In a contracts setting, innocent misrepresentation may occur where one party makes a material misrepresentation regarding the contract, but has reasonable grounds to believe that their statement is true, such as Syngenta‘s assertion that the company’s statement that their corn is salable in all major markets for American corn because it did not consider China to be a major market.
Under contracts law, innocent misrepresentation can serve as a valid cause of action. Thus, even if the defendant did not intend to make a misrepresentation, they may still be held liable for the plaintiff’s losses under the innocent misrepresentation theory. Oftentimes, innocent misrepresentation is asserted where it is difficult to prove that the defendant acted intentionally (as in contract fraud).
An example of innocent misrepresentation is where a party sells a computer and markets it as “good as new”, when in fact it may be several years old with many internal defects.
Proving innocent misrepresentation can sometimes be difficult, since it isn’t necessary for the defendant to act intentionally regarding the misrepresentation. Though these may vary slightly by jurisdiction, the elements for proving innocent misrepresentation are:
- The defendant made a representation (statement) of one or more facts that are material to the contract’s subject matter;
- The representation was done in connection with contract formation between the parties;
- The representation was actually false (at the time it was made);
- The plaintiff would not have entered into the agreement if the defendant hadn’t made the representation or statement;
- The plaintiff suffered measurable losses as a result of relying on the representation and entering into the contract; and
- The plaintiff’s loss(es) served to actually benefit the defendant
If each of these elements can’t be proven, it may serve as a defense for the defendant. For example, if the plaintiff didn’t actually suffer any losses as a result of entering into the contract, the defendant can’t be held liable for innocent misrepresentation.
The most common remedy for innocent misrepresentation in a contract claim is contract rescission. This is where the court orders the entire contract to be cancelled, in order to restore the parties to their positions before entering into the agreement. In some cases the parties may be allowed to write a new contract in light of the new facts regarding the subject matter, especially if the parties are still willing to work together.
In some jurisdictions, a court may issue a monetary damages award for the plaintiff, if they decide that it is equitable to do so. This is usually only an option where the plaintiff has suffered great financial losses as a result of the misrepresentation, or where rescission is not an adequate remedy.
Innocent misrepresentation in a contract claim can sometimes lead to complex legal issues between the parties. In general, it’s best to work with an experienced business lawyer if you are facing issues involving innocent misrepresentation. Your attorney can help represent you in court so that you obtain the appropriate remedy. Also, it’s generally wise to hire a lawyer early on during the contract drafting stages, in order to avoid issues like innocent misrepresentation.