ffi***mdM

12 CHAPITR

C H APTEN OUIl Il{T

TE A Rl{I1{G OB I E CI I V E S

AFTER READING CHAPTER, SHOULD ABLE THIS YOU BE -MISTAKES TO ANSWERFOLLOWING THE QUESTIONS: -FRAUDUTENT MISREPRESENTATION In what typesof situationsmight genuineness of to INFLUENCE DURESS assent a contract'sterms be lacking? AND -UNDUE CONTRACTS What is the differencebehveena mistakeof -ADHESION AND UNCONSCIONABILITY value or quality and a mistakeof fact?
What elementsmust existfor fraudulent misrepresentation occur? to Does a party to a contract ever have a duty to discloseinformation to the other party? What happensif a personmisrepresents fact a unintentionally?

66law apledge is that citizens the ofastate willdo justiceone to I another.!
Aristotle, 384-322 s.c.o. (Greek philosopher)

n otherwisevalid contract may still be unenforceableif the partieshave not genuinely assented its terms.As mentioned in Chapter 8, lack of genuine assentis to a defense the enforcementof a contract.As Aristotlestatedin the chapter-opening to quoto tation, the law seeks ensurethat "the citizensof a statewill do justice to one another." If the law were to enforce contractsnot genuinely assented by the contractingparties, to in justicewould result.This chapterfocuses the kinds of factorsthat indicatethat genon uinenessof assent a contract may be lacking. to Genuineness assentmay be lacking becauseof mistake,fraudulent misrepresentaof tion, undue influence, or duress. Generally,a party who demonstrates that he or she did not genuinely assent(agree)to the terms of a contract can chooseeither to carry out the contract or to rescind (cancel)it and thus avoid the entire transaction.

We all make mistakes, it is not surprisingthat mistakesare made when contrach are so created.In certain circumstances, contract law allows a contract to be avoided on the basisof mistake.It is important to distinguishbeh.veen mistakes fact and mistakes of of value or quality. Only a mistakeof fact may allow a contract to be avoided. lEEIAMFLEl2.tlPacobuys a violin from Beverlyfor $250.Although the violin is very old, neither party believes that it is exhemelyvaluable.Later, however,an antiquesdealerinforms the parties that the violin is rare and worth thousandsof dollars. Here, both parties were

3tl

CENUINENESS OF ASSENT

5r2 llEiIM

CONTRACTS

MISTAKE UNILATERAL when one Party that occurs Mistake as is to a contract mistaken to a normally fact;the contract material is enforceable. MISTAKE BILATERAL when both that occurs Mistake parties a contract mistaken are to fact aboutthe samematerial and is the mistake one that a reasonable person would make;eitherPartY the can rescind contract

a but the mistakeis a mistakeof value rathertirar-r mistakeof fact lhatwarrantscollrnistaken, Therefore,Beverlycannotrescindthe contract'E tractrescission. (mutual). A unilateral Mistakesof fact o..,-r, ir'r hvo forn1s-unilateral and bilateral a contractingparties; bilateral mistake is made by both' mistake is made by only one of tl-re in ,txl next at thesehvo typesof rnistakes illustratethem graphicall,v Exhibit 12-1' We look

Mistakes Unilateral

one partyis mistakenasto a material fact-that is, a occurswhen or-rly A unilateraln-ristake doesnot subjectmatterof the contract.Generally,a unilateraln'iistake fact importantto t1-ie In otherwords,the contractnorgii,ethe mistakenpartyany right to relief frorn the contract. tu:l Elena intendsto sell her party. feExArrlplE ihe n-ristaken against ,:naliyis ",'rfor..rb1. in is interested buying a usedmotor when she learnsthat chiir ,notor hofire for $17,500. TACT MATERML she him. when typing the fax,however, a home, shesends fax offeringto sell the vehicleto A factto whicha reasonable her fax accepting E]:y sends Chin imrnediately person would attachimPortance keysin the price Jf $ t l,ZOO. niistakenly i his she in determining or hercourse for $17,500, hasmade a unito offer.Even though Elela intendecl sell her motor home of action. to is lateralmistakeai-rd bound by contractto sell the vel-ricle Chin for $15,700.@ otherparlyto the conTlrere areat leasthvo .*..piio,'r, to this rule.l First,if the not be tract knows or should have krro*r'r that a mistakeof fact was made, the contract may knew that F,lenaintendedto sell if aboveexample, Cl-rin In tl-re enforceable. fBExA@ (statir-rg n-ristake $15,700in her offer) her motor t,o-" f- $li-lOO, then Elena'sr-rniLteral when a secondexceptionarises E rnay render tl'reresultingcontractulienforceabie. The subtraction,diviin adclitior-i, mistake of .,,-rilrt.r"l n-ristake faci *as due to a n-iatl-iematical negligence' (extreme) '*Miutrk.,are inevitable of sion,or multiplicatronanclwasrr-iacle and without gross inadvertently lot the ,) a mistakein additionwhen he low bicl If a contractor's wassignificar-itly because or shemade mankind. colrtractresultingfrom the bid nonlally rnaybe rescinded' .orir, totalingthe estimated SrnGaoncn)ussnt,, "ny nnterial fact. 881 1 82,+-1 Of co.irse,ilr botl-rsituations,the nistake n'ruststill involve some
(linglish juiist)

(M l) B i l a t e r a l u tu aM ista ke s
about the same material fact, the contract can be When botl-r parties are n-ristaken Note that, as witl'r unilateral mistakes,the rnistakenr'rst be by rescincled either party.2 abont a maierial faci (orrethat is important and central to the contrac0. IeExAMi@
( ,S" r ond)of C ontr ac ts ,Sec ti on 151, l i ber al i z esthe gener al r ul e to tak e i nto ac c oun t i h e mo d e rn ,r R"*r *t*, has been nisiaken' trencl ofallou,irg avoidance in some circumstalces even though onll one party 2, Restatement (Second') of Contracis, Section 152.

