Problems in the Formation of Contracts

By Susan K. Eggum

Chapter 6

1991 and 1994 Supplement Author

Susan K. Eggum*

PROBLEMS IN FORMATION

I. (§6.1) SCOPE OF CHAPTER

II. FRAUD IN THE EXECUTION (FRAUD IN THE FACTUM)

A. (§6.2) Generally

B. (§6.3) Duty to Read the Contract

III. MISREPRESENTATION

A. (§6.4) Fraudulent Misrepresentation:

The Elements

1. (§6.5) False Representation

2. (§6.6) Representations Regarding Future Action

3. (§6.7) Material Misrepresentation

4. (§6.8) Knowledge of the Falsity or Ignorance of the Truth

5. (§6.9) Intent that the Statement Be Acted Upon

6. (§6.10) Reliance on the Truth of the Representation

7. (§6.11) Right to Rely

B. (§6.12) Negligent and Innocent Misrepresentation

C. (§6.13) Statements of Opinion

IV. (§6.14) CONCEALMENT

V. (§6.15) MISTAKE

A. (§6.16) Mistake of Law

B. (§6.17) Unilateral Mistake of Fact

C. (§6.18) Mutual Mistake of Fact

VI. DURESS

A. (§6.19) Generally

B. (§6.20) Threat Directed to Third Party

C. (§6.21) Threat of Physical Harm

D. (§6.22) Threat of Criminal Prosecution

E. (§6.23) Threat of Civil Proceedings

F. (§6.24) Economic Duress (Business Compulsion)

G. (§6.25) Threat of Lien

VII. UNDUE INFLUENCE

A. (§6.26) Generally

B. (§6.27) Relationship Between the Parties

C. (§6.28) Proof of Undue Influence

VIII. (§6.29) UNCONSCIONABILITY

Susan K. Eggum, B.A., M.A., University of California, Berkeley (1976, 1977); J.D., Georgetown University (1982); member of the Oregon State Bar since 1982; sole practitioner, Portland.

*The author gratefully acknowledges the assistance of Janet M. Gravdal.

The case citations in this chapter were checked for overrulings and reversals through the following Shepard's volume:

Oregon Citations Vol 85, No 12

The citations to ORS were checked through 1993.

This chapter reviews Oregon law governing the nature and elements of deceitful, negligent, mistaken, or coercive conduct of parties who seek to enter a contract. This chapter addresses fraud in the execution; fraudulent, negligent, and innocent misrepresentation of material facts; concealment of material facts; unilateral and mutual mistake; duress; undue influence; and unconscionability. Remedies are reviewed in Chapter 10, infra. Problems in the area of offer and acceptance are reviewed in Chapter 1, supra. Capacity of parties and illegality are reviewed in Chapters 4 and 5, supra, respectively.

Fraud in the execution generally occurs when a party induces another to sign a document that is materially different from what it is represented to be, or when a party induces another to sign a contract by misrepresenting its essential terms. A contract entered into as a result of fraud in the execution cannot be enforced against the defrauded party. Berry v. Richfield Oil Corp., 189 Or 568, 587-588, 220 P2d 106 (1950) (casenote in §6.3).

B. (§6.3) Duty to Read the Contract

As a defense, fraud in the execution is limited to a narrow range of cases. Even though the contents of a contract have been misrepresented, if the party raising the defense has not read the contract or has not sought clarification as to what was signed, the contract cannot be avoided. Berry v. Richfield Oil Corp., 189 Or 658, 587-588, 220 P2d 106 (1950). See Colonial Leasing Co. v. McIlroy, 94 Or App 273, 765 P2d 219 (1988) (choice of law clause in lease held enforceable). The defense applies when the defrauded party suffers from some impairment, such as blindness or illiteracy, that requires the party to rely completely on the other's representation of what the contract contains. The physical and mental condition of the defrauded party, including age, is relevant to determining whether the party reasonably relied on the misrepresentation. Security Finance Co. v. Comini, 119 Or 460, 466-467, 249 P 1054 (1926).

The defense of undue influence differs somewhat from the defense of fraud in the execution. Undue influence does not require a misrepresentation, but instead requires that one party has used his or her position of trust to persuade the other to enter into a bad bargain. See §6.28, infra. Fraud in the execution, by comparison, does not require that the parties have any special relationship.

NOTE: Under the Restatement (Second) of Contracts §163 (1979), a contract entered into because of fraud in the execution is void and cannot be ratified or enforced by the defrauded party.

BERRY v. RICHFIELD OIL CORP., 189 Or 568, 220 P2d 106 (1950). Plaintiff sued to nullify a lease agreement she entered with defendant and to quiet title to the leased property. Plaintiff, the lessor, asserted that defendant fraudulently induced her to lease a combination grocery store and service station for 10 years by representing that the lease allowed her to retain control over the store for the term of the lease. The trial court dismissed the suit. Held: Affirmed. Plaintiff read the lease and sought her attorney's advice before signing it. Under these circumstances, plaintiff consented to all terms of the lease, including the lease of the grocery store, and could not have reasonably relied on any representations concerning its terms.

SECURITY FINANCE CO. v. COMINI, 119 Or 460, 249 P 1054 (1926). Plaintiff, an assignee of a conditional sales contract, sued to enforce the contract. Defendant was permitted to introduce evidence showing fraud in the execution. The trial court reversed a jury verdict in favor of defendant and ordered a new trial. Held: Reversed. Because the court found the contract was a nonnegotiable instrument, the trial court properly admitted evidence of fraud in the execution. The court further found that it is proper to permit a jury to consider age as well as mental and physical condition in determining whether the signing of an instrument was negligent.

The elements of actionable fraud allowing a party to avoid a contract are as follows:

(1) A representation;

(2) Its falsity;

(3) Its materiality;

(4) The speaker's knowledge of its falsity or ignorance of its truth;

(5) The speaker's intent that it should be acted upon;

(6) The injured party's ignorance of its falsity;

(7) The injured party's reliance on the truth of the representation; and

(8) The injured party's right to rely on its truth. Gardner v. Meiling, 280 Or 665, 671, 572 P2d 1012 (1977).

