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1 George Mason School of Law Contracts II Fraud F.H. Buckley

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1 1 George Mason School of Law Contracts II Fraud F.H. Buckley fbuckley@gmu.edu

2 Fraus omnia corrumpit I met Murder on the way – He had a mask like Castlereagh – Very smooth he looked, yet grim; Seven blood-hounds followed him: Next came Fraud, and he had on, Like Eldon, an ermined gown; His big tears, for he wept well Turned to mill-stones as they fell 2 Shelly, The Mask of Anarchy Lord Eldon ordered that Shelley’s children be taken from him

3 The Elements of Fraud  A False Representation Restatement § 159 3

4 The Elements of Fraud  A False Representation  Which the Δ knows to be false. Restatement § 162(1)(a) 4

5 The Elements of Fraud  A False Representation  Which the Δ knows to be false.  Made with the intention to induce the Π to enter into the contract. Restatement § 162(1) 5

6 The Elements of Fraud  A False Representation  Which the Δ knows to be false.  Made with the intention to induce Π’s to enter into the contract.  On which the Π relies. Restatement § 164 6

7 The Elements of Fraud  A False Representation  Which the Δ knows to be false.  Made with the intention to induce Π’s to enter into the contract.  On which Π relies.  And which is material Restatement §§ 164(1), 162(2) 7

8 The Elements of Fraud  A False Representation  Which the Δ knows to be false.  Made with the intention to induce Π’s to enter into the contract.  On which Π relies.  And which is material Restatement §§ 164(1), 162(2) Does § 164(1) dispense with materiality, if the representation is fraudulent? 8

9 The Elements of Fraud  A False Representation  Which the Δ knows to be false.  Made with the intention to induce Π’s to enter into the contract.  On which Π relies.  And which is material Restatement §§ 164(1), 162(2) What does “upon which the recipient is justified in relying” mean? 9

10 The Elements of Fraud  Does the Restatement water down materiality? “the maker knows it would be likely to induce the recipient.” § 162(2) “a fraudulent … representation … upon which the recipient is justified in relying.” § 164  What does § 164 do to the fraud requirement? Innocent material misrepresentations 10

11 The Elements of Fraud But none of this is cut-and-dried  A False Representation  Which the Δ knows to be false.  Made with the intention to induce Π’s to enter into the contract.  On which Π relies.  And which is material 11

12 The Elements of Fraud The Restatement on Reliance  A False Assertion. § 159  Which the Δ knows to be false. § 162(1)(a)  Made with the intention to induce Π’s to enter into the contract. § 162(1)  On which Π relies. § 164  And which is material. §§ 164(1), 162(2) 12

13 The Elements of Fraud  What is an assertion? Restatement §§ 159 13

14 The Elements of Fraud  Restatement § 159: What is an assertion? What aren’t assertions? 14

15 What is an Assertion? “It works”: You got a problem with that? 15

16 Mere puffs are not assertions Simplex commendatio non obligat 16

17 Mere puffs Speiss v. Brandt 17 What were the alleged representations? Lake McFarland

18 Mere puffs Speiss v. Brandt 18 What if the Δs had said “You can make good money out of the resort”? Or “I believe you can make good money out of it”?

19 Mere puffs Speiss v. Brandt 19 Qu. “We are making good money out of the resort.”

20 Mere puffs Speiss v. Brandt 20 Qu. “We are making good money out of the resort.”  What is the optimal profit to make where there is double taxation of dividends?  Cf. Gallagher’s dissent

21 Mere puffs Speiss v. Brandt 21 “We are making good money out of the resort.”  What if they had provided the financials?

22 Mere puffs Speiss v. Brandt 22 “We are making good money out of the resort.”  What if they had provided the financials?  What do you conclude from the buyers’ willingness to do the deal even though the financials were not provided

23 Mere puffs Speiss v. Brandt 23 “We are making good money out of the resort.”  What if they had provided the financials? Restatement § 172 A subjective or an objective test?

