Chapter 16 Defenses: Misrepresentation

and Nondisclosure
Answers to Problem Solving and Analysis
Questions
For use with Contracts: A Modern Coursebook by Ben Templin. (c) 2019 Ben
Templin
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Otherwise, do not distribute or copy these materials in whole or in part without
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Below are the answers for the questions in Problem Solving and Analysis section for this chapter.
For your convenience, the original question is replicated with the answer.
These questions assess you on some of the learning objectives for the chapter.

Answers to Questions

1. When Employee applied for a job, he intentionally lied to Boss and said he had never been
arrested. As a policy matter, Boss only hires employees who have not been arrested. Since
Employee stated that he had never been arrested and was otherwise qualified for the job, Boss
entered into a two-year employment contract with Employee. Actually, while in college,
Employee was arrested for trespassing when he was demonstrating to help stop global warming.
The charges were eventually dropped against Employee. Employee is excellent at his job, and
the past arrest record in no way interferes with his duties. The company is engaged in the clean
energy business; consequently, an arrest for political activity related to a protest against global
warming would normally carry less stigma than other types of arrests. Can Boss rescind the
contract under a theory of misrepresentation if the false statement does not materially interfere
with Employee’s duties? Explain your reasoning.

EXPLANATION:
Yes. Boss can rescind the agreement.
Employee’s statement is a fraudulent misrepresentation even though not material to the
job that Employee does. The contract is voidable by Boss under the Restatement

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 (Second) of Contracts § 162(1)(a).
Note that Comment (a) of Restatement (Second) of Contracts § 162 makes it explicit
that “In order that a fraudulent representation have legal effect within this Chapter, it
need not be material.” This applies, however, only to a contracts’ cause of action. In
torts, the fraudulent statement must have a material effect on the contract.

2. Lucy, seeking to induce Charlie to make a contract to buy her house, tells Charlie that the
famous physicist Albert Einstein once lived there. Albert Einstein, in fact, lived in this
neighborhood briefly, but Lucy does not actually know whether Einstein lived in her house. She
was just guessing. In fact, Einstein lived in the house next door. Charlie is induced to make the
contract by Lucy’s statement about the physicist. After learning the truth, Charlie brings an
action to rescind the contract using the defense of misrepresentation. Lucy argues that her
mistake was innocent and not fraudulent since she did not know for sure whether Einstein had
lived in her house. What would be the likely result of Charlie’s suit? Would a court accept Lucy’s
defense? Explain your reasoning.

EXPLANATION:
The statement is a fraudulent misrepresentation because Lucy does not have any basis
for her assertion about the physicist, nor should she have any confidence in it based on
these facts. Since Charlie was induced to buy Lucy's house by Lucy's assertion about
Einstein, Charlie can void the contract based on the defense of fraudulent
misrepresentation.
Whether it is material if Einstein lived in the house is not is not required to prove that
element since the representation is fraudulent. Charlie does not have to prove that a
house where Einstein lived would be a material factor.

3. Blake was interested in purchasing a small private airplane that was very fast. Knowles had a
small private plane for sale and knew that speed was important to Blake. Blake took the plane
out for a test flight and then had a mechanic do a thorough inspection. After a lengthy
negotiation, Blake and Knowles signed an agreement for the purchase and sale of Knowles’s
airplane for $400,000. As Knowles handed over the keys, he said, “You won’t be sorry. This
baby is ‘super-fast.’ She will go 200 knots.” Blake replied, “That’s good, because speed is
exactly why I want this plane.”
A small private plane travels on average at around 120 knots, which is about 138 miles per hour.
A plane that goes 200 knots travels at about 230 miles per hour, which would be considered very
fast for a small private plane. Blake later learns that the top speed for the plane he purchased
from Knowles is 150 knots—just above average.
Blake sought to rescind the contract based on a misrepresentation; however, the trial court held

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that Blake did not offer sufficient evidence to prove the defense of misrepresentation. Blake
appeals the decision, and you are one of judges hearing the appeal. Would you sustain or
overrule the lower court opinion? Explain your reasoning.