GARDNER v. MEILING, 280 Or 665, 572 P2d 1012 (1977). Plaintiff brought an action to rescind a contract for the purchase of a tavern. Plaintiff, a school teacher who had no experience in operating a tavern, raised claims of fraud, misrepresentation, and mistake. Plaintiff claimed that defendant vendor misrepresented the value of the tavern's reputation and goodwill. Defendant vendor counterclaimed for the amounts due on the purchase price. The trial court granted rescission and ordered defendant to return the purchase price. Held: Reversed. The supreme court held that the purchaser was not entitled to rescission because there was insufficient evidence that defendant made any representations indicating that the tavern had valuable goodwill or a good reputation. The court was unwilling to relieve plaintiff merely because he had made an improvident bargain.

1. (§6.5) False Representation

A misrepresentation occurs when a statement is made that is literally true but, under the circumstances, creates a false impression. Heverly v. Kirkendall, 257 Or 232, 234, 478 P2d 381 (1970). Also, a false statement that a party has no knowledge of a certain fact constitutes a misrepresentation of fact. Bodenhamer v. Patterson, 278 Or 367, 373, 563 P2d 1212 (1977); Kubeck v. Consolidated Underwriters, 267 Or 548, 553, 517 P2d 1039 (1974).

Fraud may be established if a promise is made with the knowledge and intent that it will not be performed. Hocks v. Hocks, 95 Or App 40, 44-45, 767 P2d 1369, rev. denied, 307 Or 658 (1989) (casenote in Supp §6.6). However, the court in Hocks suggested that promises made with reckless disregard of whether they will be performed may constitute fraud. Hocks v. Hocks, supra, 95 Or App at 44.

BODENHAMER v. PATTERSON, 278 Or 367, 563 P2d 1212 (1977). Seller brought an action to foreclose a land sale contract. Defendant counterclaimed for rescission, seeking return of his down payment and closing costs and reimbursement for building expenses. Defendant claimed that seller knew the property had a dry well and that the property was useless to defendant without a well. As soon as defendant discovered the well was dry, he discontinued construction on the property. The trial court granted rescission for purchaser but denied recovery of expenses. Held: Affirmed as modified. The supreme court affirmed rescission of the contract and modified the lower court's decision by awarding defendant's expenses. Seller materially misrepresented the condition of the property and purchaser relied without knowledge of the true condition of the well. Thus, rescission was permitted even though there was a seven-month delay after discovery of the dry well.

HEVERLY v. KIRKENDALL, 257 Or 232, 478 P2d 381 (1970). A real estate purchaser brought an action to rescind an earnest money agreement. Plaintiff claimed that defendant seller misrepresented the boundaries of the property by failing to inform plaintiff of an encroachment. The trial court granted rescission, finding that seller failed to disclose the encroachment. Held: Affirmed. Misrepresentation can occur by failure to inform. Even though seller made no affirmative representation, a reasonable implication arose that the boundary line was west of the road, when in fact it was not. Furthermore, defendant knew that purchaser needed to widen the road. The court explained that negligent reliance is not a defense to a claim for rescission.

2. (§6.6) Representations Regarding Future Action

Fraud may not be predicated on a promise to do something in the future unless the person making the promise, at the time the promise has made, had no intention of performing. Conzelmann v. N.W.P. & D. Prod. Co., 190 Or 332, 351, 225 P2d 757 (1950); Jeska v. Mulhall, 71 Or App 819, 823, 693 P2d 1335 (1985).

A misrepresentation is material when it would be likely to affect the conduct of a reasonable person. Millikin v. Green, 283 Or 283, 285, 583 P2d 548 (1978); Heverly v. Kirkendall, 257 Or 232, 237, 478 P2d 381 (1970) (casenote in §6.5). But see Woodtek, Inc. v. Musulin, 263 Or 644, 653, 503 P2d 677 (1972) ("The misrepresentation must be of such a nature that without it the contract would not have been consummated").

4. (§6.8) Knowledge of the Falsity or Ignorance of the Truth

An intent to mislead will be found when the defendant intentionally misrepresents a material fact, knows the misrepresentation is misleading, or acts in reckless disregard of whether he or she is misleading the other party. U.S. National Bank v. Fought, 291 Or 201, 225, 630 P2d 337 (1981); Elizaga v. Kaiser Found. Hospitals, 259 Or 542, 547, 487 P2d 870 (1971). A statement of a material fact made by a party who does not know the statement to be true, and has no reasonable grounds for believing the statement to be true, has the same legal effect as a false statement knowingly uttered. Amort v. Tupper, 204 Or 279, 287, 282 P2d 660 (1955).

The most recent case discussing the defendant's intentional misrepresentation of a material fact, or knowledge that the misrepresentation is misleading, is Malensky v. Mobay Chemical Corp., 104 Or App 165, 171, 799 P2d 683 (1990).

AMORT v. TUPPER, 204 Or 279, 282 P2d 660 (1955). Mortgagee brought an action to foreclose a chattel mortgage. Plaintiff mortgagee sold defendant 11 shares of stock, secured by a chattel mortgage and promissory note. Defendant counterclaimed for rescission, claiming that he relied on plaintiff's false representations that the company was profitable and that the stock was valuable. The trial court canceled the promissory note and mortgage and granted judgment for defendant for the return of his money. Held: Affirmed as modified. The supreme court held that it would be unconscionable for an equity court to enforce the note. Thus, the trial court properly ordered the surrender and cancellation of the note and mortgage. However, defendant could not recover damages because the required scienter was lacking. Additionally, defendant failed to exercise the care of a reasonable, prudent person.

