Contract Law: Fraud, Mistakes, Duress and Undue Influence | Business Law | CPA Exam REG - Video

In this video, I discuss contract defenses such as fraud, mistakes, duress and undue influence.
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Fraud as a defense in contract law involves proving several key elements:

Misrepresentation of a Material Fact: The defrauding party must have misrepresented a fact that is significant to the contract's terms. This can't be a mere opinion or statement of value, except in cases where such statements are made by experts, as they are then considered factual.

Scienter (Intent to Deceive): Fraud is an intentional wrongdoing. The false statement must be made with scienter, meaning with the intention to deceive the other party. This intention can be direct or indirect; if the misrepresentation is made with reckless disregard for the truth, it still qualifies. This latter scenario is often referred to as constructive fraud or gross negligence.

Intent to Induce Reliance: The defrauding party's aim in making the false statement must be to get the victim to rely on this misinformation.

Reasonable Reliance: The victim must have actually relied on this misrepresentation, and their reliance should be considered reasonable under the circumstances. This means that the victim believed the false statement and acted based on that belief.

Damages: To claim fraud, the victim must have suffered some form of loss due to the fraudulent act. The victim of fraud has the right to either rescind (cancel) the contract or sue for monetary damages, but cannot pursue both remedies.

Fraud in the Execution: This occurs when a person is tricked into signing a document that they do not recognize as a contract. For example, imagine a baseball player thinking they are signing an autograph in a fan's book, but the book is actually a contract. In such cases, because the deceived party does not realize they are entering into a contract, there is no mutual agreement or "meeting of the minds." As a result, a contract formed under fraud in the execution is considered void. This means the contract is treated as if it never existed, and hence, it has no legal effect.

Fraud in the Inducement: This type of fraud occurs when the defrauded party knows they are entering into a contract, but is misled about the contract's terms or other significant facts. For instance, if a person is lied to about the condition of a car they are buying, this is fraud in the inducement. The deception alters the defrauded party's understanding of what they are agreeing to. Unlike fraud in the execution, fraud in the inducement makes a contract voidable, not void. This means the defrauded party has the option to either affirm or reject the contract. If the contract is affirmed, it remains valid and enforceable. If it is rejected (rescinded), then it is treated as invalid from the outset.

Undue influence in contract law occurs when one party's ability to make a free and informed decision is compromised by another party's exploitation of a position of trust or authority. This typically involves a dominant party using their influence over a more vulnerable individual to gain an unfair advantage. When undue influence is proven, the affected contract becomes voidable, meaning the influenced party can choose to either affirm or rescind the contract.

Innocent misrepresentation in contract law is a concept that closely resembles fraud, but with a key difference: the absence of scienter, or intent to deceive. This means the following elements are present:

Misrepresentation of a Material Fact: Similar to fraud, innocent misrepresentation involves a false statement about a significant fact related to the contract. However, unlike fraud, the misrepresentation is not made with the intent to deceive.

Made Innocently: The critical distinction in innocent misrepresentation is that the false statement is made without any intention of deception. The party making the statement genuinely believes it to be true at the time it is made.

Contract is Voidable: As a result of this innocent misrepresentation, the contract becomes voidable at the discretion of the party who was misled. This means the deceived party can choose to either continue with the contract or rescind it, treating it as though it never existed.

Mutual mistake in contract law refers to a situation where both parties have a shared misunderstanding about a fundamental fact that is crucial to the contract. When such a mistake impacts one or both parties significantly, it can render the contract voidable, allowing the affected party to withdraw from the agreement. It's important to note, however, that mistakes regarding the value of the subject matter are usually not considered in this context, as value is often subjective.



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