Chpt 14 bus 325- Fraud and Mistakes

4 types of fraud

(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 misrepre-sentation. -have to be harmed by it- if you avoid it and don't go through with it but sue, you won't win (4) To collect damages, a party must have been harmed as a result of the misrepresentation. A cause of action based on fraud can be subject to a statute of limitations

Two exceptions to unilateral mistakes

(1) The other party to the contract knows or should have known that a mistake of fact was made. (2) The error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. In both situations, the mistake must still involve some material fact

bilateral mistake example

-Ex- shipping perishable goods on boat, one party agreed to take peerless 1 that arrived in am, and the other thought peerless 2 that arrived at night (they were both wrong) -you can get out of a mutual mistake like this

Discharge by Accord and Satisfaction

A discharge in which the parties agree to accept performance that is different from the performance originally promised. An accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged. A satisfaction is the perfor-mance of the accord agreement. Once the accord has been made, the original obligation is merely suspended until the accord agreement is fully performed. If it is not performed, the obligee (the one to whom performance is owed) can file a lawsuit based on either the original obligation or the accord.

Bilateral (Mutual) Mistakes of Fact (4 facts)

A mistake that occurs when both parties are mistaken about same material fact. Either Party Can Rescind the Contract Normally, the contract is voidable by the adversely affected party and can be rescinded. If the contract parties attach materially different meanings to the term, the mutual misunderstanding may allow the contract to be rescinded or reformed.

Substantial Performance

A party who in good faith substantially performs all the contract terms can enforce the contract against the other party under the doctrine of substan-tial performance. The basic requirements for performance to qualify as substantial performance are as follows: (1) The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract. (2) The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages). (3) The performance must create substantially the same benefits as those promised in the contract.

Statutes of Limitations

A plaintiff suing for breach of contract must file suit within the time permitted by applicable law. Failure to do so does not technically discharge the parties, but it prevents the wronged party from seeking judi-cial remedies. The limitations period for bringing suits for breach of oral contracts usually is two to three years, and for written contracts, four to five years. Parties generally have ten to twenty years to file for recovery of amounts awarded in judgments, depending on state law.

Anticipatory Repudiation

A refusal of one party to carry out his or her contractual obligations before either party has a duty to perform. When an anticipatory repudiation occurs, it is treated as a material breach of the contract, and the non-breaching party is permitted to bring an action for damages immediately.

Pattern-of-Conduct Exception

A waiver can extend to subsequent defective performance if a reasonable person would conclude that similar defective performance in the future will be acceptable. A ( . ) that waives a number of successive breaches will operate as a continued waiver. To change this result, the non-breaching party should give notice to the breaching party that full performance will be required in the future.

Fraudulent Misrepresentation

An innocent party induced to enter into a contract by a misrepresentation of material fact may avoid the contract because she/he did not genuinely consent to its terms. Fraudulent misrepresentation usually refers to misrepresentation that is consciously false and is intended to mislead another. -Have to prove every element of fraud tort -a tort but also used to overturn contract

Temporary Impossibility

An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases. Once the temporary event ends, the parties ordinarily must perform the contract as originally planned.

Discharge by Agreement

Any contract can be discharged by agreement of the parties. The agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract.

Reasons for Waiving a Breach

Businesspersons often waive breaches of contract to obtain whatever benefit is still possible out of the contract.

Commercial Impracticability

Courts may excuse parties from their performance when it becomes much more difficult or expensive than the parties originally contemplated at the time the contract was formed. To invoke the doctrine of commercial impracticability successfully, the anticipated performance must become significantly difficult or costly. The added burden of performing also must not have been foreseeable by the parties when the contract was made

What is not a valid excuse for mistakes

Ignorance of law is not a valid excuse (same for contract law)

two types of mistakes

Mistakes can also be unilateral or bilateral

Most courts do not require _________________________ to rescind a contract. In contrast, to recover damages caused by fraud, _________________ is universally required.

Most courts do not require a showing of harm in an action to rescind a contract. In contrast, to recover damages caused by fraud, proof of harm is universally required.

