1 George Mason School of Law Contracts I Fraud F.H. Buckley [email protected]

*George Mason School of Law

Contracts I

Fraud

F.H. [email protected]

*Rational Choice: The no-duress assumptionFull InformationChoices are Freely MadeNon-satiationCompleteness or comparabilityNo third party effects (externalities)Perfect rationality

*Rational Choice: Six Assumptions

Full Information No mistakes (later)No misrepresentationsAnd no informational asymmetries*

Fraus omnia corrumpit

Next came Fraud, and he had on, Like Eldon, an ermined gown;His big tears, for he wept wellTurned to mill-stones as they fell

*Shelly, The Mask of AnarchyLord Eldon ordered that Shelleys children be taken from him

The Elements of FraudA False RepresentationRestatement 159**

The Elements of FraudA False Representation

Which the knows to be false. Restatement 162(1)(a)Scienter

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The Elements of FraudA False RepresentationWhich the knows to be false.

Made with the intention to induce the to enter into the contract. Restatement 162(1)

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The Elements of FraudA False RepresentationWhich the knows to be false.Made with the intention to induce s to enter into the contract.

On which the relies.Restatement 164

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The Elements of FraudA False RepresentationWhich the knows to be false.Made with the intention to induce s to enter into the contract. On which relies.

And which is materialRestatement 164(1), 162(2)

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And which is materialRestatement 164(1), 162(2)Does 164(1) dispense with materiality, if the representation is fraudulent?

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And which is materialRestatement 164(1), 162(2)What does upon which the recipient is justified in relying mean?

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The Elements of FraudThe Restatement on RelianceA False Assertion. 159

Which the knows to be false. 162(1)(a)

Made with the intention to induce s to enter into the contract. 162(1)

On which relies. 164

And which is material. 164(1), 162(2)**

What is an Assertion?It works: You got a problem with that?*

Mere puffs are not assertionsSimplex commendatio non obligat*


Contracts I

Fraud


Next day

Statute of FraudsUnconscionability**

The Elements of FraudA False Representation

Which the knows to be false.

Made with the intention to induce s to enter into the contract.

On which relies.

And which is material

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The Elements of FraudDoes Restatement 164 water down materiality?**

The Elements of FraudDoes Restatement 164 water down materiality?Section 164 is disjunctive**

The Elements of FraudDoes the Restatement water down materiality?Section 164 is disjunctiveMaterial non-fraudulent (innocent) misrepresentations**

The Elements of FraudDoes the Restatement water down materiality?Section 164 is disjunctiveMaterial non-fraudulent (innocent) misrepresentationsFraudulent immaterial misrepresentations**

The Elements of FraudBut what does this mean?upon which the recipient is justified in relying. 164

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The Elements of FraudRestatement 159: What is an assertion?What arent assertions?

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Mere puffsSpeiss v. Brandt*What was the remedy sought?

Lake McFarland: Three Miles from Cdn. border

Mere puffsSpeiss v. Brandt*What were the alleged representations?

Lake McFarland

Mere puffsSpeiss v. Brandt*

What if all the s had said was You can make good money out of the resort?

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You can pay it off in five years?

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We are making good money out of the resort.Gross income of $19,000

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We are making good money out of the resort. What if they had said this and then provided the financials?

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We are making good money out of the resort.What if they had provided the financials?Restatement 172

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We are making good money out of the resort. What do you conclude from the buyers willingness to do the deal even though the financials were not provided?

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We are making good money out of the resort. What do you conclude from the buyers willingness to do the deal even though the financials were not provided Or to make an offer before the misrepresentations?

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Qu. We are making good money out of the resort. What is the optimal profit to make where there is double taxation of income? Cf. Gallaghers dissent

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What would you have advised your client to say?

Mere puffsSpeiss v. Brandt*Does a merchant have heightened duties to one who is young and inexperienced?

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Mere puffsSpeiss v. Brandt*In youth, every manifestation of friendship seems genuine and deserving of special trust and confidence.

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Mere puffsSpeiss v. Brandt*When is Restatement 173 triggered?

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How is the reliance requirement treated in Ziff-Davis?**

How is the reliance requirement treated in Ziff-Davis?

Can a party be said to be harmed if he does not rely on a representation?

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How is the reliance requirement treated in Ziff-Davis?

Distinguish the action in fraud from the action for breach of warranty

Suing in tort: Punitive damages*

The Merger Clause in Danann

What is it and why did the parties agree to it?

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Absent the merger clause, what result?What is the parol evidence rule?

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Absent the merger clause, what result?The representations would ordinarily be excluded by the Parol Evidence Rule Here however the fraud exception to the Parol Evidence Rule would apply.

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Absent the merger clause, what result?The representations would ordinarily be excluded by the Parole Evidence Rule Here however the fraud exception to the Parole Evidence Rule would apply. Does the sophistication of the parties matter?Grumman v. Rohr p. 423

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Is there a logical problem in relying on a term of the contract when the fraud would impeach the entire contract?*


What if the fraudulent misrepresentation had been incorporated in the contract?

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What if the fraudulent misrepresentation had been incorporated in the contract?UCC 2-316(1)

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Signing a ContractMerit Music

*Bar, 601 South Monroe St.Baltimore MD


Were the terms harsh?

