Mistakes and Fraud and Voluntary Contract

Chapter 14: Mistakes, Fraud, and Voluntary Contract

Terms:

• Scienter: “guilty knowledge” signifies tht there was an intent to deceive
• Innocent Misrepresentation: If a person makes a statement that they believe to be true but that actually misrepresents material facts, not of fraud.
• Negligent Misrepresentation: If a person fails to exercise reasonable care in uncovering or disclosing the facts or does not use the skill and competence that their business or profession requires
• Duress: both defense to the enforcement of a contract and a ground for the rescission of a contract

Section 1: Mistakes

• Contract law allows a contract to be avoided on the basis of mistake

Mistakes of Fact

• Occur in 2 forms: Bilateral/Unilateral: mistake is made by both parties/… by one party
• Bilateral (Mutual) Mistakes of Fact
  • When both parties are mistaken as to an existing material fact (a fact important to the subject matter of the contract
  • When it occurs the contract is voidable by the adversely affected party and can be rescinded (canceled) Example: Gilbert contracts to sell Magellan 3 tracts of undeveloped land for $6mil on the basis of a surveyor made an error and that the tracts actually contain 10% more acreage than reported. In this situation, Gilbert can seek Rescission (Cancellation) of the contract based on mutual mistake. It would be the same if both the parties had mistakenly believed that the tracts of land were adjoining but weren’t/
  • Good example of “meeting of the minds” Raffles v. Wichelhaus.Wichelhaus agreed to buy a shipment of Surat cotton from Raffles, “to arrive ‘Peerless’ from Bombay.” There was two ships namd Peerless sailing from Bombay, India, however.  Wichelhaus was referring to the Peerless that sailed in October; Raffles meant a different Peerless that sailed in December, Wichelhaus refused to accept them, and a lawsuit followed.  The court held in favor of Wichelhaus, concluding that a mutual mistake had been made because the parties had attached materially different meanings to an essential term of contract. 
• Unilateral Mistakes of Fact
  • Occurs when only one of the contracting parties is mistaken about a material fact; contract is usually enforceable. Example: DeVinck intends to sell his motor home for $32,500. When he learns that Benson is interested in buying a used motor home, DeVinck faxes Benson an offer to sell the vehicle to and says the price is $23,500.  DeVinck’s offer, even though DeVinck intended to sell it for $32,500, his unilateral mistakes falls on him.  He is bound in contract to sell home to Benson for $23,500.
  • Two Exceptions to the Rule:
    • If the other party to the contract knows or should have known that mistake of fact was made, the contract may not be enforceable.
    • If the mistake of fact was due to a mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. The clerical error must be readily provable. Example: Suppose that in preparing a bid a contractor itemized the estimated cost of each portion of the project, but made a mistake in addition when totaling the estimated cost, resulting in a total significantly lower that the correct total.  Because the clerical error can be easily ascertained, a court may allow any contract resulting from the bid to be canceled.  Alternatively, a court may reform the contract to reflect the accurate total. 

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 is normally enforceable.
• Can be both bilateral or unilateral; either they both serve as a basis for avoiding a contract
• Example: Hari buys a violin from Bev for $250. Although the violin is very old, neither party believes that it is extremely valuable. Later, an antiques dealer informs the parties that the violin is rare and worth thousands of dollars.   Although both parties were mistaken, the mistake is not a mistake of fact that warrants contract rescission.   This would be true even if, at the time of contracting, only Bev believed the violin was not particularly valuable (unilateral mistake) and Hari thought it was rare and worth more than $250.

Section 2: Fraudulent Misrepresentation

Elements:

Misrepresentation of a material fact must occur:

• Can occur by words or action
• Example: the statement “This sculpture was created by Michelangelo” is a misrepresentation of if another artist sculpted the statue. Or if somebody wanted to by a painting by Michelangelo and the owner of the art gallery doesn’t say anything, but shows her paintings that she believes is done by the artist and buys one.
• Statements of opinion and representations of future facts are generally not subject to claims of fraud. Example: “This land will be worth twice as much next” and “this car will last for years and years” are statements of opinion
• Misrepresentation by Concealment
  • Example: Rakas contracts to buy a new car from Bustamonte, a dealer. The car has been used as a demonstrating model for prospective customers to test-drive, but Bustamonte has turned back the odometer.  Rakas cannot tell from the odometer reading that the car has been driven nearly one thousand miles, and Bustamonte doesn’t tell Rakas the distance the car has actually been driven. 
• Misrepresentation of Law
  • Usually doesn’t entitle a party to relief from a contract
  • Example: Camara has a parcel of property that she is trying to sell to Pye. Camara knows that a local ordinance prohibits building a anything higher than three stories on the property.  Nonetheless, she tells Py, “You can build a condominium fifty stories high if you want to.”  Pye buys the land and later discovers that Camara’s statement was false.  Normall, Pye canot avoid the contract because at common law peple are assumed to know state and local ordinances.  Additionally, a layperson should not rely on a statement made by a nonlawyer about a point of law.  However, if the misrepresenting party is in a profession that is known to require greater knowledge of the law than the average citizen possesses. 
• Misrepresentation of Silence
  • Usually, neither party to a contract has aduty to come forward and disclose facts. Therefore, a contract cannot be set aside because certain pertinent info is not volunteered.  Example: You are selling a car that has been ina an accident and has been repaired.  You do not need to volunteer this info to a potential buyer.  If, however, the purchaser asks you if the car had extensive bodywork and you lie, you have committed fraudulent misrepresentation.
    • Exceptions:
      • If the seller knows of a serious potential problem that could not reasonably be suspected by the buyer, the seller may have a duty to speak. Example:  A city fails to disclose to bidders subsoil conditions that will cause great expense in constructing a sewer system, the city is guilty of fraud. 
    • Duty to Prospective Employees
      • Employers are liable for fraudulent misrepresentation

