10.2: Misrepresentation

LEARNING OBJECTIVES

After reading this section, you should be able to:

1. Explain the elements of fraudulent misrepresentation and how they differ from innocent and negligent misrepresentation.
2. Identify situations where statements of opinion, silence, or carelessness may amount to misrepresentation.
3. Analyze the legal consequences of misrepresentation, including when a contract is voidable and what remedies are available

Misrepresentation and Fraud

Contracts are built on the foundation of honesty and trust. When one party intentionally misleads another in order to induce them to enter into a contract, the law recognizes this as fraud (also called fraudulent misrepresentation). Fraud undermines the validity of the agreement because the victim’s consent was obtained through deception rather than free and informed choice.

Scenario Introduction

Imagine that Ralph is selling his car and offers it to Jack. Ralph tells Jack that the car has “only 40,000 miles” on it. Unbeknownst to Jack, Ralph has rolled back the mileage on the odometer to make the car appear more valuable. Jack relies on this statement and agrees to purchase the car. Later, Jack discovers that the car has actually been driven 120,000 miles, and its true value is much lower.

This scenario illustrates the core issue of fraud in contracts: when one party knowingly makes a false statement of material fact, intending the other to rely on it, and the other party does in fact rely to their detriment.

Elements of Fraud

To establish fraud, the plaintiff must prove:

1. Misrepresentation of a Material Fact
   • The defendant made a false statement of fact (not opinion, not puffery).
   • Example: Ralph falsely stated the car had 40,000 miles.
2. Knowledge of Falsity (Scienter)
   • The defendant knew the statement was false or acted with reckless disregard for the truth.
   • Example: Ralph deliberately rolled back the odometer.
3. Intent to Induce Reliance
   • The defendant made the misrepresentation intending the other party to rely on it in making a decision.
   • Example: Ralph wanted Jack to rely on the mileage figure so he would agree to buy the car.
4. Justifiable Reliance
   • The plaintiff actually relied on the misrepresentation in entering into the contract.
   • That reliance must also be reasonable (justifiable) under the circumstances.

   In our scenario: Jack was justified in relying on Ralph’s statement about the odometer. The mileage of a car is not something a buyer can reasonably determine on their own without professional inspection. While Jack could have taken the car to a mechanic, courts recognize that such reliance is generally reasonable without doing so—buyers are entitled to take a seller’s mileage representation at face value.

   Counterexample: Suppose Ralph instead told Jack, “These tires are brand new.” If Jack could clearly see that the tires were worn and bald, his reliance would not be justifiable. Courts do not protect blind reliance where the falsity is obvious or could have been discovered by simple observation.

5. Damages
   • The plaintiff must have suffered actual harm as a result of the misrepresentation.
   • Example: Jack overpaid for the car, which was worth far less than represented.

Negligent Misrepresentation

Not all misrepresentation is deliberate. Sometimes, a seller carelessly makes a false statement that induces reliance.

Suppose Ralph never rolled back the odometer but simply glanced at a service record, misread it, and told Jack the car had 40,000 miles when it actually had 120,000. Ralph did not intend to deceive Jack, but his careless statement was false.

In this case, Ralph may be liable for negligent misrepresentation. The elements are similar, but instead of proving intent to deceive, Jack must prove that Ralph:

1. Made a false statement of material fact.
2. Failed to exercise reasonable care in verifying the truth of the statement.
3. Intended or expected Jack to rely on it.
4. Jack reasonably relied on it.
5. Jack suffered damages as a result.

Here, Jack’s reliance would still be justifiable because mileage is not something he could confirm without professional help. Ralph, as the seller, was in the better position to verify the truth before speaking.

Statements of Opinion

Not every false or misleading statement qualifies as misrepresentation. The law generally distinguishes between statements of fact (which can support misrepresentation claims) and statements of opinion (which usually cannot).

• Fact: Something objectively verifiable, like mileage, year of manufacture, or accident history.
• Opinion: A subjective belief, judgment, or “sales talk” that reasonable buyers are expected to take with caution.