EXPLANATION:
Students should note that the call of the question is essentially asking which element of
misrepresentation cannot be proven. The problem requires a close reading of the facts
and an analysis of every element.
The correct answer is the lower court should be sustained. Blake did not plead enough
facts to prove that the contract was based on a misrepresentation.
Let us first look at two elements that are easily proven.
False Statement of Facts
Knowles did make a false statement of fact since he said that plane went 200 knots and
the plane’s top speed is only 150 knots.
Material Misrepresentation
We do not know if Knowles acted intentionally when he made the misrepresentation;
however, a misrepresentation can be either fraudulent or material. Here, the speed of
the aircraft is certainly material on both an objective and subjective level. Knowles
knew that Blake considered speed to be an important factor in the purchase decision, so
even if Knowles did not intentionally make a misrepresentation, the misrepresentation
was material.
However, Blake does not prove inducement.
Inducement
The court’s decision turns on the fact that Blake was not induced by the
misrepresentation because it was made after the contract was formed. In order to be a
valid defense, the misrepresentation has to occur at contract formation. If it occurs
afterwards, then the misstatement was a reason that the party based their decision on to
enter the agreement.
However, despite a misstatement of facts, it had no effect in Blake’s decision to
purchase the plane.

4. Angelo wants to purchase a 1990 green BMW convertible. The single most important factor
for Angelo is that the color of the car must be green. Angelo calls various used-car dealers telling
each dealer all of the above. When Angelo calls Gary’s Used Car Lot, Gary tells Angelo that he
has a 1990 green BMW convertible for sale and that Angelo should rush down and purchase it
before someone else does. The truth is that Gary lied — he only has a white BMW on his lot.
When Angelo arrives, Gary shows him the white car, all the time stating, “What a beautiful green
car that is.” Angelo scoffs and says disdainfully, “You call that green?” Gary disingenuously

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replies, “Yes, I do. What a lovely green.” Angelo test-drives the white car and then purchases it.
Neither Gary nor Angelo is color-blind. In this marketplace, there is no difference in value
between a green BMW and a white BMW.
What is the likely result if Angelo later attempts to disaffirm the contract based on the
misrepresentation defense? Explain your reasoning.

EXPLANATION:
Gary wins because Angelo was not justified in relying on the misrepresentation. Gary
intentionally made a misstatement of a fact on a matter that was important to Angelo’s
decision to purchase the car. However, Angelo was not justified in relying on this fact
given that Angelo knew that the car was not green. Note, however, that Angelo may
have a cause of action for a breach of express warranty; however, his recovery in
damages would be limited to the difference in value between a white car and a green
car, which in this case would be zero.

5. Henry is a dealer in premium show dogs that sell for thousands of dollars. In breeding show
dogs, a puppy’s father is called the “sire” and the puppy’s mother is called the “dam.” If a
puppy’s sire and/or dam were champion show dogs, then the price for the puppy is much higher.
Another important factor in price is how many championships the sire or dam won.
Morris wants to buy a puppy whose sire was Butch. Butch won two championship ribbons and
was considered an above-average sire. The real reason that Morris wanted a puppy sired by
Butch was that Morris’s uncle originally owned and raised Butch. Morris’s uncle died recently.
Since Morris was close to his uncle, he decided a good way to remember his uncle was to buy a
puppy sired by Butch.

Henry had recently bought a puppy named Lucy, and the paperwork said that Lucy’s sire was
Butch. Henry listed Lucy for sale and included a statement that her sire was Butch. Morris saw
the listing and contacted Henry about purchasing Lucy. Based on this information, Morris
entered into a contract with Henry to purchase Lucy for $1,000—a reasonable price considering
that Butch won two championship ribbons.

Morris later discovered that Lucy’s paperwork was incorrect and that her sire was King. King
had won a dozen championships and the going price for puppies sired by King was $3,000.
Henry was not at fault for the incorrect paperwork and did not know that King was Lucy’s sire.
Morris does not want to keep Lucy, but Henry refuses to refund the money. May Morris rescind
the contract based on the defense of misrepresentation? Explain your reasoning.