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GENUINENESS OF ASSENT

Keeley buys a landscape pair-rting from Umberto'sart gallery.Both Umberto and Keeley believe that the painting is by the artist Vincent van Gogh. Later, Keeley discovers that the painting is a very cleverfake. Because neither Umberto nor Keeleywas awareof this fact when they made their deal, Keeleycan rescindthe contractand recoverthe purchase price of the painting. E What a party to a A word or term in a contract may be subiect to more than one reasonable interpreta- I?|ilillifffm contract knowsor shouldknow tion. In that situation,if the partiesto the contractattach materiallydifferentmeaningsto can determine whetherthe the term, their mutual misunderstandingmay allow the contract to be rescinded. contractis enforceable. In Rafflesy. Wichelhaus,3 FEIEmFtf t2:51 a classic case, Wichelhaus purchaseda shipment of cotton from Raffles to arrive on a ship called the Peerless from Bombay, India. Wichelhaus meant a ship called Peerless sailing from Bornbayin October; Rafflesmeant a differentship calledPeerless sailingfrom Bombayin December.When the goodsarrived on the DecemberPeerless Rafflestried to deliver them, Wichelhaus refusedto accept and them. The British court held for Wichelhaus, concluding that no mutual assentexisted because partieshad attachedmateriallydifferentmeaningsto an essential the term of the contract (which ship Peerless to transport the goods). E was In the following case,the court had to grapplewith the questionof whether a mutual mistakeof fact had occurred.

3. 159 Eng.Rep. (1864) 375

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

BACKGROUND FACTS month afterthe sale,Pridetold the Inkelsthey owed another AND
The Inkels, who live in Vermont, calledPrideChevrolet-Pontiac, in Bostonabout buyinga lnc., Tahoe. new Chevy Theysaidthat they would trade in a highmileagevehiclethey leased. The salesrepresentative told penaltywould probablynot apply them that the high-mileage as the leasewas from a bank not a dealership. Whenthe Inkelstook delivery the new Tahoeand left their old vehicle of at Pride, the priceon the contract was $41,200. small print In on the backof the agreement was a provision that the buyer for was responsible any problemswith the trade-invehicle. A because therewas a misunderstanding the with $16,435 leasing companyabout the high-mileage charge. The Inkels refused pay.Pridedemandedthat they returnthe Tahoe to and wantedto cancelthe deal;the Inkelsrefused. The Inkels then sued Pridefor breachof contractand other claims. A Vermontsuperiorcourt held that a mutual mistakehad been made in the contractand that the Inkelsshouldhaveagreed judgmentfor to undo the deal.The court grantedsummary Prideand orderedthe Inkelsto pay damages. Theyappealed.

lN THE WORDS THE . 0F C0URT. . BURoEss. Justice.
The evidencesubmitted in connection with the parties' crossmotions for summary judgmentdoesnot establish what happenedin the instantcaselihe caserrnderdiscussion]. Although the superiorcourt [the trial court] statedin a footnote that it was undisputed that the Chittenden Bank was negligent in giving Pride Chevrolet an incorrect payoff amount, Mr. Inkel testified in his deposition that a bank employee told him that Pride Chevrolet had askedfor the wrong payoffamount.Thus, it is not clear whether the Pride Chevrolet employeeaskedfor the wrong information or the bank provided the wrong information. In short, the evidentiary record does not rnake it clear how the

C A S El 2 . l - C o n t i n u e s n e x t p a g e

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CONTRACTS

. CA S E 'l-Con tinu ed l2

that facts Further'the principal mistake' therewas-a ,,mistake,'occurredevenwhether or the l; f*"; of Pride couft apparently.relied t" :"1t* 'C'hevrolet-that dealerthe superior :l .q"iru?rir'rJr vehicieandthatanother negative knewtheyhad substa;tial negative Inkels *iifr ir'r.tt u"causeof the substantial d".#il;;;"g"".i".. that Pride ship had recently the Inkels'alleeation x * x ir-,the vehicle-J" ""t "-ecessarily ""dt;; reprJsentations misleading "o,ritu even o r*l'ro1-inrth,'fr-rr.lnd on chevrolet made, pavments their

that them ,# fi| ?;lil;;"il by terling
trade-in. ;r:r:";.r,

;";';;.f ou.r--ii'ag"

j:':;ij,lij"iii:I ry"''1""1""',*lr:#lxjffi$;:,i prove ;f :fui;"xl}.ff mutual ";f io"' '''otconclusiverv ;"-,,,v-.u.,''t, ?ifi;:;;l??;,1'ff,t'T;, t',:l'd;;;
a i*"tv.ingbothpariies' mistake itW*tii ,,Amutual be mu'st a mistake mistake mistake. with ignorance coupled by o'n3'party made 1'r-i"'i p"nie{' "1\ mntake independently added'] mistake'" fEmphasis not does Pride thereof 'on't'luiu-*u["ol record'*i;;h;; the Inkelsmerelyaccepted irtt l;t" Given the .t""'." the beliefs' exis"i took,au"r1trf. or the dealer's ill*t" parties' cheviolefsstatements n.,. or that ", Further,evenassuming the !"Jior.rt t" :a F tenceof mutual nff"t to "washthe that tht failed;;.;;;;it"te -irt#i, wasmutual,il;.th.;;;let no evlmistake Pridechevroletpresented th. ;ff;, ,; rescind .ontrr.t. wasa legitimate deal,, or whatterms' who madethe offer' whentl'reoff"t *" precisely denceindicating -^Je' if any,wereoffered'

that the Inkels "affirmed" the we reiect pride chevrolet,sargr_rment

vehicle

cou rheV ermonthig h rt AN D E CISI0N DRE ME DY
re ver s edinf av or o fth e l n k e l s ' h o l d i n g th a ti tw athat a ear - snotcl to find a mutual mistake'Fora court ;;;.ht"';.s would haveto be evidence mutual mistakeoccurred' had been mistaken u,.,iul to show that both parties ;;;;;;J about the samefacts'

ffi

led representotive sales tf for dubioussalesproctices' a Pride care obout the did not to the tnkels believethot the dealership willing to trade-in vehicle' should it be excessivemileson the WhYor whYnot? incur the loss?

