IN COLLABORATION WITH

SOUTHERN NEW HAMPSHIRE UNIVERSITY

____________________________________________
BUSINESS LAW [BUS 206]

LECTURE 10
LAW OF CONTRACTS [3A]

MISTAKE

Understanding not in accord with existing fact

UNILATERAL MISTAKE

A mistake by only one of the parties

Mistake as to a fact does not affect the contract when the mistake is unknown to the
other contracting party Truck South Inc. V. Patel (2000)

Party making the mistake may avoid the contract if the other contracting party
knew or should have known of the mistake

MUTUAL MISTAKE

Both parties enter into a contract under mutually mistaken understanding

assumption of either fact or law contract voidable by the adversely affected party
if mistake has material effect on the agreed exchange Browning V. Howerton
(1998)

However mutual mistake in judgment contract not voidable by the adversely

affected party

ASSUMPTION OF RISK

A party may assume the risk of a mistake

EFFECT OF FAULT UPON MISTAKE

Not a bar to avoidance unless the fault amounts to a failure to act in good faith

DECEPTION / PRESSURE / UNDUE INFLUENCE

/ INTENTIONAL MISREPRESENTATION
DECEPTION

Parties may have been misled by fraudulent statement

No true or genuine assent to the contract voidable at the innocent partys option

PRESSURE

Agreement may not in fact be voluntary as the result of undue influence or physical
or economic duress

UNDUE INFLUENCE

Influence that is asserted upon another person by one who dominates that person
One person is helpless in the hands of the other
Essential element - Not exercising free will in making a contract merely following
the will of the other person
Contract voidable may be set aside by the dominated person unless the
dominating person can prove that at the time the contract was made, no unfair
advantage had been taken
Difficult question for courts / juries to determine

INTENTIONAL MISREPRESENTATION

A party is induced into making a contract by a material misrepresentation of fact

Adversely affects the genuineness of the assent of the innocent party

FRAUD
FRAUD

Making of a false statement of fact with [1] knowledge of its falsity or reckless indifference to its
truth, [2] the intent that the listener rely on it, [3] the result that the listener does so rely, and [4]
the consequence that the listener is harmed Maack V. Resource Design & Construction, Inc
(1994)
Existence of material misrepresentation of fact required to prove fraud

[a] Statement of opinion or value

Not regarded as fraudulent

Theory the person hearing the statement recognises or should recognise that it is merely the
speakers personal opinion, not a statement of fact
However a statement of opinion may be fraudulent when the speaker knows of past or present
facts that make the opinion false

[b] Reliance on statement

Fraudulent statement made by one party has no importance unless the other party relies on the
statements truth
If the alleged victim of the fraud knew that the statements were false because the truth was
commonly known the victim cannot rely on the false statements.
When the statements of a seller are so indefinite and extravagant that reasonable persons
would not rely on them the statements cannot be the basis of a claim of fraud Eckert V. Flair
Agency, Inc (1995)

[c] Proof of harm

Required to recover damages for fraud

May recover actual losses suffered as well as punitive damages when the fraud is gross or
oppressive.
Injured party has the right to have the contract rescinded Paden V. Murray (2000)

NEGLIGENT MISREPRESENTATION / NONDISCLOSURE

NEGLIGENT MISREPRESENTATION

A negligently made false statement

The speaker failed to exercise due care regarding material information communicated to the listener- no intention
to deceive
If listener relies on the material fact and results in harm contract voidable at the option of the injured party

NONDISCLOSURE

Makes a contract voidable

[a] General Rule of Nonliability

Ordinarily party to a contract has no duty to volunteer information to the other party
Consequently nondisclosure of information that is not asked for does not impose fraud liability or impair the
validity of a contract

[b] Exceptions
[1] Unknown Defect or Condition

Defendant who had no knowledge of the defect cannot be held liable for failure to disclose it Nesbitt V. Dunn
(1996)

[2] Confidential Relationship

Relationship in which, because of the legal status of the parties or their respective physical or mental conditions
or knowledge, one party places full confidence and trust in the other
Failure to disclose information may be regarded as fraudulent
E.g. Attorney-client relationship attorney has a duty to reveal anything that is material to the clients interest
when dealing with the client
Attorneys silence has same legal consequence as a knowingly made false statement i.e. there was no
material fact to be told to the client

[3] Active Concealment

Positive act of hiding information from the other party by physical concealment or knowingly or recklessly

DURESS
DURESS

Conduct that deprives the victim of free will and that generally gives the victim the
right to set aside any transaction entered into under such circumstances
A party may enter into a contract to avoid a threatened danger
Danger threatened may be physical harm to a person or property - physical duress
Or economic duress threat of financial loss

[a] Physical Duress

Person deprived of free will and makes the contract to avoid harm
Threat may be directed either at a near relative of the contracting party or against the
contracting party
Agreement voidable at the victims election

[b] Economic Duress

Condition in which one is induced by a wrongful act or threat of another to make a

contract under circumstances that deprive one of the exercise of his own free will
Hurd V. Wildman, Harrold, Allen, and Dixon (1999)

CASE STUDY
QUESTION 1
Wolf, a used car salesman told Chimpy, This BMW had but one
owner, a retired teacher who kept it in mint condition, when in fact
the auto had several owners, the last of which was an auto salvage
company that rebuilt the car after a serious accident. Discuss Wolfs
statement.

QUESTION 2
Warren wanted to sell his house, he covered the wooden cellar beams
with plywood to hide extensive termite damage. He sold the house to
Buffet, who sued Warren for damages on later discovering the termite
damage. Discuss