U.S. NATIONAL BANK v. FOUGHT, 291 Or 201, 630 P2d 337 (1981). A lender brought an action against defendant accountants for damages resulting from misrepresentation. By agreement, plaintiff was permitted to preapprove all of borrower's expenditures through defendant accountants. While borrower was indebted to plaintiff for $1.4 million in loans, borrower diverted money. Defendants knew of borrower's diversion of proceeds and knew of borrower's agreement with the lender to turn over all proceeds. Defendants did not disclose to plaintiff the diversion and presented plaintiff with an incomplete list of borrower's expenditures. The trial court entered judgment for defendants, finding that plaintiff had not proved by clear and convincing evidence an intent to defraud the bank. The court of appeals reversed and remanded, concluding that plaintiff had pleaded and proven a claim for fraud. Held: Reversed and remanded. The court explained that the right to rely need not be pleaded because it is a conclusion of law. The court further explained that the requisite intent to mislead will be found when a defendant intentionally misrepresents a material fact, knows the misrepresentation is misleading, or acts in reckless disregard of whether he or she is misleading the other party. The court remanded to the trial court to find whether defendant had the necessary intent to defraud.

5. (§6.9) Intent that the Statement Be Acted Upon

Fraudulent intent may not be inferred from the mere fact of nonperformance of a promise. "Other circumstances of a substantial character" must be proved in addition to nonperformance before such an inference may be drawn. Conzelmann v. N.W.P. & D. Prod. Co., 190 Or 332, 352, 225 P2d 757 (1950) (casenote in §6.6).

6. (§6.10) Reliance on the Truth of the Representation

Implicit in the element of reliance is a causal relationship between the representation and the agreement to form the contract. Gardner v. Meiling, 280 Or 665, 671, 572 P2d 1012 (1977) (casenote in §6.4). Normally, the injured party must prove justifiable reliance on the misrepresentation. If a false representation was deliberately made, however, then the contract may be rescinded even though reliance may have been negligent. Bodenhamer v. Patterson, 278 Or 367, 374, 563 P2d 1212 (1977) (casenote in §6.5); Hampton v. Sabin, 49 Or App 1041, 1049-1050, 621 P2d 1202 (1980), rev. denied, 290 Or 519 (1981). "[I]t is better to encourage negligence in the foolish than fraud in the deceitful." Hansen v. Holmberg, 176 Or 173, 184, 156 P2d 571 (1945). Reliance that is grossly negligent, however, may be a defense in an action to rescind a contract.

PRACTICE TIP: In evaluating a buyer's reliance on a representation made by a seller, evidence of the buyer's efforts to investigate the purchase, including the buyer's experience and reliance on legal counsel and other experts, is relevant. Farnsworth v. Feller, 256 Or 56, 64, 471 P2d 792 (1970) (casenote in §6.13).

HAMPTON v. SABIN, 49 Or App 1041, 621 P2d 1202 (1980), rev. denied, 290 Or 519 (1981). The buyer of a restaurant brought an action to rescind the purchase. Plaintiff claimed that he relied on misrepresentations regarding the past profitability of the restaurant. The trial court granted rescission for the purchaser. Held: Affirmed. The general rule is that to avoid a contract, plaintiff bears the burden of proving justifiable reliance on a material false fact. Plaintiff reasonably relied on the vendor's material and false misrepresentations of past profitability. The court noted that three months was not an unreasonable amount of time for plaintiff to investigate and to inform defendant of his intent to rescind.

7. (§6.11) Right to Rely

Negligent and merely innocent misrepresentations of fact may be a basis for rescinding a contract if the representation was relied on and, except for believing in its truth, the injured party would not have entered into the contract. Soursby v. Hawkins, 307 Or 79, 84, 763 P2d 725 (1988); Johnson v. Cofer, 204 Or 142, 149, 281 P2d 981 (1955); Hampton v. Sabin, 49 Or App 1041, 1049, 621 P2d 1202 (1980). See also Gardner v. Meiling, 280 Or 665, 674, 572 P2d 1012 (1977) (casenote in §6.4); Woodtek, Inc. v. Musulin, 263 Or 644, 648, 503 P2d 677 (1972); Souza v. Jackson Co. Fed. S. & L., 256 Or 220, 224, 472 P2d 272 (1970).

NOTE: Rescission will be barred for nonfraudulent representations if the contract disclaims the existence of any representations other than those set forth in the agreement. See Wilkinson v. Carpenter, 276 Or 311, 314, 554 P2d 512 (1976) (clause that excluded prior warranties and declared that no representations have been made which induced a property purchase precluded rescission for innocent misrepresentations); Hoover v. Hegewald, 70 Or App 223, 229-230, 689 P2d 965 (1984), rev. denied, 298 Or 773 (1985) (same).

Unlike a claim for fraudulent misrepresentation, in an action for negligent or innocent misrepresentation, negligent reliance is probably a defense. See Soursby v. Hawkins, supra; Bodenhamer v. Patterson, 278 Or 367, 374, 563 P2d 1212 (1977) (casenote in §6.5); Johnson v. Cofer, supra, 204 Or at 150.

Because an innocent misrepresentation of a material fact is a sufficient basis for seeking rescission of a contract, the standard of care against which to measure an allegedly negligent misrepresentation has not been developed by the Oregon courts.

When an action for deceit cannot be maintained, an injured party still has a right of rescission:

Rescission is often granted in cases where an action for deceit could not be maintained. The right of rescission does not, as the right to recover damages in a common law action for deceit, depend upon fraud, for if the transaction was the result of a false representation of a material fact it cannot stand against the injured party's right to rescind, however honestly made.

The Oregon Supreme Court recognized a cause of action for negligent misrepresentation in Onita Pacific Corp. v. Trustees of Bronson, 315 Or 149, 159, 843 P2d 890 (1992). However, the court held that such a claim will not arise between the parties to an arm's length business transaction. Rather, recovery for economic losses sustained as a result of reliance on another's negligent misrepresentations will be permitted only if the negligent actor owed the injured party some duty beyond the common-law duty to exercise reasonable care to prevent foreseeable harm. Onita Pacific Corp., supra, 315 Or at 159-161.

