CHAPITR 12ffi***mdM

-MISTAKES

-FRAUDUTENTMISREPRESENTATION

-UNDUE INFLUENCE AND DURESS

-ADHESION CONTRACTSAND UNCONSCIONABILITY

CHAPTEN OUIl I l {T TEARl{I1{G OBIECIIVES 66law is a pledgethat the citizensof a state willdojustice to oneanother.! I

Aristotle, 384-322 s.c.o.(Greek philosopher)

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLETO ANSWER THE FOLLOWING QUESTIONS:

In what types of situations might genuineness ofassent to a contract's terms be lacking?

What is the difference behveen a mistake ofvalue or quality and a mistake of fact?

What elements must exist for fraudulentmisrepresentation to occur?

Does a party to a contract ever have a duty todisclose information to the other party?

What happens if a person misrepresents a factunintentionally?

n otherwise valid contract may still be unenforceable if the parties have not gen-uinely assented to its terms. As mentioned in Chapter 8, lack of genuine assent is

a defense to the enforcement of a contract. As Aristotle stated in the chapter-opening quo-tation, the law seeks to ensure that "the citizens of a state will do justice to one another."If the law were to enforce contracts not genuinely assented to by the contracting parties,in justice would result. This chapter focuses on the kinds of factors that indicate that gen-uineness of assent to a contract may be lacking.

Genuineness of assent may be lacking because of mistake, fraudulent misrepresenta-tion, undue influence, or duress. Generally, a party who demonstrates that he or she didnot genuinely assent (agree) to the terms of a contract can choose either to carry out thecontract or to rescind (cancel) it and thus avoid the entire transaction.

We all make mistakes, so it is not surprising that mistakes are made when contrach arecreated. In certain circumstances, contract law allows a contract to be avoided on thebasis of mistake. It is important to distinguish beh.veen mistakes of fact and mistakes ofvalue or quality. Only a mistake of fact may allow a contract to be avoided.

lEEIAMFLEl2.tl Paco buys a violin from Beverly for $250. Although the violin is very old,neither party believes that it is exhemely valuable. Later, however, an antiques dealer informsthe parties that the violin is rare and worth thousands of dollars. Here, both parties were CENUINENESS OF ASSENT

3tl

5r2 llEiIMCONTRACTS

UNILATERAL MISTAKEMistake that occurs when one Partyto a contract is mistaken as to amaterial fact; the contract normallyis enforceable.

BILATERAL MISTAKEMistake that occurs when bothparties to a contract are mistakenabout the same material fact andthe mistake is one that a reasonableperson would make; either PartYcan rescind the contract

MATERML TACTA fact to which a reasonableperson would attach imPortancein determining his or her courseof action.

'*Miutrk., are the inevitable lot of,)

mankind.Srn Gaoncn )ussnt,,

1 82,+-1 881(l inglish juiist)

rnistaken, but the mistake is a mistake of value rather tirar-r a mistake of fact lhatwarrants coll-

tract rescission. Therefore, Beverly cannot rescind the contract' E

Mistakes of fact o..,-r, ir'r hvo forn1s-unilateral and bilateral (mutual). A unilateral

mistake is made by only one of tl-re contracting parties; a bilateral mistake is made by both'

We look next at these hvo types of rnistakes ,txl illustrate them graphicall,v in Exhibit 12-1'

Unilateral MistakesA unilateral n-ristake occurs when or-rly one party is mistaken as to a material fact-that is, a

fact important to t1-ie subject matter of the contract. Generally, a unilateral n'iistake does not

gii,e the mistaken party any right to relief frorn the contract. In other words, the contract nor-

,:naliy is ",'rfor..rb1.

against ihe n-ristaken party. feExArrlplE tu:l Elena intends to sell her

,notor hofire for $17,500. when she learns that chiir is interested in buying a used motor

home, she sends a fax offering to sell the vehicle to him. when typing the fax, however, she

niistakenly keys in the price Jf $ t l,ZOO. Chin imrnediately sends E]:y i fax accepting her

offer. Even though Elela intendecl to sell her motor home for $17,500, she has made a uni-

lateral mistake ai-rd is bound by contract to sell the vel-ricle to Chin for $15,700. @

Tlrere are at least hvo .*..piio,'r, to this rule.l First, if the other parly to the con-

tract knows or should have krro*r'r that a mistake of fact was made, the contract may not be

enforceable. fBExA@ In tl-re above example, if Cl-rin knew that F,lena intended to sell

her motor t,o-" f- $li-lOO, then Elena's r-rniLteral n-ristake (statir-rg $15,700 in her offer)

rnay render tl're resulting contract ulienforceabie. E The second exception arises when a

.,,-rilrt.r"l n-ristake of faci *as due to a n-iatl-iematical mistake in adclitior-i, subtraction, divi-

sion, or multiplicatron ancl was rr-iacle inadvertently and without gross (extreme) negligence'

If a contractor's bicl was significar-itly low because he or she made a mistake in addition when

totaling the estimated .orir, "ny

colrtract resulting from the bid nonlally rnay be rescinded'

Of co.irse, ilr botl-r situations, the nistake n'rust still involve some nnterial fact.

Bi lateral (Mutual) MistakesWhen botl-r parties are n-ristaken about the same material fact, the contract can be

rescincled by either party.2 Note that, as witl'r unilateral mistakes, the rnistake nr'rst be

abont a maierial faci (orre that is important and central to the contrac0. IeExAMi@

, rR"*r* t* , ( ,S"rond) of Contracts, Sect ion 151, l iberal izes the general ru le to take into account ihe modern

trencl ofallou,irg avoidance in some circumstalces even though onll one party has been nisiaken'

2, Restatement (Second') of Contracis, Section 152.

