Misrepresentation & Nondisclosure

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 What are Misrepresentation and Non-disclosure?

Misrepresentation and non-disclosure are common bases for many tort law cases. Although the two are distinct, misrepresentation often implies negligence on the part of the defendant.

What is Misrepresentation?

Misrepresentation may be fraudulent or negligent. Fraudulent misrepresentation occurs when a party purposely makes a false statement to trick another party into making an agreement.

Negligent misrepresentation occurs when an individual unintentionally presents a false fact which induces another party into entering into a contract. This means that the party did not directly lie but, instead, made a statement which they were not aware was false at the time.

What is Non-disclosure?

In many cases, when an individual considers non-disclosure, they automatically think of a contract or the portion of a contract where an individual is prohibited from sharing confidential information. This is distinct from non-disclosure.

The legal term non-disclosure refers to one party failing to tell another party a fact regarding a contract or circumstances surrounding an issue.

How are Misrepresentation and Non-disclosure Connected?

Misrepresentation and non-disclosure usually refer to information or a fact that is withheld or misrepresented by a party and implies negligence on the part of that party. For example, an act or service which is provided by one of the parties may be considered unfulfilled if that party misrepresented facts or failed to disclose details which would have prevented performance of the contract.

For example, suppose a homeowner is attempting to sell their home. There is a buyer who is willing to pay the full asking price.

Suppose that the homeowner indirectly represents to the buyer that the roof is like new when it is really over 10 years and leaking. This example is a misrepresentation of a fact about the house.
The buyer, if they discovered the truth after they purchased the home, could seek a remedy such as:

  • Rescinding the purchase contract;
  • Having the defendant pay the cost of the repair; or
  • Having the defendant pay the difference between the diminished value and purchase price.

What is Innocent Misrepresentation in a Contracts Claim?

In the context of contracts, innocent misrepresentation can occur if one party makes a material misrepresentation regarding a contract but has reasonable grounds to believe that their statement is true.

Pursuant to contracts law, even if a defendant did not intend to make a misrepresentation, they can still be held liable for a plaintiff’s losses under the innocent misrepresentation theory. In many cases, innocent misrepresentation is asserted where it is difficult to prove that the defendant acted intentionally, for example, as in contract fraud.

What are Non-disclosure Violations in a Contract Claim?

A non-disclosure violation in a contract claim refers to the failure of a party to a contract to disclose a fact that has bearing on the contract to the other party. It is important to note that there is no general duty for parties to disclose facts to the other party, even if the facts relate to the subject of the transaction.

This is because it is considered unfavorable to impose a duty on either party to disclose information. Instead, each party is expected to take proactive steps to find out as much as they can regarding a contract transaction prior to entering into it.

This is referred to as entering into a contract with eyes open, or being as informed as possible. There are, however, several exceptions.

A party to a contract may be held liable for failing to disclose certain types of information in some situations. These are referred to as non-disclosure violations.

This concept is different from non-disclosure agreements, which are language included in contracts that prohibit the parties from disclosing confidential information. In many states, courts will likely hold that, in the course of negotiating a contract, there is a duty for one party who is aware of a defect or a harmful condition to disclose this information to the other party under the following circumstances:

  • The defect or harmful condition is clearly unknown to the other party; and
  • The defect or harmful condition is of a type that the other party would not be likely to discover or inquire about.

Failing to disclose material which is relevant and important may rise to the level of fraud by non-disclosure in certain cases. To prove fraud by non-disclosure, a plaintiff must prove:

  • The defendant failed to disclose or concealed certain facts to the plaintiff;
  • The defendant had a duty to disclose the facts to the plaintiff. For example, if the defendant was a fiduciary or had created a false impression;
  • The undisclosed facts were material, or, in other words, were relevant and important to the subject of the contract;
  • The defendant knew that the:
    • plaintiff was ignorant of the facts,
    • plaintiff did not have an equal opportunity to discover the facts;
  • The defendant was intentionally silent but had a duty to inform;
  • The defendant intended to induce the plaintiff to refrain from acting or to take an action by failing to disclose the fact or facts;
  • The plaintiff relied on the defendant’s non-disclosure; and
  • The plaintiff, as a result of acting without knowledge of the undisclosed fact or facts, suffered a loss or injury.

What are the Consequences of Non-disclosure Violations in a Contract Claim?

A non-disclosure violation in a contract claim may lead to legal consequences for the party that failed to disclose facts related to the subject of the contract. They may be required to pay damages for losses which resulted from the non-disclosure.

In certain cases, especially those involving fraud, the contract may be rescinded, or treated as if it never occurred. The injured party, however, may still have a right to out-of-pocket damages.

A plaintiff who successfully proves fraud by non-disclosure may be able to recover money damages for the following:

  • Out-of-pocket damages: The difference between the amount that was actually paid for the item of value that was the subject of the contract and the actual value of the item that was received;
  • Benefit-of-the-bargain damages: Damages that are equal to what the plaintiff would have received, including profits, if the contract had been fully performed as promised;
  • Damages for injury to personal property or personal injury: These may be awarded if the non-disclosure resulted in damage to property or injury to people; and
  • Exemplary damages: Also referred to as punitive damages. These damages are intended to punish a defendant for egregious or outrageous behavior.

The exact amount and type of damages a party can recover will depend upon the laws in the jurisdiction or state where the case is located.

Should I Contact a Lawyer about Misrepresentation and Non-disclosure Contract Issues?

Misrepresentation and non-disclosure claims may be complex. If you have discovered that another party in your contract misrepresented information or facts, it may be helpful to consult with a contract lawyer.

Your lawyer can review your case, advise you of the laws in your state, and the possible remedies which may be available to you. Having an attorney present your case in court will provide you with the best chance at recovery for your losses related to the contract.

If you have been accused of misrepresentation or non-disclosure related to a contract, it may be helpful to have an attorney assisting with your defense. Your attorney can advise you of the laws in your state, represent you in court, and help ensure your rights are protected.
In addition, your lawyer can assist during negotiations, if it is possible for the parties to come to an agreement regarding the amount of damages which will be paid.

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