B. Law Exam 2 Ch. 11
Stewart entered into a contract with Will to have Will build a 10-unit apartment complex on Elm Street in Randolph County. Unknown to both parties, this land had recently been rezoned and only single-unit dwellings can be constructed. a. This is a mistake of law. b. This is a mutual mistake of fact. c. Stewart is obligated to buy land elsewhere and have the complex constructed on property zoned for apartments. d. Will is liable to Stewart since Will is a contractor.
A
Tommy's parents died in a plane crash and he went to live with his guardian, Aunt Rose. Rose had a very small house and did not have a separate bedroom and bath for 12-year-old Tommy. She and Tommy decided to use some of his inheritance to pay for an addition to the house. He had some shares of stock transferred into Rose's name so that she could sell them when the money was due to be paid. The stock transfers are: a. presumed voidable unless Rose can show no unfair advantage was taken. b. presumed valid unless it can be proven that Tommy was taken advantage of. c. null and void because of undue influence. d. presumed void because of duress.
A
Define fiduciary and discuss its effect on a contract.
A fiduciary is a person in a confidential relationship who owes a duty of trust, loyalty, and confidence to another. A fiduciary owes a duty to make full disclosure of all relevant facts when entering into a transaction with the other party to the relationship.
Define "mistake," "mutual mistake," and "unilateral mistake." Explain how the law treats these two types of mistake.
A mistake is a belief that is not in accord with the facts. Mutual mistake occurs when both parties are mistaken as to the same set of facts, and unilateral mistake occurs when only one of the parties is mistaken. If a mutual mistake relates to a basic assumption on which a contract is formed and it has a material effect on the agreed exchange, it is voidable by the adversely affected party unless that party bears the risk of the mistake. Courts are hesitant to grant relief for a unilateral mistake even if it relates to a basic assumption on which the party entered into the contract and it has a material effect on the agreed exchange.
A collection agency threatened to sue Martha for the unpaid hospital bills from her heart operation. She signed a promissory note at a high but not illegal rate of interest. What result? a. It is valid because she signed it. b. It is valid because the threat to bring a civil suit to collect money owed is permissible. c. It is invalid because she signed under duress. d. It is invalid because the agency put her under undue pressure.
B
A fiduciary is a: a. person in a subservient position. b. person who owes a duty of trust, confidence, and loyalty to another. c. form of formal conduct. d. person of equal power and control.
B
Actionable fraud would be likely to be based on falsity of: a. a car owner's statement that, "This car is the best buy you will find." b. a realtor's statement that, "The contractor used 25-year warranted shingles on the roof." c. an art dealer's statement that, "This painting will increase in value." d. a stockbroker's statement that, "This stock should double in price within six months."
B
Contracts induced by threats of ____ are voidable, regardless of whether the coerced party has committed an unlawful act. a. civil prosecution b. criminal prosecution c. tortious conduct d. physical force
B
Kyle wants to buy a six-passenger car. The salesperson tells him that the two-seat sports car Kyle sees on the car lot would be just perfect for six people. Kyle test drives the car and then buys it. a. Kyle has a valid cause of action for fraud. b. Kyle was not justified in relying upon the salesperson's representation that the car would seat six people. c. The element of scienter is missing in this fact situation. d. The salesperson is a fiduciary.
B
The State of Florida enters into a contract with Treasure Salvors governing the salvage of a Spanish galleon that sunk in the 1600's. Under the terms of the contract, the salvagers agree to relinquish 25% of the items recovered to the State of Florida in return for the right to salvage on state lands. At the time the parties enter into the contract, they both believe that the seabed where the ship lies is state land. Subsequently, the United States Supreme Court holds that the continental shelf on which the ship rests has never been owned by Florida. The salvagers sue to rescind the contract. a. The contract cannot be rescinded. b. The parties made a mutual mistake for which the contract should be avoided. c. There is a mutual mistake, but because it is not material, the court should enforce the contract. d. The United States government will automatically step into the shoes of the State of Florida to make the contract enforceable.