Keeley buys a landscape pair-rting from Umberto's art gallery. Both Umberto and Keeleybelieve that the painting is by the artist Vincent van Gogh. Later, Keeley discovers thatthe painting is a very clever fake. Because neither Umberto nor Keeley was aware of thisfact when they made their deal, Keeley can rescind the contract and recover the purchaseprice of the painting. E

A word or term in a contract may be subiect to more than one reasonable interpreta-tion. In that situation, if the parties to the contract attach materially different meanings tothe term, their mutual misunderstanding may allow the contract to be rescinded.FEIEmFtf t2:51 In a classic case, Raffles y. Wichelhaus,3 Wichelhaus purchased a ship-ment of cotton from Raffles to arrive on a ship called the Peerless from Bombay, India.Wichelhaus meant a ship called Peerless sailing from Bornbay in October; Raffles meanta different ship called Peerless sailing from Bombay in December. When the goods arrivedon the December Peerless and Raffles tried to deliver them, Wichelhaus refused to acceptthem. The British court held for Wichelhaus, concluding that no mutual assent existedbecause the parties had attached materially different meanings to an essential term of thecontract (which ship Peerless was to transport the goods). E

In the following case, the court had to grapple with the question of whether a mutualmistake of fact had occurred.

3. 159 Eng.Rep. 375 (1864)

Supreme Court of Vermont, 945 A.2d 855 (2008).

BACKGROUND AND FACTSThe Inkels, who live in Vermont,

sIIE@GENUINENESS OF ASSENT

I?|ilillifffm What a party to acontract knows or should knowcan determine whether thecontract is enforceable.

month after the sale, Pride told the Inkels they owed another$16,435 because there was a misunderstanding with theleasing company about the high-mileage charge. The Inkelsrefused to pay. Pride demanded that they return the Tahoeand wanted to cancel the deal; the Inkels refused. The Inkelsthen sued Pride for breach of contract and other claims. AVermont superior court held that a mutual mistake had beenmade in the contract and that the Inkels should have agreedto undo the deal. The court granted summary judgment forPride and ordered the Inkels to pay damages. They appealed.

called Pride Chevrolet-Pontiac, lnc., in Boston about buying anew Chevy Tahoe. They said that they would trade in a high-mileage vehicle they leased. The sales representative toldthem that the high-mileage penalty would probably not applyas the lease was from a bank not a dealership. When theInkels took delivery of the new Tahoe and left their old vehicleat Pride, the price on the contract was $41,200. In small printon the back of the agreement was a provision that the buyerwas responsible for any problems with the trade-in vehicle. A

lN THE WORDS 0F THE C0URT . . . BURoEss. Justice.

The evidence submitted in connection with the parties' cross motions for summaryjudgment does not establish what happened in the instant case lihe case rrnder discus-sion]. Although the superior court [the trial court] stated in a footnote that it was undis-puted that the Chittenden Bank was negligent in giving Pride Chevrolet an incorrectpayoff amount, Mr. Inkel testified in his deposition that a bank employee told himthat Pride Chevrolet had asked for the wrong payoffamount. Thus, it is not clear whetherthe Pride Chevrolet employee asked for the wrong information or the bank provided thewrong information. In short, the evidentiary record does not rnake it clear how the CASE l2. l -Cont inues next page

5r4@CONTRACTS

. CASE l2 ' l -Cont inued,,mistake,'occurred or even whether there was-a mistake' Further' the principal facts that

the superior couft apparently.relied :l t"

:"1t* l; f*"; of Pride

'C'hevrolet-that the

Inkels knew they had substa;tial negative .q"iru?rir'rJr vehicie and that another dealer-

ship had recently d".#il;;;"g"".i".. *iifr ir'r.tt u"cause of the substantial negative

"o,ritu ir-, the vehicle-J" ""t "-ecessarily ""dt;;

the Inkels' alleeation that Pride

chevrolet made, even o r*l'ro1-inrth,'fr-rr.lnd misleading reprJsentations

x * x

by terling them that ,# fi| ?;lil;;"il ;";';;.f ou.r--ii'ag" pavments on their

trade-in.

;r:r:";.r, we reiect pride chevrolet,s argr_rment that the Inkels "affirmed" the vehicle

ry"''1""1""',*lr:#lxjffi ;f ";f :fui;"xl}.ff $;:,i j:':;ij,lij"iii:I?ifi;:;;l??;,1'ff,t'T;, ;"-,,,v-.u.,''t, t',:l'd;;;

io"' '''ot conclusiverv prove mutual

mistake. ,,Amutual mistake mu'st be a mistake itW*tii i*"tv.ingboth pariies' a mistake

independently made 1'r-i"'i p"nie{' "1\ mntake by o'n3'party coupled with ignorance

thereof does not 'on't'luiu-*u["ol

mistake'" fEmphasis added']

Given the .t""'." l;t" "i

irtt record' *i;;h;; the Inkels merely accepted Pride

cheviolefs statements ", n.,. or took ,au"r1trf. or the dealer's

ill*t" beliefs' the exis-

tence of mutual -irt#i,

!"Jior.rt t" :a F Further, even assuming that the parties'

mistake was mutual, il;.th.;;;let failed;;.;;;;it"te that tht nff"t to "wash the

deal,, was a legitimate ;ff;, ,; rescind th. .ontrr.t. Pride chevrolet presented no evl-

dence indicating precisely when tl're off"t *" -^Je'

who made the offer' or what terms'

if any, were offered'

DECISI0N AND REMEDY rheVermonthigh court

reversedinfavorof thelnkels 'holdingthat i twa-snotclear;;;.ht"';.s a mutual mistake' For a court to find that a

mutual mistake occurred' evidence would have to be

;;;;;;J u,.,iul to show that both parties had been mistaken

about the same facts'

f f i F0R,c.RlTl.cAt ANAIYSlS-Ethicalt ,I*$l Consideratlofi some cor deolerships are notorioust!&.l!s - -

for dubious sales proctices' tf a Pride sales representotive led

the tnkels to believe thot the dealership did not care obout the

excessive miles on the trade-in vehicle' should it be willing to

incur the loss? WhY or whY not?

