Concept
Material Misrepresentation
Fraud, misrepresentation, and nondisclosure
Material Misrepresentation
Materiality is the route to avoidance that does not depend on what the maker was thinking. Under Restatement (Second) of Contracts § 162(2), a misrepresentation is material if it would be likely to induce a reasonable person to manifest assent, or if the maker knows that it would be likely to induce the recipient to do so.1 The preceding section ended with a claimant who cannot show that the maker lied, doubted, or lacked a basis. For that claimant, materiality is the remaining option.
The two prongs measure importance differently. The first compares the misstated fact with what a reasonable person would weigh. The second compares it with what this recipient weighed, but only when the maker knew about it. Comment c adds a point about vantage: the materiality of a misrepresentation is determined from the maker’s viewpoint, while the justification of reliance, taken up in a later section, is determined from the recipient’s.2
Why the law needs a second route
A maker who tells a known lie to induce assent has already shown that the fact mattered, since the lie was told to move the listener. The fraud route therefore asks nothing more about the fact’s weight: where the misrepresentation is intentional, avoidance is available even if the fact represented is immaterial.3 The two routes follow different standards. For an unintentional misrepresentation the standard is objective and the focus is on materiality; for an intentional one the standard is subjective and materiality is irrelevant.4
An honest or careless maker leaves no such evidence in conduct, so the law looks for the importance in the fact itself. It asks for more as the maker’s fault shrinks: the less culpable the maker, the stronger the showing must be of the misrepresentation’s importance and of the victim’s reasonable reliance.5 Once that showing is made, a material misrepresentation supports avoidance even if it was only negligent or innocent.6
Courts have reached the same result by contract reasoning. In contrast to a tort action, one court observed, a suit to rescind an agreement induced by fraud sounds in contract.7 The pivotal question in that suit was whether an innocent misrepresentation of a material fact warrants rescission, and the court answered that it does.8 Another court gave the fairness reason: it would be unjust and inequitable to let a person who has made false representations, even innocently, keep the fruits of a bargain induced by them.9
A threshold point: materiality needs a present fact
Materiality measures how much a misstated fact matters, so it presupposes a misstated fact. A prediction about what someone else will do later is not a statement of present fact, and no showing of importance repairs that. In one case, an intermediary arranged the sale of a painting to an undisclosed buyer and assured the seller that the buyer was a very private individual and that the painting would “disappear” into the buyer’s collection. A few years later the buyer put the painting up at public auction, and the seller sued the intermediary for breach of contract and fraud.10 She lost on both counts. On the fraud claim the court held the assurance a nonactionable prediction, because it was not based on present facts and only anticipated the future action of a third party over whom the intermediary had no control.11 A contrary conclusion is imaginable if the intermediary had no factual basis for predicting that the buyer would not resell, which ties this threshold to the lack-of-basis rule in the preceding section.12
The first prong: the reasonable person
The first prong asks whether a reasonable person would give weight to the misstated fact in deciding whether to enter the transaction. The Restatement’s tort comment applies the same test.13 It adds that the requirement matters most when a party lies about a matter collateral to the immediate subject of the bargain, and that it excludes puffery, meaning a seller’s broad and predictably exaggerated statements about quality, as distinct from particular claims of fact.14
The failing side shows the line most clearly. An agent selling land for a principal the buyer never meets says the principal is left-handed. The agent honestly believes it, it is false, and nothing else the agent says is untrue. No reasonable buyer weighs a principal’s handedness in deciding whether to buy land, so the first prong fails. The second prong gives the buyer nothing, because the agent had no reason to think this buyer would care.