t ,I*$l Consideratlofi somecor deolerships - t!&.l!s

ANAIYSlS-Ethical F0R,c.RlTl.cAt arenotorious

E

ur.'dLru":::,:;-ao,ir. the Presellce fraud is Although frauda tort, the Although isatort, pres'"'"-"11'::1"*::*:'::::f;i:il::il1tHU;:::: t. a contractwith fraudr-rIentterms,thecontractusually-canbeavoidedt, -^-*. ^-,- oirher rescind (cancel) the rIIc rrrlruLerr;""#; seek sented to the terms'- Normally' or".r,for." the contract and his originai 1 and be restored to her or "or-ttt".t for iniurres resultingfrom.the fraud'

vvrlcrr drr rr'rvuvrr! r--,jr" concon party's consent to acontract ffi,Zo.,",'t toa,contract' ;vhen I:::,",'^"ri,::iY"::n:Tit':f;n. voluntarity ,t-raor he has nolyoluntarily

',ff .il;1iy-::':;:Y;":'::*-,!T"" ';*Jffi ::Hi;'ilHl'il"'il:ffi
dan-iages ifil.rtty, fraud involvesthree elements: fact must occur' of I A misrepresentation a material deceive' 2 There must be an intent to rely on the misrepresentation' 5 The innocent party must iustifiably a result of the must have been iniured as to collect damages' a party Additionally, misrePresentation' 16'l' l6J Sectrons and Rurrrn*rtls*ra) of contracts, T7.

ils EgEEq
Fraudulent misrepresentationcan also occur in the oniine environment. For a case involving allegationsthat Yahoo fraudulently posted online personal ads, see this chapter's Adapting the Law to the Online Enyironmentfeature on page717. Because curbing Internet fraud is a major challengein today's world, we alsoexplorethe topic further in Chapter 38, in the contextof consumerlaw.

ASSEN.I GENUINENESS OF

M o nt Mi srepr es ent a t iu s O c c u r
The first element of proving fraud is to show that n-risrepreThis misreoresensentation a materialfact hasoccurred. of tation can take the form of words or actions.For eximole. "This painting is a Picaiso" an art galleryowner'sstatement, fact if the painting was cione by is a misrepresentation of another artist. A staten-rent opinion is generallynot subjectto a claim of fraud. For exan'rple, of claims such as "This computerwill neverbreakdown" and "This car will lastfor yearsand years" are statemenhof opinion, not fact, and contractingpartiesshould recognize them as such and not rely on them. A fact is objectiveand verifiable;an opinion is usualh,subject to Therefore,a selleris allorved "huffand puffhis or her wares"rvithoutbeing liable to debate. for fiaud. however, In certaincases, particulariy when a naivepurchaser relieson an expert's opin(cancellation) or reformation(an equiion, the innocent party may be entitled to rescission tableremedygrantedby a court in which the termsof a contractarealteredto reflectthe true The issuein the following casewaswhetherthe statements intentionsof the parties). rnade at by instructors a danceschoolto one of the school's students qualifiedasstatements opinof ion or statements fact. of

A woman browses through some online personal ads. lndividuols who post their profiles on on lnternet doting site may exaggerote their oftrodive troits ond may even moke statementsobout themselves thot they know to be folse. But what hoppens when on lnternet service provider mokes fraudulent m i sreprese ntotions ob out its users? (Photoby BillStryker)

t**

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DistrictCourtof Appealof Florida, SecondDistrict, 212 So.2d906 (l 968).

qttf**fi

Murray, founderof Arthur bega i Murray,Inc. (www.arthurmurray.com), n teachng people how to dancein 1919. the time,social At dancing was popular becoming increasingly amongyoungpeople, part in by because many adultswere shocked the new "jazz so young peoplewantedto learnthe Across America, dancing." the new steps-theturkeytrot, the fox-trot, kangaroo dip, the the bear,and others.By chickenscratch, bunnyhug,the grizzly instructors weregiving lessons cruise on the 1930s, Murray's of ships,in touristhotels,and to the employees New York lunchbreaks. 1937, ln stores duringthe employees' Murray founded ArthurMurray the Studios, chainof franchised a dance Duringthe 1950s, Murraysponsored television a schools. show-The Arthur Murray Porty-to attractstudentsto the that Murray retired 1964, in estimating he hadtaught schools. morethan 20 millionpeoplehow to dance.

(m*$

C0MPANY PROFILE nrtnur BACKGROUND FACTS AND Audreyvokes, E. a widow
without family, wishedto become"an accomplished dancer" and to find "a new interest lifei' ln 1961.shewas invitedto in "School Dancing," attenda "danceparty''atJ. P.Davenport's of an ArthurMurray, lnc.,franchise. Vokes went to the school praise and received elaborate from her instructor her grace, for poise,and potential "an excellent as danceri'The instructor sold her eighthalf-hour dancelessons 914.50 for to each, be utilized within one calendar month.Subsequently, a periodof less over than sixteen months, Vokesboughta total of fourteendance courses, which amounted 2,302hoursof dancinglessons to at (in Davenport's school, a total cashoutlayof 931,090.45 for 2009,thiswouldamountto nearly Whenit became $150,000). that she did not in fact,havethe potential be to clearto Vokes an excellent dancer, filed a suit against school, she the alleging fraudulent misrepresentation. the trialcourtdismissed When her complaint, appealed. she next CASE 12.2-C onti nues pa ge

5t6 llNiluu

CONTRACT5

t2. CASE 2- Cont inue d

. Judge. 0F lN THEWORDS THECOURT . . PIERCE,
[The dance contracts]were proclrred by defendant Davenport and Arthur Murray, to Inc., by falserepresentations her that shewasimproving in her dancingability, that she to had excellentpotential,that shewasresponding instructionsin dancinggrace,and that they were developingher into a beautiful dancer,whereasin truth and in fact she did not developin her dancing ability, she had no "dance aptitude,"and in fact had difficulty in

