Clark 11e TB a Ch14

137

Chapter 14

Mistakes, Fraud, andVoluntary Consent

TRUE/FALSE QUESTIONS

A1. If the parties to a contract attach materially different meanings to a con-tract term, the contract cannot be rescinded.

ANSWER: F PAGE: 286 TYPE: =NAT: AACSB Reflective AICPA Legal

A2. A mistake of fact cannot be unilateral.

ANSWER: F PAGE: 289 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. A contract is always enforceable even if one party is aware that the otherparty made a mistake of fact.

ANSWER: F PAGE: 289 TYPE: =NAT: AACSB Analytic AICPA Legal

A4. If a price quotation contains a mistake in the adding of a number of fig-ures, the contract may not be enforceable.

ANSWER: T PAGE: 289 TYPE: =NAT: AACSB Reflective AICPA Legal

A5. Overestimating the value of an object is a mistake for which a court willnormally provide relief.


138 TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A6. A mistake in judgment as to value is a ground to avoid a contract.


A7. Altering contract terms to reflect the true intentions of the parties is arescission.

ANSWER: F PAGE: 289 TYPE: NNAT: AACSB Analytic AICPA Legal

A8. An innocent party can enforce a fraudulent contract.

ANSWER: T PAGE: 290 TYPE: =NAT: AACSB Analytic AICPA Legal

A9. Misrepresentation of a material fact is an element of fraud.

ANSWER: T PAGE: 290 TYPE: NNAT: AACSB Analytic AICPA Legal

A10. A statement of opinion is generally subject to a claim of fraud.


A11. An expert’s false statement to a naive buyer about a technical detail willnot usually entitle the buyer to rescind a contract.


A12. Misrepresentation of a material fact cannot occur through words alone.

ANSWER: F PAGE: 292 TYPE: NNAT: AACSB Reflective AICPA Legal

A13. Misrepresentation of a material fact can occur through conduct alone.


A14. Reliance on a non-expert’s statement of opinion will not normally entitlea party to relief.

ANSWER: T PAGE: 294 TYPE: =NAT: AACSB Reflective AICPA Legal

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 139

A15. Intent to deceive is an element of fraud.

ANSWER: T PAGE: 294 TYPE: +NAT: AACSB Analytic AICPA Legal

A16. Reliance on a misrepresentation is justified if the misrepresentation isan obviously extravagant statement.


A17. To rescind a contract for fraud, a plaintiff must prove an injury.


A18. Forcing someone to enter into a contract through fear created by threatsis duress.


A19. Economic need is always sufficient to constitute duress.


A20. An adhesion contract can occur in a one-sided transaction in which oneparty has substantially superior bargaining power.

ANSWER: T PAGE: 296 TYPE: =NAT: AACSB Analytic AICPA Legal

MULTIPLE CHOICE QUESTIONS

A1. Jill and Karl contract for the sale of Jill’s horse for $1,000. Unknown toeither party, the horse has died. Karl is

a. entitled to another horse of equivalent value.b. not required to pay due to the mutual mistake.c. not required to pay due to the unilateral mistake.d. required to pay because she assumed the risk the horse might die.

ANSWER: B PAGE: 286 TYPE: =NAT: AACSB Reflective AICPA Legal


A2. Local Investment Company and Midstate Properties, Inc., contract forthe sale of a retail mall. A mutual mistake of fact will make it possible foreither party to rescind the contract

a. if the mistake of fact is immaterial.b. if the mistake of fact is material.c. under any circumstances.d. under no circumstances.

ANSWER: B PAGE: 286 TYPE: =NAT: AACSB Reflective AICPA Legal

Fact Pattern 14-A1 (Questions A3-A4 apply)Dina, an employee of Eagle Industries, is injured in a work-related accident.Based on the diagnosis of Frank, a doctor, Dina accepts $50,000 from Eagle andwaives the right to future claims. Frank’s diagnosis later proves to have beenwrong.

A3. Refer to Fact Pattern 14-A1. According to the reasoning of the court inCase 14.1, Roberts v. Century Contractors, Inc., Frank’s misdiagnosis is,in terms of its impact on Dina’s agreement with Eagle,

a. a mutual mistake of fact.b. a unilateral mistake of fact.c. fraudulent misrepresentation.d. nonfraudulent misrepresentation.

ANSWER: A PAGE: 287 TYPE: =NAT: AACSB Communication AICPA Legal

A4. Refer to Fact Pattern 14-A1. Dina may, according to the decision in Case14.1, Roberts v. Century Contractors, Inc.,

a. obtain damages from Eagle for nonfraudulent misrepresentation.b. obtain damages from Frank for fraudulent misrepresentation.c. recover nothing because Dina waived the right to future claims.d. set aside the settlement with Eagle due to a mistake of fact.