The court stated that the nature of the parties' relationship will determine whether such a duty exists. Examples cited by the court as giving rise to such a duty include the relationship between attorneys, engineers, and architects, and their clients; between agents and principals; and between primary and excess insurers. The court noted that other professional or contractual relationships may also give rise to a tort duty to exercise reasonable care on behalf of another's interests. However, "in arm's-length negotiations, economic losses arising from a negligent misrepresentation are not actionable." Onita Pacific Corp., supra, 315 Or at 159-162.

The Oregon Court of Appeals in Ammons v. Jackson Co., 116 Or App 106, 840 P2d 1345 (1992), modified, 119 Or App 181, 184 (1993), found that "[t]he common thread in the special relationships that the Supreme Court has recognized [in Onita] as giving rise to a duty of care to protect against purely economic loss is that the professional is acting, at least in part, to further the economic interests of the person to whom the duty is owed." On the basis of that finding, the court of appeals reversed its earlier (pre-Onita) holding, and denied relief where there was no such economic connection between the negligent actor and the party acting in reliance thereon. Ammons v. Jackson Co., supra, 119 Or App at 184. Thus, the court of appeals has interpreted Onita to require not only a special relationship giving rise to a duty to use due care, but also that the negligent actor is acting, at least in part, to further the economic interests of the injured party.

Ammons v. Jackson Co., 116 Or App 106, 840 P2d 1345 (1992), modified, 119 Or App 181 (1993). Plaintiff was intoxicated when he lost control of his motorcycle and crashed. Sheriff's deputies took him to the hospital where he was examined by a physician. The physician allegedly told the deputies that plaintiff was not injured and that the deputies did not need to take special precautions in handling him. The deputies relied on the physician and transported plaintiff to jail. Plaintiff allegedly received further injuries as a result. Plaintiff, the hospital, and the physician subsequently reached a settlement. Plaintiff then sued the county for the deputies' conduct. The county filed a third-party claim against the physician based on negligent misrepresentation. Held: Reversed and remanded; later modified. In its initial decision, made two months before the Oregon Supreme Court's decision in Onita, the court of appeals found a "sufficiently close" relationship between the physician and the county to permit recovery. After Onita, the court of appeals granted reconsideration and reversed itself. The court of appeals concluded: "The common thread in the special relationships that the [Oregon] Supreme Court has recognized as giving rise to a duty of care to protect against purely economic loss is that the professional is acting, at least in part, to further the economic interests of the person to whom the duty is owed. Here, there is no such economic connection." The court therefore concluded that no negligent misrepresentation claim could be made.

JOHNSON v. COFER, 204 Or 142, 281 P2d 981 (1955). Purchasers of a hotel brought an action against vendors for rescission. Although defendants knew that plaintiffs intended to use the building as a hotel, defendants failed to disclose that, absent substantial alterations, a permit for this use would not be issued. Moreover, sellers dissuaded plaintiffs from discovering that the operation permit would not be issued. The trial court granted rescission of the real estate contract. Held: Affirmed. A contract can be rescinded by a positive fraud either "actively or negligently" practiced. Moreover, a contract may be vitiated if the contract was entered as the result of an innocent representation of a materially false fact.

Onita Pacific Corp. v. Trustees of Bronson, 315 Or 149, 843 P2d 890 (1992). Compton held the buyer's interest in real property to be developed into a subdivision. Plaintiffs were interested in purchasing Compton's interest. To eliminate the need for a third party's consent, plaintiffs agreed to make a principal payment of $200,000 to be used by defendants to pay off the third party. Defendants' attorney represented to plaintiffs that the $200,000 payment would be processed through the existing escrow and would result in the release of deeds to lots worth $200,000 to plaintiffs. Plaintiffs relied on this representation and would not otherwise have entered into the transaction. Defendants' attorney later sought permission to move the escrow to avoid substantial fees, and represented that the terms would remain the same. Plaintiffs agreed, believing that the $200,000 payment would still result in the release of the deeds. After plaintiffs paid the $200,000, defendants refused to release the deeds to the lots, insisting they could be released only upon sale to a third party. Without the released lots, plaintiffs had no collateral and were unable to obtain financing. They thereafter defaulted on their obligation to Compton, who foreclosed on their interests in the lots. Plaintiffs filed suit against defendants for, inter alia, negligent misrepresentation, and received a jury verdict. Defendants appealed. Held: Reversed and remanded. The Oregon Supreme Court agreed that Oregon should recognize a claim for negligent misrepresentation, but limited the claim to situations where the defendant owed the plaintiff a duty of care beyond the common-law duty to exercise reasonable care to prevent a foreseeable harm. The court noted that such a duty may exist in professional or fiduciary relationships. However, because the court found this to be an arm's length business transaction, no such duty existed and the jury verdict was reversed.

SOUZA v. JACKSON CO. FED. S. & L., 256 Or 220, 472 P2d 272 (1970). Purchaser of a home and six acres brought an action for rescission. Plaintiff alleged that defendant sellers falsely represented that a well would supply three gallons per minute and would be ample to satisfy the needs of plaintiff's family. The trial court found the representation accurate and entered judgment for defendant. Held: Reversed with instructions, directing that a decree granting rescission be entered. A material misrepresentation, although innocently made, may be grounds for rescission. The supreme court explained that in view of the well's history of going dry, defendants should not have represented to plaintiff that the well could produce water at the rate stated.

C. (§6.13) Statements of Opinion

Statements of mere opinion regarding quality, value, or the like are generally not actionable unless a fiduciary relationship exists between the parties, or the parties are not on equal footing and do not have equal knowledge or means of knowledge. Lackey v. Ellingsen, 248 Or 11, 13, 432 P2d 307 (1967); Holland v. Lentz, 239 Or 332, 345, 397 P2d 787 (1964); Haag v. Cembellin, 89 Or App 75, 78-79, 748 P2d 143 (1987); Neidermeyer v. Latimer, 79 Or App 116, 717 P2d 1265, rev. denied, 301 Or 241 (1986); Jeska v. Mulhall, 71 Or App 819, 821-822, 693 P2d 1335 (1985) (casenote in §6.6). See also Restatement (Second) of Contracts §164, comment d; §168, comment b; §169, comments b and d (1979).

