Chapter 6
If the offeror makes a valid offer, and the offeree has made a
valid acceptance, then a genuine agreement has been
reached—”meeting of the minds”
Sometimes, however, something goes wrong, and what
seems to be a valid contract isn’t.
Fraud
 Is a deliberate deception intended to secure an unfair
or unlawful gain.
 You have a choice if this happens
 You may rescind, or cancel the contract
 You may sue for damages
Succeeding in a lawsuit for fraud
The following 5 elements must be demonstrated
1. There must be a false representation of fact
2. The party making the representation must
know it is false
3. The false misrepresentation must be made
with the intent that it be relied upon
4. The innocent party must reasonably rely upon
the false representation
5. The innocent party must actually suffer some
monetary loss
1. False Representation of Fact
 Material fact is a fact that is
 Important
 Matters to one of the parties
 Cannot be a promise of something that will
happen in the future
 Nor someone’s opinion
 Concealment is another way false
representation can occur
2. Representation Known to Be False
 The party making the false representation must
be aware that the representation is false
 Can be shown by
 proving actual knowledge
 Showing that the statement was made
recklessly, without regard for the truth
3. False Representation Intended
to Be Relied Upon
 Must show that the false representation was made
with the intent that it be relied upon
 In other words, the person making the
misrepresentation must intend that the other
party rely upon the information as part of the
contract negotiations
 Example: Suppose that Ed met Mr. Johnson, a man whose car he admired.
He asked Mr. Johnson, “Is this car a 1964 Mustang?” Mr. Johnson, with no
intention of selling his car but with knowledge that is really was a 1965
model said, “Yes, it’s a 1964.” If Ed then went out and purchased a car like
Mr. Johnson's, believing it was really a 1964 Mustang, he could not win a
lawsuit against Johnson for fraud. Johnson did not make a statement with
the intent that Ed rely on it.
4. False Representation Actually
Relied Upon
 If fraud is to be proven, the false representation
must be reasonably relied upon by the other
party when the agreement is made
 Example: Suppose that Johnson wants to sell his car and tells Ed that it
is a 1964 Mustang. However, Ed is accompanied by George Trimmer, an
antique car expert. Trimmer takes Ed aside and tells him that the car is
actually a 1965 and is worth far less money than a 1964. If Ed still
insisted on buying Johnson’s car at an inflated price, he could not later
win a lawsuit for fraud because he did not actually rely on Johnson’s
false statement.
5. Resulting Loss
 In order to win a lawsuit for fraud, you must
have suffered a loss as a result.
 Example: If you paid a friend $75 for a CD player that was said to be “in
perfect working order” and then discovered the track selection feature
did not work, you have lost $75 and may make a legal claim for fraud. If,
however, you agreed to accept the CD player in exchange for a favor,
such as helping your friend perform a community project, you suffered
no monetary loss. In such a situation, you would not be legally entitled
to make a claim for fraud.
Innocent Misrepresentation
• Innocent statement made that turns out to be
false
• This is called misrepresentation
• Must honestly believe the statement was true
at the time
• Law gives you the right to rescind the contract
POP QUIZ!
 Question: A couple of weeks
after Joel’s next door
neighbor, Mrs. Grayson died,
Joel saw Tom Grayson at the
house taking care of his
mother’s affects. Joel asked
Tom if he would like to sell
her TV, and Tom said “sure”.
When asked if it worked, tom
answered, “as far as I know.”
Joel gave Tom $100 for the TV,
but when he plugged it in at
home, it didn’t work. Can Joel
claim there was false
representation? Why or why
not?
 Answer: Probably not. “As
far as I know” would
probably be considered
innocent
misrepresentation.
Section 6.2
The purpose of contract law is to fulfill the reasonable
expectations of the parties to a contract. 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.
Unilateral Mistake
 Is an error on the part of ONE of the parties to the
contract
 Usually cannot avoid a contract because of such a
mistake
 There are 2 types:
Mistakes as to the Nature of the Agreement
2. Mistake as to the Identity of a Party
1.
1. Mistake as to the Nature of the
Agreement
 Unilateral mistake
 Cannot be an excuse to avoid a contract
 Rescission will not be granted
 People who SIGN an agreement are bound to it,
even if they don’t read it or are mistaken about
what it says
2. Mistake as to the Identity of a
Party
 Unilateral Mistake
 Rescission may be granted
 Involves the identity of a party to a contract
 Example: If a offer is made through a letter to a person but the letter
gets delivered to a different person with the same name, the contract is
voidable because this different person with the same name was not the
person the letter was intended for.
Bilateral Mistake
 Both parties to contract are mistaken about an
important fact (mutual mistake)
 Either party may avoid the contract
 There are 2 types
 Mistake as to the Possibility of Performance
 Mistake as to the Subject Matter
1. Mistake as to the Possibility of
Performance
 Bilateral mistake
 Both parties of a contract believe that the duties
described in the agreement can be performed when, in
fact, they cannot
 Rescission will be granted
 Example: Robert agreed to sell his car to Cynthia for $3,000. Unknown
to both of them, however, was the fact that overnight the car had been
sideswiped and severely damaged by a hit-and-run driver as it sat in
front of Robert’s house. Either party may now avoid the contract.
2. Mistake as to the Subject Matter
 Bilateral mistake
 Contract may be rescinded by either party
 Example: Ellen agreed to sell Alvin five vacant lots on Indiana Avenue in
Parkersburg. Alvin refused to go through with the agreement when he
discovered that the land he thought he was buying was on another
Indiana Avenue, also in Parkersburg. Ellen sued Alvin for breach of
contract. However, because there was a bilateral mistake as to the
location to the land in the contract, Ellen lost the case.
Duress
 Is overcoming a person’s will by use of force or by
threat of force or bodily harm
 Agreements made under this are either void or
voidable
 Actual physical forced is used = void
 Threat of physical force = voidable
 Economic Duress consists of threats to a person’s
business or income that cause him or her to enter a
contract without real consent
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
 Mental impairment
POP QUIZ!
True or False – Both
parties may avoid
contracts involving
unilateral and bilateral
mistakes.
2. True or false—undue
influence is the
overcoming of a
person’s will by use of
force.
1.
1. FALSE
2. FALSE