Chapter 15

fraudulent misrepresentation consists of the following elements

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 misrepresentation. To collect damages, the innocent party must have been harmed as a result of the misrepresentation

Adhesion Contract

A "standard-form" contract, such as that between a large retailer and a consumer, in which the stronger party dictates the terms.

Latent Defects

A defect that is not obvious or cannot readily be ascertained.

Innocent Misrepresentation

A false statement of fact or an act made in good faith that deceives and causes harm or injury to another.

Bilateral Mistake

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

Unilateral Mistake

A mistake that occurs when one party to a contract is mistaken as to a material fact. Does not give the mistaken party any right to relief from the contract

Negligent Misrepresentation

Any manifestation through words or conduct that amounts to an untrue statement of fact made in circumstances in which a reasonable and prudent person would not have done that which led to the misrepresentation.

If the material mistake of fact is bilateral mistake

Contract can be rescinded by either party

Misrepresentation of a material fact can occur by either: Actions

Example: If a customer asks to see only paintings by Jasper Johns and the gallery owner immediately leads the customer to paintings that were not done by Johns, the owner's actions may be a misrepresentation.

Misrepresentation of a material fact can occur by either: Words

Example: The statement "This sculpture was created by Michelangelo" is a misrepresentation of fact if another artist sculpted the statue

Mistakes of value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable

Bilateral Mistake When the Parties Reasonably Interpret a Term Differently

If the parties to the contract attach materially different meanings to a word or term in a contract that is subject to more than one reasonable interpretation, a court may allow the contract to be rescinded because there has been no true "meeting of the minds."

Why would a seller risk the possibility of a lawsuit by providing a prospective buyer with false information about the object of their sale?

It is possible that when the information is provided to the prospective buyer, the seller actually believes it to be true. Another possibility is that the seller hopes that it will become true. Or the seller might assume that the prospective buyer would not sue even if the information turns out to be incorrect.

Voluntary Consent

Knowing and voluntary agreement to the terms of a contract.

Scienter

Knowledge by the misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive.

Misrepresentation by conduct

Misrepresentation also occurs when a party takes specific action to conceal a fact that is material to the contract

Suppose that Cypress had told Fazio about Garden Ridge's request for lower rent and the bank's request for a personal guaranty, and Fazio had still agreed to pay $7.67 million for property that had a later value of only $3.75 million. Could Fazio have successfully sued Cypress for a mistake in value?

No. When parties to both sides of a contract are mistaken as to the same material fact, either party can rescind the contract. But when a mistake concerns the later market value of the object of the contract, either party can enforce the contract.

Misrepresentation by Silence

Ordinarily, neither party to a contract has a duty to come forward and disclose facts; therefore, courts typically do not set aside contracts because a party did not volunteer pertinent information.

When Innocent Misrepresentation occurs

The aggrieved party can rescind the contract but usually cannot seek damages.

If the material mistake is unilateral

The contract is enforceable unless - • Other party knew or should have known that mistake was more or • Mistake was due to substantial mathematical error, made inadvertently and without gross negligence

How important is a deceived party's reliance on another's misrepresentation to establishing a case against a deceiving party?

The deceived party must justifiably rely on the misrepresentation, and the misrepresentation must be an important factor in inducing the party to contract, though it need not be the only factor. Reliance is not justified if the innocent party knows the truth or relies on obviously exaggerated statements ("this old car will get fifty miles to the gallon"). If the innocent party does not know the truth and has no way of finding it out, his or her reliance will be justified. But it should be emphasized that the reliance must be based on a material fact, not on a seller's puffery.

Most courts do not require a showing of injury in an action to rescind a contract.

These courts hold that because rescission returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary.

Fraudulent Misrepresentation

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

Bilateral Mistake Either Party Can Rescind the Contract

When both parties are mistaken about the same material fact, the contract can be rescinded by either party.

Make a Contact voidable Involving some material fact

a fact that a reasonable person would consider important when determining his or her course of action

Standard form for adhesion contract typically give

no opportunity to negotiate the contract terms.

