Business Law: Consent and Contract Enforceability

Introduction

Individuals operating in the modern business environment must be able to form a contract by taking a rigidly schematic approach to rights, duties, and privileges of all the parties involved. Those entering the world of business should also know how to evaluate the enforceability of a legally binding agreement and to defend it in court. It is of paramount importance for any businessperson willing to bring forward a motion to render a contract voidable or to avoid such a motion (Davies, 2016; Miller & Cross, 2012).

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To make sound business decisions regarding contracts, anyone contemplating a career in business should be intimately familiar with laws governing the legal relationship between parties to a contract, as well as decisions of courts in the context of contract enforceability.

Mistakes, fraudulent representation, duress, and undue influence among others may render a seemingly legal contract voidable (McKendrick, 2014). Entrepreneurs operating in today’s business environment should know key defenses that can void a contract and practical implications of cases in which the existence of a legally binding agreement has been challenged in court. This paper aims to discuss a lack of voluntary consent as a key defense to contract enforceability. The paper will also provide a historical analysis of the topic and outline cases that are integral to it.

Valid Contract

For a contract to be valid, it has to include the following elements: offer, acceptance, intention to create legal relations, and consideration (McKendrick, 2014). An offer constitutes a promise expressed by the offeror, either orally or in writing, to enter into a legal relationship with the offeree after the latter express their acceptance of the terms and conditions of a contract. The validity of a contract hinges on the acceptance of the offer.

A lack of acceptance signifies the continuation of negotiation or discussion, which precludes the two parties from entering into a contract. Thus, acceptance is “an unequivocal expression of consent to the proposal contained in the offer and has the effect of immediately binding both parties to the contract” (Chen-Wishart, 2015, p. 63). Consideration is another element of a contract that refers to anything of value that will be exchanged between the promisee and the promisor. In addition to mutual consideration, a valid contract must include an intention to create legal relations (Chen-Wishart, 2015). If this element is missing a contract cannot be considered legally binding.

Voluntary Consent

Good faith is not recognized under contract law; therefore, the parties to a contract are not obliged to disclose all relevant information to each other during negotiations preceding the initiation of the legal relationship. Nonetheless, the parties are liable for making false claims to obtain consent to a contract. It follows that the party who can prove that the agreement was not reached voluntarily can rescind the transaction. The following defenses to contract enforceability are based on a lack of voluntary consent: mistake, fraudulent misrepresentation, undue influence, and duress (Miller, 2013).

Mistakes

The defendant in a contract breach lawsuit can be excused from fulfilling their contractual obligations if they can prove that a mistake of fact occurred. Mistakes of value, on the other hand, cannot make a contract voidable. Mistakes of fact fall into two categories: unilateral and mutual (Chen-Wishart, 2015). Whereas a unilateral mistake transpires when a single contracting party is mistaken as to a material fact, a mutual mistake occurs when the two contracting parties make an inadvertent mistake. In the first case, the contract is considered enforceable, unless a mathematical mistake occurred without extreme negligence (Miller, 2013).

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Fraudulent Misrepresentation

The presence of a fraudulent inducement voids a contract ab initio (Miller, 2013). If the party subjected to a fraud proves in court that they were intentionally misled by the other contract party, they can seek damages. The concept of fraudulent misrepresentation presupposes the presence of the following elements: “misrepresentation of a material fact, an intent to deceive, and a justifiable reliance on the misrepresentation” (Miller, 2013, p. 180).

It has to be borne in mind that predictions and expressions of opinions cannot be regarded as evidence of fraudulent intents. The party to a contract is obliged to exercise discretion and not rely on opinions that unlike facts, which can be verified, are subject to debate (Chen-Wishart, 2015). Several types of misrepresentation can render the contracting party liable for a fraud: misrepresentation by conduct, misrepresentation of law, and misrepresentation by silence (Chen-Wishart, 2015). Ordinarily, misrepresentation by conduct occurs when there is a deceitful denial of knowledge pertaining to a contract.

In order to prove the presence of a fraudulent inducement, the defendant in a contract breach lawsuit has to demonstrate that scienter or intent to deceive was present during contract negotiations (Chen-Wishart, 2015). The element is met if the party makes a reckless statement without regard to its truthfulness or knows for a fact that the statement is false. Scienter is also present if the party implies that “a statement is made on some basis, such as personal knowledge or personal investigation, when it is not” (Miller, 2013, p. 181).

