Innocent Misrepresentation.

Suppose that one party to a contract makes a statement of fact which is false but which is innocently made without intending to deceive the other party. Can the other party set aside the contract on the ground of being misled by the statement?

Equity will permit the rescission of the contract when the innocent misstatement of a material fact induces another to make the contract. If the deceived person is a defendant in an action at law, it is generally held that such innocent deception by the plaintiff cannot be asserted as a defense. There is a tendency, however, for the law courts to adopt the rule of equity. For example, it may be possible for an insurance company to avoid its policy because of an innocent misstatement of a material fact by the applicant. Contracts between persons standing in confidential relationships, such as guardian and ward, or parent and child, can be set aside for the same reason. Some courts go beyond this and permit the recovery of damages sustained because of the misrepresentation.

Nondisclosure.

In contrast to innocent misrepresentation, nondisclosure by one party to a contract generally will not make a contract voidable by the other party. Under certain circumstances, however, nondisclosure will serve to make a contract voidable, especially when the nondisclosure consists of active concealment.

(a) General Rule of Non-liability. Ordinarily there is no duty on a party to a contract to volunteer information to the other.4 If A does not ask B any questions, B is not under any duty to make a full statement of material facts.. Consequently, the nondisclosure of information which is not asked for docs not impose fraud liability nor impair the validity of a contract.

(b) Exceptions. In some instances, the failure to disclose informa­tion which was not requested is regarded as fraudulent and the party to whom the information was not disclosed has the same remedies as though a known false statement were intentionally made.

(1) Unknown Defect or Condition. There is developing in the law a duty on a party who knows of a defect or condition to disclose that infor­mation to the other party where the defect or condition is obviously un­known to the other person and is of such a nature that it is unlikely that the other person would discover the truth or inquire about it.

FACTS:

The City of Salinas entered into a con­tract with Souza & McCue Construction Co. to construct a scwcr. The city officials knew that unusual subsoil conditions, including extensive quicksands, existed, which would make perfor­mance of the contract unusually difficult; but it did not make that information known when it advertised for bids. The advertisement for bids directed bidders to "examine carefully the site of the work" and declared that the submission of a bid would constitute "evidence that the bidder has made such examination." Souza & McCuc was awarded the contract, but because of the subsoil conditions it could not complete the con­tract on time and was sued by Salinas for breach ofdirected bidders to "examine carefully the site of the work" and declared that the submission of a bid would constitute "evidence that the bidder has made such examination." Souza & McCuc was awarded the contract, but because of the subsoil conditions it could not complete the con­tract on time and was sued by Salinas for breach of contract. Souza & McCue counterclaimed on thebasis that the City had not revealed its infor­mation of the subsoil conditions and was liable forthe loss caused thereby.

DECISION:

Judgment for contractor. An owner is liable for not informing the contractor of un­usual difficulties known to the ownet which the contractor will encounter in the performance of a contracr. As the City knew that the contractor would base its bid on the incomplete informa­tion, the City had misled the contractor by such concealment and was liable to the contractor for the loss caused thereby. The provision as to the examination of "site of the work" did not alter this conclusion since there was nothing in that provision which would call to the contractor's attention the conditions that would be encoun­tered nor which disclaimed liability for con­cealed subsoil condirions. [City of Salinas v Souza & McCue Construction Co. 66 Cal App 2d 217, 57 Cal Rptr 337, 424 P2d 921 (1967)]

(2) Confidential Relationship. If A and C stand in a confidential relationship, such as that of attorney and client, A has a duty to reveal any­thing that is material to C's interest when dealing with C, and A's silence has the same legal consequence as a knowingly made false statement that there was no material fact to be told to C.

The relationship between the buyer of a house and a financial institu­tion lending the money to finance the purchase is not a confidential relation­ship and therefore the lender is not under any duty to disclose information posessed by it.

(3) Pine Print. An intent to conceal may be present when a printed contract or document contains certain clauses in such fine print that it is rea­sonable to believe that the other contracting party will never take the time nor be able to read such provisions.

In some instances, legislatures have outlawed certain fine print contracts. Statutes commonly declare that insurance policies may not be printed in type of smaller size than designated by statute. Consumer protection statutes fre­quently require that particular clauses be set in large type. When a merchant selling goods under a written contract disclaims the obligation that goods be fit for their normal use, the Uniform Commercial Code requires the waiver to be set forth in "conspicuous” writing” which is defined as requiring "a term or clause... [to be] so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals. ..is con­spicuous. Language in the body of a form is 'conspicuous' if it is in larger or other contrasting type or color…

There is a growing trend to treat a fine print clause as not binding upon the party who would be harmed thereby, without considering whether fraud was involved. A provision freeing the other contracting party from liability is not binding when it is printed in type that is so small that a person with normal vision would have difficulty in reading it.

