BLTC 11e IM-Ch14 - NACM · Web view2016. 1. 28. · In determining the genuineness of assent of...

Chapter 14

Voluntary ConsentINTRODUCTION

To this point in the text, students have studied how a contract comes into existence, when a contract will not be enforced because it is illegal or against public policy, and how the law protects certain categories of people by allowing them to avoid their contracts. This chapter concerns another category of relief from the en forcement of contracts: a contract may be unenforceable if the parties have not genuinely assented to the terms.

In determining the genuineness of assent of the contracting parties, courts looks at a party’s objective intent. A court may find that genuineness of assent is lacking because of mistakes, misrepresentation, undue influence, or duress (in other words, because there is no true “meeting of the minds”). If the law were to en force contracts not genuinely assented to by the contracting parties, injustice would result. The injured party may opt to enforce the deal, however, or to rescind it.

CHAPTER OUTLINE

I. MistakesThere is a difference between mistakes as to judgment of market conditions (believing something will be worth more than it ultimately proves to be) and mistakes as to facts (believing something is something other than what it is). Only under a mistake of fact can a contract be avoided.

A. UNILATERAL MISTAKESA unilateral mistake occurs when one party is mistaken as to a material fact. Generally, the mistaken party has no right to relief. There are two exceptions—

• The rule does not apply if the other party knew or should have known that a mistake of fact was made.

• Some states will not enforce a contract against a mistaken party if an error was due to a mathe-matical mistake and it was done inadvertently and without gross negligence (for example, a typo).

ADDITIONAL BACKGROUND—

Unilateral MistakesThe Restatement (Second) of Contracts is an authoritative source for many of the principles discussed in

this chapter. Specific sections of the Restatement are noted throughout the text. After selected parts of the

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2 UNIT TWO: CONTRACTS AND E-CONTRACTS

text in which a section is noted, the full text of that section is set out. The following is the section that relates to this part of the text on unilateral mistakes—Restatement (Second) of Contracts, Section 153.

§ 153. When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the of the risk of the mistake under the rule stated in § 154, and

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or

(b) the other party had reason to know of the mistake or his fault caused the mistake.

B. BILATERAL (MUTUAL) MISTAKESWhen parties to both sides of a contract are mistaken as to the same material fact, either party can rescind the contract. When a mistake concerns the later market value of the object of the contract, however, either party can enforce the contract.

CASE SYNOPSIS—

Case 14.1: L & H Construction v. Circle Redmont, Inc.

L & H Construction Co. contracted with Circle Redmont, Inc., which is based in Florida, to make a staircase and flooring system. Redmont’s original proposal was to “engineer, fabricate, and install.” Installation was cut from the deal, and in the final agreement, payment was due on “Supervision” instead of “Completion” of installation. But the final agreement still stated that Redmont would “engineer, fabricate, and install.” Later, Redmont claimed that this was a mistake. L & H insisted that installation was included. L & H filed a suit in a Florida state court against Redmont. The court found that the word “install” in the phrase “engineer, fabricate and install” was the result of a mutual mistake. L & H appealed.

A state intermediate appellate court upheld the decision. The contract was ambiguous. Redmont’s witnesses clarified that the final agreement stated the parties’ understanding—Redmont would only supervise the installation, not perform it. The trial court determined that the witnesses were credible. The appellate court reversed the lower court’s final judgment in Redmont’s favor on other grounds, however.

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Notes and Questions

Why are situations such as the one presented in this case often sources of litigation appealed? The amount of money involved in these cases makes them important to the parties involved and to their attorneys. Partly for this reason, there can be many cases involving similar facts for which a particular decision serves as a binding precedent.


CHAPTER 14: VOLUNTARY CONSENT 3

The trial court allowed the parties to testify about the terms in their written contract. Redmont’s witnesses seemed to be contradicting what was stated in the contract. Under what exception to the parol evidence rule is such testimony admissible? Parol evidence is admissible to show that the true intent of the parties was something other than that expressed in a written instrument. Because of the strong presumption that a written agreement accurately expresses the parties' intent, however, the party seeking reformation based on a mutual mistake must prove its case by clear and convincing evidence.

The parties performed as agreed, with Redmont working on schedule and L & H making timely payments, until the issue of installation arose. Assuming that no further disputes arose, what might be the appropriate remedy? An appropriate equitable remedy might be reformation, rescission, or specific performance. The appropriate legal remedy would, of course, be damages. If the contract were reformed to reflect the original intent of the parties, it may then be enforced as reformed—Redmont would not have to “install” the staircase and flooring system. If the contract were rescinded, the parties would have to be returned to their respective positions before the contract. In the case of Redmont, this might be difficult because the staircase and flooring system have already been made. An order of specific performance could require L & H to accept delivery, assuming the goods pass muster, and pay for them. Damages would have to give the parties the benefit of their bargain. Reformation and enforcement of the contract as reformed would appear to be the most likely remedy for a bilateral mutual mistake of fact.


