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CHAPTER 15
MISTAKES, FRAUD, AND VOLUNTARY CONSENT
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
ETHICS TODAY—CRITICAL THINKING
What might happen if arbitration clauses were prohibited in all consumer contracts?
Certainly there would be more litigation and more class-action litigation. Some consumers
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 15.1—CRITICAL THINKING
LEGAL ENVIRONMENT
The statute at the center of this case provides for remedies that may not be available at
common law. Why would those additional remedies be sought and when would they
most likely be awarded? The statute at the center of the Schneiderman case—New York
2 UNIT THREE: CONTRACTS AND E-CONTRACTS
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Trump University, or Trump Entrepreneur Initiative, had offered courses in
real estate investing only online. Would the result in this case have been different?
CASE 15.2—LEGAL REASONING QUESTIONS
1A. In evaluating a claim of fraud, what factors does a court consider in determining
whether reliance was justifiable? In the Cronkelton case, the court states in its opinion,
“When determining whether reliance is justifiable courts consider the various circumstances
involved, such as the nature of the transaction, the form and materiality of the transaction, the
2A. In this case, what did the jury find with respect to the plaintiff’s claim of reliance?
What was the appellate court’s opinion of this finding? In the Cronkelton case, the jury
found that Cronkelton reasonably relied on Shivley's representations. On appeal, a state
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 3
3A. Did Shively’s misrepresentations rise to the level of fraud? Explain. Yes. Shivley's
misrepresentations to Cronkelton that he had taken the appropriate steps to winterize the
CASE 15.3—CRITICAL THINKING
ETHICAL
Was Cypress’s conduct unethical? Why or why not? Cypress’s conduct was probably
unethical. In failing to provide all material information, Cypress intentionally deceived Fazio.
SOCIAL
What does the decision in this case suggest to sellers of commercial real estate and
4 UNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Mistake
Yes, if both parties were ignorant of the fact of the structure, there may be grounds for
rescinding the contract. If there is a bilateral (mutual) mistake of material fact, such as structural
2A. Fraudulent misrepresentation
Anybody can file suit for anything; carrying the day in court is another matter. In the sale of an
old house, the buyer has an obligation to have it inspected by a professional. A seller may very
3A. Duty to disclose
Chelene appears to have lied because she said the house was in perfect condition and she
4A. Undue influence
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
The concept of caveat emptor (“let the buyer beware”) should be applied to all
sales, including those of real property. Buyers of personal and real property should take
responsibility for obtaining enough information about what they are buying so that they are not
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 5
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. In selling a house, Matt tells Ann that the wiring, fixtures, and appliances are of a
certain quality. Matt knows nothing about the quality, but it is not as specified. Ann buys
the house. On learning the true quality, Ann confronts Matt. He says he wasn’t trying to
fool her, he was only trying to make a sale. Can she rescind the deal? Why or why not?
2A. Elle, an accountant, certifies several audit reports to Flite Corporation, Elle’s client,
knowing that Flite intends to use the reports to obtain loans from Good Credit Company
(GCC). Elle believes that the reports are true and does not intend to deceive GCC, but
does not check the reports before certifying them. Can Elle be held liable to GCC? Why
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
15-1A. Undue influence
Undue influence arises from a relationship in which one party can, through unfair persuasion,
greatly influence or overcome the free will of another. Any contract entered into under
6 UNIT THREE: CONTRACTS AND E-CONTRACTS
15-2A. Fraudulent misrepresentation
Four basic elements are necessary to prove fraud, thus rendering a contract voidable: (1) an
Lastly, the issue centers on Grano’s duty to tell Tanner of the bypass. Ordinarily,
neither party in a nonfiduciary relationship has a duty to disclose facts, even when the
information might bear materially on the other’s decision to enter into the contract. Exceptions
are made, however, when the buyer cannot reasonably be expected to discover the information
known by the seller, in which case fairness imposes a duty to speak on the seller. Here, the
court can go either way. If the court decides there was no duty to disclose, deems the
prediction of future profits to be opinion rather than a statement of fact, and also decides there
was no justifiable reliance by Tanner because the books available to Tanner clearly indicated
Grano’s profit statement for the last year to be false, then Tanner cannot get his money back on
the basis of fraud.
