3 Types of Misrepresentation and Why They Matter

Written and Fact Checked by The Law Dictionary Staff

 

A contract largely depends on the honesty and goodwill of those who have agreed to it. If a party to a contract makes a misrepresentation of fact without suffering any repercussions for that misrepresentation, then few people would feel comfortable binding themselves to that contract. Misrepresentation is an important concept in the contract laws. There are three main types of misrepresentation; fraudulent, negligent, and innocent. Below is a brief overview of each type and the remedies for them.

To first define what misrepresentation means in context of contract law.   Misrepresentation is an untrue statement of fact that induces a party to enter a contract. Furthermore, to pursue a claim against the person who made the misrepresentation, the claimant must show that he or she relied on the untrue statement of fact when deciding to enter the contract and that the misrepresentation led to damages to the claimant. The three types of misrepresentation:

Fraudulent misrepresentation

Fraudulent misrepresentation is very serious. Fraudulent misrepresentation occurs when a party to a contract knowingly makes an untrue statement of fact which induces the other party to enter that contract. Fraudulent misrepresentation also occurs when the party either does not believe the truth of his or her statement of fact or is reckless as regards its truth. A claimant who has been the victim of alleged fraudulent misrepresentation can claim both rescission, which will set the contract aside, and damages.

Negligent misrepresentation

A party that is trying to induce another party to a contract has a duty to ensure that reasonable care is taken as regards the accuracy of any representations of fact that may lead to the latter party to enter the contract. If such reasonable care to ensure the truth of a statement is not taken, then the wronged party may be the victim of negligent misrepresentation. Negligent misrepresentation can also occur in some cases when a party makes a careless statement of fact or does not have sufficient reason for believing in that statement’s truth. As with fraudulent misrepresentation, claimants can pursue both damages and a rescission of the contract.

Innocent misrepresentation

In innocent misrepresentation, a misrepresentation that has induced a party into a contract has occurred, but the person making the misrepresentation had reasonable grounds for believing it was true at the time the representation was made. A claimant who has been the victim of innocent misrepresentation can still pursue damages, but he or she cannot pursue rescission. Again, to pursue damages it must be shown that the claimant suffered a loss because of the misrepresentation.

The three types of misrepresentation described above are fundamental to understanding contract laws. Allegations of misrepresentation help ensure that contracts are ultimately honored and that unscrupulous or negligent behavior does not go unpunished.

Claims stemming from allegations of misrepresentation will ensure that agreements are honored, and that negligent or unscrupulous behavior will not go without consequences. Certain statements may be made during the course of business that are not included into a contract. For instance, a salesman that inflates the virtues of a product could be construed as misrepresentation. However, an opinion does not constitute misrepresentation, unless such a statement is made without a reasonable belief in the truth.

Definitions to Know

Take note of the following definitions:

  • Representation: This is a statement meant to entice another party to enter into an agreement.
  • Misrepresentation: This comprises a false statement by an offending party to the other that lures the opposite party to agree to a contract, resulting in a loss for that party.

Misrepresentation Occurrences

Under certain cases, false promises or claims made by sellers regarding the nature or quality of a product constitutes misrepresentations as well. When a statement gets confirmed as a representation, you must demonstrate that it was stated to another party who used that information to proceed with a business transaction. The statement should be an inducement, and does not have to be the only factor. However, the party should be influenced by the statement in the same fashion, with the exception of cases involving outright fraud.

If a claimant has a chance to find out the truth, this would not stop the statement from qualifying as a misrepresentation. With that, the misrepresentation case may be dismissed if one can demonstrate that the representation was vitally correct instead of 100% correct.

Fraudulent Misrepresentation

Fraudulent misrepresentation is a serious offence. Such fraud, including being the foundation in which an agreement would be revoked, is enough to settle in a court of law. However, the burden of proof goes to the claimant. Fraudulent misrepresentation is the false claim that’s made without belief in truth. This form of fraud happens when a party to an agreement willingly makes untrue statements that convinces another person to take part in a contract.

Fraudulent misrepresentation also happens when a party either does not believe in the statement, or is outright reckless regarding the truth. Claimants who have been victims of supposed fraudulent statements may claim rescission, where a judge will revoke a contract entirely, and will award damages if necessary.

  • Example: A professional offers services to another. The professional willingly overly inflates his/her expertise to secure a new client.

If fraudulent misrepresentation is used to get contracts signed, that agreement could be voided in its entirety when such fraud is revealed. All parties should take reasonable measures to ensure that an opposite party is telling the truth, otherwise they could fall prey to fraudulent claims and lose money in the process.

Negligent Misrepresentation

Negligent misrepresentation occurs in cases where one party states a careless claim, or does not have enough reason to believe that a statement is true. In the same manner as fraudulent misrepresentation, a claimant can go after rescission and damages. In such a case, the burden of proof falls on the claimant. The representation is created via a third party who is not privy to the agreement. Moreover, the party that makes the negligent statement does not know that the claim is false, and he or she does not intend to outright deceive another party. However, they also have no foundation with which to believe a statement is in fact true.

For more information on types of misrepresentation, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will offer more insight into misrepresentation, and what you need to do if you are the victim of fraud of any kind. Moreover, they will provide legal representation if you need to defend your rights and losses in a court of law.