Misrepresentation in general is a legal term that means "a false statement of fact that has the effect of inducing someone into a contract." It originates from English common law, but has been adopted as a legal principle in the United States. It is a statement that is either untrue, or highly misleading (as opposed to a statement of opinion). For example, telling someone a stereo is "practically new" so that they buy it, when it is in fact 5 years old and heavily used.
Innocent misrepresentation is one of the three recognized varieties of misrepresentations in contract law. Essentially, it is a misrepresentation made by someone who had reasonable grounds for believing that his false statement was true. So in the above example, if the seller didn’t know the stereo was actually old, he would only be liable for an innocent misrepresentation.
In the real world, however, it is often the case that because the other two varieties of misrepresentation (negligent and fraudulent) are much more difficult to prove, often this is the best course of action.
It will depend on the law of the state where the misrepresentation occurred. However, there are five basic elements that must be satisfied to prove innocent misrepresentation:
- Someone must makes a false representation that must be false at the time of the transaction, and remain false.
- The misrepresentation is "material to the transaction," which means it must be about an important element of the transaction at hand. For example, if someone is selling a car and they say that it has 15,000 miles on it when it actually has 15,124 miles, the misrepresentation would like not be material. By contrast, 150,000 would be.
- The other party must substantially rely on the misrepresentation, meaning if the other party knew, they would not go through with the transaction. If the buyer, for instance, would have bought the item regardless of what was said about it, the misrepresentation may not count. They must substantially rely on the falsehood.
- The lie must also proximately cause the other party to suffer damages, or in other words, the buyer must be actually harmed by the final transaction in order to sue, such as economic damages suffered by the American corn farmers who are unable to sell corn grown from seeds that they purchased from Syngenta.
In addition to those four elements, which are necessary for negligent and fraudulent misrepresentation as well, there is a fifth element that is unique to innocent misrepresentation.
- The loss of the one party must benefit the other. This is an odd and very vague requirement, but one that the courts have held up nonetheless. Essentially, if the misrepresentation made does not benefit the person who made it, or hurts both parties to the contract, then the courts will not consider it a case of misrepresentation.
In order to become a material term of the contract, a misrepresentation must meet certain criteria. Factors considered in whether a misrepresentation amounts to a contractual term include:
- Expertise of one party v. expertise of the other party to the contract;
- The reliance one party has shown on the misrepresented statement;
- Customary norms of the trade in question;
- Ressurances given by the speaker of the statement; and
- The statement forms the basis of a contract.
Misrepresentations are civil offenses, meaning they can only be heard in civil court. The criminal equivalent, which requires a degree of intent, is called "false pretenses." The general remedy in civil court for all types of misrepresentations is rescission.
This means the court will act like the transaction or contract never existed, and everyone goes back to the way they were. Although money damages are possible, they are less likely in a case of innocent misrepresentation, unless rescission is not available as a remedy (perhaps because one party has already substantially carried out their part of the contract).
Example: Joe sell someone a stereo for $50 telling them that it is fully functional, which Joe thinks is true, and it turns out to be broken. The deal is rescinded; the buyer returns the stereo and Joe returns the money.
Dealing with any sort of misrepresentation is a difficult process, precisely because it is very difficult to ascertain whether someone was making an "innocent" mistake, or really attempting to defraud you out of your money.
If you have been the victim of a misrepresentation, a business lawyer near you will be essential in pursuing the case. Each state has its own laws regarding the topic, so a good attorney will know how best to proceed and can explain what kind of remedies you can expect.