1 george mason school of law contracts ii fraud f.h. buckley fbuckley@gmu.edu
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George Mason School of Law
Contracts II
Fraud
F.H. Buckley
fbuckley@gmu.edu
Fraus omnia corrumpit
I met Murder on the way – He had a mask like Castlereagh – Very smooth he looked, yet grim; Seven blood-hounds followed him:
Next came Fraud, and he had on, Like Eldon, an ermined gown;His big tears, for he wept wellTurned to mill-stones as they fell
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Shelly, The Mask of Anarchy
Lord Eldon ordered that Shelley’s children be taken from him
The Elements of Fraud A False Representation
Restatement § 159
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The Elements of Fraud A False Representation
Which the Δ knows to be false. Restatement § 162(1)(a)
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The Elements of Fraud A False Representation Which the Δ knows to be false.
Made with the intention to induce the Π to enter into the contract. Restatement § 162(1)
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The Elements of Fraud A False Representation Which the Δ knows to be false. Made with the intention to induce Π’s to
enter into the contract.
On which the Π relies. Restatement § 164
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The Elements of Fraud A False Representation Which the Δ knows to be false. Made with the intention to induce Π’s to
enter into the contract. On which Π relies.
And which is material Restatement §§ 164(1), 162(2)
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The Elements of Fraud A False Representation Which the Δ knows to be false. Made with the intention to induce Π’s to
enter into the contract. On which Π relies.
And which is material Restatement §§ 164(1), 162(2) Does § 164(1) dispense with materiality, if the
representation is fraudulent?
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The Elements of Fraud A False Representation Which the Δ knows to be false. Made with the intention to induce Π’s to
enter into the contract. On which Π relies.
And which is material Restatement §§ 164(1), 162(2) What does “upon which the recipient is justified in relying”
mean?
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The Elements of Fraud Does the Restatement water down
materiality? “the maker knows it would be likely to induce
the recipient.” § 162(2) “a fraudulent … representation … upon which
the recipient is justified in relying.” § 164
What does § 164 do to the fraud requirement? Innocent material misrepresentations
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The Elements of FraudBut none of this is cut-and-dried
A False Representation
Which the Δ knows to be false.
Made with the intention to induce Π’s to enter into the contract.
On which Π relies.
And which is material
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The Elements of FraudThe Restatement on Reliance
A False Assertion. § 159
Which the Δ knows to be false. § 162(1)(a)
Made with the intention to induce Π’s to enter into the contract. § 162(1)
On which Π relies. § 164
And which is material. §§ 164(1), 162(2)
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The Elements of Fraud
What is an assertion? Restatement §§ 159
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The Elements of Fraud
Restatement § 159: What is an assertion?What aren’t assertions?
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What is an Assertion?“It works”: You got a problem with that?
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Mere puffs are not assertionsSimplex commendatio non obligat
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Mere puffsSpeiss v. Brandt
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What were the alleged representations?
Lake McFarland
Mere puffsSpeiss v. Brandt
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What if the Δs had said “You can make good money out of the resort”?
Or “I believe you can make good money out of it”?
Mere puffsSpeiss v. Brandt
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Qu. “We are making good money out of the resort.”
Mere puffsSpeiss v. Brandt
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Qu. “We are making good money out of the resort.” What is the optimal profit to make where
there is double taxation of dividends? Cf. Gallagher’s dissent
Mere puffsSpeiss v. Brandt
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“We are making good money out of the resort.” What if they had provided the financials?
Mere puffsSpeiss v. Brandt
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“We are making good money out of the resort.” What if they had provided the financials? What do you conclude from the buyers’
willingness to do the deal even though the financials were not provided
Mere puffsSpeiss v. Brandt
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“We are making good money out of the resort.”What if they had provided the financials?
Restatement § 172A subjective or an objective test?
Mere puffsSpeiss v. Brandt
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“We are making good money out of the resort.” Suppose the seller had omitted to say
anything about past earnings?
Mere puffsSpeiss v. Brandt
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“We are making good money out of the resort.” Suppose the seller had omitted to say
anything about past earnings?Fraudulent concealment? Restatement § 161?
How is the reliance requirement treated in Ziff-Davis?
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How is the reliance requirement treated in Ziff-Davis?
Distinguish the action in fraud from the action for breach of warranty
Suing in tort: Punitive damages
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George Mason School of Law
Contracts II
Fraud
F.H. Buckley
fbuckley@gmu.edu
The Merger Clause in Danann
What is it and why did the parties agree to it?
The Merger Clause in Danann
Absent the merger clause, what result?
The Merger Clause in Danann
Absent the merger clause, what result? The representations would ordinarily be
excluded by the Parole Evidence Rule Here however the fraud exception to the
Parole Evidence Rule would apply.
The Merger Clause in Danann
Absent the merger clause, what result? The representations would ordinarily be
excluded by the Parole Evidence Rule Here however the fraud exception to the
Parole Evidence Rule would apply. Did the Δs misrepresent their financials?
The Merger Clause in Danann
Absent the merger clause, what result? The representations would ordinarily be
excluded by the Parole Evidence Rule Here however the fraud exception to the
Parole Evidence Rule would apply. Did the Δs misrepresent their financials? Does the sophistication of the parties
matter?
Signing a ContractMerit Music
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Bar, 601 South Monroe St.Baltimore MD
Signing a ContractMerit Music
Were the terms harsh?
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Signing a ContractMerit Music
Were the terms harsh?120 plays of the pinball machine @
week48 plays of the juke box @ week
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Signing a ContractMerit Music
Were the terms harsh?Who was in the best position to
determine the revenue from the machines?