Example 1 – Mere Opinion (Not Misrepresentation):
Ralph tells Jack, “This is the best car on the market—you won’t find a better one in town.” This is sales puffery, not a factual claim. Jack cannot sue if the car later turns out to be average.

Example 2 – Opinion by an Expert (May Count as Misrepresentation):
If Ralph is a licensed mechanic and tells Jack, “In my professional opinion, the engine is in excellent condition and will last for at least 100,000 more miles,” but Ralph knows the engine is failing, this crosses into fraudulent misrepresentation. Courts may hold experts or professionals accountable for misleading opinions because buyers justifiably rely on their superior knowledge.

Example 3 – Mixed Statement:
Ralph says, “This car feels like new.” If Jack can see worn seats, scratches, and old tires, this is likely puffery. But if Ralph couples the opinion with false facts—“It only has 40,000 miles, so of course it feels like new”—then the statement may be actionable.

Puffery

Puffery is a special category of statements that the law treats as non-actionable exaggeration or sales talk. Puffery includes vague, subjective, or promotional claims that no reasonable person would take literally.

• Puffery does not create liability because courts expect consumers to recognize exaggerations.
• Puffery contrasts with factual misrepresentation, which involves specific, verifiable falsehoods.

Examples of Puffery (Not Misrepresentation):

• Ralph tells Jack, “This car is a dream ride—you’ll look amazing driving it.”
• A restaurant claims, “We have the world’s best coffee.”
• A tech company advertises its laptop as “lightning fast,” even if it’s slower than a competitor’s.

Not Puffery (Actionable Misrepresentation):

• Ralph says, “This car has never been in an accident,” when in fact it has.
• A restaurant claims, “We have 100% organic ingredients,” but uses conventional produce.
• A laptop manufacturer states, “Battery lasts 12 hours,” when it lasts only 3.

Courts draw the line between puffery and misrepresentation by asking: Would a reasonable person treat this statement as a factual claim, or as harmless sales exaggeration?

Misrepresentation by Silence (Concealment)

Sometimes, fraud does not require an outright false statement—silence or concealment can amount to misrepresentation when one party has a duty to speak. While the general rule is that parties to a contract are not required to volunteer information, the law imposes a duty to disclose in certain circumstances.

General Rule

Silence alone is usually not misrepresentation. Buyers and sellers are often expected to use caution and diligence, and “caveat emptor” (let the buyer beware) applies. However, when nondisclosure amounts to active concealment or when fairness demands disclosure, courts may treat silence as fraudulent misrepresentation.

When Silence Becomes Actionable

1. Duty to Disclose Material Facts – If a party knows a fact that materially affects the value or desirability of the contract and the other party cannot reasonably discover it, failure to disclose may be fraudulent.
2. Partial Disclosure – If a party makes a statement that is only half true, omitting critical information, silence can turn the statement into a misrepresentation.
3. Special Relationships – Fiduciary or trust-based relationships (attorney-client, guardian-ward, business partners) impose heightened duties to disclose.
4. Active Concealment – Taking steps to hide defects (painting over water damage, rolling back an odometer) amounts to misrepresentation even without words.

Example – Ralph and Jack (Concealment)

Ralph is selling his car to Jack. Ralph doesn’t say anything about the fact that the car was previously flooded in a hurricane, causing hidden engine damage. Jack cannot easily discover this without an inspection. Ralph’s silence amounts to misrepresentation by concealment because he knew about the damage, knew it was material, and failed to disclose it.

Counterexample – Tires Scenario

If Ralph stays silent about the condition of the car’s tires, Jack cannot later claim concealment because the condition of the tires is obvious and discoverable upon reasonable inspection. Jack is not justified in relying on Ralph’s silence about something he could see for himself.

Case Illustration – Obde v. Schlemeyer (Wash. 1960)

In this case, sellers failed to disclose a termite infestation to buyers. The court held that the sellers’ silence was fraudulent because they knew about the problem and the buyers had no reasonable way to discover it themselves before purchase.

