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Chapter 15
Mistakes, Fraud, and Voluntary Consent
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.
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.
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A. UNILATERAL MISTAKES OF FACT
A unilateral mistake occurs when one party is mistaken as to a material fact. Generally, the mistaken
party has no right to relief. There are two exceptions—
matical mistake and it was done inadvertently and without gross negligence (for example, a typo).
ADDITIONAL BACKGROUND—
Unilateral Mistakes
text in which a section is noted, or is otherwise relevant, the full text of that section is set out. The following is
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
§ 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
B. BILATERAL (MUTUAL) MISTAKES OF FACT
1. Either Party Can Rescind the Contract
2. When the Parties Reasonably Interpret a Term Differently
If the parties to a contract attach materially different meanings to a term, a court may allow the
ADDITIONAL BACKGROUND—
Bilateral Mistakes
The following is the section of the Restatement (Second) of Contracts that relates to this part of the text—
Restatement (Second) of Contracts, Section 152.
§ 152. When Mistake of Both Parties Makes a Contract Voidable
contract was made has a material effect on the agreed exchange of performances, the contract is voidable by
the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.
account is taken of any relief by way of reformation, restitution, or otherwise.
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the
C. MISTAKES OF VALUE
When a mistake concerns the later market value of the object of the contract, normally either party can
enforce the contract.
II. Fraudulent Misrepresentation
Fraud affects the genuineness of the defrauded party’s consent to the contract. Normally, the innocent
party can either rescind the contract and be restored to his or her original position or enforce the contract
and seek damages for any injuries. The elements are—
• Misrepresentation of a material fact.
CASE SYNOPSIS—
Case 15.1: Schneiderman v. Trump Entrepreneur Initiative, LLC
Donald Trump and Michael Sexton formed Trump University LLC (later known as Trump Entrepreneur
Initiative LLC (TEI)) to sell courses in real estate investing. To attract students, a video featured Donald
Trump telling prospective students, “We’re going to have professors that are absolutely terrific—terrific
people, terrific brains, successful, the best. * * * All people that are handpicked by me.”
intentionally misleading more than 5,000 students, including over 600 New York residents, into paying as
Trump did not handpick the instructors.
The court dismissed the claim on the ground that it exceeded a three-year limit imposed on all statutory
causes of action and the specific statute did not provide the state with an independent cause of action for
fraud. The Attorney General appealed.
A state intermediate appellate court reversed the lower court’s dismissal of the fraud claim. Because
material issues of fact still existed as to that claim, however, the court remanded the case for further
proceedings. According to the appellate court, the lower court had misconstrued relevant case law to hold that
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Notes and Questions
How important is a deceived party’s reliance on another’s misrepresentation to establishing a
case against a deceiving party? The deceived party must justifiably rely on the misrepresentation, and the
misrepresentation must be an important factor in inducing the party to contract, though it need not be the only
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Fraud Claims
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 resell to third parties free minutes it acquired from the provider, as part of a promotion to
small businesses, was a material omission, supporting the provider’s fraud claim against the dealer; when it
was obvious that the dealer knew the provider was acting on the basis of its mistaken knowledge).
their decision to buy the property on the basis of this one appraisal).
ADDITIONAL BACKGROUND—
Fraudulent Misrepresentation
Following are sections of the Restatement (Second) of Contracts that relate to this part of the text—
Restatement (Second) of Contracts, Sections 163 and 164.
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§ 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
……………………….……………………..……………………….………………………………………………………………………………..
§ 164. When a Misrepresentation Makes a Contract Voidable
who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one
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. Yahoo! Personals, which calls itself the “top online dating site,” offers two options. One is for
people looking casual dates. It allows users to create their own profiles browse member profiles, and
exchange e-mail or instant messages. The second option, called Yahoo! Personals Primer, is for people who
want serious relationships. Users must take a 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
things.
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
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 7
dictation and vernacular [language] that such a random occurrence would not be possible.” Anthony also
argued that some photo images had multiple identities—that is, the same photo appeared in several different
profiles. He also alleged that Yahoo continued to circulate profiles of “actual, legitimate former subscribers
whose subscriptions neared its end date, Yahoo would send the subscriber a fake profile, heralding it a
“potential ‘new match.’