Unilateral mistake

one party mistaken

What is a receiver?

person appointed by a court for the protection of certain property. Sometimes, the property must be collected from those who possess it and held subject to various claims, as in the situation of a bankrupt owner or a party involved in litigation.

What are a receiver's duties?

respect to the property—he or she must act in good faith and with a high standard of care for the property's benefit and in its best interest.

mistakes of value do not affect the enforceability of contracts is that value is variable

that is, depending on the time, place, and other circumstances, the same item may be worth considerably different amounts.

Lacking Voluntary Consent

the contract will be voidable. lacking because of: •A mistake •Misrepresentation •Undue influence •Duress

essential feature of undue influence

the party being taken advantage of does not exercise free will in entering into a contract.

To avoid enforcement of the contract or of a particular clause

the plaintiff normally must show that the contract or the clause is unconscionable

To Establish Duress

there must be proof of a threat to do something that the threatening party has no right to do.

Adhesion contracts are typically presented

to the weaker party on a take-it-or-leave-it basis.

Duress is both

•A defense to the enforcement of a contract •A ground for the rescission of a contract

A misrepresentation made with an honest belief in its truth may still be negligent due to

•A lack of reasonable care in ascertaining the facts •The manner of expression •The absence of the skill or competence required by a particular business or profession

To make a contract voidable, a mistake must

•Be a mistake of fact •Mistakes of value or quality do not make a contract voidable. •Mistakes of fact occur in two forms: 1.Bilateral 2.Unilateral

Generally, for duress to occur, the threatened act must

•Be wrongful or illegal •Render the person who is threatened incapable of exercising free will

When parties form a contract, their agreement establishes the value of the object of their transaction—for the 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. •Without this rule, almost any party who did not receive what he or she considered a fair bargain could argue mistake.

Economic Duress

•Economic need generally is not sufficient to constitute duress, even when one party exacts a very high price for an item that the other party needs. •If the party exacting the price also creates the need, however, economic duress may be found.

Misrepresentation by silence exception

•If a seller knows of a serious potential problem that the buyer cannot reasonably be expected to discover, the seller may have a duty to speak. Usually, the seller must disclose only latent defects •When the parties are in a fiduciary relationship—one of trust, such as physician and patient, attorney and client, or partners—they have a duty to disclose material facts. Failure to do so may constitute fraud

Justifiable Reliance on the Misrepresentation

•In order for fraud to occur, the deceived party must have a justifiable reason for relying on the misrepresentation. •Reliance is not justified if the innocent party either: •Knows the true facts •Relies on obviously extravagant statements

Scienter exists if a party

•Knows that a fact is not as stated •Makes a statement that he or she believes is not true •Makes a statement recklessly, without regard to whether it is true or false •Says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not

Injury to the Innocent Party

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

Undue Influence

•Persuasion that is less than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party. •A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.

One party may have the opportunity to dominate and unfairly influence another party in various types of fiduciary relationships, such as

•Physician and patient •Parent and child •Husband and wife •Guardian and ward

Innocent party in fraudulent misrepresentation can either

•Rescind the contract and be restored to her or his original position •Enforce the contract and seek damages for any harms resulting from the fraud

To recover damages caused by fraud, proof of harm is universally required.

•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. •Because fraud actions necessarily involve wrongful conduct, courts may also sometimes award punitive damages, which are not ordinarily available in contract actions.

Normally, the contract is enforceable

•This general rule has at least two exceptions: 1.The contract may not be enforceable if the other party to the contract knows or should have known that a mistake of fact was made. 2.The contract may not be enforceable if 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.

Duress

•Unlawful pressure brought to bear on a person, causing the person to perform an act that he or she would not otherwise perform (or refrain from doing something that he or she would otherwise do).

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.

unconscionability under Section 2 - 3 0 2 of the UCC

•applies only to contracts for the sale of goods. •However, because the U C C gives courts a great degree of discretion to invalidate or strike down a contract or clause as being unconscionable, many courts have applied the concept of unconscionability in situations other than contracts for the sale of goods.

Standard form contracts

•often contain fine-print provisions that shift a risk ordinarily borne by one party to the other. •Examples: Life insurance policies, residential leases, loan agreements, and employment agency contracts