Defenses to Misrepresentation and Fraud

Defendants accused of misrepresentation or fraud may raise several defenses to avoid liability. These defenses focus on showing that one or more of the required elements (false statement, scienter, intent, reliance, damages) are missing.

1. No Misrepresentation of Fact
   • The statement was not about a material fact but mere opinion or puffery.
   • Example: Ralph says, “This car is a beauty—you’ll love driving it.” Jack cannot claim fraud because no factual assertion was made.
2. Truth or Substantial Truth
   • If the defendant’s statement was accurate—or close enough to not materially mislead—the defense of truth applies.
   • Example: Ralph claims the car has “about 40,000 miles,” and it has 41,200. Courts may find this substantially true, not fraudulent.
3. No Justifiable Reliance
   • The plaintiff’s reliance was unreasonable under the circumstances.
   • Example: Ralph says, “The tires are brand new,” but Jack can plainly see they are worn. Jack cannot reasonably rely on that statement.
4. Lack of Scienter (Good Faith Mistake)
   • For fraud, the defendant must know the statement is false or act with reckless disregard for the truth. If the misstatement was a genuine, reasonable mistake, the claim may fail (though negligent misrepresentation might still apply).
5. No Causation or No Damages
   • Even if there was misrepresentation, the plaintiff must show actual harm. If the false statement had no impact on the decision or caused no measurable loss, damages cannot be recovered.

Remedies for Misrepresentation and Fraud

When misrepresentation or fraud is proven, courts may award a combination of contract remedies (focused on undoing the unfair deal) and tort remedies (focused on compensating for losses).

1. Rescission (Contract Remedy)
   • The contract may be canceled (rescinded), restoring both parties to their pre-contract positions.
   • Example: Jack returns the car and Ralph returns the purchase price.
2. Restitution
   • Along with rescission, courts often order restitution to prevent unjust enrichment. Each party must give back what they received.
3. Damages (Tort Remedy)
   • The defrauded party may recover damages for actual losses suffered. Courts typically apply the “benefit of the bargain” rule, awarding the difference between the value as represented and the actual value.
   • Example: If Ralph sold the car for $10,000 claiming it had 40,000 miles, but the car with 120,000 miles was worth only $5,000, Jack can recover $5,000 in damages.
4. Punitive Damages
   • In cases of intentional fraud (not negligent misrepresentation), courts may award punitive damages to punish willful misconduct and deter future fraud.
   • Example: If Ralph ran a pattern of rolling back odometers and deceiving multiple buyers, punitive damages may be imposed.
5. Reformation
   • In some cases, instead of canceling the contract, the court may reform (rewrite) the contract to reflect the truth or the parties’ actual intent.
   • Example: If Ralph misrepresented the car’s warranty terms, the court could reform the contract to accurately reflect the true warranty coverage.

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KEY TAKEAWAY

Misrepresentation and fraud undermine the foundation of contracts by substituting deception for genuine agreement. Fraudulent misrepresentation requires proof of a false statement of material fact, knowledge of its falsity, intent to induce reliance, justifiable reliance, and damages. Negligent misrepresentation arises from careless but false statements. Not all statements—such as puffery or obvious opinions—are actionable, and silence can amount to misrepresentation only when there is a duty to disclose. Victims may seek rescission, restitution, damages, or even punitive damages, while defendants may argue that reliance was unjustified or no material harm occurred. Ultimately, the law balances protecting parties from deception with holding them responsible for reasonable diligence.

EXERCISES

1. Distinguish between fraudulent misrepresentation and nonfraudulent misrepresentation, between fraud in the execution and fraud in the inducement, and between negligent and innocent misrepresentation.
2. List the elements that must be shown to prove the four different types of misrepresentation noted in Exercise 1.
3. What is the difference between the traditional common-law approach to remedies for fraud and the UCC’s approach?