Section 6.1 Fraud and Misrepresentation
Pre-Learning Question
How would you define fraud?
How is misrepresentation different
from fraud?
Understanding Business and Personal Law
Genuine Agreement
Section
6.1
and Misrepresentation
Agreement
Chapter 6FraudGenuine
Section 6.1
Fraud and Misrepresentation
Section 6.2
Mistake, Duress, and Undue Influence
Why It’s Important
Learning the elements of fraud may prevent
you from being victimized or help you claim
your rights if you are defrauded.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
What You’ll Learn
How to identify the elements of fraud (p. 128)
How to distinguish between fraud &
concealment (p. 129)
How to distinguish between fraud and innocent
misrepresentation (pp. 128 and 132)
How to distinguish between the remedy
available for fraud and the remedy available for
misrepresentation (pp. 128 and 132)
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section Outline
Defective Agreements
Fraud
False Representation of Fact
Representation Known to Be False
False Representation Intended to Be Relied Upon
False Representation Actually Relied Upon
Resulting Loss
Innocent Misrepresentation
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Genuine Agreement
If the offeror makes a valid offer,
and the offeree has made a valid
acceptance, then a genuine
agreement has been reached.
The courts describe this type of
agreement as “a meeting of the
minds.”
Understanding Business and Personal Law
Genuine Agreement
6.1
Section
6.1 Fraud and Misrepresentation
Genuine Agreement
Several circumstances might create a
defective agreement:
Fraud
Misrepresentation
Mistake
Duress
Undue Influence
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Fraud
Fraud is a deliberate deception intended
to secure an unfair or unlawful gain.
Remedies for Fraud
You may rescind, or cancel, the contract.
You may sue for money damages.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
The 5 Elements of Fraud
5 things must be shown to succeed in a fraud lawsuit
1. A false representation of fact.
2. Knowledge of the falsity by party making
the false representation.
3. Intent to deceive by party making the false
representation.
4. Reasonable reliance by the innocent party.
5. Actual loss must be suffered by innocent
party.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
False Representation of Fact
Fraud requires a false representation of a
material, existing fact.
A material fact is one that is important; it
matters to one of the parties.
Under some circumstances, individuals can make
false representation by choosing not to reveal
important information.
This is known as concealment or passive fraud.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Representation Known to Be False
To be held accountable for fraud, the
party making the false representation
must be aware that it is false. This
may be shown by:
Proving actual knowledge
Showing the statement was made
recklessly
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
False Representation
Intended to Be Relied Upon
To prove fraud, the person making the
misrepresentation must intend that the
other party will rely upon the information
as part of the contract negotiations.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
False Representation
Actually Relied Upon
To prove fraud, the false
representation must be reasonably
relied upon by the other party when
the agreement is made.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Resulting Loss
In proving fraud, the innocent party
must show some monetary loss.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Innocent Misrepresentation
Misrepresentation is the act of making an
innocent statement that turns out to be false,
when the person honestly believed the
statement was true at the time it was made.
Remedy for Misrepresentation
The right to rescind the contract.
You may not win damages.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
After Mrs. Grayson died, her neighbor, Joel,
asked her son, Tom, if he would sell her TV.
Before giving Tom $100, Joel asked, “It works,
doesn’t it?” and Tom answered, “As far as I
know.” However, when Joel plugged it in, it did
not work.
Can Joel claim there was false
representation? Why or why not?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
ANSWER
Probably not. “As far as I know,” would
probably be considered innocent
misrepresentation.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Reviewing What You Learned
1. What are the elements of fraud?
2. What is the difference between fraud
and concealment?
3. What is the difference between fraud
and innocent misrepresentation?
4. What is the difference between the remedy
available for fraud and for misrepresentation?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Critical Thinking Activity
Fraud
Why do courts permit fraud to disrupt
genuine agreement in a contractual
setting?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Legal Skills in Action Too Good to Be True?
You recently received a phone call from a travel
agency offering a vacation package to Europe for
less than $200.
To take advantage of the offer, you were told to
send $200 in cash within 24 hours or to supply a
credit card number on the spot.
In groups discuss whether this sounds like a case of
potential fraud. Begin by listing the elements of fraud.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Pre-Learning Question
How can a mistake disrupt an
agreement?
What do you think duress is?
What do you think undue influence is?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
What You’ll Learn
How to distinguish between unilateral and
bilateral mistakes (pp. 133 and 135)
How to recognize the types of mistakes that
will allow rescission of a contract (p. 134)
How to recognize the requirements of
economic duress (p. 137)
How to recognize the requirements of undue
influence (p. 138)
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section Outline
Mistake
Unilateral Mistake
Bilateral Mistake
Duress
Undue Influence
Why It’s Important
Recognizing how mistake, duress, and undue
influence can affect agreements will help you
make better decisions in such situations.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Genuine Agreement
In addition to fraud and
misrepresentation, mistake, duress,
and undue influence can also create a
defective agreement.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Mistake
People sometimes enter into contracts
believing that certain information is
true when it is actually not, or that
information is not true when it really is.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Unilateral Mistake
A unilateral mistake is an error on the part of
one of the parties to the contract.
Through words or actions, one party has
created reasonable expectations on the part of
the other party to the contract.
Those expectations should not be blocked
because one of the parties has made an error,
or mistake.
A person usually can’t avoid a contract because
of such a mistake.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Unilateral Mistake
There are two types of unilateral
mistakes.
1. Mistake as to the nature of the
agreement.
2. Mistake as to the identity of a party.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Mistake to the Nature of the Agreement
People who sign an agreement are bound to
it, even if they have not read it or are
mistaken about what it says.
