Fisher College FTC Right Now Rapid Delivery Service Questions

See textbook

page 249

and

page 450

As a manager employed by Right-Now Rapid Delivery Service, you are responsible for pricing the services involving same-day deliveries. You are primarily concerned with the competitive aspects of your business. You have proposed contractual language that states:

“any package picked up after 10:00 a.m. will be considered as if it is picked up the next business day. Any package delivered before 10:00 p.m. on the day of pick up will be considered to have arrived on that business day. Under the language, a package received at 11:00 a.m. on Tuesday and delivered by 10:00 p.m. on Wednesday is considered, by you, to involve a “same-day delivery.”

The impact of this language is that a business day lasts for as long as 36 hours; thereby giving a customer the wrong impression of the phrase “same-day delivery.” The Federal Trade Commission (FTC), under its authority to protect the public from unfair or deceptive trade practices, has contacted your company asking questions about the plain meaning of “same-day delivery.”

In anticipation of a face-to-face meeting with an FTC investigator, you strive to answer these questions:

(1) To what degree does the FTC have authority to question your business practices?

(2) Are your clearly stated contractual provisions unfair or deceptive?

LO 8-4
When a “Meeting of the Minds” Is Lacking
In addition to the basic elements described earlier, we also require that the
parties to a contract have a mutual understanding of the essential terms and
underlying facts. This is often referred to as a “meeting of the minds.” On the
other hand, if it is clear that the parties had fundamentally different beliefs
CHAPTER 8 Contract Formation
about the contract, it may be voidable. In most cases, a mutual understanding
is assumed unless evidence to the contrary exists. A party usually raises the
lack of mutual agreement as a defense to enforcement.
FRAUD OR INNOCENT MISREPRESENTATION
agree. The specific
Contracts based on fraud or misrepresentation are important examples of
agreements in which a mutual understanding is lacking. Fraud involves an
intentional misstatement of fact that induces another to enter into a contract
to which they would not otherwise
that must
elements
be demonstrated to establish fraud are (1) a misrepresentation of fact (as
opposed to an
Ito an opinion), (2) an intent to deceive, (3) justified reliance on the
misstatement by the innocent party, and (4) injury resulting from the reliance.
You will note that fraud is also described in Chapter 10. Here, it specifically
functions as a tort that acts as a barrier to formation of a legitimate contract.
Intent is one of the most important elements of fraud. For example, if a
person selling a ring with a glass stone states that it is a
a
ring instead,
the misstatement must be a knowing lie to constitute fraud. But also note that
the innocent party must reasonably believe that lie. If the stone in a ring is
obviously glass, then the purchaser did not justifiably rely on the deception.
Fraud can be explicit as
tas described earlier. It can also arise f from a deceptive
act by a party,
such as tampering
with the c
In general, silence
o disclose a material fact that creates
does not constitute fraud. However, failing dometer of a car.
a dangerous condition may rise to that level. For
t level. For example, i
e, if a seller r removes the
airbag from a car and does not inform the buyer, fraud may be found.
the fraud. It may also be
be possible to seek
A party who is injured due to another’s fraud generally has the option to
avoid the contract and seek return of
I seek return of any consideration conveyed. In addition,
the injured party may enforce the contract and sue for damages resulting from
to seek punitive damages based on the fraud.
When a party misrepresents a material fact without intent to mislead,
harm still occurs. However, this “innocent” misrepresentation simply makes
the contract voidable by the innocent party. Heightened remedies such as puni-
tive damages are inappropriate without the intent to deceive. Due to the diffi-
culties an individual may experience in establishing all of the elements of fraud
or innocent misrepresentation, the government may step in (see Sidebar 8.8).
sidebar 8.8
Deceptive Advertising and the FTC
In many cases in which a merchant misrepresents some-
thing about its product, it may be difficult to establish
the intent necessary to bring a fraud case. A consumer
may have insufficient incentive to sue. If the misrepre-
sentation is widespread-such as though a national
advertisement-the Federal Trade Commission (FTC)
may act to address the harm. The FTC has the power to
prevent deceptive acts or practices that involve a misrep-
resentation or omission that is likely to mislead consumers
249
and is material to the decision to purchase a product. The
agency can bring an enforcement action without the need
to demonstrate intent to deceive. If deceptive advertis-
ing is found, the agency can impose civil penalties, con-
sumer compensation, and corrective advertising. State
consumer protection agencies may have similar powers.
Government regulation of deceptive advertising can be
an important complement to consumer fraud cases.
Source: FTC Policy Statement on Deception, 103 F.T.C. 110, 174 (1984).250
PART 2 Basic Legal Principles
MISTAKE
What happens when each party misunderstands something very basic and
material about a contract? Although no tortious act has occurred, such a
situation goes right to the heart of whether there has been voluntary consent
to a single set of terms. If it is clear that there has been a mutual mistake
as to a material fact relating to the contract, rescission by either party
is appropriate. The test of materiality is whether the parties would have
contracted had they been aware of the mistake. If they would not have con-
