What is a Misrepresentation?
A misrepresentation is the communication of inaccurate information that induces a recipient to enter into a contract.4 min read
A misrepresentation is the communication of inaccurate information that induces a recipient to enter into a contract. If the recipient party incurs a financial loss by entering into the contract, then the recipient party may seek legal remedies, such as voiding the contract or seeking damages. Importantly, even accidentally misrepresenting facts may carry liability, especially when the party making the misrepresentation is legally responsible for knowing about and investigating any inaccuracies (e.g., sellers and experts such as doctors and lawyers). In some states, misrepresentation is considered to be a subcategory of fraud.
When arguing a misrepresentation case in a court of law, a recipient party (or plaintiff) needs to prove that:
1.the defendant (the misrepresentor) provided the plaintiff with factual information
2.the factual information was inaccurate
3.without the inaccurate factual information, the plaintiff would not have entered into a contract
4.the contract hurt the plaintiff, and
5.the contract benefitted the defendant
Types of misrepresentations
1.Innocent misrepresentation occurs when a party makes a factual statement that they mistakingly believe is accurate
2.Negligent misrepresentation occurs when a party makes a factual statement without fulfilling its duty of care to ensure that the information is accurate
3.Fraudulent misrepresentation occurs when a party knowingly makes an inaccurate statement in order to induce another party to enter into a contract
4.In addition, not disclosing known factual information can also be legally interpreted as a misrepresentation
What types of statements can incur liability
It is important to clarify for what types of statements a party can be legally liable. First, a party is liable for statements of fact. However, a party is typically not held liable for statements of opinion or statements regarding future performance or conditions. One exception to this is when a party makes a statement of opinion or a statement regarding the future that knowingly misleads someone. When this occurs, the party may be held legally liable for any losses caused by such statements.
Similarly, there is a duty to disclose changes of condition and/or circumstance which render any statements that were previously true, false. This is especially important for material facts--information of relevance in deciding whether to enter into a contract. In addition, the duty to disclose also applies to fiduciary relationships, such as inter-family agreements, client relationships, and so forth. In addition, a party may be liable for losses caused by misleading and/or preferentially disclosing information to a recipient.
Typically, a false statement regarding the law is not grounds for a misrepresentation claim, as each person is expected to be knowledgeable regarding the law. However, the distinction between statements of law and statements of fact are often blurred.
The legal remedies for a misrepresentation claim are:
1.voiding the contract
The goal of voiding a contract is to return the contracting parties to their pre-contract state. This allows the injured party to reassess the contract on the basis of the corrected information. They can then decide whether or not to re-enter into another contract. In some instances, a party may void a contract by providing notice to the misrepresentor and/or by notifying a governing authority. Alternatively, an injured party may claim damages to cover losses incurred from entering into the contract. This legal remedy may be preferred when it is inconvenient or impossible to return the parties to their pre-contract states.
In some instances, when the injured party receives damages, they may lose the right to later void the contract on the grounds of the same misrepresentation. For example, a court may chose to award damages in lieu of voiding the contract. In addition, if an injured party chooses to continue operating under the contract and/or if they delay in voiding the contract beyond a reasonable amount of time, the injured party may lose the right to void the contract. In addition, if the injured party assigns their position in the contract to a third party, then the injured party gives up their right to void the contract at a later time.
In somes cases, a court may both void a contract and award an indemnity or a monetary payout to the injured party. The indemnity differs from damages. In particular, an indemnity is designed to comply with the terms of a contract, while damages seek to return an injured party to their pre-contract financial position. Any condition with a contract that limits or excuses liability for misrepresentations is subject to evaluation by a court of law. If the condition is deemed to be unreasonable, the condition may not hold legal weight.
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