Suggested Additional Assignments
Drafting Exercise: Distinguishing Puery and Misrepresentation
Students should write one page of dialogue or prose describing a sales pitch made to a consumer. The
seller should tread the fine line between puffery and misrepresentation, and the student should be able to
declare whether the conduct was lawful, and why.
Research: Fine Art
This exercise focuses on the issues of misrepresentation, silence, and mistake. Ask students to research a
fine art auction house, such as Sotheby’s or Christie’s. What has the auction house done to protect itself
against claims concerning a work’s provenance? Does the company provide a warranty? How carefully
does it define terms such as “painted by” or “from the school of?” (Answer: very carefully.) Does the
auction house limit its warranty to works after a certain date, such as 1870? Why is the company being so
careful about this?
Chapter Overview
Chapter Theme
Both parties must have the capacity to make a deal, and both must give genuine consent.
Quote of the Day
“I am not young enough to know everything.” –J. M. Barrie (1860-1937), Scottish playwright, Ernest in
The Admirable Crichton.
Voidable Contracts: Capacity and Consent
Problems with capacity and consent make a contract voidable. Capacity is the legal ability to enter into
a contract. Consent refers to whether a contracting party truly understood the terms of the contract and
whether she made the agreement voluntarily.
Capacity
Minors
The rule that a minor may avoid a contract will come as news to many students and may generate a great
deal of discussion on ways in which this rule could be abused. The authors provide the best response to
this concern in their answer to discussion question 1 later in this manual: “[i]t is true that some minors
are street smart, and might take advantage of the rule. However, the answer, in the opinion of most
courts, is that a concerned seller can easily protect himself by not making the sale.” A minor who wishes
to escape from a contract generally may disaffirm it; that is, he may notify the other party that he refuses
to be bound by the agreement. A minor may disaffirm a contract anytime before reaching the age of 18 or
within a reasonable time after turning 18.
Additional Case: Star Chevrolet Co. v. Green1
Facts: Kevin Green paid $4,600 cash for a used Camaro from Star Chevrolet. When the car blew a
gasket, the dealer refused to give Kevin his money back. Kevin repaired the car himself and drove it on
the highway, where it was wrecked. Kevin sued Star, and the trial court awarded him the full price of the
car, because he was a minor when he bought it. Star appealed.
Issue: Is Kevin Green entitled to disaffirm the contract even though the Camaro has been destroyed?
1 473 So. 2d 157, 1985 Miss. LEXIS 2141 Supreme Court of Mississippi, 1985
Holding: The appeals court affirmed judgment for Green but reduced the award to $3,100, based on the
car’s salvage value. A minor may disaffirm a contract. He is required to return the consideration only if it
is still in his possession. If the minor has wasted, squandered, or otherwise destroyed the consideration,
he need not return it and is still entitled to his money back.
Question: Star Chevrolet either did not know that Green was entitled to his money back, or knew but
refused to honor it. Why was that a particularly costly mistake by Star?
Answer: If Star had returned Green’s money when he first asked, it would have received a basically
Question: Why was Kevin Green permitted to keep the insurance proceeds and his purchase price?
Answer: Because of the collateral source rule, which states that a defendant that is found to owe a
Question: Kevin Green knew that he was a minor. Why should he be allowed to make an
agreement, wreck a car, and then get his money back?
Answer: The policy behind the court’s ruling was to discourage businesses from entering into
Exception: Necessaries
On a contract for necessaries, a minor must pay for the value of the benefit received.
Exception: Misrepresentation of Age
What is the result if a minor misrepresents himself to be an adult when he enters the contract and then
attempts to avoid the agreement based on his status of a minor? The text notes on p. 319 that there is no
clear rule. A few states would allow the minor to disaffirm, but more states would not allow the minor to
take advantage of his fraud.
Mentally Impaired Persons
A person suffers from a mental impairment if by reason of mental illness or defect he is unable to
understand the nature and consequences of the transaction. A party suffering a mental impairment usually
creates only a voidable contract. The law creates an exception: if a person has been adjudicated insane,
then all of his future agreements are void.
Intoxication
Similar rules apply in cases of drug or alcohol intoxication. When one party is so intoxicated that he
cannot understand the nature and consequences of the transaction, the contract is voidable. Courts are
highly skeptical of intoxication arguments.
Landmark Case: Babcock v. Engel
Facts: While Charles Engel’s wife was out of town, he sat home alone, drinking mightily. During this
period, he made an agreement with G. M. Babcock to trade a 320 acre farm and $2000 worth of personal
property for a hotel. Engel’s property was worth approximately twice the value of the hotel. Engel later
refused to honor the deal on the grounds that he had been intoxicated when he made the agreement.