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Were the terms harsh?And just how would you know?

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Were the terms harsh?120 plays of the pinball machine @ week48 plays of the juke box @ week

**Put another nickel inTo the Nickleodeon (Teresa Brewer, 1950)


Were the terms harsh?Who was in the best position to determine the revenue from the machines?

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Were the terms harsh?Who was in the best position to determine the revenue from the machines?Were the Sonneborns inexperienced?

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Were the terms harsh?Who was in the best position to determine the revenue from the machines?Were the Sonneborns inexperienced?Did they have any reason to think that what they signed was not a contract?

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Have you ever signed a contract without reading it? What effect did you think the printed language had?

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Have you ever signed a contract without reading it? What effect did you think the printed language had?Restatement 211(1)

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Standard Form ContractsBirmingham TV v. Water Works

What were s arguments?*


Were the terms benign? *


Were the terms benign? So what is a proper limitation period?**


Were the terms harsh?

How would you expect bailees to react to the decision?

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Standard Form Contracts

Were the terms harsh? Does that matter?

How would you expect bailees to react to the decision?Cf. Association Standard Terms

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Standard Form Contracts

Were the terms harsh? Does that matter?

How would you expect bailees to react to the decision? Is the world now a better place?

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Thank God for proper warning signs*

Why Employ Standard Form Contracts?

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Economize on negotiations

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Police consumer fraud

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Economize on litigation

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Economize on litigation

Police agency costs of merchant**


What about emergency cases?

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What about emergency cases?Is St. Johns Episcopal a suitable case for duress? Or for relaxing the presumption that signed contracts bind one?

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Suppose the consumer is illiterate or cant speak English

*Elbonians*


Suppose the consumer is illiterate or cant speak EnglishPirkle v. Gurr

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*Rational Choice: Six Assumptions

Full Information No mistakes (later)No misrepresentationsAnd no informational asymmetries*

*Non-doisclosure

When is Restatement 161 triggered?Should one always have to disclose where there is an informational asymmetry?*

Informational Asymmetry

Ill pay $500 for the rug [but will go as high as $1,000].*

Informational AsymmetryCoca-Cola sells you a bottle of Coke but refuses to disclose the secret formula it uses to make it.*

When Do Disclosure Duties Arise?

Restatement 161(b)*

Non-disclosureWhat happened in Laidlaw? P. 451*Treaty of Ghent1815

*The siege of Rhodes

Non-disclosureCicero, Offices IIIA corn-merchant arrives at the famine-stricken city of Rhodes, before a great number of other vessels loaded with corn; and offers his corn for sale. Is he obliged to inform the buyers that there are a great number of other vessels about to arrive, laden with food?

Diogenes thought not. But Cicero thought, on the contrary, that this dissimulation was against good faith. There ought to exist among men a concord and affection which cannot permit us to prefer our private interest to the interest of our neighbor. *

Non-disclosureAquinas, Summa Theologica

Need the seller disclose where the goods are expected to be of less value at a future time, on account of the arrival of other merchants, which was not foreseen by the buyers?

Summa theologica II.2 77.3**



The seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what is going to happen.




The seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what is going to happen.

If however he were to do so, or if he lowered his price, it would be exceedingly virtuous on his part: although he does not seem to be bound to do this as a debt of justice.



Under which rule is the famine soonest over?**

Non-disclosure

What should the buyer have concluded from the sellers silence about changed market conditions?*

Non-disclosure

Which rule better promotes efficiency in Laidlaw?**

Non-disclosure

Which rule better promotes efficiency in Laidlaw?The incentive to acquire information

*

Non-disclosure

Which rule better promotes efficiency in Laidlaw?The incentive to acquire informationLitigation over nondisclosures

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Non-disclosure

An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find.*

Non-disclosure

An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find.If this were illegal, what would happen to his incentive to discover the information?*

Non-disclosure

A company executive in the same firm sells his stock without making disclosure. Same result?**

Non-disclosure

A company executive in the same firm sells his stock without making disclosure.Kronman: was there a cost to production of the information?**

Non-disclosure

A company executive in the same firm sells his stock without making disclosure.Kronman: was the a cost to production of the information?Under which rule is the information processed in the market most quickly?**

Non-disclosureJust what did the Schlemeyers know?*Termites

Non-disclosureDid they suppress the termite condition?*Termites

The rejection of an individualistic philosophy based on freedom of contract*Unlike Aquinas, we see it from a moral point of view

Non-disclosureShould Obde be confined to its special facts? And these were?*Termites

Non-disclosure

Should Obde be confined to its special facts?Does it matter that this was an apartment house?**

Non-disclosure

Should Obde be confined to its special facts?Does it matter that this was an apartment house?Does it matter that it was termites?**

Non-disclosure

Should Obde be confined to its special facts?Does it matter that this was an apartment house?Does it matter that it was termites?Does it matter that the seller made the defect harder to discover?**

Restatement 160In some states, bondo is a primary color*

Reed v. King: Materiality*O.J.s House

Strambovsky: 448*


Contracts I

Statute of Frauds


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Documents

1 George Mason School of Law Contracts I Fraud F.H. Buckley [email protected]