"n"frirg themusical beat."
to It is true that generallya misrepresentation, be actionable,must be one of fact rather :l' than of opinion. {' " A statementof a party having * * * superiorknowledgemay be regardedas a statementof fact although it would be consideredas opinion if the parties were dealing on equal terms. supposedhere that defendantshad superior knowledgeas to It could be reasonably she whether plaintiff had "dance potential" and as to wl-rether was noticeablyimproving inferencefrom the undein the art of terpsichore[dancing].And it would be a reasonable heaped of nied avermentsfassertions] the complaint that the flowery eulogiums fpraises] * as upon her by defendants '< t' proceeded much or more from the urge to "ring the cash or register"as from any honestor realisticappraisalofher dancing prowess a factual representation her progress. of * * r.* * x * What is plainly injurious to good faith ought to be consideredas a fraud suffimay be avoided cient to impeach a contract,and * * * an improvident [unwise]agreement becauseof surprise,or mistake, want of freedom,undue influence, the suggestionof falseadded.] of hood,or the suppression truth. fEmpl-rasis

vokes's complaint wa s D EC ISI0N D RE ME DY AN
to reinstated, the casewas returned the trial court to and to allow Vokes proveher case.

DIFFERENT? T WERE WHAT THEFACTS IF
fellow students,rother thon her instructor, one of Vokes's

illustroteson importont principle. The generol rule-thot a misrepresentotion mustbe one of fod rather thon one of opinion to be actionable-does not opply in certoin situotions, somethingobout which such os when one porty misrepresents he or shepossessessuperior knowledge (Vokes'sdoncing obility, in this cose).

her hodproisedher abilityond encouroged to buy more/essont WEB SITES Tolocoteinformationonthe RELEVANT howmighttheresultinthiscosehovebeendifferen? lnc., Webconcerning Vokes ArthurMurray, decision, fhe v. select www.cengage.com/blaw/blt, IMPACT0F THIS CASE0N T0DAY'S IAW rh;scose gotothistext'sWebSifeof "Chopter ond clickon "URLs Londmorks!' for law it 12," clossic contract becouse cleorly in hasbecome,o

tr
"lt *r, beautiful simple as and are.tt alltruly gr.rtr*indles
can occur by conduct, as well as Misrepresentationby Conduct Misrepresentation preif For oral through express or witten statements. example, a seller,by her or his actions, ventsa buyer from learning of some fact that is material to the contract, such behavior contz's| a to by stitutes misrepresentation conduct.5IEEXAMPIE Cummings contracts purchase from Garner.The horseis blind in one eye,but when Garner showsthe horse, racehorse head turned so that Cummings does he skillfully conceals this fact by keepingthe horse's fraud. E Another exampleof r-nisrepresenconstitutes not seethe defect.The concealment
(Second) Contracts,Section 160 of 5. Restatement

o,#flll;

(American author)

5I7 EIEEE

GENUINENESS OF ASSENT

eyingthe wordsonline personals the into Googlesearch engine will rehrrn more than 35 million hits,

expired." Finally,Anlhony claimedthat when a subscription neared end date,Yahoowould sendthe subscriber fake ih a profile,heralding asa "potential'new match.'" it

DidYahoo Have lmmunity?
<i-*.-.r?':!:'!::*!*1:ra:'!'

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

Personals. Yahoo! Makefriendsonline.com, Yahoo! and Personals, which callsitselfthe "top online datingsite,"offers hvo options.One is for peoplelooking for casualdates. It allowsusers createtheir own profiles,browsememberproto files,and exchange The e-mailor instantmessages. second option, calledYahoo!Personals Primer, is for peoplewho want relationships. Usersmust take a relationship serious test.Then they can useYahoo's computerizedmatchingsystem "zero to in on marriagematerial."With this sewice,users can chat on the phone,aswell asexchange e-mail.

TheThorny Problem Misrepresentation of
When singles(and others)createtheir profilesfor online dating services, they tend to exaggerate their more appealing featuresand downplayor omit their lessathactiveathibutes. All users such services awarethat the profilesmay not correof are spondexactlywith reality,but they do assume that the profiles In are not completemisrepresentations. 2006,however, Robert Anthony,individuallyand on behalfofothers, broughta suit against Yahooin federaldistrictcourt, allegingfraud and negligent misrepresentation, among other things. In his complaint,Anthony claimed that Yahoowasnot just postingfictitious or exaggerated profilessubmittedby users but wasdeliberatelyand intentionallyoriginating,creating, and perpetuatingfalseand/or nonexistent profiles.According "with to Anthony, many profilesusedthe exactsamephrases such unique dictation and vernacular[anguage] that such a random occurrencewould not be possible." Anthony also arguedthat somephoto imageshad multiple identities-that in is, the samephoto appeared several differentprofiles.He alsoallegedthat Yahoocontinuedto circulateprofilesof "achral,legitimateformer subscribers whosesubscriptions had

Yahooasked court to dismiss complaint on the grounds the the that the lawsuitwasbarredby the CommunicationsDecency Act (CDA) of 1996.a discussed Chapter4. the CDA As in (lSPs) shields Internetservice providers fibm liabilityfor any informationsubmittedby anotherinformationcontent provider.In other words,an interactive computerservicecannot be held liable under statelaw asa publiJherof information that originates from a third party informationcontentprovider. The CDA definesan informationcontentprovideras"any person or entity that is responsible, whole or in part,for the in creationor development informationprovidedthrough the of Internet or any other interactivecomputerservice."b The court rejected Yahoo's ciaim that it had immunity underthe CDA and held that Yahoohad becomean information contentprovideritselfwhen it created bogususer profiles. The court observed "no caseof which this court that is aware immunizeda defendant has from allegations if that created tortiouscontent."c Thus, the court deniedYahoo's motion to dismiss and allowedAnthony's claimsof fraud and negligentmisrepresentation proceedto trirl.d to

ffi

, ssume thotAnthony FoRCRITICAL Al{ALYSlS

varioususers Yohoo's of online *##f,oa contocted profile doting seruiceonly to discoverthot eqch user's physica appeo nce, exoggeroted person's the I ro intelligence,ond occupotion.WouldAnthonyprevoil if he brought a lowsuit for fraudulentmisrepresentotion agoinst Yahoo that situation?Whyor why not? in
a. 47 U.S.C. Section 250. b. 47 U.s.c. section230(f)(3). c. Foran exampleof the type of cases that havebeen broughtagainst fnternetdatingservices, Corofonov. Metrosplash.com, Lnc.,339 see F.5dI I 19 (gth Cir.2003). d. Anthonyv. Yohoo!, Lnc.,421F.Supp.2d I257 (N.D.Cal. 2oo6). See alsoDoe v. SexSeorch.co,m, F.Supp.2d (N.D.Ohio 2007). 502 719

tation by conduct is the untruthful denial of knowledgeor information concerning factsthat are material to the conhact when such knowledge or information is requested. Misrepresentation of Law Misrepresentation of law ordinarily does not entitle a party Debbie has a parcel of property that she is tryto be relieved of a contract. FHEfrFIEEI ing to sell to Barry. Debbie knows that a local ordinance prohibits building anything higher than three storieson the property.Nonetheless, she tells Barry, "You can build a

