***Reserved for Ultimate_Writer**
Saylor URL: http://www.saylor.org/books Saylor.org
332
SELF-TEST ANSWERS
Chapter 10
Real Assent
LEARNING OBJECTIVES
After reading this chapter, you should understand the following:
1. Contracts require “a meeting of the minds” be tween competent parties, and if there is
no such “meeting,” the agreement is usually voidable.
2. Parties must enter the contract voluntarily, without duress or undue influence.
3. Misrepresentation or fraud, when proven, vitiates a contract.
4. A mistake may make a contract voidable.
& K D S W H U I U R P % X V L Q H V V / D Z D Q G W K H / H J D O ( Q Y L U R Q P H Q W Z D V D G D S W H G
E \ 7 K H 6 D \ O R U ) R X Q G D W L R Q X Q G H U D & U H D W L Y H & R P P R Q V $ W W U L E X W L R Q 1 R Q & R P P H U F L D O 6 K D U H $ O L N H
O L F H Q V H Z L W K R X W D W W U L E X W L R Q D V U H T X H V W H G E \ W K H Z R U N V R U L J L Q D O F U H D W R U R U O L F H Q V H H 7 K H 6 D \ O R U ) R X Q G D W L R Q Saylor URL: http://www.saylor.org/books Saylor.org
333
5. Parties to a contract must have capacity—tha t is, not labor under infancy, intoxication,
or insanity.
We turn to the second of the four requirements for a valid contract. In addition to manifestation of assent, a party’s
assent must be real; he or she must consent to the contract freely, with adequate knowledge, and must have capacity.
The requirement of real assent raises the following major questions:
1. Did the parties enter into the contract of thei r own free will, or was one forced to agree
under duress or undue influence?
2. Did the parties enter into the contract with full knowledge of the facts, or was one or
both led to the agreement through fraud or mistake?
3. Did both parties have the capa city to make a contract?
10.1 Duress and Undue Influence
LEARNING OBJECTIVES
1. Recognize that if a person makes an agreement under duress (being forced to enter a
contract against his or her will), the agreement is void.
2. Understand what undue influence is and wh at the typical circumstances are when it
arises to make a contract voidable.
Duress
When a person is forced to do something against his or her will, that person is said to have been the victim
of duress—compulsion. There are two types of duress: physical duress and duress by improper threat. A
contract induced by physical violence is void.
Physical Duress
If a person is forced into entering a contract on threat of physical bodily harm, he or she is the victim
of physical duress. It is defined by the Restatement (Second) of Contracts in Section 174: “If conduct that
appears to be a manifestation of assent by a party who does not intend to engage in that conduct is
physically compelled by duress, the conduct is not effective as a manifestation of assent.”
Comment (a) to Section 174 provides in part, “This Se ction involves an application of that principle to
those relatively rare situations in which actual physical force has been used to compel a party to appear
to assent to a contract.…The essence of this type of du ress is that a party is compelled by physical force to Saylor URL: http://www.saylor.org/books Saylor.org
334
do an act that he has no intention of doing. He is, it is sometimes said, ‘a mere mechanical instrument.’
The result is that there is no contract at all, or a ‘void contract’ as distinguished from a voidable one”
(emphasis added).
The Restatement is undoubtedly correct that there are “r elatively rare situations in which actual physical
force” is used to compel assent to a contract. Extortion is a crime.
Duress by Threat
The second kind of duress is duress by threat; it is more common than physical duress. Here the
perpetrator threatens the victim, who feels there is no reasonable alternative but to assent to the contract.
It renders the contract voidable. This rule contains a number of elements.
First, the threat must be improper. Second, there must be no reasonable alternative. If, for example, a
supplier threatens to hold up shipment of necessary goods unless the buyer agrees to pay more than the
contract price, this would not be duress if the buyer could purchase identical supplies from someone else.
Third, the test for inducement is subjective. It does not matter that the person threatened is unusually
timid or that a reasonable person would not have felt threatened. The question is whether the threat in
fact induced assent by the victim. Such facts as the vi ctim’s belief that the threatener had the ability to
carry out the threat and the length of time between the threat and assent are relevant in determining
whether the threat did prompt the assent.
There are many types of improper threats that might in duce a party to enter into a contract: threats to
commit a crime or a tort (e.g., bodily harm or taking of property), to instigate criminal prosecution, to
instigate civil proceedings when a threat is made in bad faith, to breach a “duty of good faith and fair
dealing under a contract with the recipient,” or to disclose embarrassing details about a person’s pr ivate
life.
Jack buys a car from a local used-car salesman, Mr. Olson, and the next day realizes he bought a lemon.
He threatens to break windows in Olson’s showroom if Olson does not buy the car back for $2,150, the
purchase price. Mr. Olson agrees. The agreement is void able, even though the underlying deal is fair, if
Olson feels he has no reasonable alternative and is frightened into agreeing. Suppose Jack knows that
Olson has been tampering with his cars’ odometers, a federal offense, and threatens to have Olson
prosecuted if he will not repurchase the car. Even though Olson may be guilty, this threat makes the
repurchase contract voidable, because it is a misuse for personal ends of a power (to go to the police) Saylor URL: http://www.saylor.org/books Saylor.org
335
given each of us for other purposes. If these threats failed, suppose Jack then tells Olson, “I’m going to
haul you into court and sue your pants off.” If Jack me ans he will sue for his purchase price, this is not an
improper threat, because everyone has the right to use the courts to gain what they think is rightfully
theirs. But if Jack meant that he would fabricate damages done him by a (falsely) claimed odometer
manipulation, that would be an improper threat. Although Olson could defend against the suit, his
reputation would suffer in the meantime from his being accused of odometer tampering.
A threat to breach a contract that induces the victim to sign a new contract could be improper. Suppose
that as part of the original purchase price, Olson agrees to make all ne cessary repairs and replace all failed
parts for the first ninety days. At the end of one month, the transmission dies, and Jack demands a
replacement. Olson refuses to repair the car unless Jack signs a contract agreeing to buy his next car from
Olson. Whether this threat is improper depends on whether Jack has a reasonable alternative; if a
replacement transmission is readily available and Jack has the funds to pay for it, he might have an
alternative in suing Olson in small claims court for the cost. But if Jack needs the car immediately and he
is impecunious, then the threat would be improper and the contract voidable. A threat to breach a
contract is not necessarily improper, however. It depends on whether the new contract is fair and
equitable because of unanticipated circumstances. If, for example, Olson discovers that he must purchase
a replacement transmission at three times the anticipated cost, his threat to hold up work unless Jack
agrees to pay for it might be reasonable.
Undue Influence
The Restatement of Contracts (Second) characte rizes undue influence as “unfair persuasion.” [1] It is a
milder form of duress than physical harm or threats. The unfairness does not lie in any
misrepresentation; rather, it occurs when the victim is under the domination of the persuader or is one
who, in view of the relationship between them, is wa rranted in believing that the persuader will act in a
manner detrimental to the victim’s welfare if the victim fails to assent. It is the improper use of trust or
power to deprive a person of free will and substitute instead another’s objective. Usually the fact pattern
involves the victim being isolated from receiving advice except from the persuader. Falling within this rule
are situations where, for example, a child takes advantag e of an infirm parent, a doctor takes advantage of
an ill patient, or a lawyer takes advantage of an unknowledgeable client. If there has been undue
influence, the contract is voidable by the party who has been unfairly persuaded. Whether the relationship Saylor URL: http://www.saylor.org/books Saylor.org
336
is one of domination and the persuasion is unfair is a factual question. The answer hinges on a host of
variables, including “the unfairness of the resulting bargain, the unavailability of independent advice, and
the susceptibility of the person persuaded.” [2] See Section 10.5.1 "Undue Influence" , Hodge v. Shea .
KEY TAKEAWAY
A contract induced by physical duress—threat of bo dily harm—is void; a contract induced by improper
threats—another type of duress—is voidable. Voidable also are contracts induced by undue influence,
where a weak will is overborne by a stronger one.
EXERCISES
1. What are the two types of duress?
2. What are the elements necessary to support a claim of undue influence?
[1] Restatement (Second) of Contracts, Section 177.
[2] Restatement (Second) of Contracts, Section 177(b).
10.2 Misrepresentation
LEARNING OBJECTIVES
1. Understand the two types of misrepresentation: fraudulent and nonfraudulent.
2. Distinguish between fraudulent misrepresentation in the execution and fraudulent
misrepresentation in the inducement.
3. Know the elements necessary to prove fraudulent and nonfraudulent misrepresentation.
4. Recognize the remedies for misrepresentation.
General Description
The two types of misrepresentation are fraudulent and nonfraudulent. Within the former are fraud in the
execution and fraud in the induceme nt. Within the latter are negligent misrepresentation and innocent
misrepresentation.
Misrepresentation is a statement of fact that is not consistent with the truth. If misrepresentation is
intentional, it is fraudulent misrepresentation; if it is not intentional, it is nonfraudulent
misrepresentation, which can be either negligent or innocent.