ANSWER: D PAGE: 287 TYPE: =NAT: AACSB Communication AICPA Legal


Fact Pattern 14-A2 (Questions A5–A6 apply)Moore Properties, Inc., offers in writing to sell to New DevelopmentCorporation (NDC) a certain half-acre of land for “$112,000.” After NewDevelopment signs the offer in acceptance and returns it, Moore discovers thatthe price should have been stated as “$121,000.”

A5. Refer to Fact Pattern 14-A2. Moore’s misstatement of the price is

a. a bilateral mistake.b. a fraudulent misrepresentation.c. a unilateral mistake.d. unconscionable.

ANSWER: C PAGE: 289 TYPE: NNAT: AACSB Reflective AICPA Legal

A6. Refer to Fact Pattern 14-A2. The effect of Moore’s misstatement of theprice will most likely fall on

a. Moore and NDC, who must split the difference.b. Moore only.c. NDC only.d. neither Moore nor NDC.

ANSWER: B PAGE: 289 TYPE: NNAT: AACSB Reflective AICPA Legal

A7. Great City and Highway Construction Company (HCC) enter into aconstruction contract that includes six pages of detailed estimates. LaterGreat City, whose engineer compiled the figures, discovers that somenumbers were added incorrectly, but HCC refuses to make changes. Acourt would most likely

a. award damages to Great City for the mistakes.b. award damages to HCC for the mistakes.c. enforce the contract without requiring changes.d. reform the contract to reflect the figures accurately.

ANSWER: D PAGE: 289 TYPE: NNAT: AACSB Reflective AICPA Legal


A8. May is a stockbroker. Due to May’s statements, Nora believes that theprice of OK Goods, Inc. (OKGI), a widely traded stock, is going to increasesubstantially. Nora buys 500 shares of OKGI at $10 per share, but theprice soon drops to $2. Nora can successfully recover

a. nothing.b. the amount of the purchase price.c. the amount of the purchase price plus the expected increase.d. the amount of the purchase price plus the unexpected decrease.

ANSWER: A PAGE: 289 TYPE: =NAT: AACSB Reflective AICPA Legal

A9. Used Car Lot’s salesperson Vic offers to sell Will, who is twenty years ofage, a car about which Vic intentionally misrepresents several materialfacts. In reliance on the misrepresentations, Will buys the car. To provefraud in this transaction, Will would not have to show that

a. Vic intentionally deceived Will.b. Vic misrepresented several material facts.c. Will is under twenty-one years of age.d. Will justifiably relied on Vic’s misrepresentations.

ANSWER: C PAGE: 290 TYPE: NNAT: AACSB Reflective AICPA Legal

A10. Gina induces Hu to enter into a contract for the purchase of acondominium about which Gina knowingly misrepresents a number ofmaterial features. When Hu discovers the truth, Hu can

a. not rescind the contract.b. rescind the contract on the basis of fraud.c. rescind the contract on the basis of mistake.d. rescind the contract on the basis of undue influence.

ANSWER: B PAGE: 290 TYPE: NNAT: AACSB Reflective AICPA Legal

A11. In selling software to Payroll Services Corporation, Ray tells Payroll’spurchasing agent that the software is “almost human.” This is

a. fraud.b. duress.c. puffery.d. undue influence.

ANSWER: C PAGE: 290 TYPE: =NAT: AACSB Reflective AICPA Legal


A12. Olin convinces Pia, who has no artistic ability, that Pia has considerabletalent and induces Pia to pay Olin $10,000 for art lessons. When Piarealizes the truth, she files a suit against Olin. Pia is most likely torecover on the basis of

a. fraud.b. mistake.c. undue influence.d. none of the choices.

ANSWER: A PAGE: 290 TYPE: NNAT: AACSB Reflective AICPA Legal

A13. Don, a salesperson for Excel Autos, promises Fern that a certain car willgive her a “smooth ride.” Don offers a test drive, which Fern declines. Shebuys the car but soon realizes that its suspension is in poor condition.Fern

a. can rescind the contract on the ground of fraud.b. can rescind the contract on the ground of misrepresentation.c. can rescind the contract on the ground of mistake.d. was not defrauded.

