Mistake, Misrepresentation, and Fraud Lesson 7-2 Mistake, Misrepresentation, and Fraud

What is a unilateral mistake? Unilateral mistake-occurs when one party holds an incorrect belief about the facts related to a contract Generally, this does not void a contract Examples Not reading a contract Hurried or careless reading In a foreign language Uses technical terminology

Recognized unilateral mistake If mistake is major and other party is aware of it, contract may be rescinded

Induced unilateral mistake-one party encouraged or induced the other to make the mistake Contract is voidable

What are mutual mistakes? Mutual mistake (bilateral mistake)-both parties have an incorrect belief about an important fact Material fact-important fact that influences the parties’ decision Contract is void (without legal effect)

Mistake about the subject matter Existence Identity-unilateral mistake about the identity of the subject matter of a transaction is considered a mutual mistake

Mistake of law-many states still consider a contract valid if a mutual mistake involves law. All persons are presumed to know the law. Zoning laws

What is misrepresentation? Innocent misrepresentation-party did not know they were making an untrue statement. Contract is voidable by party to whom the misrepresentation was made. Fraudulent misrepresentation-party knew statement was untrue

To be considered misrepresentation: Untrue statement is one of fact or there is active concealment Statement is material Victim reasonably relied on statement

Untrue statement of fact Fact….not opinion Opinions include statement about the future and are not concrete An expert’s opinion is treated as a statement of fact Active concealment-substitute for a false statement (painting over water stains, price sticker over a scratch)

Silence-Most times, seller may remain silent Three situations where disclosure is required. Statement about material fact omits important information True statement is made false by subsequent events. One party knows the other party has made a basic mistaken assumption

Three way an untrue statement can be determined to be material Materiality Three way an untrue statement can be determined to be material If statement would cause a reasonable person to contract (authentic signature of a celebrity) If the defendant knew the plaintiff would rely on statement If the defendant knew the statement was false

Reasonable Reliance- Misrepresentation results if the victim reasonably relied on the material fact

Fraud and Remedies for Fraud Fraud-same requirements as misrepresentation PLUS: Misstatement was made recklessly or intentionally Injury resulted

Misrepresentation must be intentional or reckless (not knowing if it is true or false) in order to get victim to enter into contract. Misrepresentation or concealment must injure. Must have proof of injury.

Remedies for fraud In addition to rescinding contract, courts allow (compensatory)damages and punitive damages Rescission-both parties give back Damages-(must prove fraud) Under UCC, damages are available for innocent misrepresentation for goods (tangible personal property) Punitive damages-Punishment