In further taxonomy, courts distinguish between fraud in the execution and fraud in the
inducement. Fraud in the execution is defined by the Restatement as follows: “If a misrepresentation as to Saylor URL: http://www.saylor.org/books Saylor.org
337
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.” [1] For example,
Alphonse and Gaston decide to sign a written contract incorporating terms to which they have agre ed. It is
properly drawn up, and Gaston reads it and approves it. Before he can sign it, however, Alphonse
shrewdly substitutes a different version to which Gaston has not agreed. Gaston signs the substitute
version. There is no contract. There has been fraud in the execution.
Fraud in the inducement is more common. It involv es some misrepresentation about the subject of the
contract that induces assent. Alphonse tells Gaston th at the car Gaston is buying from Alphonse has just
been overhauled—which pleases Gaston—but it has not been. This renders the contract voidable.
Fraudulent Misrepresentation
Necessary to proving fraudulent misrepresentation (usu ally just “fraud,” though technically “fraud” is the
crime and “fraudulent misrepresentation” is the civil wrong) is a misstatement of fact that is intentionally
made and justifiably relied upon.
Misstatement of Fact
Again, generally, any statement not in accord with th e facts (a fact is something amenable to testing as
true) is a misrepresentation. Falsity does not depend on intent. A typist’s unnoticed error in a letter
(inadvertently omitting the word “not,” for example, or transposing numbers) can amount to a
misrepresentation on which the recipient may rely (it is not fraudulent misrepresentation). A half-truth
can amount to a misrepresentation, as, for example, when the seller of a hotel says that the income is from
both permanent and transient guests but fails to disclose that the bulk of the income is from single-night
stopovers by seamen using the hotel as a brothel. [2]
Concealment
Another type of misrepresentation is concealment. It is an act that is equivalent to a statement that the
facts are to the contrary and that serves to prevent the other party from learning the true statement of
affairs; it is hiding the truth. A common example is painting over defects in a building—by concealing the
defects, the owner is misrepresenting the condition of the property. The act of concealment need not be
direct; it may consist of sidetracking the other party from gaining necessary knowledge by, for example, Saylor URL: http://www.saylor.org/books Saylor.org
338
convincing a third person who has knowledge of the defect not to speak. Concealment is always a
misrepresentation.
Nondisclosure
A more passive type of concealment is nondisclosure. Although generally the law imposes no obligation
on anyone to speak out, nondisclosure of a fact can operate as a misrepresentation under certain
circumstances. This occurs, for example, whenever the other party has erroneous information, or, as Reed
v. King (Section 10.5.2 "Misrepresentation by Concealment" ) shows, where the nondisclosure amounts to
a failure to act in good faith, or where the party who conceals knows or should know that the other side
cannot, with reasonable diligence, discover the truth.
In a remarkable 1991 case out of New York, a New Yo rk City stockbroker bought an old house upstate
(basically anyplace north of New York City) in the village of Nyack, north of New York City, and then
wanted out of the deal when he discovered—the defend ant seller had not told him—that it was “haunted.”
The court summarized the facts: “Plaintiff, to his horror, discovered that the house he had recently
contracted to purchase was widely reputed to be poss essed by poltergeists [ghosts], reportedly seen by
defendant seller and members of her family on numerous occasions over the last nine years. Plaintiff
promptly commenced this action seeking rescission of the contract of sale. Supreme Court reluctantly
dismissed the complaint, holding that plaintiff has no remedy at law in this jurisdiction.”
The high court of New York ruled he could rescind the contract because the house was “haunted as a
matter of law”: the defendant had promoted it as such on village tours and in Reader’s Digest. She had
concealed it, and no reasonable buyer’s inspection would have revealed the “fact.” The dissent basically
hooted, saying, “The existence of a poltergeist is no mo re binding upon the defendants than it is upon this
court.” [3]
Statement Made False by Subsequent Events
If a statement of fact is made false by later events, it must be disclosed as false. For example, in idle
chatter one day, Alphonse tells Gaston that he owns thirty acres of land. In fact, Alphonse owns only
twenty-seven, but he decided to exaggerate a little. He meant no harm by it, since the conversation had no
import. A year later, Gaston offers to buy the “thirty acres” from Alphonse, who does not correct the
impression that Gaston has. The failure to speak is a nondisclosure—presumably intentional, in this Saylor URL: http://www.saylor.org/books Saylor.org
339
situation—that would allow Gaston to rescind a contract induced by his belief that he was purchasing
thirty acres.
Statements of Opinion
An opinion, of course, is not a fact; neither is sale s puffery. For example, the statements “In my opinion
this apple is very tasty” and “These apples are the best in the county” are not facts; they are not expected
to be taken as true. Reliance on opinion is hazardous and generally not considered justifiable.
If Jack asks what condition the car is in that he wi shes to buy, Mr. Olson’s response of “Great!” is not
ordinarily a misrepresentation. As the Restatement puts it: “The propensity of sellers and buyers to
exaggerate the advantages to the other party of the bargains they promise is well recognized, and to some
extent their assertions must be discounted.” [4] Vague statements of quality, such as that a product is
“good,” ought to suggest nothing othe r than that such is the personal judgment of the opinion holder.
Despite this general rule, there are certain exceptions that justify reliance on opinions and effectively
make them into facts. Merely because someone is less astute than the one with whom she is bargaining
does not give rise to a claim of justifiable reliance on an unwarranted opinion. But if the person is
inexperienced and susceptible or gullible to blandishments, the contract can be voided, as illustrated
in Vokes v. Arthur Murray, Inc. in Section 10.5.3 "Misrepresentation by Assertions of Opinion" .
Misstatement of Law
Incorrect assertions of law usually do not give rise to any relief, but sometimes they do. An assertion that
“the city has repealed the sales tax” or that a court ha s cleared title to a parcel of land is a statement of
fact; if such assertions are false, they are governed by the same rules that govern misrepresentations of
fact generally. An assertion of the legal consequences of a given set of facts is generally an opinion on
which the recipient relies at his or her peril, especially if both parties know or assume the same facts.
Thus, if there is a lien on a house, the seller’s statement that “the courts will throw it out, you won’t be
bothered by it” is an opinion. A statement that “you can build a five-unit apartment on this property” is
not actionable because, at common law, people are su pposed to know what the local and state laws are,
and nobody should rely on a layperson’s statement ab out the law. However, if the statement of l aw is
made by a lawyer or real estate broker, or some other person on whom a layperson may justifiably rely,
then it may be taken as a fact and, if untrue, as the basis for a claim of misrepresentation. (Assertions
about foreign laws are generally held to be statements of fact, not opinion.) Saylor URL: http://www.saylor.org/books Saylor.org
340
Assertions of Intention
Usually, assertions of intention are not considered facts. The law allows considerable leeway in the
honesty of assertions of intention. The Restatement talks in terms of “a misrepresentation of
intention…consistent with reasonable standards of fair dealing.” [5] The right to misstate intentions is
useful chiefly in the acquisition of land; the cases permit buyers to misrepresent the purpose of the
acquisition so as not to arouse the suspicion of the seller that the land is worth considerably more than his
asking price. To be a misrepresentation that will permit rescission, an assertion of intention must be false
at the time made; that is, the person asserting an intention must not then have intended it. That later he
or she does not carry out the stated intention is not pr oof that there was no intention at the time asserted.
Moreover, to render a contract voidable, the false asse rtion of intention must be harmful in some way to
other interests of the recipient. Thus, in the common example, the buyer of land tells the seller that he
intends to build a residence on the lot, but he actually intends to put up a factory and has lied because he
knows that otherwise the seller will not part with it because her own home is on an adjacent lot. The
contract is voidable by the seller. So a developer says, as regards the picturesque old barn on the property,
“I’ll sure try to save it,” but after he buys the land he realizes it would be very expensive (and in the way),
so he does not try to save it. No misrepresentation.
Intentionally Made Misrepresentation
The second element necessary to prove fraud is that the misrepresentation was intentionally made. A
misrepresentation is intentionally made “if the maker intends his assertion to induce a party to manifest
his assent and the maker (a) knows or believes that the assertion is not in accord with the facts, or (b)
does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he
does not have the basis that he states or implies for the assertion.” [6]
The question of intent often has practical consequences in terms of the remedy available to the plaintiff. If
the misrepresentation is fraudulent, the plaintiff may, as an alternative to avoiding the contract, recover
damages. Some of this is discussed inSection 10.2.4 "Remedies" and more fully in Chapter 16 "Remedies",
where we see that some states would force the plaint iff to elect one of these two remedies, whereas other
states would allow the plaintiff to pursue both remedies (although only one type of recovery would
eventually be allowed). If the misrepresentation is not intentional, then the common law allowed the
plaintiff only the remedy of rescission. But the Uniform Commercial Code (UCC), Section 2-721, allows Saylor URL: http://www.saylor.org/books Saylor.org
341
both remedies in contracts for the sale of goods, whether the misrepresentation is fraudulent or not, and
does not require election of remedies.
