QUESTIONS

Post ID: 3466638

Overview

2. William tells Carol that he paid $150,000 for his farm in 2021 and that he believes it is worth twice that at the present time.

Relying upon these statements, Carol buys the farm from William for $225,000. William did pay $150,000 for the farm in 2021, but its value has increased only slightly, and it is presently not worth $300,000.

a, On discovering this, Carol offers to reconvey the farm to William and sues for the return of her $225,000. Result? Explain.

b. Modify the facts in (a) by assuming that William had paid $100,000 for the property in 2021. What is the result?

Explain.

5. Harris owned a farm that was worth about $600 an acre. By false representations of fact, Harris induced Pringle to buy the farm at $1,500 an acre. Shortly after taking possession of the farm, Pringle discovered oil under the land. Harris, on learning this, sues to have the sale set aside on the ground that it was voidable because of fraud. Result? Discuss.

In addition to requiring offer and acceptance, the law of contracts requires that the agreement be voluntary and knowing. If these requirements are not met, then the agreement is either voidable or void. This chapter deals with situations in which the consent manifested by one of the parties to the contract is not effective because it was not knowingly and voluntarily given.

We consider five such situations in this chapter: duress, undue influence, fraud, nonfraudulent misrepresentation, and mistake.

DURESS [11-1]

A person should not be held to an agreement he has not entered voluntarily. Accordingly, the l will not enforce any contract induced by duress, which in general is any wrongful or unlawful or threat that overcomes the free will of a party.

Physical Compulsion [| I-la]

Duress is of two basic types. The first type, physical duress, occurs when one party compels anot to manifest assent to a contract through actual physical force, such as pointing a gun at a per or taking a person's hand and compelling him to sign a written contract. This type of duress, w extremely rare, renders the agreement void, and the party exerting the duress is liable in restitu as necessary to avoid unjust enrichment.

Improper Threats [| I- Ib]

The second and more common type of duress involves the use of improper threats or acts, inc ing economic and social coercion, to compel a person to enter into a contract. Though the th may be explicit or may be inferred from words or conduct, in either case it must leave the vi with no reasonable alternative. This type of duress makes the contract voidable at the option c coerced party, and the party exerting the duress is liable in restitution as necessary to avoid unjust

enrichment (see Chapter 18). For example, if Ellen, a landlord, induces Vijay, an infirm, bedridden tenant, to enter into a new lease on the same apartment at a greatly increased rent by wrongfully threatening to terminate Vijay's lease and evict him, Vijay can escape or avoid the new lease b reason of the duress exerted on him.

The fact that the act or threat would not affect a person of average strength and intelligence i not important if it places fear in the person actually affected and induces her to act against her wil The test is subjective, and the question is this: did the threat actually induce assent on the part of th person claiming to be the victim of duress?

Ordinarily, the acts or threats constituting duress are themselves crimes or torts, but this is no true in all cases. The acts need not be criminal or tortious to be wrongful; they merely need to b contrary to public policy or morally reprehensible. For example, if the threat involves a breach of contractual duty of good faith and fair dealing, it is improper.

Moreover, it generally has been held that contracts induced by threats of criminal prosecutio are voidable, regardless of whether the coerced party had committed an unlawful act. Similarl threatening the criminal prosecution of a close relative is also duress. To be distinguished fror such threats of prosecution are threats that resort to ordinary civil remedies to recover a debt du from another. It is not wrongful to threaten a civil suit against an individual to recover a deb What is prohibited is threatening to bring a civil suit when bringing such a suit would be abus of process.

FACTS Between 1985 and 1987, Jerry A. Berardi, Betty J.

Berardi, and Bentley Corporation (the Berardis) leased space for three restaurants from Meadowbrook Mall Company. In 1990, the Berardis were delinquent in their rent. Meadowbrook informed Mr. Berardi that a lawsuit would be filed in Ohio requesting judgment for the total amount owed. Mr. Berardi then entered into a consent judgment with Meadowbrook granting judgment for the full amount owed. Meadowbrook in return promised that no steps to enforce the judgment would be undertaken provided the Berardis continued to operate their three restaurants.

In April 1996, Meadowbrook filed in the Circuit Court of Harrison County, West Virginia, the judgment of the Ohio lawsuits and obtained a lien on a building that was owned by the Berardis, the Goff Building. By so doing, Meadowbrook impeded the then-pending refinancing of the building by the Berardis.

In June 1997, the Berardis and Meadowbrook signed a "Settle-ment Agreement and Release" settling the 1990 Ohio judgments.

In this document, the Berardis acknowledged the validity of the

1990 Ohio judgments and that the aggregate due under them was $814,375.97. The Berardis agreed to pay Meadowbrook $150,000 on the date the Goff Building refinancing occurred and to pay Meadowbrook $100,000 plus 8.5 percent interest per year on the third anniversary of the initial $150,000 payment. These payments would discharge the Berardis from all other amounts owed. The payment of the initial $150,000 would also result in Meadowbrook releasing the lien against the Goff Building.

The agreement additionally recited:

Berardis hereby release and forever discharge Meadow-brook, its employees, agents, successors, and assigns from any and all claims, demands, damages, actions, and causes of action of any kind or nature that have arisen or may arise as a result of the leases.