E

Although fraud is a tort, the pres'"'"-"11'::1"*::*:'::::f;i:il::il1tHU;::::Although fraud is a tort, the Presellce ur.'dLru ":::,:;-ao,ir. t. a contract with fraudr-r-

ffi,Zo.,",'t to a contract ;vhen I:::,",'^"ri,::iY"::n:Tit':f;n. voluntarity conparty's consent to a,contract' vvrlcrr drr rr'rvuvrr! r--,jr" ,t-ra or he has nolyoluntarily con-

Ientterms,thecontractusually-canbeavoidedt, -^-*. ^-,- oirher rescind (cancel) the';*Jffi ',ff ::Hi;'ilHl'il"'il:ffi .il;1iy-::':;:Y;":'::*-,!T""Tl,::isented to the terms'- Normally' rIIc rrrlruLerr;""#;

or".r,for." the contract and seek

"or-ttt".t and be restored to her or his originai 1

dan-iages for iniurres resulting from.the fraud'

ifil.rtty, fraud involves three elements:

I A misrepresentation of a material fact must occur'

2 There must be an intent to deceive'

5 The innocent party must iustifiably rely on the misrepresentation'

Additionally, to collect damages' a party must have been iniured as a result of the

misrePresentation'

T7. Rurrrn*rtls*ra) of contracts, Sectrons l6J and 16'l'

ils EgEEqGENUINENESS OF ASSEN.I

Fraudulent misrepresentation can also occur in theoniine environment. For a case involving allegations thatYahoo fraudulently posted online personal ads, see thischapter's Adapting the Law to the Online Enyironment fea-ture on page 717 . Because curbing Internet fraud is a ma jor

challenge in today's world, we also explore the topic furtherin Chapter 38, in the context of consumer law.

Misrepresentat ion Must OccurThe first element of proving fraud is to show that n-risrepre-sentation of a material fact has occurred. This misreoresen-tation can take the form of words or actions. For eximole.an art gallery owner's statement, "This painting is a Picaiso"is a misrepresentation of fact if the painting was cione byanother artist.

A staten-rent of opinion is generally not subject to a claim of fraud. For exan'rple, claimssuch as "This computer will never break down" and "This car will last for years and years"are statemenh of opinion, not fact, and contracting parties should recognize them as suchand not rely on them. A fact is objective and verifiable; an opinion is usualh, subject todebate. Therefore, a seller is allorved to "huffand puffhis or her wares" rvithout being liablefor fiaud.

In certain cases, however, particulariy when a naive purchaser relies on an expert's opin-ion, the innocent party may be entitled to rescission (cancellation) or reformation (an equi-table remedy granted by a court in which the terms of a contract are altered to reflect the trueintentions of the parties). The issue in the following case was whether the statements rnadeby instructors at a dance school to one of the school's students qualified as statements of opin-ion or statements of fact.

A woman browses through someonline personal ads. lndividuolswho post their profiles on onlnternet doting site may exaggerotetheir oftrodive troits ond may evenmoke statements obout themselvesthot they know to be folse. But whathoppens when on lnternet serviceprovider mokes fraudulentm i sreprese ntoti o n s o b o ut its u se rs?(Photo by Bill Stryker)

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District Court of Appeal of Florida, Second District, 212 So.2d 906 (l 968).

C0MPANY PROFILE nrtnurMurray, founder of Arthur

BACKGROUND AND FACTS Audrey E. vokes, a widowwithout family, wished to become "an accomplished dancer"and to find "a new interest in lifei' ln 1961. she was invited toattend a "dance party''at J. P. Davenport's "School of Dancing,"an Arthur Murray, lnc., franchise. Vokes went to the schooland received elaborate praise from her instructor for her grace,poise, and potential as "an excellent danceri'The instructor soldher eight half-hour dance lessons for 914.50 each, to be uti l izedwithin one calendar month. Subsequently, over a period of lessthan sixteen months, Vokes bought a total of fourteen dancecourses, which amounted to 2,302 hours of dancing lessons atDavenport's school, for a total cash outlay of 931,090.45 (in2009, this would amount to nearly $150,000). When it becameclear to Vokes that she did not in fact, have the potential to bean excellent dancer, she filed a suit against the school, allegingfraudulent misrepresentation. When the trial court dismissedher complaint, she appealed.

CASE 12.2-Cont inues next page

Mu rray, I nc. (www.arthurmurray.com), bega n teach i ng peoplehow to dance in 1919. At the time, social dancing wasbecoming increasingly popular among young people, in partbecause so many adults were shocked by the new "jazz

dancing." Across America, young people wanted to learn thenew steps-the turkey trot, the fox-trot, the kangaroo dip, thechicken scratch, the bunny hug, the grizzly bear, and others. Bythe 1930s, Murray's instructors were giving lessons on cruiseships, in tourist hotels, and to the employees of New Yorkstores during the employees' lunch breaks. ln 1937, Murrayfounded the Arthur Murray Studios, a chain of franchised danceschools. During the 1950s, Murray sponsored a televisionshow-The Arthur Murray Porty-to attract students to theschools. Murray retired in 1964, estimating that he had taughtmore than 20 mill ion people how to dance.

5t6 llNiluuCONTRACT5

CASE t2.2-Cont inued

lN THE WORDS 0F THE COURT . . . PIERCE, Judge.

DECISI0N AND REMEDY vokes's complaintwasreinstated, and the case was returned to the trial court toallow Vokes to prove her case.

[The dance contracts] were proclrred by defendant Davenport and Arthur Murray,

Inc., by false representations to her that she was improving in her dancing ability, that she

had excellent potential, that she was responding to instructions in dancing grace, and that

they were developing her into a beautiful dancer, whereas in truth and in fact she did not

develop in her dancing ability, she had no "dance aptitude," and in fact had difficulty in"n"frirg the musical beat."