Reliance
The final element necessary to prove fraud is reliance by the victim. He or she must show that the
misrepresentation induced assent—that is, he or she relied on it. The reliance need not be solely on the
false assertion; the defendant cannot win the case by demonstrating that the plaintiff would have assented
to the contract even without the misrepresentation. It is sufficient to avoid the contract if the plaintiff
weighed the assertion as one of the important factors leading him to make the contract, and he believed it
to be true. The person who asserts reliance to avoid a contract must have acted in good faith and
reasonably in relying on the false assertion. Thus if the victim failed to read documents given him that
truly stated the facts, he cannot later complain that he relied on a contrary statement, as, for example,
when the purchaser of a car dealership was told the inventory consisted of new cars, but the supporting
papers, receipt of which he acknowledged, clearly stat ed how many miles each car had been driven. If Mr.
Olson tells Jack that the car Jack is interested in is “a recognized classic,” and if Jack doesn’t care a whit
about that but buys the car because he likes its tail fins, he will have no case against Mr. Olson when he
finds out the car is not a classic: it didn’t matter to him, and he didn’t rely on it.
Ordinarily, the person relying on a statement need not verify it independently. However, if verification is
relatively easy, or if the statement is one that concerns matters peculiarly within the person’s purview, he
or she may not be held to have justifiably relied on the other party’s fa lse assertion. Moreover, usually the
rule of reliance applies to statements about past events or existing facts, not about the occurrence of
events in the future.
Nonfraudulent Misrepresentation
Nonfraudulent misrepresentation may also be ground s for some relief. There are two types: negligent
misrepresentation and innocent misrepresentation.
Negligent Misrepresentation
Where representation is caused by carelessness, it is negligent misrepresentation. To prove it, a plaintiff
must show a negligent misstatement of fact that is material and justifiably relied upon. Saylor URL: http://www.saylor.org/books Saylor.org
342
Negligent
As an element of misrepresentation, “negligent” here means the party who makes the representation was
careless. A potential buyer of rural real estate asks the broker if the neighborhood is quiet. The broker
assures her it is. In fact, the neighbors down the road have a whole kennel of hunting hounds that bark a
lot. The broker didn’t know that; she just assumed the neighborhood was quiet. That is negligence: failure
to use appropriate care.
Misstatement of Fact
Whether a thing is a fact may be subject to the same general analysis used in discussing fraudulent
misrepresentation. (A person could negligently conceal a fact, or negligently give an opinion, as in legal
malpractice.)
Materiality
A material misrepresentation is one that “would be likely to induce a reasonable person to manifest his
assent” or that “the maker knows…would be likely to induce the recipient to do so.” [7] An honestly
mistaken statement that the house for sale was built in 1922 rather than 1923 would not be the basis for
avoiding the contract because it is not material unless the seller knew that the buyer had sentimental or
other reasons for purchasing a house built in 1922.
We did not mention materiality as an element of fraud; if the misrepresentation is fraudulent, the victim
can avoid the contract, no matter the significance of the misrepresentation. So although materiality is not
technically required for fraudulent misrepresentation, it is usually a crucial factor in determining whether
the plaintiff did rely. Obviously, the more immaterial the fa lse assertion, the less likely it is that the victim
relied on it to his detriment. This is especially the case when the defendant knows that he does not have
the basis that he states for an assertion but believes that the particular point is unimportant and therefore
immaterial. And of course it is usually not worth the plaintiff’s while to sue over an immaterial fraudulent
misrepresentation. Consequently, for practical purpos es, materiality is an important consideration in
most cases. Reed v. King (Section 10.5.2 "Misrepresentation by Concealment" ) discusses materiality (as
well as nondisclosure).
Justifiable Reliance
The issues here for negligent misrepresentation are the same as those set out for fraudulent
misrepresentation. Saylor URL: http://www.saylor.org/books Saylor.org
343
Negligent misrepresentation implies culpability and is usually treated the same as fraudulent
misrepresentation; if the representation is not fraudulent, however, it cannot be the basis for rescission
unless it is also material.
Innocent Misrepresentation
The elements necessary to prove innocent misrepresentation are, reasonably enough, based on what we’ve
looked at so far, as follows: an innocent misstatement of fact that is material and justifiably relied upon.
It is not necessary here to go over the elements in detail. The issues are the same as previously discussed,
except now the misrepresentation is innocent. The plaintiffs purchased the defendants’ eighteen-acre
parcel on the defendants’ representation that the land came with certain water rights for irrigation, which
they believed was true. It was not true. The plaintiffs were entitled to rescission on the basis of innocent
misrepresentation. [8]
Remedies
Remedies will be taken up in Chapter 16 "Remedies", but it is worth noting the difference between
remedies for fraudulent misrepresentation and remedies for nonfraudulent misrepresentation.
Fraudulent misrepresentation has traditionally given the victim the right to rescind the contract promptly
(return the parties to the before-contract status) or affirm it and bring an action for damages caused by
the fraud, but not both. [9] The UCC (Section 2-721) has rejected the “election of remedies” doctrine; it
allows cumulative damages, such that the victim can both return the goods and sue for damages. And this
is the modern trend for fraudulent misrepresentation: victims may first seek damages, and if that does not
make them whole, they may seek rescission. [10] In egregious cases of fraud where the defendant has
undertaken a pattern of such deceit, the rare civil remedy of punitive damages may be awarded against
the defendant.
One further note: the burden of proof for fraudulent mi srepresentation is that it must be proved not just
“by a preponderance of the evidence,” as in the typical civil case, but rather “by clear, cogent, and
convincing evidence”; the fact finder must believe the claim of fraud is very probably true. [11]
KEY TAKEAWAY
Misrepresentation may be of two types: fraudulent (in the execution or in the inducement) and
nonfraudulent (negligent or innocent). Each type has different elements that must be proved, but in Saylor URL: http://www.saylor.org/books Saylor.org
344
general there must be a misstatement of fact by some means that is intentionally made (for fraud),
material (for nonfraudulent), and justifiably relied upon.
EXERCISES
1. Distinguish between fraudulent misrepresentation and nonfraudulent
misrepresentation, between fraud in the execution and fraud in the inducement, and
between negligent and innocent misrepresentation.
2. List the elements that must be shown to prove the four different types of
misrepresentation noted in Exercise 1.
3. What is the difference between the traditio nal common-law approach to remedies for
fraud and the UCC’s approach?
[1] Restatement (Second) of Contracts, Section 163.
[2] Ikeda v. Curtis , 261 P.2d 684 (Wash. 1951).
[3] Stambovsky v. Ackley , 169 A.D.2d 254 (N.Y. 1991).
[4] Restatement (Second) of Contracts, Section 168(d).
[5] Restatement (Second) of Contracts, Section 171(1).
[6] Restatement (Second) of Contracts, Section 162(1).
[7] Restatement (Second) of Contracts, Section 162(2).
[8] Lesher v. Strid, 996 P.2d 988 (Or. Ct. App. 2000).
[9] Merritt v. Craig , 753 A.2d 2 (Md. Ct. App. 2000).
[10] Ehrman v. Mann , 979 So.2d 1011 (Fla. Ct. App. 2008).
[11] Kirkham v. Smith , 23 P.3d 10 (Wash. Ct. App. 2001).
10.3 Mistake
LEARNING OBJECTIVES
1. Recognize under what circumstances a person may be relieved of a unilateral mistake.
2. Recognize when a mutual mistake will be grounds for relief, and the types of mutual
mistakes.
In discussing fraud, we have considered the ways in which trickery by the other party makes a contract
void or voidable. We now examine the ways in which the parties might “trick” themselves by making Saylor URL: http://www.saylor.org/books Saylor.org
345
assumptions that lead them mistakenly to believe that they have agreed to something they have not. A
mistake is “a belief about a fact that is not in accord with the truth.” [1]
Mistake by One Party
Unilateral Mistake
Where one party makes a mistake, it is a unilateral mist ake. The rule: ordinarily, a contract is not voidable
because one party has made a mistake about the subject matter (e.g., the truck is not powerful enough to
haul the trailer; the dress doesn’t fit).
Exceptions
If one side knows or should know that the other has made a mistake, he or she may not take advantage of
it. A person who makes the mistake of not reading a written document will usually get no relief, nor will
relief be afforded to one whose mistake is caused by negligence (a contractor forgets to add in the cost of
insulation) unless the negligent party would suffer unconscionable hardship if the mistake were not
corrected. Courts will allow the correction of drafting errors in a contract (“reformation”) in order to make
the contract reflect the parties’ intention. [2]
Mutual Mistake
In the case of mutual mistake—both parties are wr ong about the subject of the contract—relief may be
granted.