B
Tom tries to sell his classic car to Victoria for $12,000. Tom tells Victoria, "I paid $12,000 for the car in 1978 and it's worth twice that today." Tom really paid $8,000 for the car in 1978. If Victoria buys the car, basing her decision on Tom's statement, which of the following correctly states the situation? a. Tom's statements amount to puffing only. b. Tom's statements provide grounds to set the contract aside. c. Tom's statements are actionable only if intentional. d. Tom's statements amount to fraud in the execution.
B
Which of the following is NOT an element of fraud? a. Material misrepresentation b. Competent parties c. Knowledge of falsity d. Justifiable reliance
B
Which of the following results in a void, rather than voidable, agreement? a. Duress by improper threat b. Fraud in the execution c. Fraud in the inducement d. Undue influence
B
A contract was made for 125 bales of cotton to arrive on a ship named "Peerless" from Bombay. Unbeknownst to either party to the contract, there were two ships named "Peerless," both of which were sailing from Bombay. One sailed in October and the other in December. The buyer had in mind the ship sailing in October, but the seller had in mind the ship sailing in December. Each party held his belief in good faith. When the goods failed to arrive on time, the buyer sued for breach of contract. a. The seller is in breach and must pay damages. b. The seller is guilty of fraud in the inducement for failing to disclose to the buyer which ship would contain the goods. c. No contract exists due to mutual mistake of fact as to the existence or identity of the subject matter of the contract. d. Two of the above, (a) and (b).
C
A party to a contract may be able to avoid the contract if: a. there is a mutual mistake, and the party undertook to bear the risk by conscious allocation. b. there is a unilateral mistake, and the party undertook to bear the risk by conscious ignorance. c. there was a mistake and the mistaken party was at fault in not discovering the problem before making the contract. d. None of the above. e. Only (a) and (b).
C
Albert found a stone in his yard and took it to Bob, a jeweler, for evaluation. Although Bob knew what the stone was, he told Albert that he wasn't sure as to the nature of the stone, but that he thought it was a topaz. Bob then offered to buy the stone for $25 and Albert agreed. Later Albert found out the stone was an uncut diamond worth about $700. a. The sale was a valid contract that should be enforced by the law. b. This contract can be voided based upon fraud in the execution. c. This contract can be voided based upon fraud in the inducement. d. This contract can be voided based upon mistake as to the identity of the subject matter.
C
An intentional misrepresentation of a material fact made with knowledge of the falsity and intention to deceive and which a party justifiably relies upon to his detriment is known as: a. duress. b. fraud in the execution. c. fraud in the inducement. d. non-fraudulent misrepresentation.
C
Eliza was an antique expert. She went to a tea party at Grandma Jones' house and saw a magnificent Queen Anne table out on the back porch. She asked Grandma about it and was told it was in the way so they were going to store it in the barn. Eliza offered to buy it from her for $200. The next week, Grandma saw it in Eliza's store on sale for $3,000. Which of the following is true? a. She can get it back because of fraudulent concealment of the value. b. She can get the true value, because it would not be fair otherwise. c. She cannot rescind the contract because Eliza did not have a duty to tell her the value of the table. d. She cannot rescind the contract because she did not rely on Eliza to give her a fair price.
C
Fred is a concert violinist who is scheduled to perform at Carnegie Hall for the first time. He buys what he is told is a Stradivarius violin from a well-known, reputable dealer in quality violins, and he pays the going rate for a Stradivarius. He later learns the violin is an imitation, although it is such a good imitation that even the dealer thought it was authentic. a. Fred has made a unilateral mistake and cannot avoid the contract. b. The dealer has committed fraud in the inducement. c. The sale is voidable by the purchaser for mutual mistake. d. The sale is voidable, because the dealer has made a fraudulent misrepresentation.
C
If untrue, which of the following would probably be considered a misrepresentation of a material fact? a. "This is the one that I think is the best buy." b. "This is the best computer on the market." c. "This car has new brakes." d. "These tires will wear like iron."
C
Sam wants to sell his Golden Retriever to Jordan. Sam tells Jordan that the dog is three years old and that he will point, back, and retrieve. Although the dog is three years old and will point at birds, he will not back (honor another dog's point). Jordan relies on these statements and purchases the bird dog. The buyer has most probably been a victim of: a. duress. b. undue influence. c. fraud in the inducement. d. fraud in the execution.
