Contracts govern the business world. Contracts exist between business partners, businesses and clients, businesses and customers and much more.
A fundamental aspect of a sound contract is that both parties must enter it in good faith. Neither party should be lied to. False statements made in the process of negotiating a contract are called misrepresentations. Not all misrepresentations are fraudulent. So, when does a misrepresentation become fraudulent?
Mistakes can happen
Humans are responsible for negotiating contracts and humans are prone to errors. One party may simply get a fact wrong without realizing it, and the contract may subsequently be entered into. This is an example of an innocent misrepresentation. While innocent representations are not fraudulent, there are still remedies available in law. Usually, innocent misrepresentation is a valid reason to rescind the contract.
When negligence occurs
There is a difference between making a mistake and acting negligently. If a party makes a promise during contract negotiations that they know is unlikely to be true, this is a negligent misrepresentation. Negligent misrepresentation is a valid reason to cancel a contract and the wronged party may also be entitled to damages.
Fraudulent misrepresentation
A misrepresentation is fraudulent when one party intentionally deceives the other. In other words, they blatantly say something untrue to entice the other party into the contract. When this happens, the wronged party can cancel the contract and sue for damages.
Fraudulent misrepresentation involves the following elements:
- A false representation was made
- One party knew the representation was false
- One party relied on that false representation
- Damage was suffered as a result of the misrepresentation
If your business has suffered as a result of a misrepresentation, you have options. Seeking legal guidance will give you a clearer idea of what to do.