It is true that generally a misrepresentation, to be actionable, must be one of fact rather

than of opinion. {' :l' " 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" and as to wl-rether she was noticeably improvingin the art of terpsichore [dancing]. And it would be a reasonable inference from the unde-nied averments fassertions] of the complaint that the flowery eulogiums fpraises] heaped

upon her by defendants * '<

t' proceeded as much or more from the urge to "ring the cashregister" as from any honest or realistic appraisal ofher dancing prowess or a factual rep-

resentation of her progress.**r .** x * What is plainly injurious to good faith ought to be considered as a fraud suffi-

cient to impeach a contract, and * * * an improvident [unwise] agreement may be avoidedbecause of surprise, or mistake, want of freedom, undue influence, the suggestion of false-hood, or the suppression of truth. fEmpl-rasis added.]

illustrotes on importont principle. The generol rule-thot amisrepresentotion must be one of fod rather thon one ofopinion to be actionable-does not opply in certoin situotions,such os when one porty misrepresents something obout whichhe or she possesses superior knowledge (Vokes's doncingWHAT IF THE FACTS WERE DIFFERENT? T

one of Vokes's fellow students, rother thon her instructor, obility, in this cose).hod proised her ability ond encouroged her to buy more /essonthowmighttheresultinthiscosehovebeendifferen? RELEVANT WEB SITES Tolocoteinformationonthe

Web concerning fhe Vokes v. Arthur Murray, lnc., decision,IMPACT 0F THIS CASE 0N T0DAY'S IAW rh;scose gotothistext'sWebSifeof www.cengage.com/blaw/blt, selecthas become,o clossic in contract law becouse it cleorly "Chopter 12," ond click on "URLs for Londmorks!'

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Misrepresentation by Conduct Misrepresentation can occur by conduct, as well as

through express oral or witten statements. For example, if a seller, by her or his actions, pre-

vents a buyer from learning of some fact that is material to the contract, such behavior con-stitutes misrepresentation by conduct.5 IEEXAMPIE tz's| Cummings contracts to purchase aracehorse from Garner. The horse is blind in one eye, but when Garner shows the horse,he skillfully conceals this fact by keeping the horse's head turned so that Cummings doesnot see the defect. The concealment constitutes fraud. E Another example of r-nisrepresen-

"lt *r, beautiful and simple asall truly gr.rt r*indles are.tt

o,#flll;(American author)

5. Restatement (Second) of Contracts, Section 160

5I7 EIEEEGENUINENESS OF ASSENT

Widowsorwidowers.com. <i-*.-.r?':!:'!::*!*1:ra:'!'

Makefriendsonline.com, and Yahoo! Personals. Yahoo!Personals, which calls itself the "top online dating site," offershvo options. One is for people looking for casual dates. Itallows users to create their own profiles, browse member pro-files, and exchange e-mail or instant messages. The secondoption, called Yahoo! Personals Primer, is for people who wantserious relationships. Users must take a relationship test. Thenthey can use Yahoo's computerized matching system to "zeroin on marriage material." With this sewice, users can chat onthe phone, as well as exchange e-mail.

The Thorny Problem of Misrepresentation

When singles (and others) create their profiles for online dat-ing services, they tend to exaggerate their more appealing fea-tures and downplay or omit their less athactive athibutes. Allusers of such services are aware that the profiles may not corre-spond exactly with reality, but they do assume that the profilesare not complete misrepresentations. In 2006, however, RobertAnthony, individually and on behalfofothers, brought a suitagainst Yahoo in federal district court, alleging fraud and negli-gent misrepresentation, among other things.

In his complaint, Anthony claimed that Yahoo was not justposting fictitious or exaggerated profiles submitted by usersbut was deliberately and intentionally originating, creating,and perpetuating false and/or nonexistent profiles. Accordingto Anthony, many profiles used the exact same phrases "withsuch unique dictation and vernacular [anguage] that such arandom occurrence would not be possible." Anthony alsoargued that some photo images had multiple identities-thatis, the same photo appeared in several different profiles. Healso alleged that Yahoo continued to circulate profiles of"achral, legitimate former subscribers whose subscriptions had

expired." Finally, Anlhony claimed that when a subscriptionneared ih end date, Yahoo would send the subscriber a fakeprofile, heralding it as a "potential 'new match.'"

Did Yahoo Have lmmunity?

Yahoo asked the court to dismiss the complaint on the groundsthat the lawsuit was barred by the Communications DecencyAct (CDA) of 1996.a As discussed in Chapter 4. the CDAshields Internet service providers (lSPs) fibm liability for anyinformation submitted by another information contentprovider. In other words, an interactive computer service can-not be held liable under state law as a publiJher of informationthat originates from a third party information content provider.The CDA defines an information content provider as "any per-son or entity that is responsible, in whole or in part, for thecreation or development of information provided through theInternet or any other interactive computer service."b

The court rejected Yahoo's ciaim that it had immunityunder the CDA and held that Yahoo had become an infor-mation content provider itself when it created bogus userprofiles. The court observed that "no case of which this courtis aware has immunized a defendant from allegations that ifcreated tortious content."c Thus, the court denied Yahoo'smotion to dismiss and allowed Anthony's claims of fraud andnegligent misrepresentation to proceed to trirl.d

ff i FoR CRITICAL Al{ALYSlS , ssume thotAnthony*##f,oa contocted various users of Yohoo's onlinedoting seruice only to discover thot eqch user's profileexoggeroted the person's physica I appeo ro nce,intelligence, ond occupotion. Would Anthony prevoil if hebrought a lowsuit for fraudulent misrepresentotion agoinstYahoo in that situation? Why or why not?

a. 47 U.S.C. Section 250.b. 47 U.s.c. section 230(f)(3).c. For an example of the type of cases that have been brought againstf nternet dating services, see Corofono v. Metrosplash.com, Lnc.,339F.5d I I 19 (gth Cir. 2003).

d. Anthony v. Yohoo!, Lnc.,421 F.Supp.2d I257 (N.D.Cal. 2oo6). Seealso Doe v. SexSeorch.co,m, 502 F.Supp.2d 719 (N.D. Ohio 2007).

eying the words onlinepersonals into the

Google search enginewill rehrrn more than35 million hits,

H'":1'1,:.ili:":#:' ffiffi_W

tation by conduct is the untruthful denial of knowledge or information concerning facts thatare material to the conhact when such knowledge or information is requested.