5r8 l@

CONTRACTS

condominium one hundred storieshigh if you want to." Barry buysthe land and later discoversthat Debbie'sstatementis false.Nonnally, Barrycannot avoidthe contractbecause to under the comrron law, people are assumed know stateand local laws.@ Exceptions known to party is in a profession to this rule occur, however,when the misrepresenting law than the average citizen possesses. require greaterknowledgeof the Misrepresentation by Silence Ordinarily, neither party to a contract has a duty to come cedain perfacts,and a contractnormally will not be setasidebecause forwardand disclose tr.gl Suppose that you are selling tinent information has not been volunteered.FHIMPLE You do not need to volunteerthis a car that hasbeen in an accidentand hasbeen repaired. had extenasks you if the car l'ras the informationto a potentialbuyer.If, however, purchaser l-rave fraudulentmisrepresentation. committeda sivebodyworkand you lie, you E defector potentialproblem that ihe buyer canGenerally,if the sellerknowsof a serious not reasonably expectedto detect,the seller may have a duty to speak.Normally, the be that could not readilybe discovonly "latent" defects-that is, defects sellermust disclose a ered.Thus, termitesin a housemay not be a latent defectbecause buyer could normally Also,when the partiesarc in a fiduci' through a termite inspection. discover their presence (one oftrust, suchaspartners, physician and patient,or attorneyand client), ary relationship fraud. materialfacts;failure to do so may constitute there is a duty to disclose

l n t e ntto D ece ive
SCIENTER by Knowledge the misrepresenting partythat material factshavebeen falsely or represented omittedwith an intentto deceive.

party that The secondelement of fraud is knowledgeon the part of the misrepresenting or This element, usually calledscienter,b "guilty knowlfactshave been misrepresented. if Scienter clearlyexists a party that there wasan intent to deceive. edge,"generallysignifies that he or if Scienter alsoexists a party makesa statement knowsthat a fact is not as stated. without regardto whether it is not to be true or makesa statementrecklessly, she believes or true or false.Finally, this element is met if a party says implies that a statementis made when it is not. such aspersonalknowledgeor personalinvestigation, on somebasis, Ir.el A convictedfelon, RobertSawis,appliedfor a positionasan adjunctprolxEXAMFC from prison.On his r6sum6,he lied about his pastwork fessor hvo weeksafter his release that he had been the presidentof a corporationfor fourteenyears historyby representing law and had taught business at another college.At his interview,Sawisstatedthat he was "well equipped to teach" business law and ethics and that he had "a great interestand probationoffilaw."After he was hired and beganworking, Sarvis's knowledgeof business and he cer alertedthe schoolto his crirninal history.The school immediatelyfired Sarvis, brought a lawsuit againstthe school for breachinghis employmentcontract.The school fraudulent misrepresentaof claimed that it was not liable for the breach because Sarvis's his The court agreed. had not fully disclosed personal Sarvis tions during the hiring process. and the schoolhad iustifiablyrelied on his mishistory,he clearlyhad an intent to deceive, rescindSarvis's employmentcontract.T representations. Therefore,the schoolcor-rld E Innocent Misrepresentation If a person makesa statementthat he or she believesto material facts,the personis guilty only of an innobe true but that actually misrepresents not of fraud. If an innocent misrepresentationoccurs, the cent misrepresentation, aggrieved pdrty can rescind the contract br-rt usually cannot seek damages. trr0l Parrisis mistakenIEEXAMFLE Parristells Robertathat a tract contains250 acres. the tract containsonly 215 acres-bllt Parrisdoesnot know that. Robertais induced by is the statementto make a contract to buy the land. Even thougl-ithe misrepresentation
6 P'^'^"."".1 --""-fcr

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

]I9EIEEE
innocent, Robertacan avoid the contract if the misrepresentationis material.E Negligent Misrepresentation Sometimes, partymakes a through carelessness, a misrepresentation believing the statement true. This misrepresentation negligentif he is is reasonable care in uncovering or or she fails to exercise disclosingthe facts or does not use the skill and competence that his or her businessor professionrequires. tttT An operatorof a weight scalecertifiesthe lxExAMPtE weightof Sneed's commodity,eventhough the scale's accuracy has not been checkedin more than a year.In this situation, the scale operator'saction could constitute negligent misrepresentation. In virtually all states,such @ negligentmisrepresentatlon equal Io scienter,or to knowis ingly making a misrepresentation. effect,negligentmisIn representation treatedas fraudulent misrepresentation, is even though the misrepresentation not purposeful.In was negligentmisrepresentation, culpable ignoranceof the truth supplies the intention to mislead,even if the defendantcan claim, "l didn't know."