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 The CDA shields Internet service providers (ISPs)
FOR CRITICAL ANALYSIS
Assume that Anthony had contacted various of users of Yahoos online dating service only to
discover that each user’s profile exaggerated the user’s physical appearance, intelligence, and
occupation. Would Anthony prevail if he brought a lawsuit for fraudulent misrepresentation against
Yahoo in that situation? Why or why not?
A. MISREPRESENTATION HAS OCCURRED
Misrepresentation can occur through words or conduct, including concealment.
1. Misrepresentation by Conduct
Misrepresentation can occur by concealing a fact material to a contract.
ADDITIONAL BACKGROUND—
Misrepresentation by Conduct
The following is the section of the Restatement (Second) of Contracts that relates to this part of the text—
Restatement (Second) of Contracts, Section 160—with selected Comments and Illustrations.
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§ 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:
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 * * * .
a. Scope. Concealment is an affirmative act intended or known to be likely to keep another from learning of a
them, if its effect on the other is to lead him to believe that the facts do not exist or cannot be discovered.
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
from discovering that the foundation is cracked. B is prevented from discovering the defect and makes the
is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.
Illustrations:
1. A, seeking to induce B to make a contract to buy his house, paints the basement floor in order to prevent B
and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule
stated in § 164.
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
2. Statements of Opinion
Representations of future facts (“this land will be worth twice as much next year”), statements of
3. Misrepresentation of Law
A misrepresentation of law (“you can build anything you want here”) does not entitle a party to relief
4. Misrepresentation by Silence
Ordinarily, a party to a contract can keep silent without liability, unless a serious potential problem
B. INTENT TO DECEIVE
Scienter (“guilty knowledge”) signifies an intent to deceive. Scienter exists if a party—
• Knows a fact is not as stated.
• Makes a statement that he or she believes not to be true or makes a statement recklessly, without
1. Innocent Misrepresentation
2. Negligent Misrepresentation
A misrepresentation is negligent if a person fails to use reasonable care in disclosing material facts
or does not use the skill and competence required by his or her business or profession.
C. JUSTIFIABLE RELIANCE ON THE MISREPRESENTATION
A deceived party must justifiably rely on the misrepresentation, and the misrepresentation must be an
important factor in inducing the party to contract, though it need not be the sole factor. Reliance is not
justified if the innocent party knows the truth or relies on obviously extravagant statements.
CASE SYNOPSIS—
Case 15.2: Cronkelton v. Guaranteed Construction Services, LLC
Clifford Cronkelton negotiated with Patrick Shivley to buy a foreclosed car wash in Bellefontaine, Ohio.
Before the sale closed, Shivley told Cronkelton that the property had been winterized, but when Cronkelton
opened the door “it was clear * * * that this whole thing had froze up, and the extent of the damage could not
even be, you know, detailed at that point.” Cronkelton filed a suit in an Ohio state court against Shivley (and
Guaranteed Construction Services, LLC, which had been hired to winterize the property), claiming fraud.
From a jury verdict in Cronkelton’s favor, and an award of more than $140,000 in damages and attorney fees,
the defendants appealed.
A state intermediate appellate court affirmed. “The jury found that Cronkelton had reasonably relied on
Shivley’s representations. The jury’s finding was supported by competent, credible evidence.”
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Notes and Questions
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prospective buyer, the seller actually believes it to be true. Another possibility is that the seller hopes that it
will become true. Or the seller might assume that the prospective buyer would not sue even if the information
Why would a seller risk the possibility of a lawsuit by providing a prospective buyer with false
information about the object of their sale? It is possible that when the information is provided to the
subject to various claims, as in the situation of a bankrupt owner or a party involved in litigation. A receiver
has fiduciary duties with respect to the property—he or she must act in good faith and with a high standard of
other destructive potentialities, including freezing during the winter. He failed to fulfill his duty to winterize the
What is a receiver? What are a receiver’s duties? A receiver is a person appointed by a court for the
protection of certain property. Sometimes, the property must be collected from those who possess it and held
D. INJURY TO THE INNOCENT PARTY
A showing of injury may not be required in an action to rescind a contract, but in an action to recover
damages, proof of injury is universally required. The measure of damages is ordinarily equal to what the
value of the property would have been if it had been delivered as represented, less what it is actually
worth. In actions based on fraud, courts often award punitive damages.
