What Is Misrepresentation? Types and How It Works

What Is a Misrepresentation?

A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract.

If the misrepresentation is discovered, the contract can be declared void. Depending on the situation, the adversely impacted party may seek damages. In this type of contract dispute, the party that is accused of making the misrepresentation is the defendant, and the party making the claim is the plaintiff.

How Misrepresentation Works

Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size.

A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller.

In higher stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.

Special Considerations

In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur when a fiduciary fails to disclose material facts of which they have knowledge.

A duty also exists to correct any statements of fact that later become known to be untrue. In this case, the failure to correct a previous false statement would be a misrepresentation.

Types of Misrepresentations

There are three types of misrepresentations.

• Innocent misrepresentation is a false statement of material fact by the defendant, who was unaware at the time of contract signing that the statement was untrue. The remedy in this situation is usually rescission or cancellation of the contract.
• Negligent misrepresentation is a statement that the defendant did not attempt to verify was true before executing a contract. This is a violation of the concept of "reasonable care" that a party must undertake before entering an agreement. The remedy for negligent misrepresentation is contract rescission and possibly damages.
• Fraudulent misrepresentation is a statement that the defendant made knowing it was false or that the defendant made recklessly to induce the other party to enter a contract. The injured party can seek to void the contract and to recover damages from the defendant.

How to Prove Misrepresentation

In order to recover damages due to misrepresentation, there are six legal bars for the plaintiff to overcome. The plaintiff must be able to show that:

1. A representation was made.
2. The representation was false.
3. The defendant knew at the time that the representation was false, or recklessly made the statement without knowledge of its truth.
4. The representation was made with the intention that the plaintiff would rely on it.
5. The plaintiff did rely on the false representation.
6. The plaintiff suffered harm by relying on the false representation.

All six of these requirements must be met in order for a plaintiff to win a case for misrepresentation. A defendant in one of these cases need not disprove all six of these claims.

Example of Misrepresentation

In 2022, Tesla CEO Elon Musk offered to purchase Twitter for $43 billion, an offer which the company at first resisted and then accepted. A few weeks later, and after a substantial fall in Twitter's share price, Musk attempted to back out of the deal, claiming that Twitter had misrepresented the number of human users on the platform.

According to his termination letter, Musk alleged that Twitter had knowingly misrepresented the number of live users on its platform and that he had relied on those false representations when he made his takeover offer. In response, Twitter claimed that Musk's allegations were "factually inaccurate" and that the billionaire was simply trying to back out of the merger that he himself had initiated.

The Bottom Line

Misrepresentation is a legal term for any type of falsehood or omission of fact that affects the behavior of a contractor or other party. Contrary to popular belief, misrepresentation does not just mean deliberate lies—it can also include accidental omissions or reckless statements without certainty of the facts. Misrepresentation can void a contract and in some cases allow the misled party to seek damages.