’ offer of the stallion as
loan collateral and statement of ownership
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9. Timothy v. Keetch
• Issue: Is it reasonable to rely on representation
that an asset is owned “free and clear” when
public record check would show otherwise
• Holding: plaintiff may justifiably rely on positive
assertions of fact without independent
Investigation since nothing in the transaction
suggested anything that would “serve as a
warning” that they were being deceived
– Affirmed in favor of plaintiffs
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10. Mistake in Contracts
• A mistake is a belief about a fact that
is not in accord with the truth
– Mistake must relate to facts as they
exist at the time the contract is created
– Mistake not due to other party’s
statements
• Mutual mistakes may be remedied by
reformation
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11. Mistake in Contracts
• A unilateral mistake will not render a
contract unenforceable unless unequal
bargaining position existed
– Sumerel v. Goodyear Tire & Rubber Company in
which plaintiffs attempted to exploit
defendants’ mathematical or clerical error
and failed
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12. Duress
• Duress is wrongful threat or
act that coerces a person
to enter or modify contract
– Physical, emotional, or
economic harm
• Given duress, victim must
have no reasonable
choice but to enter the
contract
– Cabot Corp. v AVX Corp.
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13. Cabot Corporation v.
AVX Corporation
• Facts:
– After long negotiation of a long-term supply
contract, parties disputed whether contract
was valid and binding (Cabot’s claim) or void
due to economic duress (AVX’s claim)
• The Law:
– To establish economic duress, party must show
he has been the victim of a wrongful or
unlawful act or threat, and such act or threat
must be one which deprives the victim of
unfettered will
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14. Cabot Corporation v.
AVX Corporation
• Law Applied to Facts:
– AVX and Cabot are sophisticated and
substantial commercial parties represented
by highly competent counsel
– Cabot was in stronger position than AVX, but
“hard bargaining is not unlawful”
– No evidence of coercion, but there is
evidence of AVX’s ratification
• Holding:
– Judgment affirmed in favor of Cabot
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15. Undue Influence
• Undue influence involves
wrongful pressure exerted
on a person during the
bargaining process
• Unlike duress, pressure is
exerted through persuasion
rather than coercion
• Key is the weakness of the
person “persuaded”
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17. Test Your Knowledge
• True=A, False = B
– A contract signed under duress or
undue influence is simply void.
– A misrepresentation may be negligent
(innocent) or fraudulent.
– Mutual mistakes may be remedied by
reformation
– Duress and undue influence have the
same meaning
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18. Test Your Knowledge
• Multiple Choice
– Elements of innocent misrepresentation:
a) False assertion
b) Knowingly made to induce a person
to enter a contract
c) Reasonable reliance on the assertion
by complainant
d) All of the above
e) Both (a) and (c), but not (b)
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19. Test Your Knowledge
• Multiple Choice
– A unilateral mistake will not render a
contract void unless:
a) Substantial difference between
contract and market price
b) Fundamental error occurred
c) An unequal bargaining position
existed
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20. Thought Question
• Your landlord tells you
that you will be evicted
from your apartment or
your rent must increase
by $50 per month
because your neighbors
complain about your
dog. If you agree to the
increase, would the
contract be void or
voidable under the
theory of duress?
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Editor's Notes
Cabot Corporation v. AVX Corporation is a case example of ratification.
Concealment example: if Summers offers his house for sale and paints the ceilings to conceal the fact that the roof leaks, his active concealment constitutes an assertion of fact Nondisclosure differs from concealment in that concealment involves the active hiding of a fact, while nondisclosure is the failure to volunteer information
Problem with justifiable reliance element is identifying the extent to which the relying party is responsible for investigating the accuracy of the statement on which he relies. Section 172 of the Restatement, which provides that a relying party’s failure to discover facts before entering the contract does not make his reliance unjustifiable unless his fault was too extreme. Most courts place a greater degree of accountability on the person who makes the assertion rather than the person who relies on the assertion.
The hyperlink is to the Circuit Court’s opinion on the Findlaw.com website. The photo is of a dun stallion (though a mustang rather than a Quarter Horse). The plaintiffs did some due diligence, checking status of ownership of the horse with the trainer and the American Quarter Horse Association, but did not check Uniform Commercial Code filings.
