What is the effect of misrepresentation on the formation of a contract?

🤔 Contracts • Defenses to Enforcement and Formation K#069

Legal Definition

If one party induces another party to enter into a contract by making a known false assertion of fact, then the contract is voidable by the innocent party if they justifiably relied on the fraudulent misrepresentation. If the misrepresentation was not fraudulent, then the contract is still voidable by the innocent party if they justifiably relied on a material misrepresentation.

Plain English Explanation

Contracts are sacred. The law expects all parties to make good faith efforts not to be jerks or shady. People are generally free to not make any representations about services and products, which would force potential customers to do their own research and come to their own conclusions. That would be pretty difficult, though, since representations and claims are the basis of marketing. For example, if both Bob and Sam sell hamburgers, Bob may be able to sell more hamburgers if he advertises them as "100% Grass Fed Beef," especially if Sam is only selling his as "Hamburger."

When a party makes a representation and knowingly lies about it, then the contract can be voided/cancelled by the innocent party if they reasonably relied on the claim. Any type of lie that is used to induce someone into a contract is sufficient to allow them to void the agreement if they can show they relied on that information to be true. In contrast, if a party makes a representation that is false but they didn't realize it was false, the innocent party may only void the agreement if they can show that they relied on the information to be true and that it is an important aspect of the agreement (i.e., a material misrepresentation).

Hypothetical

Hypo 1: Bob is selling a framed painting. Sam is interested in the painting. Bob tells Sam, "This was painted by Picasso and is framed in a pine wood frame." Bob knows that the painting was not actually painted by Picasso, but he is not aware that the frame is actually made out of oak, not pine. Sam agrees to buy the painting and later finds out the truth about the painter and the wood. Result: Bob lying about the painting being by Picasso is sufficient to allow Sam to void the contract to purchase it. However, Bob being incorrect about the type of cheap wood the frame is made out of is unlikely sufficient to void the contract unless there are additional facts that make it clear the type of wood was important to Sam. If the wood type was important, then it would be a "material misrepresentation," and then would be sufficient to void the contract.

Visual Aids

What is the effect of misrepresentation on the formation of a contract?

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