Nevertheless, on October 2, 2000, the Berardis filed a complaint against Meadowbrook alleging that Meadowbrook breached the October 1990 agreement by attempting to enforce the 1990 Ohio judgments and that Meadowbrook extorted by duress and coercion the 1997 agreement. Meadowbrook filed a motion to dismiss under the 1997 settlement. Meadowbrook sought summary judgment, which the circuit court granted. Berardi now appeals.

DECISION Summary judgment affirmed.

OPINION Courts are generally reluctant to overturn settlement agreements as long as they are legally sound. The law favors and encourages the resolution of controversies by contracts of compromise and settlement rather than by litigation; and it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy.

The concept of "economic duress" may be generally stated as follows: Where the plaintiff is forced into a transaction as a result of unlawful threats or wrongful, oppressive, or unconscionable conduct on the part of the defendant which leaves the plaintiff no reasonable alternative but to acquiesce, the plaintiff may void the transaction and recover any economic loss.

Duress is not readily accepted as an excuse to avoid a contract.

Thus, to establish economic duress, in addition to their own statements, the plaintiffs must produce objective evidence of their duress. Evidence of duress is not shown just because one party to the contract has driven a hard bargain or that market or other conditions now make the contract more difficult to perform by one of the parties or that financial circumstances may have caused one party to make concessions.

Mr. Berardi is a sophisticated businessman who has operated a number of commercial enterprises. Typically, "where an experienced businessman takes sufficient time, seeks the advice of counsel and understands the content of what he is signing he cannot claim the execution of the release was a product of duress."

INTERPRETATION Economic duress consists of unlawful threats or wrongful, oppressive, or unconscionable conduct by one party that leaves the other party no reasonable alternative but to acquiesce to the terms of a contract.

ETHICAL QUESTION Did Meadowbrook act in a proper manner? Explain.

CRITICAL THINKING QUESTION Did Berardi really have a reasonable alternative to signing the release? Explain.

JNDUE INFLUENCE [11-2]

ndue influence is the unfair persuasion of a person by a party in a dominant position based on confidential relationship. The law very carefully scrutinizes contracts between those in a relation-ip of trust and confidence that is likely to permit one party to take unfair advantage of the other. xamples are the relationships of guardian-ward, trustee-beneficiary, agent-principal, spouses, arent-child, attorney-client, physician-patient, and clergy-parishioner.

A transaction induced by undue influence on the part of the dominant party is voidable, and the minant party is liable in restitution as necessary to avoid unjust enrichment (see Chapter 18). The timate question in undue influence cases is whether the transaction was induced by dominating ther the mind, emotions, or both of a submissive party. The weakness or dependence of the per-n persuaded is a strong indicator of whether the persuasion may have been unfair. For example, bigail, a person without business experience, has for years relied on Boris, who is experienced in isiness, for advice on business matters. Boris, without making any false representations of fact, duces Abigail to enter into a contract with Boris's confederate, Cassius. The contract, however, disadvantageous to Abigail, as both Boris and Cassius know. The transaction is voidable on the ounds of undue influence.

FACTS Harold and Pearl Neugebauer owned a 159-acre farm they called the "Home Place." The farm included a house, garage, granary, machine sheds, barns, silos, and a dairy barn. During their marriage, Harold handled all of the legal and financial affairs of the farm and family. In 1980, Harold died, leaving Pearl as the sole owner of the Home Place and another farm property. Following Harold's death, Lincoln, the youngest of Harold and Pearls seven children, began farming both properties. Lincoln also lived with his mother on the Home Place. In 1984, Lincoln and Dennis, one of Pearl's other sons, formed L & D Farms partnership to manage the farming operation on Pearl's land. L & D Farms entered into an oral ten-year lease with Pearl that included an option to purchase the Home Place for $117,000, the appraised value in 1984. In 1985, Pearl moved from the farm to a home in town. In 1989, Lincoln and Dennis dissolved L & D Farms without exercising the option to purchase the Home Place. After dissolution of the partnership, Lincoln farmed Pearl's land by himself. He paid annual rent, but Lincoln and Pearl never put their oral farm lease in writing.

Pearl trusted Lincoln and left it to him to determine how much rent to pay. Pearl did, however, expect that Lincoln would be "fair." Pearl never took any steps to determine if the $6,320 annual rent Lincoln was paying was fair.

On several occasions from 2004 to 2008, Lincoln privately consulted with an attorney, Keith Goehring, about purchasing the Home Place. On December 3, 2008, Lincoln took Pearl to Goehring's office to discuss the purchase. Pearl, who had only an

eighth-grade education, was almost eighty-four years old and was hard of hearing. Although Lincoln and Goehring discussed details of Lincoln's proposed purchase, Pearl said virtually nothing. She later testified that she could not keep up with the conversation and did not understand the terms discussed. A few days later, Pearl and Lincoln executed a contract for deed that had been drafted by Goehring. Goehring had been retained and his fees were paid by Lincoln. Neither Lincoln nor Goehring advised Pearl that Goeh-ring represented only Lincoln, and neither suggested that Pearl could or should retain her own legal counsel.

There is no dispute that the fair market value of the Home Place was $697,000 in 2008 when the contract for deed was exe-cuted. Under the terms of the contract, Lincoln was to pay Pearl $117,000, the farm's 1984 appraised value. The contract price was to be paid over thirty years by making annual payments of $6,902.98.

