Misrepresentation

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In the legal word, the term “misrepresentation” refers to a statement someone makes an untrue statement in order to encourage someone else to sign a contract. For example, misrepresentation occurs when a person signs a contract, then suffers damages as the result of taking the other person’s advice.

In this case, the wronged party can then sue for misrepresentation, and the court may order compensatory or punitive damages, or both. To explore this concept, consider the following misrepresentation definition.

Definition of Misrepresentation

Noun

  1. A statement, which is untrue, made by someone for the purpose of encouraging another party to enter into a contract.

Origin

1640-1650

What is Misrepresentation?

A misrepresentation is information that is untrue, but which convinces someone to enter into a contract. For a better understanding, consider the following example of misrepresentation:

Tom agrees to a contract with RealMan Magazine Company. The details of the contract state that, if Tom subscribes to the magazine for a year, he will receive a gift worth over $100. After signing the contract, Tom realizes that the gift is not actually free, but the company has instead incorporated the price of the gift into the contract for the magazine subscription.

Had Tom known that beforehand, he would never have subscribed. Now, he is out over $100 because he has both an expensive magazine subscription and a “free” gift that he ultimately ended up paying for anyway.

The above is an example of fraudulent misrepresentation. The company knew they were baiting Tom to pay for the gift over the life of the magazine subscription, but they told Tom the gift was “free” to get him to sign up. Once Tom signed up, however, and read the fine print, he realized the company had taken him for a fool.

Three Types of Misrepresentation

There are three types of misrepresentation in contract law:

  1. Fraudulent Misrepresentation
  2. Negligent Misrepresentation
  3. Innocent Misrepresentation

It is important to understand that all three types of misrepresentation is a misconstrued “fact,” not an opinion. If someone relies on another person’s opinion and suffers damages, that is not misrepresentation. If, however, that person claimed something was true when it wasn’t, that is a misrepresentation.

Fraudulent Misrepresentation

Fraudulent misrepresentation is the worst of the three types. This is because the person who shared the information knew that it was untrue, but he made the claim in order to convince another person to enter into a contract. Someone who falls victim to fraudulent misrepresentation can sue the offender for damages and ask the court for rescission.

Compensatory Damages

Compensatory damages are monies that a court awards to an individual who suffers damages or injury as the result of another person’s wrongful actions. This applies whether the acts are intentional or negligent. These damages are “compensatory” because they compensate for the costs incurred in replacing an item or seeking medical attention.

Courts typically award compensatory damages in cases concerning negligence or illegal conduct engaged in by the other party. In misrepresentation cases, courts can award compensatory damages to make up for the loss of money a person can suffer as the result of believing a lie.

Negligent Misrepresentation

Negligent misrepresentation occurs when a party to a contract does not care enough to verify information before passing it on to those whom he is encouraging to sign a contract. As a result, the other parties suffer loss of some type for believing his misinformation. Had he vetted the information properly, then he would have realized it was bogus before passing it on and damaging others. Victims of negligent misrepresentation can also sue for damages, and ask the court for rescission.

Innocent Misrepresentation

A party makes an innocent misrepresentation when he has no reason to believe that the information he has is untrue. He then shares that information with those who are entering into the contract, and they all suffer damages as a result. The victims here can sue for damages, but they cannot ask the court for rescission. To succeed on a claim of damages, the victims must be able to prove they suffered a loss by believing a misrepresentation.

Misrepresentation Example Involving

An example of misrepresentation, specifically fraudulent misrepresentation, exists in the matter of Nielsen v. Adams (1986). Here, Don Nielsen was looking for a house to purchase for his son in Nebraska in 1984. A house owned by Orlene Adams was one of the houses he considered.

On Nielsen’s inspection of the house, he noticed a sump pump in a closet near the basement stairs. When he asked Adams about it, she told him the sump pump was there to solve a minor issue involving moisture collecting at the bottom of the stairs.

Nielsen asked Adams if she had ever had issues with water in the basement, and she told him “absolutely not.” Nielsen bought the house shortly thereafter, and about one month after moving in, the basement flooded during a spring rain and suffered significant damage.

Lawsuit

Nielsen sued Adams, alleging fraudulent misrepresentation, and asked the court for damages. During the trial, Adams admitted hiding information from Nielsen regarding past basement floods, but she claimed that telling him anything about it would have been irrelevant, as she believed someone had fixed the problem. However, Nielsen knew better because when he removed the paneling, he discovered enough damage to prove that the basement had suffered water issues for years.

The jury ultimately ruled in Adams’ favor, finding that Nielsen was unable to prove that Adams had deliberately lied to him. She stated that she believed the problem no longer existed when she sold the house to Nielsen, and the jury believed her.

Appeal

Nielsen appealed the case to the Supreme Court of Nebraska, and the Court admitted that the trial court should not have instructed the jury to rule in the way that it did. Ultimately, the Court reversed and remanded the case back to the trial court for reconsideration. In the Court’s own words, this decision said:

“Having considered the history of the matter and the various cases within this jurisdiction, we conclude that adding ‘intent to deceive’ as a separate element rather than its being included in the element of knowledge or belief is error. Our earlier holding in Peterson v. Schaberg, (citation omitted), and our recent holding in ServiceMaster Indus. v. J.R.L. Enterprises, (citation omitted), therefore, are correct statements of the law and ones which we should continuously, consistently, and uniformly follow. In doing so we believe we will nevertheless be true to the rules of law regarding the necessary elements of the offense of a tort action for false representation or deceit.

We therefore hold that in order to maintain an action for damages for false representation, the plaintiff must allege and prove by a preponderance of the evidence the following elements: (1) that a representation was made; (2) that the representation was false; (3) that, when made, the representation was known to be false, or made recklessly without knowledge of its truth and as a positive assertion; (4) that it was made with the intention that the plaintiff should rely upon it; (5) that the plaintiff reasonably did so rely; and (6) that he or she suffered damages as a result.

If the defendant can establish by a preponderance of the evidence that the defendant had a reasonable basis to believe that the statement of fact was true, then recovery will be denied. If, on the other hand, the evidence is such that a reasonable person in the position of the defendant could not have honestly believed the statement to be true, recovery may be had. In any event, it need not be shown that the defendant also had a ‘bad’ motive in doing what he or she did. The fact that the defendant deceives, itself, establishes scienter even though the defendant may have been unaware of the deception.”

Related Legal Terms and Issues

  • Compensatory Damages – An award of money in compensation for actual economic loss, property damage, or injury, not including punitive damages.
  • Contract – An agreement between two or more parties in which they make a promise to do or provide something in return for a valuable benefit.
  • Damages – A monetary award in compensation for a financial loss, loss of or damage to personal or real property, or an injury.
  • Fraud – A false representation of fact, whether by words, conduct, or concealment, intended to deceive another.
  • Jury – A group of people sworn to render a verdict in a trial, based on evidence presented.
  • Negligent – Failure to act as, or to exercise the level of care of, another reasonably prudent person would likely to act.
  • Punitive Damages – Money awarded to the injured party above and beyond their actual damages, to punish the wrongdoer for outrageous misconduct in a civil matter.
  • Rescission – The revocation or cancellation of an agreement or contract.