Misrepresentation, Nondisclosure, Duress and Undue Influence
Short Video: Contract Defenses for Lack of Mutual Assent: Mistake, Misunderstanding and Misrepresentation
A misrepresentation is a statement about something that is not in line with the facts.
A fraudulent misrepresentation is where someone misstates a fact and either knows or believes that what he is saying is not true or is not sure whether or not his statement is true but passes it off as true anyway.
If a party to the contract relies on the fraudulent misrepresentation and enters into a contract based on that misrepresentation, the contract is voidable by the innocent party. For example:
Karl is looking to buy a house in the Salt Lake City area of Utah. Karl contacts John, a realtor, and arranges to see several houses that are on sale. After picking out the house he likes, Karl asks the owner if the house has a termite problem. The house does have a termite problem but the owner, knowing that Karl will not buy the house if he knows about the termite problem, tells Karl that there is no termite problem. Karl and the owner sign a contract under which Karl will buy the house for $250,000. After the contract is signed, Karl finds out about the termite problem. In this case, the contract will be voidable by Karl because the owner made a fraudulent misrepresentation that Karl relied on and, based on that misrepresentation, Karl entered into the contract.
Sometimes, in the use of agents to sell an item on behalf of an owner, mere (allowable) puffing of the item’s value can go so far as negligent misrepresentation.
In our case above, John the realtor has no indication or reason to believe that the house has a termite problem. If asked directly, John may be tempted to affirmatively deny the existence of termites, even though the owner was aware of the situation. John’s misrepresentation, although not fraudulent, is negligent.
A material misrepresentation (which is what the owner’s statement in the above example is) is a misstatement of fact that will induce a reasonable person to enter into a contract. If a misrepresentation is material to the contract, the contract will be voidable by the relying party even if the misrepresentation is not fraudulent. For example:
Karl is looking to buy a house in the Salt Lake City area of Utah. Karl contacts John, a realtor, and arranges to see several houses that are on sale. After picking out the house he likes, Karl asks the owner if the house has a termite problem. The house does have a termite problem. However, the owner is unaware of the problem. The owner tells Karl that there is no termite problem and Karl and the owner sign a contract under which Karl will buy the house for $250,000. After the contract is signed, Karl finds out about the termite problem. In this case, the contract will also be voidable by Karl. Although the misrepresentation that the owner made was not fraudulent (because he himself was unaware of the termite problem), it was still a material misrepresentation that Karl relied on.
In general, parties that propose contracts are not required to disclose facts regarding the subject matter of the contract. For example:
George, the owner and manager of Babe’s Baseball Memorabilia, offers to buy Mickey’s signed Ted Williams Bat for $200. The bat is actually worth $5,000. Mickey agrees to sell the bat to George for $200. Here, there is a binding contract because George had no duty to tell Mickey what the bat was really worth.
However, where one party knows of a material fact because of his special position and the other party is unaware of that fact and will not be able to easily discover it there may be a duty to disclose. Failure to disclose would be an issue of non-disclosure. For example:
Karl finds a house that he would like to buy and enters into a contract to buy it for $250,000. Karl never asks about any termite problems and the owner never volunteers that there is a termite problem. Karl buys the house and then finds out that there is an extensive termite problem. In this case, Karl can void the contract. Given the owner’s special position as the home owner, he had an obligation to let Karl know about the termite problem.
A contract is also voidable on the grounds of duress, where one party is threatened into entering into a contract with another party.
Economic duress will make a contract voidable if one party threatens to commit a wrongful act that would put the other party’s property or financial well-being in jeopardy and there is nothing the other party can do to avoid the threat other than enter into the contract. For example:
All Major League Baseball players are signed to their contracts between March 1st and March 31st. According to the League rules, at 12:00 A.M. April 1st, teams are no longer allowed to sign players to contracts for the rest of the year. On March 1st, the Red Sox tell Ramon Garcia that at the end of March they will give him a one-year contract to play for the team for $500,000. On March 31st, the Red Sox tell Garcia that, unless he signs a contract for $100,000, they will release him. Garcia signs the contract. In this case, the contract would be unenforceable on the grounds of economic duress. The Red Sox have committed a wrongful act by breaching their oral contract with Garcia and this wrongful act has threatened Garcia’s financial situation because Garcia is in a position where he either needs to take an 80% pay cut or not get paid at all. Further, there is no way for Garcia to avoid the threatened action other than by signing this contract. See
Thompson Crane & Trucking Co. v. Eyman, 123 Cal.App.2d 904 (1954).
When one party has a substantial position or power and exerts such power to negotiate the terms of a contract, courts may consider such contracts equitably void for undue influence.
Risk factors for undue influence include isolation, dependence, and vulnerability. Most common cases of undue influence involve the elderly at nursing homes and professional self-dealing when there is a fiduciary duty.