The Restatement sets out three requirements for successfully arguing mutual mistake. [3] The party seeking
to avoid the contract must prove that
1. the mistake relates to a “basic assumpti on on which the contract was made,”
2. the mistake has a material effect on the agreed exchange of performances,
3. the party seeking relief does not bear the risk of the mistake.
Basic assumption is probably clear enough. In the famous “cow case,” the defendant sold the plaintiff a
cow—Rose of Abalone—believed by both to be barren an d thus of less value than a fertile cow (a promising
young dairy cow in 2010 might sell for $1,800). [4] Just before the plaintiff was to take Rose from the
defendant’s barn, the defendant discovered she was “large with calf”; he refused to go on with the
contract. The court held this was a mutual mistake of fact—“a barren cow is substantially a different
creature than a breeding one”—and ruled for the defendant. That she was infertile was “a basic Saylor URL: http://www.saylor.org/books Saylor.org
346
assumption,” but—for example—that hay would be readily available to feed her inexpensively was not, and
had hay been expensive, that would not have vitiated the contract.
Material Effect on the Agreed-to Exchange of Performance
“Material effect on the agreed-to exchange of performance” means that because of the mutual mistake,
there is a significant difference between the value th e parties thought they were exchanging compared
with what they would exchange if the contract were pe rformed, given the standing facts. Again, in the cow
case, had the seller been required to go through with the deal, he would have given up a great deal more
than he anticipated, and the buyer would have received an unagreed-to windfall.
Party Seeking Relief Does Not Bear the Risk of the Mistake
Assume a weekend browser sees a painting sitting on the floor of an antique shop. The owner says, “That
old thing? You can have it for $100.” The browser takes it home, dusts it off, and hangs it on the wall. A
year later a visitor, an expert in art history, recognizes the hanging as a famous lost El Greco worth $1
million. The story is headlined; the antique dealer is chagrined and claims the contract for sale should be
voided because both parties mistakenly thought they were dickerin g over an “old, worthless” painting. The
contract is valid. The owner is said to bear the ri sk of mistake because he contracted with conscious
awareness of his ignorance: he knew he didn’t know what the painting’s possible value might be, but he
didn’t feel it worthwhile to have it appraised. He gambled it wasn’t worth much, and lost.
KEY TAKEAWAY
A mistake may be unilateral, in which case no relief will be granted unless the other side knows of the
mistake and takes advantage of it. A mistake may be mu tual, in which case relief may be granted if it is
about a basic assumption on which the contract was made, if the mistake has a material effect on the
agreed-to exchange, and if the person adversely af fected did not bear the risk of the mistake.
EXERCISES
1. Why is relief usually not granted for unila teral mistakes? When is relief granted for
them?
2. If there is a mutual mistake, what does the pa rty seeking relief have to show to avoid the
contract?
[1] Restatement (Second) of Contracts, Section 151. Saylor URL: http://www.saylor.org/books Saylor.org
347
[2] Sikora v. Vanderploeg , 212 S.W.3d 277 (Tenn. Ct. App. 2006).
10.4 Capacity
LEARNING OBJECTIVES
1. Understand that infants may avoid their contracts, with limitations.
2. Understand that insane or intoxicated people may avoid their contracts, with limitations.
3. Understand the extent to which contracts made by mentally ill persons are voidable,
void, or effectively enforceable.
4. Recognize that contracts made by intoxicated persons may be voidable.
A contract is a meeting of minds. If someone lacks me ntal capacity to understand what he is assenting
to—or that he is assenting to anything—it is unreasonable to hold him to the consequences of his act. At
common law there are various classes of people who are presumed to lack the requisite capacity. These
include infants (minors), the mentally ill, and the intoxicated.
Minors (or “Infants”)
The General Rule
The general rule is this: minors (or more legalistically “infants”) are in most states persons younger than
seventeen years old; they can avoid their contracts, up to and within a reasonable time after reaching
majority, subject to some exceptions and limitations. Th e rationale here is that infants do not stand on an
equal footing with adults, and it is unfair to require them to abide by contracts made when they have
immature judgment.
The words minor and infant are mostly synonymous, but not exactl y, necessarily. In a state where the
legal age to drink alcohol is twenty-one, a twenty-yea r-old would be a minor, but not an infant, because
infancy is under eighteen. A seventeen-year-old may avoid contracts (usually), but an eighteen-year-old,
while legally bound to his contracts, cannot legally drin k alcohol. Strictly speaking, the better term for one
who may avoid his contracts is infant, even though, of course, in normal speaking we think of an infant as
a baby.
The age of majority (when a person is no longer an in fant or a minor) was lowered in all states except
Mississippi during the 1970s (to correspond to the Twenty-Sixth Amendment, ratified in 1971,
guaranteeing the right to vote at eighteen) from twenty-one to either eighteen or nineteen. Legal rights for
those under twenty-one remain ambiguous, however. Although eighteen-year-olds may assent to binding Saylor URL: http://www.saylor.org/books Saylor.org
348
contracts, not all creditors and landlords believe it, and they may require parents to cosign. For those
under twenty-one, there are also legal impediments to holding certain kinds of jobs, signing certain kinds
of contracts, marrying, leaving home, and drinking alcohol. There is as yet no uniform set of rules.
The exact day on which the disability of minority vanishes also varies. The old common-law rule put it on
the day before the twenty-first birthday. Many states have changed this rule so that majority commences
on the day of the eighteenth birthday.
An infant’s contract is voidable, not void. An infant wishing to avoid th e contract need do nothing positive
to disaffirm. The defense of infancy to a lawsuit is sufficient; although the adult cannot enforce the
contract, the infant can (which is why it is said to be voidable, not void).
Exceptions and Complications
There are exceptions and complications here. We call out six of them.
Necessities
First, as an exception to the general rule, infants are generally liable for the reasonable cost of necessities
(for the reason that denying them the right to contract for necessities would harm them, not protect
them). At common law, a necessity was defined as food, medicine, clothing, or shelter. In recent years,
however, the courts have expanded the concept, so that in many states today, necessities include property
and services that will enable the infant to earn a living and to provide for those dependent on him. If the
contract is executory, the infant can simply disaffirm. If the contract has been executed, however, the
infant must face more onerous consequences. Although he will not be required to perform under the
contract, he will be liable under a theory of “quasi-contract” for the reasonable value of the necessity.
In Gastonia Personnel Corp. v. Rogers , an emancipated infant, nineteen years old (before the age of
minority was reduced), needed employment; he contra cted with a personnel company to find him a job,
for which it would charge him a fee. [1] The company did find him a job, and when he attempted to
disaffirm his liability for payment on the grounds of infancy, the North Carolina court ruled against him,
holding that the concepts of necessities “should be enlarged to include such…services as are reasonable
and necessary to enable the infant to earn the money required to provide the necessities of life for
himself” and his dependents. Saylor URL: http://www.saylor.org/books Saylor.org
349
Nonvoidable Contracts
Second, state statutes variously prohibit disa ffirmation for such contracts as insurance, education or
medical care, bonding agreements, stocks, or bank accounts. In addition, an infant will lose her power to
avoid the contract if the rights of third parties interv ene. Roberta, an infant, sells a car to Oswald; Oswald,
in turn, shortly thereafter sells it to Byers, who knows nothing of Roberta. May Roberta—still an infant—
recover it from Byers? No: the rights of the third part y have intervened. To allow the infant seller recovery
in this situation would undermine faith in commercial transactions.
Misrepresentation of Age
A third exception involves misrepresentation of age. Certainly, that the adult reasonably believed the
infant was an adult is of no consequence in a contract suit. In many states, an infant may misrepresent his
age and disaffirm in accordance with the general rule. Bu t it depends. If an infant affirmatively lies about
his age, the trend is to deny disaffirmation. A Michigan statute, for instance, prohibits an infant from
disaffirming if he has signed a “separate instrument co ntaining only the statement of age, date of signing
and the signature.” And some states estop him from claiming to be an infant even if he less expressly
falsely represented himself as an adult. Estoppel is a refusal by the courts on equitable grounds to allow a
person to escape liability on an otherwise valid defense; unless the infant can return the consideration, the
contract will be enforced. It is a question of fact how far a nonexpress (an implied) misrepresentation will
be allowed to go before it is considered so clearly misleading as to range into the prohibited area. Some
states hold the infant liable for damages for the tort of misrepresentation, but others do not. As William
Prosser, the noted torts scholar, said of cases paying no attention to an infant’s lying about his age, “The
effect of the decisions refusing to recognize tort liab ility for misrepresentation is to create a privileged
class of liars who are a great trouble to the business world.” [2]
Ratification
Fourth, when the infant becomes an adult, she has two choices: she may ratify the contract or disaffirm it.