In Horner v. Wagy, 173 Or 441, 455, 146 P2d 92 (1944), the Oregon Supreme Court gave examples of expressions of opinions on which vendees have no right to rely. These examples include statements commendatory of the thing to be sold, including statements assuring a good investment, a money-maker, or great value. Mere nonactionable opinions additionally include statements regarding future profits of a business.

To whom, with what knowledge, and in what context a party makes a statement bears on whether the statement is a mere opinion of value or an actionable misrepresentation of fact. Jeska v. Mulhall, supra, 71 Or App at 822 (citing Holland v. Lentz, supra, 239 Or at 346). If the defendant has special knowledge, then the defendant's opinion may be actionable. See Lackey v. Ellingsen, supra.

An expression of an opinion may be so blended with statements of fact as to become itself an actionable statement of fact. Horner v. Wagy, supra, 173 Or at 457; Haag v. Cembellin, supra, 89 Or App at 79. Under some circumstances, an opinion blended with a statement of fact constitutes an implied assertion that the speaker knows facts that justify and make certain the opinion. Horner v. Wagy, supra. For an opinion as to value to be actionable, the opinion must be coupled with some untrue or misleading statement of fact that reinforces the opinion. The injured party must also have been induced to forgo further inquiry as to the value of the thing the injured party acquired. Horner v. Wagy, supra, 173 Or at 456. See also Farnsworth v. Feller, 256 Or 56, 62, 471 P2d 792 (1970).

PRACTICE TIP: If a party is concerned whether a statement is a representation or a mere nonactionable opinion, the statement should be included among the provisions of the contract. By including such statements in the contract, a party has a better basis for evaluating the prospects contemplated by the contract.

FARNSWORTH v. FELLER, 256 Or 56, 471 P2d 792 (1970). Buyers brought an action to rescind a contract for the sale of a gravel and sand business. Plaintiff buyers claimed that sellers provided false and forged appraisals that overstated the property's value. Plaintiffs further believed defendants' representation that part of the property could be used for digging sand and gravel when in fact the property had been zoned for residential use. The trial court held for defendants. Held: Reversed and remanded. Concealment of a material fact, when combined with a half-truth or other misleading statement, is a ground for rescission. Representations that part of the land could be used for digging sand and gravel, as well as the false and forged appraisals, provided sufficient grounds for rescission. The court explained that although a mere expression of opinion by a seller as to a property's value is not a sufficient basis for rescission, a false representation regarding its appraised value is not merely an expression of opinion. "An expression of opinion may be so blended with statements of fact [that the expression itself becomes] a statement of fact." 256 Or at 62 (quoting Horner v. Wagy, supra, 173 Or at 457).

HOLLAND v. LENTZ, 239 Or 332, 397 P2d 787 (1964). Plaintiffs brought an action against a broker for knowingly false representations concerning the condition of a home. The broker stated that the home was of good quality and was well-built. The broker also stated that for the price plaintiffs had paid for the home it should be a good home. The trial court entered judgment for plaintiffs. Held: Reversed and remanded. The supreme court held that statements of opinion were inadmissible. Generally, false representations must be about past or existing facts. Hence, statements of opinion expressing commendation are not actionable even though false. The court explained, however, that statements of opinion regarding quality or value may be considered misrepresentations of fact if a fiduciary relationship exists or if the parties are not on equal footing.

Concealment of a known fact that is material to the transaction constitutes actionable fraud. Millikin v. Green, 283 Or 283, 285, 583 P2d 548 (1978); Musgrave v. Lucas, 193 Or 401, 410, 238 P2d 780 (1951). Also, nondisclosure of a material fact may amount to actionable fraud if the defendant has made representations that are misleading without full disclosure. Elizaga v. Kaiser Found. Hospitals, 259 Or 542, 546-547, 487 P2d 870 (1971); Felonenko v. Siomka, 55 Or App 331, 335, 637 P2d 1338 (1981), aff'd, 294 Or 136 (1982).

Once a party to a contract undertakes to speak, the party has an obligation to tell the whole truth. Heise v. Pilot Rock Lbr. Co., 222 Or 78, 86, 352 P2d 1072 (1960) (when there is a duty to speak, fraudulent concealment is a form of fraudulent misrepresentation); Williams v. Collins, 42 Or App 481, 490, 600 P2d 1235, rev. denied, 288 Or 173 (1979); see Dahl v. Crain, 193 Or 207, 224, 237 P2d 939 (1951); Palmiter v. Hackett, 95 Or 12, 18-19, 185 P 1105, 186 P 581 (1920) (buyer allowed to rescind because sellers concealed rentability of property).

Similarly, when circumstances impose on a person a duty to speak and that person deliberately remains silent, the concealment may be the equivalent of asserting a falsehood. Musgrave v. Lucas, supra. For example, a principal who deliberately withholds material facts from an agent so that the agent may innocently misrepresent the facts is chargeable with fraud. Bodenhamer v. Patterson, 278 Or 367, 373, 563 P2d 1212 (1977) (casenote in §6.5) (sellers of property failed to tell listing salesperson that the well on the property was dry); Widmer v. Leffelman, 187 Or 476, 491, 212 P2d 737 (1949) (principal may be charged with fraud based on innocent misstatements of agent when principal has received and retained the benefits of the misrepresentation).

PRACTICE TIP: In preparing a contract, include a provision that all material facts have been disclosed.