Bilateral MistakesThe following is the section of the Restatement (Second) of Contracts that relates to this part of the text—

Restatement (Second) of Contracts, Section 152.

§ 152. When Mistake of Both Parties Makes a Contract Voidable

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.

(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

II. Fraudulent MisrepresentationFraud affects the genuineness of the defrauded party’s consent to the contract. Normally, the innocent party can either rescind the contract and be restored to his or her original position or enforce the contract and seek damages for any injuries. The elements are—

• Misrepresentation of a material fact.• An intent to deceive.• The innocent party’s justifiable reliance on the misrepresentation.• To collect damages, the innocent party’s injury.




Fraudulent Misrepresentation

Following are sections of the Restatement (Second) of Contracts that relate to this part of the text—Restatement (Second) of Contracts, Sections 163 and 164.

§ 163. When a Misrepresentation Prevents Formation of a Contract

If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a mani festation of assent...............................................................................................................................................................................

§ 164. When a Misrepresentation Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresenta tion by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

(2) 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 upon which the recipient is justified in relying, the contract is voidable by the recipient, 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.

ENHANCING YOUR LECTURE—

ONLINE PERSONALS—

FRAUD AND MISREPRESENTATION ISSUES Keying the words online personals into the Google search engine will return more than over 35 million hits

including Match.com, Chanceforlove.com, Widowsorwidowers.com, Makefriendsonline.com, and Yahoo! Personals. Yahoo! Personals, which calls itself the “top online dating site,” offers two options. One is for people looking casual dates. It allows users to create their own profiles browse member profiles, and exchange e-mail or instant messages. The second option, called Yahoo! Personals Primer, is for people who want serious relationships. Users must take a relationship test. Then they can use Yahoo’s computerized matching system to “zero in on marriage material.” With this service, chat on the phone as well as exchange e-mail.

THE THORNY PROBLEM OF MISREPRESENTATION



When singles (and others) create their profiles for online dating services, they tend to exaggerate their more appealing features and downplay or omit their less attractive attributes. All users of such services are aware that the profiles may not correspond exactly with reality, but they to assume that the profiles are not complete misrepresentations. In 2006, however, Robert Anthony, individually and on behalf of others, brought a suit against Yahoo in federal district court, alleging fraud and negligent misrepresentation, among other things.

In his complaint, Anthony claimed that Yahoo was not just posting fictitious or exaggerated pro files submitted by users but was deliberately and intentionally originating, creating, and perpetuat ing false and /or nonexistent profiles. According to Anthony, many profiles used the same exact phrases “with such unique dictation and vernacular [language] that such a random occurrence would not be possible.” Anthony also argued that some photo images had multiple identities—that is, the same photo appeared in several different profiles. He also alleged that Yahoo continued to circulate profiles of “actual, legitimate former subscribers whose subscriptions neared its end date, Yahoo would send the subscriber a fake profile, heralding it a “potential ‘new match.’

DID YAHOO HAVE IMMUNITY?

Yahoo asked the court to dismiss the complaint on the grounds that the lawsuit was barred by section 230 of the Communications Decency Act (CDA of 1996.a The CDA shields Internet service providers (ISPs) from liability for any information submitted by another information content provider. In other words, an interactive computer service cannot be held liable under state law as a publisher of information that originates from a third party information content provider. The CDA defines an information content provider as “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or nay other interactive computer service.”b

The court rejected Yahoo’s claim that it had immunity under the CDA on the grounds that Yahoo had become an information content provider itself when it created bogus user profiles. The court observed that “no case of which this court is aware has immunized a defendant from allegations that it created tortuous content.” c Thus, the court denied Yahoo’s motion to dismiss and allowed Anthony’s claims of fraud and negligent misrepresentation to proceed to trial.d

FOR CRITICAL ANALYSIS

Assume that Anthony had contacted various of users of Yahoos online dating service only to discover that each user’s profile exaggerated the user’s physical appearance, intelligence, and occupation. Would Anthony prevail if he brought a lawsuit for fraudulent misrepresentation against Yahoo in that situation? Why or why not?

a. Communications Decency Act of 1996, 47 U.S.C. Section 230.b. 47 U.S.C. Section 230(f)(3).c. For an example of the type of cases that have been brought against Internet dating services, see Carafano v. Metrosplash.com, Inc., 339 F.3d 1119 (9th Cir. 2003).d. Anthony v. Yahoo!, Inc., 421 F.Supp.2d 1257 (N.D.Cal. 2006).

