In this chapter, we shall consider four areas of contract law that deal with evaluating the nature of assent given by a party to a contract. Questions relating to the genuineness of assent are usually raised after a contract has been entered into, either as a defense to a breach of contract or in an attempt by a party to rescind a contract, asserting that some problem existed at the beginning of a contract that may have precluded genuine assent. The four areas we shall consider are: 1) unilateral and bilateral mistake; 2) duress; 3) undue influence; and 2) misrepresentation and fraud.

Mistake

There may be a case where one or both of the parties to a contract claim that a mistake has been made in the formation of an agreement which would preclude the existence of a true “meeting of the minds” between the parties. It may also be alleged that the words of a contract do not convey the real intent of the parties.

There are two types of mistake. A unilateral mistake is a mistake made by one party in a contract; a bilateral or mutual mistake is made by both parties in the contract. A mistake may be made as to facts or may be made as to the identity of the subject matter of the contract, a matter of judgment as to the value of an item, or the quality of an item. Generally speaking, only a mistake as to a matter of fact, and not a mistake in judgment—sometimes called “buyers’ or sellers’ remorse”—will permit a party to rescind a contract on the ground of a mistake.

A frequently cited example of a unilateral mistake involves an error in a bid made by a construction contractor, perhaps caused by a computational or mathematical error or a misunderstanding of the terms of the invitation to bid. In general, a unilateral mistake does not afford a party any right to rescind the contract unless the other party knows or has reason to know that a mistake has been made; unless enforcement of the contract against a party would be oppressive or might result in an unconscionable result; and where rescission of the contract would impose no substantial hardship on the innocent party.

A classic case from 1898 exemplifies the harsh rule found in the common law. Odell Construction Co. made a bid to install plumbing in an apartment building. When the president of the company, Herbert Odell, added up the costs on the job, he and his secretary apparently forgot to include figures for the pipe fittings. Because of this omission, Odell’s bid was $6,500 below those of the other bidders and, of course, it was accepted by the prime contractor, Sunspan, Inc. Since Odell had made a unilateral mistake, the court would not afford a remedy to Odell under these circumstances.

Under a more modern view, however, exceptions to the general rule have been recognized. Reflecting our earlier discussion, many courts will not apply the unilateral mistake rule when the other party to the contract knows or should have known that a mistake was made, or where the mistake was the result of an inadvertent computational or mathematical error, and not as a result of gross negligence. Thus, the “blundering party” will be permitted to seek to reform or rewrite the contract, seek its rescission, or might be able to assert a defense against enforcement of the contract. Remember, however, that the mistake must be palpable; that is, the mistake must be known or obvious to the party receiving the bid.

Example

A construction company bids on a golf course addition. In marking up its bid, the president fails to take into account a major component. The bid submitted was fully 20% below what it should have been. In such a case, a court might conclude that since the bid received was “far below” that which was expected, the receiving party should have known that a mistake had been made. In these circumstances, it is incumbent on the receiving party to check to see if the bid was correct. (Sant­ucci v. City of Chicago). Contrast this decision to Odell.

Where both parties to a contract share a common assumption about an important fact upon which they have based their bargain and that assumption turns out to be false, the bargain may be avoided on the basis of a mutual mistake. The classic case of a mutual mistake of fact involved a ship named “Peerless” that was scheduled to leave Bombay with a shipment of Surat cotton goods. The case of Raffles­ v. Wichelhaus discusses the question of a mutual mistake of fact. Notice also the unusual form of the case, stated under English common law.

Case Summary

Raffles v. Wichelhaus And Another

906, 159 Eng. Rep. 375 (1864) Court of Exchequer (Per Curiam)

BACKGROUND AND FACTS

The defendant purchased a shipment of Surat cotton from the plaintiff “to arrive ex Peerless’ from Bombay.” The defendant expected the goods to be shipped on the Peerless sailing from Bombay in October. The plaintiff expected to ship the goods on another Peerless, which sailed from Bombay in December. By the time the goods arrived and the plaintiff tried to deliver them, the defendant was no longer willing to accept them.

Declaration.

For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, that the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit. 125 bales of Surat cotton, guaranteed middling fair merchant’s Dhollorah, to arrive ex “Peerless” from Bombay; and that the cotton should be taken from the quay, and that the defendants would pay the plaintiff for the same at a certain rate, to wit, at the rate of 17d. per pound, within a certain time then agreed upon after the arrival of the said goods in England. Averments: that the said goods did arrive by the said ship from Bombay in England, to wit, at Liverpool, and the plain­tiff was then and there ready, and willing and offered to deliver the said goods to the defendants. Breach: that the defendants refused to accept the said goods or pay the plaintiff for them.

Plea.

That the said ship mentioned in the said agreement was meant and intended by the defendants to be the ship called the “Peerless,” which sailed from Bombay, to wit, in October; and that the plaintiff was not ready and willing and did not offer to deliver to the defen­dants any bales of cotton which arrived by the last mentioned ship, but instead thereof was only ready and willing and offered to deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship, which was also called the “Peerless,” and which sailed from Bombay, to wit, in December.