C
Which of the following does not exemplify a relationship that typically leads to scrutiny of a contract for undue influence? a. Wife and husband b. Clergy and parishioner c. Brother and sister d. Parent and child
C
Which of the following need NOT be proved in order to establish the defense of economic duress? a. That one side involuntarily accepted the terms of another. b. That circumstances permitted no other alternative. c. That one party explicitly made an economic threat. d. That the circumstances leading up to the contract were the result of coercive threats or acts of the opposite party.
C
Which of the following would be considered to be a misrepresentation of a material fact for purposes of establishing fraud in the inducement? a. A statement of judgment of value, such as "This is the best car in town for the money." b. "This style of jacket is going to be the most popular style next year." c. "This car has a new radiator." d. "In my opinion, this is the best buy for the money."
C
A misrepresentation is material if: a. it would likely induce a reasonable person to enter into a transaction. b. the maker knows it would likely induce the other party to enter into the transaction. c. it is made knowingly. d. Both (a) and (b).
D
Alex wants to submit a bid on a city sewer project. He computes the cost, but mistakenly omits the cost of one item. Accordingly, he submits a bid of $430,000 to the city. The next highest bid is $675,000, and the rest of the bids are even higher. The city is happy to have such a low bid, so it accepts Alex's bid and awards him the contract for the job, even though the city engineer is of the opinion the job cannot be done for less than $650,000. a. Alex must perform for the agreed upon price because he has made a unilateral mistake. b. The city was aware of or should have been aware of Alex's mistake. When it accepted the bid with knowledge of Alex's mistake, the city sought to take an unconscionable advantage of Alex's error. c. This case is an example of a palpable unilateral mistake. d. Both (b) and (c).
D
Physical compulsion and improper threats are the two basic types of duress.
T
Rescission is usually permitted where the parties to a contract are both mistaken about a material fact.
T
Scienter is the element of fraud that requires that the person who makes the misrepresentation knows that it is false or has reckless indifference as to its truthfulness.
T
There are two distinct types of fraud.
T
To obtain relief for negligent or innocent misrepresentation all the remaining elements of fraud must be present and the misrepresentation must be material.
T
To sustain a case of fraudulent misrepresentation, the injured party must prove that he actually relied upon the false representation.
T
Undue influence is the taking of unfair advantage of a person by reason of a dominant position based upon a confidential relationship.
T
For a misrepresentation to be material, it must be likely to induce a reasonable person to manifest assent or the maker must know that it would be likely to induce the recipient to do so.
T
Jill contracts to purchase Kevin's automobile under the belief that she can sell it at a profit to Linda, but after Jill has bought the car, she finds out that Linda isn't interested in buying it. a. Jill cannot void the contract. b. Jill can rescind the agreement. c. Jill could rescind the agreement if she was mistaken in her estimate of the value of the auto. d. Jill can sue Linda for detrimental reliance.
A
What are the two types of duress and what is the effect of each on the contract involved? b. Give an example of each type of duress. c. Who does the law intend to protect by reason of the defense of duress? Why does the law protect this type of person?
ANS: a. The first is called physical duress and occurs when a party is compelled to manifest assent to a contract through actual physical force. It renders the agreement void.The second type of duress involves the use of improper threats or acts, including economic or social coercion, to compel a person to enter into a contract. The threat may be explicit or it may be inferred from words or conduct. This type of duress makes the contract voidable at the option of the coerced party. b. Pointing a gun at a person or taking a person's hand and compelling him to sign a written contract is an example of physical duress. An example of improper threats: If Ellen, a landlord, induces Vijay, an infirm, bedridden tenant, to enter into a new lease on the same apartment at a greatly increased rent by wrongfully threatening to terminate Vijay's lease and evict him, Vijay can avoid the new lease by reason of duress exerted on him. c. The Restatement states, "Persons of a weak or cowardly nature are the very ones who need protection; the courageous can usually protect themselves. Timid and inexperienced persons are particularly subject to threats, and it does not lie in the mouths of the unscrupulous to excuse their imposition on such persons on the ground of their victims' infirmities."