A. MISREPRESENTATION HAS OCCURREDMisrepresentation can occur through words or conduct, including concealment.



SPECIAL EXHIBIT—

MisrepresentationThe following illustration summarizes the elements of misrepresentation discussed in the text.


Was there a MISREPRESENTATION of a MATERIAL FACT?The misrepresentation—• May take the form of words or action• Must be a statement of fact, not of opinion

Did the misrepresenting party have an INTENT TO DECEIVE?The misrepresenting party—• Must know the misrepresented fact is not as stated• Must believe that the statement is not true• Must make a statement recklessly without regard for the truth• Or must express or imply that a statement is made on some basis when it is not

Did the deceived party JUSTIFIABLY RELY on the misrepresentation?The deceived party—• Must have a justifiable reason for relying on the misrepresentation• Must have been induced to enter the contract by the misrepresentation• Must not have known the true facts• Must not have relied on obviously extravagant statements

Did the deceived party suffer an INJURY?

In most courts,the contract

MAY BE RESCINDED.

DAMAGES MAY BE RECOVERED.• The measure of damages is the property’s

value had it been delivered as represented, less the actual price paid.

• Punitive damages may also be awarded.

The contractMAY BE ENFORCED

if there areNO OTHER DEFENSES.

YES NO

NO

NO

NO

YES

YES

YES


1. Misrepresentation by ConductMisrepresentation can occur by concealing a fact material to a contract.


Misrepresentation by Conduct

The following is the section of the Restatement (Second) of Contracts that relates to this part of the text—Restatement (Second) of Contracts, Section 160—with selected Comments and Illustrations.

§ 160. When Action is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.

Comments:

a. Scope. Concealment is an affirmative act intended or known to be likely to keep another from learning of a fact of which he would otherwise have learned. Such affirmative action is always equivalent to a misrepresentation and has any effect that a misrepresentation would have * * * .

b. Common situations. The rule stated in this Section is commonly applied in two situations, although it is not limited to them. In the first, a party actively hides something from the other, as when the seller of a building paints over a defect. See Illustration 1. In such a case his conduct has the same effect as an assertion that the defect does not exist, and it is therefore a misrepresentation. Similarly, if the offeror reads a written offer to the offeree and omits a portion of it, his conduct has the same effect as an assertion that the omitted portion is not contained in the writing and is therefore a misrepresentation. In the second situation, a party prevents the other from making an investigation that would have disclosed a defect. An analogous situation arises where a party frustrates an investigation made by the other, for example by sending him in search of information where it cannot be found. Even a false denial of knowledge by a party who has possession of the facts may amount to a misrepresentation as to the facts that he knows, just as if he had actually misstated them, if its effect on the other is to lead him to believe that the facts do not exist or cannot be discovered. Action may be considered as likely to prevent another from learning of a fact even though it does not make it impossible to learn of it.

Illustrations:

1. A, seeking to induce B to make a contract to buy his house, paints the basement floor in order to prevent B from discovering that the foundation is cracked. B is prevented from discovering the defect and makes the contract. The concealment is equivalent to an assertion that the foundation is not cracked, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

2. A, seeking to induce B to make a contract to buy his house, convinces C, who, as A knows, is about to tell B that foundation is cracked, to say nothing to B about the foundation. B is prevented from discovering the defect and makes the contract. A’s conduct is equivalent to an assertion that the foundation is not cracked, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.



2. Statements of OpinionRepresentations of future facts (“this land will be worth twice as much next year”), statements of opinion (“this car will last for years”), and sales puffery are not fraud. An expert’s statement of opinion to a layperson is treated as fact. In a cased of contract fraud, this may entitle an innocent party to rescission or reformation.

3. Misrepresentation of LawA misrepresentation of law (“you can build anything you want here”) does not entitle a party to relief from a contract, unless the misrepresenting party is in a profession known to require greater knowl-edge of the law than a layperson possesses (for example, real estate brokers are expected to know the law governing land sales and use).

4. Misrepresentation by SilenceOrdinarily, a party to a contract can keep silent without liability, unless a serious potential problem or latent defect (a crack in a building’s foundation, for instance) is known to the seller but cannot reasonably be suspected by the buyer. Failure to disclose may constitute fraud in a fiduciary relationship.

B. INTENT TO DECEIVEScienter (“guilty knowledge”) signifies an intent to deceive. Scienter exists if a party (1) knows a fact is not as stated; (2) makes a statement that he or she believes not to be true or makes a statement recklessly, without regard to whether it is true or false; or (3) says or implies that a statement is made on some basis such as personal knowledge or investigation when it is not.

