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George Mason School of Law. Contracts II Fraud F.H. Buckley fbuckley@gmu.edu. Fraus omnia corrumpit. Lord Eldon ordered that Shelley’s children be taken from him. I met Murder on the way – He had a mask like Castlereagh – Very smooth he looked, yet grim;

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George mason school of law
George Mason School of Law

Contracts II

Fraud

F.H. Buckley

fbuckley@gmu.edu


Fraus omnia corrumpit
Fraus omnia corrumpit

Lord Eldon ordered

that Shelley’s children

be taken from him

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 well

Turned to mill-stones as they fell

Shelly, The Mask of Anarchy


The elements of fraud
The Elements of Fraud

  • A False Representation

    • Restatement§ 159

3


The elements of fraud1
The Elements of Fraud

  • A False Representation

  • Which the Δ knows to be false.

    • Restatement § 162(1)(a)

4


The elements of fraud2
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)

5


The elements of fraud3
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

6


The elements of fraud4
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)

7


The elements of fraud5
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?

8


The elements of fraud6
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?

9


The elements of fraud7
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

10


The elements of fraud but none of this is cut and dried
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


The elements of fraud the restatement on reliance
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)

12


The elements of fraud8
The Elements of Fraud

  • What is an assertion?

    • Restatement §§ 159


The elements of fraud9
The Elements of Fraud

  • Restatement § 159: What is an assertion?

    • What aren’t assertions?


What is an assertion it works you got a problem with that
What is an Assertion?“It works”: You got a problem with that?


Mere puffs are not assertions simplex commendatio non obligat
Mere puffs are not assertionsSimplex commendatio non obligat


Mere puffs speiss v brandt
Mere puffsSpeiss v. Brandt

  • What were the alleged representations?

Lake McFarland


Mere puffs speiss v brandt1
Mere puffsSpeiss v. Brandt

  • 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”?

18


Mere puffs speiss v brandt2
Mere puffsSpeiss v. Brandt

  • Qu. “We are making good money out of the resort.”

19


Mere puffs speiss v brandt3
Mere puffsSpeiss v. Brandt

  • 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

20


Mere puffs speiss v brandt4
Mere puffsSpeiss v. Brandt

  • “We are making good money out of the resort.”

    • What if they had provided the financials?

21


Mere puffs speiss v brandt5
Mere puffsSpeiss v. Brandt

  • “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

22


Mere puffs speiss v brandt6
Mere puffsSpeiss v. Brandt

  • “We are making good money out of the resort.”

    • What if they had provided the financials?

      • Restatement § 172

      • A subjective or an objective test?

23


Mere puffs speiss v brandt7
Mere puffsSpeiss v. Brandt

  • “We are making good money out of the resort.”

    • Suppose the seller had omitted to say anything about past earnings?

24


Mere puffs speiss v brandt8
Mere puffsSpeiss v. Brandt

  • “We are making good money out of the resort.”

    • Suppose the seller had omitted to say anything about past earnings?

      • Fraudulent concealment? Restatement § 161?

25



How is the reliance requirement treated in ziff davis1
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


George mason school of law1
George Mason School of Law

Contracts II

Fraud

F.H. Buckley

fbuckley@gmu.edu

28


The merger clause in danann
The Merger Clause in Danann

What is it and why did the parties agree to it?


The merger clause in danann1
The Merger Clause in Danann

  • Absent the merger clause, what result?


The merger clause in danann2
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 danann3
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 danann4
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 contract merit music
Signing a ContractMerit Music

Bar, 601 South Monroe St.

Baltimore MD


Signing a contract merit music1
Signing a ContractMerit Music

Were the terms harsh?

35


Signing a contract merit music2
Signing a ContractMerit Music

  • Were the terms harsh?

    • 120 plays of the pinball machine @ week

    • 48 plays of the juke box @ week

36


Signing a contract merit music3
Signing a ContractMerit Music

  • Were the terms harsh?

    • Who was in the best position to determine the revenue from the machines?

37


Signing a contract merit music4
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?

38


Signing a contract merit music5
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?

39


Signing a contract merit music6
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)

40


Signing a contract merit music7
Signing a ContractMerit Music

  • Were the terms harsh?

    • Does that matter?

41


Signing a contract merit music8
Signing a ContractMerit Music

  • Were the terms harsh?

    • Does that matter?

    • Should Restatement § 211(3) have been triggered?

42


Standard form contracts birmingham tv v water works
Standard Form ContractsBirmingham TV v. Water Works

Were the terms benign?


Standard form contracts birmingham tv v water works1
Standard Form ContractsBirmingham TV v. Water Works

  • Were the terms benign?

    • Is that irrelevant?

44


Standard form contracts birmingham tv v water works2
Standard Form ContractsBirmingham TV v. Water Works

Were the terms harsh?

How would you expect bailees to react to the decision?

45


Standard form contracts
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?






Why employ standard form contracts1
Why Employ Standard Form Contracts?

Economize on negotiations

51


Why employ standard form contracts2
Why Employ Standard Form Contracts?

Economize on negotiations

Police consumer fraud

52


Why employ standard form contracts3
Why Employ Standard Form Contracts?

Economize on negotiations

Police consumer fraud

Economize on litigation

53


Why employ standard form contracts4
Why Employ Standard Form Contracts?

Economize on negotiations

Police consumer fraud

Economize on litigation

Police agency costs of merchant

54


Why employ standard form contracts5
Why Employ Standard Form Contracts?

Suppose the consumer is illiterate or can’t speak English

Elbonians

55


Why employ standard form contracts6
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!?!?

56


Why employ standard form contracts7
Why Employ Standard Form Contracts?

  • Suppose that most non-lawyers would have a hard time understanding the language?

    • Cf. Pirkle v. Gurr, 438-39

57


Non disclosure
Non-disclosure

Treaty of Ghent

What happened in Laidlaw? P. 451


Rational choice six assumptions
Rational Choice: Six Assumptions

Full Information

No mistakes

No misrepresentations

And no informational asymmetries

59


Non disclosure1
Non-disclosure

“I’ll pay $500 for the rug” [but will go as high as $1,000].


Non disclosure2
Non-disclosure

Coca-Cola sells Coke but refuses to disclose the secret formula it uses to make it.


Non disclosure cicero offices iii
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.


Non disclosure aquinas summa theologica
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

63


Non disclosure aquinas summa theologica1
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?

64


Non disclosure3
Non-disclosure

What should the buyer have concluded from the seller’s silence about changed market conditions?


Non disclosure4
Non-disclosure

Which rule better promotes efficiency in Laidlaw?

66


Non disclosure5
Non-disclosure

  • Which rule better promotes efficiency in Laidlaw?

    • The incentive to acquire information


Non disclosure6
Non-disclosure

  • Which rule better promotes efficiency in Laidlaw?

    • The incentive to acquire information

    • Litigation over nondisclosures


Non disclosure7
Non-disclosure

An industry analyst discovers that a public firm has fraudulently inflated its profits, and shorts its stock without disclosing his find.


Non disclosure8
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?


Non disclosure9
Non-disclosure

A company executive in the same firm sells his stock without making disclosure. Same result?

71


Non disclosure10
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?

72


Non disclosure11
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?

73


Non disclosure12
Non-disclosure

Should Obde be confined to its special facts? And these were?

Termites


Non disclosure13
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?

75


Non disclosure14
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)

76


Restatement 160 in some states bondo is a primary color
Restatement § 160In some states, bondo is a primary color


Reed v king
Reed v. King

O.J.’s House


George mason school of law2
George Mason School of Law

Contracts II

Unconscionability

F.H. Buckley

fbuckley@gmu.edu


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