Bell Ringer

• What is fraud?

• What is an innocent misrepresentation?

• Did anyone do anything fun over break?

CH 6: Genuine Agreement

Fraud & Misrepresentation• If the offeror makes a valid offer, and the

offeree has made a valid acceptance, than a genuine agreement has been reached

• However, sometimes something goes wrong, and the agreement is said to be defective

• Several circumstances could create a defective agreement: fraud, misrepresentation, mistake duress, and undue influence

Fraud

• Fraud is a deliberate deception intended to secure an unfair or unlawful gain

• Fraud has 5 elements to it1. A false representation of fact2. Knowledge of the falsity by the

party making the false representation

3. Intent to deceive by the party making the false representation

4. Reasonable reliance by the innocent party

5. Actual loss suffered by the innocent party

• If you have been induced to enter into a contract by fraud you have a choice: you may rescind, or cancel, the contract, or you may sue for money damages

• Because of the deliberate deception involved in fraud, you may also collect punitive damages

False Representation of Fact• Fraud requires a false

representation of a material, existing fact– A Material fact is a fact that is

important to one of the parties– Fraud, Concealment, or

Misrepresentation• The law allows for a certain amount

of exaggeration: “sales talk,” “sales puffing,” or “sales puffery”

Sales Puffery• Illegal: I’ll tell you what…

If you buy this car you will get girls (or guys) to ask you out you’ll look so good. (Said as a fact, or a promise)

• Legal: A good looking guy like you, a good looking car like this…? I’ll let you imagine the possibilities.

Concealment• Concealment is known as passive fraud or

nondisclosure, and is considered just as fraudulent as actively deceiving an innocent party

• Concealment occurs when a party chooses not to reveal important information to you

Known to be false• To be held accountable for fraud,

the party making the false representation must be aware that the representation is false– This may be shown by proving

actual knowledge, or showing that the statement was made recklessly, without regard for the truth

– If a party can not prove that the other party was aware of the problem, they can not be held liable for fraud

To Prove Fraud• One must show that the false

representation was made with the intent that it be relied upon• The Person making the

misrepresentation must intend that the other party rely upon the information as part of the contract negotiations

• If fraud is to be proven, the false representation must be reasonably relied upon by the other party when the agreement is made

Resulting Loss• You may choose to enter into an

agreement based on bad information

• You may only sue for fraud if you suffer a loss from this information– If received something in exchange for

a favor you may not sue for fraud: Help me move my new fridge into the house and you can have my old one (you can’t sure for fraud if the old fridge is broken)

Innocent Misrepresentation

• Sometimes, people make innocent statements that turn out to be false

• However, that person honestly believed the statement to be true when they made it

• The law gives you the right to rescind the contract, but you may not win damages if the false representation was innocently made

Mistake

• When two parties enter a contract they – Have reasonable expectation

for the contract to be fulfilled– Believe certain information to

be true, but in some cases it may not be

• If this is not the case, then the parties may wish to avoid the contract

Unilateral Mistakes• A Unilateral mistake is an error on the part of only one

of the parties to the contract• Since the other party has made the agreement with

the reasonable belief of its fulfillment, the contract should not be blocked because one party made an error– A man published an add in the newspaper offering to sell

his motorcycle for $5,000, but the paper instead read $500.

• Mistake as to the Nature of the Agreement– A person is required to fulfill an

agreement even if they are mistake to what the agreement is

– If an oral agreement stated differently than a signed written agreement you are legally required to fulfill the written agreement

– If you can not read English you are still legally bound to the agreement

• Mistake as to the identity of a Party– If an offer is made to the wrong party in a

not face to face manor, the contract may be voidable.

– If the contract is offered face to face, it is a binding contract

Bilateral Mistake

• A bilateral mistake is when both parties are mistake about terms of the contract.

• In this instance either party can void the contract

• Mistake as to the Possibility of Performance– When either party enters into a contract believing that

the duties described in the agreement can be performed, but in fact, they can not

• Mistake as to the Subject Matter– Both parties can be mistaken about the identity of the

subject matter when they enter into a contract.• Chuck offers to sell Judy the store on the Corner of

Broadway and W 42 St. There are 2 different stores on two different corners of the same intersection.

Duress• Duress is overcoming a person’s will by use of force or

threat of force of bodily harm– Physical Duress: Actual physical violence is used to force a

person to enter a contract– Emotional Duress: Threat of physical force is used to force a

person to enter a contract– Economic Duress: Threats to a person’s business or professional

reputation are used to force a party to enter a contract

Undue Influence• Undue influence occurs when

a person uses unfair and improper persuasive pressure to force another person to enter into an agreement

• Circumstances such as ill health, old age, or mental immaturity may put a person in a weaker position, giving others the opportunity to take advantage of them

• Dependency Relationship: One party in the relationship is dependent on the other party because of ill health, old age, or mentally immature

• Unfair or Improper Pressure: The Independent person uses excessive pressure to force the dependent person to enter the contract

• Beneficial Contract: The contract that results benefits the independent party at the expense of the dependent party.

Exit Assignment• Imagine one of your friends is facing a

defective agreement (bad contract) with a recent contract. Write an 8-10 sentence story about the situation using as many of the key terms in the story as possible