After executing the contract, Lincoln told Pearl not to tell the rest of her children about the agreement. Pearl later became suspicious that something may have been wrong with the contract. In January 2009, Pearl revealed the contract to the rest of her children, and they explained the contract to her. She began to cry and wanted the contract torn up. OPINION The elements of undue influence are: (1) a person susceptible to undue influence; (2) another's opportunity to exert undue influence on that person to effect a wrongful purpose;

(3) another's disposition to do so for an improper purpose; and

(4) a result clearly showing the effects of undue influence.

The party alleging undue influence must prove these elements by a preponderance of the evidence.

Lincoln argues that no evidence supported the court's finding that Pearl was susceptible to undue influence. Lincoln contends that in the absence of medical evidence of mental deficits, the court erred in finding that Pearl was susceptible to undue influence.

Obviously, an aged and infirm person with impaired mental faculties would be more susceptible to influence than a mentally alert younger person in good health. But it is not required that medical evidence be presented to prove susceptibility to undue influence. There was substantial non-medical evidence demonstrating Pearl's susceptibility to undue influence. Pearl had an eighth-grade education, and she lacked experience in business and legal transactions. When she signed the contract for deed, Pearl was almost eighty-four and hard of hearing. Lincoln further admitted that Pearl had some mental impairment.Pearl personally and through her children asked Lincoln to tear up the contract. Lincoln refused.

Pearl then brought an action for rescission of the contract on the ground of undue influence. The trial court found that Lincoln had exerted undue influence and rescinded the contract.

Lincoln appealed.

DECISION Judgment of the trial court is affirmed.

OPINION The elements of undue influence are: (1) a person susceptible to undue influence; (2) another's opportunity to exert undue influence on that person to effect a wrongful purpose;

(3) another's disposition to do so for an improper purpose; and

(4) a result clearly showing the effects of undue influence.

The party alleging undue influence must prove these elements by a preponderance of the evidence.

Lincoln contends that the court's finding of opportunity to exert undue influence was erroneous because Lincoln and Pearl had no confidential relationship and Pearl had the ability to seek independent advice between the two meetings with Goehring, but chose not to do so. In this case, Pearl testified that Lincoln was her son and someone with whom she had previously lived for many years, someone she trusted to "do right." Lincoln conceded that on the date Pearl signed the contract, he knew Pearl trusted him and had confidence that he would treat her fairly in his business dealings with her. This type of trust and confidence by a mother in her son is sufficient to prove opportunity.

The court's finding that Lincoln had a disposition to exert undue influence for an improper purpose was also supported.

Lincoln had substantial experience in farmland transactions and real estate appreciation. He collaborated with an attorney a number of times over four years to purchase the farm and draft the necessary documents. Yet Lincoln did not have the farm appraised as he had previously done when farming the property with his brother. Instead, Lincoln set the price at a value for which it had appraised twenty-four years earlier, a price that was one-sixth of its then current value. He also took no steps to ensure that his elderly mother understood the contract terms, including the fact that considering her age and the thirty-year amortization, she would likely never receive a substantial portion of the payments.

Neither Lincoln nor his attorney advised Pearl to seek legal representation.

Finally, Lincoln's conduct after execution of the contract was also relevant to show disposition to exercise undue influence at the time the contract was executed.

INTERPRETATION A transaction induced by undue influence on the part of the dominant party is voidable by the unduly influenced party.

ETHICAL QUESTION Did Lincoln act in a proper manner?

Explain.

CRITICAL THINKING QUESTION Explain who should have the burden of proof in undue influence cases: the party alleging undue influence or the party alleged to have exerted undue influence.

FRAUD [11-3]

Another factor affecting the validity of consent given by a contracting party is fraud, which prevents assent from being knowingly given. There are two distinct types of fraud: fraud in the execution and fraud in the inducement.

Fraud in the Execution [| I-3a]

Fraud in the execution, which is extremely rare, consists of a misrepresentation that deceives the defrauded person as to the very nature of the contract. Such fraud occurs when a person does not know, or does not have reasonable opportunity to know, the character or essence of a proposed contract because the other party misrepresents its character or essential terms. Fraud in the execution renders the transaction void.

For example, Melody delivers a package to Ray, requests that Ray sign a receipt for it, holds out a simple printed form headed "Receipt,' and indicates the line on which Ray is to sign. This line, which appears to Ray to be the bottom line of the receipt, is actually the signature line of a promissory note cleverly concealed underneath the receipt. Ray signs where directed without knowing that he is signing a note. This is fraud in the execution. The note is void and of no legal effect, for, although the signature is genuine and appears to manifest Ray's assent to the terms of the note, there is no actual assent. The nature of Melody's fraud precluded consent to the signing of the note because it prevented Ray from reasonably knowing what he was signing.

Fraud in the Inducement [| | -3b]

Fraud in the inducement, generally referred to as fraud or deceit, is an intentional misrepre tation of material fact by one party to the other who consents to enter into a contract in justifi. reliance on the misrepresentation. Fraud in the inducement renders the contract voidable by the defrauded party and makes the fraudulent party liable in restitution as necessary to avoid unjust enrichment. For example, Alice, in offering to sell her dog to Bob, tells Bob that the dog won first prize in its class in the recent national dog show. In truth, the dog had not even been entered in the show. However, Alice's statement induces Bob to accept the offer and pay a high price for the dog.