James threatens to hit Kenneth on the head with a baseball bat unless Kenneth signs a contract agreeing to pay James $900 for a motor. Because of the threat, Kenneth signs the contract. a. This contract is voidable at Kenneth's option. b. James has committed physical duress against Kenneth. c. This is an example of economic duress. d. All of the above.
D
Ralph sold a motel to Steve by stating that he had paid $250,000 for it and that his net average annual profit from the business has been $40,000. In reality he paid $100,000 for the motel and has earned a net average annual profit of only $30,000. Steve made no attempt to verify the statements until after the transaction was completed. a. Ralph has committed fraudulent misrepresentation. b. Steve is bound by the contract, because he failed to verify the statements which were made to him. c. The contract is voidable at Steve's option. d. Both (a) and (c).
D
Steven has a typed copy of a contract, which he would like to have Thomas sign. Thomas, who needs glasses to read typing, doesn't want to sign until he has read the document, but Steven convinces Thomas to sign it anyway, because it is a "standard" contract for this type of situation. Is the contract which Thomas signed binding upon him? a. No, because he did not read it b. No, because he entered into it based upon fraud in the execution c. Yes, because he has made a unilateral mistake of law d. Yes, because he was negligent in not ascertaining its contents
D
The remedies of damages and rescission are available for: a. fraudulent misrepresentation. b. negligent misrepresentation. c. innocent misrepresentation. d. All of the above.
D
When both parties misunderstand the same set of facts relating to a basic assumption on which a contract is made, it is termed: a. rescissionary mistake. b. unilateral mistake. c. mistake of law. d. mutual mistake.
D
Which of the following can meet the scienter requirement to establish fraud in the inducement? a. Actual knowledge b. Lack of belief in the statement's truthfulness c. Reckless indifference as to a statement's truthfulness d. All of the above meet the requirement.
D
A unilateral mistake of fact is ordinarily grounds for avoiding a contract.
F
Al owns a farm that he believes is worth $150,000. Betty knows that there is oil under the farm and offers Al $160,000 for it. Al accepts and sells the farm to Betty. Al later realizes that the land was worth more than $160,000. Al can have the contract avoided based upon fraud.
F
An arm's-length transaction is one in which the parties owe each other special duties.
F
For a misrepresentation to be actionable as fraud in the inducement, it must be a misrepresentation of opinion.
F
For a misrepresentation to be fraud in the inducement, it need not be material.
F
Fraud in the inducement will render an agreement void.
F
Generally, whether or not the parties deal at arm's length does not affect whether silence alone amounts to fraud.
F
Historically, courts held that representations of law were statements of fact, but the present trend is to recognize that they have only the effect of statements of opinion.
F
If the act or threat would affect a person of average strength and intelligence, then and only then will the act constitute duress.
F
Marjorie has been cared for by her family physician for 35 years. She decides to assume the mortgage on his new clinic. The contract is automatically invalid because of undue influence.
F
Matt sells bikes at a local discount store. To encourage Bob to buy a more expensive model than he originally contemplated, Matt tells Bob, "This is the most awesome bike money can buy at this price. You can expect lots of riding pleasure." Based on this statement Bob buys the bike. A week later, before his bike is fully paid for, Bob sees a far superior bike for a lower price at another store. Bob can avoid his contract with Matt because of fraudulent misrepresentation.
F
Mistake by failure to read a document is grounds to void a contract.
F
Pat told her friends that her car got 35 miles to the gallon in the city when in reality it only got 20 miles per gallon. When Pat decides to sell and one these friends decides to buy the car, Pat is under no duty to tell the correct figure unless asked.
F
The difference between fraud and misrepresentation is that fraud involves malice while nonfraudulent misrepresentation is always innocent.
F
The most uncommon type of duress involves the use of economic and social coercion.
F
The test for duress is objective and the act must be classified as a tort or a crime in order to be wrongful.
F
The trustee of a trust does not owe a fiduciary duty to the beneficiary of that trust.
F
Name the two types of nonfraudulent misrepresentation. Identify the remedies that may be available.
Nonfraudulent misrepresentation includes negligent and innocent misrepresentation. Negligent misrepresentation is made without due care, and innocent misrepresentation is made without knowledge of the falsity of the representation. The remedies available for nonfraudulent misrepresentation are rescission and damages.
