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Chapter 14
Mistakes, Fraud, and Voluntary Consent
See Separate Lecture Outline System
INTRODUCTION
To this point in the text, students have studied how a contract comes into existence, when a contract will not be
enforced because it is illegal or against public policy, and how the law protects certain categories of people by allowing them to
avoid their contracts. This chapter concerns another category of relief from the enforcement of contracts: a contract may be
unenforceable if the parties have not genuinely assented to the terms.
In determining the genuineness of assent of the contracting parties, courts looks at a party’s objective intent. A court
may find that genuineness of assent is lacking because of mistakes, misrepresentation, undue influence, or duress (in other
words, because there is no true “meeting of the minds”). If the law were to enforce contracts not genuinely assented to by the
contracting parties, injustice would result. The injured party may opt to enforce the deal, however, or to rescind it.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
342 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, ELEVENTH EDITION
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 14.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
Defenses of Contract Enforceability: Fraudulent Statement—What exactly is reliance on a fraudulent statement,
and how is it proven?—Reliance is an element of proof in a fraud case. It consists of belief and action. We can generally
assertion or promise, and then acted on it to his or her detriment.
Mistake—Plausible Pepper Price Published in Paper—An advertised price often constitutes a valid unilateral offer.
Matilda—Intellectual Property—The Invention—Misrepresentation.
CHAPTER OUTLINE
I. Mistakes
There is a difference between mistakes as to judgment of market conditions (believing something will be worth more
than it ultimately proves to be) and mistakes as to facts (believing something is something other than what it is). Only
under a mistake of fact can a contract be avoided.
A. MISTAKES OF FACT
1. Bilateral (Mutual) Mistakes of Fact
When parties to both sides of a contract are mistaken as to the same material fact, either party can rescind
the contract at any time.
CASE SYNOPSIS—
Case 14.1: Inkel v. Pride Chevrolet-Pontiac, Inc.
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The Inkels, who lived in Vermont, negotiated with Pride Chevrolet-Pontiac, Inc., to buy a Chevy Tahoe. Pride’s
contract stated that the buyer was responsible for any problems with a trade-in vehicle. The Inkels’ trade-in was a high-
The Vermont Supreme Court reversed. Pride knew the terms of its contract and the Inkels knew the high mileage
determined at trial. Also, it was not clear whether Pride had offered to rescind the contract.
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Notes and Questions
Why are situations such as the one presented in this case often sources of litigation appealed to the states’ highest
courts? The amount of money involved in these cases makes them important to the parties involved and to their
attorneys. Partly for this reason, there can be many cases involving similar facts for which a particular decision serves
as a binding precedent.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 14.1
If a Pride sales representative led the Inkels to believe the dealership did not care about the excessive miles on the
trade-in vehicle, should Pride be willing to incur the loss? Why or why not? If a sales representative lies to a customer,
the manager should be obliged to make good, within reason, and fire the sales representative. But most dealerships
that have bad reputations for dubious practices know what is going on and the sales reps are not truly acting on their
own.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 14.1
Suppose that the provision making the buyers responsible for any problems with the trade-in vehicle was clearly
visible on the face of the contract that the Inkels signed (rather than being in small print on the back). How might this
have changed the outcome of this case/? If the provision making the buyers responsible for problems with the trade-in
vehicle were more obvious, it would reduce the likelihood that a court could hold the dealer liable for consumer fraud.
344 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, ELEVENTH EDITION
The buyers would have a less plausible basis for claiming that they were not aware of this term.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 152
The Restatement (Second) of Contracts is an authoritative source for many of the principles discussed in this
chapter. Specific sections of the Restatement are noted throughout the text. After selected parts of the text in which a
section is noted, the full text of that section is set out. The following is the section that relates to this part of the text—
Restatement (Second) of Contracts, Section 152.
§ 152. When Mistake of Both Parties Makes a Contract Voidable
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract
affected party unless he bears the risk of the mistake under the rule stated in § 154.
(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken
of any relief by way of reformation, restitution, or otherwise.
2. Unilateral Mistakes of Fact
A unilateral mistake occurs when one party is mistaken. Generally, the mistaken party has no right to
relief. There are two exceptions. The rule is not applied if the other party knew or should have known
that a mistake was made. Also, some states will not enforce, or may reform, a contract in which an error
was due to a significant mathematical mistake and it was done inadvertently and without gross
negligence (for example, a typo).
ANSWER TO VIDEO QUESTION LTR. A
What kind of mistake is involved in the dispute shown in the video (mutual or unilateral, mistake of fact or mistake
of value)? This was a unilateral mistake of fact having to do with the price of the peppers, not a mistake of value having
to do with the quality of the peppers.