There is a contract, but it is voidable by Bob because Alices fraud induced his assent.

The requisites for fraud in the inducement are as follows:

1. a false representation

2. of a fact

3. that is material and

4. made with knowledge of its falsity and the intention to deceive (scienter) al

5. which representation is justifiably relied on.

The Third Restatement of Torts: Liability for Economic Harm, Section 9, f requirements. The final portions of this new Restatement were approved in 2018. It 1 on torts that involve economic loss or pecuniary harm not resulting from physical I contact to a person or property.

The remedies that may be available for fraud in the inducement include rescission, restitution, and damages, as discussed in Chapter 18.

False Representation A basic element of fraud is a false representation or a misrepresentation (i.e., misleading conduct or an assertion not in accord with the facts, made through a positive statement). In contrast, concealment is an action intended or known to be likely to keep another from learning a fact he otherwise would have learned. Active concealment can form the basis for fraud, as, for example, when a seller puts heavy oil or grease in a car engine to conceal a knock. Truth may be suppressed by concealment as much as by misrepresentation.

Expressly denying knowledge of a fact that a party knows to exist is a misrepresentation if it leads the other party to believe that the fact does not exist or cannot be discovered. Moreover, a statement of misleading half-truth is considered the equivalent of a false representation.

Generally, silence or nondisclosure alone does not amount to fraud when the parties deal at arm's length. An arm's-length transaction is one in which the parties owe each other no special duties and each is acting in his or her self-interest. In most business or market transactions, the parties deal at arm's length and generally have no obligation to tell the other party everything they know about the subject of the contract. Thus, it is not fraud when a buyer possesses advantageous information about the seller's property, information of which he knows the seller to be ignorant, and does not disclose such information to the seller. A buyer is under no duty to inform the seller of the greater value or other advantages of the property for sale. Assume, for example, that Sid owns a farm that, as a farm, is worth $100,000. Brenda, who knows that there is oil under Sid's farm, also knows that Sid is ignorant of this fact. Without disclosing this information to Sid, Brenda makes an offer to Sid to buy the farm for $100,000. Sid accepts the offer, and a contract is duly made. Sid, on later learning the facts, can do nothing about the matter, either at law or in equity. As one case puts it, "a purchaser is not bound by our laws to make the man he buys from as wise as himself." Although nondisclosure usually does not constitute a misrepresentation, in certain situations, it does. One such situation arises when (1) a person fails to disclose a fact known to him, (2) he knows that the disclosure of that fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract, and (3) nondisclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. Accordingly, if the property at issue in the contract contains a substantial latent (hidden) defect, one that would not be discovered through an ordinary examination, the seller may be obliged to reveal it. Suppose example, that Judith owns a valuable horse, which she knows is suffering from a disease disc able only by a competent veterinary surgeon. Judith offers to sell this horse to Curt but de inform him about the condition of her horse. Curt makes a reasonable examination of th and, finding it in apparently normal condition, purchases it from Judith. Curt, on later disa the disease in question, can have the sale set aside. Judith's silence, under the circumstances misrepresentation.

In other situations, the law also imposes a duty of disclosure. For example, one may have a duty of disclosure because of prior representations innocently made before entering into the contract, which are later discovered to be untrue. Another instance in which silence may constitute fraud is a transaction involving a fiduciary. A fiduciary is a person in a confidential relationship who owes a duty of trust, loyalty, and confidence to another. For example, an agent owes a fiduciary duty to his principal, as does a trustee to the beneficiary of the trust and a partner to her copartners.

A fiduciary may not deal at arm's length, as a party in most everyday business or market transactions may, but owes a duty to disclose fully all relevant facts when entering into a transaction with the other party to the relationship.

The Third Restatement of Torts: Liability for Economic Harm, is in accord and provides, A failure to disclose material information may result in liability if the actor has a duty to speak. Such a duty exists where (a) the actor has made a prior statement and knows that it will likely mislead another if not amended, even if it was not misleading when made; or (b) the actor is in a fiduciary or confidential relationship with another that obliges the actor to make disclosures; or (c) the actor knows that the other party to a transaction is mistaken about a basic assumption behind it, and that the other party, because of the relationship between them, the customs of the trade, or other circumstances, would reasonably expect disclosure of what the actor knows.

tial relationship with another that donge

other party to a transaction is mistaken about a baste as the trade or other circumstenner party, because of the relationship between them, the customs of the trade, or other circumstances, would reasonably expect disclosure of what the actor knows.

ict The basic element of fraud is the misrepresentation of a material fact. A fact is an event it actually took place or a thing that actually exists. Suppose that Dale induces Mike to purchase tres in a company unknown to Mike at a price of $100 per share by representing that she had id $150 per share for them during the preceding year, when in fact she had paid only $50.00. This resentation of a past event is a misrepresentation of fact.

Actionable fraud rarely can be based on what is merely a statement of opinion. A representation one of opinion if it expresses only the uncertain belief of the representer as to the existence of a t or his judgment as to quality, value, authenticity, or other matters of judgment.

