MODULE 23 CONTRACTS 133

EXAMPLE: An expert appraiser ofjewelry appraises a diamond to be worth $500 when he

knows it is actually worth $1,500. This fulfills the "misrepresentation of a material fact" ele-
ment and also scienter element. If the remaining elements of fraud are met, then there is fraud.
2] Opinions about what will happen in future (expert or not) do not satisfy fact require-
ment
EXAMPLE: A real estate agent tells a prospective buyer that the income property she is consider-
ing purchasing will earn at least 50% more next year than last year.

3] Puffmg or sales talk is not fact

EXAMPLE: A seller claims her necklace is worth $1,000. The buyer pays $1,000 and later finds
out that he can buy a very similar necklace from another seller for $700. Even if the other elements
offraud are present, this opinion does not constitute fraud. .

4] Presently existing intention in mind of the speaker is fact

(2) Intent to mislead=-vscienter''
(a) Need knowledge of falsity withintent to mislead, or
(b) Reckless disregard for truth can be substituted

1] If all elements (1) through (4) are present but reckless disregard is proven instead of
actual knowledge of falsity, then it is called constructive fraud

(3) Reasonable reliance by injured party

(a) One who knows the truth or might have learned it by a reasonable inquiry may not recover
(b) One cannot reasonably rely on opinions about future

(4) Resulting in injury to others

(5) Remedies for fraud
(a) Defrauded party may affirm agreement and sue for damages under tort of deceit, or if
party is sued on contract, then s/he may set up fraud in reduction of damages, or

(b) Defrauded party may rescind contract and sue for damages that result from the fraud
(6) Fraud may occur
(a) In the inducement
1] The misrepresentation occurs during contract negotiations
2] Creates voidable contract at option of defrauded party
EXAMPLE: A represents to B that A's car has been driven 50,000 miles when in fact it has been
driven for 150,000 miles. If B purchases A's car in reliance on this misrepresentation,fraud in the
inducement is present, creating a voidable contract at B's option.

(b) In the execution

1] Misrepresentation occurs in actual form of agreement
2] Creates void contract
EXAMPLE: Larry Lawyer represents to Danny that Danny is signing his will, when infact he is
signing a promissory note payable to Larry. This promissory note is void because fraud in the exe-
cution is present.

(7) Fraud is also called intentional misrepresentation

b. Innocent misrepresentation
(1) An innocent misstatementmade in good faith (i.e., no scienter)
(2) All other elements same as fraud

(3) Creates right of rescission (cancellation) in other party-to return both parties to their precon-
tract positions to extent practicably possible

(a) Does not allow aggrieved party to sue for damages

c. Mistake-an act done under an erroneous conviction
(1) Mutual mistake (i.e., by both parties) about material characteristics of subject matter in con-
tract makes contract voidable by either party ,