In contract negotiations, it’s generally not required for the involved parties to proactively share information. The fundamental rule is that each party should protect their own interests, and if they need information, they are expected to request it.
However, there are occasions when parties are obligated to reveal information without being asked. The following scenarios may lead to misrepresentation:
- Providing only partial information can be seen as misrepresentation since any disclosed information must be complete and not misleading.
- Active concealment of facts, such as hiding a structural defect in a property for sale, is required to be disclosed; otherwise, it constitutes misrepresentation.
- Failing to update information that was accurate at one time but has since become outdated or incorrect requires correction. For example, a doctor must inform a potential buyer of any changes in the value of their practice.
- In relationships based on high trust, such as in insurance, there is a duty to disclose all pertinent information to the other party assessing the risk, such as an insurer.
- Legal mandates sometimes require specific disclosures. Legislation may require corporate directors to reveal their interests in certain transactions involving their corporation.
In this legal context, distinguishing between a statement included within the contract and one made before entering the contract is important. A statement within the contract constitutes a promise or a contractual term. If this statement turns out to be false, it results in a breach of contract. Conversely, a statement made before the contract, which is not part of the contract terms, can still lead to legal repercussions. Such a statement, if it meets specific criteria, is legally recognized as an actionable misrepresentation.
In contract law, if a party has acted on a misrepresentation, they are entitled to cancel the contract, a process known as rescission. Rescission aims to restore both parties to their positions before the contract was made. Since rescission is considered an equitable remedy, the court mandates that the individual seeking it must promptly file their complaint.
In situations where rescission isn’t feasible, for instance, when the contract’s subject matter has been significantly changed by one party, the courts will strive to ensure fairness. They aim to provide some form of relief to the affected party, which may include financial compensation.
Elements of a legally actionable misrepresentation
Legal principles stipulate that during negotiations, parties are obligated to respond to questions truthfully and any volunteered information must be accurate. The classification of a statement as misrepresentation, enabling the other party to seek a remedy, is contingent on its specific nature and consequences. For a statement to qualify as a misrepresentation, it needs to be established that the statement is:
- Untrue.
- Precise and without ambiguity.
- Relevant to the contract, meaning it plays a critical role in influencing the decision to proceed with the contract.
- A determining factor that motivates the wronged party to commit to the contract.
- Pertinent to a factual claim, as opposed to an opinion, except in cases where the issuer of the statement represents it as a fact.
Types of misrepresentations subject to legal action
Legal classifications break down misrepresentations into three distinct types:
- Fraudulent misrepresentation: This occurs when the issuer of the statement intentionally aims to deceive or makes the statement recklessly, without regard for its truthfulness.
- Negligent misrepresentation: The statement is made without due care or with negligence.
- Innocent misrepresentation: The speaker, while neither fraudulent nor negligent, incorrectly states a fact. Thus, the misrepresentation is considered unintentional.
For instance, consider a scenario where Lisa, a real estate agent, tells the Johnsons that the house they are interested in buying is “perfectly situated away from any flood zones,” suggesting minimal risk of flooding. This statement constitutes a misrepresentation if it turns out the property is actually prone to flooding, a fact that significantly impacts the property’s value and the buyer’s decision-making. If the Johnsons can prove they purchased the property based on Lisa’s assurances, they may successfully argue for actionable misrepresentation. At minimum, Lisa’s statement could be regarded as negligent due to a lack of proper investigation. However, if evidence suggests Lisa was aware of the flooding risks but chose to withhold this information, her actions might be classified as fraudulent.
Similarly, if Lisa expressed confidence that the local zoning laws would not affect the property’s extension plans, this might be seen as just her opinion rather than a factual assertion, and not directly actionable. Nevertheless, if a court determines that Lisa’s professional background should have informed her of the zoning laws, thereby making her statement imply a factual guarantee, it might necessitate remedial action. Though not necessarily fraudulent without further evidence, this misrepresentation could be deemed negligent, considering her professional responsibility to provide accurate information.
What to do if you have been misrepresented
In addition to allowing courts to annul or nullify contracts, certain misrepresentations are considered tortious acts, warranting compensation for damages. Specifically, if the misrepresentation is identified as fraudulent or made negligently, the affected party may receive tort damages on top of rescission, the contractual remedy. For misrepresentations that are neither fraudulent nor negligent, there remains a possibility to invalidate the contract based on innocent misrepresentation. Considering the expenses associated with legal actions and the risk that the wronged party might not successfully prove that a legally actionable misrepresentation occurred, prevention is highly recommended. It is wise to ensure that important terms are explicitly included in a written contract, aiming for clear understanding between the parties. Seeking the guidance of a business lawyer is often beneficial due to their specialized knowledge and skills. Proving a violation of a written contract term is typically more straightforward than demonstrating that a verbal statement made during negotiation constitutes a legal misrepresentation. Should the counterparty hesitate to document a vital representation in writing, the individual should seek business relations elsewhere.
- Misrepresentations in contracts: Types, legal ramifications, and remedies - April 24, 2024
- Strategies for contract termination: Navigating fulfillment, mutual agreement, frustration, and breach - April 4, 2024
- Navigating marijuana use in Ontario workplaces: An overview of employment laws - January 24, 2024
Leave a Reply