Required information

Introduction

Read the overview below and complete the activities that follow.

Juan Sells His Business

Sometimes a person will enter a contract because she relied on false information provided by the other party to the contract. Often in such circumstances it would be unfair to require her to remain bound to the contract, because she did not consent to enter the contract in which she actually finds herself. In this activity we look at a fictional scenario in which one party to a contract makes a false statement to the other about the subject of the contract. The questions that follow the scenario deal with the circumstances under which the contract can be rescinded as a result.

CONCEPT REVIEW:

Contracts induced by misrepresentation or fraud are generally considered to be voidable.

Case Analysis

Read the mini case and answer the questions that follow.

Juan recently sold his business to Sarita. The business was in poor shape when he sold it to her and she has realized that it is inevitably a losing proposition. Sarita wants a way out of the deal.

Assume, for this question only, the following: During the negotiations, Juan guaranteed Sarita that the business had turned a profit in each of the past five years. Actually, it lost money in each of those years, although Juan did not know that because his girlfriend, Carleigh (who served as the business's bookkeeper), was hiding that fact from him. Carleigh was afraid that Juan, who was prone to depression and suicidal thoughts, would not be able to handle the truth about the business's losses. So, she "cooked the books" and had been secretly infusing the business with cash from an inheritance she had received from a rich aunt. Sarita looked at the balance sheet, was satisfied that the business was in decent shape, and likely would not have bought the business otherwise. After the sale, though, Sarita and her accountant discovered Carleigh's cover up. If Sarita seeks to rescind the contract with Juan claiming fraud, which of the following is true?

Multiple Choice

Fraud, because Sarita suffered actual economic injury due to losses the business suffered.

Fraud, because the fact that the business was not profitable was material to Sarita.

No fraud, because the fact that the business was not profitable was not material to Sarita.

No fraud, because Juan did not know that the business had lost money.

No fraud, because Sarita did not actually rely on Juan's false assertion of profitability.

Assume, for this question only, the following: During the negotiations Juan guaranteed Sarita that the business had turned a profit in each of the past 5 years. Actually, it lost money in each of those years, although Juan did not know that. When Juan made the statement about the business's profitability, however, Sarita was conferring with her attorney and did not hear it. Her friend Harry, who was observing the negotiations, heard Juan's statement. Before long, when Sarita realizes what a bad deal she's made, she laments the fact to Harry. When Harry inquires how a business that had been profitable under Juan was suddenly losing money, Sarita is confused. They finally realize that Harry heard Juan's misstatement about the business's profitability and Sarita did not. Even so, Sarita is thrilled. With Harry as her key witness, she seeks to rescind the sale agreement claiming innocent misrepresentation. Which of the following is true?

Multiple Choice

No rescission, because Juan lacked sufficient knowledge of the false nature of his statement and did not intend to trick Sarita.

No rescission, because Juan's claims of the business's profitability would not have been material to Sarita if she had heard them.

Rescission, because Juan intended to defraud Sarita.

Rescission, because Juan's claims of the business's profitability would have been material to Sarita if she had heard them.

No rescission, because Sarita did not actually rely on Juan's false statement about the business's profitability.

Assume, for this question only, the following: During the negotiations Juan guaranteed Sarita that the business had turned a profit in each of the past 5 years. Actually, it lost money in each of those years. Sarita had access to all of the financial statements of the business, from which any reasonably informed business person could have discovered the losses. Sarita did not look at the statements or have her accountant do so. She simply took Juan at his word. When Sarita finds out the truth, she seeks to rescind the sale agreement claiming innocent misrepresentation and fraud. Which of the following is true?

Multiple Choice

Actually, this is a case of unilateral mistake, rather than fraud or misrepresentation; thus, Sarita can only rescind the contract if she can prove that Juan honestly believed the business turned a profit.

Sarita's blind reliance on Juan's assertion that the business was profitable was not justifiable, so she cannot rescind the contract.

A buyer like Sarita never has an obligation to discover a seller's false statements; thus, the contract is voidable.

The contract is voidable due to both fraud and innocent misrepresentation; Sarita can rescind it at her election.

Sarita will be able to rescind the contract if she can prove that Juan made the statement about the business's profitability with the intent to defraud her.

Assume, for the sake of this question only, the following: The sale of the business included a warehouse building. The contract for the sale of the business indicated that the warehouse was included "in its present condition" or "as is." Shortly after Sarita took possession of the warehouse, she discovered a walled-in basement room that neither she nor Juan had realized was there. The room was packed full of drums of hazardous materials, which (as far as anyone could tell) had been leaking their contents into the ground for a decade or so. Sarita was going to have to clean up the mess at a considerable ongoing expense. If she seeks to rescind the contract based on the doctrine of mistake, which of the following is true?

Multiple Choice

The contract will be rescinded, because both Juan and Sarita were mistaken as to a basic assumption that the warehouse was free of hazardous waste.

The contract will be rescinded due to unilateral mistake, but only if Sarita can prove that Juan caused or had reason to know of Sarita's mistaken belief that the warehouse was free of hazardous waste.

The contract will not be rescinded, because Sarita bore this risk of this mistake.

The contract will be rescinded, because both Juan and Sarita were mistaken as to a basic assumption that the warehouse was free of hazardous waste.

The contract will be rescinded due to unilateral mistake, because the contract would be unconscionable to enforce otherwise.

Which of the following statements, if it turns out to be false, is most likely to give rise to a successful rescission claim of fraud or misrepresentation?

Which of the following statements, if it turns out to be false, is most likely to give rise to a successful rescission claim of fraud or misrepresentation?

Multiple Choice

"You should be able to sell this ring in a few years for a substantial profit."

"I believe that it would be hard to find a house of this age that is in as good of condition."

"If you buy this dishwasher from me, I guarantee you will be back in a month's time to thank me."

"This car has only 40,000 miles on the odometer."

"Because the market is likely to move upward, you should buy this stock now at a low price."