Chapter 6Mistakes, Misrepresentation,

and Fraud

Valid Contract Review

• Remember, if the offeror makes a valid offer and the offeree has made a valid acceptance, then a genuine agreement has been reached,

• All 3 elements- consideration, capacity and legality- must also be met for it to be a valid contract

• This is called a “meeting of the minds”***However, several items might create a defective

agreement: fraud, misrepresentation, mistake, duress, and undue influence. Let’s find out what these are!

Fraud

• Fraud: a deliberate deception intended to secure an unfair or unlawful gain

• If you have entered into a contract by fraud you can:– Rescind (cancel the contract)– Sue for $$$

Fraud, cont.

• To succeed in a lawsuit for fraud, the following 5 elements must be demonstrated:

1. There must be a false representation of fact2. The party making the representation must know it is

false3. The false representation must be made with the

intent that it be relied upon4. The innocent party must reasonably rely upon the

false representation5. The innocent party must actually suffer some

monetary lossWe will look at each 5 in detail. Let’s take a look

False Representation of Fact

• Fraud requires a false representation of a material, existing fact.

• Material fact- a fact that is important; it matters to one of the parties. It cannot be a promise of something or an opinion

• Concealment- NOT revealing something is also false representation- (I’m selling my house but I intentionally do not say by roof leaks every time it rains)

• What is allowed? “Sales puffing”, aka “sales puffery”. – This car is really flashy, it’ll attract lots of girls

Keep it zipped shut!

Representation Known to Be False

• To be held accountable for fraud, the party making the false representation MUST be aware that the representation is false.

• Example: Justin purchases a used car from Jazmine. She assures Justin that the car has never been in an accident. While looking through the glove box a week after purchasing the car, he finds a receipt for car repairs that indicate the car was in a major accident. As a result, Justin is able to pursue a claim of false representation.

False Representation Intended to Be Relied Upon

• To prove fraud, one must show that the false representation was made with the intent that it be relied upon. That is, the person making the misrepresentation must intend that the other party rely upon the information as part of the contract negotiations.

• Example: If you asked me if my diamond ring was real and I say yes, even though it wasn’t, and then you went out and bought the same ring thinking it was real b/c I said it was, it wasn’t fraud b/c I didn’t make the statement with the intent that this person would rely on it. I knew I was lying but how was I to know you were going to buy a ring with that intent?

False Representation Actually Relied Upon

• If fraud is to be proven, the false representation must be reasonably relied upon by the other party when the agreement was made. Sometime people make misrepresentations to others who pay no attention to those misrepresentations.

• Example: Suppose that D’andre was selling me his 1964 Ford Mustang , but when I was purchasing it I had my friend with me who is a car expert that said the car is actually a 1966 and worth far less than what D’andre was selling it to me for. I still bought the car knowing that it wasn’t a ’64 anyway. I could not later sue D’andre for fraud b/c I did not actually rely on D’andre’s false statement.

Resulting Loss

• Unless you suffer a monetary loss, you could not win a lawsuit for fraud.

• Example: Shantanique and I agree that if she vacuums my room after school and sanitizes the desks I will give her my I-phone. Upon receiving the I-phone she realizes that it doesn’t stay charged for more than 30 minutes at a time. B/C she suffered no $$ loss, she could not sue me for fraud. Sorry Shantanique

Innocent Misrepresentation

• Sometimes a person will make an innocent statement that turns out to be false. However, that person honestly believed the statement was true at the time.

• Misrepresentation- an untrue statement of facts that the law gives you the right to rescind the contract- but not seek monetary damages

• Example: I sell you my mountain bike for $400 and honestly believe that the bike is in pristine condition. You find out that the tire is severely misaligned in front and needs a $200 repair. In this case you could ask for your $ back, but you could not sue me for damages, b/c I truly believed that it was in good condition.

Mistake

• Unilateral Mistake– An error on the part of one of the parties – Cannot get out of contract – Types:

• Nature of the Agreement– Signing a contract you don’t understand or have not read – This applies to signing a contract in a language you don’t

understand

• Identity of a Party– Bound by contract with face to face meetings – May be able to void a contract made NOT face to face – Example: You send a contract to John Smith in Detroit, and

instead a John Smith in Southfield received this letter by mistake and accepts the offer. The contract is voidable b/c this John Smith is not the John Smith it was intended to go to.

Mistake, cont.

• Bilateral Mistake (Mutual Mistake)– Both parties are mistaken– Types:

• Possibility of Performance– Contract is impossible to perform Either party can void

contract – Example: I sell my car to Elon on Friday and tell him he can

have it on Sunday but on Saturday it was stolen.

• Subject Matter– Either party can void contract – Example: I sell you some land up north on Indiana Avenue, but

then you realize it was a different Indiana Avenue although in the same city. Both were mistaken and this can then be a voidable contract.

Duress

• Parties entering into an agreement must enter into it voluntarily!

• Duress- Overcoming a person’s will by use of force or by threat of force or bodily harm

• Economic Duress– Threats to a person’s business or income

• A threat of exercising one’s legal right is NOT duress Ex Threatening to sue someone and you have right to sue, is NOT duress

Assignments

• 1. Damages for Lawsuits Assignment: Ask students to use the Internet to research lawsuits that have resulted in large settlements for compensatory and punitive damages. Students must write a one-page report about the incident, damages suffered, settlements awarded, and actual amounts received by the winning plaintiffs.

• 2. Analyze the Television Commercials for Facts and Personal Opinion: Watch 10 television commercials and complete the associated table with facts and personal opinions included in the advertisements.

• 3. Consumer Fraud PowerPoint Presentation: A government study recently discovered that consumer fraud takes a $40 billion toll each year on its victims. According to a Harris poll, more than 92 percent of all Americans are affected. Conduct research about consumer fraud and produce a PowerPoint presentation that describes the fraud and explains what can be done to reduce or eliminate it.

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