CASE SYNOPSIS—
Case 15.3: Fazio v. Cypress/GR Houston I, LP
Peter Fazio offered to buy from Cypress/GR Houston I, LP, retail property in Texas that included a
Garden Ridge store. During the negotiations, Cypress failed to disclose that Garden Ridge had requested a
$240,000 reduction in its annual rent and Cypress’s bank was so concerned about Garden Ridge’s financial
health that it had required a personal guaranty on the property’s loan. Fazio paid $7.67 million for the
property. After the sale, Garden Ridge went bankrupt, and Fazio was forced to sell the property for $3.75
million. He filed a suit in a Texas state court against Cypress for fraud. The court ruled in Cypress’s favor.
Fazio appealed.
A state intermediate appellate court reversed. Cypress had engaged in fraud. Before the sale, Cypress
had agreed to provide all information in its possession, but then failed to do so. A reasonable person in
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Notes and Questions
Suppose that Cypress had told Fazio about Garden Ridge’s request for lower rent and the bank’s
request for a personal guaranty, and Fazio had still agreed to pay $7.67 million for property that had a
later value of only $3.75 million. Could Fazio have successfully sued Cypress for a mistake in value?
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 11
SPECIAL EXHIBIT—
Misrepresentation
The following illustration summarizes the elements of misrepresentation discussed in the text.
Was there a MISREPRESENTATION of a MATERIAL FACT?
The misrepresentation—
Did the misrepresenting party have an INTENT TO DECEIVE?
The misrepresenting party—
• Must know the misrepresented fact is not as stated
Did the deceived party JUSTIFIABLY RELY on the misrepresentation?
The deceived party—
• Must not have relied on obviously extravagant statements
Did the deceived party suffer an INJURY?
In most courts,
DAMAGES MAY BE RECOVERED.
The contract
YES
NO
NO
NO
NO
YES
YES
YES
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ENHANCING YOUR LECTURE—
“CATFISHING”—
IS THAT ONLINE “FRIEND” WHO YOU THINK IT IS?
When you are communicating with a person you have met only online, how do you know that person is
who she or he purports to be? After all, the person could turn out to be a “catfish.” The term comes from
Catfish, a 2010 film about a fake online persona.
their flesh became mushy. When catfish were added to the tanks, the cod swam around and stayed in good
condition. At the end of the film, a character says of the creator of the fake persona, “There are those people
CATFISHING MAKES NATIONAL HEADLINES
later claimed that he had been a victim of a catfishing hoax. Others suggested that his friends created the
the Heisman trophy.
Catfishing made headlines in 2012 when a popular Notre Dame football star supposedly fell victim to it.
Linebacker Manti Te’o said that his girlfriend Lennay Kekua, a student at Stanford, had died of leukemia after
a near-fatal car accident. Although Kekua had Facebook and Twitter accounts and Te’o had communicated
IS ONLINE FRAUDULENT MISREPRESENTATION ACTIONABLE?
Some victims of catfishing have turned to the courts, but they have had little success. A few have
attempted to sue Internet service providers for allowing fake personas, but the courts have generally
dismissed these suits.a Laws in some states make it a crime to impersonate someone online, but these laws
generally do not apply to those who create totally fake personas.’
Jesse had attempted suicide, Bonhomme suffered such emotional distress that she incurred more than
$5,000 in bills for a therapist. Eventually, she was told that Jesse had died of liver cancer. When Bonhomme
Attempts to recover damages for fraudulent misrepresentation have generally failed to meet the
requirement that there must be proof of actual injury. For instance, Paula Bonhomme developed an online
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 13
context of purely private personal relationships is simply not something the state regulates or in which the
CRITICAL THINKING
commercial transaction. The victim who paid the fee and relied on the advice to his or her detriment might
So far, victims of catfishing have had little success in the courts. Under what circumstances
might a person be able to collect damages for fraudulent misrepresentation involving online
impersonations? Online impersonation of a professional—such as an accountant, securities broker, adviser,
nutritionist, or therapist—might lead to liability for fraudulent misrepresentation. Someone posing as some
III. Undue Influence
Undue influence occurs in relationships in which one party can greatly influence another, thus overcoming the
other’s free will. A contract entered into under undue influence is voidable.