Injury to the Innocent Party

Most courts do not require the innocent party to prove an injury in order to rescind the contract. However, if the innocent party seeks to recover damages, she/he must prove that the misrepresentation caused economic harm.

Conditions

Performance is conditioned in some situations. A condition is a qualification in a contract based on a possible future event. The occurrence (or nonoccurrence) of the event will trigger the performance of a legal obligation-or terminate an existing obligation under a contract. If the condition is not satisfied, the obligations of the parties are discharged. A condition precedent must be fulfilled before a party's performance can be required. The condition precedes the absolute duty to perform (e.g., Bob promises to buy Terry a car as soon as Terry gets his driver's license).

Impossibility of Performance

Supervening events may make performance impossible in an objective sense. This is known as impossibility of performance and can discharge a contract. The doctrine of impossibility of performance applies only when the parties could not have reasonably fore-seen, at the time the contract was formed, the event that rendered performance impossible. Objective impossibility ("It can't be done") must be distinguished from subjective impossibility ("I'm sorry, I simply can't do it"). Such excuses for subjective impossibility do not discharge a contract, and the non-performing party is normally held in breach of contract.

Justifiable reliance on the misrepresentation of fact (2 things)

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 deceived party to enter into the contract.

When Performance Is Impossible

The following types of situations may qualify as grounds for the dis-charge of contractual obligations based on impossibility of performance: (1) When one of the parties to a personal contract dies or becomes incapacitated prior to performance. (2) When the specific subject matter of the contract is destroyed. (3) When a change in law renders performance illegal.

Discharge by Performance:

The great majority of contracts come to an end when both parties fulfill their respective duties by performing the acts they have promised. Performance can also be accomplished by tender, an unconditional offer to perform by a person who is ready, willing, and able to do so. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party then refuses to perform, the party making the tender can sue for breach of contract. There are two basic types of performance-complete performance and substantial performance.

The measure of damages is ordinarily equal to the property's value had it been delivered as represented, _________________

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.

Mistake of Fact

The parties entered into a contract with different understandings of one or more material facts relating to the contract's performance. Only a mistake of fact makes a contract voidable.

Types of Damages

There are four broad categories of damages: (1) Compensatory (to cover direct losses and costs). (2) Consequential (to cover indirect and foreseeable losses). (3) Punitive (to punish and deter wrongdoing). (4) Nominal (to recognize wrongdoing when no monetary loss is shown).

One Party Dominates the Other

There must be clear and convincing evidence that the person did not act out of her or his free will. There must be clear and convincing evidence that the person did not act out of her or his free will. It is not enough that a person is elderly or suffers from some physical or mental impairment.

Enforceability

To determine if a particular provision is for liquidated damages or for a penalty, a court must answer two questions: (1) When the contract was entered into, was it apparent that damages would be difficult to estimate in the event of a breach? (2) Was the amount set as damages a reasonable estimate and not excessive? If the answers to both are "yes," the provision will usually be enforced. If either answer is "no," the provision usually will not be enforced.

Misrepresentation by Words or Conduct

To prove fraud, the innocent party must show that misrepresentation of a material fact has occurred. This misrepresentation can occur by words or actions. The conduct of a party-particularly a party's concealment of some material fact from the other party-will support an excuse of misrepresentation.

Complete Performance:

When a party performs exactly as agreed, there is no question as to whether the contract has been performed and it is said to be complete. Normally, conditions expressly stated in a contract must fully occur in all respects for complete performance (strict performance) of the contract to take place. Any deviation breaches the contract and discharges the other party's obligation to perform.

Consequences of a Waiver of Breach

When a waiver of a breach of contract occurs, the party waiving the breach cannot take any later action on it. The waiver of breach of contract extends only to the matter waived and not to the whole contract.

Misrepresentation by conduct involves: a. a seller preventing a buyer from learning of some fact that is material. b. a buyer preventing a seller from knowing the true value of the object of the sale c. a party who really does not wish to enter into the contract.

a. a seller preventing a buyer from learning of some fact that is material.