Hyperlink is to the Colorado Supreme Court’s opinion in pdf. Court: “In short, the record demonstrates that Brooks did not seek an agreement through conscious ignorance. Rather, the record shows that he sought further dialogue because he knew of the discrepancy in the parties’ calculations. In our view, plaintiffs’ efforts to exploit Goodyear’s obvious mathematical or clerical error, thereby obtaining a windfall of over $550,000, were clearly inequitable. For these reasons, we hold that even if Brooks’s November 2, 2006, e-mail and charts could be characterized as an offer and that offer was accepted, Goodyear may properly avoid the resulting agreement on the facts presented here.”
Reasonable Alternative Example: Barry, a traveling salesman, takes his car to Cheatum Motors for repair. Barry pays Cheatum the full amount previously agreed upon for the repair, but Cheatum refuses to return Barry’s car to him unless Barry agrees to pay substantially more than the contract price for the repairs. Because of his urgent need for the return of his car, Barry agrees to do this. In this case, Barry technically had the alternative of filing a legal action to recover his car. However, this would not be a reasonable alternative for someone who needs the car urgently because of the time, expense, and uncertainty involved in pursuing a lawsuit. Thus, Barry could avoid his agreement to pay more money under a theory of duress.
AVX Corporation manufactures capacitors for electronic products. Tantalum, an elemental metal as rare in nature as uranium, is used in the manufacture of AVX’s products. Cabot Corporation is a major supplier of tantalum powder and wire and supplied AVX with tantalum products for many years. During volatile market, AVX purchased tantalum from Cabot at preferable prices without entering binding, long-term contracts. In 2000, a shortage of tantalum developed and In August 2000, Cabot notified all of its customers that, in the future, it proposed to commit its limited production capacity to those customers who were prepared to enter into binding, long-term supply contracts. Between August and November 2000, Cabot and AVX negotiated the terms of a binding, long-term supply contract. Both parties were represented by highly competent legal counsel throughout the process. Cabot and AVX memorialized the terms of a basic agreement to a binding, five-year contract, under which AVX would purchase specified quantities of tantalum powder and wire at stated prices. The prices agreed to were no higher than the then-current market prices for tantalum products. Cabot agreed to AVX’s demand of “most favored customer” protection. In addition, the parties agreed that the agreement would supersede all prior agreements (including the letters of intent) and released each other from all claims arising under any prior agreements. In July 2002, more than 20 months after the supply contract was negotiated, and more than 18 months after it was signed, AVX filed an action against Cabot in federal court. AVX alleged that the 2000 letters of intent were binding contracts and that the supply contract was void because it had been executed by AVX under economic duress. This action was dismissed for lack of jurisdiction. Cabot then filed an action for a declaratory judgment, seeking a declaration that the supply contract was a valid and binding contract, and that the 2000 letters of intent were not binding contracts, and were, in any event, superseded by the supply contract. In its answer, AVX asserted economic duress with regard to the supply contract, and filed various counterclaims. Cabot filed a motion for partial summary judgment, which the trial court granted. AVX appealed.
Court: “Even if we were to conclude that material facts regarding the existence of economic duress remain in dispute, Cabot nonetheless would be entitled to summary judgment because AVX ratified the contract by its actions. A contract that is voidable for duress may be ratified and affirmed. A party must complain promptly of coercive acts that allegedly forced it into the contract or the defense of duress is waived, and the contract ratified. The requirement that the party claiming duress disclaim the contract or release about which he is complaining promptly or be held to have forfeited his right to do so protects the stability and reliability of such agreements by denying the weaker party the “heads I win, tails you lose” option of waiting to see how the arrangement works out and then deciding whether to seek to undo it…. The supply agreement was executed in January 2001, and the first time AVX asserted duress was in July 2002. This lengthy period of silence is powerful (if not conclusive) evidence of ratification.” Lesson : If you’re going to complain about something, get to court and resolve the situation or forget it and move on!
Undue influence is common in familial relationships with regard to wills and trusts.
False. The contract is voidable at the option of the person pressured. True. True. False. Unlike duress, pressure is exerted through persuasion rather than coercion .
The correct answer is (e). If the assertion was knowingly made, the misrepresentation would be fraudulent rather than innocent.
The correct answer is (c).
Good question since the answer may vary from state to state. Also, it might depend on whether the landlord knew about the dog and required a security deposit at the lease beginning. Most states, however, would hold that you have reasonable alternatives, thus duress has not occurred. Of course, this raises the issue of policy and lawmaking since laws in some states protect commercial interests (e.g., landlords) more than consumer interests (e.g., tenants).