ADDITIONAL BACKGROUND—
Undue Influence
The following is the section of the Restatement (Second) of Contracts that relates to this part of the text—
Restatement (Second) of Contracts, Section 177.
§ 177. When Undue Influence Makes a Contract Voidable
(1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the
persuasion or who by virtue of the relation between them is justified in assuming that that person will not act
in a manner inconsistent with his welfare.
voidable by the victim.
voidable by the victim unless the other party to the transaction in good faith and without reason to know of the
undue influence either gives value or relies materially on the transaction.
A. ONE PARTY DOMINATES ANOTHER
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CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 15
B. PRESUMPTION OF UNDUE INFLUENCE IN CERTAIN SITUATIONS
When a dominant party is enriched from a fiduciary relationship, undue influence is presumed.
IV. Duress
Duress involves conduct of a coercive nature, such as forcing a party to contract by threatening the party with
a wrongful act. Duress is a defense to the enforcement of a contract and a ground for rescission.
A. THE THREATENED ACT MUST BE WRONGFUL OR ILLEGAL
Generally, the threatened act must be wrongful or illegal.
B. ECONOMIC DURESS
V. Adhesion Contracts and Unconscionability
An adhesion contract is written exclusively by one party and presented to the other party with no opportunity
to negotiate.
A. STANDARD-FORM CONTRACTS
These often contain fine-print provisions that shift a risk ordinarily borne by one party to the other. To be
B. UNCONSCIONABILITY AND THE COURTS
UCC 2–302, which applies to sales of goods, gives courts discretion to invalidate unconscionable
TEACHING SUGGESTIONS
1. Often, students have difficulty with the concept of mistake. The concept can be reduced to two basic
rules. First, there are unilateral mistakes, which are mistakes of material fact attributable to only one of the
2. Ask students to suppose that in the Raffles v. Wichelhaus case, although there are two ships called
Peerless, sailing from Bombay in different months, both parties intend the same Peerless. Do the parties
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Raffles makes the contract intending not to perform it, Wichelhaus can avoid the contract on grounds of
Ask students to imagine that although there are two ships called Peerless, sailing from Bombay in
misrepresentation.
3. Students should be encouraged to note situations in which the common law alone applies and situations
in which the UCC applies. Also noteworthy are those principles on which the common law and the UCC
diverge. To call attention to the divergences, students might be asked whether they think the courts should
use the UCC as a guide even in non–UCC cases.
customers to get out of contracts as a gesture of good will. Most people have come to expect this as a matter
of right. Ask students whether they think the law should be changed.
between mistakes of fact and mistakes as to market value or market conditions is not always as clear as it
sounds. You might use the following example to illustrate the distinction:
Suppose that Ann contracts to buy ten acres of land in Minnesota. Ann believes that Bob owns the land,
but it actually belongs to Carol. This is a mistake of fact, which could serve as grounds to avoid the
contract. Suppose, however, that Ann contracts to buy ten acres of land because she believes that she
4. Spend some time discussing fraudulent misrepresentation. Cases involving avoidance of contracts be-
that certain facts were false and to prove his or her intent to deceive.
5. With a little imagination, the elements of fraudulent misrepresentation can be presented as the four “I’s”:
• mIsrepresentation of a material fact.
• Intent.
• Injured party’s justifiable reliance (or simply rel-I-ance).
• Injury to the innocent party (or simply Injury).
Cyberlaw Link
What preventive techniques might a party use to minimize harm due to such wrongs as fraud,
undue influence, and duress in cyberspace? How can anyone assure the authenticity of the parties
(and their representations) with whom he or she does business over the Internet?
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 17
DISCUSSION QUESTIONS
1. What is the legal significance of the difference between a mistake in judgment as to market
conditions and a mistake of fact? Mistakes in judgment as to market conditions involve believing something is
2. Does a unilaterally mistaken party have any right to relief? Generally, no, but there are exceptions.
Relief may be granted if the other party knew or should have known that a mistake was made (a bid well below other
3. Why are mistakes of value not accorded the same relief as mistakes of fact? At different times, the
same thing may have different values. A contract establishes the value of an object for the moment. The next
moment, the value may change. A party may be mistaken about the direction that the change will take, but that
4. What are the elements of fraudulent misrepresentation? Fraudulent misrepresentation refers to
misrepresentation that is intended to mislead another. The perpetrator must know or believe that the statement is not
true, or must be lacking the confidence that he or she states or implies in the truth of the statement, or must know that
5. The elements of fraudulent misrepresentation include misrepresentation of a material fact. Discuss
this element. Misrepresentation can be in words (“this is a Warhol,” if the work is by another artist).