There is nothing on the face of the contract to show that any particular ship called the “Peerless” was meant; but the moment it appears that two ships called the “Peerless” were about to sail from Bombay there is a latent ambiguity, and parol evidence may be given for the purpose of showing that the defendant meant one “Peer­less,”­ and the plaintiff another. That being so, there was no consensus ad idem, and therefore no binding contract.

The judgment was for the defendants.

Duress

Duress involves a claim of the use of coercive force or a threat of force against a party to a contract. Duress may be used either as a defense to an action for breach of con­tract or as grounds for rescission of a contract. In determining whether duress exists, a court will evaluate the nature of the threat against a party to a contract. Two types of duress were recognized under common law: simple duress (also called economic duress or “duress of goods”); and actionable duress, which is sometimes known as “legal duress” to distinguish it from simple duress.

Example

Crotty and Schneeman are involved in an automobile accident on South Orange Avenue. Crotty agrees to settle the case for $5,000, but Schneeman balks. Crotty’s attorney sends Schneeman a letter demanding the payment of $5,000 or he will immediately file a negligence suit and seek damages in the amount of $100,000. Schneeman agrees but later backs out of the deal, claiming that he entered the contract under duress. Is he correct? Suppose that Crotty had threatened Schneeman with a criminal prosecution for driving without insurance? Would that change the result?

Generally, a threat to file a civil suit where there are “good grounds” for the suit (e.g., where a breach has actually occurred or where a required or timely payment has not been made), would not constitute actionable duress and would be classified as simple or economic duress.

Actionable duress, on the other hand, includes a threat of physical violence or force (“I’m going to make you an offer you can’t refuse”); a threat to initiate a criminal prosecution; a threat to wrongful seize or withhold property; or threats of “other wrongful acts” that are in some way improper, illegal, immoral, or unconscionable.

Example

The “Flamingo Kid” notices Bert cheating in a game of gin rummy. He approaches Bert and says that unless Bert agrees to hire him as a salesperson in his car dealership, he will expose his cheating to the Club Board of Directors. In fear of imminent exposure, Bert signs the employment contract. Can Bert claim duress and void the contract of employment?

Economic duress will not generally be found where one of the parties is in desperate need of the subject matter of the contract or is being economically pressured into “making a deal,” and the other party takes advantage of that need or desire in order to drive a very hard, even one-sided bargain.

However, the abusive or oppressive threat to deploy pressure has been recognized by some courts as constituting economic duress, if the parties were truly “mismatched” and the victim’s will has been “overmatched.” Does this sound like an application of the rule of unconscionability?

Example

Sabitus falls six months behind on his home mortgage note. The bank contacts him and states that unless he agrees to refinance the mortgage at a higher rate (14% as opposed to 6%); they will “pull the mortgage” and will foreclose on it. Sabitus agrees to refinance, but later seeks to avoid the refinanced mortgage on the ground that he entered the agreement under duress. Is Sabitus correct?

Finding “economic distress” will generally not afford a party a remedy where “actionable distress” will provide such a remedy.

Undue Influence

Closely related to the concept of duress is that of undue influence. The defense of undue influence originated in a court of equity as a ground for setting aside a transaction that was imposed by a dominant party over a subservient party. Undue influence involves the deployment of over-persuasive bargaining tactics designed to overcome the will of a party. There are two broad classes of undue influence. In the first instance, Restatement Section 497 notes that one party uses a dominant psychological position in an unfair manner to induce the subservient party to consent to an agreement to which he or she would not otherwise have consented. In the second instance, a party uses a position of trust and confidence to unfairly persuade the other party to enter into a transaction. The party being taken advantage of does not, in reality, exercise free will in entering into a contract. Many allegations of undue influence arise after the death of the person alleged to have been unduly influenced. In this scenario, relatives of the deceased will typically seek to set aside a will or an inter vivos (living) transfer or gift of property in what is termed a “wills contest.”

Generally speaking, two conditions must be present in order to prove undue influence:

1. Susceptibility, that is, the person allegedly being influenced must be open to the influence caused by conditions such as old age, infirmity, mental or physically weakness, handicap, psychological dependency, etc.; and
2. Opportunity, that is, a special relationship of trust and confidence exists between the parties. This relationship may encompass traditional fiduciary or confidential relationships such as: attorney-client, trustee-beneficiary, guardian-ward, administrator-legatee; or non-traditional relationships such as: husband-wife, parent-child, physician-patient, nurse-patient, pastor-parishioner, funeral director-putative customer, or even a good friend-aged or confused individu­al.

The following elements, found in Odorizzi v. Bloomfield School District, 246 Cal. App. 2d 123 (1966), are common circumstances leading to a finding of undue influence:

• Discussing the bargain at an unusual or inappropriate time;
• Consummation of the transaction at an unusual place;
• Insistence that the transaction be concluded at once, with extreme emphasis on the risks or disadvantages of delay;
• The use of multiple persuaders;
• The absence of any independent third party advice;
• Statements discouraging a weaker party to consult an independent advisor.

According to a rule enunciated in the seminal case of Wenger v. Rosinsky, 192 A.2d 82 (1963), once the prima facie elements of susceptibility and opportunity are shown, the burden of proof is shifted to the dominant party to prove, by clear and convincing proof, that:

• There was no abuse of confidence;
• The transaction was done in “good faith”;
• The transaction (perhaps a gift or a provision of a will) was made in a manner that was free, independent, and voluntary.