NOTE: Ordinarily purchasers are not required to disclose to the seller facts within their knowledge that materially affect the value of the property. Dahl v. Crain, supra, 193 Or at 222. There are three exceptions to this rule: (1) a party, by artifice or trick, places the other under a misleading impression as to the true facts concerning the transaction; (2) special circumstances require disclosure, such as a relation of trust and confidence; and (3) one party makes an innocent misrepresentation, discovers the truth, but permits the other party to act on the misrepresentation in consummating the transaction. Dahl v. Crain, supra, 193 Or at 222-223.

MUSGRAVE v. LUCAS, 193 Or 401, 238 P2d 780 (1951). Purchasers of a sand and gravel business adjacent to a river brought an action against sellers for damages in fraud. Before the sale, defendants had been threatened with criminal prosecution by the federal government if they continued to remove sand and gravel. Plaintiffs claimed that defendants concealed this fact. The trial court entered a judgment on the pleadings for defendants. Held: Reversed and remanded. The court held that plaintiffs' complaint stated a claim for fraud. When the law imposes a duty on one to disclose known material facts, silence or concealment violates this duty and amounts to actionable fraud. Defendants were on notice and owed plaintiffs a duty of disclosure. The court explained that, in selling the business to plaintiffs, good faith obligated defendants to fully disclose material facts.

The finality of transactions is favored in the absence of a mistaken belief in existing facts. A mistake is a state of mind that is not in accordance with the facts. Shop. Centers v. Stand. Growth Prop., 265 Or 405, 498 P2d 781, on reh'g, 265 Or 417, 422 (1973) (citing Restatement of Contracts §500 (1938)). The mistake must be fundamental in character and relate to the intrinsic nature of the bargain. Shop. Centers v. Stand. Growth Prop., supra, 265 Or at 422-423.

PRACTICE TIP: The recitals of the contract should set forth the parties' understanding of the existing facts material to the transaction.

SHOP. CENTERS v. STAND. GROWTH PROP., 265 Or 405, 498 P2d 781, on reh'g, 265 Or 417 (1973). Purchasers brought an action to rescind a land sale contract and for damages in the amount of the down payment, the value of improvements, and increased value in the land. Plaintiffs claimed they agreed to purchase tracts of land at $750 an acre, assuming that 750 out of the total 827 acres could be subdivided and sold separately. In fact, only 307 of the 827 acres could be subdivided. The trial court granted rescission and damages in the amount of the down payment, but denied damages for the increased value of the property. The supreme court affirmed the decision as modified and remanded, stating that, because a mutual mistake frustrated the purpose of a contract, rescission was justified. Held on rehearing: Reversed and remanded. The supreme court reversed its prior holding, explaining that rescission was not warranted. Although the parties were mutually mistaken as to the number of acres available for subdivision, the mistake did not affect the intrinsic nature of the bargain. The court found that no mutual mistake occurred. The court concluded that because defendant had not breached the contract, the trial court must enter a decree deciding the issue raised by defendant's counterclaim for foreclosure.

A. (§6.16) Mistake of Law

Ignorance of the law is ordinarily not a proper basis for rescission. Farnsworth v. Feller, 256 Or 56, 62, 471 P2d 792 (1970) (casenote in §6.13). Persons are presumed to know the law. Palmiter v. Hackett, 95 Or 12, 18, 185 P 1105, 186 P 581 (1920). A mistake, for example, concerning the legal effect of a bargain is ordinarily not a sufficient defense to its enforcement. Shell Oil Co. v. Boyer, 234 Or 270, 276-277, 381 P2d 494 (1963). An inequitable or misunderstood legal effect is not sufficient to enable one to avoid contractual duties unless there is evidence that shocks "the conscience of equity," Shell Oil Co. v. Boyer, supra, 234 Or at 279, or one party intentionally deceives the other regarding any law applicable to the transaction, Farnsworth v. Feller, supra, 256 Or at 62-64.

PRACTICE TIP: If a party to a contract is not represented by counsel, then the contract should contain a recital advising that it is a binding legal document and that the parties should consult their own lawyers regarding its legal effect.

SHELL OIL CO. v. BOYER, 234 Or 270, 381 P2d 494 (1963). Lessee brought an action against lessors for specific performance of an option to purchase a service station. Plaintiff claimed that the lease permitted it to purchase the property. Defendants argued that they were under a mistaken belief as to the legal effect of a clause in the contract. The trial court denied plaintiff's request for specific performance. Held: Reversed with instructions. The supreme court held that specific performance should be granted because a party's failure to read an instrument does not afford that party the right to avoid enforcement of the instrument. The court further found that enforcement of the contract would not be inequitable.

B. (§6.17) Unilateral Mistake of Fact

An offer and an acceptance are deemed to effect a meeting of the minds even though the offeror made a material mistake in compiling the offer, as long as the other party "was not aware of the mistake and had no reason to suspect it." Rushlight Co. v. City of Portland, 189 Or 194, 244, 219 P2d 732 (1950). A party's prediction, judgment, hope, or belief, however, is not a mistake of fact going to the basis of the agreement. Jackson Co. v. Jackson Education Serv. Dist., 90 Or App 299, 304-305, 752 P2d 1224 (1988).

To avoid a contract on account of a unilateral mistake of fact, there must be (1) a mistake that is basic to the contract and known to the other party, or (2) the other party, as a reasonable person, should have known of the mistake. Gardner v. Meiling, 280 Or 665, 674, 572 P2d 1012 (1977) (casenote in §6.4); G.E. Supply Corp. v. Republic Cons. Corp., 201 Or 690, 693, 272 P2d 201 (1954); Rushlight Co. v. City of Portland, supra; Foster & Marshall v. Pfister, 66 Or App 685, 687, 674 P2d 1215 (1984). For example, if the offeree knows that the terms of the offer are unintended or misunderstood by the offeror, the contract is unenforceable. See Rushlight Co. v. City of Portland, supra, 189 Or at 244, citing Williston on Contracts §94 (rev ed 1936). An example would be an offer that is so inconsistent with the true value of the bargain that a reasonable person would know the offeror was mistaken. Gardner v. Meiling, supra, 280 Or at 675.