GENUINENESS OF ASSEN]

Supposethat o city solicited bids from contractorsto expond i6 public tronsportotion sqtem on this nrip of lond without disclosingthe existence of o subsoilcondition thot would greotly increase the projeds cost justifiable reliance on the misrepresentation fact. The The third element of fraud is of Assuming thot the city wos aware deceived party must havea justifiablereasonfor relying on the misrepresentation, the and of the situation, would it hove had must be an important factor (br-rtnot necessarily rnisrepresentation the sole factor) in o duty to disclosethe condition to inducing the party to enter into the contract. bidders? What effed would the city's Relianceis not lustifiedif the innocent partyknowsthe true factsor reiieson obviously silencehove on the resulting contracfl statemenh. If extravagant dealertellsyou, "This old Cadillacwill (Michael IEExAMFC-Ir.tZ a used-car McCauslin/Creative Commons)

Reliance lheMisrepresentation 0n

get over sixtymiles to ihe gallon," you normally would not be fustified in relying or-r this statehowevet,that Merkel, a bank director,inducesO'Conneli, a co-director, ment. Suppose, to sign a statementthat the bank hassufficientassets meet its liabilities by telling O'Connell, to "We haveplentyof assets satisftour creditors." to This statement false. O'Connell knows is If the true factsor, as a bank director, should know the hue facts,he is not fustified in relying If on Merkel'sstatement. O'Connell doesnot know the true facts,however, and hasno way of findingthem otLt, may be justifiedin relyingon the statement. he E How much informotion must employersdiscloseto prospectiveemployees?One of the probface is that it is not alwaysclearwhat informationthey should disclose lems employers to prospective To employees. lure qualifiedworkers,employers often tempted to "promise are prospects bright.Employers the moon" and painttheir companies' as must be careful, though, by to avoidany conductthat could be interpreted a court as intentionally deceptive. particIn prospects finanular,they must avoidmakingany statements abouttheir companies'future or lf cialhealththat they know to be false. theydo makea falsestatement which a prospective on reliesto her or his detriment, they may be suedfor fraudulentmisrepresentation. employee In one case, example, employeeaccepted job with a brokerage for an a firm, relyingon that assurances the firm was not aboutto be sold.In fact,as the employee was laterableto provein his lawsuitagainst firm for fraud,negotiations sellthe firm were underway at the to the time he was hired.Thetrial courtawarded employee the more than 96 millionin damthat was affirmed appeal.s on ages, decision a
r. N.J.Super. 25,804 A,.zd (A.D.2002) 8. McConkey AONCorp.,354 572

nf:ffiliffiL-Cffl An opinion is neithera contractoffer,nor a contractterm, norfraud.

520 INIIUil

CONTRACTS

ln another case,Kevin Helmer sued BinghamToyotalsuzu and Bob Clark,his former fraud. Helmer allegedthat he was fraudulently for employer and supervisor, promissory job with anotherToyotadealership false promisesmade to him by inducedto leavea prior A that he would receive. jury found in Helme/s by Clarkabout the amount of compensation damand in him $450,913 compensatorydamages $1.5millionin punitive favor, awarding were later reducedto $675,000).e ages(the punitivedamages

H

Party Injury theInnocent to
(cancel) the of a do Mostcourts not require showing injury whenthe actionis to rescind to returnsthe parties the positions rescission hold that because courts contract-these of they held beforethe contractwasmade,a showing iniury to the innocentpartyis lo unnecessary. proof of an iniury is universally causedby fraud, however, To recoverdamages valuehad it been to the property's is equal of required. The measure damages ordinarily on In based for the property. actions less delivered represented, the actualpricepaid as to punitive,or exemplary, which aregranted a plaintiff damages, fraud,courtsoftenaward 4, As for the overand above compensation the actualloss. pointedout in Chapter punior the of punishing defendant consideration on are tivedamages based the public-policy others. by to an setting example detersimilarwrongdoing To avoid makingcommentsthat might later be construedas a misrepresentation Thosein the of materialfact, be carefulwhat you sayto clientsand customers. are all customers shouldassumethat of business sellingproductsor services to Instructemployees nai've and are relyingon the selley'srepresentations. that that any statements phrasetheir commentsso that customers understand a questionthat is oPinion.lf someoneasks are not factual are the employee's it knowledge, is better to saythat he or she does not beyondthe employee's that turns know than to guessand havethe customerrely on a lePresentation questionsconcetn out to be false.This can be particularlyimportantwhen the topics suchas compatibilityor speedol electronicand digital goods,software,or relatedservices. Also be prudentabout what you saywhen interviewingpotentialemployees. the on Do not speculate the financial health of the firm or exaggerate companlds in a business to Exercising caution in one's statements others future prospects. contextis the best way to avoid potentiallegal actionsfor fraudulent misrepresentation.

nlllftmtliffifl To collectdamages in theremustbe almostany lawsuit, some sort of injury.

E

Undue influence arisesfrom relationshipsin which one party can greatly influence thus overcomingthat party'sfree will. Minors and elderly people,for examanotherparty,. ple, are often under the influence ofguardians.Ifa guardianinducesa young or elderly ward (a personplacedby a court under the careofa guardian)to enter into a contractthat benefitsthe guardian,the guardianmay have exertedundue influence. Undue influence
136 1 lsuzu, 129Cal.App.4th l2l, 29 Cal.Rptr.Sd (2005). 9 , Helmerr. BinghamToyota t0. For a leading caseon this issue,seeKauftnan v. laffe, 244 Lpp.Div. 344,279 N.Y.S. 392 (1935)

t2l tTrltlmr't

GENUINENESS OF ASSENT

including can also arise from a number of other confidential or fiduciary relationships, attorney-client, physician-patient,parent-child, husband-wife, and trustee-beneficiary relationshios. The essential feature of undue influence is that the party being taken advantageof free will in entering into a contract.It is not enough that the doesnot, in reality,exercise personis elderly or suffers from some mental or physicalimpairment. A court will require clear and convincing evidencethat the persondid not act out of her or his free will. If the persondid lack free will, the contractis voidable.A contractenteredinto under excessive and is thereforevoidable. or undue influence lacksgenuine assent to Similarly,assent the terms of a contract is not genuine if one of the partiesis forced Forcinga pg-rty enter into a contractbecause the fear createdby to of into the agreement. threats is referred to as duress.tl Inducing consent to a contract through blackmail or contestingcontractson the Duressis both a defense the enforcementof a contract groundsof fraud and duress, to duress. to extortionalsoconstitutes go for of and a gror-rnd rescission a contract.Therefore, a party who signsa contract under duress can choose to carry out the contract or to avoid the entire transaction.(The in wrongedparty usually has this choice in cases which assentis not real or genuine.) Economic need is generallynot sufficient to constituteduress,even when one party exactsa very high price for an item the other party needs.Ifthe party exactingthe price The also createsthe need, however, economic duressmay be found. lxEFAttlFLs-tzirl a Internal RevenueService(lRS) assessed large tax and penalty againstWeller. Weller Two retained Eyman to contestthe assessrnent. daysbeforethe deadlinefor filing a reply Weller unlesshe agreedto pay a very high fee with the IRS, Eyman declined to represent The agreementwas held to be unenforceable.l2 Although Eyman for Eyman'sservices. somethingthat he waslegally entitled to do, had threatenedonly to withdraw his services, he was responsiblefor delaying his withdrawal until just before the deadline. Because Weller wasforced into either signingthe contract or losing his right to challengethe IRS assessment, agreementwas securedunder duress.El the