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Signing a ContractMerit Music
Were the terms harsh?Who was in the best position to
determine the revenue from the machines?
Were the Sonneborns inexperienced?
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Signing a ContractMerit Music
Were the terms harsh?Who was in the best position to
determine the revenue from the machines?
Were the Sonneborns inexperienced?Did they have any reason to think that
what they signed was not a contract?
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Signing a ContractMerit Music
Have you ever signed a contract without reading it? What effect did you think the printed language had? Restatement § 211(1)
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Signing a ContractMerit Music
Were the terms harsh?Does that matter?
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Signing a ContractMerit Music
Were the terms harsh?Does that matter?Should Restatement § 211(3) have
been triggered?
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Standard Form ContractsBirmingham TV v. Water Works
Were the terms benign?
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Standard Form ContractsBirmingham TV v. Water Works
Were the terms benign? Is that irrelevant?
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Standard Form ContractsBirmingham TV v. Water Works
Were the terms harsh?
How would you expect bailees to react to the decision?
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Standard Form Contracts
Were the terms harsh? Does that matter?
How would you expect bailees to react to the decision?Is the world now a better place?
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Thank God for proper warning signs
Thank God for proper warning signs
Thank God for proper warning signs
Why Employ Standard Form Contracts?
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Why Employ Standard Form Contracts?
Economize on negotiations
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Why Employ Standard Form Contracts?
Economize on negotiations
Police consumer fraud
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Why Employ Standard Form Contracts?
Economize on negotiations
Police consumer fraud
Economize on litigation
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Why Employ Standard Form Contracts?
Economize on negotiations
Police consumer fraud
Economize on litigation
Police agency costs of merchant
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Why Employ Standard Form Contracts?
Suppose the consumer is illiterate or can’t speak English
55Elbonians
Why Employ Standard Form Contracts?
Suppose that most non-lawyers would have a hard time understanding the language? You mean we let such people enter into
contracts!?!?
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Why Employ Standard Form Contracts?
Suppose that most non-lawyers would have a hard time understanding the language? Cf. Pirkle v. Gurr, 438-39
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Non-disclosure
What happened in Laidlaw? P. 451
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Treaty of Ghent
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Rational Choice: Six Assumptions
Full Information No mistakes No misrepresentations And no informational asymmetries
Non-disclosure
“I’ll pay $500 for the rug” [but will go as high as $1,000].
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Non-disclosure
Coca-Cola sells Coke but refuses to disclose the secret formula it uses to make it.
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Non-disclosureCicero, Offices III
A corn-merchant arrives at the famine-stricken city of Rhodes, before a great number of other vessels loaded with corn; and offers his corn for sale. Is he obliged to inform the buyers that there are a great number of other vessels about to arrive, laden with food?
Diogenes thought not. But Cicero thought, on the contrary, that this dissimulation was against good faith. There ought to exist among men a concord and affection which cannot permit us to prefer our private interest to the interest of our neighbor.
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Non-disclosureAquinas, Summa Theologica
If one were bound to tell the faults of what one offers for sale, this would only be in order to lower the price. Now sometimes the price would be lowered for some other reason, without any defect in the thing sold: for instance, if the seller carry wheat to a place where wheat fetches a high price, knowing that many will come after him carrying wheat; because if the buyers knew this they would give a lower price. But apparently the seller need not give the buyer this information. Therefore, in like manner, neither need he tell him the faults of the goods he is selling.
ST 1.2.94.2, obj. 4
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Non-disclosureAquinas, Summa Theologica
If one were bound to tell the faults of what one offers for sale, this would only be in order to lower the price. Now sometimes the price would be lowered for some other reason, without any defect in the thing sold: for instance, if the seller carry wheat to a place where wheat fetches a high price, knowing that many will come after him carrying wheat; because if the buyers knew this they would give a lower price. But apparently the seller need not give the buyer this information. Therefore, in like manner, neither need he tell him the faults of the goods he is selling.
Under which rule is the famine soonest over?
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Non-disclosure
What should the buyer have concluded from the seller’s silence about changed market conditions?
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Non-disclosure
Which rule better promotes efficiency in Laidlaw?
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Non-disclosure
Which rule better promotes efficiency in Laidlaw? The incentive to acquire information
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Non-disclosure
Which rule better promotes efficiency in Laidlaw? The incentive to acquire information Litigation over nondisclosures
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Non-disclosure
An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find.
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Non-disclosure
An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find. If this were illegal, what would happen to
his incentive to discover the information?
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Non-disclosure
A company executive in the same firm sells his stock without making disclosure. Same result?
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Non-disclosure
A company executive in the same firm sells his stock without making disclosure.Kronman: was there a cost to production
of the information?
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Non-disclosure
A company executive in the same firm sells his stock without making disclosure.Kronman: was the a cost to production of
the information?Under which rule is the information
processed in the market most quickly?
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Non-disclosure
Should Obde be confined to its special facts? And these were?
74Termites
Non-disclosure
Should Obde be confined to its special facts? Does it matter that this was an
apartment house? Does it matter that it was termites? Does it matter that the seller made the
defect harder to discover?
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Non-disclosure
Should Obde be confined to its special facts? Does it matter that this was an
apartment house? Does it matter that it was termites? Does it matter that the seller made the
defect harder to discover?Restatement §§ 160, 161(b)
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Restatement § 160In some states, bondo is a primary color
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Reed v. King
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O.J.’s House
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George Mason School of Law
Contracts II
Unconscionability
F.H. Buckley
fbuckley@gmu.edu
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