Equity will not relieve a party of an improvident bargain simply because the party's opinion of its value proves incorrect. Gardner v. Meiling, supra (citing Restatement of Contracts §502, comment f (1932)). For example, a party will be held to a bad bargain as a consequence of negligent research in connection with facts pertinent to the bargain. Foster & Marshall v. Pfister, supra, 66 Or App at 688. The Restatement (Second) of Contracts provides that a party bears the risk of a mistake when that party is aware that he or she has only limited knowledge of the facts to which the mistake relates, but treats the limited knowledge as sufficient. Restatement (Second) of Contracts §154(b) (1979). Comment (c) of this section clarifies that if a party is aware that his or her knowledge of facts material to the transaction is limited but enters the contract in any event, the party bears the risk of the mistake.

A motion to set aside a default judgment is an attempt to rescind a contract and will be denied if one party is mistaken as to the effect of consenting to the entry of the default judgment. Wershow v. McVeety Machinery, 263 Or 97, 103, 500 P2d 696 (1972).

PRACTICE TIP: The contract should provide that the parties have independently investigated or evaluated the facts material to their decision to enter the agreement.

FOSTER & MARSHALL v. PFISTER, 66 Or App 685, 674 P2d 1215 (1984). A stock brokerage firm brought an action for restitution arising out of its purchase of 100 shares of stock for $4,950. Plaintiff claimed it overpaid defendants in the amount of $4,466.25. Defendant stockholders asserted that they requested plaintiff to recheck the value of the stock and that plaintiff twice verified the amount before purchasing the stock. Defendants further asserted that they had reasonably relied on plaintiff's price quotes and had purchased a home after receiving the $4,950 from plaintiff. The trial court granted summary judgment for plaintiff. Held: Reversed and remanded. The court of appeals held that plaintiff was not entitled to restitution based on unilateral mistake. Defendants did not have actual knowledge of plaintiff's mistaken valuation of the stock. When defendants were suspicious of plaintiff's valuation, defendants insisted that plaintiff recheck the valuation amount. Because defendants' detrimental reliance was reasonable, summary judgment was improper.

RUSHLIGHT CO. v. CITY OF PORTLAND, 189 Or 194, 219 P2d 732 (1950). The bidder on a construction contract with the city sought to recover $21,472.21 that it had deposited concurrently with its bid on a contract for construction of the city sewer. Plaintiff claimed it had made an honest, excusable mistake in preparing the bid and further claimed it had apprised the city of this mistake and asked to withdraw the bid before it was accepted. Moreover, the city was aware of the disparity between plaintiff's bid and the next higher bidder, enough to make the city suspicious of a mistake. The trial court entered judgment for plaintiff. Held: Affirmed. The mistake was excusable. The supreme court affirmed the trial court's refusal to hold plaintiff liable for the bid.

C. (§6.18) Mutual Mistake of Fact

If both parties to a contract are mutually mistaken regarding a fact fundamental to the bargain, the contract may be rescinded by either party. Kladouchos v. Ballis, 94 Or App 403, 765 P2d 831 (1988); Shop. Centers v. Stand. Growth Prop., 265 Or 405, 422, 498 P2d 781, on reh'g, 265 Or 417 (1973) (casenote in §6.15); G.E. Supply Corp. v. Republic Cons. Corp., 201 Or 690, 692, 272 P2d 201 (1954); Crown Northwest Equip., Inc. v. Drake, 49 Or App 679, 685, 620 P2d 946 (1980).

NOTE: A mutual mistake of fact, as well as fraud or actual absence of consent, will form the basis for rescission of a contract, including consent decrees and stipulations agreed to in open court. Westfall v. Wilson, 255 Or 428, 431, 467 P2d 966 (1970) (consent decree); Murray v. Johnson, 86 Or App 295, 297, 738 P2d 1005 (1987) (stipulation).

CROWN NORTHWEST EQUIP., INC. v. DRAKE, 49 Or App 679, 620 P2d 946 (1980). A subcontractor brought an action to recover damages from a general contractor arising out of the installation of a vacuum cleaning system and a bus washing system. The trial court found for plaintiff with respect to the bus washing system, but found for defendant with respect to the vacuum cleaning system. Held: Affirmed. The court of appeals held that as to the vacuum cleaning system, the parties made a mutual mistake fundamental to the performance of the contract. The mistake related to time and method of approval for the subcontractor's alternative vacuum cleaning system. The court, however, found that the general contractor's cancellation of the subcontractor's contract for the vacuum cleaning system was wrongful and granted relief for plaintiff.

Duress is the threat of physical or economic harm compelling a person to enter into a contract that he or she would not otherwise have entered. The inquiry is a subjective one: whether the free will of the contracting party has been so overcome by duress that actual consent to the bargain is lacking. Port of Nehalem v. Nicholson, 122 Or 523, 530, 259 P 900 (1927), overruled on other grounds, Godell v. Johnson, 244 Or 587, 418 P2d 505 (1966). According to the majority rule, however, the coerced party is bound to the contract when he or she ratifies it by acting according to its terms or accepting its benefits. John D. Calamari & Joseph M. Perillo, The Law of Contracts 349 (3d ed 1987).

PORT OF NEHALEM v. NICHOLSON, 122 Or 523, 259 P 900 (1927), overruled on other grounds, Godell v. Johnson, 244 Or 587, 418 P2d 505 (1966). The port brought an action to recover on two promissory notes guaranteed by Nicholson. Rowe was the treasurer of the port and misappropriated several thousand dollars from public funds. Port authorities told Nicholson, Rowe's brother-in-law, that Rowe would be prosecuted if he did not sign a promissory note in the amount of the misappropriated funds and if Nicholson did not guarantee the notes. The trial court directed a verdict in Nicholson's favor and dismissed the action. Held: Affirmed. Under these circumstances, defendant's agreement was given solely because of the threat to prosecute Rowe.