24 Mere puffs Speiss v. Brandt 24 “We are making good money out of the resort.”  Suppose the seller had omitted to say anything about past earnings?

25 Mere puffs Speiss v. Brandt 25 “We are making good money out of the resort.”  Suppose the seller had omitted to say anything about past earnings? Fraudulent concealment? Restatement § 161?

26 How is the reliance requirement treated in Ziff-Davis? 26

27 How is the reliance requirement treated in Ziff-Davis?  Distinguish the action in fraud from the action for breach of warranty  Suing in tort: Punitive damages

28 28 George Mason School of Law Contracts II Fraud F.H. Buckley fbuckley@gmu.edu

29 The Merger Clause in Danann  What is it and why did the parties agree to it?

30 The Merger Clause in Danann  Absent the merger clause, what result?

31 The Merger Clause in Danann  Absent the merger clause, what result? The representations would ordinarily be excluded by the Parole Evidence Rule  Here however the fraud exception to the Parole Evidence Rule would apply.

32 The Merger Clause in Danann  Absent the merger clause, what result? The representations would ordinarily be excluded by the Parole Evidence Rule  Here however the fraud exception to the Parole Evidence Rule would apply.  Did the Δs misrepresent their financials?

33 The Merger Clause in Danann  Absent the merger clause, what result? The representations would ordinarily be excluded by the Parole Evidence Rule  Here however the fraud exception to the Parole Evidence Rule would apply.  Did the Δs misrepresent their financials?  Does the sophistication of the parties matter?

34 Signing a Contract Merit Music 34 Bar, 601 South Monroe St. Baltimore MD

35 Signing a Contract Merit Music  Were the terms harsh? 35

36 Signing a Contract Merit Music  Were the terms harsh? 120 plays of the pinball machine @ week 48 plays of the juke box @ week 36

37 Signing a Contract Merit Music  Were the terms harsh? Who was in the best position to determine the revenue from the machines? 37

38 Signing a Contract Merit Music  Were the terms harsh? Who was in the best position to determine the revenue from the machines? Were the Sonneborns inexperienced? 38

39 Signing a Contract Merit Music  Were the terms harsh? Who was in the best position to determine the revenue from the machines? Were the Sonneborns inexperienced? Did they have any reason to think that what they signed was not a contract? 39

40 Signing a Contract Merit Music  Have you ever signed a contract without reading it? What effect did you think the printed language had? Restatement § 211(1) 40

41 Signing a Contract Merit Music  Were the terms harsh? Does that matter? 41

42 Signing a Contract Merit Music  Were the terms harsh? Does that matter? Should Restatement § 211(3) have been triggered? 42

43 Standard Form Contracts Birmingham TV v. Water Works  Were the terms benign? 43

44 Standard Form Contracts Birmingham TV v. Water Works  Were the terms benign? Is that irrelevant? 44

45 Standard Form Contracts Birmingham TV v. Water Works  Were the terms harsh?  How would you expect bailees to react to the decision? 45

46 Standard Form Contracts  Were the terms harsh? Does that matter?  How would you expect bailees to react to the decision? Is the world now a better place? 46

47 Thank God for proper warning signs

48

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50 Why Employ Standard Form Contracts? 50

51 Why Employ Standard Form Contracts?  Economize on negotiations 51

52 Why Employ Standard Form Contracts?  Economize on negotiations  Police consumer fraud 52

53 Why Employ Standard Form Contracts?  Economize on negotiations  Police consumer fraud  Economize on litigation 53

54 Why Employ Standard Form Contracts?  Economize on negotiations  Police consumer fraud  Economize on litigation  Police agency costs of merchant 54

55 Why Employ Standard Form Contracts?  Suppose the consumer is illiterate or can’t speak English 55 Elbonians

56 Why Employ Standard Form Contracts?  Suppose that most non-lawyers would have a hard time understanding the language? You mean we let such people enter into contracts!?!? 56