Misrepresentation of Law Misrepresentation of law ordinarily does not entitle a partyto be relieved of a contract. FHEfrFIEEI Debbie has a parcel of property that she is try-ing to sell to Barry. Debbie knows that a local ordinance prohibits building anythinghigher than three stories on the property. Nonetheless, she tells Barry, "You can build a

5r8 l@CONTRACTS

SCIENTERKnowledge by the misrepresentingparty that material facts have beenfalsely represented or omitted withan intent to deceive.

condominium one hundred stories high if you want to." Barry buys the land and later dis-

covers that Debbie's statement is false. Nonnally, Barry cannot avoid the contract because

under the comrron law, people are assumed to know state and local laws. @ Exceptionsto this rule occur, however, when the misrepresenting party is in a profession known torequire greater knowledge of the law than the average citizen possesses.

Misrepresentation by Silence Ordinarily, neither party to a contract has a duty to comeforward and disclose facts, and a contract normally will not be set aside because cedain per-

tinent information has not been volunteered. FHIMPLE tr.gl Suppose that you are selling

a car that has been in an accident and has been repaired. You do not need to volunteer thisinformation to a potential buyer. If, however, the purchaser asks you if the car l'ras had exten-sive bodywork and you lie, you l-rave committed a fraudulent misrepresentation. E

Generally, if the seller knows of a serious defect or potential problem that ihe buyer can-not reasonably be expected to detect, the seller may have a duty to speak. Normally, the

seller must disclose only "latent" defects-that is, defects that could not readily be discov-ered. Thus, termites in a house may not be a latent defect because a buyer could normallydiscover their presence through a termite inspection. Also, when the parties arc in a fiduci'ary relationship (one oftrust, such as partners, physician and patient, or attorney and client),there is a duty to disclose material facts; failure to do so may constitute fraud.

lntent to DeceiveThe second element of fraud is knowledge on the part of the misrepresenting party thatfacts have been misrepresented. This element, usually called scienter,b or "guilty knowl-edge," generally signifies that there was an intent to deceive. Scienter clearly exists if a partyknows that a fact is not as stated. Scienter also exists if a party makes a statement that he orshe believes not to be true or makes a statement recklessly, without regard to whether it istrue or false. Finally, this element is met if a party says or implies that a statement is madeon some basis, such as personal knowledge or personal investigation, when it is not.

lxEXAMFC Ir.el A convicted felon, Robert Sawis, applied for a position as an adjunct pro-fessor hvo weeks after his release from prison. On his r6sum6, he lied about his past workhistory by representing that he had been the president of a corporation for fourteen yearsand had taught business law at another college. At his interview, Sawis stated that he was"well equipped to teach" business law and ethics and that he had "a great interest andknowledge of business law." After he was hired and began working, Sarvis's probation offi-cer alerted the school to his crirninal history. The school immediately fired Sarvis, and hebrought a lawsuit against the school for breaching his employment contract. The schoolclaimed that it was not liable for the breach because of Sarvis's fraudulent misrepresenta-tions during the hiring process. The court agreed. Sarvis had not fully disclosed his personalhistory, he clearly had an intent to deceive, and the school had iustifiably relied on his mis-representations. Therefore, the school cor-rld rescind Sarvis's employment contract.T E

Innocent Misrepresentation If a person makes a statement that he or she believes tobe true but that actually misrepresents material facts, the person is guilty only of an inno-cent misrepresentation, not of fraud. If an innocent misrepresentation occurs, theaggrieved pdrty can rescind the contract br-rt usually cannot seek damages.IEEXAMFLE trr0l Parris tells Roberta that a tract contains 250 acres. Parris is mistaken-the tract contains only 215 acres-bllt Parris does not know that. Roberta is induced bythe statement to make a contract to buy the land. Even thougl-i the misrepresentation is

6 P'^ '^"."" .1 --""- fcr

7. Sanisv.VemontState Colleges, 172Vl76,772 A.zd 194 (2001)

]I9 EIEEEGENUINENESS OF ASSEN]

innocent, Roberta can avoid the contract if the misrepre-sentation is material. E

Negligent Misrepresentation Sometimes, a party makesa misrepresentation through carelessness, believing thestatement is true. This misrepresentation is negligent if heor she fails to exercise reasonable care in uncovering ordisclosing the facts or does not use the skill and compe-tence that his or her business or profession requires.lxExAMPtE tttT An operator of a weight scale certifies theweight of Sneed's commodity, even though the scale's accu-racy has not been checked in more than a year. In this sit-uation, the scale operator's action could constitutenegligent misrepresentation. @ In virtually all states, suchnegligent misrepresentatlon is equal Io scienter, or to know-ingly making a misrepresentation. In effect, negligent mis-representation is treated as fraudulent misrepresentation,even though the misrepresentation was not purposeful. Innegligent misrepresentation, culpable ignorance of the truthlead, even if the defendant can claim, "l didn't know."

supplies the intention to mis-

Reliance 0n lhe MisrepresentationThe third element of fraud is justifiable reliance on the misrepresentation of fact. Thedeceived party must have a justifiable reason for relying on the misrepresentation, and thernisrepresentation must be an important factor (br-rt not necessarily the sole factor) ininducing the party to enter into the contract.