ANSWER: D PAGE: 290 TYPE: =NAT: AACSB Reflective AICPA Legal

A14. Bret is convicted of arson for burning down his warehouse to collect theinsurance. On an application for insurance from Cover-All InsuranceCompany on a new building, in answer to a question about priorconvictions, Bret does not disclose his conviction. This makes thecontract

a. binding because the omission is immaterial to Cover-All’s decisionto issue coverage.

b. binding due to Cover-All’s failure to discover Bret’s conviction.c. voidable by Bret because the omission is immaterial to Cover-All’s

decision to issue coverage.d. voidable by Cover-All because the omission is material to its

decision to issue coverage.



A15. Nero makes an honest but erroneous statement that misrepresents amaterial fact in a contractual transaction with Odell. Nero is guilty of

a. a unilateral mistake.b. duress.c. fraud.d. innocent misrepresentation.

ANSWER: D PAGE: 294 TYPE: +NAT: AACSB Reflective AICPA Legal

A16. Allen, who is Beth’s guardian, convinces her to buy a certain parcel ofland from Chris at a greatly inflated price. Allen may be liable for

a. duress.b. fraud.c. puffery.d. undue influence.


Fact Pattern 14-A3 (Questions A17-A18 apply)Flo enters into a contract under Gail’s threats. Later, Flo refuses to perform,claiming that she acted under duress.

A17. Refer to Fact Pattern 14-A3. Flo sues to rescind the contract. Gail claimsthat duress is a defense to enforcement of a contract, not a ground for re-scission. The court will probably rule in favor of

a. Flo only.b. Flo and Gail.c. Flo or Gail, but not both.d. Gail only.


A18. Refer to Fact Pattern 14-A3. Gail sues to enforce the contract. To beguilty of duress, Gail must have threatened

a. a civil suit.b. a lost opportunity.c. a social snubbing.d. a wrongful act.



A19. Gary threatens physical harm to force Hugh to sell his business,Imported Goods, Inc., to Gary for a below-market price. This is

a. duress.b. fraud.c. puffery.d. undue influence.


A20. Sam uses duress to force Tanya to agree to pay him for protecting her re-tail store against the vandalism and destruction. Tanya may

a. avoid the contract or choose to carry it out.b. do nothing once she has agreed to pay.c. recover from her insurer for a failure to direct her “protection.”d. recover from the local police for a failure to protect her “direction.”


ESSAY QUESTIONS

A1. Alpha Investments, Inc., offers to buy Beta Computer Corporation. OnMay 1, Beta gives Alpha copies of Beta’s financial statements for the pre-vious year. The statements show an inventory of $1 million. On May 15,Beta discovers that the previous year’s inventory is overstated by$500,000, but does not inform Alpha. On June 1, Alpha, relying on the fi-nancial statements, buys Beta. On June 10, Alpha discovers the inven-tory overstatement. Can Alpha succeed in a suit against Beta for fraud?

ANSWER: Yes, Alpha can succeed in a suit against Beta for fraud, be-cause Beta had a duty to disclose that the inventory was overstated assoon as Beta learned of that fact. Ordinarily, no party to a contract has aduty to come forward and disclose facts. Each party is responsible for theuse of common sense and normal business sense in negotiating a con-tract. An action for fraud can be based on a failure to disclose materialfacts if there is a certain relationship between the parties such as be-tween partners in a partnership or a party could not reasonably discovera fact known to the other party. An action may also be maintained if, ashere, a party who misstates a material fact later learns of the misstate-ment. The elements of an action for fraud are (1) the misrepresentation ofa material fact, (2) the intent to deceive, and (3) the innocent party’sjustifiable reliance on the misrepresentation. Here, by providing finan-cial statements, Beta made certain representations. Those representa-


tions were false, however, as Beta learned. Beta’s knowledge of the over-stated inventory and failure to disclose this to Alpha evidenced intent todeceive. Alpha’s reliance on Beta’s statements was reasonable andjustifiable.

PAGES: 290–295 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. Eagle Properties, a real estate investment and sales firm, presents aform contract to its customer Floyd, who wants to buy a certain quarteracre of land in a proposed housing subdivision that Eagle is marketing.Eagle does not pressure Floyd to sign a contract, but offers its form on atake-it-or-leave basis. If Floyd signs the form, is it enforceable?

ANSWER: Possibly, but not under all circumstances. This standardform contract is not enforceable if enforcement would be unfair oroppressive. A standard form contract is often an adhesion contract,which may not be enforced if the adhering party—the buyer in thissituation—shows that the parties were in substantially unequalbargaining positions and enforcement would be unfair or oppressive.Such a contract may be avoided on grounds of fraud, undue influence,duress, or unconscionability. Unconscionability is the most likelypossibility in this question because the seller did not pressure itscustomer to sign the contract.

PAGES: 296–298 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch14

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