57 Why Employ Standard Form Contracts?  Suppose that most non-lawyers would have a hard time understanding the language? Cf. Pirkle v. Gurr, 438-39 57

58 Non-disclosure  What happened in Laidlaw? P. 451 58 Treaty of Ghent

59 59 Rational Choice: Six Assumptions  Full Information No mistakes No misrepresentations And no informational asymmetries

60 Non-disclosure  “I’ll pay $500 for the rug” [but will go as high as $1,000]. 60

61 Non-disclosure  Coca-Cola sells Coke but refuses to disclose the secret formula it uses to make it. 61

62 Non-disclosure Cicero, Offices III A corn-merchant arrives at the famine-stricken city of Rhodes, before a great number of other vessels loaded with corn; and offers his corn for sale. Is he obliged to inform the buyers that there are a great number of other vessels about to arrive, laden with food? Diogenes thought not. But Cicero thought, on the contrary, that this dissimulation was against good faith. There ought to exist among men a concord and affection which cannot permit us to prefer our private interest to the interest of our neighbor. 62

63 Non-disclosure Aquinas, Summa Theologica If one were bound to tell the faults of what one offers for sale, this would only be in order to lower the price. Now sometimes the price would be lowered for some other reason, without any defect in the thing sold: for instance, if the seller carry wheat to a place where wheat fetches a high price, knowing that many will come after him carrying wheat; because if the buyers knew this they would give a lower price. But apparently the seller need not give the buyer this information. Therefore, in like manner, neither need he tell him the faults of the goods he is selling. ST 1.2.94.2, obj. 4 63

64 Non-disclosure Aquinas, Summa Theologica If one were bound to tell the faults of what one offers for sale, this would only be in order to lower the price. Now sometimes the price would be lowered for some other reason, without any defect in the thing sold: for instance, if the seller carry wheat to a place where wheat fetches a high price, knowing that many will come after him carrying wheat; because if the buyers knew this they would give a lower price. But apparently the seller need not give the buyer this information. Therefore, in like manner, neither need he tell him the faults of the goods he is selling. Under which rule is the famine soonest over? 64

65 Non-disclosure  What should the buyer have concluded from the seller’s silence about changed market conditions? 65

66 Non-disclosure  Which rule better promotes efficiency in Laidlaw? 66

67 Non-disclosure  Which rule better promotes efficiency in Laidlaw? The incentive to acquire information 67

68 Non-disclosure  Which rule better promotes efficiency in Laidlaw? The incentive to acquire information Litigation over nondisclosures 68

69 Non-disclosure  An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find. 69

70 Non-disclosure  An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find. If this were illegal, what would happen to his incentive to discover the information? 70

71 Non-disclosure  A company executive in the same firm sells his stock without making disclosure. Same result? 71

72 Non-disclosure  A company executive in the same firm sells his stock without making disclosure. Kronman: was there a cost to production of the information? 72

73 Non-disclosure  A company executive in the same firm sells his stock without making disclosure. Kronman: was the a cost to production of the information? Under which rule is the information processed in the market most quickly? 73

74 Non-disclosure  Should Obde be confined to its special facts? And these were? 74 Termites

75 Non-disclosure  Should Obde be confined to its special facts? Does it matter that this was an apartment house? Does it matter that it was termites? Does it matter that the seller made the defect harder to discover? 75

76 Non-disclosure  Should Obde be confined to its special facts? Does it matter that this was an apartment house? Does it matter that it was termites? Does it matter that the seller made the defect harder to discover?  Restatement §§ 160, 161(b) 76

77 Restatement § 160 In some states, bondo is a primary color 77

78 Reed v. King 78 O.J.’s House

79 79 George Mason School of Law Contracts II Unconscionability F.H. Buckley fbuckley@gmu.edu


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