ACC241 Lesson 10

Lacey and Eliot are both "city slickers" and make a mistake and agree to the sale of a horse, only to learn later that it was a mule,

here is likewise not common agreement because neither of them agreed to sell or buy a mule

Lacey (in Idaho) writes to Eliot (in Florida) and convinces him to buy Speedy, the horse with three legs, by stating that Speedy is a normal horse and in good condition.

(1) knowingly made a false statement about an important FACTUAL matter, (2) her intent is to deceive Jed, and (3) he is justified in believing her. this is fraud. Jed is entitled to rescind the contract.

Suppose that Lucille contracts to sell Marvin a parcel of property that Marvin buys, believing that a new freeway will be constructed nearby.

(Obviously, construction of a freeway near the land will increase the value of the land.) Later, Marvin learns that he has made a mistake and a freeway will not be constructed near the land he has contracted to purchase. Lucille knew nothing about a freeway; Marvin's mistake was unilateral. In this case, a unilateral mistake will not suffice as a basis to rescind the contract.

Mutual asset

A contract requires mutual assent, or mutual agreement, which means that each party agrees to the same proposition.

Ordinarily, Lacey does not have an obligation to correct Eliot's plans to qualify for tax benefits from using Speedy for breeding purposes.

But this obviously would not be true if Lacey had expertise or training (or represented that she had expertise or training) that qualified her in tax law and she created a fiduciary relationship in relationship to taxation.

undue influence

Contracts entered into because of undue influence may be rescinded. Undue influence requires evidence of persuasion in an atmosphere of trust and confidence where one party has dominance over the other, and that the persuasion is unfair.

Suppose that Lacey's uncle in Montana died and left the horse to her and that she is simply selling a horse she has never seen and doesn't want. She has been erroneously told that the horse is normal and she repeats that error to Eliot.

In the earlier fraud examples, Lacey knew that Speedy was abnormal and actively worked to conceal that fact from Eliot; but, in this example, she is innocently mistaken.

Sharp v. Idaho Investment Corp.,

Mr. Sharp purchased stock in a business that subsequently failed. Sharp filed suit to recover his investment and argued that literature distributed by the sellers was fraudulently misleading. In contrast, though, attorneys for Idaho Investment Corp. believed that the real reason Sharp invested was not because of the misleading literature. They believed that Sharp invested because he had had other business dealings with two of the principals in the new business (Neilson and Frazier) and believed that with their involvement, the new business would be successful. Their point was that Sharp had relied on the business expertise of Neilson and Frazier and not on misleading literature, which he didn't read.

Return to Wilkin v. 1st Source Bank and suppose that the bank was selling off estate assets and offered to sell the Wilkins a safe belonging to the estate. In the safe is a locked compartment for which there is no key, and the bank, noting that there is no key, offered to sell the safe to the Wilkins for $100, and whatever they find in the compartment (if they can get it open) they can keep. If the Wilkins buy the safe and manage to get the compartment open and find therein $20,000 in cash, can the bank rescind the agreement on the basis of mistake, as they did in the original decision?

No; the agreement cannot be rescinded on the basis of mistake. In this case there is no mistake: both parties knew they did not know the contents of the compartment. Thus, risk was part of the transaction, and the contract will be enforced.

Donald W. Odorizzi v. Bloomfield School District

Odorizzi, an elementary school teacher, was arrested and charged with unlawful homosexual activity. Superintentent told Odorizzi that he should resign immediatley cause it would be better for him to get a job elsewhere. Odorizzi resigned, and then sued for undue inflence. decision to decide if there should be a trial. Appellate court reversed decision = there should be a trial.

In Whitaker v. Associated Credit Services, suppose that the typographical error was $5,000 instead of $500,000. Would the result in the case have been the same?

Quite possibly the result would have been different. The case was decided on an exception, a "loophole": unilateral mistakes are not normally rescinded, but they are if the mistake is known to the other party. In the original decision, the plaintiff's (the Whitakers) knew immediately that a mistake had been made because $500,000 was such an "outrageous" amount. In contrast, $5,000 is not such an outrageous amount and it is quite possible that the court may have concluded that this amount would not communicate to the Whitakers that a mistake had been made.

Evan who is old and competent (but feeble) and stays with his niece, Sariah, instead of living in a nursing home. Evan trusts Sariah and relies on her to make important decisions

She tells him that if he were to sell her his ranch (at a greatly reduced price) he could stay with her; otherwise, he must go to the nursing home. If the reduction in the sales price is grossly disproportionate to the service he receives from staying with Sariah, or, if she sends him to the nursing home after signing the sales contract, then the contract between them is unfair and subject to rescission on the basis of undue influence.

Correcting Mistakes about Basic Assumptions.

Silence is not acceptable, and a party has an obligation to disclose information if a contracting party is acting on the basis of a mistake which is central to the transaction and the mistake is known to the other party. An example is the sale of real estate with a water well; the well is known by the seller to be contaminated, but the buyer does not discover that fact during a reasonable investigation.