Jed, a homecare nurse, tells his ailing patient, an elderly woman, that unless she lends him money for a business investment, he will prevent her family from being able to see her. She agrees but later changes her mind and asks for her money back. Jed claims that they have formed a binding contract. The contract may be rescinded because of ____________

duress

Rescission and Restitution

is the cancellation of a contract in order to return the parties to their pre-contract position. When fraud, a mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present, unilateral rescission is available. Rescission may also be available by statute. The failure of one party to perform entitles the other party to rescind the contract. The rescinding party must give prompt notice to the breaching party. Generally, to rescind a contract, both parties must make restitution to each other by returning goods, property, or funds previously conveyed. If the goods or property have been consumed, restitution must be made in an equivalent dollar amount. Because an award of restitution basically returns something to its rightful owner, a party can seek restitution in actions for breach of contract, tort actions, and other types of actions.

5. When a party is fraudulently induced into a contract, that party can ....

rescind the contract

8. When a naïve purchaser relies on the opinion of an expert, the innocent party may be entitled to ....

rescission or reformation

Material Breach of Contract

the nonperformance of a contractual duty, and the performance is not at least substantial. the non-breaching party is excused from the performance of contractual duties. That party can also sue the breaching party for damages resulting from the breach.

Duress

Use of threats to force a party to enter into a contract constitutes duress.

Presumption of Undue Influence in Certain Situations

When a contract enriches the dominant party in a fiduciary relationship, the court will often presume that the contract was made under undue influence.

Exception to misrepresentation of law

When the misrepresenting party is in a profession known to require greater knowledge of the law than the average citizen possesses, you could be able to take action

Discharge by Operation of Law

Contractual duties may be discharged by operation of law in specified circumstances including material alteration of the contract, the running of the statute of limitations, bankruptcy, and the impossibility or impracticability of performance.

Compensatory Damages

Damages that compensate the non-breaching party for the loss of the bargain and simply replace what was lost because of the wrong or damage. A two-step process determines whether a breach of contract has resulted in compensable damages: (1) It must be established that there was a contract between the parties and a breach of that contract. (2) It must be proved that the breach caused damages.

Material Alteration of the Contract

If one or more material terms of a contract are altered, an innocent party (i.e., one who neither altered nor consented to the alteration of the contract) may be discharged from its contractual obligations

Misrepresentation of law

Misrepresentation of law ordinarily does not entitle a party to be relieved of a contract.

Sellers are allowed to use _______________ to sell their goods without being liable for fraud.

Sellers are allowed to use puffery to sell their goods without being liable for fraud.

Undue influence

arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will.

When a contract enriches a fiduciary....

c. the courts will find a rebuttable presumption that the fiduciary has breached their duty to rescind the contract.

7. Which of the following would NOT be considered a confidential or fiduciary relationship for the purposes of establishing undue influence?

merchant-buyer

4. When an innocent party is fraudulently induced to enter into a contract, the contract normally can be avoided because that party has not voluntarily consented to its terms. t/f

true

9. Misrepresentation of law ordinarily does not entitle a party to relief from a contract. t/f

true

Unilateral Mistakes of Fact

A mistake made by only one of the parties that does not generally give the mistaken party any right to relief from the contract. The contract is usually enforceable with two exceptions:

Specific Performance

An equitable remedy that calls for the performance of the act promised in the contract. This remedy is attractive to a nonbreaching party because it provides the exact bargain promised in the contract and also avoids some of the problems inherent in a suit for damages such as collecting a judgment. In some situations, the actual performance may be more valuable than the monetary damages. Normally, specific performance will not be granted unless the party's legal remedy (monetary damages) is inadequate

Discharge by Mutual Rescission

For mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract. There must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract (the rescission).

Mistake, voidable, void

Mistake- error in law, error in fact Voidable- some legal problem with it Void- never legal

Innocent misrepresentation

Occurs when a person makes a false statement of fact that he or she believes is true.

Only a mistake of fact (and not _______________) makes a contract voidable.

