Defective Agreements
by
Charles Lamson
Fraud
One who intends to and does induce another to enter into a contract as a result of an intentionally or recklessly false statement of a material fact commits fraud. The courts recognize two kinds of fraud relating to contracts. These are fraud in the inducement and fraud in the execution.
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Fraud in the Inducement
When the party defrauded intended to make the contract, fraud in the inducement occurs. Fraud in the inducement involves a false statement regarding the terms or obligations of the transaction between the parties and not the nature of the document signed. The false statement might relate to the terms of agreement, the quality of the goods sold, or the seller’s intention to deliver goods. A contract so induced is voidable.
Fraud in the Execution
The defrauded party might also be tricked into signing a contract under circumstances in which the nature of the writing could not be understood. The law calls this fraud in the execution or fraud in the factum. In this case, the victim unknowingly signs a contract. A person who cannot read or cannot read the language in which the contract is written could be a victim of this type of fraud. When fraud in the execution occurs, the contract is void.
Fraud also may be classified according to whether a party engages in some activity that causes the fraud or does nothing. A party who actually does something or takes steps to cause a fraud commits active fraud. Sometimes a party may be guilty of fraud without engaging in any activity at all. Passive fraud results from the failure to disclose information when there is a duty to do so.
Active Fraud
Active fraud may occur either by express misrepresentation or by concealment of material facts.
Express Misrepresentation. Fraud as a result of express misrepresentation, consists of four elements, each of which must be present to constitute fraud:
If these four elements are present, a party who has been harmed is entitled to release in court.
Concealment of Material Facts. If one actively conceals material facts for the purpose of preventing the other contracting party from discovering them, such concealment results in fraud even without false statement.
Merely refraining from disclosing pertinent facts unknown to the other party is not fraud in some states. In those states there must be an active concealment. However, in other states refraining from disclosing relevant facts does constitute fraud.
Passive Fraud
If one's relationship with another relies on trust and confidence, then silence may constitute passive fraud. Such a relationship exists between partners in a business firm, an agent and principal, a lawyer and client, a guardian and ward, a physician and patient, and in many other trust relationships. In the case of an attorney-client relationship, for example, the attorney has a duty to reveal anything material to the client's interests, and silence has the same effect as making a false statement that there was no material fact to be told to the client. The client could, in such a case, avoid the contract.
Silence, when one has no duty to speak, is not fraud. Is Lawrence offers to sell Marconi, a diamond merchant, a gem for $500 that is actually worth $15,000; Marconi's superior knowledge of value does not, in itself, impose a duty to speak.
Innocent Misrepresentation
When a contract is being negotiated, one party could easily make a statement believing it to be true when it is in fact false. Such a statement, made in the belief that it is true, it's called an innocent misrepresentation. Courts generally hold that if it was reasonable for the mislead party to you have relied on the innocent misrepresentation, the contract is voidable.
Statements of Opinion
Statements of opinion, as contrasted with statements of fact, do not, as a rule, constitute fraud. The person hearing the statement realizes or ought to realize that the other party is merely stating a view and not a fact. When the speaker is an expert or has special knowledge not available to the other party and should realize that the other party relies on this expert opinion, then a misstatement of opinion or value, intentionally made, would amount to fraud.
Such expressions as "This is the best buy in town," "The price of the stock will double in the next 12 months," "This business will net you $25,000 a year" are all statements of opinion, not statements of fact. However, the statement "This business has netted the owner $25,000" is not an opinion or a prophecy, but a historical fact.
Duress
For a contract to be valid, all parties must enter into it of their own free wills. The rest is a means of destroying another's free will by one party obtaining consent to a contract as a result of a wrongful threat to do the other person or family members some harm. Duress causes a person to agree to a contract he or she would not otherwise agree to. Normally, to constitute duress, the threat must be made by the other party and must be illegal or wrongful. A contract made because of duress is voidable. 
Duress is classified according to the nature of the threat as physical, emotional, or economic.
Physical Duress
When one party makes a threat of violence to another person who then agrees to a contract to avoid injury, physical duress occurs. Holding a gun to another's head or threatening to beat a person clearly risks injury to a human being and is unlawful.
Emotional Duress
Emotional duress occurs when one party's threats of something less than physical violence results in such psychological pressure that the victim does not act under free will. Courts will consider the age and health of the victim in determining whether emotional duress occurred.
Economic Duress
When one party wrongly threatens to injure another person financially in order to get agreement to a contract, economic duress occurs. However, duress does not exist when a person agrees to a contract merely because of difficult financial circumstances that are not the fault of the other party. Also, duress does not exist when a person drives a hard bargain and takes advantage of the other person's urgent need to make the contract.
Undue Influence
One person may exercise such influence over the mind of another that the latter does not exercise free will. Although there is no force or threat of harm (which would be duress), a contract between two such people is nevertheless regarded as voidable. If a party in a confidential or fiduciary relationship to another induces the execution of a contract against the other person's free will, the agreement is voidable because of undue influence. If, under any relationship, one is in a position to take undue advantage of another, undue influence may render the contract voidable. Relationships that may result in undue influence are family relationships, a guardian and ward, an attorney and client, a physician and patient, and any other relationship where confidence reposed on one side results in domination by the other. Undue influence may result from sickness, infirmity, or serious distress.
In undue influence there are no threats to harm the person or property of another as in duress. The relationship of the two parties must be such that one relies on the other so much that he or she yields because it is not possible to hold out against the superior position, intelligence, or personality of the party. Whether undue influence exists is a question for the court (usually the jury) to determine. Not every influence is regarded as undue; for example, a nagging spouse is ordinarily not regarded as exercising undue influence. In addition, persuasion and argument are not per se undue influence. The key element is that the dominated party is helpless in the hands of the other.
Remedies for Breach of Contract Because of Fraud, Duress, or Undue Influence
Since some mistakes, such as fraud in the inducement, duress, and undue influence, render contracts voidable, not void, you must know what to do if you are a victim of one of these acts. If you do nothing, you're right to avoid the contracts provisions may be lost. Furthermore, you may ratify the contract by some act or word indicating an intention to be bound. After you affirm or ratify the contract, you are as fully bound by it as if there had been no mistake, fraud, duress, or undue influence. But still you may sue for whatever damages you have sustained.
If the contract is voidable, you might elect to rescind it or set it aside. Rescission seeks to put the parties in the position they were in before the contract was made. In order to rescind, you must first return or offer to return what you received under the contract. After this is done, you are in a position to take one of four actions depending upon the circumstances:
In no case can the wrongdoer set the contract aside and thus profit from the wrong. If the agreement is void, neither party may enforce it; no special act is required for setting the agreement aside.
INTERNET RESOURCES FOR BUSINESS LAW
*SOURCE: LAW FOR BUSINESS, 15TH ED. 2005, JANET E. ASHCROFT, J.D., PGS. 93-101*
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