1. Innocent MisrepresentationThis occurs when a person makes a statement that he or she believes to be true but that misrep-resents a material fact. Remedies include rescission but usually not damages.

2. Negligent MisrepresentationA misrepresentation is negligent if a person fails to use reasonable care in disclosing material facts or does not use the skill and competence required by his or her business or profession.

C. JUSTIFIABLE RELIANCE ON THE MISREPRESENTATIONA 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 sole factor. Reliance is not justified if the innocent party knows the truth or relies on obviously extravagant statements.

CASE SYNOPSIS—

Case 14.2: Cronkelton v. Guaranteed Construction Services, LLC

Clifford Cronkelton negotiated with Patrick Shivley to buy a foreclosed car wash in Bellefontaine, Ohio. Before the sale closed, Shivley told Cronkelton that the property had been winterized, but when Cronkelton opened the door “it was clear * * * that this whole thing had froze up, and the extent of the damage could not even be, you know, detailed at that point.” Cronkelton filed a suit in an Ohio state court against Shivley (and Guaranteed Construction Services, LLC, which had been hired to winterize the property), claiming fraud.



From a jury verdict in Cronkelton’s favor, and an award of more than $140,000 in damages and attorney fees, the defendants appealed.

A state intermediate appellate court affirmed. “The jury found that Cronkelton had reasonably relied on Shivley's representations. The jury's finding was supported by competent, credible evidence.”

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Notes and Questions

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.

What is a receiver? What are a receiver’s duties? A receiver is a 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. A receiver has fiduciary duties with 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.

In the Cronkelton case, Shively would have been charged with securing the car wash from vandalism and other destructive potentialities, including freezing during the winter. He failed to fulfill his duty to winterize the property. When informed that the only way to safeguard the equipment from damage was to leave the heat on, he did not arrange for this to be done.

In evaluating a claim of fraud, what factors does a court consider in determining whether reliance was justifiable? In the Cronkelton case, the court states in its opinion, “When determining whether reliance is justifiable courts consider the various circumstances involved, such as the nature of the transaction, the form and materiality of the transaction, the form and materiality of the representation, the relationship of the parties, the respective intelligence, experience, age, and mental and physical condition of the parties, and their respective knowledge and means of knowledge.”

Here, the transaction was the sale of a car wash—the building and its equipment. For Cronkelton, an important condition of the deal was that the property be winterized, and Shively assured him that it would be done. Cronkelton knew that Shivley was a receiver appointed by a court to protect the property. Both parties were businesspersons who were aware of their respective responsibilities regarding inspections of the property. Both fulfilled their responsibilities at the inception of the negotiations. But Cronkelton relied on Shively’s representations during the later negotiations, and Shively failed to fulfill his duties by caring for the property and by failing to disclose its condition to Cronkelton before the deal closed.

In this case, what did the jury find with respect to the plaintiff’s claim of reliance? What was the appellate court’s opinion of this finding? In the Cronkelton case, the jury found that Cronkelton reasonably relied on Shivley's representations. On appeal, a state intermediate appellate court concluded that the jury's finding was supported by competent, credible evidence. “As a receiver, Shivley had a fiduciary duty to the assets under his control. Under the circumstances of this case, Cronkelton had a reasonable basis to believe that Shivley, who was acting as an arm of the court, would take the promised steps to winterize the property.”



At the beginning of their negotiations for the sale of the car wash, Cronkelton stated that an important condition for his purchase was the winterization of the property. Shively assured him that it would be done. Cronkelton knew that Shivley was a receiver appointed by a court to protect the property. There was nothing to indicate to Cronkelton that it would not be done. Shively failed to fulfill his duties, and his promise to Cronkelton, however—he did not winterize the property sufficiently—and he further failed to meet his obligations by not disclosing the property’s damaged condition to Cronkelton before the sale was complete.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Fraud Claims

Other cases considering claims of fraud include the following:

• Buy This, Inc. v. MCI Worldcom Communications, Inc., 209 F.Supp.2d 334 (S.D.N.Y. 2002) (the failure of a dealer in long-distance airtime minutes to disclose to a provider of telecommunications services that the dealer intended to resell to third parties free minutes it acquired from the provider, as part of a promotion to small businesses, was a material omission, supporting the provider’s fraud claim against the dealer; when it was obvious that the dealer knew the provider was acting on the basis of its mistaken knowledge).

• In re Sallee, 286 F.3d 878 (6th Cir. 2002) (a bank committed fraud, in relation to the financing obtained by debtors for the purchase of a convenience store and laundromat, when the bank failed to provide the debtors with more than one of the several appraisals the bank received on the property, and the debtors clearly based their decision to buy the property on the basis of this one appraisal).

