CONTRACTS: Misrepresentation and Fraud

Materiality Standard

"The meat of the deal." (Importance)

Restatement § 20. Effect of Misunderstanding

(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meaning to their assent and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. (2) the manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

Undue Influence: Restatement, Second § 177. When undue influence makes a contract voidable (in a position of trust)

(1) Undue influence is unfair persuasion of a party who is under the domination the person and is justified in assuming that the person will not act inconsistent with his welfare. (2) If manifestation of assent is induced by undue influence, then voidable by the victim.

Procedural & Substantive Unconscionability

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UCC 2-302. Unconscionable Contract or Clause

1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result...

Restatement § 151. Mistake Defined

A mistake is a belief not in accord with the facts

Restatement (Second) § 161: When Non-disclosure is Equivalent to an Assertion (Silence)

A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and and in accordance with reasonable standards of fair dealing. (c) where he knows that disclosure

Restatement (Second) § 160: When Action is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.

UCC 2-209: Modification

An agreement modifying a contract within this chapter needs no consideration to be binding

Duress: Bad Faith in Contract Modification Austin Instrument, Inc. v. Loral Corp.

Contract modification where one side gets more than the other side + the side that gets more also exploits a vulnerability

Fraud and Duress: Germantown v. Raulson (criminal prosecution)

Fraud in the factum: a type of fraud where misrepresentation causes one to enter a transaction without accurately realizing the risks, duties, or obligations incurred.

Outline for Hypo Answer

Fraud: Intent and reckless disregard Negligent Misrepresentation Mistake

Restatement (Second) § 175. When Duress by Threat Makes a Contract Voidable

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Procedural & Substantive Unconscionability

Procedural: how did I behave Substantive: look at the terms of the contract Either type is shocking to the court!!

Not Duress: Quigley v. KPMG Marwick, LLP (Economic Pressure: The Distinction)

TAKE AWAY: Economic duress does not equal (legal) duress.

Restatement (Second) § 162: When a Misrepresentation is Fraudulent or Material

(1) A misrepresentation is FRAUDULENT, when the maker intends his assertion to induce a party to assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies in the truth of the assertion. (2) A misrepresentation is MATERIAL (critical part of the transaction) if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.

Restatement (Second) § 176(1). When a Threat is Improper

(1) A threat is improper if (a) the threat is a crime or a tort, or the threat would be a crime or a tort if it resulted in obtaining property, (b) what is threatened is a criminal prosecution, (c) the threat is a breach of duty of good faith and fair dealing under a contract with the recipient.

Restatement § 152. When Mistake of Both Parties Makes a Contract Voidable

(1) where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

Restatement (Second) § 176(2). When a Threat is Improper

(2) A threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat is significantly increased by prior unfair dealing, or (c) what is threatened is otherwise a use of power for illegitimate ends.

Restatement, Second § 208. Unconscionable Contract of Term

If a contract or term is shocking to the conscience, then the court may 1) refuse to enforce the contract, or 2) enforce the remainder of the contract without the unconscionable term, or 3) so limit the application of any unconscionable term as to avoid any unconscionable result

Restatement (Second) § 164: When a Misrepresentation is Fraudulent or Material

If a party's manifestation of assent is induced by either fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

Duress: Bad Faith: Supervening Difficulties

New England Rock Services, Inc. v. Empire Paving, Inc.

Mistake

The parties reach an agreement, but one or both of the parties reach the agreement on the assumption that a certain state of affairs exists.

Restatement § 153. When Mistake of one Party Makes a Contract Voidable

Where a mistake of one party at the time a contract wa made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performance that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake.