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*** Chapter Outcome ***
Identify the types of fraud and the elements that must be shown to establish the
existence of each.
C. FRAUD
Fraud prevents agreement from being knowingly given. There are two
distinct types: fraud in the execution and fraud in the inducement.
Fraud in the Execution
A misrepresentation that deceives the other party as to the nature of a
document evidencing the contract (such as when secretly switching
documents before signing); renders the agreement void (extremely rare).
Fraud in the Inducement
An intentional misrepresentation of material fact by one party to the other,
who then consents to a contract in justi$able reliance on the
misrepresentation; renders the contract voidable by the defrauded party.
The requisite elements of fraud in the inducement are:
1. A false representation
Includes assertion of something not true, concealment of a fact, expressly
denying knowledge of a known fact, and statement of a misleading half-fact.
Silence alone does not automatically amount to false representation.
2. of a fact (not just an opinion)
An event that actually took place or something that actually exists, not just a
belief or a prediction of a future event. May or may not include a statement
of law.
NOTE: See Vokes v. Arthur Murray, Inc., below.
3. that is material (relating to something of importance to the
contract)
Must be likely to induce a reasonable person to manifest assent (or the
maker must know that the recipient is likely to do so).
NOTE: See Reed v. King, below.
4. made with knowledge of its falsity and the intention to deceive,
and
Known as scienter; can consist of actual knowledge, lack of belief in the
statement or reckless indifference to truthfulness.
5. which representation is justi%ably relied on.
If the misrepresentation did not influence the complainer's decision, he has
no right to relief.
CASE 11-3
MAROUN v. WYRELESS SYSTEMS, INC.
Supreme Court of Idaho, 2005
141 Idaho 604, 114 P.3d 974
http://scholar.google.com/scholar_case?case=18286843461461582750&hl=en&as_sdt=2&as_vis=1&oi=scholarr
Trout, J.
Tony Y. Maroun (Maroun) was employed by Amkor when he accepted an offer to work for
Wyreless, a startup company. On November 20, 2000, a letter was sent from Bradley C.
Robinson, president of Wyreless, to Maroun setting forth the terms of their employment
agreement. The pertinent portions of the letter were as follows:
* * *
•Annual salary of $300,000.
•$300,000 bonus for successful organization of Wyreless Systems, Inc.
•15% of the issued equity in Wyreless Systems, Inc.
•The equity and “organization bonus” will need to be tied to agreeable milestones (e.g.,
* * *
I would like you to have an understanding of the fund raising status. I was able to get a
commitment from two investors today for a minimum of $250,000 for arrival into the WSI
bank account early next week. I believe we will be able to raise an additional $350,000
during the following week. * * * If we are not successful in raising the required capital for
the business the funds remaining in the account on May 1, 2001 will be release[d] to you
and Jen Gadelman (sic) as compensation beyond salaries and expenses for your efforts in
developing the business.
I anticipate a starting date of employment of December 1, 2000 or as soon you (sic) can
reasonably and professional (sic) resolve your responsibilities with Amkor.
* * *
Maroun argues the district court erred in granting summary judgment in favor of
Robinson on the fraud claim. Fraud requires: (1) a statement or a representation of fact; (2)
its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity; (5) the speaker’s
intent that there be reliance; the hearer’s ignorance of the falsity of the statement; reliance by
the hearer; (8) justifiable reliance; and (9) resultant injury. [Citation.] In opposition to the
defendants’ motion for summary judgment, Maroun filed an affidavit that stated Robinson
made the following representations to Maroun:
(1) That Wyreless was to be a corporation of considerable size, with initial net revenues
in excess of several hundred million dollars.
(2) That Robinson would soon acquire one and one-half million dollars in personal
“An action for fraud or misrepresentation will not lie for statements of future events.”
[Citation.] “[T]here is a general rule in [the] law of deceit that a representation consisting of
[a] promise or a statement as to a future event will not serve as [a] basis for fraud
“[Citation.] Statements numbered one and two both address future events. Robinson
allegedly stated Wyreless “was to be” and that he “would soon acquire.” “[T]he
representation forming the basis of a claim for fraud must concern past or existing material
facts.” [Citation.] Neither of these statements constitutes a statement or a representation of
past or existing fact. A “promise or statement that an act will be undertaken, however, is
actionable, if it is proven that the speaker made the promise without intending to keep it.”