Only a mistake of fact (and not a mistake of value or quality) makes a contract voidable.

___________________________ of future facts (predictions) generally are not subject to claims of fraud. An exception is when a naïve purchaser relies on an opinion from an expert. In that situation, the innocent party may be entitled to a rescission.

Statements of opinion and representations of future facts (predictions) generally are not subject to claims of fraud.

Waiver of Breach and Subsequent Breaches

Typically, a waiver by a contracting party will not operate to waive subsequent, additional, or future breaches of contract. This is always true when the subsequent breaches are unrelated to the first breach.

Scienter

knowledge on the part of the misrepresenting party that facts have been misrepresented. One party's intent to deceive the other party to a contract

Duress is both a defense to ....

the enforcement of a contract and a ground for rescission of a contract.

10. Ordinarily, any party to a contract has a duty to come forward and disclose facts that the other party does not know about. t/f

false

What you do and dont need to disclose when selling house

-You don't need to disclose if someone was killed in ur house, if there was a fire -Roof leak, dishwasher broke- disclose it -"as is"- covers a lot of ground legally

Discharge by Settlement Agreement

A compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law. The agreement will be substituted as a new contract and will either expressly or impliedly revoke and discharge the obligations under the prior contract.

Discharge by Novation

A contractual obligation may also be discharged through novation (when both of the parties to a contract agree to substitute a third party for one of the original parties). The requirements of a novation are as follows: (1) A previous valid obligation. (2) An agreement by all parties to a new contract. (3) The extinguishing of the old obligation (discharge of the prior party). (4) A new contract that is valid. A novation expressly or impliedly revokes and discharges a prior contract.

Mistakes of Value

A mistake about the future market value or quality of the object of the contract. Contracts cannot be rescinded due to mistakes of value. When parties form a contract, their agreement establishes the value of the object of their transaction-for that moment. Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what he or she thought.

Bilateral mistake

A mistake that occurs when both parties to a contract are mistaken about the same material fact.

Adhesion Contracts and Unconscionability

Adhesion contracts are written exclusively by one party and presented to the other party on a take-it-or-leave-it basis. These contracts often use standard forms, which contain fine-print provisions that shift a risk ordinarily borne by one party to the other. To avoid enforcement of the contract (or of a particular clause), the plaintiff normally must show that the contract or particular clause is unconscionable (contains terms that are unfairly burdensome and that unfairly benefit the dominating party).

Reformation

An equitable remedy used when the parties have imperfectly expressed their agreement in writing. Reformation allows a court to rewrite the contract to reflect the parties' true intentions.

Time for Performance

If no time for performance is stated in a contract, a reasonable time is implied. If a specific time is stated, the parties must usually perform by that time. Unless time is expressly stated to be vital, a delay in performance will not destroy the performing party's right to payment. When time is expressly stated to be "of the essence" or vital, the parties normally must perform within the stated time period because the time element becomes a condition.

Negligent misrepresentation

Occurs when a person makes a false statement of fact through carelessness, or because he or she did not use the skill and competence required by her or his business or profession.

Misrepresentation by Silence

Ordinarily, neither party to a contract has a duty to come forward and disclose facts, and a contract normally will not be set aside because such information has not been volunteered.

Proof of what for duress

There must be proof of a threat to commit an act-usually a wrongful or illegal one

3. Alicia offers to sell a purebred cat for $200. Neither Alicia nor the buyer discusses the cat's ancestry, but the buyer believes that it comes from a championship line and agrees to the price. Upon discovering that the cat is only worth $50, can the buyer rescind the contract based on her mistake?

b. Probably not, because the buyer made a mistake about the cat's value, not a mistake about a material fact.

Which of the following is NOT an element of fraud? a. justifiable reliance on a misrepresentation b. intent to deceive c. intent to improve one's bargaining position

c. intent to improve one's bargaining position

voluntary consent

can be used as a defense to the contract's enforceability. Voluntary consent may be lacking because of a mistake, misrepresentation, undue influence, or duress.

A contract entered into under excessive or undue influence lacks ......

voluntary consent and is therefore voidable.