She may ratify explicitly; no further consideration is necessary. She may also do so by implication—for
instance, by continuing to make payments or retainin g goods for an unreasonable period of time. If the
child has not disaffirmed the contract while still an infant, she may do so within a reasonable time after
reaching majority; what is a “reasonable time” depends on the circumstances. Saylor URL: http://www.saylor.org/books Saylor.org
350
Duty to Return Consideration Received
Fifth, in most cases of disavowal, the infant’s only obligation is to return the goods (if he still has them) or
repay the consideration (unless it has been dissipated); he does not have to account for what he wasted,
consumed, or damaged during the contract. But since the age of majority has been lowered to eighteen or
nineteen, when most young people have graduated from high school, some courts require, if appropriate
to avoid injustice to the adult, that the infant account for what he got. (In Dodson v. Shrader, the supreme
court of Tennessee held that an infant would–if the co ntract was fair–have to pay for the pickup truck he
bought and wrecked.) [3]
Tort Connected with a Contract
Sixth, the general rule is that infants are liable for their torts (e.g., assault, trespass, nuisance, negligence)
unless the tort suit is only an indirect method of enforcing a contract. Henry, age seventeen, holds himself
out to be a competent mechanic. He is paid $500 to overhaul Baker’s engine, but he does a careless job
and the engine is seriously damaged. He offers to re turn the $500 but disaffirms any further contractual
liability. Can Baker sue him for his negligence, a tort? No, because such a suit would be to enforce the
contract.
Persons Who Are Mentally Ill or Intoxicated
Mentally Ill Persons
The general rule is that a contract made by person who is mentally ill is voidable by the person when she
regains her sanity, or, as appropriate, by a guardian. If, though, a guardian has been legally appointed for
a person who is mentally ill, any contract made by the mentally ill person is void, but may nevertheless be
ratified by the ward (the incompetent person who is under a guardianship) upon regaining sanity or by
the guardian. [4]
However, if the contract was for a necessity, the other party may have a valid claim against the estate of
the one who is mentally ill in order to prevent unju st enrichment. In other cases, whether a court will
enforce a contract made with a person who is mental ly ill depends on the circumstances. Only if the
mental illness impairs the competence of the person in the particular transaction can the contract be
avoided; the test is whether the person understood the nature of the business at hand. Upon avoidance,
the mentally ill person must return any property in her possession. And if the contract was fair and the
other party had no knowledge of the mental illness, the court has the power to order other relief. Saylor URL: http://www.saylor.org/books Saylor.org
351
Intoxicated Persons
If a person is so drunk that he has no awareness of his acts, and if the other person knows this, there is no
contract. The intoxicated person is obligated to refund the consideration to the other party unless he
dissipated it during his drunkenness. If the other pers on is unaware of his intoxicated state, however, an
offer or acceptance of fair terms manifesting assent is binding.
If a person is only partially inebriated and has some understanding of his actions, “avoidance depends on
a showing that the other party induced the drunkenness or that the consideration was inadequate or that
the transaction departed from the normal pattern of si milar transactions; if the particular transaction is
one which a reasonably competent person might have made, it cannot be avoided even though entirely
executory.” [5] A person who was intoxicated at the time he made the contract may nevertheless
subsequently ratify it. Thus where Mervin Hyland, se veral times involuntarily committed for alcoholism,
executed a promissory note in an alcoholic stupor but later, while sober, paid the interest on the past-due
note, he was denied the defense of intoxication; the court said he had ratified his contract. [6] In any event,
intoxicated is a disfavored defense on public policy grounds.
KEY TAKEAWAY
Infants may generally disaffirm their contracts up to majority and within a reasonable time afterward, but
the rule is subject to some exce ptions and complications: necessities , contracts made nonvoidable by
statute, misrepresentation of age, extent of duty to return consideration, ratification, and a tort connected
with the contract are among these exceptions.
Contracts made by insane or intoxicated people ar e voidable when the person regains competency. A
contract made by a person under guardianship is vo id, but the estate will be liable for necessities. A
contract made while insane or intoxicated may be ratified.
EXERCISES
1. Ivar, an infant, bought a used car—not a necessity—for $9,500. Selle r took advantage of
Ivar’s infancy: the car was really worth only $5,500. Can Ivar keep the car but disclaim
liability for the $4,000 difference?
2. If Ivar bought the car and it was a necessity , could he disclaim liability for the $4,000?
3. Alice Ace found her adult son’s Christmas stoc king; Mrs. Ace herself had made it fifty
years before. It was considerably deteriorated. Isabel, sixteen, handy with knitting, Saylor URL: http://www.saylor.org/books Saylor.org
352
agreed to reknit it for $100, which Mrs. Ace paid in advance. Isabel, regrettably, lost the
stocking. She returned the $100 to Mrs. Ace, who was very upset. May Mrs. Ace now sue
Isabel for the loss of the stocking (conversion) and emotional distress?
4. Why is voluntary intoxication a disfavored defense?
[1] Gastonia Personnel Corp. v. Rogers , 172 S.E.2d 19 (N.C. 1970).
[2] William L. Prosser, Handbook of the Law of Torts , 4th ed. (St. Paul, MN: West, 1971), 999.
[3] Dodson v. Shrader , 824 S.W.2d 545 (Tenn. 1992).
[4] Restatement (Second) of Contracts, Section 13.
[5] Restatement (Second) of Contracts, Section 16(b).
[6] First State Bank of Sinai v. Hyland, 399 N.W.2d 894 (S.D. 1987).
10.5 Cases
Undue Influence
Hodge v. Shea
168 S.E.2d 82 (S.C. 1969)
Brailsford, J.
In this equitable action the circuit court decreed spec ific performance of a contract for the sale of land,
and the defendant has appealed. The plaintiff is a phys ician, and the contract was prepared and executed
in his medical office on August 19, 1965. The defendant had been plaintiff’s patient for a number of years.
On the contract date, he was seventy-five years of age, was an inebriate of long standing, and was afflicted
by grievous chronic illnesses, including arteriosclerosis , cirrhosis of the liver, neuritises, arthritis of the
spine and hip and varicose veins of the legs. These afflictions and others required constant medication
and frequent medical attention, and rendered him infirm of body and mind, although not to the point of
incompetency to contract.
During the period immediately before and after August 19, 1965, George A. Shea, the defendant, was
suffering a great deal of pain in his back and hip and was having difficulty in voiding. He was attended
professionally by the plaintiff, Dr. Joseph Hodge, either at the Shea home, at the doctor’s office or in the
hospital at least once each day from August 9 through August 26, 1965, except for August 17. The contract
was signed during the morning of August 19. One of Dr. Hodge’s frequent house calls was made on the Saylor URL: http://www.saylor.org/books Saylor.org
353
afternoon of that day, and Mr. Shea was admitted to the hospital on August 21, where he remained until
August 25.
Mr. Shea was separated from his wife and lived alone. He was dependent upon Dr. Hodge for house calls,
which were needed from time to time. His relationship with his physician, who sometimes visited him as a
friend and occasionally performed non-professional se rvices for him, was closer than ordinarily arises
from that of patient and physician.…
“Where a physician regularly treats a chronically ill person over a period of two years, a confidential
relationship is established, raising a presumption that financial dealings between them are fraudulent.”
[Citation]
A 125 acre tract of land near Mr. Shea’s home, adjace nt to land which was being developed as residential
property, was one of his most valuable and readily sala ble assets. In 1962, the developer of this contiguous
land had expressed to Mr. Shea an interest in it at $1000.00 per acre. A firm offer of this amount was
made in November, 1964, and was refused by Mr. Shea on the advice of his son-in-law that the property
was worth at least $1500.00 per acre. Negotiations between the developer and Mr. Ransdell commenced
at that time and were in progress when Mr. Shea, at the instance of Dr. Hodge and without consulting Mr.
Ransdell or anyone else, signed the contract of Augu st 19, 1965. Under this contract Dr. Hodge claims the
right to purchase twenty choice acres of the 125 acre tract for a consideration calculated by the circuit
court to be the equivalent of $361.72 per acre. The mar ket value of the land on the contract date has been
fixed by an unappealed finding of the master at $1200.00 per acre.…
The consideration was expressed in the contract between Dr. Hodge and Mr. Shea as follows:
The purchase price being (Cadillac Coupe DeVille 6600) & $4000.00 Dollars, on the following terms: Dr.
Joseph Hodge to give to Mr. George Shea a new $6600 coupe DeVille Cadillac which is to be registered in
name of Mr. George A. Shea at absolutely no cost to him. In return, Mr. Shea will give to Dr. Joe Hodge
his 1964 Cadillac coupe DeVille and shall transfer title of this vehicle to Dr. Hodge. Further, Dr. Joseph
Hodge will pay to Mr. George A. Shea the balance of $4000.00 for the 20 acres of land described above
subject to survey, title check, less taxes on purchase of vehicle.