[The district court’s ruling on this issue is affirmed.]
CASE 11-4
REED v. KING
California Court of Appeals, 1983
145 Cal.App.3d 261, 193 Cal.Rptr. 130
http://scholar.google.com/scholar_case?case=575864357603110085&q=193+Cal.Rptr.+130&hl=en&as_sdt=2,34
Blease, J.
In the sale of a house, must the seller disclose it was the site of a multiple murder?
Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents
(the other named defendants) told Reed that a woman and her four children were murdered
there 10 years earlier. However, it seems “truth will come to light; murder cannot be hid
long.” (Shakespeare, Merchant of Venice, act II, scene II.) Reed learned of the gruesome
episode from a neighbor after the sale. She sues seeking rescission and damages. King and
the real estate agent defendants successfully demurred to her first amended complaint for
failure to state a cause of action. Reed appeals the ensuing judgment of dismissal. We will
reverse the judgment.
* * * King and his real estate agent knew about the murders and knew the event
materially affected the market value of the house when they listed it for sale. They
* * *
Does Reed’s pleading state a cause of action? Concealed within this question is the
nettlesome problem of the duty of disclosure of blemishes on real property which are not
physical defects or legal impairments to use.
Reed seeks to state a cause of action sounding in contract, i.e., rescission, or in tort, i.e.,
deceit. In either event her allegations must reveal a fraud. [Citation.] “The elements of actual
fraud, whether as the basis of the remedy in contract or tort, may be stated as follows: There
The trial court perceived the defect in Reed’s complaint to be a failure to allege
concealment of a material fact. * * *
Concealment is a term of art which includes mere nondisclosure when a party has a duty
to disclose. [Citation.] Rest.2d Contracts, § 161; Rest.2d Torts, § 551; Reed’s complaint
reveals only nondisclosure despite the allegation King asked a neighbor to hold his peace.
There is no allegation the attempt at suppression was a cause in fact of Reed’s ignorance.
[Citations.] Accordingly, the critical question is: does the seller have a duty to disclose here?
Resolution of this question depends on the materiality of the fact of the murders.
Whether information “is of sufficient materiality to affect the value or desirability of the
property * * * depends on the facts of the particular case.” [Citation.] Materiality “is a
question of law, and is part of the concept of right to rely or justifiable reliance.” [Citation.]
* * * Three considerations bear on this legal conclusion; the gravity of the harm inflicted by
nondisclosure; the fairness of imposing a duty of discovery on the buyer as an alternative to
* * *
The murder of innocents is highly unusual in its potential for so disturbing buyers they
may be unable to reside in a home where it has occurred. This fact may foreseeably deprive
a buyer of the intended use of the purchase. Murder is not such a common occurrence that
buyers should be charged with anticipating and discovering this disquieting possibility.
Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly
be imposed upon the buyer. Reed alleges the fact of the murders has a quantifiable effect on
Reputation and history can have a significant effect on the value of realty. “George
Washington slept here” is worth something, however physically inconsequential that
consideration may be. Ill repute or “bad will” conversely may depress the value of property.
* * *
Whether Reed will be able to prove her allegation the decade-old multiple murder has a
significant effect on market value we cannot determine. If she is able to do so by competent
*** Chapter Outcome ***
De$ne the two types of nonfraudulent misrepresentation.
D. NONFRAUDULENT MISREPRESENTATION
Negligent Misrepresentation — made without due care in ascertaining its
truthfulness; renders agreement voidable.
Innocent Misrepresentation — made without knowledge of its falsity but
with due care; renders contract voidable.
*** Chapter Outcome ***
Identify and discuss the situations involving voidable mistakes.
E. MISTAKE
A mistake is an understanding that does not match existing fact.
Mutual Mistake
Both parties have a common but erroneous belief forming the basis of the
contract; renders the contract voidable by either party.
