BUSINESS LAW

TEXT AND CASES

Fourteenth Edition

CLARKSON MILLER CROSS 

 


CHAPTER 15: MISTAKES,

FRAUD, AND
VOLUNTARY CONSENT
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 §1: MISTAKES (1 OF 8)
 A lack of voluntary consent (assent)
can be used as a defense to the
contract’s enforceability. Consent
may be lacking due to:
 Mistake.
Fraudulent Misrepresentation.
Undue Influence.
Duress.
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22
 MISTAKES (2 OF 8)
 A mistake of fact occurs when the
parties entered into a contract with
different understandings of one or
more material facts relating to the
contract’s performance.
 Only a mistake of fact makes a
contract voidable.
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33
 MISTAKES (3 OF 8)
 Unilateral Mistakes of Fact: A mistake
made by only one of the parties that
does not generally give the mistaken
party any right to relief from the
contract.
 The contract is usually enforceable with

two exceptions. (These still must involve

a mistake of some material fact.) 
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 MISTAKES (4 OF 8)
 Unilateral Mistakes of Fact:
The other party to the contract knows
or should have known that a mistake
of fact was made.
The error was due to an inadvertent,
substantial mathematical mistake and
not gross (extreme) negligence.

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 MISTAKES (5 OF 8)
 Bilateral (Mutual) Mistakes of Fact: A
mistake by both contracting parties
about one or more material facts
generally entitles (but does not compel)
either party to rescind. 

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 MISTAKES (6 OF 8)
 Bilateral (Mutual) Mistakes of Fact:
Either party can rescind the contract
when both parties are mistaken about the
same material fact.
When the parties reasonably interpret a
term differently, a court may allow the
contract to be rescinded.
• SEE CASE IN POINT 15.3 L & H CONSTRUCTION CO. V.
CIRCLE REDMONT, INC. (2011). 7
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 MISTAKES (7 OF 8)

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 MISTAKES (8 OF 8)

 A mistake of value (or quality) is a mistake

about the future market value or quality
of the object of the contract.
 Contracts cannot be rescinded due to

mistakes of value. Each party is considered

to have assumed the risk that the value
will change in the future or prove to be
different from what she/he thought.
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 §2: FRAUDULENT
MISREPRESENTATION (1 OF 14)
 Fraudulent Misrepresentation: When an
innocent party is induced to enter into a
contract by a misrepresentation of
material fact. The party may avoid the
contract because she/he did not genuinely
consent to its terms. 

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FRAUDULENT MISREPRESENTATION
(2 OF 14)

 Fraudulent Misrepresentation: Consists

of the following elements:
A misrepresentation of a material fact
must occur.
There must be an intent to deceive.

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FRAUDULENT MISREPRESENTATION
(3 OF 14)

 Fraudulent Misrepresentation:
The innocent party must justifiably
rely on the misrepresentation.
To collect damages, a party must have
been harmed as a result of the
misrepresentation. 

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FRAUDULENT MISREPRESENTATION
(4 OF 14)

 Fraudulent Misrepresentation: To prove

fraud, the innocent party must show that
misrepresentation of a material fact has
occurred by words or actions.
Misrepresentation by Conduct: occurs
when a party takes specific action to
conceal a fact that is material to the
contract.
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FRAUDULENT MISREPRESENTATION
(5 OF 14)

Statements of opinion and predictions

(representations of future facts) generally
are not subject to claims of fraud.
• Exception: If a naïve purchaser relies on
an opinion from an expert, the innocent
party may be entitled to a rescission or
reformation.

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FRAUDULENT MISREPRESENTATION
(6 OF 14)

Misrepresentation of Law: This will

usually not excuse the innocent party,
unless the speaker is a member of a
profession that requires greater
knowledge of the law than possessed by
the average citizen.
Misrepresentation by Silence: Ordinarily
neither party has duty to disclose facts. 
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FRAUDULENT MISREPRESENTATION
(7 OF 14)

Misrepresentation by Silence: Common

and statutory law create a duty to speak
in certain situations (e.g., where one is
aware of a serious defect or serious risk
of injury). 
• SEE CASE 15.3 FAZIO V. CYPRESS/GR HOUSTON I,
LP (2012).

