George Mason School of Law

George Mason School of Law
Contracts II Fraud Not to be shared © F.H. Buckley

Rational Choice: The no-duress assumption
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Perfect rationality

Rational Choice: Six Assumptions
Full Information No mistakes (later) No misrepresentations And no informational asymmetries 3 3

What are the Elements of Fraud?
4

The Elements of Fraud An Assertion: § 159 5

The Elements of Fraud An Assertion: § 159
Misrepresentation--A False Assertion: § 159 6

Misrepresentation--A False Assertion: § 159 Scienter: Knowledge of falsity and intention to deceive and induce Π’s to enter into the contract. § 162(1) 7

Misrepresentation--A False Assertion: § 159 Scienter: Knowledge of falsity and intention to deceive and induce Π’s to enter into the contract. § 162(1) Materiality: §§ 164(1), 162(2) 8

Misrepresentation--A False Assertion: § 159 Scienter: Knowledge of falsity and intention to deceive and induce Π’s to enter into the contract. § 162(1) Materiality: §§ 164(1), 162(2) Reliance: § 164 9

1. Assertions Restatement § 159: “an assertion” 10

2. A Misrepesentation Restatement § 159: “an assertion that is not in accord with the facts” 11

3. Scienter Restatement § 162(1)(a): A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker knows or believes that the assertion is not in accord with the facts 12

4. Materiality Restatement § 162(2): A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent or if the maker knows that it would be likely to induce the respondent to do so.” 13

5. Reliance Restatement § 164: If a party’s manifestation of assent is induced by … a fraudulent … misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. 14

The Remedy Restatement § 164: If a party’s manifestation of assent is induced by … a fraudulent … misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. 15

Misrepresentation--A False Assertion: § 159 Scienter: Knowledge of falsity and intention to deceive and induce Π’s to enter into the contract. § 162(1) Materiality: §§ 164(1), 162(2) Reliance: § 164 16

Does § 164 dispense with scienter if the misrepresentation is material?
Restatement § 164: If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. 17

Does § 164 dispense with scienter if the misrepresentation is material?
Restatement § 164: If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. “Innocent misrepresentations” 18

Does § 164 dispense with materiality given scienter ?
Restatement § 164: If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. I.e., innocent party may rely on an immaterial misrepresentation 19

First: What is an Assertion?

What is an Assertion? “It works”: You gotta problem with that?

Mere puffs are not assertions Simplex commendatio non obligat

Mere puffs Speiss v. Brandt at 421
What were the assertions? Lake McFarland

Mere puffs Speiss v. Brandt
Lake McFarland What was the remedy sought?

What was the remedy sought?

What if all the Δs had said was “You can make good money out of the resort”? 26

“You can pay it off in five years”? 27

Restatement § 168. Reliance On Assertions Of Opinion. An assertion is one of opinion if it expresses only a belief, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters. 28

Restatement § 168(2) If it is reasonable to do so, the recipient of an assertion of a person's opinion as to facts not disclosed and not otherwise known to the recipient may properly interpret it as an assertion (a) that the facts known to that person are not incompatible with his opinion, or (b) that he knows facts sufficient to justify him in forming it. 29

“We are making good money out of the resort.” 30

“We are making good money out of the resort.” Were they? Gross income of $19,000… 31

What is the optimal profit to make where there is double taxation of corporate and personal income? 32

“We are making good money out of the resort.” What if they had said this and then provided the financials? 33

“We are making good money out of the resort.” What do you conclude from the buyers’ willingness to do the deal even though the financials were not provided? 34

“We are making good money out of the resort.” What do you conclude from the buyers’ willingness to do the deal even though the financials were not provided Or to make an offer before the misrepresentations? 35

“We are making good money out of the resort.” Did the court dispense with the materiality requirement? “One who deceives another ought not to be heard to say in defense that the other party was negligent in taking him at his word”—p. 425 36

Does § 164 dispense with materiality given scienter ?
Restatement § 164: If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient. I.e., innocent party may rely on an immaterial misrepresentation 37

Was this a case of non-disclosure or of fraudulent misrepresentation? And why is that distinction important? 38

The defendants presented evidence that the resort was worth $100,000. Was that relevant? 39

But what about Restatement § 172? A recipient’s fault in not knowing or discovering the facts … does not make his reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. 40

What would you have advised your client to say?