EXPLANATION:

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 May Morris rescind the contract based on the defense of misrepresentation?
A contract is voidable if a party's manifestation of assent is induced by either a
fraudulent or a non-fraudulent material misrepresentation made by the other party upon
which the recipient is justified in relying.
Misrepresentation:
Here, Henry made a misrepresentation, as his statement that the puppy’s sire was Butch
was false since the puppy was, in fact, sired by King. However, the misrepresentation is
not fraudulent since Henry did not know and did not have reason to know that the
puppy was sired by King.
Inducement:
Morris was induced to enter into the agreement with Henry by the misrepresentation
because Morris’ primary reason for entering into the agreement was to purchase a
puppy sired by a dog once owned by his Uncle. Morris wanted to honor his Uncle who
had recently died and the purchase of a puppy sired by Butch would help to remind
Morris of his affection for his Uncle.
Justifiable Reliance:
Morris was justified in relying on Henry’s statement since Henry was an expert in show
dogs and should have known the pedigree of the dog that he was selling.
Materiality:
A misrepresentation is material if a reasonable person would likely be induced or there
is knowledge by the maker that the recipient would likely be induced.
Here, the misrepresentation is likely not material under either of the two criteria.
First, a reasonable purchase of a show dog would likely want a puppy sired by a dog
who had won more championships. Since King had won a dozen championships and
Butch had only won two championships, the reasonable person would actually consider
himself to be in a better position as a result of the seller’s misrepresentation.
Second, Henry had no reason to know of Morris’ special criteria of wanting a puppy
sired by a lesser champion since Morris did not disclose the fact that he wanted a puppy
sired by a dog once owned by his deceased Uncle.
Therefore, because the misrepresentation that Henry made was not material, Morris
would not be able to rescind the contract based on the defense of misrepresentation

6. After Sydney’s parents died, Arvin welcomed Sydney into his home. Although Arvin never
became Sydney’s legal guardian, he raised her as if she were his own child. Sydney inherited
some valuable property from her parents. After she came of age, Sydney continued to rely on
Arvin for advice on how to manage her property since Arvin was an experienced real estate
developer. Sydney wanted to go to medical school and needed to sell some of her property to pay
for the tuition. Arvin knew that the city was planning to build a football stadium near some of the

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property that Sydney owned; however, Sydney was unaware of this fact and it was not public
knowledge. Arvin offered to purchase the property at a price that was below the value when
taking into account the plans for the stadium. Sydney accepted.
May Sydney rescind the agreement based on nondisclosure? Explain your reasoning.

EXPLANATION:
This problem is based on illustration 13 to Restatement (Second) of Contracts § 161.
Yes. Arvin's nondisclosure is equivalent to an assertion that the value of the land has
not appreciably increased, and this assertion is a misrepresentation. While in an
arms-length transaction, Arvin might not need to disclose the fact that the land has
appreciated, here the facts suggest a relationship of trust and confidence, which also
requires disclosure under the Restatement nondisclosure rule.

7. One of your clients “flips” houses—purchases distressed properties, fixes them up, and then
resells them for a profit. The client calls and tells you about a house that he bought at a discount
because a mass murder was committed there ten years ago. He tells you, “The seller was so
stupid. They actually told me there had been a mass murder there. I was able to knock 30% off
the price because of that.” Your client goes on, “But I am not going to make that mistake. I
already have a buyer lined up. The only thing I said to her was, ‘This house is in immaculate
condition and is fit for an “elderly lady” living alone.’ So long as she doesn’t find out about the
murders, I am going to double my money. The house isn’t worth nearly what I am asking for it,
but that’s her problem. Caveat emptor, right?”

Before you can respond, he says, “The reason I called was that I want a legal opinion telling me
that it is okay to sell the house without disclosing the murders. Can you get that to me this
afternoon? I think I can get the old lady to sign the papers in the next week.” The client then
hangs up without waiting for an answer. Unlike some states, in your jurisdiction there is no
statutory requirement that a seller of property has a duty to disclose if a murder was committed
on the property; therefore, the common law rules apply.

Your first step is to visit the residence yourself and gather facts about the house. It is a beautiful
old Victorian. Your client was truthful when he said the house was immaculate. It is a real
showplace. You introduce yourself to a neighbor, and he confirms that ten years ago a woman
and her four children were murdered in the house. The neighbor also says, “Don’t worry. I won’t
tell anyone who is looking to buy the property. Your client already paid me to keep quiet.” The
neighbor walks away before you can respond. You return to the office and sit down at your
computer thinking about the email you need to draft to your client. You decide to address two
questions:
A.Has your client made a misrepresentation about the house when he told the prospective buyer,

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“This house is in immaculate condition and is fit for an ‘elderly lady’ living alone”? Explain
your reasoning.
B.Does your client have a duty to disclose the mass murder that occurred ten years ago? Explain
your reasoning.
Use the common law rules from this chapter to address these two issues. Would the fact that your
client wants a certain outcome affect your conclusion? How would you counsel the client if you
determine that he must disclose the mass murder but he is determined not to do so? Note that
when an attorney is acting in the capacity of an advisor, ABA Model Rules of Professional
Responsibility Rule 2.1 provides the following: “In representing a client, a lawyer shall exercise
independent professional judgment and render candid advice. In rendering advice, a lawyer may
refer not only to law but to other considerations such as moral, economic, social and political
factors, that may be relevant to the client’s situation.”