ANSWER TO VIDEO QUESTION LTR. B
According to the chapter, in what two situations would the supermarket be able to rescind a contract to sell
peppers to Melnick at the incorrectly advertised price? The general rule is that unilateral mistake does not afford the
CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 345
ANSWER TO VIDEO QUESTION LTR. C
Does it matter if the price that was advertised was a reasonable price for the peppers? Why or why not? Yes,
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 153
§ 153. When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract
has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if
he does not bear the of the risk of the mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or
(b) the other party had reason to know of the mistake or his fault caused the mistake.
II. Fraudulent Misrepresentation
346 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, ELEVENTH EDITION
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 163
§ 163. When a Misrepresentation Prevents Formation of a Contract
If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be
a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or
essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.
Restatement (Second) of Contracts, Section 164
§ 164. When a Misrepresentation Makes a Contract Voidable
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is
not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient,
unless the other party to the transaction in good faith and without reason to know of the misrepresentation either
gives value or relies materially on the transaction.
ENHANCING YOUR LECTURE—
ONLINE PERSONALS—
FRAUD AND MISREPRESENTATION ISSUES
Keying the words online personals into the Google search engine will return more than over 35 million hits
including Match.com, Chanceforlove.com, Widowsorwidowers.com, Makefriendsonline.com, and Yahoo! Personals.
dates. It allows users to create their own profiles browse member profiles, and exchange e-mail or instant messages.
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relationship test. Then they can use Yahoo’s computerized matching system to “zero in on marriage material.” With
this service, chat on the phone as well as exchange e-mail.
THE THORNY PROBLEM OF MISREPRESENTATION
When singles (and others) create their profiles for online dating services, they tend to exaggerate their more
appealing features and downplay or omit their less attractive attributes. All users of such services are aware that the
profiles may not correspond exactly with reality, but they to assume that the profiles are not complete
misrepresentations. In 2006, however, Robert Anthony, individually and on behalf of others, brought a suit against
Yahoo in federal district court, alleging fraud and negligent misrepresentation, among other things.
DID YAHOO HAVE IMMUNITY?
Yahoo asked the court to dismiss the complaint on the grounds that the lawsuit was barred by section 230 of the
Communications Decency Act (CDA of 1996.a As you may recall from Chapter 4, the CDA shields Internet service
providers (ISPs) from liability for any information submitted by another information content provider. In other words,
an interactive computer service cannot be held liable under state law as a publisher of information that originates from
a third party information content provider. The CDA defines an information content provider as “any person or entity
that is responsible, in whole or in part, for the creation or development of information provided through the Internet
or nay other interactive computer service.”ba
The court rejected Yahoo’s claim that it had immunity under the CDA on the grounds that Yahoo had become an
information content provider itself when it created bogus user profiles. The court observed that “no case of which this
court is aware has immunized a defendant from allegations that it created tortuous content.” c Thus, the court denied
Yahoo’s motion to dismiss and allowed Anthony’s claims of fraud and negligent misrepresentation to proceed to trial.d
FOR CRITICAL ANALYSIS
Assume that Anthony had contacted various of users of Yahoos online dating service only to discover that each
brought a lawsuit for fraudulent misrepresentation against Yahoo in that situation? Why or why not?
1. Statement of Fact v. Opinion
Misrepresentation must involve a material fact.
a. Statements of Opinion Do Not Qualify
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b. Opinions from Experts Can Qualify
An expert’s statement of opinion to a layperson is treated as fact. In a cased of contract fraud, this
may entitle an innocent party to rescission or reformation.
2. Misrepresentation by Conduct
Misrepresentation can occur by concealing a fact material to a contract.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 160
§ 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 the fact
does not exist.
Comments:
a. Scope. Concealment is an affirmative act intended or known to be likely to keep another from learning of a fact of
which he would otherwise have learned. Such affirmative action is always equivalent to a misrepresentation and has
any effect that a misrepresentation would have * * * .
b. Common situations. The rule stated in this Section is commonly applied in two situations, although it is not limited to
them. In the first, a party actively hides something from the other, as when the seller of a building paints over a defect.