Babcock sued, but the jury sided with Engel and dismissed the complaint. Babcock appealed.
Issue: Was Engel so intoxicated that his agreement with Babcock became voidable?
Excerpts from Justice Holloway’s Decision: If, as a matter of fact, Engel was so far under the influence
of intoxicating liquor when he signed the contract that he was incapable of giving his assent it would be
voidable at the election of Engel when he became sober.
[T]he jury answered that on November 22, Engel was “so under the influence of intoxicating liquors as to
deprive him of his powers of reasoning and render him unable to comprehend the consequences of his act
in executing said agreement.”
Engel himself testified to the effect that, availing himself of his wife’s absence from home, he had been
indulging greatly to excess and had been drunk on November 21; that he drank heavily of whisky which
he had at his home on the morning of November 22; that immediately upon his arrival in the town he had
four or five drinks of whisky and blackberry before he entered upon the negotiations with Babcock.
Upon the question of his intoxication he was corroborated abundantly.
Four other witnesses, each apparently disinterested, testified that at the time in question Engel was
intoxicated, could not comprehend the nature of his acts, in other words, that he was not qualified to
transact business. The jury determined upon the credibility of the witnesses.
Intoxication is not made a defense by the Codes, and there was a time in the history of our jurisprudence
when courts refused to lend their aid to relieve one from the consequences of his own voluntary
intemperance, but the doctrine has long since been abandoned. The courts do not now concern themselves
so much with the question of intoxication as with the question of contractual capacity, and if in fact either
party is not mentally capable of giving his free consent to the terms disclosed by the writing, it is
altogether immaterial by what cause his incapacity was produced. The courts have simply recognized the
fact that intoxication, among other things, may render a person incapable of making a binding contract.
The test approved by the great majority of the decisions is the same which is applied in other forms of
mental derangement, namely, that the deed or contract will be voidable if the person, at the time of its
execution, was so far under the influence of intoxicants as to be unable to understand the nature and
consequences of his act, and unable to bring to bear upon the business in hand any degree of intelligent
choice and purpose.
Affirmed.
Question: What was the court’s holding?
Question: What did the court use as a comparison?
Reality of Consent
Fraud
The distinction between misrepresentation and fraud lies in intent. Misrepresentation can occur
innocently, without awareness of a statement’s falsity. If the defendant knows a statement of fact is false,
or is uncertain whether it is true and intends that the other party rely on the statement, then there is fraud.
To recover from fraud, the injured person must show the following:
1. The defendant knew that his statement was false, or that he made the statement recklessly and
without knowledge of whether it was false;
2. The false statement was material; and
3. The injured party justifiably relied on the statement.
Additional Case: Homan v. Stamper2
Facts: Plaintiffs alleged that Robert Beeman purchased dilapidated houses in poor sections of Baltimore,
searched for unsophisticated, low-income buyers, and promised them a renovated home for a mere $500
down payment. Beeman had the buyers sign contracts for greatly inflated prices and arranged 100%
purchase financing through an accomplice working in a mortgage company. To support this financing
Arthur Hoffman, a real estate appraiser, supplied an appraisal at exactly the sales price. When the buyers
took possession they found none of the promised repairs had been made. They sued multiple defendants
for fraud and the trial court awarded them compensatory and punitive damages. Hoffman appealed.
Issue: Did Hoffman commit fraud?
Holding: Judgment affirmed. Hoffman’s fraud was amply supported by the evidence. The court stated
“[p]laintiff Beeman purchased a property for $14,500 and sold it three weeks later to McFadden for
$52,000, without any change in its physical condition. Knowing these facts Hoffman appraised the
property’s value at $52,000. Hoffman misstated the zoning applicable to and physical condition of
properties. He reported distant and dissimilar properties as comparable sales. [The court recited other
evidence showing Hoffman’s knowledge of the falsity of material statements of fact and his willing
participation in the fraudulent scheme.]”
Question: What is “flipping?”
Question: Is flipping illegal or inherently fraudulent?
Question: What made this flipping scheme fraudulent?
Answer: The defendants colluded to (a) purchase run-down housing, (b) locate unsophisticated
buyers, (c) enter contracts with these buyers to make substantial repairs to and sell the properties at
Question: What is “100 percent financing?”
Answer: That is a loan that covers the entire purchase price of the property and (often) closing costs
Question: What was Hoffman’s role in this scam?
Question: What is an appraisal?
Answer: An appraisal is an independent expert assessment of the market value of property, based on
Question: Why were Hoffman’s appraisals fraudulent?
