DEFINITION of Misrepresentation
A misrepresentation is a false statement of 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 and, depending on the situation, the adversely impacted party may seek damages. In such a contract dispute, the party that made the misrepresentation becomes the defendant and the aggrieved party is the plaintiff.
BREAKING DOWN Misrepresentation
Misrepresentation applies only to statements of fact, not to opinions or predictions. 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 of the contract. The second type is negligent misrepresentation, 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 a negligent misrepresentation is contract rescission and possibly damages. The third type is fraudulent misrepresentation, statement that the defendant made knowing it was false or that the defendant made recklessly in order to induce the other party to enter a contract. The injured party will seek to void to contract and recover damages from the defendant.
In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur where a fiduciary fails to disclose material facts of which he or she has knowledge. A duty also exists to correct any statements of fact which later become known to be untrue. In this case, failure to correct a previous false statement would be misrepresentation.
Misrepresentation is a basis for contract breach for 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, he can file 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, or grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.