chapter 10: misrepresentation and fraud

1. that danann did not rely on any oral statement or other reps not in the contract

"neither party is relying upon any statement or representation not embodied in this contract, made by the other" (general disclaimer)

policy of misreps

-disclaimers of reliance on reps or the accuracy of certain reps allocate the risk of misrepresentations to the recipient (often a purchaser)

Leasco v. Taussig (issue)

-is taussig entitled to rescission based on the misrepresentation of MKI's earnings in MKI's jan. 1971 statement

representation example

-lisa's "saxophone for sale. made from tin" -saxophone is actually made from copper, and buyer reasonably relied on the rep -fraud: if lisa is lying then a buyer can rescind even if a reasonable person would not care about what it was made from -misrep: if lisa was MISTAKEN, a buyer could NOT rescind if a reasonable person would not care about what it was made of

will a general disclaimer or merger clause bar a claim for material misrepresentation or fraud by rendering the flase reps not part of the agreement (in accordance w/ the PE rule)?

-no (danann)

contrasts of representation

-opinions, predictions, puffery, or promises to perform -a representation can be verified or falsified at time of contracting -"maker" and "recipient"

reasonable reliance

-was it reasonable for the person to think the rep is true?

materiality

-would a reasonable person care about the representation being true when entering into a contract?

fraud or innocent

if false, did the maker know it was false?

fraudulent misrepresentation

-a misrepresentation made to induce another to enter a contract, and that the maker KNOWS OR BELIEVES is false, an exaggeration, or an unsupported inference

no material misrepresentation (leasco v. taussif)

-the misreps related to only 5% of MKI's revenues

no reasonable reliance (implied rule)

-a recipient cannot reasonably rely on statements they know or should know are untrustworthy

material misrepresentation

-a misrepresentation that would induce any reasonable person to enter the contract or that the maker KNOWS would induce the PARTICULAR recipient to enter the contract

actual reliance

-did a party subjectively care enough to rely on the statement as being true when entering into the contract?

examples of representation

-"this video game is multiplayer" -"this car gets 20 MPG" -"this car is certified pre-owned" -"i have clear title to this land and therefore I am entitled to sell it to you

Danann Realty v. Harris (facts)

-Danann realty agrees to purchase a building lease from Harris (to make money from reselling lease or leasing building out to other ppl) -Danaan sues for damages from fraud due to misreps from the seller about operating expenses of the building and profits from the investment

Leasco v. Taussig (facts)

-Taussig agrees to buy MKI for 1 mill from Leasco -promises to pay $625 in cash for MKI stock -promises to take responsibility for MKI's $375 loan from bank of america (release of guarantee) -taussif learns of MKI's $4,750 loss from Feb. financial statement due to a flawed bridge project -MKI buys MKE to get MKE's personnel and contracts w/ clients and MKE gets 50% of MKI's profits -Leasco sues Taussig for FAILURE TO PURCHASE MKI stock -taussig wants to get out of contract due to misrep in MKI's financial statement

Danann Realty v. Harris (rule)

-a disclaimer SPECIFICALLY DENYING that a plaintiff is relying on any of the defendant's reps related to the fraud means that the actual reliance element of a fraud claim is NOT present -however, a general merger clause does NOT prevent a claim for fraud (this is an exception to PE rule that prohibits oral statements from being a part of the contract)

fraudulent misrepresentation (rule)

-a party can rescind a contract or sue for damages if the party entered into the contract in reasonable (justified) reliance on the truth of a representation that was fraudulent **the misrepresentation does NOT need to be "material" for fraud

material misrepresentation (rule)

-a party can rescind a contract or sue for damages if the party entered into the contract in reasonable (justified) reliance upon the truth of a material representation that was false

representation

-a statement of fact by one party that the other actually relies on in deciding to enter a contract -relates to character, quality, condition, title to, or rights in, the subject matter of the contract

big question

-do merger clauses or either type of disclaimer prevent the recipient from bringing a claim of misrepresentation or fraud against the maker?

remedy

-false statements make contract voidable

Danann Realty v. Harris (application/holding)

-here, the contract states that 1.) Danann did NOT rely on any oral statement or other reps not in the contract and 2) that Harris made NO representations as to expenses of profits -holding: yes, b/c of the specific disclaimer relating to the alleged fraud there is NO RELIANCE element

falsity

-is it true?

Leasco v. Taussig (holding)

-no for 3 reasons -1.) no reasonable reliance -2.) no actual reliance -3.) no material misrepresentation

no reasonable reliance (leasco v. taussig)

-taussig KNEW OR SHOULD have known that MKI's "cost of completion" accounting method meant that MKI's financial statements were potentially misleading and exaggerated revenues -taussig could have known the truth before entering the contract -assume % total revenues = % cost of completion -the flaw discovered by MKI in late jan. decreased % cost of completion, hence revenues and earnings

2. that Harris made no reps as to expenses or profits

-the seller (harris) has not made and does not make any reps as to the physical condition, rents, leases, expenses, operation or any other matter or thing affecting or related to the aforesaid premises, except as herein specifically set forth, and the purchaser hereby expressly acknowledges that no such representations have been made (specific disclaimer)

no actual reliance (leasco v. taussig)

-there is a specific disclaimer denying any reps about MKI's financial condition ("except set forth in this agreement, leasco makes NO other reps and warranties w/ respect to MKI and the business thereof) -this disclaimer allocates the risk of misrep in the financial statements to taussig

Leasco v. Taussig (policy question)

-who should bear the loss of an innocent misrep MKIS's financial statements?

does a disclaimer specifically denying that recipient is relying on any of the marker's reps relating to the misrep mean that the actual reliance element of a fraud or material misrep is not present?

-yes (danann, leasco)