Contract Defenses: Misrepresentation

Question 1

What are three main kinds of misrepresentation?

Answer 1

• Fraudulent misrepresentation
• Non-fraudulent misrepresentation
• Fraudulent nondisclosure

Question 2

What are the four elements of fraudulent misrepresentation?

Answer 2

• Misrepresentation
• State of mind
• Materiality
• Reasonable reliance

Question 3

What constitutes a misrepresentation?

Answer 3

• Defendant must have made an assertion inconsistent with existing facts
• What would be sufficient to prove this element?
  o Oral or written misrepresentations;
  o Fraudulent conduct such as concealment;
  o A half-truth.
• EXAMPLE: A seller of real estate undertakes efforts to hide termite damage.

Question 4

Which are not examples of sufficient misrepresentation?

Answer 4

• They are not broken promises, opinions, or guesses; they must be misstatements of existing fact

Question 5

What is required to satisfy the state of mind element for fraudulent misrepresentation?

Answer 5

• Scienter, AND
• Intent to mislead

Question 6

How is scienter shown?

Answer 6

• Scienter is satisfied if defendant made assertion either
  o knowing it to be false OR
  o knowing he had no idea whether it was true or false
• EXAMPLE: Auto dealer says, “this baby can go from zero to 70 in six seconds flat.” If he either knows that the car can’t accelerate that quickly, or has no basis for knowing whether the car can accelerate that quickly, scienter is present.

Question 7

When does a defendant have an intent to mislead to satisfy the state of mind element for fraudulent misrepresentation?

Answer 7

• Intent to Mislead is satisfied if defendant made assertion
  o for purpose of misleading the aggrieved party OR
  o knowing there was a substantial likelihood to mislead

Question 8

How could the materiality element be satisfied to prove fraudulent misrepresentation?

Answer 8

• Objective materiality: Where such an assertion is likely to induce a reasonable person to enter into a contract, OR
  o EXAMPLE: An assertion that a used car has been carefully inspected by an independent auto mechanic would appeal to a reasonable person, and thus satisfy the objective materiality test.
• Subjective Materiality: If the party making the assertion had reason to know that it was likely to induce the particular aggrieved party into entering the K.
  o EXAMPLE: An assertion that the car was once owned by the actor Jon Voight would be material if made to an individual (e.g., George Costanza) whom the seller knew to be a Voight enthusiast.

Question 9

Under which circumstances would reliance on a misrepresentation be unreasonable, thus disproving fraudulent misrepresentation?

Answer 9

• EXAMPLE: Reliance would be unreasonable if the aggrieved party has independent knowledge or reason to know that the statement in question is false.
• EXAMPLE: Reliance would be unreasonable if the aggrieved party has reason to believe that the statement in question was made by a person who is unreliable.
• EXAMPLE: Reliance would be unreasonable if no reasonable person would have believed the assertion.
• EXAMPLE: Reliance would be unreasonable if the aggrieved party could have easily ascertained the truth by cursory inspection of the goods.

Question 10

What are the two types of non-fraudulent misrepresentation?

Answer 10

• Negligent misrepresentation
• Innocent misrepresentation

Question 11

What are the four elements of negligent misrepresentation?

Answer 11

• Misrepresentation
• Materiality
• Reasonable reliance
• Negligence

Question 12

How is the negligence element shown to prove negligent misrepresentation?

Answer 12

• For Negligent misrepresentation: The defendant would have known the assertion was false had he exercised reasonable care.

Question 13

What are the four elements of innocent misrepresentation?

Answer 13

• Misrepresentation
• Materiality
• Reasonable reliance
• Defendant made an assertion not in accord with existing facts

Question 14

How is a fraudulent nondisclosure different from a fraudulent misrepresentation?

Answer 14

• The fraud consists of defendant’s silence when duty to disclose.

Question 15

What are the elements of a fraudulent nondisclosure?

Answer 15

• Material nondisclosure
• Reasonable reliance
• Duty to disclosure
• Failure to fulfill duty to disclose

Question 16

Is there generally a duty to disclose a material fact to a trading partner?

Answer 16

• Although there is generally no duty of disclosure to trading partners, if a party is aware of material facts that are unlikely to be discovered by the other party in the exercise of ordinary care and diligence, then there will be a duty to disclose that information in these circumstances:
  o Parties enjoy relationship of trust and confidence (e.g., familial relationships or the relationship between a professional and client).
  o Party has made an assertion that was true at the time but has been rendered untrue by intervening events.
  o If obligation of good faith would require that the party disclose the information (e.g., real estate transaction where one party knows of a termite infestation).