Vitiating factors in contract: Misrepresentation

Date: Oct 24, 2014
Document Type: Article

Even when all the formal elements of a contract have been complied with, the law acknowledges human foibles which cause us to make mistakes, act unethically towards one another or unfairly use an advantage or knowledge against another. Therefore, rules have been formulated to counteract the effect of these human failings. Factors which will impair the legal validity of contracts include:

  • mistake
  • misrepresentation
  • unfairness
  • duress
  • undue influence

Although these factors will often overlap, they will be dealt with in separate articles. This article deals with the doctrine of misrepresentation.

What is a misrepresentation?

A misrepresentation is a false statement of fact which is intended to induce a party into a contract and which has this effect.

What constitutes a statement of fact?

The statement must be one of material fact which has a true or false answer. Some statements which may not be a misrepresentation include:

  • promises regarding the future – eg. ‘business will get better’. If there is no way of presently verifying the veracity of this statement, it will not constitute a misrepresentation.
  • advertising ‘puffs’ – eg. ‘my restaurant serves the best lobster in the world’. These are exaggerations and not generally understood as statements of fact.
  • Expressions of intention or opinion – eg. ‘I think the value of this painting will increase with time’. These can be hard to distinguish from fact
    • An expression of intention or opinion which is honestly held is not a fraudulent misrepresentation, even if their mind subsequently changes.
    • However, if the representor never had the intention or held the opinion, it will be a fraudulent misrepresentation.
    • In addition, the position of a representor may imply that their opinion is one based on fact. For example, a professional art dealer who claims a painting is authentic cannot say they were only giving an opinion as to its authenticity. Their expertise implies the opinion could be understood as fact.
  • Representations of law – generally this is only understood to be an opinion and is determined in the same way.

Can silence amount to a misrepresentation?

Silence will generally not amount to a misrepresentation. The classic caveat of ‘buyer beware’ applies, which insists each party has to look after their own interests. For example, a seller of a car is not required to go into all its faults unless specifically asked. Exceptions to this rule include:

  • Special contracts which require you to actively disclose relevant information eg. insurance contracts
  • Half-truths – eg. assuring the buyer the property is fully-tenanted but failing to mention the tenants just gave notice.
  • Change in circumstances – if circumstances change to falsify a statement which was true when it was made, the representor must correct the representation.
  • Fraudulent concealment – when a party has deliberately concealed something, such as a defect in the property, so as to give a false impression.

What constitutes reliance on the fact?

Generally, the party seeking to rely on the misrepresentation to rescind the contract must prove they relied on the misrepresentation in entering the contract. However, if a false statement was made which was by its nature calculated to induce a party to enter into a contract, which subsequently occurred, the presumption is that the party relied on the false statement. This presumption can be rebutted by:

  • proving that the false statement was not intended to induce entry into the contract– eg. A is selling a car to B and lies about his dog dying that day. Although a false statement, it is unrelated to the contract and thus couldn’t be relied upon when buying the car.
  • proving the other party undertook their own investigations – if a party relies exclusively upon their own inquiries or discovers the falsity of a statement before they enter into a contract, they cannot claim they were induced by it. However, simply having the opportunity to discover its falsity and failing to do so will not absolve the representor of their false inducement.

There are often multiple factors which induce a party to enter into the contract. A misrepresentation need not have been the sole or even the dominant factor relied upon in order to gain relief.

Types of Misrepresentation

Misrepresentation can be fraudulent, negligent or innocent.

Fraudulent misrepresentation occurs when a representation has been made knowing it is not true, or made with reckless disregard to its truth.

A negligent misrepresentation occurs when there is a duty owed by the representor to the other party to take due care and ensure the representation is true and reliable and the representor fails to take such due care which ultimately results in loss or damaged caused by the falsity of the representation.

An innocent representation is a residual category where the representation is neither fraudulent or negligent.

What happens if a serious misrepresentation is incorporated into a contract?  

If a contract is found to be induced on the basis of a misrepresentation it is not automatically void. The innocent party has the choice of rescinding the contract from its beginning or affirming it and continuing to be bound by it. Since the contract remains valid until the innocent party rescinds, it is vital to act as soon as possible if you believe you have been induced into a contract by a misrepresentation. The longer you leave it, the more likely property may pass to another innocent party, putting it beyond your reach.

Except for innocent misrepresentation, you may also be able to recover damages through tort actions.

If you believe you have been induced into a contract on the basis of a misrepresentation, please do not hesitate to contact us.

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