Another element of fraud is reliance on misrepresentation, which must be justifiable to be used in defense to contract enforceability (Chen-Wishart, 2015). The allegedly deceived party cannot claim that they relied on the misrepresentation in the case of explicitly extravagant information. Injury to the party is also grounds for rescinding a contract.

Undue Influence

To recover damages from a void contract, the party has to show that the agreement was reached under undue influence. An action based on this element falls into the category of a defense to contract enforceability based on a lack of voluntary consent (Miller, 2013). Contract law recognizes several types of undue influence: confidential relationship, fiduciary relationship, and the influence of a guardian (Chen-Wishart, 2015). A guardian can induce the party to enter into a contract that benefits only them. The examples of domineering relationships that can constitute undue influence with respect to contract negotiations include, but are not limited to, “attorney-client, physician-patient, parent-child, husband-wife, and trustee-beneficiary” (Miller, 2013, p. 182).

Not unlike undue influence, duress prevents the party from a contract from exercising their free will. In contract law, duress refers to blackmail, extortion, and threats (Chen-Wishart, 2015). However, to notify the contracting party of the intention to exercise a legal right cannot constitute duress. It has to be borne in mind that the economic need of a person entering a contract is not considered duress unless it is created by the other party.

History

Contract law is a relatively recent concept that has been independently created by several civil law countries. American contract law is fundamentally based on the English property law developed in the late eighteenth and early nineteenth centuries (Bix & Bix, 2012). English judges of the nineteenth century realized that enforceability of a contract is not grounded in the inherent justice but rather stems from the convergence of minds of the parties entering into legal relationships (Bix & Bix, 2012).

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The whole conceptual body of contract law was developed when the market economy necessitated the recognition of the fact that goods do not have an intrinsic value. According to Osinger (2015), “pre-modern contract law was the legal framework that developed to deal with the new economy by adopting the law of immovable real property to movable chattels” (p. 3).

Pre-modern contract law in America developed along two distinct trajectories: promises aimed at facilitating trade and promises aimed at stabilizing the trading relationship (Osinger, 2015). The evolution of contract law to its modern form was propelled by the necessity to trade promises. The value of promise underlying a contractual agreement is directly proportional to its enforceability. Thus, proper enforcement mechanisms had to be created to ensure that businesspersons and governments did not circumvent their obligations. The emergence of government securities markets in America further transformed contract law (Bix & Bix, 2012).

Modern contract law substituted its legal predecessor when enforceability of promises was in full sway. The law stipulates specific rights and duties of individuals entering into a contract, how those rights are assigned, who is eligible to what when a breach of contract occurs, and how a contract is enforced (Osinger, 2015). The most important feature of the modern contractual paradigm is the standardization of the rights and obligations of the contract parties, which allows them to understand the consequences of their legal relationship.

Legal Cases

Misrepresentation

Esso Petroleum v. Mardon is an example of a misrepresentation based on a misstatement of a fact. An employee of Esso informed Mardon that the sales of a company’s gas station would exceed 200,000 gallons in three years of its operation (Petroleum v. Mardon, 1976). The statement persuaded Mardon to buy the station, thereby entering into a legal relationship with Esso Petroleum. The company’s representative deliberately withheld their knowledge of the fact that the station’s throughput would not reach the specified mark (Petroleum v. Mardon, 1976). Therefore, Mardon wanted to recover damages caused by the negligent misrepresentation. The Court of Appeal ruled that there had been a breach of warranty or negligent misrepresentation (Petroleum v. Mardon, 1976).

Undue Influence

In Odorizzi v. Bloomfield School District, the plaintiff wanted to rescind his resignation from a teacher’s post. The man claimed that he was forced to resign after he was arrested for homosexuality (Odorizzi v. Bloomfield School District, 1966). The plaintiff also maintained that he was threatened by the school’s representatives. Odorizzi did not have time to consult his attorney and was under severe mental pain.