of may arisewhen the termsof a contractare dicconcerninggenuineness assent Questions tated by a party with overwhelming bargaining power and the signer must agreeto those terms or go without the commodity or sewice in question.As explainedin Chapter 10, such by contracts,which are written exclusit'ely one party and presentedto the other party on a take-it-orleave-itbasis,are often referredto as adhesionconhacts.These conhactsoften use standardforms,which give the adheringparty no opportunif to negotiatethe contractterms. Standard-formcontractsoften contain fine-print provisionsthat shift a risk naturally use Life insr-rrance borne by one party to the other.A varietyof businesses such contracts. loan agreements, and employment agencycontractsare often policies,residentialleases, contracts.To avoid enforcementof the contract or of a particular clause, standard-form party must show that the partieshad substantially unequal bargainingposithe aggrieved If tions and that enforcementwould be manifestlyunfair or oppressive. the requiredshowand is not ing is made, the contract or particular term is deemed unconscionab/e enforced. Adhesion contractsare standardin the retail automobile industry.The following case aroseout of an arbitration clausein such a contract between an auto dealershipand its customer.

(Second) ofContracfs, Sections174 and 175. 11.Restatement 904,267P.2d 1043(1954) 12.Thompson Crane&TruckingCo. t. Eyman, 123Cal.App.2d

522Eimu

CONTRACTS

665 (2007). 375 S.C.14, 644 S.E.2d SupremeCourtof SouthCarolina, r www.findlaw.com/tstategov/sclscca.htmla

that "in no event amongotherthings, which provided, AND BACKGROUND FACTS clause, :**i MSAof MyrtleBeach, lnc.,in as doesbusiness Addy'sHarborDodge(Addy)'a SouthCarolina with Addyto signeda contract Simpson Sherry cardealership. for 4Runner a new 2004 Dodge tradein her 2O0t Toyota line abovethe signature on the firstpageof the Directly Caravan. in was instructed bold tyPeto "SEE a contract, signee PACE." ON ANDCONDITIONS OPPOSITE TERMS ADDITIONAL an contained arbitration termsand conditions Theadditional
In clickon "March." the result,clickon the number section, a. In the "2OO7" the next to the name of the caseto access opinion'

exemplary to be shallthe arbitrator authorized awardpunitive, which are (or any otherdamages double,or trebledamages Six eitherparty." months punitive natureor effect)against in statecourtagainst Carolina filed a suit in a South later, Simpson the that the dealerhad misrePresented trade-in Addy,claiming price, the purchase increased artificially valueof her vehicle, of promised, violation state in all and failedto provide rebates Simpson to compelarbitration. Addyfiled a motion statutes. and was unconscionable clause that responded the arbitration Addy'smotion.Addyappealed The unenforceable. courtdenied Court. Supreme to the SouthCarolina

rustice. chief . 0F f N THEW0RDS THECOURT . . roAL,
* x * in claimsof unconscionability the contextof arbitration agreements, ;: ":.;r*, * courts * * ficus generallyon whetherthe arbitration clauseis gearedtowardsachieting It by an unbiaseddecisiort a neutral decision-maker. is under this generalrubric that we of due contractprovisionis unconscionable to both an absence meandeterminewhethera added.] terms.lEmphasis one-sided t"*t_.1"1." and oppressive, to Absenceof meaningful choice on the part of one party generallyspeaks the fundawhether in of fairness the bargainingprocess the contractat issue.In deterrnir-ring rnental was tainted by an absenceof meaningful choice, courts should take into a contract account the nature of the injuries sufferedby the plaintiff; whether the plaintiff is a subconcern; the relative disparityin the parties'bargainingPower;the parstantialbr,rsiness rvhetherthere is an element of surprisein the inclusion of the ties' relativesophistication; ofthe clause. and the conspicuousness clause; challenged * * '* \Ve * * * acknorvledge the claim that shedid not possess business Simpson's iudgagreenent,and that to rnent necessary make her awareof the implicationsof the arbitratior-r in she did noi havea lawyerpresentto provideany assistance the matter. * x x ###BOT_TEXT###amp;/ealso find it necessary considerthe otherwiseinconspicuousnature of the to The arbitrationclausein light of its consequences. lossof the right to a jury trial is an obvialsorequiredSimpson clause arbitration this particular However, ousresultof arbitration. to forgo certain remediesthat were otherwiserequired by statute.While certain phrases within other provisionsof the additional terms and conditionswere printed in all capital * x * small print, and embedletters,the arbitration clausein its entiretywas written it-r Although includedon the page. ten ded in paragraph (10) ofsixteen(16) total paragraphs that this Court ackr-rowiedges partiesare alwaysfree to contractawaytheir rights,we cannature of a provision,which was ignore the inconspicuous not, rindeJthe circumstances, drafted by the superiorparty, and which functioned to contract awaycertain significant * x * the otherwise available to Simpson by law. Furthermore, rights and ,.-"di.r presenttransactionmay be distinguishedfrom la transaction]where both partieswere negotiation' in interests an armsler-rgth business sophisticated Accordingly,we find that wl'renconsideredas a whole and in the context of an adherevealthat Simpsonhad no meansion contractfor a vehicle trade-in,the circumstances ingful choice in agreeingto arbitrateciaims with Addy.