The passing side is just as clear. A homeowner who tells a buyer that the foundation has “no problems,” unaware of hidden structural flaws, has likely made a material misrepresentation. A reasonable buyer would give heavy weight to the soundness of the foundation, and the owner’s innocence does not change that. Whether the buyer’s reliance was reasonable is a separate question, and it would fail if the buyer had hired a structural engineer who negligently missed the problem.15
A statement about the very feature a buyer is shopping for is the kind the first prong is built to catch. In Williams v. Rank & Son Buick, Inc., 44 Wis.2d 239, 170 N.W.2d 807 (1969), the plaintiff testified that he was looking for an air-conditioned car, that the salesman told him the car was air-conditioned, and that the car had been so described in an advertisement on which he relied.16
The second prong: the susceptible recipient
A reasonable-person yardstick can miss a recipient whose priorities are unusual. Comment c explains that a recipient may regard as important a personal consideration that would not be expected to affect others in his situation. If the maker is aware of this, the misrepresentation may be material even though it would not be expected to induce a reasonable person to contract, because one who preys upon another’s known idiosyncrasies cannot complain if the contract is held voidable.17
The knowledge requirement is what makes the prong fair. The first prong protects a maker from sensitivities the maker could not foresee, and the second withdraws that protection once the maker has learned what matters to this listener. In the usual case, a salesperson’s statement that a car was previously owned by a federal judge, when a law professor owned it, is not sufficiently material.18 Change the recipient and the result can change. If the maker knows that the recipient believes in astrology and falsely represents that the signs strongly favor the deal, the representation may be deemed material, though it would not be as to the average person.19 That source frames its example around a fraudulent maker, but the Restatement’s text of the second prong speaks only of what the maker knows.20
Who counts as “the recipient” is a question the later discussion of non-party misrepresentation takes up. For now, note that one court refused to let lack of privity defeat a fraud claim by plaintiffs who belonged to a class of persons the defendant intended to reach.21
The two scenes show that the second prong turns on what the maker knew about the recipient, and the maker’s sincerity about the underlying fact has no bearing on it. When a question reveals a recipient’s private concern, ask whether the maker learned of it before the contract was made.
Fraud and materiality are separate questions
Fraud looks at the maker’s mind. The maker intends the assertion to induce assent22 and, as the preceding section showed, knows it false or lacks the confidence or basis it conveys. Materiality looks at the fact: would it likely move a reasonable person, or a recipient the maker knew to be susceptible? Section 164(1) joins the two with the word either, so a claimant who proves fraud has one route to avoidance and a claimant who proves only materiality has another.23 The tort of fraud is stricter on this point, because the Restatement’s tort comment says liability attaches only to material misrepresentations.24 Do not carry that tort rule over to avoidance. An answer should state the contract position: materiality is required when the misrepresentation is not fraudulent, and it is not an element when the misrepresentation is.
What the recipient gets
Avoidance does not depend on a successful tort claim. A misrepresentation or nondisclosure may render a transaction voidable even if no tort action for fraud would lie, though the converse is not true: whenever a party has fraudulently induced another to enter a transaction under circumstances giving the right to sue for deceit, the deceived party may instead elect to avoid and claim restitution.25 Tort relief is the harder route for a non-fraudulent misrepresentation. A party may rescind for a material misrepresentation made without fraudulent intent (often called scienter), but the law may not recognize a tort action, or may limit the remedy, in that case. Compare Restatement (Second) of Torts § 549 (damages for fraudulent misrepresentation) with §§ 552, 552B, and 552C (remedy and damages for negligent and innocent misrepresentation).26
A third path opens if the contract itself contains a warranty term. A seller who honestly but wrongly says a house is free of termites may have misrepresented a material fact, which supports avoidance and restitution. Or the buyer may claim breach of a warranty term in the contract and recover expectation damages, aimed at putting the buyer where the buyer would have been had the property been as represented.27 The writing matters here too. The parol evidence rule’s exception for fraud does not reach a nonfraudulent misrepresentation when the writing is integrated, or when the term is inconsistent with a partially integrated writing.28 A non-fraudulent misrepresentation that is not material does not make the contract voidable under these rules, although the recipient may still claim relief under other rules, such as breach of warranty.29
Material importance settles only part of the claim. Section 164(1) also requires that the misrepresentation induced the recipient’s assent and that the recipient was justified in relying on it.30 The next section takes up inducement.