7-2 Mistake, Misrepresentation, and Fraud GOALS Recognize the types of mistakes that can make a contract voidable or void List the criteria for a statement to be treated as a misrepresentation Define fraud and describe the remedies for it Chapter 7

WHAT ARE THE TYPES OF CONTRACTUAL MISTAKES? Unilateral mistakes Mutual mistakes Chapter 7

What are the types of contractual mistakes? Unilateral: one party’s mistake. Contract is valid Bilateral: both parties mistake about a material fact. Contract is void. Chapter 7

What is misrepresentation: Innocent misrepresentation Fraudulent misrepresentation In both cases, contract is voidable by innocent party Chapter 7

Untrue Statement of Fact Must be factual statement, not opinion Expert’s opinion is always treated as a statement of fact Chapter 7

Active concealment Actively concealing a defect Substitute for false statement of fact Chapter 7

Silence Omits important information A true statement is made false by subsequent events One party knows the other party has made a basic mistaken assumption Chapter 7

Materiality The statement would cause a reasonable person to contract The defendant knew the plaintiff would rely on the statement The defendant knew the statement was false Chapter 7

Reasonable Reliance Buyer must reasonably rely on statement Chapter 7

Fraud and Remedies for Fraud: The misrepresentation must be intentional or reckless Induced victim to enter into the contract. May also have to show victim had no way to check accuracy of statement. Chapter 7

The misrepresentation or concealment must injure No liability for fraud if no injury Chapter 7

Remedies for fraud: Rescission Voidable by injured party. Anything received must be returned Chapter 7

Damages If fraud is proven. If victim ratifies the contract, may seek damages for loss created by the fraud. Chapter 7

Punitive damages May also be awarded for fraud Chapter 7

Unilateral mistake A mistake in which only one party holds an incorrect belief about the facts related to a contract Chapter 7

Mutual mistake (bilateral mistake) A mistake in which both parties have an incorrect belief about an important fact Chapter 7

Material facts Important facts that influence the parties’ decisions about a contract Chapter 7

void A contract is void (without legal effect) if a mutual mistake of fact as to the identity of the subject matter of a contract occurs Chapter 7

Innocent misrepresentation Party to a contract does not know that a statement he or she made is untrue. Chapter 7

Fraudulent misrepresentation An untrue statement by a party in a contract that the party knows is untrue Chapter 7

fraud The tort that occurs when one person intentionally misrepresents an existing important fact thereby causing financial injury Chapter 7

Describe three ways a party may make a unilateral mistake Describe three ways a party may make a unilateral mistake. Do these make a contract voidable? Failing to read a contract Reading a contract carelessly Signing a contract written in a language that the party does not understand. Generally, does not make a contract voidable Chapter 7

What is the difference between an innocent misrepresentation and a fraudulent misrepresentation? An innocent misrepresentation occurs when the offeror makes a statement that he does not know to be untrue. Fraudulent misrepresentation occurs when the offeror makes a statement that he knows to be false. Contract is voidable by offeree in both cases Chapter 7

If there is intentional misrepresentation, but no injury, is there fraud? Can the contract by rescinded? Should it be rescinded? Fraud requires injury. However, misrepresentation may be grounds for rescinding the contract. If the contract is still to the advantage of both parties, the injured party may not want to rescind. Chapter 7

CHECKPOINT    Name the types of mistakes that can make a contract voidable or void. Chapter 7

WHAT IS MISREPRESENTATION? Untrue statement of fact Active concealment Silence Materiality Reasonable reliance Chapter 7

Chapter 7 5/20/2019 CHECKPOINT    What are the three criteria for a statement to be treated as a misrepresentation? Chapter 7 LAW

FRAUD AND REMEDIES FOR FRAUD The misrepresentation must be intentional or reckless The misrepresentation must injure Remedies for fraud Rescission Damages Punitive damages Chapter 7

CHECKPOINT    What are the remedies available for fraud? Chapter 7

PREVENT LEGAL DIFFICULTIES In making contracts . . . Research important transactions before entering into them. Verify claims of the seller by outside means or through firsthand personal experience. Do not rush into a decision. Take time to review and understand the advantages and disadvantages of the proposed contract. Legitimate proposals will usually survive a delay. Continued on the next slide Chapter 7

PREVENT LEGAL DIFFICULTIES Do not hesitate to ask questions about vague or uncovered issues. Forcing the other party to make statements about them may lay the groundwork for proving fraud or misrepresentation later. If the other party does not properly answer your questions, proceed with great caution or abandon the negotiations. If you believe you have been defrauded, act promptly to rescind the contract. Chapter 7