Undue influence may also be raised as a defense to enforcement of a contract if the transaction sought to be enforced was the product of unfair persuasion. In equity, the usual remedy once undue influence had been proven was cancellation of any instrument procured by undue influence, avoidance of the transaction, and what a court of equity would term “restoration of the status quo ante.”

Misrepresentation and Fraud

It may be said that fraud and misrepresentation represent a “curious mixture” of contract and tort law. Under the common law, an action for fraud was technically an action in tort (deceit) and not in contract. However, as fraud may affect the genu­ineness of a party’s ability to assent to a contract, fraud is an important contract consideration. Cases involving fraud can normally be divided into two main categories: (1) the defrauded party obtains what he bargained for, but because of a misrepresentation, the item is worth less than he had reason to expect; (2) the defrauded party obtains something substantially different from what he was led to expect. In these cases, the defrauded party has been deprived of the “benefit of his or her bargain” and thus will ordinarily be sufficient to permit a disaffirmance of the contract.

There are three types of fraud under the common law. Fraud in the execution is a real or universal defense rendering a contract void. It consists of a deception that has the consequence of preventing a party from realizing that a contract has been created. A second type of fraud may occur when an oral contract or understanding has been reduced to a writing. Here, the victim of fraud trusts that their counterpart will reduce the oral agreement to a written expression. Acting on the assurance that this has been done faithfully, the victim signs the writing without reading it. Depending on the jurisdiction, the innocent party may be permitted to assert the personal defense of fraud, ignoring the fact that the fraud could have been uncovered had the victim taken the step to read the document before signing it. (However, it should be recognized that the failure to read a document may not be raised as a defense to breach in most jurisdictions and thus is clearly a minority view.)

The third type of fraud, fraud in the inducement, occurs where consent to a bargain is induced by lies, misstatements, or half-truths. Fraud in the inducement is a personal defense, which renders the contract voidable at the option of the innocent victim.

The basic distinction between fraud and misrepresentation lies in the presence or absence of scienter, which is defined as the intent to deceive. Scienter arises either from the knowl­edge of falsity or the reckless disregard of the truth of a statement. We may see the term “innocent misrepresenta­tion” used to describe the situation where a party has made a misrepresentation but has not done so with “scienter” or intent. The misrepresentation is termed as “innocent” only in the sense that it was not done with scienter or intent. It is still actionable.

Issues Of Damages

Depending on the jurisdiction, if an innocent misrepresenta­tion has occurred, the innocent party may rescind the contract but may not be able to seek damages for the innocent misrepre­sentation. In other jurisdictions, if a court finds that either fraud or misrepresentation was committed, the innocent party may be permitted to rescind the contract and will be restored to the original, pre-contract condition, but will also be permitted to sue for compensatory damages. The compensatory damages will be computed on the basis of the difference between the value of the item as represented or promised in the contract and the value of the item received by the innocent party. Additionally, in some circum­stances, an innocent party may seek punitive damages to punish the party who committed fraud (but not misrepresentation) for their bad behavior. In many cases, the actual damages will be trebled to effect this prospective.

Elements Of Proof

Four elements are necessary to prove contract fraud: 1) a false representation of a material fact; 2) scienter (referring to intent); 3) justifiable reliance; and 4) proof of damages.
A material fact is defined as any fact that is important in inducing a party to enter into a contract. According to the Restatement, § 470(2), materiality exists whenever “the misrepresentation would be likely to affect the conduct of a reasonable man.” There are several special aspects or rules concerning this first element of proving fraud relating to the issue of a material fact.

Example

Margot takes her watch to a jeweler for an appraisal. The jeweler tells Margot that the watch is “not a very good” one and that “in my opinion, it is worth about $75.” Based upon this opinion, Margot sells the watch to Babcock. It is an interesting question whether Margot might be able to rescind her contract with Babcock on a theory of bilateral or mutual mistake; however, if such an action were not possible, Margot might sue the jeweler for fraud. Even though the jeweler has stated an opinion, that opinion would be action­able because the jeweler is an expert and clearly Margot has relied on the jeweler’s advice when selling the watch to Babcock. 

Misrepresentation of Fact

Relief may be granted for a misrepresentation of fact, and not for a statement of opinion. However, the distinction between “fact and opinion” is sometimes rather difficult to maintain. A statement or a representation or prediction of a future fact, or a statement of an opinion is gener­ally not actionable as fraud. As a practical matter, a seller may be expected to employ a certain amount of “puffing” or “trade talk” without incurring liability for fraud. However, a statement of opinion given by an expert (a disinterested professional) to an unsophisticated purchaser may give rise to a cause of action for fraud. This opinion may become one of fact, depending on the circumstances of the case.

The case of Vokes v. Arthur Murray illustrates how dance instructors, who made various statements concerning Vokes’ dance potential, committed fraud. It will be one of the most memorable and interesting cases from your study of contract law. Note especially the use of the English language by the judge. Before you read Vokes, it might be a good idea to have a thesaurus close by! Do you believe that the statements were mere opinions? Why should J.P. Davenport and Arthur Murray be held liable for the statements of one of its instructors? Do you think that Mrs. Vokes bears any personal responsibility here?

