1 george mason school of law contracts ii fraud not to be shared © f.h. buckley [email protected]

*George Mason School of Law

Contracts II

Fraud

Not to be shared

F.H. [email protected]

*Rational Choice: The no-duress assumptionFull InformationChoices are Freely MadeNon-satiationCompleteness or comparabilityNo third party effects (externalities)Perfect rationality

*Rational Choice: Six Assumptions

Full Information No mistakes (later)No misrepresentationsAnd no informational asymmetries*

The Elements of FraudAn Assertion: 159

Misrepresentation--A False Assertion: 159

Scienter: Knowledge of falsity and intention to deceive and induce s to enter into the contract. 162(1)

Materiality: 164(1), 162(2)

Reliance: 164

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1.Assertions

Restatement 159: an assertion**

2.A Misrepesentation

Restatement 159: an assertion that is not in accord with the facts**

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

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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.

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5.Reliance

Restatement 164: If a partys 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.

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The Elements of FraudAn Assertion: 159

Misrepresentation--A False Assertion: 159

Scienter: Knowledge of falsity and intention to deceive and induce s to enter into the contract. 162(1)

Materiality: 164(1), 162(2)

Reliance: 164

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Does 164 dispense with scienter if the misrepresentation is material?

Restatement 164: If a partys 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

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Does 164 dispense with materiality given scienter ?

Restatement 164: If a partys 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**

First: What is an Assertion?*

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

Mere puffs are not assertionsSimplex commendatio non obligat*

Mere puffsSpeiss v. Brandt at 421*What were the assertions?

Lake McFarland

Mere puffsSpeiss v. Brandt *What was the remedy sought?

Lake McFarland

Mere puffsSpeiss v. Brandt *What was the remedy sought?

Mere puffsSpeiss v. Brandt*

What if all the s had said was You can make good money out of the resort?

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You can pay it off in five years?

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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.

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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.

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We are making good money out of the resort.

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

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

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

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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?

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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?

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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 wordp. 425

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Does 164 dispense with materiality given scienter ?

Restatement 164: If a partys 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**


But what about Restatement 172?A recipients 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.

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What would you have advised your client to say?

Does a merchant have heightened duties to one who is young and inexperienced?*

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

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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.

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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.

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How is the reliance requirement treated in Ziff-Davis at 432?**

How is the reliance requirement treated in Ziff-Davis?

What is the difference between an action for misrepresentation in contract and an action for breach of contract?

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How is the reliance requirement treated in Ziff-Davis?

What is the difference between an action of misrepresentation in contract and in tort?

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The Merger Clause in Danann at 428

What is a Danann clause and why did the parties agree to it?

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The Merger Clause in Danann

Absent the merger clause, what result?What is the parol evidence rule?

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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.

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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*


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

The Merger Clause in DanannWhat if the fraudulent misrepresentation had been incorporated in the contract?

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The Merger Clause in DanannWhat 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.

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Non est factum: Fraud in the factum

Curtis v. Curtis at 437

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Non est factum: Fraud in the factum

Restatement 166: If a partys manifestation of assent is induced by the other partys fraudulent misrepresentation as to the contents or effect of a writing. Restatement 163: a misrepresentation as to the character of a proposed contract

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The effect of Signing a ContractMerit Music at 438

*Bar, 601 South Monroe St.Baltimore MD

Signing a ContractMerit Music

Were the terms harsh?

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

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

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

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

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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?

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

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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.

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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.

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Standard Form ContractsBirmingham TV v. Water Worksat 443

Were the terms reasonable? *

Standard Form ContractsBirmingham TV v. Water Works

How would you expect bailees to react to the decision?

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Standard Form Contracts

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

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Thank God for proper warning signs*

*George Mason School of Law

Contracts II

Fraud

Not to be shared

F.H. [email protected]

For next day, under Unconscionability

Add Signaling, at blog*

*What a future earnings distribution wont look like

*What a future earnings distribution will look likeY = Percent of individualsX = Non-digitalalizable skills

*Are you training for a job that can be replaced by a computer?

*Should outfielders be permitted to wear Google Glasses?

*What Law Isnt like

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.

**

Standard Form Contracts as Fascism

*Friedrich Kessler1901-98

Why Employ Standard Form Contracts?

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Economize on negotiations

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Police consumer fraud

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Economize on litigation

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Economize on litigation

Police agency costs of merchant**

What about emergency cases?

St. Johns Episcopal at 444

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Suppose the consumer is illiterate or cant speak English

*Elbonians*

The blind and elderly

Pirkle v. Gurr at 446

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*Rational Choice: Six Assumptions

Full Information No mistakes (later)No misrepresentationsAnd no informational asymmetries*

*Non-disclosure

When does the duty to speak arise?*

Informational Asymmetry

Ill pay $500 for the rug [but will go as high as $1,000].*

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

Non-disclosureWhat happened in Laidlaw? P. 460*Treaty of Ghent1815

*The siege of Rhodes

Non-disclosureCicero, Offices IIIA 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-disclosureAquinas, 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.2 77.3**



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.




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.


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

*

Silence as an Assertion

Might silence constitute an assertion?Restatement 160: Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist

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*Restatement 161: When non-disclosure is equivalent to an assertionA 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.*

*Restatement 161: When non-disclosure is equivalent to an assertionA 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.*

*Restatement 161: When non-disclosure is equivalent to an assertionA 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.

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*Restatement 161: When non-disclosure is equivalent to an assertionA 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 relation of trust and confidence between them.*

Non-disclosure

What should the buyer have concluded from the sellers silence about changed market conditions?*

Non-disclosure

Which rule better promotes efficiency in Laidlaw?**

Non-disclosure

Which rule better promotes efficiency in Laidlaw?Under which rule is the famine soonest over?**

Non-disclosure

Which rule better promotes efficiency in Laidlaw?The incentive to acquire information

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Non-disclosure

Which rule better promotes efficiency in Laidlaw?Litigation over nondisclosures

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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?**

Non-disclosure

A company executive in the same firm buys shares in the firm without making disclosure. Problem?**

Non-disclosure

Kronman: was there a cost to production of the information?**

Non-disclosure

Kronman: was the a cost to production of the information?Whatever--Under which rule is the information processed in the market most quickly?**

*Restatement 160: When action is equivalent to an assertion (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*

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

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

Non-disclosureDid they suppress the termite condition?*Termites

The rejection of an individualistic philosophy based on freedom of contract*We see it from a moral point of view unlike Aquinas

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?**

Non-disclosure

Should Obde be confined to its special facts?Does it matter that this was an apartment house?Does it matter that it was termites?**

Non-disclosure

Should Obde be confined to its special facts?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?**

Non-disclosure

Should Obde be confined to its special facts?Does it matter that this was an apartment house?Does it matter that it was termites?Does fault matter? Should this be a warranty?**

Reed v. King at 452*O.J.s House

Strambovsky: 456*

Strambovsky*

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1 george mason school of law contracts ii fraud not to be shared © f.h. buckley [email protected]

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