What is Fraudulent Misrepresentation in Business?
When entering into a commercial contract, a variety of declarations are typically made outlining the terms and history of the transaction. Misrepresentation occurs when someone enters into a contract based on a statement that later turns out to be false.
Fraudulent misrepresentation can lead to disastrous consequences. When entering into a business contract, it is critical that both parties behave in good faith. As a result, if one party to a contract makes a false statement in order to encourage the other party to perform an act they would not have performed otherwise and it causes them harm, they will be held accountable.
Defining Fraudulent Misrepresentation
Fraudulent misrepresentation is a tort claim under the law that occurs when a defendant makes an intentional or reckless misrepresentation of fact or opinion with the intent to coerce a party into action or inaction based on that misrepresentation.
Putting that in simple terms, fraudulent misrepresentation is a statement made by another party that they knew was untrue or was made carelessly to entice another party into signing a contract. Misrepresentation occurs in a variety of ways. It could be written words, spoken words, gestures, body movements such as a nod, or silence and inaction.
Types of Business Misrepresentation
Fraudulent misrepresentation has an impact on a contract’s legitimacy. False statements do not have to be in a formal written document, they can be made during a discussion, meeting, or pitch. If misrepresentation is shown, the court may rescind the contract, and if a loss has occurred, damages may be granted.
Fraudulent misrepresentation is based on deception, and it occurs when a false representation is made that leads someone to enter into an agreement that they would not have otherwise entered. The claimant must demonstrate that the defendant was in a sound state of mind and that they knew the statement was false or were reckless as to whether it was true or not, which is often demonstrated through inference.
It is also important to show that the claimant would not have entered into the contract if the misrepresentation had not occurred.
Negligent misrepresentation occurs when a statement is made that is later determined to be negligent, and the claimant relies on that statement and suffers a loss as a result. Negligence occurs when the statement is made carelessly or without reasonable grounds to believe it is truthful.
Innocent misrepresentation happens when a false statement is made by someone who honestly believes it is true, and the statement subsequently leads someone to enter into a contract. If the case is proven, the court can order rescission of the contract as a remedy, or, if this remedy is unavailable, damages instead of rescission.
Elements of a Fraudulent Misrepresentation Claim
When examining a claim of fraudulent misrepresentation, the court will evaluate six factors to determine whether misrepresentation occurred. There is not one factor that outweighs another, rather they are taken collectively to determine the best course for the case.
The six factors that are collectively weighed include:
- That a representation was made
- That the representation was false
- Defendant knowingly made the representation and knew that it was false or the defendant hastily or recklessly made the statement without knowing its truth
- The defendant made the statement knowing that the plaintiff would rely on it
- The plaintiff did in fact rely on the statement
- The plaintiff suffered harm as a result of the fraudulent misrepresentation
When evaluating these factors, it is important to have an understanding of what they mean and to define a few terms. Most importantly, parties must understand what a representation is. A representation is an express or inferred statement made by one party to encourage the other party to join into an agreement.
In addition, actual harm is generally shown through a monetary loss or loss of service that resulted from the misrepresentations made to induce the plaintiff to enter into the contact.
Examples of Fraudulent Misrepresentation in Business
One of the most common examples of fraudulent misrepresentation is when one party is negotiating with another party to enter into a contract to buy a business or enter into business with one another, but Party A says things that are not true to Party B in an effort to get Party B to enter into a contract with them to buy or join their business.
Parties entering into a purchase agreement to buy a business can choose to convey misrepresentations in order to hide the deficits of their company to make the business seem stronger than it is. A party will do this in hopes that they can offload their dying business to an unknowing party.
Luckily, in these situations, it is easy for parties to issue an order of discovery to look into a business’s assets or background to see if the misrepresentations were made knowingly or recklessly before finalizing the contract. If a court finds fraudulent misrepresentation in this example, it will generally dissolve the contract and allow the party that was harmed to receive the money back that they paid for the business, among other potential additional damages.
Damages Available in a Fraudulent Misrepresentation Lawsuit
To hold the defendant accountable for a false misrepresentation, the plaintiff must have experienced measurable harm as a result of the misrepresentation. This is critical because the damages granted by the court must be proportionate to the plaintiff’s losses.
As a result, a company that has been the victim of deceptive misrepresentation can claim financial recompense. Aside from monetary damages, culpability may result in contract termination. This is due to the deception rendering the contract voidable rather than void. As a result, the parties can cancel the contract and resume their pre-contractual positions.
In short, this means there are generally two remedies available to a plaintiff: (1) receive monetary compensation for their damages, or (2) terminate the contract, and the parties are no longer responsible for abiding by any of the terms.
Generally, a court will dissolve (or rescind) a contract if the plaintiff was not harmed in a monetary way but seeks relief from the court to not be joined to the other party via contractual obligations.
Contacting a Business Law Attorney
It’s important to choose a lawyer who understands the ins and outs of contract law. The business lawyers of Lovell, Lovell, Isern & Farabough are upstanding members of the Amarillo community who are ready and able to serve you in your time of need. Contact us today to review a contract or discuss a business law claim.