Case Summary

Vokes v. Arthur Murray, Inc.

District Court of Appeal of Florida, 2d District, 212 So. 2d 906 (1968)

BACKGROUND AND FACTS

The defendant, Arthur Murray, Inc., operated dancing schools throughout the nation through local franchised operators, one of whom was the defendant. The plaintiff, Audrey E. Vokes, a widow without family, wished to become “an accom­plished dancer” to find “a new interest in life.” In 1961 she was invited to attend a “dance party” at J. P. Davenport’s “School of Dancing.” Vokes went to the school and received elaborate praise from her instructor for her grace, poise, and potential as “an excellent dancer.” The instructor sold her eight half hour dance lessons for $14.50 each, to be utilized within one calendar month.

Subsequently, over a period of less than sixteen months, Vokes bought a total of fourteen dance courses, which amounted to 2,302 hours of dancing lessons for a total cash outlay of $31,090.45, all at Davenport’s school.

PIERCE, Judge

These dance lesson contracts and the monetary consideration therefore of over $31,000 were procured from her by means and methods of Davenport and his associates which went beyond the unsavory, yet legally permissible, parameter of “sales puffing” and intruded well into the forbidden area of undue influence, the suggestion of falsehood, the suppression of truth, and the free exercise of rational judgment, if what plaintiff alleged in her complaint was true. From the time of her first contact with the dancing school in February, 1961, she was influenced unwittingly by a constant and continuous barrage of flattery, false praise, excessive compliments, and panegyric encomiums, to such extent that it would be not only inequitable, but unconscionable, for a Court exercising inherent chancery power to allow such con­tracts to stand.

She was incessantly subjected to overreaching blandishment and cajolery. She was assured she had “grace and poise”; that she was “rapidly improving and develop­ing in her dancing skill”; that the additional lessons would “make her a beautiful dancer, capable of dancing with the most accomplished dancers”; that she was “rapidly progressing in the development of her dancing skill and gracefulness”, etc., etc. She was given “dance aptitude tests” for the ostensible purpose of “determining” the number of remaining hours of instructions would be needed by her from time to time.

At one point she was sold 545 additional hours of dancing lessons to be entitled to award of the “Bronze Medal” signifying that she had reached “the Bronze Standard,” a supposed designation of dance achievement by students of Arthur Murray, Inc.

Later she was sold an additional 926 hours in order to gain the “Silver Medal,” indicating she had reached “the Silver Standard,” at a cost of $12,501.35.

At one point, while she still had to her credit about 900 unused hours of instructions, she was induced to purchase an additional 24 hours of lessons to partici­pate­ in a trip to Miami at her own expense, where she would be “given the opportunity to dance with members of the Miami Studio.

She was induced at another point to purchase an additional 126 hours of lessons in order to be not only eligible for the Miami trip but also to become “a life member of the Arthur Murray Studio,” carrying with it certain dubious emoluments, at a further cost of $1,752.­30.

At another point, while she still had over 1,000 unused hours of instruction she was induced to buy 151 additional hours at a cost of $2,049.00 to be eligible for a “Student Trip to Trinidad,” at her own expense as she later learned.

Also, when she still had 1100 unused hours to her credit, she was prevailed upon to purchase an additional 347 hours at a cost of $4,235.74, to qualify her to receive a “Gold Medal” for achievement, indicating she had advanced to “the Gold Standard.”

On another occasion, while she still had over 1200 unused hours, she was induced to buy an additional 175 hours of instruction at a cost of $2,472.75 to be eligible “to take a trip to Mexico.”

Finally, sandwiched in between other lesser sales promotions, she was influenced to buy an additional 481 hours of instruction at a cost of $6,523.81 in order to “be classified as a Gold Bar Member, the ultimate achievement of the dancing studio.”

All the foregoing sales promotions, illustrative of the entire fourteen separate contracts, were procured by defendant Davenport and Arthur Murray, Inc., by false representations to her that she was improving in her dancing ability, that she had excellent potential, that she was responding to instructions in dancing grace, and that they were developing her into a beautiful dancer, whereas in truth and in fact she did not develop in her dancing ability, she had no “dance aptitude,” and in fact had difficulty in “hearing the musical beat.” The complaint alleged that such representa­tions to her “were in fact false and known by the defendant to be false and contrary to the plaintiff’s true ability, the truth of plaintiff’s ability being fully known to the defendants, but withheld from the plaintiff for the sole and specific intent to deceive and defraud the plaintiff and to induce her in the purchasing of additional hours of dance lessons.” It was averred that the lessons were sold to her “in total disregard to the true physical, rhythm, and mental ability of the plaintiff”. In other words, while she first exulted that she was entering the “spring of her life”, she finally was awakened to the fact there was “spring” neither in her life nor in her feet.

It is true that “generally a misrepresentation, to be actionable, must be one of fact rather than of opinion”. But this rule has significant qualifications, applicable here. It does not apply where there is a fiduciary relationship between the parties, or where there has been some artifice or trick employed by the representor, or where the parties do not in general deal at “arm’s length” as we understand the phrase, or where the representee does not have equal opportunity to become apprised of the truth or falsity of the fact represented.