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FRAUDULENT MISREPRESENTATION
(8 OF 14)

 Misrepresentation by Silence:
When parties are in a fiduciary
relationship, failure to disclose material
facts may be fraud.

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FRAUDULENT MISREPRESENTATION
(9 OF 14)

 Intent to Deceive: Knowledge on the part

of the misrepresenting party that facts
have been falsely represented.
Scienter (“guilty knowledge”) is an intent
to deceive. 

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FRAUDULENT MISREPRESENTATION
(10 OF 14)

 Intent to Deceive: Scienter exists if a party

knows that a fact is not as stated;
makes a statement that she/he believes
is not true;
makes a statement recklessly, without
regard to whether it is true or false; or
says (or implies) that a statement is
made on some basis when it is not.
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FRAUDULENT MISREPRESENTATION
(11 OF 14)

 Innocent Misrepresentation: A
person makes statement she/he
believes to be true but actually
misrepresents facts.
 Innocent party can rescind contract, but
usually cannot seek damages.

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FRAUDULENT MISREPRESENTATION
(12 OF 14)

 Negligent Misrepresentation: When a

party does not exercise reasonable care
in uncovering or disclosing facts—or
use the skill and competence required
by his or her business or profession.
 Negligent misrepresentation is equal to
scienter in nearly all states. Culpable
ignorance of the truth supplies the
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FRAUDULENT MISREPRESENTATION
(13 OF 14)

 Justifiable Reliance on
Misrepresentation.
 Deceived party must have justifiably relied on
representation.
 Reliance is not justified if the innocent party
knows the true facts or relies on extravagant
statements.
 SEE CASE 15.2 CRONKELTON V. GUARANTEED
CONSTRUCTION SERVICES, LLC (2013).
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FRAUDULENT MISREPRESENTATION
(14 OF 14)

 Injury to the Innocent Party:

 No proof of injury is required when the
action is to rescind contract.
 Proof of injury is universally required to
recover damages.

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 §3: UNDUE INFLUENCE (1 OF 3)
 Undue influence arises from
relationships in which one party can
greatly influence another party and
overcome that party’s free will.
 Contract lacks voluntary consent and is

voidable. 

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 UNDUE INFLUENCE (2 OF 3)
 One Party Dominates the Other: In
various types of relationships, one party
may have the opportunity to dominate
and unfairly influence another party.
 Undue influence can arise from a

number of fiduciary relationships such

as physician-patient or husband-wife. 

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 UNDUE INFLUENCE (3 OF 3)
 Presumption of Undue Influence in
Certain Situations: When a contract
enriches the dominant party in a
fiduciary relationship, the court will
often presume that the contract was
made under undue influence.

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 §4: DURESS (1 OF 2)
 A party who enters into a contract under
fear or threat makes the contract
voidable.
 Threatened act must be wrongful or illegal

and render person incapable of exercising

free will.
 The threat of civil suit is not unlawful. 

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 DURESS (2 OF 2)
 Economic Duress: Economic need
on its own is usually not sufficient
enough to constitute duress.
 But if a party creates a need for an item
and then exacts a very high price for the
item from another party, economic duress
may be found.

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 §5: ADHESION CONTRACTS
AND UNCONSCIONABILITY (1 OF 4)
 Adhesion contracts are written
exclusively by one party and
presented to the other party on a
take-it-or-leave- it basis.
 These are often standard form contracts
that are preprinted and give the adhering
party no opportunity to negotiate the terms
of the contract.
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 ADHESION CONTRACTS
AND UNCONSCIONABILITY (2 OF 4)
 Adhesion Contracts:
 To avoid enforcement of the contract, the
plaintiff normally must show that the
contract or particular clause is
unconscionable (contains terms that are
unfairly burdensome and that unfairly
benefit the dominating party).

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 ADHESION CONTRACTS
AND UNCONSCIONABILITY (3 OF 4)
 Unconscionability and the Courts:
 Under UCC, unconscionability technically
only applies to the sale of goods.
 However, its application has been
broadened and courts can invalidate a
contract (or clause) as being
unconscionable at their discretion.

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 ADHESION CONTRACTS
AND UNCONSCIONABILITY (4 OF 4)

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