There must be an intent to deceive

• Scienter exists if a party knows a fact is not stated, if a party makes a statement that they believe is not true or makes a statement recklessly or without regard to whether it is true or false, and if a party says that a statement is made on some basis, such as personal knowledge or investigation, when it is not. Example: Bob, a securities broker, offers, to sell BIM stocks to Bill.  Bob assures Bill that BIM shares are blue-chip securities.  In fact, Bob knows nothing about the quality of BIM stock and doesn’t believe what he is saying is true.  Statement is misrepresentation. 
• Innocent Misrepresentation
  • When it occurs, the aggrieved party can cancel the contract but usually cannot seek damages. Example: Parris tells Roberta that a tract of land contains 250 acres. Perris is mistaken—the tract contains only 215—but Parris had no knowledge of the mistake.  Roberta relies on the statement and contracts to buy the land.  Even though the misrepresentation is innocent, Roberta can avoid the contract if the misrepresentation is material.
• Negligent Misrepresentation
  • Example: an operator of weight scale certifies the weight of Sneed’s commodity, even though the scale’s accuracy has not been checked in more than a year

The innocent party must justifiably rely on the misrepresentation

• The deceived party must have a justifiable reason for relying on the misrepresentation, and the misrepresentation must be an important factor. Example: Suppose that to rent a car, an 18 year old misrepresents his age and presents a false driver’s license listing his age as 22. In that situation, the car-rental agency would be justified in relying on this misrepresentation. 

Injury to the Innocent Party

• Most courts don’t require showing of injury when the action is to cancel the contract because cancellation returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary.
• For a person to recover damages cause by fraud, proof of an injury is required.

Section 3: Undue Influence

How Undue Influence May Occur

• Arises from special kinds of relationships in which one party can greatly influence another party, thus overcoming that party’s free will. Example: Minors and elderly people are under the influence of their guardian. If a guardian induces a young or elderly person to enter into a contract that benefits the guardian, undue influence may have been exerted. 
• Overall undue influence is that the party being taken advantage of doesn’t, in reality, exercise free will in entering into a contract.
• A court must ask, “To what extent was the transaction induced by domination of the mind or emotions of the person in question?”

The Presumption of Undue Influence

• When the principal in a confidential relationship benefits from the relationship, a presumption of undue influence arises. Example: If a guardian enters into a contract on behalf of the ward that financially benefits the guardian and the ward challenged the contract, a presumption arises that the guardian has taken advantage of the ward.  To rebut this presumption successfully, the guardian has to show that full disclosure was made to the ward, that consideration was adequate, and that the ward received, if available, independent and competent advice before completing the transaction.

Section 4: Duress

Forcing a part to do something through fear created by threats, black mail, or extortion

The Threatened Act Must be Wrongful or Illegal

• Threatening to exercise a legal right, such as the right to sue someone, isn’t illegal and does not constitute duress. Example: Joan injures Olin in a car accident.  The police wasn’t called.  Joan has no car insurance, but she has substantial assets.  Olin wants to settle the potential claim out of court for $3000, but Joan refuses.  After much arguing,  Olin says, “If you don’t pay me $3000 right now, I’m going to sue for $35,000.”  Joan is frightened and gives Olin a check for $3000.  Later in the day, Joan stops payment on the check, and later Olin sues her for the $3000.  Although Joan argues that she was a victim of duress, the threat of civil suit normally isn’t considered duress. 

Economic Duress

• Economic need is generally not sufficient to constitute duress, even when 1 party exacts a very high price for an item that the other party needs. If the party exacting the prices also creates the need, however, Economic Duress, may be found
• Example: suppose that the Internal Revenue Service (IRS) assesses a large tax and penalty against Weller. Weller retains Eyman, the accountant who prepared the tac returns on which the assessment was based, to challenge the assessment.  Two days before the deadline for filing a reply with the IRS, Eyman declines to represent Weller unless he signs a very high contingency-fee agreement for the services.  Although, Eyman has threatened only to withdraw his services, something that he is legally entitled to do, he is responsible for delaying the withdrawal until the last days before the deadline.  Because it would be impossible at that late date to obtain adequate representation elsewhere, Weller would be forced either to sign the contract or to lose his right to challenge the IRS assessment.

Section 5: Adhesion Contracts and Unconscionability

Standard-form Contracts

• Often contain fine-point provisions that shift a risk naturally borne by one party to the other. To avoid enforcement of the contract or of a particular clause, the aggrieved party must show that the parties had substantially unequal bargaining positions and that enforcement would be manifestly unfair.

Unconciability and the Courts

• Apply only to contracts for the sale of goods.