Does a merchant have heightened duties to one who is “young and inexperienced”?
42

Spiess: “In youth, every manifestation of friendship seems genuine and deserving of special trust and confidence.” 43

Restatement§ 169. When Reliance On An Assertion Of Opinion Is Not Justified. To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the recipient (a) stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or (b) reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or (c) is for some other special reason particularly susceptible to a misrepresentation of the type involved. 44

Does this threaten to turn commercial relationships into fiduciary ones under Restatement § 173? If a fiduciary makes a contract with his beneficiary within the scope of the fiduciary relation, the contract is voidable unless (a) it is on fair terms, and (b) all parties beneficially interested manifest assent with full understanding .. of all relevant facts that the fiduciary knows or should know. 45

The remedy The plaintiffs sought recission, not damages
What’s the difference? 46

Ratification and the loss of recissionary rights
Spyder Enters at 437 Why was the attempted sale a problem? 47

Why was the reliance requirement ignored in Ziff-Davis at 432?
48

Why was the reliance requirement ignored in Ziff-Davis at 432?
What is the difference between a representation and a term of the contract? 49

How is the reliance requirement treated in Ziff-Davis?
In terms of remedies, what is the difference between an action for misrepresentation in contract and an action for breach of contract?

Misrepresentation vs. Breach
No tort recovery for innocent misrepresentation (absent negligence) Measure of damages Limitation period Punitives

Can one bargain around scienter? The Merger Clause in Danann at 428
What is a “Danann clause”?

The Merger Clause in Danann
Absent the merger clause, what result? What is the parol evidence rule?

Absent the merger clause, what result? The representations would ordinarily be excluded by the Parol Evidence Rule Here however the fraud exception to the Parol Evidence Rule would apply.

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. But Danann holds that the parties can bargain around this

Why was Danaan wrongly decided? Why was Danaan rightly decided?

Is there a logical problem in relying on a term of the contract when the fraud would impeach the entire contract?

What if the fraudulent misrepresentation had been incorporated in the contract? Danaan was an “as is” contract

What if the fraudulent misrepresentation had been incorporated in the contract? UCC § 2-316(1): “Words … relevant to the creation of an express warranty and words … tending to negate … liability shall be construed wherever reasonable as consistent with each other; but … negation … is inopertative to the extent that such construction is unreasonable.

Non est factum: Fraud in the factum
Curtis v. Curtis at 437 60

Non est factum: Fraud in the factum
Restatement § 166: If a party’s manifestation of assent is induced by the other party’s fraudulent misrepresentation as to the contents or effect of a writing…. Restatement § 163: “a misrepresentation as to the character of a proposed contract” 61

The effect of Signing a Contract Merit Music at 438
Bar, 601 South Monroe St. Charm City …

Signing a Contract Merit Music
Were the terms harsh? 63

Were the terms harsh? And just how would you know? 64

Were the terms harsh? For the pinball machine, at $30/week and 25 cents a play, 20 plays a day For the juke box, at $12/week and 25 cents a play, 8 plays a day 65

Were the terms harsh? Who was in the best position to determine the revenue from the machines? 66

Were the terms harsh? Who was in the best position to determine the revenue from the machines? Were the Sonneborns inexperienced? 67

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? 68

Have you ever signed a contract without reading it? What effect did you think the printed language had? 69

Restatement § 211(1): STANDARDIZED AGREEMENTS Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing. 70

Restatement § 211(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement. 71

Why do you think the case was rightly (wrongly?) decided? 72

Standard Form Contracts Birmingham TV v. Water Works at 443
Were the terms reasonable?

