George Mason School of Law

1. George Mason School of Law Contracts I Fraud F.H. Buckley fbuckley@gmu.edu

2. Rational Choice: The no-duress assumption • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities) • Perfect rationality

3. Rational Choice: Six Assumptions Full Information No mistakes (later) No misrepresentations And no informational asymmetries 3

4. Fraus omnia corrumpit Lord Eldon ordered that Shelley’s children be taken from 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

5. The Elements of Fraud • A False Representation • Restatement§ 159 5

6. The Elements of Fraud • A False Representation • Which the Δ knows to be false. • Restatement § 162(1)(a) • “Scienter” 6

7. 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) 7

8. 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 8

9. 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) 9

10. 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? 10

11. 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? 11

12. 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

13. What is an Assertion?“It works”: You got a problem with that?

14. Mere puffs are not assertionsSimplex commendatio non obligat

15. George Mason School of Law Contracts I Fraud F.H. Buckley fbuckley@gmu.edu

16. Next day Statute of Frauds Unconscionability 16

17. 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

18. The Elements of Fraud Does Restatement § 164 water down materiality? 18

19. The Elements of Fraud • Does Restatement § 164 water down materiality? • Section 164 is disjunctive 19

20. The Elements of Fraud • Does the Restatement water down materiality? • Section 164 is disjunctive • Material non-fraudulent (innocent) misrepresentations 20

21. The Elements of Fraud • Does the Restatement water down materiality? • Section 164 is disjunctive • Material non-fraudulent (innocent) misrepresentations • Fraudulent immaterial misrepresentations 21

22. The Elements of Fraud • But what does this mean? • “upon which the recipient is justified in relying.” § 164 22

23. The Elements of Fraud • Restatement § 159: What is an assertion? • What aren’t assertions?

24. Mere puffsSpeiss v. Brandt Lake McFarland: Three Miles from Cdn. border • What was the remedy sought?

25. Mere puffsSpeiss v. Brandt • What were the alleged representations? Lake McFarland

26. Mere puffsSpeiss v. Brandt • What if all the Δs had said was “You can make good money out of the resort”? 26

27. Mere puffsSpeiss v. Brandt • “You can pay it off in five years”? 27

28. Mere puffsSpeiss v. Brandt • “We are making good money out of the resort.” • Gross income of $19,000… 28

29. Mere puffsSpeiss v. Brandt • “We are making good money out of the resort.” • What if they had said this and then provided the financials? 29

30. Mere puffsSpeiss v. Brandt • “We are making good money out of the resort.” • What if they had provided the financials? • Restatement § 172 30

31. Mere puffsSpeiss v. Brandt • “We are making good money out of the resort.” • What do you conclude from the buyers’ willingness to do the deal even though the financials were not provided? 31

32. Mere puffsSpeiss v. Brandt • “We are making good money out of the resort.” • What do you conclude from the buyers’ willingness to do the deal even though the financials were not provided • Or to make an offer before the misrepresentations? 32

33. 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 income? • Cf. Gallagher’s dissent 33

34. Mere puffsSpeiss v. Brandt • What would you have advised your client to say?

35. Mere puffsSpeiss v. Brandt • Does a merchant have heightened duties to one who is “young and inexperienced”? 35

36. Mere puffsSpeiss v. Brandt • “In youth, every manifestation of friendship seems genuine and deserving of special trust and confidence.” 36

37. Mere puffsSpeiss v. Brandt • When is Restatement § 173 triggered? 37

38. How is the reliance requirement treated in Ziff-Davis? 38

39. How is the reliance requirement treated in Ziff-Davis? • Can a party be said to be harmed if he does not rely on a representation?

40. 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

41. The Merger Clause in Danann What is it and why did the parties agree to it?

42. The Merger Clause in Danann • Absent the merger clause, what result? • What is the parol evidence rule?

43. The Merger Clause in Danann Absent the merger clause, what result? The representations would ordinarily be excluded by the Parol Evidence Rule Here however the fraud exception to the Parol Evidence Rule would apply.

44. 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. Does the sophistication of the parties matter? Grumman v. Rohr p. 423

45. The Merger Clause in Danann • Is there a logical problem in relying on a term of the contract when the fraud would impeach the entire contract?

46. The Merger Clause in Danann • What if the fraudulent misrepresentation had been incorporated in the contract?

47. The Merger Clause in Danann • What if the fraudulent misrepresentation had been incorporated in the contract? • UCC § 2-316(1)

48. Signing a ContractMerit Music Bar, 601 South Monroe St. Baltimore MD

49. Signing a ContractMerit Music Were the terms harsh? 49

50. Signing a ContractMerit Music • Were the terms harsh? • And just how would you know? 50