15-3A. Voluntary consent
(a) Simmons and Jenson have made a bilateral mistake. The issue is whether the
(b) A contract entered into through a threat of criminal prosecution is generally held to
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 7
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
15–4A. Fraudulent misrepresentation
The court determined that “a promise made without a present intent to perform is a
misrepresentation of a material fact and is sufficient to support a cause of action for fraud.”
Esprit had promised to deliver pre-cut and pre-drilled logs that could be assembled quickly. It
15–5A. Fraudulent misrepresentation
Yes. Ordinarily, neither party to a contract has a duty to disclose facts about the object of their
deal. If a seller knows of a serious problem that a buyer cannot reasonably be expected to
discover, however, the seller has a duty to speak if the defect is latent and could not readily be
ascertained.
15–6A. Standard-form contracts
Desgro’s complaint was filed too late—the contract’s twelve-month limit was enforceable.
Standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by
one party to the other or otherwise impose limitations on claims and disputes. Many businesses
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
15–7A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Fraudulent misrepresentation
Yes, the facts in this problem evidence fraud. There are three elements to fraud: (1) the
misrepresentation of a material fact, (2) an intent to deceive, and (3) an innocent party’s
justifiable reliance on the misrepresentation. To collect damages, the innocent party must suffer
an injury.
Here, Pervis represented to Pauley that no further commission would be paid by Osbrink.
This representation was false—despite Pervis’s statement to the contrary, Osbrink continued to
send payments to Pervis. Pervis knew the representation was false, as shown by the fact that
15–8A. Fraudulent misrepresentation
Yes, the facts in the circumstances described in this problem satisfy the requirements for cause
of action based on fraudulent misrepresentation. Those requirements generally include the
following: 1. The misrepresentation of a material fact.
In this problem, Stibal averred in her book that she had been diagnosed with cancer and
had cured herself using a “self-discovered” healing method that she referred to as
“ThetaHealing.” Stibal’s representation that she cured herself of cancer was false, however, and
she knew it. This is indicated by her medical records, which did not confirm a cancer diagnosis.
Stibal used this false representation to induce people to take her classes in ThetaHealing.
Among those who believed Stibal’s claim was Kara Alexander, who at presumably considerable
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 9
15-9A. A QUESTION OF ETHICS—Mistake
(a) The court held that the contract was void due to mutual mistake and issued a
judgment in the defendant’s favor. The lower court determined, among other things, that a
mutual mistake of fact existed as to the divisibility of lot five—in other words, that the property
was entitled to a free split.
BRJM appealed this ruling to a state intermediate appellate court, which reversed the
lower court’s judgment and remanded the case for a new trial. The appellate court explained
that a mutual mistake requires a mutual misunderstanding between the contracting parties as to
a material fact and “effects a result that neither intended.”
Besides, “the fact that it was later determined that approval would be necessary in order
to subdivide the property adversely affected the plaintiff, as purchaser, not the defendant, as
seller. The defendant cannot seek to invalidate the agreement by asserting the defense of
mutual mistake on this basis because the defendant is not the party adversely affected by the
mistake.”
(b) As noted in the answer to the previous question, the court held that the contract
was void due to mutual mistake and issued a judgment in the defendant’s favor. The court found
in part the existence of a mutual mistake in the parties' reliance on an inaccurate appraisal that
resulted in a below market purchase price for the property.
10 UNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
15–10A. Fraudulent misrepresentation
(a) Yes, Rosenzweig could have committed fraud against Givens. Fraud requires (1) a
misrepresentation of a material fact, (2) an intent to deceive, (3) an innocent party’s justifiable
reliance on the misrepresentation, and (4) the innocent party’s injury. Rosenzweig
signed the mortgage, and married him. As for injury, besides the mental and emotional anguish
that these circumstances undoubtedly inflicted on Givens, she may have suffered other losses—
giving up educational or employment opportunities, for example.
decision in his favor.
(c) It might be possible to act ethically and still commit fraud. For example, if fraud
were committed in the service of an ethical duty or directed towards an ethical end—such as