Answer: Hoffman’s appraisals were not independent—he reported values according to what was
Plainti’s Remedies for Fraud
In the case of fraud, the injured party generally has a choice of rescinding the contract or suing for
damages or, in some cases, doing both.
2 2005 WL 263996 Court of Appeals of Maryland, 2005
Innocent Misrepresentation
If all elements of fraud are present except the misrepresentation of fact was not made intentionally or
recklessly, then innocent misrepresentation has occurred. So, if a person misstates a material fact and
induces reliance, but he had good reason to believe that his statement was true, then he has not
committed fraud. Most states allow recission of a contract, but not damages, in such a case.
Special Problem: Silence
Nondisclosure of a fact amounts to misrepresentation in these four cases: (1) where disclosure is
necessary to correct a previous assertion; (2) where disclosure would correct a basic mistaken
assumption that the other party is relying on; (3) where disclosure would correct the other party’s
mistaken understanding about a writing; or (4) where there is a relationship of trust between the two
parties.
Case: Hess v. Chase Manhattan Bank, USA, N.A.3
Facts: Billy Stevens owned a paint company and on several occasions he ordered employees to dump
55-gallon paint drums and pallets of old paint cans on property that he owned. Employees notified the
Environmental Protection Agency (EPA) of this dumping and the EPA began an investigation. (Stevens
later served time for environmental crimes.)
Stevens defaulted on his mortgage for the property and Chase initiated foreclosure proceedings.
During those proceedings Chase learned of the EPA investigation. Chase put the property up for sale “as
is.” The bank did not inform interested buyers of the investigation. Hess bought the property for
$52,000.
Hess later learned of the illegal waste and sued Chase for failing to disclose the EPA investigation.
The jury awarded Hess $52,000. Chase appealed.
Issue: Did Chase have a duty to disclose to Hess the ongoing investigation?
Holding: Yes, judgment for Hess affirmed. The buyer has the right to rely on the seller to disclose
information that would not otherwise be discoverable through ordinary diligence. Chase claims that had
Hess conducted a reasonable inspection of the property, he would have discovered old paint cans near the
foundation of the barn. However, the basis of Hess’ claim is that Chase had a duty to disclose the EPA
investigation, not the presence of old paint cans.
Hess presented evidence at trial of two potential buyers who did discover the paint cans and still made
offers on the property. Both testified that the paint cans did not put them on notice of the EPA
investigation, and had they known about the EPA investigation they would have never made offers to
purchase the property. Thus, a jury could have found that even had Hess discovered the paint cans, he
would not have been on notice of the EPA investigation.
Chase argues that it did not have a duty to disclose because it sold the property “as is,” thus it
bargained for the right to remain silent. According to the court, Hess is alleging fraud in the inducement
of the contract, not in the execution of the contract. A party may not, by disclaimer or otherwise, exclude
liability for fraud in inducing a contract. Chase’s duty to disclose arose because it had the information
about the investigation before it entered into a contract to sell the property. The “as is” clause does not
negate its duty to disclose.
Question: What is the issue in this case?
Question: I thought we had a rule called “caveat emptor”—let the buyer beware.
3 220 S.W.3d 758, Missouri Supreme Court, 2007.
Question: What is the difference between fraud in the inducement of a contract and fraud in the
execution of a contract?
Answer: Fraud in the execution of the contract would include lying about the terms of the contract.
Fraud in the inducement of the contract would include lying about the subject matter of the contract
itself. For example, a person asks you to donate money to his charity and you sign a form pledging
Question: Why does Hess win?
Answer: Because Hess was claiming Chase fraudulently induced him into buying the property. He
bought a piece of property that was not what he thought it was (subject of an ongoing EPA
Ethics of Disclosure
A state could adopt various rules concerning disclosure:
Caveat emptor – let the buyer beware
Seller has a duty to notify buyer of important considerations that buyer must check (soil condition,
building laws, problems with neighboring property, etc.)
Seller has a duty to disclose only if asked
Seller has a duty to disclose, regardless of whether asked
Caveat emptor has largely fallen out of favor. The trend is clearly towards a greater duty to disclose. As
mentioned, many states require a seller to disclose any latent defects of which he is aware. However,
there are limits to that trend. In Strawn v. Canuso, 140 N.J. 43, 657 A2d 420 (NJ 1986), the New Jersey
Supreme Court held that a builder-seller of residential real estate – and its broker – were obligated to
divulge not only problems on the property being sold but problems on neighboring land. In that case,
huge quantities of hazardous chemicals had been illegally dumped in a landfill nearby, and the odors, on a
given day, could dramatically decrease the value of the property being sold. This was about as
far-reaching as any court’s holding on disclosure.