(4) Active Concealment. Nondisclosure may be more than the pas­sive failure to volunteer information. It may consist of a positive act of hiding information from the other party by physical concealment, or it may consist of furnishing the wrong information. Such conduct is fraud.

Fraud.

Fraud is (1) the making of a false statement of fact (2) with knowl­edge of its falsity or with reckless indifference as to its truth, (3) with the intent that the listener rely thereon and (4) the listener does so rely and (5) is harmed.10

The boundary line between fraud and nondisclosure may sometimes be very thin and frequently cases involve elements of both.

FACTS:

Karan purchased a used truck from a dealer, Bob Post, Inc. In selecting his purchase, he asked whether the odometer reading of 27,000 miles was correct. The salesman did not know whether it was or not but assured Karan that it was correct and also stated that certain parts of the truck were stil! covered by the manufacturer's 50,000 mile warranty. The ac­tual mileage of the truck was over 48,000 miles and the truck was not eligible for any warranty protection. After taking possession of the truck, Karan discovered its poor condition and then learned that the statements of the salesman had been false. Karan sued the dealer for the fraud. The defense was made that the salesman had not known that his statements were false and did not have any reason to know that they were false and therefore he could not have been guilty of fraud.

DECISION:

The salesman was guilty of fraud even though he did not actually know that his state­ments were false. He knew that he did not have definite knowledge that what he said was true, but he made his statements as being true. He therefore took the risk that they might be false and if they were false, his statements constituted fraud. [Karan v Bob Post, Inc. ___Colo App ___,521 P2d 1276 (1974)]

(a) Statement of Intention. A statement of intention can constitute ftaud when a promise is made by a person who does not intend to keep it." To illustrate, a customer purchases goods from a merchant on credit and agrees to pay for them in 60 days. If the customer does not intend to pay for the goods and does not do so, the customer is guilty of fraud by misrepresent­ing intention.

(b) Statement of Opinion or Value. Ordinarily a misstatement of opinion or value is not regarded as fraudulent on the theory that the person hearing the statement recognizes or should recognize that it is merely the speaker's personal view and not a statement of fact.

If however, the defendant, in making a statement as to the future, had knowledge not available to the plaintiff which showed that such expec­tations could not be realized, the statement as to the future expectations can be held fraudulent. Thus, a statement that a business would make a stated profit in the future is actionable when the speaker knew that on the basis of past events such prediction was false.

Likewise a statement of opinion may be fraud when the speaker knows of past or present facts that make the opinion false.

(c) Statement of Law. A misstatement of law is treated in the same manner as a misstatement of opinion or value. Ordinarily, the listener is regarded as having an opportunity of knowing what the law is, an opportu­nity equal to that of the speaker, so that the listener is not entitled to rely on what the speaker says. When the speaker has expert knowledge of the law or claims to have such knowledge, however, the misstatement of law can be the basis for fraud liability.

(d) Use of Assumed Name. The use of an assumed name is not nec­essarily fraudulent or unlawful. It is only such when the user of the name uses the name of another person or makes up a name for the purpose of conceal­ment to avoid arrest or to avoid creditors or to imitate a competitor and deceive customers.

FACTS:

Euge opened a checking account under the assumed name of Horn with the Manchester Bank. He drew a check for an amount greater than hisaccount and was prosecuted for the crime of issuing a bogus check. The prosecution claimed that the check was drawn by a fictitious person on a fictitious account.

DECISION:

Huge was not guilty since there was an actual account although under the ficti­tious name he had assumed. The contract with the bank was lawful, and the bank would have been protected had it honored Euge's checks in the assumed name that he used. The account was an existing account under a fictitious name, but this did not constitute the crime charged. [State v Euge (Mo) 400 SW2d 119 (1966)]

In the absence of any intent to evade or deceive by the use of the assumed name, it is lawful for a person to go by any name, although other persons may refuse to enter into contracts unless the actual name is used. If a person makes a contract in an assumed or fictitious name or in a trade name, such person is bound by the contract because that name was in fact used to identify that person.

A married woman has the right to retain her maiden name. More­over, a married woman who has taken her husband's name may return to her maiden name after they are divorced.