• Columbia/HCA Healthcare Corp. v. Cottey, 72 S.W.3d 735 (Tex.App.—Waco 2002) (employer af-firmatively misrepresented by silence that an investment plan, which the employer offered an employee to induce his continued work for the employer, could be rescinded before the employee’s interest in the plan vested).

D. INJURY TO THE INNOCENT PARTYA showing of injury may not be required in an action to rescind a contract, but in an action to recover damages, proof of injury is universally required. The measure of damages is ordinarily equal to what the value of the property would have been if it had been delivered as represented, less what it is actually worth. In actions based on fraud, courts often award punitive damages.

CASE SYNOPSIS—

Case 14.3: Fazio v. Cypress/GR Houston I, LP

Cypress/GR Houston I, LP, owned retail property in Texas that included a Garden Ridge store. Peter Fazio offered to buy the property. During negotiations, Cypress failed to disclose that Garden Ridge had requested a $240,000 reduction in its annual rent and Cypress’s bank was so concerned about Garden Ridge’s financial health that it had required a personal guaranty on the property’s loan. Fazio paid $7.67



million for the property. After the sale, Garden Ridge went bankrupt, and Fazio was forced to sell the property for $3.75 million. He filed a suit in a Texas state court against Cypress for fraud. The court ruled in Cypress’s favor. Fazio appealed.

A state intermediate appellate court reversed. Cypress had engaged in fraud. Before the sale, Cypress had agreed to provide all information in its possession, but then failed to do so. A reasonable person in Fazio’s position would have attached significance to Garden Ridge’s request for a rent reduction and to the bank’s request for a personal guaranty on the loan. Fazio was not entitled to damages, however, because the misrepresentation had not negatively affected the property’s value.

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Notes and Questions

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.

What does the decision in this case suggest to sellers of commercial real estate and others who engage in business negotiations? Of course the decision in this case underscores the importance of dealing in business negotiations in honesty and good faith. The decision suggests that no misconduct will go unpunished. Here, the defendant had engaged in fraud. During negotiations before the sale, the defendant had agreed to provide all material information in its possession, but then failed to do so. The decision in this case also reminds businesses that in the absence of an express agreement, a quasi contract may be implied to avoid unjust enrichment.

III. Undue Influence and Duress

A. UNDUE INFLUENCEUndue influence occurs in relationships in which one party can greatly influence another, thus over-coming the other’s free will. A contract entered into under undue influence is voidable.

1. One Party Dominates AnotherRelationships in which one party may dominate another include fiduciary relationships—parent-child, trustee-beneficiary, and guardian-ward, for example. The party unduly influenced must not act out of his or her free will.

2. A Presumption of Undue Influence in Certain SituationsWhen a dominant party benefits from a relationship, a presumption of undue influence may arise. For example, when a contract enriches the dominant party in a fiduciary relationship, a court will often presume the existence of undue influence.




Undue Influence

The following is the section of the Restatement (Second) of Contracts that relates to this part of the text—Restatement (Second) of Contracts, Section 177.

§ 177. When Undue Influence Makes a Contract Voidable

(1) Undue influence is unfair persuasion of a party who is under the domination of the person exercis ing the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.

(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.

(3) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the con tract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction.

B. DURESSDuress involves conduct of a coercive nature, such as forcing a party to contract by threatening the party with a wrongful act. Duress is a defense to the enforcement of a contract and a ground for rescission.

• Generally, the threatened act must be wrongful or illegal.

• Being in need is generally not a circumstance that will lead to a finding of duress, unless the party exacting the price has created the need.

TEACHING SUGGESTIONS

1. Often, students have difficulty with the concept of mistake. The concept can be reduced to two basic rules. First, there are unilateral mistakes, which are mistakes of material fact attributable to only one of the parties. A unilateral mistake will not result in the mistaken party being excused from performing his or her contractual obligations unless the other party knew or had reason to know that the party was mistaken. Second, there are mutual (bilateral) mistakes, which involve mistakes of material fact attributable to both par-ties. A mutual mistake may result in either party being excused from performing. Requiring students to come up with specific examples of their own to illustrate these rules can help to overcome the abstractness of the concept.

2. Ask students to suppose that in the Raffles v. Wichelhaus case, although there are two ships called Peerless, sailing from Bombay in different months, both parties intend the same Peerless. Do the parties have a binding contract? Yes. If both parties intend the same Peerless, they are bound to the contract. In that circumstance, it makes no difference whether there are two ships called Peerless or whether the parties are aware of both ships. There is no mistake.