Dr. Hodge was fully aware of Mr. Shea’s financial troubles, the liens on his property and his son-in-law’s
efforts in his behalf. He was also aware of his patient’s predilection for new Cadillacs. Although he was not
obligated to do so until the property was cleared of liens, which was not accomplished until the following Saylor URL: http://www.saylor.org/books Saylor.org
354
June, Dr. Hodge hastened to purchase a 1965 Cadillac Coupe DeVille and delivered it to Mr. Shea on the
day after his discharge from the hospital on August 25, 1965. If he acted in haste in an effort to fortify
what he must have realized was a dubious contract, he has so far succeeded.…
The case at hand is attended by gross inadequacy of consideration, serious impairment of the grantor’s
mentality from age, intemperance and disease, and a confidential relationship between the grantee and
grantor. Has the strong presumption of vitiating unfairness arising from this combination of
circumstances been overcome by the evidence? We must conclude that it has not. The record is devoid of
any evidence suggesting a reason, compatible with fairness, for Mr. Shea’s assent to so disadvantageous a
bargain. Disadvantageous not only because of the gross disparity between consideration and value, but
because of the possibility that the sale would impede the important negotiations in which Mr. Ransdell
was engaged. Unless his memory failed him, Mr. Shea knew that his son-in-law expected to sell the 125
acre tract for about $1500.00 per acre as an importan t step toward raising sufficient funds to satisfy the
tax and judgment liens against the Shea property. These circumstances furnish strong evidence that Mr.
Shea’s assent to the contract, without so much as notice to Mr. Ransdell, was not the product of a
deliberate Exercise of an informed judgment.…
Finally, on this phase of the case, it would be naiv e not to recognize that the 1965 Cadillac was used to
entice a highly susceptible old man into a hard trade. Mr. Shea was fatuously fond of new Cadillacs, but
was apparently incapable of taking care of one. His own 1964 model (he had also had a 1963 model) had
been badly abused. According to Dr. Hodge, it ‘smelled like a toilet. * * * had several fenders bumped,
bullet holes in the top and the car was just filthy * * *. It was a rather foul car.’…Knowing the condition of
Mr. Shea’s car, his financial predicament and the activi ties of his son-in-law in his behalf, Dr. Hodge used
the new automobile as a means of influencing Mr. Shea to agree to sell. The means was calculated to
becloud Mr. Shea’s judgment, and, under the circumstances, its use was unfair.…
Reversed and remanded.
CASE QUESTIONS
1. Why is it relevant that Mr. Shea was separated from his wife and lived alone?
2. Why is it relevant that it was his doctor who convinced him to sell the real estate?
3. Why did the doctor offer the old man a Cadillac as part of the deal? Saylor URL: http://www.saylor.org/books Saylor.org
355
4. Generally speaking, if you agree to sell your real estate for less than its real value, that’s
just a unilateral mistake and the courts will grant no relief. What’s different here?
Misrepresentation by Concealment
Reed v. King
193 Cal. Rptr. 130 (Calif. Ct. App. 1983)
Blease, J.
In the sale of a house, must the seller disclose it wa s the site of a multiple murder? Dorris Reed purchased
a house from Robert King. Neither King nor his real es tate agents (the other named defendants) told Reed
that a woman and her four children were murdered there ten years earlier. However, it seems “truth will
come to light; murder cannot be hid long.” (Shakespeare, Merchant of Venice, Act II, Scene II.) Reed
learned of the gruesome episode from a neighbor afte r the sale. She sues seeking rescission and damages.
King and the real estate agent defendants successfully demurred to her first amended complaint for
failure to state a cause of action. Reed appeals the ensuing judgment of dismissal. We will reverse the
judgment.
Facts
We take all issuable facts pled in Reed’s complaint as true. King and his real estate agent knew about the
murders and knew the event materially affected the market value of the house when they listed it for sale.
They represented to Reed the premises were in good condition and fit for an “elderly lady” living alone.
They did not disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of
that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in purchasing
the house because of the stigma. Reed paid $76,000, but the house is only worth $65,000 because of its
past.…
Discussion
Does Reed’s pleading state a cause of action? Concealed within this question is the nettlesome problem of
the duty of disclosure of blemishes on real property wh ich are not physical defects or legal impairments to
use.
Numerous cases have found non-disclosure of physical defects and legal impediments to use of real
property are material. [Citation] However, to our knowledge, no prior real estate sale case has faced an
issue of non-disclosure of the kind presented here. Should this variety of ill-repute be required to be Saylor URL: http://www.saylor.org/books Saylor.org
356
disclosed? Is this a circumstance where “non-disclosure of the fact amounts to a failure to act in good faith
and in accordance with reasonable standards of fair dealing [?]” (Rest.2d Contracts, § 161, subd. (b).)
The paramount argument against an affirmative conclusi on is it permits the camel’s nose of unrestrained
irrationality admission to the tent. If such an “irrational” consideration is permitted as a basis of
rescission the stability of all conveyances will be seriously undermined. Any fact that might disquiet the
enjoyment of some segment of the buying public may be seized upon by a disgruntled purchaser to void a
bargain. In our view, keeping this genie in the bottle is not as difficult a task as these arguments assume.
We do not view a decision allowing Reed to survive a demurrer in these unusual circumstances as
endorsing the materiality of facts predicating peripheral, insubstantial, or fancied harms.
The murder of innocents is highly unusual in its potent ial for so disturbing buyers they may be unable to
reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of
the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating
and discovering this disquieting possibility. Accordingl y, the fact is not one for which a duty of inquiry
and discovery can sensibly be imposed upon the buyer.
Reed alleges the fact of the murders has a quantifiable effect on the market value of the premises. We
cannot say this allegation is inherently wrong and, in the pleading posture of the case, we assume it to be
true. If information known or accessible only to the seller has a significant and measureable effect on
market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making
the duty to disclose turn upon the character of the information. Physical usefulness is not and never has
been the sole criterion of valuation. Stamp collections and gold speculation would be insane activities if
utilitarian considerations were the sole measure of value.
Reputation and history can have a significant effect on the value of realty. “George Washington slept here”
is worth something, however physically inconsequential that consideration may be. Ill-repute or “bad will”
conversely may depress the value of property. Failure to disclose such a negative fact where it will have a
forseeably depressing effect on income expected to be generated by a business is tortuous. [Citation] Some
cases have held that unreasonable fears of the potential buying public that a gas or oil pipeline may
rupture may depress the market value of land and entitle the owner to incremental compensation in
eminent domain. Saylor URL: http://www.saylor.org/books Saylor.org
357
Whether Reed will be able to prove her allegation the decade-old multiple murder has a significant effect
on market value we cannot determine. If she is able to do so by competent evidence she is entitled to a
favorable ruling on the issues of materiality and duty to disclose. Her demonstration of objective tangible
harm would still the concern that permitting her to go forward will open the floodgates to rescission on
subjective and idiosyncratic grounds.…
The judgment is reversed.
CASE QUESTIONS
1. Why is it relevant that the plaintiff was “an elderly lady living alone”?
2. How did Mrs. Reed find out about the gruesome fact here?
3. Why did the defendants conceal the facts?
4. What is the concern about opening “flood gates to rescission on subjective and
idiosyncratic grounds”?
5. Why did George Washington sleep in so many places during the Revolutionary War?
6. Did Mrs. Reed get to rescind her contract a nd get out of the house as a result of this
case?
Misrepresentation by Assertions of Opinion
Vokes v. Arthur Murray, Inc.
212 S.2d. 906 (Fla. 1968)
Pierce, J.
This is an appeal by Audrey E. Vokes, plaintiff belo w, from a final order dismissing with prejudice, for
failure to state a cause of action, her fourth amende d complaint, hereinafter referred to as plaintiff’s
complaint.
Defendant Arthur Murray, Inc., a corporation, authoriz es the operation throughout the nation of dancing
schools under the name of “Arthur Murray School of Da ncing” through local franchised operators, one of
whom was defendant J. P. Davenport whose dancing establishment was in Clearwater.
Plaintiff Mrs. Audrey E. Vokes, a widow of 51 years and without family, had a yen to be “an accomplished
dancer” with the hopes of finding “new interest in life .” So, on February 10, 1961, a dubious fate, with the
assist of a motivated acquaintance, procured her to attend a “dance party” at Davenport’s “School of
Dancing” where she whiled away the pleasant hours, sometimes in a private room, absorbing his Saylor URL: http://www.saylor.org/books Saylor.org
358
accomplished sales technique, during which her grace and poise were elaborated upon and her rosy future
as “an excellent dancer” was painted for her in vivid and glowing colors. As an incident to this interlude,
he sold her eight 1/2-hour dance lessons to be utilized within one calendar month therefrom, for the sum
of $14.50 cash in hand paid, obviously a baited “come-on.”