tracted, the mistaken fact is material. In addition, the mistake must be one
of fact as opposed to value. When parties misconstrue only the value of
their transaction but fully appreciate the subject matter, the contract is not
voidable.
Significantly, the both parties must be mistaken in their understanding. For
example, if both a seller and buyer believe they have made an agreement con-
cerning an original Picasso painting, but it turns out to be the work of another
artist, both should have the right to avoid the contract. On the other hand,
if only one party is mistaken about some aspect of the contract (a unilateral
mistake) no remedy is generally available. We do not want to impose the costs
of one party’s mistake on the other party who acted with complete knowl-
edge. For example, suppose that Royal Carpet Co. bids $8.70 per yard for
certain carpet material instead of $7.80 per yard as it had intended. If the
seller accepts Royal Carpet’s bid, a contract results even though there was a
unilateral mistake.
DURESS OR UNDUE INFLUENCE
Other examples of contracts in which a mutual agreement is lacking include
those induced by duress or undue influence. Duress means force or threat
of force. The force may be physical or, in some instances, economic. However,
duress cannot be based on one’s assertion of legitimate business consequences;
it must rise to the level of a tort. For example, if a seller informs a buyer that
his or her offer is so advantageous the buyer’s business will suffer if the buyer
does not form a contract, no duress has occurred. Similarly, threatening to sue
unless the parties reach a settlement is also not duress.
Undue influence occurs when one is taken advantage of unfairly through
a contract by a party who misuses a position of relationship or legal con-
fidence. Contracts voidable because of undue influence often arise when
persons weakened by age or illness are persuaded to enter into a disadvanta-
geous contract. Someone who has a special relationship of power and trust
over the other party, such as a psychiatrist or lawyer, may also exert undue
influence.Consent orders
are settlement
agreements in which a
business or individual
agrees to comply with
all administrative rules.
“The Commodity
Futures Trading Com-
mission (CFTC) opened
a record 419 investiga
tions over the last year,
into things as diverse
as small-time Ponzi
schemes and claims of
market manipulation.”
-Julie Creswell and
Graham Bowley,
“Once on Sleepy
Beat, Regulator is
Suddenly Busy,”
New York Times,
November 4, 2010
enforcing. Often, guidelines help businesses determine whether certain prac-
tices may or may not be viewed as legal. While guidelines can be helpful in
understanding an agency’s policy, these guidelines do not have the same force
of law as rules and regulations do.
Adjudicating The quasi-judicial function involves both fact-finding and
applying law to the facts. If violations of the law are found, sanctions, such
as a fine or other penalty, may be imposed. In addition, an agency may order
that a violator stop (cease) the objectionable activity and refrain (desist) from
any further similar violations. This type of agency action is called a cease
and desist order. Violations of a cease and desist order are punishable by
fines, which can be as much as $10,000 per day.
Many cases before agencies are settled by agreement before a final deci-
sion, just as most lawsuits are settled. Such a settlement results in the issu-
ance of a consent order, which requires that the organization or individual
accused admit to the jurisdiction of the agency and waive all rights to seek a
judicial review. There is no admission that the business has been guilty of a
violation of the law, but there is an agreement not to engage in the business
activities that were the subject of the complaint. A consent order saves con-
siderable expense and has the same legal force and effect as a final cease and
desist order issued after a full hearing.
Advising The advisory function of an administrative agency may be
accomplished by making reports to the president or to Congress. For exam-
ple, an agency may propose new legislation to Congress, or it may inform
the attorney general of the need for judicial action due to violations of the
law. Agencies also report information to the general public that should be
known in the public interest, and they publish advisory opinions. For exam-
ple, a commission may give advice as to whether a firm’s proposed course of
action might violate any of the laws that commission administers. Advisory
opinions are not as binding as formal rulings, but they do give a business an
indication of the view an agency would take if the practice in question were
challenged formally. The advisory opinion is a unique device generally not
available in the judicial system, as courts deal only with actual cases and
controversies.
Investigating One of the major functions of all agencies is to investigate
activities and practices that may be illegal. Because of this investigative power,
agencies can gather and compile information concerning the organization
and business practices of any corporation or industry engaged in commerce
to determine whether there has been a violation of any law. In exercising their
investigative functions, agencies may use the subpoena power and require
reports, examine witnesses under oath, and examine and copy documents, or
they may obtain information from other governmental offices. This power of
investigation complements the exercise of the agency’s other powers, espe-
cially the power to adjudicate.
As discussed in Chapter 13, it is a crime to make any false or fraudulent
statement in any matter within the jurisdiction of a federal agency. A person
may be guilty of a violation without proof that he or she had knowledge that
the matter was within the jurisdiction of a federal agency. As a result, infor-
mation furnished to an agency must be truthful.