Misrepresentation, Mistake, Fraud, Etc.

Hypotheticals of the day:

1) S is an amateur gem collector at a gem collectors' convention who has a basket full of stones with a sign in front saying "$15 each." B is a professional jeweler with years of experience. As B rummages through the basket, he finds a stone, looks at it closely, and says, "$15??!" S thinks to himself, "oh shit, this asshole is going to try to bargain with me."

"Well, that's not the nicest looking stone in the basket. I'll give it to you for $10," says S.

B takes out two wrinkled $5 bills and pays. The stone turns out to have been the world's largest sapphire and is worth 3 million dollars. Can S get the stone back?

What if S and B both thought that the stone was a diamond worth $1,000, but it turned out to be a topaz worth only $5. Or it turned out to be a flawed diamond? Can B get his money back after he's paid for it?

Some rules/principles to guide us:

Sherwood v. Walker: If there is a mistake about a material fact and both parties are mistaken at the time the contract is executed, then the contract may be avoided. If there is a mistake about the value of the item, then there is no relief, so long as value is a subjective belief about what the price should be given all the facts that either are known or could be known.

Lawson v. Citizens & Southern Nat'l Bank: "Where material facts are accessible to the vendor only, and he knows them not to be within the reach of the diligent attention, observation and judgment of the purchaser, the vendor [of real estate] is bound to disclose such facts and make them known to the purchaser."

Whenever there is a fraudulent transaction under which the aggrieved party would have a tort action for deceit, the aggrieved party may elect to avoid the transaction and claim restitution. However, even if there is no viable tort action for deceit, the transaction may still be voidable if certain elements of misrepresentation or non-disclosure are proved. In other words, there are lower standards for voiding the contract than there are for recovering damages on a tort claim for fraud.

In an unintentional misrepresentation, voidability usually requires that the misrepresentation be about a material fact. A fact is material whenever the misrepresentation would be likely to affect the conduct of a reasonable person or if "the maker of the representation knows that the recipient is likely to regard the fact as important" although a reasonable person would not.

Where the misrepresentation is intentional, the misrepresented fact does not need to be objectively material; rather, it is a subjective standard that has more to do with whether the deceived party was induced by the misrepresentation, rather than whether any reasonable third party would have been induced by the misrepresentation. In this way, it is much easier to satisfy the materiality element for an intentional misrepresentation.

UCC: An affirmation, statement, opinion or commendation as to the value of the goods does not create a warranty on the seller.

An opinion does not count as a representation, but there are a number of exceptions/factors that make this principle less powerful: "1) where there is a relationship of trust and confidence between the parties, 2) the representor is or claims to be an expert 3) the representor has superior access to knowledge."

Laidlaw v. Organ: In a bargaining transaction there is generally no duty to disclose information.
Exceptions to this rule:
1) statutory regulations (specific situations in which the information can only be obtained by extremely expressive means and the non-disclosure took the form of false or misleading statements).
2) Concealment: intentional hiding of the truth through positive action is not allowed.
3) partial disclosure: leaving out important details of a disclosure is fraudulent.
4) When a true statement becomes no longer true, there is a duty to disclose that the statement is no longer true.
-Historical view: "A sound price warrants a sound commodity." (implied warranty if the item sold doesn't end up reflecting its price)
-Less historical view: caveat emptor
-Modern view: Older view prevails for "latent defects in consumer transactions and single family housing," whereas caveat emptor remains in place for commercial realty and transactions between merchants.
5) Nature of the transaction: Suretyship and insurance require broad duties of disclosure.
6) Relationship between the parties: "Whenever one party to a transaction justifiably believes the other is looking out for his or her interests, a duty of disclosure arises."

2) S owns a tract of land that has a market value of $50,000. B has private knowledge that a developer plans to build a mall across the street that will make the land worth $500,000. B makes a contract to buy the land from S, to be closed on November 15th. On November 14th, the plans to develop the mall are made public. Can S rescind the contract?

What if the plans are made public on November 16th. Can S recover the land?