Chapter 9

Mutual Assent and Defective Agreement

BUSINESS LAW/MUSOLINO

9-2

Learning Objectives

1. Explain the nature of mutual assent2. Identify the ways that mutual assent

can be destroyed3. List the elements that must be

proved to establish fraud4. Identify those situations that can

give rise to claims of passive fraud5. Distinguish between fraud and

misrepresentation, and contrast the remedies available for each

9-3

Learning Objectives

6. Discuss the difference between unilateral and bilateral mistakes

7. Judge which types of mistakes provide appropriate grounds for getting out of a contract

8. Explain the nature of physical and emotional duress

9. Explain the elements of economic duress

10. Explain how the existence of a confidential relationship is a key factor in establishing undue influence

9-4

Question?

__________ is when both parties know what the terms are, and both have willingly agreed to be bound by those terms?

A. Agreement

B. Mutual assent

C. Shared agreement

D. A firm offer

9-5

Mutual Assent

Mutual assent – both parties know what the terms are,

and both have willingly agreed to be bound by those terms

– “meeting of the minds.”

9-6

Mutual Assent

Destruction of Mutual AssentIf one party or the other discovers

that he or she has been cheated or finds out that a mutual mistake placed the party at a great disadvantage, that party is no longer bound to the terms of the agreement

Defective agreement

9-7

Question?

What is a wrongful statement, action, or concealment pertinent to the subject matter of a contract knowingly made to damage the other party?

A. Tort

B. Deception

C. Mutual acceptance

D. Fraud

9-8

Fraud and Misrepresentation

Fraud – a wrongful statement, action, or

concealment pertinent to the subject matter of a contract knowingly made to damage the other party

9-9

Types of Fraud

Fraud in the inception – occurs when one party tricks another

party into a contract by lying to the innocent party about the actual nature of the contract

Fraud in the inducement – occurs when one party tricks another

party into a contract by lying about the terms of the agreement to get the innocent party to enter the contract under false pretenses

9-10

Question?

Which type of fraud occurs when one party to a contract makes a false statement intended to deceive the other party?

A. Passive fraud

B. Active fraud

C. Submissive fraud

D. Dynamic fraud

9-11

Active Fraud

Active fraud – occurs when one party to a contract

makes a false statement intended to deceive the other party and thus leads that party into a deceptively based agreement.

9-12

Passive Fraud

Passive fraud – occurs when one party does not say

something about certain facts that he or she is under an obligation to reveal

– Also called concealment or nondisclosure

9-13

Fiduciary Relationships

Fiduciary relationship – a relationship based on trust. – Exist between attorneys and clients,

guardians and wards, trustees and beneficiaries, and boards of directors and corporations

9-14

Agreements Made Defective by Falsehood

9-15

Question?

What is a false statement made innocently with no intent to deceive?

A. Rescission

B. Recession

C. Misrepresentation

D. Representation

9-16

Misrepresentation

Misrepresentation – a false statement made innocently

with no intent to deceive

Rescission – both parties are returned to their

original positions, before they entered into the contract

9-17

Mistake

Unilateral mistake – A mistake made by only one of the

contracting parties is a and not offering sufficient grounds for rescission or renegotiation

Bilateral mistake – both parties are mistaken, and may

permit a rescission by either the offeror or the offeree

9-18

The Nature of Mistakes

Mistakes as to DescriptionMistakes as to ExistenceMistakes as to ValueMistakes Through Failure to Read

DocumentMistakes of Law

9-19

Agreements Made Defective by Mutual Mistake

9-20

Question?

What forces a person into a contract through the use of physical, emotional, or economic threats?

A. Stress

B. Eustress

C. Duress

D. Coercion

9-21

Duress and Undue Influence

Duress – an action by one party that forces

another party to do what need not otherwise be done

– forces a person into a contract through the use of physical, emotional, or economic threats

9-22

Question?

Which type of duress consists of threats of a business nature that force another party without real consent to enter a commercial agreement?

A. Physical duress

B. Emotional duress

C. Economic duress

D. Undue influence

9-23

Physical and Emotional Duress

Physical duress – involves either violence or the threat

of violence against an individual or against that person’s family, household, or property

Emotional duress – arises from acts or threats that would

create emotional distress in the one on whom they are inflicted

9-24

Economic Duress

Economic duress – consists of threats of a business

nature that force another party without real consent to enter a commercial agreement

– also known as business compulsion

9-25

Undue Influence

Undue influence – occurs when the dominant party in a

special relationship uses excessive pressure to convince the weaker party to enter a contract that greatly benefits the dominant party

9-26

Agreements Made Defective by Force or Pressure