In corporate law, the act an individual or party of intentionally tricking another individual or party is termed as fraudulent misrepresentation. This Buzzle post will explain the concept of fraudulent misrepresentation, including its elements, remedies, and examples.
The tort of deceit is a commonly-used remedy when you have been a victim of fraudulent misrepresentation. A claim under the tort of deceit needs to fulfill the elements of intention, false representation, and loss for the victim.
To understand any legal concept, you need to understand some basic terms. In this context, remember that a representation is a statement that is made by the parties in question. It is something that helps gain an insight into the contract, but it is not something that is defined as a term in the contract. On the contrary, the legal definition of misrepresentation states, “a false statement of facts that has the effect of inducing someone into a contract”. It means that you have made a false statement about a fact in order to complete the transaction; it is a statement that is not consistent with what is true.
In this article, you will learn about fraudulent misrepresentation, which occurs when one party betrays the other on purpose. Similar to perjury, it may be difficult to prove whether a party has intentionally committed this offense.
What is Fraudulent Misrepresentation?
- There are three types of misrepresentation―innocent, negligent, and fraudulent.
- In case the false statement was made without any knowledge of the same or with no bad intent, it qualifies for innocent misrepresentation. If the statement was made without paying attention or in negligence/carelessness, it qualifies for negligent misrepresentation.
- Fraudulent misrepresentation, on the other hand, is when the untrue statement is made intentionally, to trick the other party.
- Thus, you will be accused of a fraudulent misrepresentation if you have, on purpose, and with full knowledge and consciousness, lied about a transaction for your own benefit by betraying the other party. It is most serious offense of all three, and qualifies for penalties.
The elements of fraudulent misrepresentation are given below.
This is the essence of fraudulent misrepresentation. Someone has to make a false representation. That is to say, someone has to misrepresent the fact, and believe that it is false.
Involvement of the Other Party
The other party has to be involved in the fraud. That means, they have to rely on the lie, they have to be affected due to the lie. For example, if the seller lies about a product but you do not buy it, you cannot blame the seller for lying. It’s none of your business to take any action against him, when you haven’t been the affected party at all. You can take an action if and only if you have believed his lie and have purchased the item.
Damages to the Other Party
A case for fraudulent misrepresentation can be filed if and only if the other party has suffered damages. The final transaction must actually cause some harm to the other party.
Relation of the Misrepresentation to the Transaction
Whatever the misrepresentation, it must be related to the transaction only. If the fraudulent party lies about something that has no relation to the deal, it cannot qualify as fraudulent transaction.
The intention of the betraying party should be clear, i.e., to trick the other party. The untruth should be told with an intention of affecting the transaction.
The Untruth that Led to the Fraud
The misrepresentation must be made with complete awareness that it is false, or at least, with a careless assumption that it is false, or with complete disregard as to whether it is true or not. This means that either you know that you are lying, in full consciousness, or you have no reason to believe that it is the truth.
- In legal terms, a ‘rescission’ is defined as a cancellation of contract.
- The contract is then considered as null and void, as if never existed.
- This step is generally undertaken by insurance companies, that is to say, the company can terminate your policy if you have intentionally listed wrong information about yourself.
- In case of a fraudulent misrepresentation, a rescission ensures that the contract is completely terminated, i.e., things are brought back to how they were in the beginning of the contract.
- All the parties are in the situation they were prior to signing the contract, and any money or any benefit received by the fraudulent party must be returned to the other party.
- Let’s say, you have purchased an expensive dress for an event, wherein your boss requires you to make a good impression on his clients/guests.
- After being assured by the store owner that the dress is made of expensive fabric and will last long, you have bought the same.
- However, he has conveniently and intentionally lied about this so that you make your purchase. At the event, the dress gets stuck on a chair and gets ripped off completely, and the event manager fires you for embarrassing him.
- In this case, the court will order that the store owner compensate you for the loss of your job, since he very well was aware that the dress you purchased was of a poor quality. Even if he didn’t, he will still have to pay for the damages due to fraudulent misrepresentation.
- Let us suppose you have been asked by the owner of a company to work for him, and that he would pay you a stipulated amount in return.
- You go there to work trusting your boss that he will pay you the promised amount. However, you discover that he pays you lesser than the stated amount.
- This is a case of fraudulent misrepresentation, and you can sue the owner for fraudulent inducement of employment. This example fulfills all the elements of the fraudulent misrepresentation tort.
- Let’s assume you have purchased a house through a real estate agent/owner after having seen several houses.
- You have then asked him if the house has a leakage problem. Now, the owner probably knows that the house does have a leakage problem, yet, he does not inform you of the same, since he wants to close the deal as soon as possible.
- After signing the contract and shifting to the house, you notice that it has a leakage issue. This is a case of fraudulent misrepresentation.
- You can now void the contract and get back your money since the owner knew about the problem, yet, he did not inform you, with the intent of tricking you into buying a house with a problem.
- The owner has made a fraudulent misrepresentation that you have relied on, and the court will void the contract.
- Another scenario would be when you inquire about the leakage, and the owner genuinely does not know that the house has one. Therefore, he tells you that there is no problem.
- After signing the contract, you discover the problem, and despite one of the elements of fraudulent misrepresentation not being satisfied, you can still void the contract.
- Assume that you have purchased an electronic gadget with a 2-year warranty. Also, you are assured by the salesman that the components of the gadget are new.
- However, in reality, the components are 2 years old and fall apart when you begin to use the gadget.
- In this case, the salesman might have known about the defective components, but he has deliberately chosen to refrain from mentioning about them, because he wants you to purchase it. When you find that you have been a victim of fraudulent misrepresentation, you can sue the seller and recover damages.
- Even if the seller was unaware of the defective piece, in this case, he would still have to pay for the loss (if any) sustained by you.
Not every kind of fraud classifies as a fraudulent misrepresentation. It might very well be possible that your business has been wronged by another party, but it may not have been done with a purpose; it may not always qualify for a fraudulent misrepresentation. This is rather difficult to identify. It is essential that both parties complete all the formalities with the help of a good corporate attorney.