BUL3310 - Chapter 13

Injury to the Innocent Party

For a person to recover damages based on fraud, proof of an injury is required. The measure of damages is ordinarily equal to the property's value had it been delivered as represented, less the actual price paid for the property. In actions based on fraud, courts also often award punitive damages. These damages are often used to punish a defendant or set an example for similar wrongdoers.

Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable. Mistakes of value can be bilateral or unilateral. Either way, they do not serve as a basis for avoiding a contract.

Voluntary Consent

Knowledge of and genuine assent to the terms of a contract.

Misrepresentation of Law

Misrepresentation of law does not ordinarily entitle the party to avoid a contract. People are assumed to know the law.

Mistakes of Fact

Mistakes of fact can occur in two forms—unilateral and bilateral (mutual). In either instance, the mistake must involve a material fact. A material fact is a fact that is important and central to the subject matter of the contract, such as the identity of the parties.

Misrepresentation by Silence

Ordinarily, neither party to a contract has a duty to come forward and disclose facts. Generally, a contract will not be set aside because certain pertinent information is not volunteered.

Undue Influence

Persuasion that induces a person to act according to the will of the dominating party.

Learning Outcome 2: List the elements of fraud.

The elements of fraud are (1) a misrepresentation of a material fact, (2) an intent to deceive, and (3) an innocent party's reliance on the misrepresentation. To recover damages, the innocent party must suffer an injury.

Misrepresentation Has Occurred

The first element of proving fraud is to show that misrepresentation of a material fact has occurred. This misrepresentation can occur through words or conduct.

Intent to Deceive

The second element of fraud is knowledge on the part of the misrepresenting party that facts have been falsely represented. This element, called scienter (pronounced sy-en-ter) or "guilty knowledge," signifies that there was an intent to deceive. Scienter clearly exists if a party knows that a fact is not as stated.

Reliance on the Misrepresentation

The third element of fraud is reasonably justifiable reliance on the misrepresentation of fact. The deceived party must have a justifiable reason for relying on the misrepresentation. The misrepresentation must also be an important factor (but not necessarily the sole factor) in inducing the party to enter into the contract. Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements. If the defects in a piece of property are obvious, the buyer cannot justifiably rely on the seller's misrepresentations concerning those defects.

Duress

Threats made to force a party to enter into a contract.

Learning Outcome 4: Recognize the difference between undue influence and duress.

Undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. Duress involves forcing a party to enter into a contract under the fear of threats. This pressure causes a party to do what he or she would not do otherwise. A contract entered into under undue influence or duress is voidable due a lack of voluntary consent.

Mistakes

We all make mistakes, and it is not surprising that mistakes are made when contracts are formed. In certain circumstances, contract law allows a contract to be avoided on the basis of mistake. It is important to distinguish between mistakes of fact and mistakes of value, however. Only a mistake of fact makes a contract voidable.

Typically, fraud has three elements:

1. A misrepresentation of a material fact must occur. 2. There must be an intent to deceive. 3. The innocent party must justifiably rely on the misrepresentation.

There are at least two exceptions to this rule (unilateral mistake). The contract may not be enforceable if:

1. The other party to the contract knows or should have known that a mistake was made. 2. The error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made accidentally and without intentional carelessness. If, for instance, a contractor's bid was significantly low because he or she made a mistake when adding up the total estimated costs, any contract resulting from the bid normally may be rescinded.

Undue Influence and Duress

A contract lacks voluntary consent if undue influence or duress is present. If a contract lacks voluntary consent, it is voidable.

Learning Outcome 3: Contrast misrepresentations of a material fact and of law.

A material fact is objective and verifiable. A misrepresentation of a material fact can serve as the basis to avoid a contract. A misrepresentation of law usually does not entitle a party to avoid a contract. People are assumed to know the law.

Misrepresentation by Conduct

A misrepresentation need not be expressly made through the words or writings of another. It can also occur by conduct.

Misrepresentation by Words

A misrepresentation of a material fact can be expressly made through a person's words or writings. A statement of opinion cannot be used in a claim of fraud. A fact is objective and verifiable, whereas an opinion usually is subject to debate.

Learning Outcome 1: State the difference between mistakes of fact and of value.

A mistake of fact involves a material fact—one that is important to the subject matter of the contract. Only a mistake of fact can give a party the right to avoid a contract. A mistake of value concerns the future market value or quality of the object of the contract. This type of mistake normally does not serve as a basis for avoiding a contract.

Bilateral (Mutual) Mistakes

A mistake that occurs when both parties are mistaken about a material fact.

Unilateral Mistakes

A mistake that occurs when one party to a contract is mistaken about a material fact.

scienter

A party's knowledge that material facts have been falsely represented with an intent to deceive.

Fraudulent Misrepresentation

Although fraudulent misrepresentation is a tort, the presence of fraud also affects the authenticity of the innocent party's consent to the contract. When an innocent party consents to a contract with fraudulent terms, the contract usually can be avoided because the innocent party has not voluntarily consented to the terms. Normally, the innocent party can either cancel the contract or enforce it and seek damages.