B. (§6.20) Threat Directed to Third Party

To be successful, the defense of duress requires that the threat be directed to the contracting party or to a close relative. Horn v. Davis, 70 Or 498, 506, 142 P 544 (1914) (casenote in §6.24) (threat must be directed against "the other party to the contract, or to the husband or wife, parent or child, or other near relative"). However, the Oregon Supreme Court later held that the closeness of the relationship is of secondary importance. Port of Nehalem v. Nicholson, 122 Or 523, 529, 259 P 900 (1927), overruled on other grounds, Godell v. Johnson, 244 Or 587, 418 P2d 505 (1966) (casenote in §6.19). The court stated that, rather than limiting the defense of duress to cases in which threats were directed to immediate relatives, all the circumstances should be considered to determine whether the threat to a third party impaired the contracting party's free will. The Restatement (Second) of Contracts §176, comment c (1979), similarly does not limit use of the defense to threats directed exclusively to relatives of the contracting party.

C. (§6.21) Threat of Physical Harm

Physical duress usually takes the form of a threat of physical harm to the contracting party or to a third party. Restatement (Second) of Contracts §174 (1979).

D. (§6.22) Threat of Criminal Prosecution

Duress is present when assent to a contract is obtained through the threat of criminal prosecution. Such a threat may constitute duress even though the threatened party has committed a crime. The test is whether the threat alone has compelled assent to the contract. See Port of Nehalem v. Nicholson, 122 Or 523, 529, 259 P 900 (1927), overruled on other grounds, Godell v. Johnson, 244 Or 587, 418 P2d 505 (1966) (casenote in §6.19).

E. (§6.23) Threat of Civil Proceedings

A threat to institute a civil suit may constitute duress if it is made "without probable cause and with no belief in the existence of the cause of action." Adams v. Crater Well Drilling, Inc., 276 Or 789, 793-794, 556 P2d 679 (1976), quoting Restatement of Restitution §71, at 290 (1937).

ADAMS v. CRATER WELL DRILLING, INC., 276 Or 789, 556 P2d 679 (1976). Defendant contracted to drill a water well for plaintiff. Plaintiff, believing that defendant had overcharged him, initially refused to pay the full amount billed by defendant. When defendant threatened to institute litigation, plaintiff paid the disputed amount because he feared the stress of a lawsuit would harm his critically ill wife. Plaintiff sued to recover both the overcharge and punitive damages. Defendant appealed a jury verdict awarding plaintiff both compensatory and punitive damages. Held: Affirmed. The threat of a civil suit alone does not constitute duress sufficient to justify recovery of money paid to avoid litigation. However, when the threat is made without probable cause to believe the litigation would be successful, recovery is permitted. In this case, in addition, defendant's actions were sufficiently wrongful to justify the imposition of punitive damages.

F. (§6.24) Economic Duress (Business Compulsion)

A more common form of duress is economic duress, also known as business compulsion. Economic duress occurs when a party enters into a contract because of a wrongful act or threat by the other party which, if carried out, would cause severe financial distress. Oregon Bank v. Nautilus Crane & Equip. Corp., 68 Or App 131, 142, 683 P2d 95 (1984). A common form of economic duress is the threat to breach a contract unless the other party agrees to a significant modification. There is no duress, however, unless the other party has no reasonable alternative but to agree to the modification. Oregon Bank v. Nautilus Crane & Equip. Corp., supra. In the Oregon Bank case, the court held that there was no economic duress when a supplier threatened to breach his contract to supply cranes unless the defendant agreed to modify the contract by accepting a limitation of warranties. The court held that the limitation was enforceable because the defendant failed to show that it had no other available suppliers or that it could not have obtained adequate relief in an action for breach of contract.

The Oregon Supreme Court initially ruled that economic duress is not present merely because a contract is entered into at a time when the contracting party is in financial distress. Instead, an actual threat of economic or physical harm must accompany the offer to constitute duress. Horn v. Davis, 70 Or 498, 506, 142 P 544 (1914). In Capps v. Georgia-Pacific, 253 Or 248, 453 P2d 935 (1969), however, the court ruled that duress was present when the plaintiff settled a case at a time when he needed immediate cash to prevent foreclosure on his home. There was no evidence that the defendant made any improper threats to coerce the plaintiff's consent, although the defendant was aware of the plaintiff's financial condition.

CAPPS v. GEORGIA-PACIFIC, 253 Or 248, 453 P2d 935 (1969). Plaintiff sued to collect $157,000 allegedly owed as a commission for finding a lessee for defendant's property. Defendant affirmatively defended that the dispute had been settled by plaintiff for $5,000. Plaintiff replied that he entered into the settlement under duress, in that defendant knew that plaintiff needed immediate cash to forestall foreclosure on his house and would accept a very low settlement. The trial court entered judgment for defendant on the pleadings. Held: Reversed and remanded. Plaintiff stated facts which, if proven, would state a defense of duress barring enforcement of the settlement.

HORN v. DAVIS, 70 Or 498, 142 P 544 (1914). Plaintiffs sued to collect a $5,000 note given by defendant as partial payment for a ranch and stock. Defendant affirmatively defended that plaintiff agreed to discharge the note to compensate for plaintiff's failure to deliver all the cattle and horses he had agreed to provide. At trial, plaintiff moved to amend his reply to allege that he entered into the settlement under duress because it was offered when his wife was seriously ill. The trial court denied plaintiff's motion to amend the reply. Held: Affirmed. Defendant did not make any physical or economic threats against plaintiff or his wife. That the settlement was offered at a time when plaintiff was economically distressed does not constitute duress. Defendant's actions were not the cause of plaintiff's financial distress.

OREGON BANK v. NAUTILUS CRANE & EQUIP. CORP., 68 Or App 131, 683 P2d 95 (1984). Plaintiff, assignee of a contract for the sale of cranes, sued to collect payment due from defendant. The contract included a separate document entitled "Dealer Agreement" that contained a limited warranty provision. Defendant asserted affirmative defenses of breach of warranty of merchantability and of fitness for a partic