Misrepresentation

What Is a Misrepresentation?

A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void and, depending on the situation, the adversely impacted party may seek damages. In this type of contract dispute, the party that is accused of making the misrepresentation is the defendant, and the party making the claim is the plaintiff.

How Misrepresentation Works

Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size.

A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller.

In higher stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.

Special Considerations

In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur where a fiduciary fails to disclose material facts of which they have knowledge.

A duty also exists to correct any statements of fact which later become known to be untrue. In this case, the failure to correct a previous false statement would be a misrepresentation.

Types of Misrepresentations

There are three types of misrepresentations. Innocent misrepresentation is a false statement of material fact by the defendant, who was unaware at the time of contract signing that the statement was untrue. The remedy in this situation is usually rescission or cancellation of the contract.

The second type is the negligent misrepresentation. This type of misrepresentation is a statement that the defendant did not attempt to verify was true before executing a contract. This is a violation of the concept of "reasonable care" that a party must undertake before entering an agreement. The remedy for negligent misrepresentation is contract rescission and possibly damages.

The third type is a fraudulent misrepresentation. A fraudulent misrepresentation is a statement that the defendant made knowing it was false or that the defendant made recklessly to induce the other party to enter a contract. The injured party can seek to void the contract and to recover damages from the defendant.