See Illustration 1. In such a case his conduct has the same effect as an assertion that the defect does not exist, and it is
actually misstated them, if its effect on the other is to lead him to believe that the facts do not exist or cannot be
discovered. Action may be considered as likely to prevent another from learning of a fact even though it does not
Illustrations:
1. A, seeking to induce B to make a contract to buy his house, paints the basement floor in order to prevent B from
2. A, seeking to induce B to make a contract to buy his house, convinces C, who, as A knows, is about to tell B that
foundation is cracked, to say nothing to B about the foundation. B is prevented from discovering the defect and makes
3. Misrepresentation of Law
A misrepresentation of law (“you can build anything you want here”) does not entitle a party to relief from a
4. Misrepresentation by Silence
Ordinarily, a party to a contract can keep silent without liability, unless a serious potential problem or latent
CASE SYNOPSIS—
Case 14.2: Rosenzweig v. Givens
Radiah Givens, a student, was involved romantically with Joseph Rosenzweig, an older attorney. She moved into an
apartment on which he made the down payment and acted as the lender for mortgages totaling $285,300. His attorney
had her sign the mortgage documents, but Rosenzweig made the payments and paid household expenses. Givens and
Rosenzweig later married, but she soon learned that he had forged her signature to obtain another loan and that he
was married to someone else. After their marriage was annulled, he filed a suit in a New York state court against her to
collect on the mortgages. The court issued a judgment in his favor. She appealed, claiming that the apartment had
been a “gift.”
relationship requiring the utmost good faith. Givens and Rosenzweig were not married when she signed the mortgage
raised questions. Indications that the apartment was a gift included the lack of a demand for payment until their
relationship disintegrated.
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Notes and Questions
Does the plaintiff’s status as a student support or undercut her claim? Facts in the defendant’s favor in this case
include those listed in the text, as well as her status as a student at the time of the transaction. Her specific financial
and academic situation might be scrutinized—how was she paying her tuition? what was she studying?—but generally
few students can afford monthly payments on mortgages totaling $285,300..
Does it seem plausible that a party would not understand the nature of a transaction in which he or she signed
documents for a mortgage or other loan? No, if the documents clearly state their purpose. And if the party was aware
that money was being loaned, and why, then he or she could not credibly claim that it was a gift. Yes, in some
This case might be revisited during a discussion of the elements of a gift in the chapter covering personal property.
CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 351
Do these requirements exist in the facts here? The most difficult element to show might be the donor’s intent. Did
Rosenzweig intend to give the apartment to Givens?
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 14.2
Suppose that the difference in the parties’ ages was reversed so that Rosenzweig was nineteen years Givens’s
junior. Should this affect the outcome in the case? Explain. In fact, Givens was twenty-nine at the time of the
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 14.2
Could Rosenzweig be characterized as a scoundrel? If so, should this influence a decision in this case? Discuss. One
of the appellate court judges referred to Rosenzweig’s “deficiencies of character” and he likely would be subject to
sanctions by the state attorneys’ professional responsibility organization. But a desire to see a scoundrel punished
should not motivate the application of the legal principles in this, or any other, case.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering claims of fraud include the following.
• Buy This, Inc. v. MCI Worldcom Communications, Inc., 209 F.Supp.2d 334 (S.D.N.Y. 2002) (the failure of a dealer in
long-distance airtime minutes to disclose to a provider of telecommunications services that the dealer intended to
• In re Sallee, 286 F.3d 878 (6th Cir. 2002) (a bank committed fraud, in relation to the financing obtained by debtors
for the purchase of a convenience store and laundromat, when the bank failed to provide the debtors with more than
one of the several appraisals the bank received on the property, and the debtors clearly based their decision to buy the
property on the basis of this one appraisal).
B. INTENT TO DECEIVE
1. Innocent Misrepresentation
This occurs when a person makes a statement that he or she believes to be true but that misrepresents a
material fact. Remedies include rescission but usually not damages.
CASE SYNOPSIS—
Case 14.3: Eaton v. Waldrop
Marguerite Eaton transferred by deed a certain parcel of land to her son James. Marguerite then moved into a
mobile home on the property with Bobby Joe Waldrop. Bobby Joe asked James to transfer that portion of the land to
him and Marguerite, representing falsely that they had married. James agreed. Marguerite soon transferred her
interest in the land to Bobby Joe. When James learned what had happened, he filed a suit in an Alabama state court
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Notes and Questions
How might James have avoided the run of events that led to this suit? Before executing a deed to transfer the land
to Bobby Joe and Marguerite, James might have verified that they were married, as Bobby Joe claimed. James could
have done this by asking Bobby Joe to produce a marriage certificate, or by checking with Marguerite, or by inspecting
the public records.
ANSWER TO QUESTIONS AT THE END OF CASE 14.3
1. Why was James arguing on appeal that intent to deceive was not a requirement for fraud? Given that Waldrop
had told James that he and Marguerite were married, when in fact they weren’t, couldn’t intent to deceive be
inferred? Discuss. Although the trial court’s decision was not published, one could assume that Eaton did not have
Waldrop and Marguerite the property, and therefore the land transfer was not based on fraud. On appeal, Eaton