EXPLANATION
This problem uses facts surrounding a “murder house” derived from Reed v. King, 145 Cal.
App. 3d 261, 264-69, (1983).

The facts surrounding the ethical dilemma are fictional, but are the sort of challenge faced by
attorneys. Under the attorney should not write the opinion that the clients wants. Instead, the
attorney needs to draft an opinion that concludes that the transaction would likely be
rescinded. Under ABA Model Rules of Professional Responsibility Rule 2.1, the attorney
would be justified in drawing on moral – as well as legal -- arguments that the client’s action
constitute a bad faith attempt to deceive and conceal a material fact.

A. Misrepresentation.

The client said to the potential buyer, “This house is in immaculate condition and is fit for an
“elderly lady” living alone.’”

The client has not likely made a misrepresentation since both statements are opinions and not
statements of facts.

B. Non-Disclosure

Under Hill v. Jones in your reading, the client would likely be deemed to have a intentionally
concealed a material fact.

The opinion in Reed v. King is instructive. What follows is a heavily edited version of
portions of the opinion with subheads to guide the reader:
Facts in Reed
King and his real estate agent knew about the murders and knew the event materially affected
the market value of the house when they listed it for sale. They represented to Reed the

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 premises were in good condition and fit for an “elderly lady” living alone. They did not
disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of
that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in
purchasing the house because of the stigma. Reed paid $76,000, but the house is only worth
$65,000 because of its past.

Non-Disclosure and Concealment Rules

Concealment is a term of art which includes mere nondisclosure when a party has a duty to
disclose. Accordingly, the critical question is: does the seller have a duty to disclose here?
Resolution of this question depends on the materiality of the fact of the murders.

In general, a seller of real property has a duty to disclose: “where the seller knows of facts
materially affecting the value or desirability of the property which are known or accessible
only to him and also knows that such facts are not known to, or within the reach of the
diligent attention and observation of the buyer, the seller is under a duty to disclose them to
the buyer.

Whether information “is of sufficient materiality to affect the value or desirability of the
property ... depends on the facts of the particular case.” Materiality “is a question of law, and
is part of the concept of right to rely or justifiable reliance.” Three considerations bear on this
legal conclusion: the gravity of the harm inflicted by nondisclosure; the fairness of imposing
a duty of discovery on the buyer as an alternative to compelling disclosure, and the impact on
the stability of contracts if rescission is permitted.

Analysis
Numerous cases have found nondisclosure of physical defects and legal impediments to use
of real property are material. However, to our knowledge, no prior real estate sale case has
faced an issue of nondisclosure of the kind presented here.
The murder of innocents is highly unusual in its potential for so disturbing buyers they may
be unable to reside in a home where it has occurred. This fact may foreseeably deprive a
buyer of the intended use of the purchase. Murder is not such a common occurrence that
buyers should be charged with anticipating and discovering this disquieting possibility.
Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be
imposed upon the buyer.
Reed alleges the fact of the murders has a quantifiable effect on the market value of the
premises. We cannot say this allegation is inherently wrong and, in the pleading posture of
the case, we assume it to be true. If information known or accessible only to the seller has a
significant and measurable effect on market value and, as is alleged here, the seller is aware
of this effect, we see no principled basis for making the duty to disclose turn upon the
character of the information. Physical usefulness is not and never has been the sole criterion

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 of valuation.
Reputation and history can have a significant effect on the value of realty. “George
Washington slept here” is worth something, however physically inconsequential that
consideration may be. Ill-repute or “bad will” conversely may depress the value of property.
Failure to disclose such a negative fact where it will have a foreseeably depressing effect on
income expected to be generated by a business is tortious.
The court found in favor of the plaintiff buyer.

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