Thus she embarked upon an almost endless pursuit of the terpsichorean art during which, over a period of
less than sixteen months, she was sold fourteen “dance courses” totaling in the aggregate 2302 hours of
dancing lessons for a total cash outlay of $31,090.45 [about $220,000 in 2010 dollars] all at Davenport’s
dance emporium. All of these fourteen courses were evidenced by execution of a written “Enrollment
Agreement-Arthur Murray’s School of Dancing” with the addendum in heavy black print, “No one will be
informed that you are taking dancing lessons. Your relati ons with us are held in strict confidence”, setting
forth the number of “dancing lessons” and the “lessons in rhythm sessions” currently sold to her from
time to time, and always of course accompanied by payment of cash of the realm.
These dance lesson contracts and the monetary cons ideration therefore of over $31,000 were procured
from her by means and methods of Davenport and hi s associates which went beyond the unsavory, yet
legally permissible, perimeter of “sales puffing” and intruded well into the forbidden area of undue
influence, the suggestion of falsehood, the suppress ion of truth, and the free Exercise of rational
judgment, if what plaintiff alleged in her complaint wa s true. From the time of her first contact with the
dancing school in February, 1961, she was influenced un wittingly by a constant and continuous barrage of
flattery, false praise, excessive compliments, and panegyric encomiums, to such extent that it would be
not only inequitable, but unconscionable, for a Court exercising inherent chancery power to allow such
contracts to stand.
She was incessantly subjected to overreaching blandishment and cajolery. She was assured she had “grace
and poise”; that she was “rapidly improving and developing in her dancing skill”; that the additional
lessons would “make her a beautiful dancer, capable of dancing with the most accomplished dancers”;
that she was “rapidly progressing in the development of her dancing skill and gracefulness”, etc., etc. She
was given “dance aptitude tests” for the ostensible purpose of “determining” the number of remaining
hours of instructions needed by her from time to time.
At one point she was sold 545 additional hours of dancing lessons to be entitled to an award of the
“Bronze Medal” signifying that she had reached “the Bronze Standard”, a supposed designation of dance Saylor URL: http://www.saylor.org/books Saylor.org
359
achievement by students of Arthur Murray, Inc.…At another point, while she still had over 1,000 unused
hours of instruction she was induced to buy 151 additional hours at a cost of $2,049.00 to be eligible for a
“Student Trip to Trinidad”, at her own expense as she later learned.…
Finally, sandwiched in between other lesser sales promotions, she was influenced to buy an additional 481
hours of instruction at a cost of $6,523.81 in order to “be classified as a Gold Bar Member, the ultimate
achievement of the dancing studio.”
All the foregoing sales promotions, illu strative of the entire fourteen separate contracts, were procured by
defendant Davenport and Arthur Murray, Inc., by false representations to her that she was improving in
her dancing ability, that she had excellent potential, that she was responding to instructions in dancing
grace, and that they were developing her into a beautiful dancer, whereas in truth and in fact she did not
develop in her dancing ability, she had no “dance apti tude,” and in fact had difficulty in “hearing that
musical beat.” The complaint alleged that such representations to her “were in fact false and known by the
defendant to be false and contrary to the plaintiff’s tr ue ability, the truth of plaintiff’s ability being fully
known to the defendants, but withheld from the plaint iff for the sole and specific intent to deceive and
defraud the plaintiff and to induce her in the purchasing of additional hours of dance lessons.” It was
averred that the lessons were sold to her “in total disregard to the true physical, rhythm, and mental
ability of the plaintiff.” In other words, while she first exulted that she was entering the “spring of her life”,
she finally was awakened to the fact there was “spring” neither in her life nor in her feet.
The complaint prayed that the Court decree the dance co ntracts to be null and void and to be cancelled,
that an accounting be had, and judgment entered against, the defendants “for that portion of the
$31,090.45 not charged against specific hours of inst ruction given to the plaintiff.” The Court held the
complaint not to state a cause of action and dismissed it with prejudice. We disagree and reverse.
It is true that “generally a misrepresentation, to be ac tionable, must be one of fact rather than of opinion.”
[Citations] But this rule has significant qualifications, applicable here. It does not apply where there is a
fiduciary relationship between the parties, or where th ere has been some artifice or trick employed by the
representor, or where the parties do not in general deal at “arm’s length” as we understand the phrase, or
where the representee does not have equal opportunity to become apprised of the truth or falsity of the
fact represented. [Citation] As stated by Judge Allen of this Court in [Citation]: Saylor URL: http://www.saylor.org/books Saylor.org
360
“* * * A statement of a party having * * * superior knowledge may be regarded as a statement of fact
although it would be considered as opinion if the parties were dealing on equal terms.”…
In [Citation] it was said that “* * * what is plainly in jurious to good faith ought to be considered as a fraud
sufficient to impeach a contract.”… [Reversed.]
CASE QUESTIONS
1. What was the motivation of the “motivated acquaintance” in this case?
2. Why is it relevant that Mrs. Vokes was a “widow of 51 years and without family”?
3. How did the defendant J. P. Davenport entice her into spending a lot of money on dance
lessons?
4. What was the defendants’ defense as to why they should not be liable for
misrepresentation, and why was that defense not good?
5. Would you say the court here is rather co ndescending to Mrs. Vokes, all things
considered?
Mutual Mistake
Konic International Corporation v. Spokane Computer Services, Inc.,
708 P.2d 932 (Idaho 1985)
The magistrate found the following facts. David Young, an employee of Spokane Computer, was instructed
by his employer to investigate the possibility of purchasing a surge protector, a device which protects
computers from damaging surges of electrical current. Young’s investigation turned up several units
priced from $50 to $200, none of which, however, we re appropriate for his employer’s needs. Young then
contacted Konic. After discussing Spokane Computer’s needs with a Konic engineer, Young was referred
to one of Konic’s salesmen. Later, after deciding on a certain unit, Young inquired as to the pr ice of the
selected item. The salesman responded, “fifty-six twenty.” The salesman meant $5,620. Young in turn
thought $56.20.
The salesman for Konic asked about Young’s authorit y to order the equipment and was told that Young
would have to get approval from one of his superiors. Young in turn prepared a purchase order for $56.20
and had it approved by the appropriate authority. Young telephoned the order and purchase order
number to Konic who then shipped the equipment to Spokane Computer. However, because of internal
processing procedures of both parties the discrepanc y in prices was not discovered immediately. Spokane Saylor URL: http://www.saylor.org/books Saylor.org
361
Computer received the surge protector and installed it in its office. The receipt and installation of the
equipment occurred while the president of Spokane Computer was on vacation. Although the president’s
father, who was also chairman of the board of Spokane Computer, knew of the installation, he only
inquired as to what the item was and who had ordered it. The president came back from vacation the day
after the surge protector had been installed and placed in operation and was told of the purchase. He
immediately ordered that power to the equipment be turned off because he realized that the equipment
contained parts which alone were worth more than $56 in value. Although the president then told Young
to verify the price of the surge protector, Young failed to do so. Two weeks later, when Spokane Computer
was processing its purchase order and Konic’s invoice, the discrepancy between the amount on the invoice
and the amount on the purchase order was discovered. The president of Spokane Computer then
contacted Konic, told Konic that Young had no authority to order such equipment, that Spokane
Computer did not want the equipment, and that Koni c should remove it. Konic responded that Spokane
Computer now owned the equipment and if the equipment was not paid for, Konic would sue for the
price. Spokane Computer refused to pay and this litigation ensued.
Basically what is involved here is a failure of communication between the parties. A similar failure to
communicate arose over 100 years ago in the celebrated case of Raffles v. Wichelhaus, [Citation] which
has become better known as the case of the good ship “Peerless.” In Peerless, the parties agreed on a sale
of cotton which was to be delivered from Bombay by the ship “Peerless.” In fact, there were two ships
named “Peerless” and each party, in agreeing to th e sale, was referring to a different ship. Because the
sailing time of the two ships was materially different, ne ither party was willing to agree to shipment by the
“other” Peerless. The court ruled that, because each part y had a different ship in mind at the time of the
contract, there was in fact no binding contract. The Peerless rule later was incorporated into section 71 of
the Restatement of Contracts and has now evolved into section 20 of Restatement (Second) of Contracts
(1981). Section 20 states in part:
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different
meanings to their manifestations and
(a) neither knows or has reason to know the meaning attached by the other.
Comment (c) to Section 20 further explains that “eve n though the parties manifest mutual assent to the
same words of agreement, there may be no contract because of a material difference of understanding as Saylor URL: http://www.saylor.org/books Saylor.org
362
to the terms of the exchange.” Another authority, Williston, discussing situations where a mistake will
prevent formation of a contract, agrees that “where a phrase of contract…is reasonably capable of different
interpretations…there is no contract.” [Citation]
In the present case, both parties attributed different meanings to the same term, “fifty-six twenty.” Thus,
there was no meeting of the minds of the parties. With a hundred fold difference in the two prices,
obviously price was a material term. Because the “f ifty-six twenty” designation was a material term
expressed in an ambiguous form to which two meanings were obviously applied, we conclude that no
contract between the parties was ever formed. Accord ingly, we do not reach the issue of whether Young
had authority to order the equipment.
