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Undue influence differentiated from duress and fraud

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Define undue influence with regards to contracts. How does undue influence differ from duress and fraud? Please provide some examples.

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Contract signed under Duress

If one of the parties can prove that the contract was signed under duress, that is the party's signature was extracted by physical or mental coercion, then the contract is null and void.
Duress is defined as coercion of a party to execute a contract against the free will of that party. For example, a person signs a check, or a deed transferring a house title to a stranger, under a threat or act of violence, imprisonment (retaining a person in a confined space), victim's property detention or breach of contract.

Parad Law Offices. "Contracts". http://www.paradfirm.com/contracts.html. Retrieved April 11, 2011.

Undue influence exists where one improperly takes advantage of one's relationship with another to coerce the other person to enter a contract

Source: Answers.com. http://wiki.answers.com/Q/What_is_undue_influence_with_regard_to_contract#ixzz1JCXMerK7 . Retrieved April 11, 2011.

If undue influence is proved in a contract, in U.S. law, the contract is voidable by the innocent party, and the remedy is rescission.

Fraud prevents mutual agreement to a contract because one party intentionally deceives another as to the nature and the consequences of a contract. It is the willful misrepresentation or concealment of a material fact of a contract, and it is designed to persuade another to enter into that contract. If a special relation-ship exists, such as that of attorney and client, nondisclosure of a material fact is fraud. Many courts have held that mere silence concerning a material fact did not constitute fraud, but the emerging trend is to find a duty to disclose and, therefore, deliberate concealment of a material fact gives rise to an action for fraud.

Answers Encyclopedia. "What is Contract Fraud?". http://answers.encyclopedia.com/question/contract-fraud-385769.html. Retrieved April 11, 2011.

Undue Influence, duress, and fraud differentiated
?Duress occurs when an individual physically compels or "makes an improper threat that induces a part who has no reasonable alternative but to manifest assent."
?Undue influence - results when a party applies unfair persuasion in the context of a confidential relationship or domination over the other party.
?Fraud or misrepresentation - is "an assertion that is not in accord with the facts" that is made by a party and induces the other party to assent to a contract.

Gianna Scatchell. http://legallynoted.wordpress.com/2009/11/03/whats-the-difference-bt-duress-undue-influence-and-fraud/. Retrieved April 11, 2011.


On actual undue influence

Williams v Bailey (1866) LR 1 HL 200

A son forged his father's signature on promissory notes and gave them to their bankers. At a meeting of all the parties at the bank, one of the bankers said to the father: "If the bills are yours we are all right; if they are not, we have only one course to pursue; we cannot be parties to compounding a felony." The bank's solicitor said it was a serious matter and the father's own solicitor added, "a case of transportation for life." After further discussion as to the son's financial liability the bank's solicitor said that they could only look to the father. The father then agreed to make an equitable mortgage to the bank in consideration of the return of the promissory notes. The father succeeded in an action for cancellation of the agreement.
It was held by Lord Westbury that the security given for the debt of the son by the father under such circumstances, was not the security of a man who acted with that freedom and power of deliberation that must be considered as necessary to validate a contract to give security for the debt of another.

Lloyd's Bank v Bundy [1975] QB 326

A guarantee was given to the bank by an elderly farmer, a customer of the bank, for his son's debts. The guarantee was secured by a mortgage of Bundy's house in favour of the bank. An assistant manager of the bank, with the son, later told the father that they would only continue to support the son's company if he increased the guarantee and charge. The father did so, the assistant manager appreciating that the father relied on him implicitly to advise him about the transaction. The Court of Appeal set aside the guarantee and charge.
Lord Denning held that the relationship between the bank and the father was one of trust and confidence. The bank knew that the father relied on them implicitly to advise him about the transaction. The father trusted the bank. This gave the bank much influence on the father. Yet the bank failed in that trust. They allowed the father to charge the house to his ruin. There was also a conflict of interest between the bank and the father, yet the bank did not realise it, nor did they suggest that the father should get independent advice. If the father had ...

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This solutions defines undue influence with regards to contracts. It also differentiate undue influence from duress and fraud.

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Application of the Objective Theory of Contracts

You are still working for the City of Bigtown's Counsel, and it seems that your work largely involves shooting down the mayor's "creative" ideas to boost tourism. He is taken with the idea of an advertising campaign developed around auctioning Bigtown on eBay! He thinks that no one will take the auction seriously but that people will come to Bigtown to satisfy their curiosity.

As you and your boss are rolling your eyes at each other, you remember a similar situation - the Pepsi Harrier-Jet case. You offer to provide background

Wall Street Journal, August 9, 1999.
John D.R. Leonard took PepsiCo seriously when one of their "Pepsistuff" commercials made an offer of a Harrier jet, the famous high-tech "jump jet" used by the U.S. Marines. In a TV commercial that aired in 1995, Pepsi jokingly included the Harrier as one of the prizes that could be received with a "mere" 7 million Pepsi points. While that sounds like a lot of points to get from drinking Pepsi products (roughly 190 Pepsis a day for 100 years), the company also allowed customers to purchase points for 10 cents a piece.

Leonard did the math, and discovered that the cost of the 7 million points needed for the jet was a mere $700,000. He then put together a business plan, raised the $700,000 from friends and family, and submitted 15 Pepsi points, the check, and an official order form along with a demand for the Harrier jet.

PepsiCo wrote back, stating: "The Harrier jet in the Pepsi commercial is fanciful and is simply included to create a humorous and entertaining ad. We apologize for any misunderstanding or confusion that you may have experienced and are enclosing some free product coupons for your use."

The free coupons did not satisfy Leonard, who then took PepsiCo to task in court. Finally, on August 5, 1999, a federal judge for the Southern District of New York held that PepsiCo was only joking when it implied in its ad that it was giving away fighter jets. Judge Wood noted that since the jets sell for approximately $23 million each, "no objective person could reasonably have concluded that the commercial actually offered consumers a Harrier jet." Instead, this was a classic example of "a deal too good to be true."

1. What are the four elements of a valid contract?
2. Describe the objective theory of contracts. How does that theory apply to this case?
3.Why do you think the court held that there was not a valid agreement here?
4. Are advertisements generally considered offers? Why or why not?
5. How does this case differ from a reward situation, where a unilateral contract is formed upon completion of the requested act?

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