The line between fact and opinion is not an easy one to draw and in close cases presents an le for the jury. The solution often will turn on the superior knowledge of the person making the ement and the information available to the other party. Thus, if Dale said to Mike that the shares re "a good investment," she was merely stating her opinion; and normally Mike ought to regard it 1o more than that. Other common examples of opinion are statements of value, such as "This is best car for the money in town" or "This deluxe model will give you twice the wear of a cheaper del." Such exaggerations and commendations of articles offered for sale are to be expected from lers, who are merely puffing their wares with "sales talk." If the representer is a professional ising a client, the courts are more likely to regard an untrue statement of opinion as actionable. h a statement expresses the opinion of one holding himself out as having expert knowledge, and tendency is to grant relief to those who have sustained loss by reasonable reliance on expert luation, as the next case shows,

The Third Restatement of Torts: Liability for Economic Harm provides that a false statement of opinion results in liability only if (1) the parties are in a fiduciary or confidential relationship or (2) the perpetrator of the fraud holds himself out as having expertise or other knowledge not accessible to the defrauded party.

Also to be distinguished from a representation of fact is a prediction. Predictions are similar to opinions, as no one can know with certainty what will happen in the future, and normally they are not regarded as factual statements. Likewise, promissory statements ordinarily do not constitute a basis of fraud, because a breach of promise does not necessarily indicate that the promise was fraudulently made. However, a promise that the promisor, at the time of making, had no intention of keeping is a misrepresentation of fact. The Third Restatement of Torts: Liability for Economic Harm is in accord: "A statement of a speaker's intention to perform a promise is a fraudulent misrepresentation if the intention does not exist at the time the statement is made."

Historically, courts held that representations of law were not statements of fact but of opinion.

The present trend is to recognize that a statement of law may have the effect of either a statement of fact or a statement of opinion. For example, a statement asserting that a particular statute has been enacted or repealed has the effect of a statement of fact. On the other hand, a statement as to the legal consequences of a particular set of facts is a statement of opinion.

The Third Restatement of Torts: Liability for Economic Harm provides that false statements of law "subject their makers to liability if they imply untrue facts, or if the parties have a relationship that makes it reasonable for the plaintiff to rely on the defendant's opinions. They are not actionable if they amount to judgments based on facts available to both sides and on which the plaintiff can reasonably be expected to arrive at an independent view."

FACTS Tony Y. Maroun (Maroun) was employed by Amkor when he accepted an offer to work for Wyreless, a start-up com-pany. Wyreless promised Maroun, among other items, the follow-ing: (1) annual salary of $300,000; (2) $300,000 bonus for successful organization of Wyreless Systems, Inc.; (3) 15 percent of the issued equity in Wyreless Systems, Inc.; (4) the equity and "organization bonus" tied to mutually agreeable milestones; (5) full medical benefits; and (6) the position of chief executive officer, president, and board member. Maroun began working for Wyreless but was terminated a few months later. Maroun then filed suit alleging he had not received 15 percent of issued equity and had not received $429,145, which represented the remainder of the $600,000. Wyre-less filed a motion for summary judgment. The district court granted the motion, and Maroun appealed.

DECISION Judgment of the district court affirmed.

OPINION Maroun argues the district court erred in granting summary judgment on the fraud claim. In opposition to the defendants' motion for summary judgment, Maroun filed an affidavit that stated Robinson (representing Wyreless) made the following representations to Maroun:

1. That Wyreless was to be a corporation of considerable size, with initial net revenues in excess of several hundred million dollars.

2. That Robinson would soon acquire one and one-half million dollars in personal assets, which Robinson would make available to personally guarantee payment of Maroun's compensation from Wyreless.

3. That Robinson would have no difficulty in obtaining the initial investments required to capitalize Wyreless as a large, world-leading corporation with initial net revenues in excess of several hundred million dollars.

That Robinson had obtained firm commitments from several investors and that investment funds would be received in Wyreless' bank account in the near future.

An action for fraud or misrepresentation will not lie for statements of future events. A promise or a statement as to a future event will not serve as a basis for fraud. Statements numbered one and two both address future events. The representation forming the basis of a claim for fraud must concern past or existing material facts. Neither of these statements constitutes a statement or a representation of past or existing fact. A promise or statement that an act will be undertaken, however, is actionable, if it is proven that the speaker made the promise without intending to keep it. There is no indication that Robinson did not intend to fulfill those representations to Maroun at the time he made the statements.

Opinions or predictions about the anticipated profitability of a business are generally not actionable as fraud. Statement number three was merely Robinson's opinion. As to statement number four, no evidence was submitted that Robinson had not received commitments at the time he made the statement to Maroun.

Accord-ingly, the district court's grant of summary judgment against Maroun on the fraud claim was affirmed.

INTERPRETATION Fraud generally must be based on a material fact and not on predictions or a person's opinion.

ETHICAL QUESTION Did Wyreless act in an ethical manner?

CRITICAL THINKING QUESTION When should an employer be held to its "promises"?