Supervening Events.

Silence is not acceptable, and a party has an obligation to disclose information if supervening facts (new facts) arise. For example, the parties negotiate the sale of a car, and the buyer examines the car. A day later, before the transaction is completed, the underside of the car is hit by a rock and the engine develops a serious oil leak. The seller knows of this condition.

Fiduciary Relationship

Silence is not acceptable, and a party has an obligation to disclose relevant information if a fiduciary relationship (a relationship of confidence or trust) exists between the parties. Examples of this might include attorneys, accountants, bankers, or real estate agents and their clients.

mutual mistake

Suppose that Elmer contracts to sell Leann a violin. If they both believe the violin is a valuable Stradivarius violin, and then they discover it is not, a mutual mistake has occurred. If they both believe the violin might be a valuable Stradivarius violin, and then they discover it is not, no mistake has occurred. 1st scenario - factual assumption on which contract is based 2nd scenario = uncertainty and risk are basic assumptions and subsequently learning the truth does not upset the reasonable expectations of either party.

speedy material

The fact that Speedy has only three legs would normally be material (important) in a transaction for his sale, but the fact that he didn't like apples would not be material.

fraud

There is not mutual assent if one of the contracting parties has defrauded the other. The essence of fraud is dishonesty, meaning intentional wrongdoing. Fraud is based on (1) a false statement of a material fact (2) the false statement being made with intent to deceive, and (3) the false statement being justifiably relied on by the injured party.

duress

This refers to force or compulsion. If a party is compelled to enter into an agreement by force or compulsion, a meeting of the minds has not occurred and the agreement may be rescinded.

opinion vs. fact

Thus, "this is a bed that George Washington slept in," is a statement of fact, but "this is the best bed in the world," is an opinion. Similarly, "Speedy is a nice horse" is a matter of opinion, but "Speedy is a normal horse" is a statement of fact.

unilateral mistake

Whitaker v. Associated Credit Services. In this case, a typist made a mistake and wrote $500,000 in an agreement, instead of $500. This was a unilateral mistake, and normally such a contract would not be rescinded on the basis of mistake because, as noted above, rescission would upset the reasonable expectations of the other contracting party. But, in Whitaker, there were no reasonable expectations to upset because Whitaker's attorney knew when he received the $500,000 offer that something was wrong. As the court noted: "Plaintiffs' attorney himself characterized the offer of $500,000 as 'outrageous,' and admitted he was 'shocked' by the offer when he received it." In short, the Whitakers knew when they received the offer that something was wrong.

Wilkin v. 1st Source Bank.

Wilkin purchased a house from a bank only to find it very cluttered. The bank and the buyer agreed that the buyer would clean up the property and, in return, could keep any part of the trash he or she wanted. A previous owner had been a famous artist and, unknown to either party, valuable works of art were included in the trash. The court applied the mutual mistake doctrine discussed above to solve the problem. The probate court properly concluded that there was no agreement for the purchase, sale, or other disposition of the eight drawings and plaster sculpture, because there was no meeting of the minds. Affirmed. Mutual mistake

Loral sold two contracts. 1st was accepted, and 2nd was bidding war. Buyer would cancel first order, if terms wern't agreed to on 2nd order. Loral accepted to meet commitments, then later sued to recover extra money, claimed duress, will she be successful?

Yes, Loral will be, and was, successful. Loral was forced into the terms of the second contract by the threat of Austin that it would breach the terms of the first contract. Loral could not get the goods it needed from any other source. (It would have been perfectly lawful for Austin to refuse to contract with Loral a second time, if that was where the negotiations ended. What Austin did wrong was to threaten breach of an existing contract if the new contract did not have terms to Austin's liking.)

You are an attorney handling a contract case for a plaintiff. You have evidence that the defendant made a number of intentional misstatements of fact for the purpose of inducing your client (the plaintiff) to enter into a contract for the sale of real estate. The remedy your client wants is rescission of the contract. As a practical matter, what theory (fraud or misrepresentation) will you pursue in favor of your client?

You would pursue the theory of misrepresentation. Even with good evidence, fraud is always troublesome to prove because the mental state (the intention) of the defendant must be proved. If all the plaintiff wants is rescission, it is sufficient to prove misrepresentation because proof of wrongful intent is not required.

audrey e. vokes v. arthur murray inc.

a widow of 51 years and without family, [who] had a yen to be 'an accomplished dancer' with the hopes of finding 'new interest in life.'" Taking advantage of Mrs. Vokes's hopes, the defendant sold her 2,302 hours of dancing lessons for a cash total of $31,090.45. To sell these lessons to Mrs. Vokes, the defendants extravagantly praised her dancing abilities and potential as a dancer. The point of the opinion is whether the statements of the defendant were factual in nature, or in the realm of salesman puffery. Trial court thought her first claim was insufficient but had sympathetically allowed her to keep amending it to try and state a good enough claim to entitle to her to go to trial. Never good enought, so found she should get without trial granted summary judgement. The decision of the trial court is reversed, meaning that Mrs. Vokes is, indeed, entitled to a trial.

