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Contracts II
Faulkner Law - Thomas Goode Jones School of Law
Hammond, Jeffrey B.

Contracts II

Professor Hammond – Spring 2011

I. Policing Contracts for Improper Bargaining

A. Misrepresentation and Fraud

1. General Principles and Elements

a. Restatement 2d § 164 – If manifestation of assent is induced by fraud or misrepresentation in which a party is justified in relying, the contract is voidable

b. Restatement 2d § 162 – When a misrepresentation is fraudulent or material:

– Maker knows the assertion is not in accord with facts

– Maker does not have confidence he states or implies in the truth of the assertion

– Maker knows that he does not have basis he states or implies

– A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or maker knows it would likely induce assent.

c. Restatement 2d § 160 – Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion fact does not exist (Concealment)

d. Restatement 2d § 161 – When non-disclosure is equivalent to an assertion

– Knowledge that disclosure of the fact is necessary to prevent a previous assertion from being fraudulent

– Disclosure of fact would correct a mistake of the other party and failure to act in good faith with reasonable standards of dealing

– Disclosure of fact would correct a mistake of an evidencing or writing

– Other person is entitled to know the fact because of relation of trust and confidence

2. Affirmative Fraud

Sarvis v. Vermont State Colleges Vt. Sup. Ct. 2001

Procedure: D’s motion for summary judgment granted. P appealed.

Facts: P incarcerated for bank fraud from April 1995 to August 1998. Two weeks after release P sought employment as a professor and coordinator of academic services at a community college. P submitted resume for professor position stating he was employed as the president of a company that had been sold by divisions after which he retired. P submitted second resume for coordinator position stating he was semi-retired and have served as a professor at Franklin Pierce College. P also provided additional application materials suggesting he would be best suited to teach Business Ethics courses. P’s probation officer alerted D of P’s convictions.

Issue: Were the P’s misrepresentations during the application process sufficient grounds for the D to fire the P for just cause making the employment contract voidable?

Rule: Misrepresentations of work history made with the intent of creating a false impression of how a potential employee spent a specified period of time are sufficient to void an employment contract.

Application: P’s representations were not in accord with facts. P also took additional steps to prevent D from learning the truth.

Conclusion: Affirmed.

3. Silence as Fraud

Kaloti Enterprises, Inc. v. Kellogg Sales Company Wis. Sup. Ct. 2005

Procedure: Trial court dismissed complaint for failure to state a claim.

Facts: P had entered into numerous transactions with D to purchase food products that were resold to large market stores. D changed marketing practices of two products, NutriGrain and Rice Krispie Treat products, in which they sold the products directly to the large market stores that were previously serviced by the P. After D’s agent knew marketing practices were changed, he solicited an order of $124,000 from the P. D claims disclosure not made due to confidentiality agreement.

Issue: Whether a duty to disclose arises between sophisticated parties to a commercial transaction where the parties have an established practice of doing business and the facts are material in that practice of doing business?

Rule: Where the material facts are peculiarly and exclusively within the knowledge of one party to the transaction and the other party is not in a position to discover the facts for himself, disclosure is required.

Application: Although the merger was publicly announced, the new marketing strategy was not. There was no way for the P to learn of this change through normal business practices. There was a duty to disclose.

Conclusion: Reversed and remanded.

In re House of Drugs, Inc.

Facts: Lessee drug store claims it went out of business because lessor shopping mall failed to disclose two largest tenants at the mall were about to go out of business.

Rule: Under New Jersey Law, there is no duty to disclose impose upon a party to an arm’s length transaction.

Stambovsky v. Ackley N.Y. Sup Ct., App. Div. 1991

Procedure: Supreme Court dismissed P complaint.

Facts: P entered into contract for sale of home reputed to be possessed by poltergeists. D actively promoted the haunting of the home in national publications. Home also included in five-home walking t

atement 2d § 176 – (1) When a threat is improper

– What is threatened is a crime or a tort, or threat itself would be a crime

– What is threatened is a criminal prosecution

– What is threatened is the use of civil process and made in bad faith

– Threat is a breach of duty of good faith and fair dealing

(2) Threat is improper if the resulting exchange is not on fair terms

– Act would harm the recipient and would not significantly benefit the maker

– Effectiveness of threat increased by prior unfair dealing by the maker

– What is threatened is otherwise a use of power for illegitimate ends

Germantown Manufacturing Co. v. Rawlinson Penn. Sup. Ct.

Procedure: Trial court opened judgment on the second note.

Facts: Mr. Rawlinson embezzled over $300,000 from the P. Over the course of a weekend, he did not tell his wife that he had been fired. He then told her that he had only taken $20,000. A representative of the P’s insurer arrived at house with two promissory notes the following Tuesday. The first stated the Rawlinson would repay the $160,000 that Mr. Rawlinson had admitted to embezzling. The second note stated the P would determine the amount. The representative of the insurer told Mrs. Rawlinson that if she did not sign the documents her husband would go to jail.

Issue: Did the threat of possible jail time give rise to inducement by duress voiding the repayment agreement?

Rule: It is improper to threaten criminal prosecution to induce an embezzler or his relative to undertake to repay.

Application: Mr. Kulaski took unsolicited liberty of adding Mrs. Rawlinson to the repayment agreement and did not tell her until minutes before she was to sign. She was already in a fragile mental state due to a miscarriage. The only reasonable thing would be to refuse to sign the documents and place unbearable stress on her family.

Conclusion: Affirmed