Materiality In addition to misrepresenting a fact, a misrepresentation also must be material. A misrepresentation is material if (1) it would be likely to induce a reasonable person to manifest assent or (2) the maker knows that it would be likely to induce the recipient to do so. The Third Restatement of Torts: Liability for Economic Harm provides that a misrepresentation is material if a reasonable person would give weight to it in deciding whether to enter into the relevant transaction, or if the fraudulent party knew that the defrauded party would give it weight (whether reasonably or not). In the sale of a racehorse, it may not be material whether the horse was ridden in its most recent race by a certain jockey, but its running time for the race probably would be. The Restatement of Contracts and the Restatement of Restitution provide that a contract justifiably induced by a misrepresentation is voidable if the misrepresentation is either fraudulent or material. Therefore, a fraudulent misrepresentation does not have to be material to obtain rescission, but it must be material to recover damages.

The Reed v. King case presents an unusual factual situation involving the duty to disclose a “material” facts.

sale, neighbors told Reed about the murders and informed her that the house was consequently worth only $65,000. Reed brought an action against King and the real estate agent, alleging fraud and seeking rescission and damages. The complaint was dismissed, and Reed appealed.

DECISION Judgment reversed.

OPINION The requisite elements of fraud are "(1) a false representation or concealment of a material fact (or, in some cases, an opinion) susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it; and such person must (4) act in reliance upon the representation (5) to his damage." The trial court determined that Reed failed to allege concealment of a material fact.

Concealment, however, may include mere silence when a party has a duty to disclose. This duty falls upon the seller of real property where he (1) knows of facts that have a material effect upon the value or desirability of the property and (2) knows that these facts are unknown to the buyer and inaccessible to the buyer through the exercise of ordinary diligence. The second of these conditions clearly applies.

King knew that Reed was unaware of the murders, and Reed cannot reasonably be expected to anticipate and discover such an unlikely possibility. The issue therefore turns upon the question of materiality. Material nondisclosures in real property cases generally pertain to physical defects of the property or to legal impediments to its use. Murder, however, is a particularly disturbing event that may cause a buyer to be unable to live in a house where it has occurred and may thus deprive the buyer of the intended use of the property. Moreover, the content of the information not disclosed by the seller need not be the crucial factor.

If Reed can prove that the murders significantly and measurably affected the market value of the premises, she should receive a favorable judgment on the issue of materiality and duty to disclose.

INTERPRETATION A representation is material if it is likely to influence or affect a reasonable person.

ETHICAL QUESTION Should King have revealed the information to Reed? Explain.

CRITICAL THINKING QUESTION What is material infor-mation, and how should it be determined?

Knowledge of Falsity and Intention to Deceive To establish fraud, the misrepresentation must have been known by the one making it to be false and must be made with an intent to deceive. This element of fraud is known as scienter. Knowledge of falsity can consist of

(1) actual knowledge, (2) lack of belief in the statement's truthfulness, or (3) reckless indifference as to its truthfulness. The Third Restatement of Torts: Liability for Economic Harm similarly provides that scienter exists if the maker of a misrepresentation (1) knows or believes that the matter is not as represented, (2) knows that he does not have the confidence in the statement that he states or implies, or (3) knows that he does not have the basis for the statement that he states or implies.

ustifiable Reliance A person is not entitled to relief unless she has justifiably relied on the misrepresentation. If the complaining party's decision was in no way influenced by the nisrepresentation, she must abide by the terms of the contract. She is not deceived if she does not ely on the misrepresentation. Justifiable reliance requires that the misrepresentation contribute ubstantially to the misled party's decision to enter into the contract. If the complaining party knew r it was obvious that the representation of the defendant was untrue, but she still entered into the ontract, she has not justifiably relied on that representation. Moreover, where the misrepresentation fraudulent, the party who relies on it is entitled to relief even though she does not investigate the atement or is contributorily negligent in relying on it. Not knowing or discovering the facts before aking a contract does not make a person's reliance unjustified unless her reliance amounts to a ilure to act in good faith and in accordance with reasonable standards of fair dealing. Thus, most purts will not allow a person who concocts a deliberate and elaborate scheme to defraud-one that le defrauded party should readily detect—to argue that the defrauded party did not justifiably rely pon the misrepresentation.

Under the Third Restatement of Torts: Liability for Economic Harm, the defrauded party can cover for economic loss only if (1) the misrepresentation causes the loss, (2) the defrauded party lies on the misrepresentation, and (3) the reliance is justifiable.

naking a contract does not make a person's reliance unjustified unless her reliance amounts to a ailure to act in good faith and in accordance with reasonable standards of fair dealing. Thus, most ourts will not allow a person who concocts a deliberate and elaborate scheme to defraud-one that he defrauded party should readily detect —to argue that the defrauded party did not justifiably rely pon the misrepresentation.

NONFRAUDULENT MISREPRESENTATION [11-4] nonfraudulent misrepresentation is a material, false statement that induces another to rely justi-bly but is made without scienter. Such representation may occur in one of two ways. Negligent representation is a false representation that is made without knowledge of its falsity and with out due care in ascertaining its truthfulness; such representation renders an agreement voidable. locent misrepresentation, which also renders a contract voidable, is a false representation made without knowledge of its falsity but with due care. To obtain relief for nonfraudulent misrepresenta-tion, all of the other elements of fraud must be present and the misrepresentation must be material The remedies that may be available for nonfraudulent misrepresentation are rescission, restitution, and damages (see Chapter 18).