Reliance is not lustified if the innocent party knows the true facts or reiies on obviouslyextravagant statemenh. IEExAMFC-Ir.tZ If a used-car dealer tells you, "This old Cadillac willget over sixty miles to ihe gallon," you normally would not be f ustified in relying or-r this state-ment. Suppose, howevet, that Merkel, a bank director, induces O'Conneli, a co-director, tosign a statement that the bank has sufficient assets to meet its liabilities by telling O'Connell,"We have plenty of assets to satisft our creditors." This statement is false. If O'Connell knowsthe true facts or, as a bank director, should know the hue facts, he is not fustified in relyingon Merkel's statement. If O'Connell does not know the true facts, however, and has no wayof findingthem otLt, he may be justified in relying on the statement. E

How much informotion must employers disclose to prospective employees? One of the prob-lems employers face is that it is not always clear what information they should disclose toprospective employees. To lure qualified workers, employers are often tempted to "promisethe moon" and paint their companies' prospects as bright. Employers must be careful, though,to avoid any conduct that could be interpreted by a court as intentionally deceptive. In partic-ular, they must avoid making any statements about their companies'future prospects or finan-cial health that they know to be false. lf they do make a false statement on which a prospectiveemployee relies to her or his detriment, they may be sued for fraudulent misrepresentation.

In one case, for example, an employee accepted a job with a brokerage firm, relying onassurances that the firm was not about to be sold. In fact, as the employee was later able toprove in his lawsuit against the firm for fraud, negotiations to sell the firm were under way atthe time he was hired. The trial court awarded the employee more than 96 mill ion in dam-ages, a decision that was affirmed on appeal.s

Suppose that o city solicited bids fromcontractors to expond i6 publictronsportotion sqtem on this nrip oflond without disclosing the existenceof o subsoil condition thot wouldgreotly increase the projeds costAssuming thot the city wos awareof the situation, would it hove hado duty to disclose the condition tobidders? What effed would the city'ssilence hove on the resulting contracfl(Michael McCauslin/Creative Commons)

nf:ffiliffiL-Cffl An opinion is neither acontract offer, nor a contract term,nor fraud.

8. McConkey r. AON Corp.,354 N.J.Super. 25,804 A,.zd 572 (A.D.2002)

520 INIIUilCONTRACTS

nlllftmtliffifl To collect damages inalmost any lawsuit, there must besome sort of injury.

ln another case, Kevin Helmer sued Bingham Toyota lsuzu and Bob Clark, his former

employer and supervisor, for promissory fraud. Helmer alleged that he was fraudulently

induced to leave a prior job with another Toyota dealership by false promises made to him

by Clark about the amount of compensation that he would receive. A jury found in Helme/s

favor, awarding him $450,913 in compensatorydamages and $1.5 mill ion in punitive dam-

ages (the punitive damages were later reduced to $675,000).e

Injury to the Innocent PartyMost courts do not require a showing of injury when the action is to rescind (cancel) thecontract-these courts hold that because rescission returns the parties to the positionsthey held before the contract was made, a showing of iniury to the innocent party isunnecessary. lo

To recover damages caused by fraud, however, proof of an iniury is universallyrequired. The measure of damages is ordinarily equal to the property's value had it beendelivered as represented, less the actual price paid for the property. In actions based onfraud, courts often award punitive, or exemplary, damages, which are granted to a plaintiffover and above the compensation for the actual loss. As pointed out in Chapter 4, puni-tive damages are based on the public-policy consideration of punishing the defendant orsetting an example to deter similar wrongdoing by others.

To avoid making comments that might later be construed as a misrepresentationof material fact, be careful what you say to clients and customers. Those in thebusiness of selling products or services should assume that all customers arenai've and are relying on the selley's representations. Instruct employees tophrase their comments so that customers understand that any statements thatare not factual are the employee's oPinion. lf someone asks a question that isbeyond the employee's knowledge, it is better to say that he or she does notknow than to guess and have the customer rely on a lePresentation that turnsout to be false. This can be particularly important when the questions concetntopics such as compatibility or speed ol electronic and digital goods, software, orrelated services.

Also be prudent about what you say when interviewing potential employees.Do not speculate on the financial health of the firm or exaggerate the companldsfuture prospects. Exercising caution in one's statements to others in a businesscontext is the best way to avoid potential legal actions for fraudulentmisrepresentation.

Undue influence arises from relationships in which one party can greatly influence

another party,. thus overcoming that party's free will. Minors and elderly people, for exam-

ple, are often under the influence ofguardians. Ifa guardian induces a young or elderly

ward (a person placed by a court under the care ofa guardian) to enter into a contract that

benefits the guardian, the guardian may have exerted undue influence. Undue influence

Helmer r. Bingham Toyota lsuzu, 129 Cal.App.4th 1 l2l, 29 Cal.Rptr.Sd 136 (2005).

For a leading case on this issue, see Kauftnan v. laffe, 244 Lpp.Div. 344,279 N.Y.S. 392 (1935)

H

E

9,t0.

t2l tTrltlmr'tGENUINENESS OF ASSENT

contesting contracts on thegrounds of fraud and duress, go to

can also arise from a number of other confidential or fiduciary relationships, includingattorney-client, physician-patient, parent-child, husband-wife, and trustee-beneficiaryrelationshios.

The essential feature of undue influence is that the party being taken advantage ofdoes not, in reality, exercise free will in entering into a contract. It is not enough that theperson is elderly or suffers from some mental or physical impairment. A court will requireclear and convincing evidence that the person did not act out of her or his free will. If theperson did lack free will, the contract is voidable. A contract entered into under excessiveor undue influence lacks genuine assent and is therefore voidable.

Similarly, assent to the terms of a contract is not genuine if one of the parties is forcedinto the agreement. Forcing a pg-rty to enter into a contract because of the fear created bythreats is referred to as duress.tl Inducing consent to a contract through blackmail orextortion also constitutes duress. Duress is both a defense to the enforcement of a contractand a gror-rnd for rescission of a contract. Therefore, a party who signs a contract underduress can choose to carry out the contract or to avoid the entire transaction. (Thewronged party usually has this choice in cases in which assent is not real or genuine.)

