Contracts II--Fraud
Elements of Proof Required for Misrepresentation? (3 elements)
(1) Other Party's State of Mind: A negligent or even innocent misrepresentation is generally sufficient to avoid the contract if it goes to a material fact. (2) Justifiable Reliance: The party asserting misrepresentation must show that he justifiably relied on the misstatement. This requires him to show not only actual reliance, but also that his reliance was justified. (3) Misrepresentation of Fact: The misrepresentation must be one of fact, rather than of opinion.
To recover for misrepresentation or fraud P must prove:
1) D made a false representation or concealed a material fact; 2) with knowledge of its falsity or uncertain as to whether it was true or false; 3) for the purpose of inducing P to enter into the K; 4) P has relied on that statement; 5) to his or her detriment.
5 exceptions to the "no general duty to speak" rule (special situations).
1) half truths--if you started to speak, need to finish 2) fail to correct prior statement--if you said something before and later found out that wasn't true, need to give update. (ex: "I think the deadline is on Tuesday" then later find out its actually "Monday.") 3) fail to correct a mistake (if you know the other is making a mistake as to a basic assumption on which the K was made, and failure to speak would be amount to a failure to act in good-faith and in accordance to reasonable standards of fair dealing) 4) fiduciary relationship--if in a special relationship where the other trusts you and expects you to look out for their best interest, need to inform them. (ex: attorney/client, doctor-patient) 5) positive concealment--go out of your way to make sure the person doesnt find out.
When does a misrepresentation make a contract voidable?
A Misrepresentation Makes a Contract Voidable: (1) If a party's manifestation of assent is induced by either fraudulent or a material misrepresentation by the other party to the K upon which the recipient relied on and is justified in relying. §164
A misrepresentation is fraudulent if... (2 elements)
A misrepresentation is fraudulent if: 1) The maker intends to induce another into manifesting his assent; and 2) the maker knows that he is either: a. lying (assertion not in according with the fact); or b. Does not know or have confidence in the truth of the assertion stated or implied; or c. Has no factual basis for his assertion. (RS§162) Note, fraud has elements of knowledge and deliberateness; when you plead fraud you open the possibility of punitive damages. If you want out of the K and you plead fraud, then you're in equity asking for rescission.
A misrepresentation is material if...
A misrepresentation is material if it is LIKELY to: a) induce a reasonable person to manifest assent, or 2) induce the recipient to manifest his assent. (RS§162)
What is Fraud in factum?
Fraud in factum is a misrepresentation as to the character or "essential elements" of the proposed contract that induces conduct that appears to be a manifestation of assent by a party who neither knows nor has a reasonable opportunity to know of the character or essential terms of the contract, through no fault of his own. Thus, his conduct is not effective as manifestation of assent. No assent. Think of fraud in the factum as signing a contract with invisible ink! Fraud in factum is very rare! Ex: blind individual who signs after having had the agreement read aloud by a person whom he wrongly believed would read the agreement honestly.
What's the difference between Fraud & Misrepresentation?
Fraud is a species of misrepresentation that's more egregious. It's lying, deceit, deception. Scienter is a requirement of fraud (intent or knowledge of wrongdoing by the offending party prior to committing it). Fraud is INTENTIONAL misrepresentation. Misrepresentation is negligent, but Fraud is very intentional. If it's negligent & you're seeking to rescind the K, or they did it innocently, you can rescind K for a misrepresentation that wasn't evil, it was just an accident. It also needs to be material - You wouldn't have entered into a bargain at all had you known the actual facts. It's material if it affects your decision about the K.
What is the general rule regarding a duty to disclose information?
General rule: no general duty to disclose information to the other party. BUT there are 5 exceptions to this rule (special situations)
What is the general rule for misrepresentations by third parties (not part of the contract)? Is the contract voidable?
If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction (3rd party), upon which the recipient is justified in relying, the contract is voidable by the recipient. Exception: Unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction. In other words, if the other party to the transaction acts in good faith and does not know or have reason to know of the misrepresentation, then the other party's giving of value or material reliance will make the K enforceable.
Generally, are false statements that concern matters of opinion, future conditions, or matters promissory in nature actionable? Is there an exception?
Ordinarily, not actionable. BUT, an exception is that statements of present intention as to future conduct may be the basis for a fraud action if the statements misrepresent the actual intention of the speaker and are relied upon by the recipient to his damage. In other words, at the time the K was made, party had no intention of actually performing from the get-go. Statements that can be understood as a promise are not actionable unless the plaintiff's reliance on them was reasonable, and unless there is evidence that the defendant intends to breach that promise at the time it is made.
What is the difference between puffery and statement of fact? Examples?
Puffery: subjective opinions, superlatives, or exaggerations usually made to make something seem better/more desirable. These statements are generally vague and state no specific facts. Examples of puffery that has long been tolerated in K law can be found in advertising or other sales representations, which praise the item to be sold. Such as: 1) "This is a great, dependable car - you will really enjoy it and you won't be sorry if you buy it." (Hmmm. Might depend on who says it. A mechanic might have some problems with this one.) 2) Car dealer: this car is a "dandy," a "bear-cat," "a good little car" or a "sweet job." (puff) For a statement to cross the line—past the point of "puffery"—the misrepresentation has to be a fact (cannot be a prediction or an opinion), and one that is material to the K. Example: "This car has never been in an accident." (This one clearly crosses the line if it is not true!)
What is the general rule about opinions? What are the exceptions to the general rule?
