23. Contracts: Misrepresentation

>> We began investigation
into how courts regulate

improper bargaining tactics by
looking at the doctrine of duress.

We will now consider two additional
doctrines related to improper bargaining.

This module will consider the
doctrine of misrepresentation,

instances in which one party makes

factually incorrect statements that

induced the other to
enter into a contract.

In the next module,

we will consider the
doctrine of non-disclosure,

which polices instances in which
one party conceals or fails to

disclose facts and thereby induces the
other party to enter into a contract.

Like the doctrine of duress,

a person's agreeing to enter into a
bargain based on misrepresented facts

is an instance in which that person's
ascent has not been voluntarily given.

Sometimes, one party will,

despite knowing the truth,

flat out lie about facts to induce the
other party to enter into a contract.

In such instances, not only does

contract law protect the wronged
party from enforcement of a contract,

tort law and even criminal
law may on occasion

also penalize the wrongdoer
for such misrepresentation.

We will later see that such instances of

misrepresentation are described as
fraudulent in Section 162 Subsection 1.

On other occasions, however,

a party may misrepresent
that while genuinely,

though erroneously, believing
his statement to be true.

In such instances, the misrepresentation
is either negligent or innocent.

Even in these cases,

contract law will, on occasion,

allow the party wrongly
induced into entering

a contract to avoid
enforcement of that contract.

The concept of
misrepresentation is defined in

Section 159 of the restatement

as an assertion that is not
in accord with the facts.

It applies to both intentional as well as

to negligent or innocent
misrepresentation.

In dealing with misrepresentations,

one must be careful to distinguish between

a parties making an affirmative
assertion of fact on

the one hand and a parties merely

expressing an opinion or making
a prediction on the other.

Consider the following.

A man goes into a clothing
store to buy a suit.

The salesperson says, this
suit is 100 percent wool.

In fact, it's made entirely of
polyester and the salesman knows it.

This is a clear instance
of a misrepresentation

and assertion that is not
in accord with the facts.

Contrast that with the salesman saying,

I think that suit looks very good on you.

It makes you look quite debonair.

This is clearly the salesmen
expressing his opinion.

Even if the salesman is
exaggerating or lying,

it is unlikely that the
customer could rescind

the sale when a friend states that
the suit makes them look fat.

Similarly, if the salesman says,

I'll bet you'll get a
lot of dates when you

wear that suit to your
favorite singles bar.

At most, it's the salesman's prediction
of what may happen in the future,

not an actionable assertion of fact.

Subsection 1 of Section 164 of

the restatement tells us that if
a party is sent to a contract,

is induced by either a fraudulent
or a material misrepresentation,

then the wronged party can
treat the contract as voidable.

The section mentions two
types of misrepresentations,

fraudulent misrepresentations
and material misrepresentations.

To understand this distinction,

we turn to Section 162.

Subsection 1 of Section 162

tells us that a misrepresentation
is fraudulent when

the person making the
misrepresentation intends

it to induce another person
to assent to an agreement,

and the misrepresenter
knows or believes that

the statement he is making is
false and or without basis.

Reading Sections 162
Subsection 1 and 164 together,

we can conclude that,

if one party makes a fraudulent
misrepresentation to the other party,

the wronged party can avoid enforcement
of the contract if it wishes to do so.

As mentioned earlier, not all
misrepresentations are fraudulent.

Some false or misleading assertions
may be made carelessly or innocently.

That is, if the maker believes
his statement to be true.

In such instances, a party
seeking to avoid a contract

must prove that the
misrepresentation is material.

Subsection 2 of Section 162 states that

a misrepresentation is material
if it is likely to induce

the other party to ascent
to a contract or if

the maker of the statement
knows that it would be

likely to induce the
other party to ascent.

Reading Sections 162
Subsection 2 and 164 together,

we learned that with respect to careless
or innocent misrepresentations,

the wronged party will be able to
avoid enforcement of a contract,

only if the misrepresentation
was material.

Consider the following.

A seller is selling a
used tractor to a buyer.

In the negotiations, the seller states
that the tractor is 10 years old.

In fact, his memory is faulty
and it's actually 11 years old.

In such a case,

it is unlikely that the court would
set aside the sale when the buyer

discovers that the tractor
is actually one year

older than the seller
represented it to be.

The buyer's decision to purchase or

not to purchase the
tractor would probably not

be swayed by knowledge
of the tractors being

one year older than
represented by the seller.