Economic need is generally not sufficient to constitute duress, even when one partyexacts a very high price for an item the other party needs. Ifthe party exacting the pricealso creates the need, however, economic duress may be found. lxEFAttlFLs-tzirl TheInternal Revenue Service (lRS) assessed a large tax and penalty against Weller. Wellerretained Eyman to contest the assessrnent. Two days before the deadline for filing a replywith the IRS, Eyman declined to represent Weller unless he agreed to pay a very high feefor Eyman's services. The agreement was held to be unenforceable.l2 Although Eymanhad threatened only to withdraw his services, something that he was legally entitled to do,he was responsible for delaying his withdrawal until just before the deadline. BecauseWeller was forced into either signing the contract or losing his right to challenge the IRSassessment, the agreement was secured under duress. El

Questions concerning genuineness of assent may arise when the terms of a contract are dic-tated by a party with overwhelming bargaining power and the signer must agree to thoseterms or go without the commodity or sewice in question. As explained in Chapter 10, suchcontracts, which are written exclusit'ely by one party and presented to the other party on atake-it-orleave-it basis, are often referred to as adhesion conhacts. These conhacts often usestandard forms, which give the adhering party no opportunif to negotiate the contract terms.

Standard-form contracts often contain fine-print provisions that shift a risk naturallyborne by one party to the other. A variety of businesses use such contracts. Life insr-rrancepolicies, residential leases, loan agreements, and employment agency contracts are oftenstandard-form contracts. To avoid enforcement of the contract or of a particular clause,the aggrieved party must show that the parties had substantially unequal bargaining posi-tions and that enforcement would be manifestly unfair or oppressive. If the required show-ing is made, the contract or particular term is deemed unconscionab/e and is notenforced.

Adhesion contracts are standard in the retail automobile industry. The following casearose out of an arbitration clause in such a contract between an auto dealership and itscustomer.

11. Restatement (Second) ofContracfs, Sections 174 and 175.

12. Thompson Crane &TruckingCo. t. Eyman, 123 Cal.App.2d 904,267 P.2d 1043 (1954)

522EimuCONTRACTS

Supreme Court of South Carolina, 375 S.C.www.f indlaw.com/t r stategov/sclscca.htmla

BACKGROUND AND FACTS:**i MSA of Myrtle Beach, lnc., in

South Carolina does business as Addy's Harbor Dodge (Addy)' a

car dealership. Sherry Simpson signed a contract with Addy to

trade in her 2O0t Toyota 4Runner for a new 2004 Dodge

Caravan. Directly above the signature line on the first page of the

contract, a signee was instructed in bold tyPe to "SEE

ADDITIONAL TERMS AND CONDITIONS ON OPPOSITE PACE."

The additional terms and conditions contained an arbitration

a. In the "2OO7" section, click on "March." In the result, click on the number

next to the name of the case to access the opinion'

f N THE W0RDS 0F THE COURT . . . roAL, chief rustice.

14, 644 S.E.2d 665 (2007).

clause, which provided, among other things, that "in no event

shall the arbitrator be authorized to award punitive, exemplary

double, or treble damages (or any other damages which are

punitive in nature or effect) against either party." Six months

later, Simpson filed a suit in a South Carolina state court against

Addy, claiming that the dealer had misrePresented the trade-in

value of her vehicle, artificially increased the purchase price,

and failed to provide all rebates promised, in violation of state

statutes. Addy filed a motion to compel arbitration. Simpson

responded that the arbitration clause was unconscionable and

unenforceable. The court denied Addy's motion. Addy appealed

to the South Carolina Supreme Court.

;: ":.;r*,

claims of unconscionability in the context of arbitration agreements, * x *

courts * * * ficus generally on whether the arbitration clause is geared towards achieting

an unbiased decisiort by a neutral decision-maker. It is under this general rubric that we

determine whether a contract provision is unconscionable due to both an absence of mean-

t"*t_.1"1." and oppressive, one-sided terms. lEmphasis added.]

Absence of meaningful choice on the part of one party generally speaks to the funda-

rnental fairness of the bargaining process in the contract at issue. In deterrnir-ring whether

a contract was tainted by an absence of meaningful choice, courts should take into

account the nature of the injuries suffered by the plaintiff; whether the plaintiff is a sub-

stantial br,rsiness concern; the relative disparity in the parties' bargaining Power; the par-

ties' relative sophistication; rvhether there is an element of surprise in the inclusion of the

challenged clause; and the conspicuousness ofthe clause.

* * '* \Ve * * * acknorvledge Simpson's claim that she did not possess the business iudg-rnent necessary to make her aware of the implications of the arbitratior-r agreenent, and that

she did noi have a lawyer present to provide any assistance in the matter.* x x \&/e also find it necessary to consider the otherwise inconspicuous nature of the

arbitration clause in light of its consequences. The loss of the right to a jury trial is an obvi-

ous result of arbitration. However, this particular arbitration clause also required Simpson

to forgo certain remedies that were otherwise required by statute. While certain phrases

within other provisions of the additional terms and conditions were printed in all capital

letters, the arbitration clause in its entirety was written it-r * x * small print, and embed-

ded in paragraph ten (10) ofsixteen (16) total paragraphs included on the page. Although

this Court ackr-rowiedges that parties are always free to contract away their rights, we can-

not, rindeJ the circumstances, ignore the inconspicuous nature of a provision, which was

drafted by the superior party, and which functioned to contract away certain significant

rights and ,.-"di.r otherwise available to Simpson by law. Furthermore, * x * the

present transaction may be distinguished from la transaction] where both parties were

sophisticated business interests in an armsler-rgth negotiation'

Accordingly, we find that wl'ren considered as a whole and in the context of an adhe-

sion contract for a vehicle trade-in, the circumstances reveal that Simpson had no mean-

ingful choice in agreeing to arbitrate ciaims with Addy.

