Ch 13 Fin 331

A party injured by fraud in a contract for the sale of goods can both rescind the contract and sue for damages.

True. UCC 2-721

Misrepresentation or Fraud: Elements The "fact" is material if it is likely to play significant role in inducing

a reasonable person to enter into the contract.

A Unilateral Mistake:

When only one party makes a mistake about a basic assumption.

Misrepresentation or Fraud: Elements Misrepresentation or Fraud: Elements

Injury (must prove actual economic damages).

Misrepresentation or Fraud: Elements . If misrepresentation, the "fact" must be

material (not necessary with fraud).

The elements of misrepresentation: false statement of a material fact made with knowledge of its falsity with intent to deceive with reasonable reliance by the plaintiff All of the above Both (a) and (c), but not (b)

(e). Both (a) and (c), but not (b) If the false statement was knowingly made, then we have fraud.

Elements Misrepresentation or Fraud:

1. Defendant made a false statement of "fact." The "fact" must be a past or existing "fact." Not merely an opinion or promise or prediction of some future event. Fraud includes the active concealment to prevent the other party from discovering the truth (freshly painting a ceiling to conceal a roof leak) or non-disclosure (failure to volunteer information, i.e., Chinese drywall; slide 6-33). 2. If misrepresentation, the "fact" must be material (not necessary with fraud). The "fact" is material if it is likely to play significant role in inducing a reasonable person to enter into the contract. 3. Plaintiff entered into the contract because of his reliance on the false statement. 4. Plaintiff's reliance was reasonable. 5. Additional element if Plaintiff is seeking to recover money damages for Fraud: Injury (must prove actual economic damages).

Another remedy for mutual mistake is to avoid the contract. Parties may avoid the contract if:

1. Mistake relates to a basic assumption upon which the contract was made (i.e., about the identity, existence, quality or quantity of the subject matter) cubic zirconia vs. diamond; 2. Mistake has a material effect on the exchange (i.e., so severe that it would be unfair to require "victim" to perform, and the other party would receive an un-bargained-for advantage); and 3. The "victim" must not have assumed the risk of the mistake (i.e., where Buyer contracts to buy property "as is," or contracts knowing that he has only limited knowledge of the facts).

In order to avoid a contract based on a unilateral mistake, the "victim" must prove all 3 elements of mutual mistake, and also prove that:

1. the other (non-mistaken) party caused or knew of the mistake, or 2. it would be unconscionable to enforce the contract (the mistaken party will suffer a "grave loss" if it must perform).

Law Applied to Facts:

AVX and Cabot are sophisticated commercial parties represented in negotiations by highly competent counsel. Due to worldwide shortage, Cabot was in stronger position than AVX, but "hard bargaining is not unlawful." No coercion, but even so, AVX ratified the contract (waited 18 months to file suit & accepted benefits of supply contract).

Which of the following is most likely to be a false statement of "fact" resulting in fraud or misrepresentation liability? "I think that this car's engine was overhauled." "This is the best used car in town." Concealing that the car was submerged in a lake. Stating that the mileage on the odometer is 56,000 miles when it is actually 59,000 miles.

Concealing that the car was submerged in a lake.

(1) a voluntary agreement (offer and acceptance),

Elements of a Contract

(2) supported by consideration,

Elements of a Contract

(3) based on mutual consent (i.e., a "meeting of the minds") that is

Elements of a Contract

(4) between parties with "legal capacity,"

Elements of a Contract

(5) made for a lawful purpose, and

Elements of a Contract

(6) in writing, if required by law.

Elements of a Contract

A Unilateral Mistake:

Ex.: Buyer places order to purchase 100 shares of Apel Corp. stock mistakenly believing that he is buying Apple, Inc.

case in which the sellers sued buyers after buyers recognized a $900k profit on the sale of estate paintings. Held: Sellers bore the risk of the mistake based on their own conscious ignorance.

Ex.: Estate of Nelson v. Rice

Generally, even if there is a good faith dispute over a matter, a person's threat to file a lawsuit to resolve that dispute is considered to be improper.

False

A party who has the right to rescind a contract may do so at any time.

False. The party must act quickly and not act in a way to ratify the contract.

Legal Reasoning & Holding: Fraud that induces someone to enter into a contract is a defense making the contract voidable at the election of injured party. Knafel's statement that she "was pregnant with Jordan's child" was a false statement made with knowledge of its falsity that induced Jordan to offer the settlement. Agreement was the result of fraud and mutual mistake and thus voidable by Jordan.