If a confidential relationship exists between parties to a contract, the law presumes that undue influence exists if it appears that the dominant party has gained at the other party's expense, but the presumption can be rebutted by evidence that it was not exercised.
T
If a seller occupies a fiduciary relationship with the buyer and fails to make full disclosure to the buyer, then the latter will be able to avoid the transaction.
T
If an agreement is not voluntary and knowing, it will be either void or voidable.
T
A basic element of fraud is a false representation or a misrepresentation.
T
A famous decision involving mistake as to the meaning of contract terms is Raf les v. Wichelhaus, a case involving two ships with the same name which were confused by the two parties to the contract.
T
A party to a contract may be entitled to relief even if he is contributorily negligent in relying on a fraudulent misrepresentation.
T
A seller's promise to service a sewing machine free for the next 90 days when she has no intention of doing so is actionable as a false representation of a fact if the other elements of fraud are present.
T
Al owns a farm that he believes is worth $150,000. Betty knows that there is oil under the farm and offers Al $160,000 for it. Al is suspicious and asks her why she wants to buy the place. She says she would like to live in the country. Al then asks her if she thinks there might be valuable minerals under the land. Betty laughs and says she doubts that very much, so Al sells her the farm for $160,000. Al later realizes that the land was worth more than he was paid. Betty's statement to Al was a misrepresentation requisite for fraud.
T
An act that is contrary to public policy or is morally reprehensible may constitute duress.
T
At the marriage of her daughter, Lorna is given papers to sign which the catering company says are the invoices for the food, service, and decorations. Underneath the invoices are a carbon and a contract of sale for a portion of the failing catering business. Lorna signs the papers; her signature is transferred to the sales contract. This is a void contract because it was entered by fraud in the execution.
T
Economic duress renders a contract voidable.
T
Nonfraudulent representation is made without scienter.
T
Define undue influence and name some of the relationships that would be affected.
Undue influence is the unfair persuasion of a person by a party generally in a dominant position based upon a confidential relationship. Some of the relationships that would be affected would include: guardian-ward, trustee- beneficiary, principal-agent, spouses to one another, parent-child, attorney-client, physician-patient, and clergy- parishioner.
What are the two types of fraud and what is the effect of each on the contract involved? b. Give an example of each type of fraud. c. What elements need to be proved to establish each type of fraud?
a. Fraud in the execution is a misrepresentation that deceives the other party as to the nature of a document evidencing the contract. It renders a transaction void. Fraud in the inducement is an intentional misrepresentation regarding the subject matter of a contract and inducement of the other party to enter into it. It renders the contract voidable by the defrauded party. b. Melody delivers a package to Ray, requests Ray to sign a receipt for it, holds out a simple printed form headed "Receipt," and indicates the line on which Ray is to sign. This line appears to Ray to be the bottom line of the form, but instead it is the bottom line of a promissory note cleverly concealed underneath the receipt. Ray signs where directed without knowing that he is signing a note. This is fraud in the execution. Alice, in offering to sell her dog to Bob, tells Bob that the dog won first prize in its class in the recent national dog show. In fact, the dog had not even been entered in the show. This statement induces Bob to accept the offer and pay a high price for the dog. There is a contract, but it is voidable by Bob because Alice's fraud induced his assent. c. Fraud in the inducement requires proof of a false representation of a fact that is material and made with knowledge of its falsity and the intention to deceive and that was justifiably relied on. Fraud in the execution requires a misrepresentation that defrauds a person as to the nature of the contract so that he is unaware of entering into it.
Give an example of each of the following: a. Unilateral mistake b. Mistake in the meaning of a contract term.
a. Nancy offers to sell Sidney a certain boat. Sidney believes the boat is a valuable antique with significant collector's value. Nancy makes no misrepresentations with regard to its value, but asks for $5,000 more than the appraised value. Sidney pays the asking price, because he thinks it is worth more. If the boat is not an antique collectible, and Sidney has paid more than the boat is worth, he has no recourse. b. Florence agrees to buy Henry's "automobile" for $3,000, believing it is Henry's 1998 car. In reality, Henry wants to sell his 1991 automobile. There is no contract if both held their belief in good faith without knowledge of the other party's belief.