Standard Form Contracts Birmingham TV v. Water Works
How would you expect bailees to react to the decision? 74

Standard Form Contracts
How would you expect bailees to react to the decision? Is the world now a better place?

Thank God for proper warning signs

Standard Form Contracts
Restatement § 211(1): STANDARDIZED AGREEMENTS Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing. 78

Standard Form Contracts as Fascism
Friedrich Kessler

Why Employ Standard Form Contracts?

Economize on negotiations 81

Economize on negotiations Police consumer fraud 82

Economize on negotiations Police consumer fraud Economize on litigation 83

Economize on negotiations Police consumer fraud Economize on litigation Police agency costs of merchant 84

What about emergency cases?
St. John’s Episcopal at 444 85

Suppose the consumer is illiterate or can’t speak English
Elbonians 86

The blind and elderly Pirkle v. Gurr at 446 87

George Mason School of Law
Contracts II Fraud Not to be shared © F.H. Buckley

Rational Choice: Six Assumptions
Full Information No mistakes (later) No misrepresentations And no informational asymmetries 89 89

Non-disclosure When does the duty to speak arise? 90 90

Informational Asymmetry
“I’ll pay $500 for the rug” [but will go as high as $1,000].

Informational Asymmetry
Coca-Cola sells you a bottle of Coke but refuses to disclose the secret formula it uses to make it.

Non-disclosure What happened in Laidlaw? P. 460 Treaty of Ghent 1815

The siege of Rhodes

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.

Non-disclosure Aquinas, Summa Theologica
Need the seller disclose where “the goods are expected to be of less value at a future time, on account of the arrival of other merchants, which was not foreseen by the buyers”? Summa theologica II 96

Need the seller disclose where “the goods are expected to be of less value at a future time, on account of the arrival of other merchants, which was not foreseen by the buyers”? The seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what is going to happen. Summa theologica II 97

Need the seller disclose where “the goods are expected to be of less value at a future time, on account of the arrival of other merchants, which was not foreseen by the buyers”? The seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what is going to happen. If however he were to do so, or if he lowered his price, it would be exceedingly virtuous on his part: although he does not seem to be bound to do this as a debt of justice. Summa theologica II 98

Non-disclosure What happened in Laidlaw? P. 460 Did Organ lie?

Restatement § 161: When non-disclosure is equivalent to an assertion
A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a)where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. 100 100

A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which the party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. 101 101

A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effects of a writing, evidencing or embodying an agreement in whole or in part. 102 102

A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them. 103 103

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

Non-disclosure Which rule better promotes efficiency in Laidlaw? 105

Non-disclosure Which rule better promotes efficiency in Laidlaw?
Under which rule is the famine soonest over? 106

The incentive to acquire information

Litigation over nondisclosures

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

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?

Non-disclosure A company discovers minerals under a farm and buys the land. Problem? 111

Non-disclosure A company executive in the same firm buys shares in the firm without making disclosure. Problem? 112

Non-disclosure Henry G. Manne, Insider Trading and the Stock Market
113

Fraud: Three Remaining Questions
Nondisclosure: Silence and a duty to correct Nondisclosure: Silence vs. Concealment Nondisclosure: Silence vs. Warranty 114 114

Restatement § 161: A Duty to Correct
A person's non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a)where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. 115 115

Restatement § 160: Silence vs. Concealment
Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that a fact does not exist 116 116

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

Obde v. Schlemeyer at 449 Just what did the Schlemeyers know? Termites

Non-disclosure Did they suppress the termite condition? Termites

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

Non-disclosure Should Obde be confined to its special facts?
Does it matter that this was an apartment house? 121

Does it matter that this was an apartment house? Does it matter that it was termites? 122

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? 123

Silence vs. Warranty Reed v. King at 452
O.J.’s House

Reed v. King at 452 Why is land different?
Caveat emptor doesn’t apply in California land sales O.J.’s House

Strambovsky: 456

Strambovsky

Strambovsky In New York caveat emptor does apply in land sales
So how did the court get around it?

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