Misrepresentation contract law is the communication of inaccurate information that induces a recipient to enter into a contract. Fundamentally, a contract is the transfer of rights, property, and consideration between entities, such as individuals and businesses. Misrepresentation contract law helps to reduce unscrupulous and negligent behavior in contract agreements.

Misrepresentation contract law is especially important in business dealings, where large transactions occur with high frequency. Misrepresentations of the value and/or risk associated with an agreement can cause enormous financial losses to businesses and individuals, while increasing the risk of collaborative business ventures. Accordingly, misrepresentation contract law is vital to ensuring fairness and reducing the risk of entering into agreements between individuals and businesses.

Types of Misrepresentations

Fraudulent Misrepresentation

Fraudulent misrepresentation is when an individual knowingly and intentially uses false statements of fact to induce another party to enter into a contract. An offending party must either not believe in the truth of his statement or must show reckless disregard for whether a statement is true or not. The offending party's intent must have been to induce the aggrieved party into entering into the contract.

A claimant who has been the victim of fraudulent misrepresentation can claim both rescission, which will set the contract aside, and damages. With respect to damages, only actual losses stemming from the misrepresentation may be claimed.

In a lawsuit, a plaintiff must prove the elements of fraudulent misrepresentation. Specifically, that:

  1. A representation was made—an action or statement of factual substance
  2. The representation was false
  3. At the time, the representation was either known to be false or was made with reckless disregard for whether it was accurate
  4. The representation was purported as being a reliable fact
  5. The representation was relied on
  6. A loss was experienced because of the false representation

Negligent Misrepresentation

Negligent misrepresentation is a false statement made by a person who had no reasonable grounds for believing it to be true. Instead of direct lies, negligent misrepresentations are careless statements of fact that are untrue. When selling or marketing, each party has a duty to make sure that reasonable care is exercised when making representations of fact.

In court, the claimant must prove that the offender had no reasonable ground for believing the representation to be true. The claimant must also prove intent—that the offender sought to induce the claimant to rely on the misrepresentation. In many courts of law, the claimant must prove that his reliance on the misrepresentation was reasonable. In addition, the claimant must have incurred a loss from relying on the misrepresentation.

The distinction between fraudulent misrepresentation and negligent misrepresentation is in the degree of the offense. Fraudulent misrepresentations have a “reckless disregard” for the truth, while negligent misrepresentation requires only factual statements with no reasonable grounding in the truth. Importantly, misrepresentations only apply to statements of fact. Statements about the future and statements of opinion typically do not carry legal liability.

Misrepresentations are civil offenses. Accordingly, claims are only handled in civil courts. Typical court remedies include rescinding the contract and awarding damages under the tort of deceit. Negligence is also a separate civil offense, with its own remedies under the tort of negligence. A claimant could sue the offending party for both negligent misrepresentation and negligence.

Innocent Misrepresentation

In innocent misrepresentation, a party had reasonable grounds for believing that a misrepresentation was true at the time of statement. The sole legal remedy to innocent misrepresentation is the award of damages—the contract cannot be rescinded. Similar to other types of misrepresentations, to pursue damages, a claimant must show that he suffered a loss because of the misrepresentation.

Duress, Coercion, and Undue Influence

In addition to misrepresentations, duress is also grounds for termination of a contract. Duress is the unlawful use of coercion to induce a party to agree to a contract. Coercion may include threats of harm and threats to commit a wrongful act. In addition, undue influence must not be used when pursuading a party to enter into a contract. Undue influence can be the use of power, position, and/or authority over another party to cause them to agree to a contract.

Guarding against undue influence is especially important in situations of power and/or knowledge imbalence, such as with elderly individuals, mentally-disabled individuals, fiduciary relationships, and/or minors. The exercise of undue influence to induce a party to enter into a contract is grounds to have the contract rescinded by a court of law.

If you need help with understanding your rights under misrepresentation contract law, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.