Ask students to imagine that although there are two ships called Peerless, sailing from Bombay in different months, Raffles knows that Wichelhaus means the Peerless sailing in October, and Wichelhaus does not know that there is another Peerless. Do they have a binding contract? If so, is the contract for the sale of goods on the Peerless sailing in October? Yes, to both questions. If, under these circumstances, Raffles makes the contract intending not to perform it, Wichelhaus can avoid the contract on grounds of misrepresentation.

3. Students should be encouraged to note situations in which the common law alone applies and situations in which the UCC applies. Also noteworthy are those principles on which the common law and the UCC diverge. To call attention to the divergences, students might be asked whether they think the courts should use the UCC as a guide even in non–UCC cases.

Part of the difficulty may arise from what is a common practice in business. Although a unilateral mistake is not enough to permit rescission of a contract for lack of genuineness of assent, many businesses allow customers to get out of contracts as a gesture of good will. Most people have come to expect this as a matter of right. Ask students whether they think the law should be changed.

Another part of the problem is that courts have had considerable difficulty in specifying circumstances that justify allowing a mistake to invalidate a contract. The results in cases with similar facts can be different, and finding in these cases clear rules governing the effects of mistakes can be difficult. That is, the distinction between mistakes of fact and mistakes as to market value or market conditions is not always as clear as it sounds. You might use the following example to illustrate the distinction:

Suppose that Ann contracts to buy ten acres of land in Minnesota. Ann believes that Bob owns the land, but it actually belongs to Carol. This is a mistake of fact, which could serve as grounds to avoid the contract. Suppose, however, that Ann contracts to buy ten acres of land because she believes that she can resell the land at a profit to Dan. Can Ann get out of the contract if it later turns out that Dan doesn’t want to buy the property? Probably not. Ann’s overestimation of the value of the land or of Dan’s interest in it is an ordinary risk of business that would not normally provide a basis for relief.

4. Spend some time discussing fraudulent misrepresentation. Cases involving avoidance of contracts be-cause of fraud are rare, but it is an important concept in the law and in daily business transactions. Perhaps the most important aspect of fraud—to attorneys and to businesspersons—is that it is difficult to prove. In many states, the burden of proof is stricter than in other civil actions. In any state, of the elements of fraud, reliance and injury are easiest to prove. Frequently, it is very difficult to prove another person’s knowledge that certain facts were false and to prove his or her intent to deceive.

5. With a little imagination, the elements of fraudulent misrepresentation can be presented as the four “I’s”:

• mIsrepresentation of a material fact.• Intent.• Injured party’s justifiable reliance (or simply rel-I-ance).• Injury to the innocent party (or simply Injury).

Cyberlaw Link

What preventive techniques might a party use to minimize harm due to such wrongs as fraud, undue influence, and duress in cyberspace? How can anyone assure the authenticity of the parties (and their representations) with whom he or she does business over the Internet?



DISCUSSION QUESTIONS

1. What is the legal significance of the difference between a mistake in judgment as to market conditions and a mistake of fact? Mistakes in judgment as to market conditions involve believing something is worth more than it ultimately proves to be. Mistakes of fact involve believing something is other than what it is. The legal significance of the difference between a mistake in judgment as to market conditions and mistakes of fact is that only under a mistake of fact can a contract be avoided.

2. Does a unilaterally mistaken party have any right to relief? Generally, no, but there are exceptions. Relief may be granted if the other party knew or should have known that a mistake was made (a bid well below other bidders’ figures). Some states will not enforce a contract if an error was due to a significant mathematical mistake, done inadvertently and without gross negligence (a typographical error, for instance).

3. Why are mistakes of value not accorded the same relief as mistakes of fact? At different times, the same thing may have different values. A contract establishes the value of an object for the moment. The next moment, the value may change. A party may be mistaken about the direction that the change will take, but that mistake will almost never justify voiding the contract. Each party is considered to assume the risk that the value will change or prove to be different. A contract may be avoided if the parties are mutually mistaken as to a material fact that affects the value of the subject matter of their deal (a seller may be able to avoid delivering a cow that he and the buyer believed was barren, on learning that the cow is with calf).

4. What are the elements of fraudulent misrepresentation? Fraudulent misrepresentation refers to misrepresentation that is intended to mislead another. The perpetrator must know or believe that the statement is not true, or must be lacking the confidence that he or she states or implies in the truth of the statement, or must know that he or she does not have the basis stated or implied for the statement. (A false statement to a credit rating firm, on whose report the perpetrator knows another will rely in contracting with the perpetrator, is fraudulent misrepresentation.) Fraudulent misrepresentation affects the genuineness of the defrauded party’s consent to the contract. Normally, the innocent party can either rescind the contract and be restored to his or her original position or enforce the contract and seek damages for any injuries. The elements are (1) misrepresentation of a material fact, (2) an intent to deceive, (3) the innocent party’s justifiable reliance on the misrepresentation, and (4) to collect damages, the innocent party’s injury.