MISTAKE [11-5]

A mistake is a belief that is not in accord with the facts. Where the mistaken facts relate to the basis of the parties' agreement, the law permits the adversely affected party to avoid or reform the contract under certain circumstances. But because permitting avoidance for mistake undermines the objective approach to mutual assent, the law has experienced considerable difficulty in specifying those circumstances that justify permitting the subjective matter of mistake to invalidate an otherwise objectively satisfactory agreement. As a result, establishing clear rules to govern the effect of mistake has proven elusive.

The Restatement and modern cases treat mistakes of law in existence at the time of making the contract no differently than mistakes of fact. For example, Susan contracts to sell a parcel of land to James with the mutual understanding that James will build an apartment house on the land. Both Susan and James believe that such a building is lawful. Unknown to them, however, three days before they entered into their contract, the town in which the land was located had enacted an ordinance precluding such use of the land. In states that regard mistakes of law and fact in the same light, this mistake of law would be treated as a mistake of fact that would lead to the consequences discussed in the following section.

Mutual Mistake [| |-5a]

Mutual mistake occurs when both parties are mistaken as to the same set of facts. If the mistake relates to a basic assumption on which the contract is made and has a material effect on the agreed exchange, then it is voidable by the adversely affected party unless he bears the risk of the mis-take. In addition, the adversely affected party is entitled to restitution as necessary to avoid unjust enrichment.

Usually, market conditions and the financial situation of the parties are not considered basie assumptions. Thus, if Gail contracts to purchase Pete's automobile under the belief that she can sell it at a profit to Jesse, she is not excused from liability if she is mistaken in this belief. Nor can she rescind the agreement simply because she was mistaken as to her estimate of what the utomobile was worth. These are the ordinary risks of business, and courts do not undertake to elieve against them. But suppose that the parties contract upon the assumption that the auto-nobile is a 2010 Cadillac with fifteen thousand miles of use, when in fact the engine is that of cheaper model and has been run in excess of fifty thousand miles. Here, a court likely would llow a rescission because of mutual mistake of a material fact. In a New Zealand case, the plaintiff urchased a "stud bull" at an auction. There were no express warranties as to "sex, condition, or therwise." Actually, the bull was sterile. Rescission was allowed, the court observing that it was a “bull in name only”

relieve against them. But suppose that the parties contract up whe

mobile is a 2010 Cadillac with fifteen thousand miles of use, when in fact the engine is that of a cheaper model and has been run in excess of fifty thousand miles. Here, a court likely would allow a rescission because of mutual mistake of a material fact. In a New Zealand case, the plaintiff purchased a "stud bull" at an auction. There were no express warranties as to "sex, condition, or

otherwise." Actually, the bull was sterile. Rescission was allowed, the court observing that it was a "bull in name only."

Unilateral Mistake [| I-5b]

Unilateral mistake occurs when only one of the parties is mistaken. Courts have been hesitant to grant relief for unilateral mistake, even though it relates to a basic assumption on which a party entered into the contract and has a material effect on the agreed exchange. Nevertheless, relief will be granted in cases in which (1) the nonmistaken party knows, or reasonably should know, that such i mistake has been made (palpable unilateral mistake) or (2) the mistake was caused by the fault f the nonmistaken party. For example, suppose a building contractor makes a serious error in his omputations and consequently submits a job bid that is one-half the amount it should be. If the her party knows that the contractor made such an error, or reasonably should have known it, she nnot, as a general rule, take advantage of the other's mistake by accepting the offer. In addition, ny courts and the Restatement allow rescission in cases in which the effect of unilateral mistake kes enforcement of the contract unconscionable.

FACTS In 2006, Jeff Burningham and Westgate Resorts, Ltd.

(Westgate) entered into a real estate purchase contract (the REPC) in which Burningham agreed to purchase a Park City, Utah condominium unit from Westgate for $899,000. Pursuant to the REPC, Burningham made a 10 percent deposit of $89,900, which was to be retained by Westgate as liquidated damages if Burningham defaulted. As the 2007 closing date approached, real estate market conditions worsened, and Burningham refused to close. A dispute arose between the parties as to whether Burningham was entitled to a refund of the deposit, with Burningham alleging that Westgate had made misrepresentations to fraudulently induce him to enter into the REPC. In September 2010, the parties settled their dispute by executing a second contract (the Agreement) for the sale of the condominium unit, this time for the reduced purchase price of $462,500. The only deposit contemplated by the Agreement was the $89,900 that Burningham had previously paid. The Agreement purported to resolve all outstanding issues between the parties arising under the REPC and stated that it was "wholly integrated and shall supersede any and all previous and current understandings and agreements between the Buyer and Seller." Unlike the REPC, the Agreement contained a provision (Paragraph 38.1) granting Burningham the right to terminate the Agreement in his sole dis-the Agreement's effective date, upon which timely notice Burning-ham would be entitled to payment of his deposit.

Burningham exercised this termination option by giving timely written notice to Westgate. However, Westgate refused to return Burningham's deposit, contending that neither party had intended to provide Burningham the unilateral right to cancel the Agreement and recover the full $89,900 originally deposited under the REPC. Burningham sued Westgate for the return of the deposit, and Westgate brought counterclaims arguing mutual mistake. The district court granted summary judgment in favor of Burningham for $89,900. Westgate appealed.