RS § 168/169: Opinions that predict the future are generally not actionable. There are exceptions. Opinions about facts are actionable 1) when the person who gives opinion is in a special position of trust (i.e. fiduciary or confidential relationship - bankers, priests, etc.) or people whose expertise is such that you'd trust their opinions; or 2) b/c you're a little vulnerable to that opinion. The misrepresentation also needs to be an opinion about a fact - not predictions about the future.
What are the remedies for Misrepresentation? (2 choices)
Remedies for Misrepresentation: Under modern law, victim of misrepresentation has 2 choices: a) Under tort law, file tort action for monetary damages; or b) Under K law, sue in a court of equity (equitable remedy so no monetary damages). Under K law judge may allow parties to rescind the K and avoid the enforceability of the K. This remedy requires the injured party to return any money or property received under K. Rescission may not be allowed if defrauded party is unable to return the property b/c it was transferred to a 3rd party. (RS of Restitution §66) Party may rescind K even if the material misrepresentation was not made with fraudulent intent, but instead was due to negligence (RS 2nd §164(1)). Example: Purchaser of home receives termite letter from seller stating that the home is free of termites. After purchase, buyer learns that the home is infested and that the seller fraudulently procured the termite letter by bribing the termite company. If the buyer doesn't want to give up the house, a tort action for damages to compensate for the termite problem might be a better remedy.
Syester: dance studio induced old lady into purchasing the most expensive dance course by telling her she was improving (but they knew she sucked).
Rules (that could all possibly apply): RS§159: A statement of opinion amounts to misrepresentation of fact if the person giving the opinion misrepresented his state of mind (said he had an opinion that he didn't have). RS§162: (1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker either: (a) Knows or believes that the assertion is not in accord with the facts, or (b) Does not have the confidence in the truth of the assertion stated or implied; or (c) Knows that there is no factual basis in the assertion that he states or implies. RS§169: A statement of opinion is actionable if the one giving the opinion is: a) In a fiduciary relationship with recipient; b) Is an expert on matters covered by the opinion; or c) Renders the opinion to one who, b/c of age or other factors, is peculiarly susceptible (vulnerable) to misrepresentation.
What is fraud in the inducement?
When one is induced by a fraudulent misrepresentation (see Restatement 162 for elements). Note, high standard of proof, need clear and convincing evidence.
Most misrepresentations are affirmative statements (blatantly lied). If however 1) a party failed to "disclose" information (i.e., speak) OR 2) took "action" to make sure the person wouldn't find out about the truth, can those act amount to a misrepresentation that would give the other party a right to sue?
Yes to both. 1) under limited circumstances a person's purposeful non-disclosure of a known fact will be treated as if he affirmatively lied by saying the fact does not exist. (§161) 2) In addition, if the person purposefully took action to prevent (or likely prevent) the other person from finding out the truth, that will also be treated as if he affirmatively lied by saying the fact does not exist. (ex: hid things, or went around telling people not to tell her the truth). (§160)
Can concealment of material facts constitute fraud?
Yes. RS § 160: Concealing defects to prevent prospective contractors from becoming aware of the defects constitutes fraud. Actively trying to hide a fact is an assertion that the fact does not exist and constitutes concealment.
Basically, fraud in the inducement occurs when...
fraud in the inducement is where you took someone's word for it, and their representation was wrong, and as a result you entered into the K. That makes the K voidable at your election. **If there's fraud in the inducement on exam, argue misrepresentation (b/c lower standard? fraud is generally intentional conduct which means the innocent party would need to provide evidence that D lied, and had the required intent to defraud. On the other hand, misrepresentation is merely a statement that wasn't true, so evidence re: D's intent is not required).
Ex: -intentional mistakes -hurried signatures -no copies of the contract -"application" v. contract -Relationship of trust -timing -skepticism re: the way something is sold These can be examples of some trigger facts for what kind of fraud?
fraud in the inducement
Under K law, what kind of cause of action is fraud in the inducement? equitable or at law?
Fraud in the inducement is an equitable cause of action, so the remedy will consist of the court ordering the other party to do (specific performance), or refrain from doing something (injunction); rather than monetary damages. K made under fraudulent inducement is K voidable at the innocent party's election. Example: When one person tells the other that he must sign a mortgage K or else his car will be repossessed, but in actuality there is no consequence for not signing.
What is a misrepresentation?
Misrepresentation: an assertion that is not in accord with the facts. (§159.)
For fraud, what is the first thing that must be determined?
Nature of the fraud--whether its fraud in the factum or fraud in the inducement. This first step is crucial because that will allow you to determine the overall effect on the contract (void or voidable).
Can fraud arise from negligent conduct?
No fraud is generally done intentionally. Misrepresentation can be negligent.
If one party failed to disclose information when he had a duty to speak, does that automatically entitle the injured party to damages?
No. Some courts have held that even though a party failed to disclose, still not bad enough to warrant monetary damages. So instead, court may grant the equitable relief of rescinding the contract.
What is the effect of fraud in factum on the contract?
VOID
If one is induced by a fraudulent misrepresentation, or if there was a material misrepresentation, the contract is... (effect on contract)
Voidable (RS§162 and 164)
How can misrepresentation be used as a shield? How can it be used as a sword?
Shield: A claim of misrepresentation can be used as a defense against enforcement in a suit brought by the misrepresenting party (misrepresented party as defendant). or Sword: misrepresentation can be used as a grounds for rescission or damages by the misrepresented/party suing as a plaintiff.