Ulysses sells Lauren a pill that he says "will make you 10 years younger."

auren believes it; however, any person of common sense knows that there is no pill known to medical science that makes a person younger. Thus Lauren's reliance is not justified, and for lack of justifiable reliance, Lauren cannot successfully assert fraud against Ulysses.

contracts are presumed to be valid and enforceable, but that ceases to be the case when

formation of the contract is induced by fraud, misrepresentation, mistake, duress, or undue influence. The existence of these improper influences destroys mutual assent and the disadvantaged party may ask for rescission of the contract, and sometimes money damages.

defects that prevent mutual assent

fraud, misrepresentation, mistake, duress, and undue influence.

cousineau v. walker

growing trend by trial courts to force people to disclose information. materiality questions. The property being sold was located along a highway, and two principal motivations for the buyer to buy were (1) highway frontage for commercial development and (2) the existence of gravel that would be removed and sold. At trial, it was obvious that there had been confusion about the extent of the frontage and the amount of gravel—much of the confusion being caused by the seller. The seller argued that the truth was obvious—if the buyer had only investigated—and the buyer had an obligation to make a reasonable investigation. The trial court found in favor of the seller, but the appellate court reversed. In their opinion, the appellate court first concluded that facts about frontage and gravel are material (important) and then moved on to the issue of disclosure. the court concluded that the facts at issue (frontage and gravel) were material facts and that the seller had an obligation to clarify misunderstandings concerning those facts. another question if the sellers did this intentionally = fraud? In short, the purchaser was entitled to believe the seller and was not required to double-check to be sure that the seller was telling the truth.

affirmative misrepresentation

if kept silent you can sell three leged horse, but if you lied about good racing qualities thats fraud.

remedies

if there is fraud, injured party is entitled to remedies of rescission and money damages.

material fact

important fact, that would be given serious consideration in making a decision.

caveat emptor

let the buyer beware silence is not fraud extreme`

innocent misrepresentation

no mutual asset, like fraud but different in that innocent misrepresentation does not require proof of scienter (intentional concealment or misstatement of facts).

mistake

not mutual asset if there is a mistake. A court may refuse to enforce a contract if it was entered into on the basis of mutual mistake (a mistake by both parties). In contrast, mistakes which are unilateral (a mistake by one party only) are usually enforced.

whitaker v. associated credit services.

plaintiffs claimed violation of the Fair Credit Reporting Act. Hoping to dispose of the case by paying a small amount of money, the defendant prepared a settlement agreement in which there was an offer to pay $500 to the plaintiffs. The defendant's secretary, however, made a typographical error and typed in $500,000 instead of $500. defendents asked trial court to refuse to enforce, because not "meeting of the minds" and no mutual assent. plaintiff appealed. But trial court opionion was affirmed.

Rich & Whillock, Inc. v. Ashton Development, Inc.,

plaintiffs had loss to business after charging customer 76k but customer only paid 50k and said sue me for the rest At that point, plaintiffs signed the compromise ($50,000) agreement while protesting that it was blackmail and that they were signing only to survive financially. Later, the plaintiffs sued to recover the unpaid balance. The trial court ruled in favor of the plaintiffs and the defendants appealed. Appellate court appealed. defendant had gone beyond bargaining, and used leverage that was unlawful threat. economic dures.

undue influence

requires evidence that the persuasion was in an atmosphere of trust and confidence where one party has dominance over the other, and that the persuasion was unfair

scienter

so called guilty knowledge, misrepresentation of material facts. evidence of intentionally concealing or misstating the facts.

fraud

sometimes known as deceit fraud of tort or fraud of contract

Raffles v. Wichelhaus

the contract was to transport cotton from Bombay on the ship Peerless. The problem was that there were two ships by the name Peerless, one leaving in October and the other leaving in December, which was too late for the buyer's purposes. The contract was voided because of mutual mistake: one party was contracting with respect to the Peerless leaving in October and the other with respect to the Peerless leaving in December. There was obviously a shared mistake about a basic factual assumption: the identity of the ship to be used.

misrepresentation

the first cousin of fraud; that is, it is fraud without the requirement to prove intent. In other words, the difference between fraud and misrepresentation is that misrepresentation does not require proof of scienter easier to prove than fraud. not entitiled to damages.

rescission

the remedy for lack of mutual assent. If there is a defect there is often recission. to rescind a contract means to cancel it. return to precontract precision.

ratification

the willingness to continue with a contract despite mutual assent.

if Lacey uses a gun to force Eliot to sign a contract,

there is likewise no common agreement

lacey sells horse to eliot but hids there is three legs

there is not agreement on the same proposition because Lacey is selling a horse with three legs, and Eliot is entitled to think he is buying a horse with four legs.