The Court provided seven elements of “over-persuasion,” many of which were present in the case (Bix & Bix, 2012, p. 49). The plaintiff’s claims of duress, fraud, and mistakes were dismissed by the Court. However, the agreement was rescinded based on a claim of undue influence. According to the Court, undue influence presupposes “taking advantage of another’s weakness of mind or taking grossly oppressive and unfair advantage of another’s necessities or distress” (Odorizzi v. Bloomfield School District, 1966, p. 5). The Court held that Odorizzi had been under excessive pressure when signing the resignation, which was deemed sufficient grounds for avoiding enforcement (Odorizzi v. Bloomfield School District, 1966).

Mutual Mistake

Sherwood v. Walker is a case that has played an essential role in the formation of modern American contract law. The plaintiff (Sherwood) entered a contract to buy a cow from the defendant (Walker) (Alces, 2011). The two parties mistakenly assumed that the cow was sterile (Sherwood v. Walker, 1887). However, the animal was not barren; it had a calf. Thus, the defendant “had entered into a contract to purchase more than he thought he was purchasing and the seller had contracted to sell more than he thought he was selling” (Alces, 2011, p. 64).

Walker stated that neither he nor the plaintiff was aware of the fact that the real price of the cow substantially differed from that stipulated in the contract. The Appellate Court held that the contract could be rescinded because the mistake concerning the subject matter of the transaction was mutual (Sherwood v. Walker, 1887). Thus, it is clear that in the case under discussion a meeting of minds was not present.

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Discussion

It is impossible to overemphasize the importance of contracts in the world of business. Without having an ability to enter into a legally binding agreement with strictly delineated rights and obligations of all parties, the functioning of the modern economy would be impossible. Contracts can be considered conduits or facilitators of business transactions that range from a purchase of raw materials to monetary exchanges.

It follows that those who are contemplating a career in business should be cognizant of facts, fixed costs, and rules of enforcement associated with contracts (McKendrick, 2014). Once an agreement is reached, facts cannot be changed. The same is applied to the cost of a transaction. However, a savvy businessperson can defend contract enforceability in court if they know certain circumstances making a contract invalid.

The law of contract develops alongside the market economy. Therefore, it would be unreasonable to assume that the rate of its transformation can subside as the economy is spurred by globalization and technological progress. Contract law has substantially evolved since its inception in eighteenth-century England (Bix & Bix, 2012). The conditions of the free market have necessitated the transformation of the main principle of classical contract law according to which all legally binding agreements should be fair (Bix & Bix, 2012). Furthermore, the law’s scope has been extended to a meaningful degree over several centuries (Bix & Bix, 2012).

The rapid development of information technologies (IT) during recent decades necessitates the revision of contractual regulations to adjust them to functioning in electronic settings (Miller & Cross, 2012). It can be argued that the pace of economic change will not subside in the following centuries. Therefore, in order to effectively regulate legal relationships between parties bounded by an agreement, both the scope and nature of the law of contract will have to undergo significant transformations.

Conclusion

The paper has discussed a defense to contract enforceability—a lack of voluntary consent. It has been argued that businesspersons who often participate in contract negotiations should be keenly aware of key elements of contract enforceability. The paper has also reviewed the historical context of the issue and argued that contract law will inevitably change to accommodate the requirements of the information age.

References

Alces, P. (2011). A theory of contract law: Empirical insights and moral philosophy. Oxford, England: Oxford University Press.

Bix, B., & Bix, B. (2012). Contract law: Rules, theory, and context. Cambridge, England: Cambridge University Press.

Chen-Wishart, M. (2015). Contract law. Oxford, England: Oxford University Press.

Davies, P. (2016). JC Smith’s the law of contract. Oxford, England: Oxford University Press.

Esso Petroleum v. Mardon, QB 801 (1976).

McKendrick, E. (2014). Contract law: Text, cases, and materials. Oxford, England: Oxford University Press.

Miller, R. L. (2013). Fundamentals of business law: Summarized cases (9th ed.). Boston, MA: Cengage Learning.

Miller, R. L., & Cross, F., B. (2012). The legal environment today: Business in its ethical, regulatory, e-commerce, and global setting (7th ed.). Boston, MA: Cengage Learning.

Odorizzi v. Bloomfield School District, 54 Cal. Rprt. 533 (1966).

Osinger, R. R. (2015). The rise of modern American contract law. Web.

Sherwood v. Walker, 66 Mich. 568 (1887).

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StudyCorgi. (2020, December 25). Business Law: Consent and Contract Enforceability. Retrieved from https://studycorgi.com/business-law-consent-and-contract-enforceability/

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