BLAW 3430 Chapter 11

Ben and Kate had been negotiating Ben's employment contract in conversations over the phone for a couple of weeks. Finally, they agreed on some contract terms. Kate offered to create a draft of the contract for Ben to read over. On the same day Ben was fired from his job. Afraid he would be unemployed, Ben signed Kate's draft without reading it. In this example Ben:

cannot avoid the contract because of economic duress or failure to read.

Contracts induced by threats of __________ are voidable, regardless of whether the coerced party has committed an unlawful act.

criminal prosecution

Albert found a stone in his yard and took it to Bob, a jeweler, for evaluation. Bob wasn't sure as to the nature of the stone, but told Albert 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. This:

is a valid contract that should be enforced by the law, because neither party knew the exact nature of the stone at the time of the sale.

By holding a knife to his back, Ed compelled Sean to sign a contract advantageous to Ed. This contract was entered under:

physical duress.

Justifiable reliance

requires that the misrepresentation contribute substantially to the misled party's decision to enter into the contract.

Relationships that may lead to a court's careful scrutinization of contracts between the parties to make sure undue influence was not present include all but:

salesperson and customer.

In relation to fraud, scienter is a legal term which means:

that the seller had knowledge that his statements are false and had the intention to deceive.

An arm's length transaction is one in which:

the parties are acting in their own self-interest.

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 a good imitation, which fooled even the dealer. In this case:

the sale may be rescinded, because the dealer has made a nonfraudulent misrepresentation.

Which of the following would be considered to be a misrepresentation of a material fact for purposes of establishing fraud in the inducement?

"This car has a new radiator."

If incorrect, which of the following would probably be considered a misrepresentation of a material fact?

"This car has new brakes."

Which of the following is NOT an element of fraud?

Competent parties.

Which of the following is correct with regard to duress?

Duress by improper threats is the most common form of duress

Which of the following results in a void contract?

Duress by physical force.

Unilateral mistake

Examples should show situations in which only one of the parties to a contract has a belief not in accord with the facts. 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 made a unilateral mistake and he has no recourse.

Mistake in the meaning of a contract term

Examples should show situations in which the parties to a contract attach materially different meanings to their manifestations of mutual assent and neither party has reason to know the meaning attached by the other. Florence agrees to buy Henry's "car" for $2,000, believing it is Henry's 1990 automobile. In reality, Henry wants to sell his 1981 vehicle. There is no contract.

A voluntary choice from among perfectly legitimate alternatives may in some instances constitute economic duress.

F

Acts constituting duress are necessarily crimes or torts in themselves.

F

An arm's length transaction is one in which the parties owe each other special duties.

F

Economic duress, such as that found in the case of Berardi v. Meadowbrook Mall Company, renders a contract void.

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 fraudulent, it need not be material.

F

Fraud in the execution is a fairly common occurrence and involves defrauding a person as to the very nature of the contract.

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

Harry was told that he had to pay $50 for filing his claim in small claims court. He did. If the fee is really $40, he cannot recover the $10 because it is a unilateral mistake of fact.

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

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. If Pat decides to sell the car and one of these friends decides to buy it, Pat is under no duty to tell the correct figure unless asked.

F

Scienter is the element of fraud that requires that the misrepresentation must have been known by the one making it to be false, although it need not have been made with an intent to deceive.

F

The test for duress is objective and the act constituting duress must be a tort or a crime in order to be wrongful.

F

Ty threatened to have Lisa's father prosecuted for embezzlement unless Lisa signed a contract to pay Ty 12 monthly payments of $500 each to purchase his car. Lisa cannot avoid the contract based on duress since the threat was toward Lisa's father rather than Lisa herself.

F

Name two types of nonfraudulent misrepresentation and define each one.

Negligent misrepresentation is a false representation that is made without due care in ascertaining its truthfulness. Innocent misrepresentation is a false representation made without knowledge of its falsity but with due care.

Who does the law intend to protect by reason of the defense of duress? Why does the law protect this type of person?

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 the law protects them from the unscrupulous who want to impose their will on such persons on the ground of the victim's infirmities. Thus, a subjective test is used in determining whether a threat or act induced assent.

Give an example of each type of duress.

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.

Identify two situations in which silence or nondisclosure constitutes a misrepresentation.

Students may identify any two of the following situations. Silence or nondisclosure constitutes a misrepresentation when: (a) a person fails to disclose a fact known to him, he knows that the disclosure of that fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract, and nondisclosure of the fact amounts to a failure to act in good faith; (b) a party discovers that prior representations she innocently made are untrue and she does not correct the error; or (c) the parties are not dealing at arm's length, such as when the transaction involves a fiduciary, or a person in a confidential relationship who owes a duty of trust, loyalty, and confidence to the other.