” * * * A statement of a party having * * * superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.”

It could be reasonably supposed here that defendants had “superior knowledge” as to whether plaintiff had “dance potential” and as to whether she was noticeably improving in the art of terpsichore. It would be a reasonable inference from the untended averments of the complaint that the flowery eulogists heaped upon her by defendants as a prelude to her contracting for 1944 additional hours of instruction in order to attain the rank of the Bronze Standard, thence to the bracket of the Silver Standard, thence to the class of the Gold Bar Standard, and finally to the crowning plateau of a Life Member of the Studio, proceeded as much or more from the urge to “ring the cash register” as from any honest or realistic appraisal of her dancing prowess or a factual representation of her progress.

” * * * (W)hat is plainly injurious to good faith ought to be considered as a fraud sufficient to impeach a contract,” and that an improvident agreement may be avoided” * * * because of surprise, or mistake, want of freedom, undue influence, the suggestion of falsehood, or the suppression of truth.” (Emphasis supplied.)

Judgment and Remedy.

Mrs. Vokes’ complaint, which had originally been dis­missed at the trial court, was reinstated, and the case was returned to the trial court to allow Vokes to prove her case.

Statements of Quality

Statements of quality or value or commendations, using such adjectival phrases as “good,” “adequate,” “great,” “successful,” “the best,” “the finest quality,” etc., are generally not action­able. However, there may be circumstances where such state­ments may be actionable, as where the parties are not acting “on equal footing” or where one party has superior knowledge about the true facts of a situation. In such a case, a court may find that the “opinion line has crossed into the law of fact.” (Wat Henry Pontiac v. Bradley, 202 Okl. 82 (1949)).
The case of Sellers v. Looper concerns the phrase “a good well.” Note the use of the JNOV after the jury had returned its verdict. What is a JNOV? How and why is it used? Refresh your memory of the steps in a civil law suit.

Case Summary

Sellers v. Looper

Supreme Court Of Oregon, 264 Ore. 13; 503 P.2d 692 (1972)

BACKGROUND AND FACTS

This is an action for damages based upon fraudulent misrepresentation pertaining to a well on property the plaintiffs purchased from defendants. The trial court found for plaintiffs. On motion, the trial court found JNOV and plaintiffs appealed.

Defendants argue here that the plaintiff had not submitted evidence sufficient to establish fraudulent representations to induce plaintiffs to enter into the contract to purchase the property.

The plaintiffs contend: Statements regarding quality, value or the like may be considered misrepresen­tations of fact where the parties are not on equal footing and do not have equal knowledge or means of knowledge “and the decision of whether a representation is of fact or of opinion is always left to the jury” and therefore the order setting aside the jury’s verdict should not have been entered.

* * * Defendant’s argue that the representation of a “good well” was a mere inclusion of adjectival words of commendation or opinion and therefore, not actionable.

In Holland v. Lentz, we held:

* * * It is recognized that statements of opinion regarding quality, value or the like, may be considered as misrepresentations of fact, that is, of the speaker’s state of mind, if a fiduciary relationship exists between the parties, as for example, representations of value of a real estate broker to his princi­pal; or where the parties are not on equal footing and do not have equal knowledge or means of knowledge.

Prosser stated: * * * misrepresentation will not lie for misstate­ments of opinion as distinguished from those of fact * * *
The evidence discloses that defendants owned a house and acreage located in Illinois Valley near the city of Cave Junction, Oregon. In May of 1969, defendants executed a listing agreement to sell the property with Mrs. McLean, a real estate broker. This agreement included information given by the defendants to Mrs. McLean. Mrs. McLean testified:

I asked the Loopers: Do you have a good well * * * and the comment came back, “Yes, we have a good well

* * *.”

On May 28, 1969, plaintiffs contacted Mrs. McLean.

Q: At the time you told them that there was a good well on the property, did you tell them that for the purpose of inducing them to buy the Looper’s property?

A: A good well on any property is a tremendous inducement. If you have a good well, that’s a selling point…

Q: At the time you told them that there was quote, a good well on the property, what did you mean to convey by that, what meaning did you mean to get across to the prospective buyers?

A:* * * that it was an adequate well, there was plenty of water * * *

Q: Plenty of water for what?

A: Adequate for household, and usually that includes a modest garden.
In the early evening of July 28, 1969, the parties met and inspected the house and “looked at the well and pump house.” No specifications as to the depth of the well or how many gallons it would pump per hour were given the plaintiffs and the realtor did not have this information. The sale was later consummated.

On August 15, 1969, plaintiffs moved onto the property and on August 22, 1969, the well went dry. Plaintiffs drilled two additional wells but found no water.
We conclude that there was sufficient evidence to submit the case to the jury. A reasonable person could believe that a “good well” meant a well with adequate water for family household use and the plaintiffs relied on this representation.

The evidence shows that defendants knew the water in the well got low in the Fall of the year and they had to be careful in flushing the indoor toilet or the well would probably go dry. The plaintiffs were not on equal footing with the defendants and did not have equal knowledge of the adequacy or lack of adequacy of the water in the well. The jury returned a verdict for the plaintiffs and “These matters are ordinarily for the determination of the jury.”