5. The elements of fraudulent misrepresentation include misrepresentation of a material fact. Discuss this element. Misrepresentation can be in words (“this is a Warhol,” if the work is by another art ist). Misrepresentation can occur through conduct (concealment by showing samples that differ markedly from actual goods). All of us are expected to use care and judgment when entering into contracts, however—predictions (“this land will be worth twice as much next year”) or statements of opinion (“this car will last for years”) are ordinarily not subject to claims of fraud. A seller can use puffery without liability for fraud, but an expert’s statement of opinion to a layperson is treated as fact. As regards the law, at common law people are assumed to know the law where they live. A layperson should not rely on a statement made by a nonlawyer about a point of law. A misrepresentation of law (“you can build anything you want here”) does not normally entitle a party to relief from a contract. There is an exception if the person who makes the misrepresentation is a member of a profession that is known to require greater knowledge of the law than a layperson possesses (realtors are expected to know the law governing land sales and use). Disclosing some, but not all, of the facts can be deceitful. Nevertheless, normally, a contract cannot be set aside because certain pertinent information (a used car was in an accident) is not volunteered. That is, under normal circumstances, no party to a contract has a duty to disclose. If a serious potential problem or latent defect (a crack in



a building’s foundation) is known to the seller but cannot reasonably be suspected by the buyer, however, the seller may have a duty to speak. Also, in a fiduciary relationship, one party’s failure to disclose facts that materially affect the other’s interests may constitute fraud. There are other exceptions. If circumstances change so that what once was true is now false, the party aware of the change has a duty to inform the other. Other exceptions are provided by statutes (the Truth-in-Lending Act).

6. In the context of fraudulent misrepresentation, when does a party evidence an intent to deceive? Scienter indicates that there was an intent to deceive. Scienter exists (1) if a party knows a fact is not as stated; (2) if a party makes a statement that he or she believes not to be true or makes a statement recklessly, without regard to whether it is true; or (3) if a party says or implies that a statement is made on some basis such as personal knowledge or personal investigation when it is not.

7. 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. Thus, if there are defects in the subject matter of the transaction that would be obvi-ous on inspection, a buyer cannot justifiably rely on the seller’s representations. If defects are hidden or latent, however, a buyer is justified in relying on the seller’s statements.

8. When does a deceived party have to show that he or she suffered an injury to recover on the basis of fraud? A showing of injury may not be required in an action to rescind a contract, because rescission returns the parties to the position they were in before they made the contract. In an action to recover damages, proof of injury is required. The measure of damages is usually equal to what the value of the property would have been if it had been delivered as represented, less what it is actually worth. In effect, this gives the innocent party the benefit of the bargain rather than reestablishing the party’s pre-contract position. Also, a court may award punitive damages (damages over and above compensation for the loss) to punish the defendant or set an example for other wrongdoers.

9. In what circumstance does undue influence occur? Undue influence occurs in relationships in which one party can greatly influence another, thus overcoming the other’s free will (an attorney’s inducing a client to enter into a contract that benefits the attorney may indicate undue influence). When a contract enriches one party at the expense of another who is in a fiduciary relationship with or who is dominated by the enriched party, it may be presumed that the contract was made under undue influence. To rebut the presumption, the enriched party must show that there was full disclosure, that consideration was adequate, and that the other party received independent and competent advice before completing the transaction. A contract entered into under undue influence is voidable.

10. What is duress? Duress involves conduct of a coercive nature. Forcing a party to contract by threaten ing a wrongful or illegal act (blackmail or extortion) is duress. Threatening to exercise a legal right (bring a civil suit) usually does not constitute duress. Being in need is not usually a situation that will lead to a finding of duress, but duress may be found if the party exacting the price has created the need. (An attorney tells a client, the day before the client’s trial, that unless the client agrees to pay a higher fee, the attorney will quit the case. The client agrees; the agreement is unenforceable.) Duress is a defense to enforcement of a contract and ground for rescission.



ACTIVITY AND RESEARCH ASSIGNMENT

Ask students to imagine that they are capable of accomplishing simple bookkeeping tasks, such as balancing a checkbook and tracking an inventory, but are otherwise unsophisticated with financial statements and accountancy. As self-employed, entrepreneurial contractors, they (1) offer to buy a local home improvement store based on the equally unsophisticated owner’s simply prepared financial statement and (2) submit a bid for work on a commercial building. In both situations, suppose that there are material mistakes—inflated values for the store’s assets and income, and overstated or understated cost estimates on the bid. Are these mistakes binding?