Unilateral Mistake
When only one of the parties is mistaken; usually no relief for unilateral
mistake unless the error is known or should be known by the nonmistaken
party.
Assumption of Risk of Mistake
Either party may assume the risk of a mistake, and therefore will not be able
to avoid the contract.
Effect of Fault upon Mistake
The mistaken party cannot avoid the contract obligation if she simply did not
read what she was signing.
Mistake in Meaning of Terms
In some cases, a term of the contract can have different meanings for the
seller and the buyer, without either party knowing that the other party has a
different understanding. This renders the contract void. If, however, one
party knows that the other party has a different understanding, the contract
stands with the second party's interpretation of the terms.
CASE 11-5
LESHER v. STRID
Court of Appeals of Oregon, 2000
165 Or.App. 34, 996 P.2d 988
http://scholar.google.com/scholar_case?case=3643927747561854317&q=996+P.2d+988&hl=en&as_sdt=2,34
Wollheim, J.
[In May 1995, the plaintiffs, Vernon and Janene Lesher, agreed to purchase an eighteen-acre
parcel of real property from defendant with the intention of using it to raise horses. In
purchasing the property, the plaintiffs relied on their impression that at least four acres of the
subject property had a right to irrigation from Slate Creek. The earnest money agreement to
the contract provided:
D. Water Rights are being conveyed to Buyer at the close of escrow. * * * Seller will
provide Buyer with a written explanation of the operation of the irrigation system, water
right certificates, and inventory of irrigation equipment included in sale. [Bold in
original].
The earnest money agreement also provided:
THE SUBJECT PROPERTY IS BEING SOLD “AS IS” subject to the Buyer’s
approval of the tests and conditions as stated herein. Buyer declares that Buyer is not
depending on any other statement of the Seller or licensees that is not incorporated by
reference in this earnest money contract. [Bold in original].
After purchasing the property and before establishing a pasture, the plaintiffs learned
that the property did not carry a four-acre water right. The plaintiffs sought rescission of the
contract for sale, alleging mutual mistake of fact or innocent misrepresentation regarding the
existence of water rights. The trial court ruled in favor of the plaintiffs and the defendant
appeals.]
Grounds for rescission on the basis of a mutual mistake of fact or innocent
misrepresentation must be proved by clear and convincing evidence. [Citations.] An
innocent misrepresentation of fact renders a contract voidable by a party if the party’s
“manifestation of assent is induced by * * * a material misrepresentation by the other party
upon which the recipient is justified in relying[.]” [Citations.] A mutual mistake of fact
Even though it appears that the trial court did not apply the clear and convincing
standard, * * * , we find that plaintiffs’ evidence meets that standard. Both defendant and
plaintiffs testified that they believed that the four acres of water rights were appurtenant to
the subject property. Defendant does not dispute that the 1977 water rights certificate and the
“area to be irrigated” map are her representation about the water right.
* * *
Plaintiffs also established by clear and convincing evidence that the existence of the
four-acre water right was material and essential to the contract. Vernon testified that the
motivation for the purchase was to expand his ability to raise horses from property they
already owned where they had a two-acre irrigation right and that the subject property’s
water right was essential to the contract. Certainly, a smaller water right would limit, not
expand, plaintiffs’ ability to raise horses. The mistake, therefore, goes to the very essence of
the contract.
We next consider defendant’s arguments that plaintiffs bore the risk of that mistake. The
Restatement (Second) of Contracts § 154 explains that a party bears the risk of a mistake, in
Defendant argues in the alternative that plaintiffs’ mistake of fact is the result of
defendant’s misrepresentation, on which plaintiffs could not reasonably rely. An “innocent
misrepresentation may support a claim for rescission of a real estate agreement if the party
who relied on the misrepresentations of another establishes a right to have done so.”
[Citations.]
Defendant argues that her representations about the four-acre water right were extrinsic
to the contract and that the contract’s “as is” clause expressly excluded reliance on such
extrinsic representations. * * * The “as is” clause specifically contemplated reliance on any
statements by the seller that were “incorporated by reference” in the earnest money
agreement. The earnest money agreement specifically referred to the conveyance of water
rights.
* * *