* * *”

Reversed With Instructions to Reinstate the Jury’s Verdict.

Active Concealment

Active concealment occurs where a party, through its conduct, conceals the true nature of a situation. Ac­tions such as turning back the odometer of a car, adding oil to the crankcase of a car where the oil would have otherwise run out, causing the engine to seize, painting over a crack in the ceiling or wall, and gluing together pieces of a set of china, are examples of active concealment. This is often termed the “half truths” rule since a party to a contract will often disguise the true nature of a transaction. Consider these two examples.

Example

Capone agrees to purchase a collie puppy from Spindell. The puppy is blind in one eye but when Spindell shows the puppy to Capone, he skillfully keeps the puppy’s head turned so that Capone does not notice the defect. Has Spindell committed fraud through concealing the true nature of the puppy’s eye condition?

Example

Paul Hemmeter purchased a home in South Bend, Indiana. When Paul notices that water is pooling in his basement, he calls his neighbor to help in the bailing out operation. His neighbor tells Paul: “Gee, that’s funny. There used to be a big crack in the basement floor. Mrs. Lovejoy (the former owner) must have painted over it.” Has Mrs. Lovejoy commit­ted fraud? What theory? Evaluate.

Misrepresentation of Law

Under the common law, in the absence of a fiduciary relationship, a statement made by a person con­cerning a matter of law was not actionable as fraud even if untrue because of a curious rule that “everyone was presumed to know the law.” The rule established was that a statement of the law governing a given set of facts is merely the expression of opinion by the speaker absent a fiduciary relationship. No person ought to rely on such opinion without further research.

The case of Puckett Paving v. Carrier Leasing exemplifies the common law rule concerning statements as to a matter of law. Note that in this case, the court stated that a different result might have been obtained had there been a fiduciary relation­ship (a special relationship of trust and confidence) between the parties.

Case Summary

Puckett Paving v. Carrier Leasing Corp.

Supreme Court of Georgia, 236 Ga. 891; 225 S.E.2d 910 (1976)

BACKGROUND AND FACTS

Carrier brought an action to recover four heavy-duty trucks from Puckett. The pleadings and the evidence show that Puckett was in possession of the vehicles under the terms of two certain leases providing for monthly payments in stated sums for 44 months.

Puckett had an option to purchase same for a stated price after all monthly payments had been made; that Puckett had made all monthly payments but refused to purchase the vehicles or to return them. Carrier elected to recover the vehicles rather than damages.

Puckett filed an answer and cross claim alleging that the contracts were induced by fraud in that an agent of Carrier “assured defendant that the lease agreements entered into would be considered a lease by the IRS” but that the IRS considered the same to be a sale and not a lease, resulting in damage to Puckett. The trial Court ordered Puckett to return the vehicles.

We affirm. Assuming such statements were made by an agent of Carrier to Puckett, they could only have been expressions of an opinion as to how the IRS had treated such agreements or would treat them in the future.

“Where no fiduciary relationship exists, misrepre­sentations as to a question of law will not constitute remedial fraud, since everyone is presumed to know the law and therefore cannot in legal contemplation be deceived by erroneous statements of law, and such representations are ordinarily regarded as mere expres­sions of opinion.”

Affirmed.

As times changed, a new rule has developed. Today, most courts would hold that a profession­al who gives an opinion as to a matter of law in a profes­sional setting, would be responsible for the truth of the statement made. Professionals such as commercial lessors, architects, financial planners, real estate brokers, tax professionals – those professions which require a greater or more substantial knowledge of the law than possessed by a layperson – would fall within the rule of law found in the case of Yorke v. Taylor, 356 Mass. 42 (1969). Would the application of the rule in Yorke v. Taylor have changed the result in Puckett Paving?

Scienter

The second element of a cause of action for fraud is that of scienter—either knowledge of falsity or reckless disre­gard of the truth. Scienter implies an intent to deceive, or a “guilty mind,” and is required to prove fraud. Without proof of scienter, a plaintiff will only be able to prove misrepresentation and will certainly not be eligible to receive punitive damages.

In most cases, scienter will be found in the words or actions of a party. An important question arises: When might silence constitute a basis of an action for fraud?

Under the common law, in a typical “arms length” contract negotiation or business transaction, neither party had the positive duty to come forward with facts and disclose them to the opposite party. Because the par­ties were operating “at arms length,” no “duty to speak” existed. Parties were expected to take steps to protect their own interests.

Example

Fidelis Brokerage House contacts its clients using a phone bank or “boiler room” operation. To its potential customers in New Jersey, it has recommended the purchase of shares in the Fibex Corporation. To potential clients in California who already own Fibex stock, it has recommended that they sell their shares. Is there a duty of full disclosure? Has Fidelis committed fraud? What basis?