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

Footnote 8: Arthur Murray, Inc., operated dancing schools through local, franchised operators. At a “dance party” at one of the schools, an instructor praised Audrey Vokes for her potential as “an excellent dancer.” The instructor sold her eight half-hour dance lessons for $14.50 each. Over the next sixteen months, Vokes bought 2,302 hours of lessons for $31,090.45, all at the same school. When Vokes realized that she did not have the potential to be an excellent dancer, she filed a suit against the school in a Florida state court, alleging fraud. The court dismissed her complaint. She appealed. In Vokes v. Arthur Murray, Inc., a state intermediate appellate court reinstated the complaint and remanded. “A statement of a party having * * * superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms. It could be reasonably supposed here that defendants had ‘superior knowledge’ as to whether plaintiff had ‘dance potential.’ ”

Did the instructor misrepresent to Vokes any facts, as opposed to giving misleading statements of opinion? Some facts may have been misrepresented, but the court does not consider whether misrepresentation of a material fact was necessary because it concludes that the misleading statements of opinion were enough.

Fraud requires reasonable reliance on a misrepresentation. How could Vokes reasonably have relied on what she was told? Surely, she must have been aware of her own limitations. This is a question of fact to be decided by the trial court on remand. The question before the appellate court in this case arose from the trial court’s dismissal of Vokes’s complaint on Arthur Murray’s motion to dismiss for failure to state a claim on which relief can be granted.

In the seventeenth century, in some of the new American colonies, the law prohibited professional performances of music. By the time of the Revolutionary War, however, the bans had generally been lifted, and the nineteenth century saw the founding of opera companies, city orchestras, and music schools. In the South, gospel music gave birth to the blues, which in turn gave birth to ragtime and jazz. With the development of radio and the recording industries in the first decades of the twentieth century, music became available to an ever-growing American audience, and social dancing became more popular than ever. Dancing skills often led to popularity on the dance floor and, because dancing was popular, to social popularity, especially for the generations that came of age in the 1920s, 1930s, 1940s, and 1950s. With the popularity of social dance came dancing schools.

If one of Vokes’s fellow students, rather than her instructor, had praised her ability and encouraged her to buy more lessons, should the result in this case have been different? Explain. The result likely should have been different. In its opinion, the court explained that a “statement of a party having . . . superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.” In the Vokes case, the instructor and the school clearly appeared to be taking advantage of Vokes. This is not only illegal but unethical. Most likely, a student, rather than an instructor, who praised Vokes’s ability and



prompted her to buy more lessons, would have been a party “dealing on equal terms” and the praise might not have been perceived as illegal or unethical.

Footnote 10: In 1995, Robert Sarvis was convicted of bank fraud and sentenced to prison. Two weeks after his release in 1998, he applied for a teaching position at Community College of Vermont (CCV). On his resume, he stated that from “1984-1998” he was “President and Chairman of the Board” of “CMI International Inc.” For a position as CCV’s Coordinator of Academic Services, he submitted a second resume, on which he added, “1998-present. Semi-retired. Adjunct Instructor of Business at Colby-Sawyer College and Franklin Pierce College.” CCV hired him. When his probation officer alerted CCV to his criminal history, CCV terminated him. He filed a suit in a Vermont state court against CCV, alleging, among other things, breach of contract. CCV filed a motion for summary judgment, which the court granted. Sarvis appealed. In Sarvis v. Vermont State Colleges, the Vermont Supreme Court affirmed and rescinded the contract between Sarvis and CCV. “Misrepresentation in this case occurred through plaintiff’s partial disclosure of his past work history and references and his effort to limit defendant’s inquiry into his past.” Sarvis “was not silent; he carefully drafted his resumes and supplemental materials to lead defendant to believe he had made a full disclosure about his past and his qualifications,” but he “failed to mention his felony bank fraud conviction” and dissuaded CCV from inquiring further.

Sarvis also argued that he had been discharged without just cause because “neither law nor public opinion recognizes termination for criminal history unrelated to the job as good cause for dismissal.” How did the court respond to this argument? The court reasoned that Sarvis was misstating the basis for his discharge and said that it was not addressing this issue. “We affirm the decision below because plaintiff misrepresented his past to create a false impression to persuade defendant to hire him. As a matter of law, just cause existed to fire plaintiff under these grounds. We need not determine whether the mere fact of a prior criminal history can support a just cause dismissal.”

Could Parlier have verified the nature of Foley’s business more thoroughly before moving to Texas? Yes, although at a greater cost. For example, Parlier might have contacted Foley’s “customers” to determine the extent of the purported contracts, work, and charges.


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