Mistake as to the Identity of a Party
If you make an offer by letter to one party,
but the wrong person mistakenly receives
the offer, the mistake may be cause to void
the contract.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Mistake as to the
Identity of a Party
If you make the same offer face-toface with a person whose identity you
have mistaken, your mistake as to the
identity will not prevent a binding
contract.
Understanding Business and Personal Law
Genuine Agreement
6.2
Section
6.1 Fraud and Misrepresentation
Remedies for Unilateral Mistakes
Unilateral Mistake
Type of Mistake
1. Mistake as to the
nature of the
agreement.
2. Mistake as to the
identity of a party.
Understanding Business and Personal Law
Remedy
1. Rescission will not
be granted.
2. Rescission may be
granted.
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Bilateral Mistake
When both parties to a contract are
mistaken about an important fact it is called
a bilateral mistake, or mutual mistake.
When this mistake occurs, either party may
avoid the contract.
There are two types of bilateral mistakes.
1. Mistake to the possibility of performance.
2. Mistake as to the subject matter.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Mistake as to the
Possibility of Performance
If both parties enter into a contract
believing that the duties described in
the agreement can be performed,
when in fact, they cannot, either party
may avoid the contract.
Understanding Business and Personal Law
Genuine Agreement
6.2
Section
6.1 Fraud and Misrepresentation
Remedies for Bilateral Mistakes
Bilateral Mistake
Type of Mistake
1. Mistake as to
possibility of
performance.
2. Mistake as to the
subject matter.
Understanding Business and Personal Law
Remedy
1. Rescission will be
granted.
2. Rescission will be
granted.
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
True or false—Both parties may avoid
contracts involving unilateral and
bilateral mistakes.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
ANSWER
False
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Duress
Duress is overcoming a person’s will
by use of force or threat of force or
bodily harm.
3 Types of Duress:
Physical
Emotional
Economical
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Types of Duress
Physical duress is when actual physical
violence is used to force a person to enter a
contract.
Emotional duress is when the threat of
physical force is used to force a person to
enter a contract.
Economic duress is when threats to a
person’s business or professional reputation
are used to force a party to enter a contract.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Undue Influence
Undue influence occurs when a
person uses unfair and improper
persuasive pressure to force another
person to enter into an agreement.
Circumstances such as ill health, old
age, and mental immaturity may put a
person in a weaker position.
Understanding Business and Personal Law
Genuine Agreement
6.2
Section
6.1 Fraud and Misrepresentation
Elements of Undue Influence
Element
A dependency
relationship
Understanding Business and Personal Law
Description
One party in a
relationship is
dependent on the
other party.
Genuine Agreement
6.2
Section
6.1 Fraud and Misrepresentation
Elements of Undue Influence
Element
Unfair or improper
pressure
Understanding Business and Personal Law
Description
The independent person
uses excessive pressure
to force the dependent
person to enter a
contract.
Genuine Agreement
6.2
Section
6.1 Fraud and Misrepresentation
Elements of Undue Influence
Element
A beneficial contract
Understanding Business and Personal Law
Description
The contract benefits
the independent party
at the expense of the
dependent party.
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Reviewing What You Learned
1. What is the difference between unilateral and
bilateral mistakes?
2. What types of mistake will allow rescission of
a contract?
3. What are the requirements of economic duress?
4. What are the requirements of undue
influence?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Critical Thinking Activity
Types of Mistakes
Why is it important to be able to distinguish
between unilateral and bilateral mistakes?
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Legal Skills in Action Undue Influence
Suppose that a close friend has sent you an email message saying that she believes her
grandfather was tricked into signing over all of
his property to his live-in caretaker.
Your friend asks for your advice. Write an e-mail
reply to explain the elements she would have to
prove to demonstrate that her grandfather signed
over his property because of undue influence.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Reviewing What You Learned Answer
There must be false representation of a material fact.
The party making the representation must know it is
false.
The false representation must be made with intent
that it be relied upon.
The innocent party must reasonably rely upon the
false representation.
The innocent party must suffer some monetary loss.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Reviewing What You Learned
Answer #2 Concealment is passive fraud.
Answer #3 In fraud, the defrauding party
knows of the false representation. In
misrepresentation the false statement is made
innocently.
Answer #4 Damages are a possible remedy
in a fraud case.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1 Assessment
Critical Thinking Activity Answer
Fraud
Answers will vary, but should recognize
that fraud leads to a defective agreement.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Reviewing What You Learned
Answer #1
Unilateral M: only one party is mistaken.
Bilateral M: both parties are mistaken.
Answer #2
Mistake as to the identity of a party, mistake as
to the possibility of performance, and mistake
as to the subject matter.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Reviewing What You Learned
Answer #3
Economic duress requires threats to a person’s
business or income that cause the person to
enter a contract without real consent.
Answer #4
Undue influence requires unfair and improper
persuasive pressure exercised by one person
in a relationship of trust with another person.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.1/6.2 Assessment
Legal Skills in Action Answer
Too Good to Be True?
Discussions will vary, but should compare the
elements of fraud to the information given about
the vacation offer.
Critical Thinking Activity Answer
Types of Mistakes
Answers will vary, but should recognize that
understanding the differences between unilateral
and bilateral mistakes will help you know your
rights and remedies in a contract.
Understanding Business and Personal Law
Genuine Agreement
Section 6.1 Fraud and Misrepresentation
Section 6.2 Assessment
Legal Skills in Action Answer
Undue Influence
To prevail in a claim of undue influence,
your friend would need to show that the
parties had a relationship of trust, and that
the caretaker exercised improper
persuasion to take advantage of her
grandfather .
Understanding Business and Personal Law
Genuine Agreement