This common law rule has been supplanted in many cases by decisions that have established a “duty to speak.” Some of the circumstances establishing a “duty to speak” include:

• In the sale of a home or other real property, the seller must disclose material “latent defects,” that is, any defect that would not be readily discovered upon an inspection and which is known by the seller. The application of this rule depends on state law.
• If a serious defect or serious potential problem is known to the seller (i.e., a crack in the engine block that might cause a serious steering problem), but could not reason­ably be discovered by the buyer, some courts may impose a “duty to speak.”
• Where a fiduciary relationship exists. A fiduciary relationship is a special relationship of “trust and confidence” between parties. Examples of a fiduciary relationship include lawyers and their clients, partners in a partnership, a broker and a client, direc­tors of a corporation and their sharehold­ers, and a guardian and his or her ward.
• To correct a prior statement which, although true when made, has now become false or untrue due to a change in facts or circumstances.

Read Bergeron v. Dupont.

Case Summary

Bergeron v. Dupont

359 A.2d 627 (1976)

BACKGROUND AND FACTS

The plaintiff purchased a mobile home park from the defendant. Subsequent to the transfer of title, plain­tiff brought this action to recover damages allegedly sustained as a result of fraudulent misrepresentations by the defendant, Lawrence Dupont, Jr., through his agent.

On January 25, 1973, the plaintiff and defendant executed a purchase and sale agreement which specified a sale price of $89,999. In the course of negotiations, the agent represented that the septic system in the park was satisfactory, requiring only an occasional pumping out for proper functioning.

Subsequent to the signing of the agreement but prior to the closing, complaints were lodged by park residents in February, 1973, with the water supply and pollution control commission to the effect that effluent from some of the systems was emerging above ground. Tests by the State in February were inconclusive because of weather conditions, but on March 13 and 14, tests disclosed that three of the systems had failed. The Defendant was informed by a sanitary engineer from Concord sometime during this period that they were testing the system because of the emergence of the effluent.

The title was transferred on March 14, 1973, and shortly thereafter the plaintiffs were informed that three of the septic systems had failed. The plaintiff replaced them and the cost of replacement was the basis for the verdict.

The master found on the issue of defendant’s fraud as follows: At no time did the defendant reveal to the plaintiff that the state was investigating a complaint from tenants. The defendant’s representations to the plaintiff regarding the conditions of the septic tank and systems were a material factor in persuading the plain­tiff to buy the mobile home park. When the defendant acquired new knowledge regarding the conditions of the septic systems, he came under the duty to disclose this additional information to the plaintiff since it was at variance with the representations previously made.

The Master correctly ruled that a representation which was true when made could be fraudulent if the maker failed to disclose subsequent information which made the original representation false. While it is true that one who makes a representation believing it to be true and does not disclose its falsity until after the transaction has been consummated has committed no fraud, both parties herein treat March 14, the date of the closing, as the time at which the rights of the parties became fixed.

AFFIRMED.

Justifiable Reliance

The third element of proving fraud is that of “justifiable reliance”; that is, the party claiming that he or she has been defrauded must prove reasonable or justifiable reliance upon the misrepresentation in entering into the contract. This is very similar to a finding of causation in the area of tort law. The question of reliance is preeminently a question of fact. The plaintiff need not prove that the false statement was the sole factor in entering into the contract; rather, that it was an important element in inducing him or her to enter into a contract.

As we have noted, a certain amount of “puffing” or “trade talk” may be expected in a sales contract. Two views of reliance developed. Under one view of the common law, it was the duty of every person “to take notice of obvious facts and to investigate the truth of representations.” Under this view, if a statement was obviously or patently false, a plaintiff could not say that he justifiably relied upon it. For example, while a statement by a car salesman that a car might get “45 miles to a gallon of gas” when in reality, it will get only 30 miles to a gallon, might form the basis for a cause of action for fraud, a statement that the car might get “400 miles to a gallon” probably would not. As result, sometimes the more outrageous a statement, the less likely that an action for fraud could be maintained. At the same time, a second view, more favorable to plaintiffs, developed that “the law will afford relief even to the simple and credulous who have been duped by art and falsehood.” (Kendall v. Wilson, 41 Vt. 567 (1869). The issue of reliance is ordinarily an issue for the jury to decide as a question of fact.

Similarly, if a party knows actually knows that a statement is untrue, he or she may not later claim justifiable reliance. For example, if a salesperson were to falsely assure an office manager that a copy machine will produce 75 full copies per minute, and the office manager knows that the machine will in fact only produce 35, there can be no action for fraud since no justifiable reliance can be shown on the part of the office manager.

Is there a requirement of investigation or of inspection of goods or property by a purchaser? Generally, yes, especially if an inspection or investigation would not require the services of an expert, the expenditure of considerable time or money, or any special training or expertise. However, if a defect in property is latent (not readily seen) or hidden, the buyer would be justified in relying on statements or representations of the seller, and no inspection would be required.

Damages

Finally, the innocent party must suffer some pecuniary or monetary injury or damage as a result of fraud or misrepresentation. If the plaintiff is only attempting to rescind or cancel the contract, the court will not require other proof of monetary damages. However, if the plaintiff is seeking damages in the form of money, proof of an injury is required.

As a final look at the area of fraud, we will read the case of Miller v. Plains Insurance Co.

Case Summary

Miller v. Plains Insurance Co.

