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Contract Enforcement: Misrepresentation & Fraud

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  • 0:06 Krysa V. Payne
  • 2:30 Fraud
  • 5:10 Misrepresentation
  • 7:58 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

A contract won't be enforced if it's based on fraud or misrepresentation. These are civil causes of action regarding the formation of a contract. Both of these causes of action involve a statement of facts that is untrue. This lesson explains fraud and misrepresentation in contract formation, and takes a look at a case example.

Krysa v. Payne

There are several civil causes of action regarding the formation of a contract. A contract won't be enforced if it's based on fraud or misrepresentation. Both of these causes of action involve a statement of facts that is untrue. Let's take a look at a fairly well known contract law case that involves fraud and misrepresentation. It's a 2005 case from Missouri. Shelly and Frank Krysa needed a new car. They were looking for a dependable truck that had room for their whole family. After several trips to Payne's Car Company, they found a 1991 Ford F-350 pick-up truck.

Interestingly, the truck was parked at the back of the lot and running when they saw it. They were told the battery was recharging. They also noticed that the hood was a different color than the rest of the car. They were told not to worry, that the truck was in perfect condition, and that it was a trade-in vehicle that had only one previous owner. This was all good news for the Krysa family.

The Krysas bought the truck. They used the truck but quickly noticed several severe problems, including a smashed radiator, difficulty in starting, and even broken glass under the seats. The Krysas decided they should get a CARFAX report for the truck. The report showed that the truck had 13 previous owners, when the Krysas were told there was only one. The Krysas went back to the dealership to complain, and Payne's admitted there were problems with the truck. Payne's offered the Krysas a credit toward the purchase of a different Payne's vehicle. The Krysas were worried about the history and safety of Payne's cars and so they declined Payne's offer.

The Krysas then hired an automotive expert to look at the truck. The expert noticed that the truck was actually two different vehicles. The two vehicles had been welded together. The expert told the Krysas that the truck was unsafe and they shouldn't drive it. The Krysas then sued Payne's for fraud and misrepresentation. So, what are fraud and misrepresentation? And what did the court think about the Krysa's case?

Fraud

Unfortunately, sometimes a party is purposefully dishonest when making a contract. This certainly seems to be what happened to the Krysa family. Fraud is any intentional misrepresentation of a material fact, made knowingly and made with the intent that the other person will rely on the fact. Contract fraud is a type of fraud where the intentional misrepresentation of a material fact is made in the formation of the contract. In contract fraud, a material misrepresentation is a false statement that has substantial effects on the formation of the contract.

For example, the Krysas had a contract with Payne's for the sale of the truck. The Krysas would pay Payne's, and Payne's would provide the truck that Payne's described. Payne's told the Krysas that the truck only had one owner and was in perfect condition. Since the truck actually had 13 owners and was a pieced-together, unsafe vehicle with major damage, this is a material misrepresentation and will constitute contract fraud.

If, however, Payne's told the Krysas that the truck had one previous owner when in fact it had two, but the vehicle was still in perfect shape, then that inconsistency likely wouldn't constitute contract fraud. Contract fraud is a civil cause of action, and can even be a criminal charge in some states. In the Krysa case, the court found that Payne's was aware of the damage to the truck, and that Payne's took active steps to mislead the Krysa family. This was a civil case and the court ordered a civil remedy.

When a court finds contract fraud, it can order one of two different civil remedies. The court can void the contract and return any money or items back to the parties, so that the parties are in the positions they were in prior to the contract. Or, the court can award money damages to the innocent party. The Krysas were awarded $18,449 in compensatory damages. These are damages meant to compensate the Krysas for any actual loss or money paid. They were also awarded $500,000 in punitive damages. These are damages meant to penalize Payne's and hopefully keep them and others from acting in a fraudulent manner. Payne's appealed the award, but they lost.

Misrepresentation

The Krysas also sued for misrepresentation. This cause of action is very similar to fraud, but there are some key differences. Misrepresentation is any statement or expression by words or actions that is not in keeping with the facts. Unlike fraud, a misrepresentation doesn't have to be intentionally misleading or false. A misrepresentation can be made with a reckless disregard for the truth or a conscious ignorance of the truth. This means that a party can make a misrepresentation when he or she doesn't know the truth and doesn't bother to find out.

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