Defining Misrepresentation

Defining Misrepresentation

A misrepresentation is "an assertion that is not in accord with the facts." Restatement (Second) of Contracts § 159 supplies that definition, and it is the first step of the analysis.¹ The step asks one question. Set the assertion beside the facts as they stood, and see whether the two match. If they do not, a misrepresentation exists. Whether it lets the recipient out of the contract is for the later steps to decide: the maker's fault, the importance of the misstated fact, and the recipient's own conduct. The definition itself says nothing about why the assertion was wrong, who knew it was wrong, or whether anyone meant to mislead.

Because the definition is silent on the speaker's state of mind, it reaches the deliberate lie, the careless error, and the honest mistake alike. Halpert v. Rosenthal states the consequence. Where one party induces another to contract by a material misrepresentation, the other may rescind, and it does not matter whether the representation was "innocent" or fraudulent.² The court found that rule supported by the overwhelming weight of decision and textual authority.³

Fault does its work later, and the more culpable the maker, the less a court demands of the recipient. A deliberate falsehood invites leniency on the remaining prerequisites, including a more subjective view of inducement, because the maker's accountability for purposeful deceit is likely to outweigh the victim's gullibility or carelessness. A negligent or innocent misrepresentation is less reprehensible and may not entirely defeat the maker's reliance interest.⁴

The law sorts misrepresentations into three categories by the speaker's state of mind, and each carries different rules.⁵

• Fraudulent. The maker knows the assertion is false, which makes it a deliberate lie, and intends to induce the other party's agreement.
• Negligent. The maker did not know the assertion was untrue but violated a duty of reasonable care by failing to check the facts on which it rests.
• Innocent. The maker was without fault and was simply wrong.

Misrepresentation and fraud are therefore not synonyms. Fraud is the narrower term, because it requires a material misrepresentation and usually also scienter, an intent to deceive and to induce reliance by the other party.⁶ Every fraudulent misrepresentation is a misrepresentation, but many misrepresentations are not fraudulent. The gap does not end the inquiry. The comment to § 159 explains that a misrepresentation that is not fraudulent has no consequences unless it is material.⁷

An exam stem that stresses the speaker's sincerity invites the conclusion that no misrepresentation occurred, and at this step that conclusion is wrong. In the standard illustration, a seller tells a buyer that the house's foundation has "no problems," and the seller knows nothing of the hidden structural flaws.⁸ The assertion is untrue, so a misrepresentation exists despite the seller's good faith. Whether the buyer can avoid the sale depends on the later steps. The flaws would likely have mattered to a reasonable buyer, which satisfies materiality. The buyer would lose only if reliance proved unjustified, as it would if an engineer hired by the buyer had negligently missed the flaws.

Compare the seller in the illustration. The words are the same in both cases, and so is the seller's sincerity. The difference is the foundation as it stood at the moment the definition looks to, the time of contracting.⁹ A later failure leaves an earlier accurate assertion accurate. The timing rule has a boundary, however. Suppose the seller learned between signing and closing that the soil was shifting and said nothing. The Restatement treats nondisclosure as an assertion where the person knows that disclosure is necessary to prevent a previous assertion from being a misrepresentation.¹⁰ The sections on concealment and nondisclosure develop that duty.

An assertion need not be spoken. Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.¹¹ A seller who paints over water stains to hide a leaking roof has asserted by conduct that the roof is sound. Words are read in light of their whole setting as well. An ambiguous statement is a misrepresentation if its false meaning is the one the listener reasonably understood, and a statement that is literally true but phrased to mislead under the circumstances may be actionable.¹²

The definition concerns existing fact. A statement of opinion or a prediction about the future does not suffice, so a salesperson's claim that a Range Rover is "awesome" is not a statement of fact. A statement about what the speaker intends to do is a misrepresentation only if the speaker in fact lacked that intent at the time.¹³ That is a first approximation, and the sections on fact, opinion, and law and on statements of intention refine it.