[Affirmed.]
CASE QUESTIONS
1. Why is it reasonable to say that no contract was made in this case?
2. A discrepancy in price of one hundred times is, of course, enormous. How could such an
egregious mistake have occurred by both pa rties? In terms of running a sensible
business, how could this kind of mistake be avoided before it resulted in expensive
litigation?
10.6 Summary and Exercises
Summary
No agreement is enforceable if the parties did not enter into it (1) of their own free will, (2) with adequate
knowledge of the terms, and (3) with the ment al capacity to appreciate the relationship.
Contracts coerced through duress will void a contract if actually induced through physical harm and will
make the contract voidable if entered under the compulsion of many types of threats. The threat must be
improper and leave no reasonable alternative, but the test is subjective—that is, what did the person
threatened actually fear, not what a more reasonable person might have feared.
Misrepresentations may render an agreement void or voidable. Among the factors to be considered are
whether the misrepresentation was deliberate and material; whether the promisee relied on the
misrepresentation in good faith; whether the representation was of fact, opinion, or intention; and
whether the parties had a special relationship. Saylor URL: http://www.saylor.org/books Saylor.org
363
Similarly, mistaken beliefs, not induced by misrepresentations, may suffice to avoid the bar gain. Some
mistakes on one side only make a contract voidable. Mo re often, mutual mistakes of facts will show that
there was no meeting of the minds.
Those who lack capacity are often entitled to avoid contract liability. Although it is possible to state t he
general rule, many exceptions exist—for example, in contracts for necessities, infants will be liable for the
reasonable value of the goods purchased.
EXERCISES
1. Eulrich, an auto body mechanic who had never operated a business, entered into a Snap-
On Tools franchise agreement. For $22,000 invested from his savings and the promise of
another $22,000 from the sale of inventory, he was provided a truck full of tools. His job
was to drive around his territory and sell them. The agreement allowed termination by
either party; if Eulrich terminated, he was entitled to resell to Snap-On any new tools he
had remaining. When he complained that his territory was not profitable, his supervisors
told him to work it harder, that anybody could make money with Snap-On’s marketing
system. (In fact, the evidence was the system made money for the supervisors and little
for dealers; dealers quickly failed and were replaced by new recruits.) Within several
months Eulrich was out of money and desperate. He tried to “check in” his truck to get
money to pay his household bills and uninsured medical bills for his wife; the supervisors
put him off for weeks. On the check-in day, the exhausted Eulrich’s supervisors berated
him for being a bad businessman, told him no check would be forthcoming until all the
returned inventory was sold, and presented him with a number of papers to sign,
including a “Termination Agreement” whereby he agreed to waive any claims against
Snap-On; he was not aware that was what he had signed. He sued to rescind the
contract and for damages. The defendants held up the waiver as a defense. Under what
theory might Eulrich recover? [1]
2. Chauncey, a college student, worked part-time in a restaurant. After he had worked for
several months, the owner of the restaura nt discovered that Chauncey had stolen
$2,000 from the cash register. The owner ca lled Chauncey’s parents and told them that
if they did not sign a note for $2,000, he would initiate criminal proceedings against Saylor URL: http://www.saylor.org/books Saylor.org
364
Chauncey. The parents signed and delivered the note to the owner but later refused to
pay. May the owner collect on the note? Why?
3. A restaurant advertised a steak dinner that in cluded a “juicy, great-tasting steak, a fresh
crisp salad, and a warm roll.” After reading the ad, Clarence visited the restaurant and
ordered the steak dinner. The steak was dry, the lettuce in the salad was old and limp
with brown edges, and the roll was partly frozen. May Clarence recover from the
restaurant on the basis of misrepresentation? Why?
4. Bert purchased Ernie’s car. Before selling the car, Ernie had stated to Bert, “This car runs
well and is reliable. Last week I drove the car all the way from Seattle to San Francisco to
visit my mother and back again to Seattle.” In fact, Ernie was not telling the truth: he had
driven the car to San Francisco to visit hi s paramour, not his mother. Upon discovery of
the truth, may Bert avoid the contract? Why?
5. Randolph enrolled in a business law class and purchased a new business law textbook
from the local bookstore. He dropped the cla ss during the first week and sold the book
to his friend Scott. Before making the sale, Randolph told Scott that he had purchased
the book new and had owned it for one week. Unknown to either Randolph or Scott, the
book was in fact a used one. Scott later discovered some underlining in the middle of the
book and attempted to avoid the contract. Randolph refused to refund the purchase
price, claiming that he had not intentionally deceived his friend. May Scott avoid the
contract? Why?
6. Langstraat was seventeen when he purchased a motorcycle. When applying for
insurance, he signed a “Notice of Rejection,” declining to purchase uninsured motorist
coverage. He was involved in an accident with an uninsured motorist and sought to
disaffirm his rejection of the uninsured motorist coverage on the basis of infancy. May
he do so?
7. Waters was attracted to Midwest Supply by its advertisements for doing federal income
taxes. The ads stated “guaranteed accurate tax preparation.” Waters inquired about
amending past returns to obtain refunds. Midwest induced him to apply for and receive
improper refunds. When Waters was audited, he was required to pay more taxes, and Saylor URL: http://www.saylor.org/books Saylor.org
365
the IRS put tax liens on his wages and bank accounts. In fact, Midwest hired people with
no knowledge about taxes at all; if a customer inquired about employees’ qualifications,
Midwest’s manual told the employees to say, “Midwest has been preparing taxes for
twenty years.” The manual also instructed office managers never to refer to any
employee as a “specialist” or “tax expert,” but never to correct any news reporters or
commentators if they referred to employees as such. What cause of action has Waters,
and for what remedies?
8. Mutschler Grain Company (later Jamestown Farmer s Elevator) agreed to sell General Mills 30,000
bushels of barley at $1.22 per bushel. A dispute arose: Mutschler said that transportation was to
be by truck but that General Mills never ordered any trucks to pick up the grain; General Mills said
the grain was to be shipped by rail (railcars were in short supply). Nine months later, after
Mutschler had delivered only about one-tenth th e contracted amount, the price of barley was
over $3.00 per bushel. Mutschler defaulted on, a nd then repudiated, the contract. Fred Mutschler
then received this telephone call from General Mill s: “We’re General Mills, and if you don’t deliver
this grain to us, why we’ll have a battery of lawyers in there tomorrow morning to visit you, and
then we are going to the North Dakota Public Service (Commission); we’re going to the
Minneapolis Grain Exchange and we’re going to th e people in Montana and there will be no more
Mutschler Grain Company. We’re going to take your license.”
Mutchsler then shipped 22,000 bushels of barley at the $1.22 rate and sued General Mills for the
difference between that price and the market price of over $3.00. Summary judgment issued for
General Mills. Upon what basis might Mutschler Grain appeal?
9. Duke decided to sell his car. The car’s muffler had a large hole in it, and as a result, the
car made a loud noise. Before showing the car to potential buyers, Duke patched the
hole with muffler tape to quiet it. Perry bought the car after test-driving it. He later
discovered the faulty muffler and sought to avoid the contract, claiming fraud. Duke
argued that he had not committed fraud be cause Perry had not asked about the muffler
and Duke had made no representation of fact concerning it. Is Duke correct? Decide and
explain. Saylor URL: http://www.saylor.org/books Saylor.org
366
10. At the end of the term at college, Jose, talking in the library with his friend Leanne, said,
“I’ll sell you my business law notes for $25.” Leanne agreed and paid him the money.
Jose then realized he’d made a mistake in that he had offered his notes when he meant
to offer his book. Leanne didn’t want the book; she had a book. She wanted the notes.
Would Leanne have a cause of action against Jose if he refused to deliver the notes?
Decide and explain.
SELF-TEST QUESTIONS
1. Misrepresentation that does not go to the core of a contract is
a. fraud in the execution
b. fraud in the inducement
c. undue influence
d. an example of mistake
In order for a misrepresentation to make a contract voidable,
a. it must have been intentional
b. the party seeking to void must have relied on the misrepresentation
c. it must always be material
d. none of the above is required
A mistake by one party will no t invalidate a contract unless
a. the other party knew of the mistake
b. the party making the mistake did not read the contract closely
c. the parties to the contract had never done business before
d. the party is mistaken about the law
Upon reaching the age of majority, a person wh o entered into a contract to purchase goods
while a minor may
a. ratify the contract and keep the goods without paying for them
b. disaffirm the contract and keep the goods without paying for them
c. avoid paying for the goods by keeping them without ratifying or disaffirming the
contract Saylor URL: http://www.saylor.org/books Saylor.org
367
d. none of these
Seller does not disclose to Buyer that the foundation of a house is infested with termites. Upon
purchasing the house and remodeling part of the ba sement, Buyer discovers the termites. Has Buyer a
cause of action against Seller?
a. yes
b. no
SELF-TEST ANSWERS
1. a
2. d
3. a
4. e
5. b