CASE 12.5-Cont inued

*: f i : f i+

The general rule is that courts will not enforce a contract which is violative of publicpolicy, statutory law, or provisions of the Constitution. In our opinion, this rule has hvo appli-cations in the present case. First, this arbitration clause vioiates statutory law because it pre-i.ents Simpson fron receiving the n'randatory statutory remedies to which she may beentitled * i1 * . Second, unconditionally permitting the weaker party to waive these statu-tory remedies pursuant to an adhesion contract runs contrary to the underlying statutes'verypurposes of punishing acts that adversely affect the public interest. Therefore, under thegeneral rule, this provision in the arbitration clause is unenforceable. lEmphasis added.]

525 EIMEEGENUINENESS OF ASSENI

F0R CRITICAt ANAIYSIS-LegalConsideration rhe deoler's controct also

provided thot Addy did not have to submit to arbitrotion onyclaims it might have agoinst Simpson for "monies owed" ondthat these claims "shall not be stoyed pending the outcome oforbitrotion!' ls this provision unconscionoble? Discuss.

DECISI0N AND REMEDY rtre court aff irmed the lowercourt's denial of Addy's motion to compel arbitration. Thestate supreme court found the arbitration clause to beunconscionable and unenforceable. Simpson had nomeaningful choice in agreeing to arbitrate, and the termslimiting her remedies were oppressive and one sided.

@

Chelene had been acaregiver for Marta'seighty-year-oldmother, Janis, for nineyears. Shortly before

Janis passed away, Chelene convinced her to buy Chelene'shouse for Marta. The elderly woman died before the paperswere signed, however. Four months later, Marta used herinheritance to buy Chelene's house without having itinspected. The house was built in the 1950s, and Chelene saidit was in "perfect condition." Nevertheless, one year after thepurchase, the basement started leaking. Marta had thepaneling removed from the basement walls and discoveredthat the walls were bowed inward and cracked. Marta thenhad a civil engineer inspect the basement walls, and he foundthat the cracks had been caulked and painted over before thepaneling was installed. He concluded that the "wall failure"had existed "for at least thirty years" and that the basementwalls were "structurally unsound." Using the informationpresented in the chapter, answer the following questions.

Can Marta obtain rescission of the contract based onundue influence? lf the sale to Janis had been completedbefore her death, could Janis have obtained rescissionbased on undue influence? Explain.

Can Marta sue Chelene for fraudulent misrepresentation?Why or why not? What element(s) might be lacking?

Now assume that Chelene knew that the basement wallswere cracked and bowed and that she had hired someoneto install paneling prior to offering to sell the house. Didshe have a duty to disclose this defect to Marta? Could acourt find that Chelene's silence in this situation constitutedmisrepresentation? Explain.

lf Chelene knew about the problem with the walls but didnot know that the house was structurally unsound, could shebe liable for negligent misrepresentation? Why or why not?

Can Marta avoid the contract on the ground that both partiesmade a mistake about the condition of the house? Explain.

bilateral mistake 512material lact 512

scienter 518uni lateral mistake 512

524 l@CONTRACTS

Mistakes(See pages 311-314.)

FraudulentMisrepresentation(See pages 314-521.)

Undue Influenceand Duress(See pages 320-321.)

Adhesion Contractsand Unconscionability(See pages 321-323.)

1. lJniloterol-Cenerally, the mistaken pafi is bound by the contract unless (a) the other partyknows or should have known of the mistake or (b) the mistake is an inadvertent mathematicalerror-such as an error in addition or subtradion-committed without gross negligence.

2. Biloteral (mutual)-When both parties are mistaken about the same material fact, such asidentity, either pafi can avoid the contract.

When fraud occurs, usually the innocent party can enforce or avoid the contract. The elementsnecessary to establish fraud are as follows:

l. A misrepresentation of a material fact must occur.

2. There must be an intent to deceive.

5. The innocent party must justifiably rely on the misrepresentation.

l. Undue influence arises from special relationships, such as fiduciary or confidentialrelationships, in which one party's free will has been overcome by the undue influence exertedby the other party. Usually, the contract is voidable.

2. Duress occurs when a party is forced to enter into a contract under the fear of a threat-forexample, the threat of violence or serious economic loss. The pafi forced to enter the contractcan rescind the contract.

One-sided bargains in which one pafi has substantially superior bargaining power and candictate the terms of a contract may be deemed unconscionable. Unconscionability typically occursas a result of the following:

1. Standard-form contracts in which a fine-print provision purports to shift a risk normally borneby one party to the other (for example, a liability disclaimer).

2. Take-it-or-leave-it adhesion contracts in which the buyer has no choice but to agree to theseller's dictated terms if the buyer is to procure certain goods or services.

Answers for the even-numhered questions in this For Review section con be found on this text's accompanying Web site otwww.cengage.com/blaw/blt. Select "Chopter 12" and click on "For Review,"

I h-r what types of situations might genuineness of assent to a contract's terms be lacking?

2 What is the difference beh.rreen a rnistake of value or quality and a mistake of fact?

3 What elements must exist for fraudulent misrepresentation to occur?

4 Does a party to a contract ever have a duty to disclose informatior-r to the other party?

5 Wrat happens if a person misrepresents a fact unintentionally?

E

iiiltilit'4r*

ffi HypoTHETrcAt scENARros AND cAsE pRoBtEMs

X3-t Genuineness of Assent. Jeron-re is an elderly man who liveswith his nephew, Philip. ferome is totally dependent onPhilip s support. Philip tells ferome that unless Jerome trans-fers a tract ofland he owns to Philip for a price 30 percentbelow market valLre, Philip will no longer support and take

care of him. Jerome enters into the contract. Discuss fullywhether lerome can set aside this contract.

I?,? Hypothetical Question with Sample Answer. Grano owns aforty-room motel on Highway 100. Tanner is interested in