A basic element of fraud is a false representation or a misrepresentation.

T

A statement of misleading half-truth is considered the equivalent of a false representation.

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. Al can have the contract voided based upon 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

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

Hal holds a gun to Irving's head and tells him to sign the contract. Irving signs the contract, because he fears for his personal safety. The contract is void, because it was entered into under duress

T

Nonfraudulent representation is made without scienter.

T

Physical compulsion and improper threats are the two basic types of duress.

T

Predictions, opinions, and promissory statements ordinarily do not constitute bases of fraud.

T

The law requires that to form a valid contract the agreement must be voluntary and knowing.

T

The law will carefully scrutinize contracts between Pete, a trustee, and Mason, a beneficiary of the trust, to make sure there was no undue influence by Pete.

T

Threats of resorting to a civil lawsuit to recover a debt does not constitute duress.

T

To sustain a case of fraud in the inducement, the injured party must prove that he actually relied upon the false representation.

T

Today, a majority of courts permit a rescission of a contract for negligent or innocent misrepresentation, provided that all the remaining elements of fraud are present and the misrepresentation is material

T

Undue influence is the taking of unfair advantage of a person by reason of a dominant position based upon a confidential relationship.

T

Which of the following need NOT be proved in order to establish the defense of economic duress?

That one party explicitly made the economic threat.

What are the two types of duress and what is the effect of each on the contract involved?

The first is called physical duress and it occurs when a party is compelled to manifest assent to a contract through actual physical force. The effect is to make 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. The effect of the use of improper threats or acts is to make the contract voidable at the option of the coerced party.

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.

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?

Yes, because he was negligent in not ascertaining its contents.

In the Lesher v. Strid case, the court held that:

a mutual mistake of fact renders a contract voidable by the adversely affected party if the mistake is so fundamental that it frustrates the purpose of the contract.

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 these are correct.

Which of the following, if any, are requisites for fraud in the inducement?

a. False representation of a fact that is material. b. Representation is made with knowledge of its falsity and the intention to deceive. c. The representation is justifiably relied on. d. All of the above.

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 $28,000. Steve made no attempt to verify the statements until after the transaction was completed. In this case:

a. Ralph has committed fraudulent misrepresentation. c. the contract is voidable at Steve's option.

The remedies of damages and rescission are available for:

a. fraudulent misrepresentation. b. negligent misrepresentation. c. innocent misrepresentation. d. All of the above.

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.

Define and discuss the concept of materiality in relation to misrepresentation

A misrepresentation is material if it would be likely to induce a reasonable person to manifest assent or the maker knows that it would be likely to induce the recipient to do so. The Restatement of Contracts provides that a contract justifiably induced by a misrepresentation is voidable if the misrepresentation is either fraudulent or material. A fraudulent misrepresentation does not have to be material to obtain rescission, but it must be material to recover damages.

Adam wants to buy a six-passenger car. The salesman tells him that the two-seat sports car Adam sees on the car lot would be just perfect for six people. Adam test drives the car and then buys it. In this case:

Adam was not justified in relying upon the salesman's representation that the car would seat six people.

What are the two types of fraud and what is the effect of each on the contract involved? Give an example of each type of fraud.

Fraud in the execution is a misrepresentation that deceives the other party as to the nature of a document evidencing the contract. For example, 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 and renders the transaction void. Fraud in the inducement is an intentional misrepresentation of a material fact by one party to the other who consents to enter into a contract in justifiable reliance on the misrepresentation.. For example, 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.

Which of the following results in a void, rather than voidable, agreement?

Fraud in the execution.

What elements need to be proved to establish each type of fraud?

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.

James threatens to hit Kenneth in the head with a baseball bat unless Kenneth signs a contract agreeing to pay James $400 for his saw. If, because of the threat, Kenneth signs the contract:

James has committed physical duress against Kenneth.

What remedies may be available for nonfraudulent misrepresentation?

The remedies available for nonfraudulent misrepresentation are rescission and damages.

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.

This is a mistake in law, which is treated no differently than a mistake in facts.

Bill, a builder, 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 Bill'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. In this case:

b. the city was aware of Bill's mistake. When it accepted the bid, with knowledge of Bill's mistake, the city sought to take an unconscionable advantage of Bill's error. c. there is a palpable unilateral mistake.

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:

fraud in the inducement.

Sam wants to sell his Golden Retriever to Al. Sam tells Al 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). Al relies on these statements and purchases the bird dog. The buyer has probably been a victim of:

fraud in the inducement.

A fiduciary:

is a person in a confidential relationship who owes a duty of trust and loyalty to another

A fraudulent misrepresentation:

must be material to recover damages.

When both parties are mistaken as to the same set of facts, it is termed:

mutual mistake.

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. In this case:

no contract exists due to mutual mistake of fact.