Misrepresenting the Document

Misrepresenting the Document

Most of this chapter concerns a victim who understood the document and signed it for a bad reason. A smaller set of cases turns on a different lie, one about the paper itself. When the deception reaches what the document is or what it says, the signature that follows may not be assent at all. Restatement (Second) of Contracts § 163 governs those cases. It provides that if a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms, that conduct is not effective as a manifestation of assent.¹

The rule has three working parts:

1. The subject of the lie. The misrepresentation must concern the character of the proposed contract, meaning what kind of transaction the paper creates, or its essential terms, meaning the provisions that define what each side commits to.
2. The inducement. The lie must induce the signer's conduct. The section speaks of conduct that appears to be assent because a signature looks like agreement whether or not agreement exists.
3. The signer's position. The signer must lack knowledge of the character or essential terms and lack a reasonable opportunity to acquire it. Both must be missing.

When all three are present, the law treats the signature as no assent at all.

Compare the deception that fills the rest of this chapter. A seller who misstates a roof's age, or a lawyer who inflates the strength of a case, gives the other side a false reason to sign a document whose nature and terms are plain. Section 164(1) makes the resulting contract voidable.² Section 163 aims at something else: the document itself. Deception of this second kind is called fraud in the factum, or fraud in the execution, and it concerns the nature and effect of the paper to be signed.³ A signer persuaded to sign an order for goods on the assurance that it is only a request for a catalog illustrates the point, as does a signer told that a contract is merely a receipt.⁴

To sort a case, ask what the signer was lied to about. The reasons for the transaction put the case under inducement. The identity or essential terms of the paper put it under § 163. The consequences differ sharply: fraud in the inducement generally makes a contract voidable, while fraud in the factum voids it completely.⁵

The harsher result follows from what a signature ordinarily proves. The law treats a signature as the outward sign that a person has agreed to the terms on the page, because the signer has usually looked, or could look, at what is being signed. A signer deceived about the inducement still assents to the transaction, though on false information, so the law offers a choice between affirming the deal and undoing it. A signer deceived about the character or essential terms has given the outward sign with no agreement behind it, because the signer's mind never met the terms the paper contains. No assent exists to repair or to elect away. That is why § 163 says the conduct is not effective as assent, and why it leaves the deceived party no election to make.

The classification matters most when a third party appears. A void deed conveys no title, so the grantee has nothing to pass on, and even a later purchaser who paid value without notice of the fraud takes nothing. A voidable deed passes title, so that purchaser takes good title and the victim is left with a damages claim against the wrongdoer.⁶ Negotiable instruments follow the same logic. A holder in due course takes free of fraud in the inducement, a personal defense, but takes subject to fraud in the execution, which UCC § 3-305 treats as a real defense good even against such a holder.⁷ The more a rule shields strangers who relied on the signature, the more it matters that the deception be one that deprived the signer of any chance to agree.

Park 100 Development Co. v. Kartes shows the pattern. A landlord's agent, Scannell, told two officers of a tenant corporation, the Karteses, that the matter could not wait and that the corporation could not move into the building until the papers were signed. He then produced a document entitled Lease Agreement.⁸ It was in fact a personal guaranty of the lease. The guaranty was never discussed during the lease negotiations, and Scannell never told the Karteses they were signing one, even after he overheard Mr. Kartes ask by telephone whether the corporation's lawyer had approved the lease agreement.⁹ The court upheld findings that Scannell knew the document was a guaranty and knowingly misrepresented it, and that the Karteses, using ordinary care, believed they were signing a lease and reasonably relied on his statements to their detriment.¹⁰ The court analyzed the case under the elements of actual fraud, not under § 163 by name. Even so, the facts show what § 163 describes, because the misdescription went to what kind of obligation the paper created.

The landlord's main answer was the duty to read. Parties are generally obligated to know the terms of an agreement they sign and cannot avoid it by claiming they never read it. But a party who uses misrepresentation to induce the obligation cannot bind the other party to its terms.¹¹ The duty exists because a signature lets the other side treat a deal as settled without quizzing the signer, and because reading is cheap for whoever holds the paper. If every signer could disown a document by saying it went unread, no one could rely on a signed writing. That reasoning presupposes that the paper is what the other side says it is. Here the landlord's agent supplied the label and the description that made reading look unnecessary, and letting the landlord point to the unread text would reward the deception that produced the signature. Courts have divided on whether a failure to read forecloses proof that a paper was misdescribed, and the modern view holds that fraud is the greater evil.¹²

The words neither knows nor has reasonable opportunity to know keep the rule narrow, because both conditions must be met. A signer who could have understood the document and simply did not read it stays within the duty to read. The Uniform Commercial Code uses parallel language for negotiable instruments: fraud in the execution is a defense when it induced the obligor to sign without knowing the instrument's terms and without reasonable opportunity to find them out.¹³ The official comment to § 3-305 lists what a court weighs: the signer's intelligence, education, business experience, and ability to read English; the nature of the representations and whether the signer had good reason to trust the person making them; the presence of a third person who might read or explain the paper, or any other chance to get independent information; and whether the situation called for acting without delay.¹⁴ A signer so unschooled that a note could not be recognized as a note, with no one nearby to read it, has no reasonable opportunity. The same signer with a literate relative at the table may be held to have had one.¹⁵

Two decisions show how much turns on that limit. The Code's own illustration involves a maker about to sign a $100 note who is distracted when the payee knocks over a lamp, and the payee substitutes a note for $1,000 that the maker signs without noticing the switch. The maker knew the kind of instrument but not its essential terms, and the substitution is fraud in the execution.¹⁶ Mrs. Elliott, who could not read, agreed to sell two mineral acres for $3,300, and the buyer drafted a deed conveying a one-fifth interest in the minerals under seventy-five acres. The court found fraud and found her free of negligence, yet it held the deed merely voidable, reasoning that she knew she was executing a deed of mineral rights and that the law charged her with informing herself of its effect.¹⁷ Her daughter, who could read, had looked over the instrument and guessed it was all right, a fact of the kind that bears on whether a signer had a reasonable opportunity to learn the terms. The two results show that a signer who knows what kind of document is being signed may still reach § 163 when an essential term was swapped without any chance of detection. They also show that courts differ on how much a signer's knowledge of the document's kind, or a reader's presence, should count against the signer.

On an exam, a stem that says a party was tricked into signing leaves open the question on which the analysis turns: what was the party tricked about?

The falsehood in that scene is as deliberate as the agent's in Park 100, yet the result differs because the signer knew what the paper was and what it said. The knowledge condition therefore operates as a gate, and a claimant who cannot pass it proceeds under § 164(1) with its requirements of inducement and justified reliance. On that route a written term contradicting the lie can make reliance hard to justify.¹⁸ A decision in which a buyer gave a seller two checks as a deposit on a truck, on the promise that they would not be cashed, shows the same boundary. The buyer knew perfectly well that he was issuing checks, so any deception went to what would be done with them, and the ruling that let his defense reach a jury as a real defense has been criticized for that reason.¹⁹ A different problem arises when the writing misstates terms the parties actually agreed on. Restatement § 166 answers that problem with reformation, which is available only if, among other conditions, the recipient was justified in relying on the misrepresentation, and the section on remedies below takes it up.²⁰