DECISION Judgment affirmed.

OPINION Bench, Senior Judge. The district court concluded that, pursuant to paragraph 38.1 of the Agreement, Burningham timely terminated the Agreement and was entitled to a refund of his $89,900 deposit as a matter of law. Notwithstanding the language of paragraph 38.1, Westgate argues that extrinsic evidence-primarily the declaration of its sales agent [that the parties did not intend to include the provision of a full return of the deposit]-creates mate-rail questions of facts on its arguments of mutual mistake

*** A mutual mistake of fact can provide the basis for equitable rescission or reformation of a contract even when the contract appears on its face to be a "complete and binding integrated agreement." [Citation.] "A mutual mistake occurs when both parties, at the time of contracting, share a misconception about a basic assumption or vital fact upon which they based their bar-gain." [Citation.] Westgate argues that its sales agent's declaration, viewed in light of the parties' course of conduct leading up to the Agreement, raises a fact question as to whether the inclusion of paragraph 38.1's refund language in the Agreement was a mutual mistake.

The sales agent's declaration summarizes, from Westgate's perspective, the events leading up to the execution of the Agree-ment. The declaration clearly provides evidence that Westgate did not intend for the $89,900 to be refundable, stating that "at no time did Westgate intend for the [$89,900] to be considered a refundable deposit under the [Agreement]." It also provides evidence of West-gates subjective understanding that Burningham shared its intent, stating that the sales agent "understood these to be Burningham's intentions based on (the agent's] discussions and interactions with

[Burningham] leading up to the [Agreement].

What the sales agent's declaration does not do is provide evidence of Burningham's intent, as opposed to Westgate's understanding of that intent. The declaration does not provide the substance of any of the sales agent's "discussions and interactions" with Burningham that would provide evidence of Burningham's intent.

Instead, the declaration relies on Burningham's silence, stating that

"[a]t no time did Burningham indicate... that he intended the [$89,900] to be a refundable deposit under the [Agreement] or that he interpreted it to be the 'deposit' referenced in Paragraph 38.1 of the [Agreement)."

We agree with the district court that the sales agent's declaration "does not show that Mr. Burningham was also mistaken on [the deposit] issue. The declaration provides evidence only of unilateral mistake by Westgate, not the mutual mistake required to establish grounds for equitable rescission of the Agreement.

We therefore conclude that the declaration did not raise a material question of fact on mutual mistake so as to preclude summary judgment.

INTERPRETATION For a mistake to render a contract void-able, it must be a mutual mistake of fact.

Assumption of Risk of Mistake [| |-5c]

A party who has undertaken to bear the risk of a mistake will not be able to avoid the contract, even though the mistake (which may be either mutual or unilateral) would have otherwise permitted the party to do so. This allocation of risk may occur by agreement of the parties. For instance, a ship at sea may be sold "lost or not lost." In such case, the buyer is liable whether the ship was lost or not lost at the time the contract was made. There is no mistake; instead, there is a conscious allocation of risk.

The risk of mistake also may be allocated by conscious ignorance when the parties recognize that they have limited knowledge of the facts. For example, the Supreme Court of Wisconsin refused

to set aside the sale of a stone for which the purchaser paid $1.00 but that was subsequently discovered to be an uncut diamond valued at $700. The parties did not know at the time of sale what the stone was and knew they did not know. Each consciously assumed the risk that the value might be more or less than the selling price.

Effect of Fault upon Mistake [| I -5d]

The Restatement provides that a mistaken party's fault in not knowing or discovering a fact before making a contract does not prevent him from avoiding the contract "unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing." This rule does not, however, apply to a failure to read a contract. As a general proposition, a party is held to what she signs. Her signature authenticates the writing, and she cannot repudiate that which she has voluntarily approved. Generally, one who assents to a writing is presumed to know its contents and cannot escape being bound by its terms merely by contending that she did not read them; her assent is deemed to cover unknown as well as known terms.

Mistake in Meaning of Terms [||-5e]

Somewhat related to mistakes of fact is the situation in which the parties misunderstand the meaning of each other's manifestations of mutual assent. A famous case involving this problem is Raffles v.

Wichelhaus, 2 Hurlstone & Coltman 906 (1864), popularly known as the Peerless case. A contract of purchase was made for 125 bales of cotton to arrive on the Peerless from Bombay. It happened, however, that there were two ships by the name of Peerless sailing from Bombay, one in October and the other in December. The buyer had in mind the ship that sailed in October, whereas the seller reasonably believed the agreement referred to the Peerless sailing in December. Neither party was at fault, but both believed in good faith that a different ship was intended. The English court held that no contract existed.

The Restatement is in accord: there is no manifestation of mutual assent in cases in which the parties attach materially different meanings to their manifestations and neither party knows or has reason to know the meaning attached by the other. If blame can be ascribed to either party, however, that party will be held responsible. Thus, if the seller knew of the sailing from Bombay of two ships by the name of Peerless, then he would be at fault, and the contract would be for the ship sailing in October as the buyer expected. If neither party is to blame or both are to blame, there is no contract at all; that is, the agreement is void.

The only book that you’re able to use is the business law and the legal environment.