However, the New Jersey legislature responded to the decision by passing a statute that greatly
limited the liability of a builder-seller. Under the new law, such a seller was only obligated to furnish to
prospective buyers a state-mandated list of off-property hazardous sites. The burden was placed on the
buyer to use the list to investigate, and to determine for himself whether the property for sale would be
affected. A builder-seller who furnishes the list cannot be sued for failing to disclose any off-site
conditions. Nobrega v. Edison Glen Associates, 167 N.J.520, 771 A.2d 368 (2001).
Disclosure in Business Contracts
Courts are likely to take more of a laissez-faire approach to disclosure in contracts between businesses
that are not governed by the UCC. It is common practice in many business transactions for a seller to
limit its liability for disclosure by providing the buyer with a period of time, 30 to 45 days, to perform due
diligence. The seller obligates itself to share information (pursuant to a non-disclosure agreement) which
the buyer could not otherwise obtain, such as internal financial statements, contracts with third parties,
and building plans, to provide the buyer access to the property to perform tests and inspections, and to
allow the buyer to review permits and approvals issued by third parties such as building departments and
zoning boards. The purpose is to minimize the extent to which the buyer relies on any representations or
warranties of the seller in making its decisions about the transaction.
Mistake
Not all mistakes are created equal: Some mistakes lead to voidable contracts; others create enforceable (if
unfortunate) deals. How can we know the difference? First, we must ask who was mistaken because
different rules apply to unilateral and mutual mistakes. We must also examine the character of the
mistake to see if its circumstances warrant rescission.
Unilateral Mistake
Sometimes one party enters a contract under a mistaken assumption; the other is not mistaken. In
these cases it is not easy for the mistaken party to rescind a contract.
Mutual Mistake
A mutual mistake occurs when both contracting parties share the same mistake. If the contract is
based on a fundamental factual error by both parties, the contract is voidable by either one.
Case: Donovan v. RRL Corporation4
Facts: Brian Donovan, in the market for a used car, spotted a newspaper ad for a local Lexus dealer
listing a sapphire blue Jaguar XJ6 Vanden Plas for $25,995. Jaguars of the same year and mileage cost
about $8,000 to $10,000 more than the auto at the Lexus agency. Brian and his wife went to the dealer
and attempted to purchase the car for the listed price. The dealer refused; it had paid $35,000 for the
Jaguar and intended to sell it for about $37,000. The price in the newspaper ad arose from the
newspaper’s typographical and proofreading errors, although the Lexus dealership had failed to review
the proof sheet before the ad went to press. Brian sued. The trial court found that unilateral mistake
prevented enforcement. The appellate court reversed, and Donovan appealed to the state’s highest court.
Issue: Did the Lexus dealer’s mistake entitle it to rescind the contract?
Holding: Judgment for the Lexus dealer affirmed. The court first ruled that there was in fact a contract
between the parties, noting that despite the general rule that a newspaper advertisement is merely a
solicitation for an offer, a California statute generally holds automobile dealers liable to the terms of their
offers.
Next the court considered the mistake:
A significant error in the price term of a contract constitutes a mistake regarding a basic assumption
upon which the contract is made, and such a mistake ordinarily has a material effect adverse to the
mistaken party. The defendant must show that the resulting imbalance in the agreed exchange is so
severe that it would be unfair to require the defendant to perform. Measured against this standard,
defendant’s mistake in the contract for the sale of the Jaguar automobile constitutes a material mistake
regarding a basic assumption upon which it made the contract. Enforcing the contract with the
mistaken price of $25,995 would require defendant to sell the vehicle to plaintiff for $12,000 less than
the intended advertised price of $37,995-an error amounting to 32 percent of the price defendant
intended. If we were to accept plaintiff’s position that that the dealer always must be held to the strict
terms of a contract arising from an advertisement, we would be holding that the dealer intended to
assume the risk of all typographical errors in advertisements, no matter how serious the error and
regardless of the circumstances in which the error was made.
Question: I thought an advertisement was merely an invitation for an offer. Why did this
advertisement create an offer?
4 26 Cal.4th 261, 27 P.3d 702, 109 Ca. Rptr.2d 807 Supreme Court of California, 2001
Question: The dealer could have caught this serious typo by proofreading the ad before the paper
printed it. Did the court take that into account?
Answer: The court took it into account but was not persuaded, holding the fact that one might avoid
Question: What would be the result if the court adopted the plaintiff’s argument and enforced this
contract?
Answer: Persons in the dealer’s position would be deemed to have assumed the risk of all
Question: What’s the moral?