525 EIMEE
CA S E12.5 -Con tinu ed
*:fi:fi+

OF ASSENI GENUINENESS

The general rule is that courts will not enforcea contract which is violative of public policy,statutory In law, or provisions the Constitution. our opinion,this rule hashvo appliof First,this arbitrationclausevioiates statutory because prelaw it cationsin the presentcase. statutoryremediesto which she may be i.ents Simpson fron receiving the n'randatory entitled * i1 * . Second,unconditionallypermitting the weakerpartyto waive thesestatucontractrunscontraryto the underlyingstatutes'very pursuantto an adhesion tory remedies affect the public interest.Therefore,under the of purposes punishing acts that adversely generalrule, this provisionin the arbitrationclauseis unenforceable. lEmphasisadded.]

rtre affirmed lower the ANDREMEDY court DECISI0N
The court'sdenialof Addy'smotion to compelarbitration. clause be to courtfoundthe arbitration statesupreme had no Simpson and unconscionable unenforceable. to and meaningful choicein agreeing arbitrate, the terms were oppressive one sided. and limitingher remedies

F0RCRITICAt ANAIYSIS- Legal also Consideration deoler's rhe controct
provided thot Addy did not have to submit to arbitrotion ony claims it might have agoinst Simpson for "monies owed" ond that theseclaims "shall not be stoyedpending the outcomeof orbitrotion!' ls this provision unconscionoble?Discuss.

@

had beena Chelene caregiver Marta's for eighty-year-old mother, for Janis, nine years. Shortlybefore passed her away, Chelene convinced to buy Chelene's Janis woman died before the papers Theelderly housefor Marta. Fourmonthslater,Marta used her were signed,however. housewithouthaving it to inheritance buy Chelene's and Chelene The said inspected. housewas built in the 1950s, Nevertheless, year afterthe one it was in "perfectcondition." purchase, basement startedleaking. Marta had the the wallsand discovered paneling removed from the basement Martathen that the walls were bowed inward and cracked. the walls,and he found inspect basement had a civilengineer had beencaulked and painted overbeforethe that the cracks that paneling was installed. concluded the "wallfailure" He "for at leastthirty years"and that the basement had existed Usingthe information unsound." wallswere "structurally presented the chapter, answerthe followingquestions. in

Can Martaobtain rescission the contractbasedon of undueinfluence? the saleto Janis lf had beencompleted Janis rescission beforeher death,could haveobtained basedon undueinfluence? Explain. for misrepresentation? CanMartasue Chelene fraudulent Why or why not?What element(s)might be lacking? that Chelene knewthat the basement walls Now assume had hiredsomeone were cracked and bowedand that she paneling priorto offering sellthe house. to install to Did she havea duty to disclose this defectto Marta?Coulda court find that Chelene's silencein this situationconstituted misrepresentation? Explain. lf Chelene knew aboutthe problemwith the wallsbut did not know that the housewas structurally unsound, couldshe Why be liablefor negligent misrepresentation? or why not? on CanMartaavoidthe contract the groundthat both parties Explain. madea mistake aboutthe condition the house? of

mistake 512 bilateral material lact 512

scienter 518 unilateral mistake512

524 l@

CONTRACTS

Mistakes (Seepages 311-314.)

(a) pafi is boundby the contract unless the otherparty the 1. lJniloterol-Cenerally, mistaken mathematical is or haveknownof the mistake (b) the mistake an inadvertent knows should or negligence. withoutgross or error-such an errorin addition subtradion-committed as fact, (mutual)-When are aboutthe samematerial suchas both parties mistaken 2. Biloteral identity, eitherpafi canavoidthe contract. The party enforce avoid contract. elements the can or the usually innocent When fraudoccurs, fraudareasfollows: necessary establish to fact of a l. A misrepresentation material mustoccur. to 2. There mustbe an intent deceive. party rely mustjustifiably on the misrepresentation. 5. Theinnocent or relationships, asfiduciary confidential such fromspecial influence arises l. Undue exerted influence by free in whichoneparty's will hasbeenovercome the undue relationships, is Usually, contract voidable. the by the otherparty. underthe fearof a threat-for when a partyis forcedto enterinto a contract 2. Duress occurs to the economic Thepafi forced enter contract loss. of or the example, threat violence serious canrescind contract. the

Fraudulent Misrepresentation (Seepages 314-521.)

UndueInfluence and Duress (See pages 320-321.)

powerandcan bargaining superior in bargains whichonepafi hassubstantially One-sided Adhesion Contracts and Unconscionability dictate terms a contract be deemed occurs typically unconscionable. Unconscionability may of the (Seepages 321-323.) of asa result thefollowing: borne purports shifta risknormally provision to in contracts whicha fine-print 1. Standard-form party the other(forexample, liability disclaimer). a to by one to but in has contracts whichthe buyer no choice to agree the adhesion 2. Take-it-or-leave-it goodsor services. certain termsif the buyeris to procure dictated seller's

Answersfor the even-numheredquestionsin this For Review sectioncon be found on this text's accompanyingWeb site ot www.cengage.com/blaw/blt. Select"Chopter 12" and click on "For Review," termsbe lacking? to might genuineness assent a contract's of I h-rwhat typesof situations mistake of fact? a 2 What is the differencebeh.rreen rnistakeof value or quality and a to 3 What elementsmust existfor fraudulentmisrepresentation occur? to 4 Does a party to a contract ever have a duty to discloseinformatior-r the other party? a 5 Wrat happensif a personmisrepresents fact unintentionally?

E

iiiltilit'4r*
fully Discuss into the contract. enters manwho lives careof him. Jerome is of Assent. X3-t Genuineness Jeron-rean elderly this on whether leromecansetaside contract. his nephew, Philip.feromeis totallydependent with transPhiliptellsferomethatunless Philips support. Jerome Answer.Granoownsa with Sample I?,? Hypothetical to fersa tractofland he owns Philipfor a price30 percent Question in is 100. Tanner interested motelon Highway forty-room and valLre, Philipwill no longersupport take belowmarket

ffi

AND pRoBtEMs scENARros cAsE HypoTHETrcAt