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6. In the context of fraudulent misrepresentation, when does a party evidence an intent to deceive?
Scienter indicates that there was an intent to deceive. Scienter exists (1) if a party knows a fact is not as stated; (2) if
7. How important is a deceived party’s reliance on another’s misrepresentation to establishing a case
against a deceiving party? The deceived party must justifiably rely on the misrepresentation, and the
misrepresentation must be an important factor in inducing the party to contract, though it need not be the only factor.
8. When does a deceived party have to show that he or she suffered an injury to recover on the basis of
fraud? A showing of injury may not be required in an action to rescind a contract, because rescission returns the
9. In what circumstance does undue influence occur? Undue influence occurs in relationships in which one
party can greatly influence another, thus overcoming the other’s free will (an attorney’s inducing a client to enter into a
10. What is duress? Duress involves conduct of a coercive nature. Forcing a party to contract by threatening a
ACTIVITY AND RESEARCH ASSIGNMENT
CHAPTER 15: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 19
Have students bring in standard form contracts (for example, residential leases, insurance policies, em-
ployment agency agreements, loan agreements) and discuss whether the contracts are adhesion contracts and
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 4: L & H Construction Co. contracted with Circle Redmont, Inc., which is based in Florida, to
make a staircase and flooring system. Redmont’s original proposal was to “engineer, fabricate, and install.”
Installation was cut from the deal, and in the final agreement, payment was due on “Supervision” instead of
In L & H Construction v. Circle Redmont, Inc., a state intermediate appellate court upheld the decision.
The contract was ambiguous. Redmont’s witnesses clarified that the final agreement stated the parties’
understanding—Redmont would only supervise the installation, not perform it. The trial court determined that the
witnesses were credible. The appellate court reversed the lower court’s final judgment in Redmont’s favor on other
grounds, however.
Why are situations such as the one presented in this case often sources of litigation appealed? 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.
The trial court allowed the parties to testify about the terms in their written contract. Redmont’s
witnesses seemed to be contradicting what was stated in the contract. Under what exception to the parol
evidence rule is such testimony admissible? Parol evidence is admissible to show that the true intent of the
parties was something other than that expressed in a written instrument. Because of the strong presumption that a
Suppose that Redmont had intentionally misled L & H to believe that installation was included in the
price. Would the court’s decision on the mutual mistake issue have been different? Discuss. Yes, the outcome
would have been different. The court most likely would have ruled in favor of L & H. The use of the word “install” in the
The parties performed as agreed, with Redmont working on schedule and L & H making timely
payments, until the issue of installation arose. Assuming that no further disputes arose, what might be the
appropriate remedy? An appropriate equitable remedy might be reformation, rescission, or specific performance.
20 UNIT THREE: CONTRACTS AND E-CONTRACTS
Footnote 9: Arthur Murray, Inc., operated dancing schools through local, franchised operators. At a
“dance party” at one of the schools, an instructor praised Audrey Vokes for her potential as “an excellent dancer.”
The instructor sold her eight half-hour dance lessons for $14.50 each. Over the next sixteen months, Vokes bought
2,302 hours of lessons for $31,090.45, all at the same school. When Vokes realized that she did not have the
Did the instructor misrepresent to Vokes any facts, as opposed to giving misleading statements of
Fraud requires reasonable reliance on a misrepresentation. How could Vokes reasonably have relied on
what she was told? Surely, she must have been aware of her own limitations. This is a question of fact to be
decided by the trial court on remand. The question before the appellate court in this case arose from the trial court’s
If one of Vokes’s fellow students, rather than her instructor, had praised her ability and encouraged
her to buy more lessons, should the result in this case have been different? Explain. The result likely should
have been different. In its opinion, the court explained that a “statement of a party having . . . superior knowledge