Jordan v. Knafel

Procedural History & Issue: Jordan filed suit for a declaratory judgment that even if an agreement had been made, it was unenforceable due to fraud and mutual mistake. Knafel filed a counterclaim for breach of contract. Knafel's claim was dismissed and she appealed. Issue: what effect did the paternity test have on enforceability of alleged agreement (i.e., did Knafel engage in fraud when she told Jordan "I am pregnant with your child?")

Jordan v. Knafel

Facts: In 1991 Knafel claimed she was pregnant with Jordan's child and Jordan offered a settlement: Jordan promised to pay Knafel $5 million upon his retirement from NBA in return for her promise to keep the situation confidential and to refrain from filing a paternity suit. After child's birth, paternity test revealed that Jordan was not the child's father.

Jordan v. Knafel (Ill, 2007)

Five doctrines that permit people to avoid their contracts because of the absence of real consent:

Misrepresentation Fraud Mistake Duress, and Undue influence

Contract was induced by an improper threat, and victim had no reasonable choice but to enter or modify the contract.

See Cabot Corp. v AVX Corp.

Facts: After extended negotiations of a long-term supply contract, parties disputed whether contract was valid and binding (Cabot's claim) or voidable due to economic duress (AVX's claim).

See Cabot Corp. v AVX Corp.

Holding: Judgment affirmed in favor of Cabot

See Cabot Corp. v AVX Corp.

The Law: To establish economic duress, party must show it is the victim of a wrongful or unlawful act or threat, and such act or threat must be one which deprives the victim of unfettered will.

See Cabot Corp. v AVX Corp.

A contract is more likely to be voidable if it is the result of mutual mistake rather than unilateral mistake.

True

Undue influence cases often involve a relationship of trust and confidence between the contracting parties.

True

Mutual mistake:

Where both parties have incorrect assumptions about the same fact. May be due to a drafting error: Ex.: Seller owns a house located at 123 Main St., and also owns a vacant lot located at 125 Main St. Seller intends to sell the vacant lot to Buyer; Buyer intends to buy the vacant lot, but contract states "123 Main St."

Mistake in Contracts A mistake is an erroneous belief in

a false "fact." must relate to facts as they exist at the time the contract is created.

Misrepresentation and Fraud

both involve a false statement made by D, however with misrepresentation, D is not being intentionally deceptive, but with fraud, D makes the false statement with knowledge of its falsity and with the intent to deceive P. Either way, injured party may avoid (rescind) the contract. A person who commits fraud may also be liable in tort for damages, including punitive damages.

Contracts induced by misrepresentation, fraud, mistake, duress, or undue influence are generally considered to be voidable. "Victim" has power to rescind (cancel) the contract because their consent was not real. "Victim" must rescind quickly and not act in a manner to ratify (affirm) the contract (i.e., must not accept the benefits of the contract). Ratification terminates the ability to rescind the ...

contract.

Duress

is improper threat or act that coerces a person to enter into or modify a contract. Threat of physical, emotional, or economic harm Contract was induced by an improper threat, and victim had no reasonable choice but to enter or modify the contract.

. Misrepresentation or Fraud: Elements Defendant made a

false statement of "fact."

Misrepresentation or Fraud: Elements Plaintiff entered into the contract because

his reliance on the false statement.

Undue influence

involves wrongful pressure exerted on a person during the bargaining process. Unlike duress, pressure is exerted through persuasion rather than coercion. Usually involves close family relationships, or trust and confidence, where 1 party is particularly vulnerable.

A person who commits fraud may also be liable in tort for damages, including

punitive damages.

Contracts induced by misrepresentation, fraud, mistake, duress, or undue influence are generally considered to be voidable. "Victim" has power to rescind (cancel) the contract because their consent was not

real.

Remedy for mutual mistakes due to drafting errors is

reformation (the court will modify the contract to express the party's true intentions).

Contracts induced by misrepresentation, fraud, mistake, duress, or undue influence are generally considered to be voidable. "Victim" has power to rescind (cancel) the contract because their consent was not real. "Victim" must rescind quickly and not act in a manner to ratify (affirm) ....

the contract (i.e., must not accept the benefits of the contract).

Another remedy for mutual mistake is

to avoid the contract. Parties may avoid the contract if: 1. Mistake relates to a basic assumption upon which the contract was made (i.e., about the identity, existence, quality or quantity of the subject matter) cubic zirconia vs. diamond; 2. Mistake has a material effect on the exchange (i.e., so severe that it would be unfair to require "victim" to perform, and the other party would receive an un-bargained-for advantage); and 3. The "victim" must not have assumed the risk of the mistake (i.e., where Buyer contracts to buy property "as is," or contracts knowing that he has only limited knowledge of the facts).

Contracts induced by misrepresentation, fraud, mistake, duress, or undue influence are generally considered to be

voidable.