Springfield Court of Appeals (Missouri), 409 S.W. 2d 770 (1966)

BACKGROUND AND FACTS

The plaintiff in this action, D. C. Miller, is suing the insurance company of the owner and driver of the automobile in which his wife was killed. The owner and operator of the automobile, Hazel Gales, also perished in the crash. She was insured by Plains Insurance Company, the defendant. The policy provided, among other things, $500 medical expense coverage and up to $10,000 uninsured motorists coverage. This coverage provides for payment to the insured in case the insured is involved in an accident where someone else is at fault and does not have any insurance.

At the trial, Miller was awarded both $500 in medical expenses and $10,000 under the uninsured motor­ists provision. On appeal, the defendant argued that had it known certain representations were untrue, it would not have undertaken the risk in insuring Gales, who had a record for moving traffic violations and, in particu­lar, for hazardous driving and did not disclose it when applying for the policy.

TITUS, Judge

What is a material misrepresentation? A misrepre­sentation that would likely affect the conduct of a reasonable man in respect to his transaction with another is material. (Emphasis added.) Materiality, however, is not determined by the actual influence the representation exerts, but rather by the possibility of its so doing. A representation made to an insurer that is material to its determination as to what premium to fix or to whether it will accept the risk, relates to a fact actually material to the risk which the insurer is asked to assume. The word “risk” does not relate to an actual increase in danger but to a danger determined by the insurer’s classification of the various circumstances affecting rates and insurability. That the fact misrep­resented has no actual subsequent relation to the manner in which the event insured against occurred, does not make it any the less material to the risk. Thus, whether a misrepresentation is material in an application for an automobile insurance policy, is determined by whether the fact, if stated truthfully, might reasonably have influenced the insurance company to accept or reject the risk or to have charged a different premium, and not whether the insurer was actually influenced.

It is a well known fact insurance companies rely on expense, loss, and other statistical data to measure differences among risks and thus ascertain rates to be charged for individual risks in accordance with standards for measuring variations in hazards. This is recognized and, to some extent, controlled by our statutes. Ques­tions as to traffic violations of prospective insured and as to previous accidents in which they have been involved are legitimate fields of research for insurance companies, for these are not only rate determining facts but may also determine if the risk will even be insured. In consideration of the authorities previously cited, * * * we are of the opinion the misrepresentations involved in this case might reasonably be expected to have influenced the insurance company to have accepted or rejected Mrs. Gales as an insured or to have charged her a different premium for issuing her a policy. As the only evidence in this case is that if defendant had known the truth it would have declined the risk, we are drawn to the conclusion the misrepresentations were material and should permit defendant to avoid its liability under the policy.

Judgment and Remedy

The decision of the trial court was reversed. The defendant, Plains Life Insurance Company, did not have to pay the $10,000 uninsured motorists claim or the $500 medical expense coverage because of the material misrepresentation of fact made by Hazel Gales when she filled out the applica­tion on the basis of which her insurance policy was issued. The court decided there was no true assent by the insurance company to insure Gales under these circumstances. No insurance contract ever came into existence.

Do you believe that a fair result was reached in this case? How did Miller participate in the fraud committed? Do you agree with the definition of materiality found here?

Ethical Considerations

Baseball Cards

An employee of Grillo Sports Cards inadvertently places an authentic Honus Wagner player card with a lot of cards selling for $1.00 a piece. The Wagner card is worth $25,000. Should Grillo be able to get back their card from its purchaser, nine year old Bobby Parker, on grounds that their employee had made a terrible mistake”? Suppose Bobby actually knew of their mistake? Would or should that change your decision?

Questions

Raffles v. Wichelhaus

1. Why did the dispute arise?
2. What was the nature of the “mutual mistake” made by the parties?
3. What is a latent ambiguity?
4. What do the words “consensus ad idem” mean?

Vokes v. Arthur Murray, Inc.

1. What is “sales puffing”?
2. When will an opinion be actionable as fraud?
3. What does it mean to deal “at arm’s length”?
4. Does Mrs. Vokes bear any responsibility for her loss?

Sellers v. Looper

1. What is a JNOV? How and when is it used?
2. What were the parties’ opposing views on the question of a commendation?
3. What were the precise words used by Mrs. McLean regarding the condition of the well? What do they signify to you? What did they mean to the court?
4. Who decides the issue of whether a statement is one of fact or opinion?
5. Whose testimony was most important in this case? Why?
6. What is a fiduciary relationship?
7. When will parties to a contract not be acting on “equal footing”?

Puckett Paving v. Carrier Leasing Corporation

1. Why did Puckett Paving sue Carrier?
2. Why did opinions as to a matter of law generally not constitute remedial fraud under the common law?
3. Are there any exceptions?
4. Is the rule enunciated in this case currently in use? What is the modern view?

Bergeron v. Dupont

1. Who is a “Master”? Under what circumstances will a court use a Master to decide a case?
2. When did the defendant learn about the deteriorating condition in the septic tank? Why was that critical?
3. What was the measure of plaintiff’s damages?
4. When did the rights of the parties become fixed?
5. How did the master rule in the case?
6. What is a “closing”? What events take place at a closing?

Miller v. Plains Insurance Co.

1. What is “uninsured motorist” coverage?
2. When would a representation found in an insurance application be considered material?
3. What was the effect of the court finding that a misrepresentation had taken place?
4. Was the result in this case a fair one?

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