AVOIDING CONTRACTUAL DISPUTES: A GUIDE ON MISREPRESENTATIONS IN A CONTRACT

In the wake of the COVID-19 pandemic, it is important to understand how you may end up in a contract litigation dispute and how to avoid these problems in the future. On October 7, 2020, Walker Law presented a webinar on contract law disputes, specifically to provide a synopsis of contract law cases applicable to COVID-19 and to provide insight on legal terms you may want to consider. Click here to watch the webinar on our Walker Law YouTube Channel.

During the webinar, an overwhelming number of attendees indicated that their main area of concern was misrepresentations in a contract. This article aims to provide you with highlights of the webinar with a focus on misrepresentations.

WHAT IS A MISREPRESENTATION?

A misrepresentation is a false statement made by Party A to Party B that influences Party B’s decision to enter into a contract. There are three types of misrepresentation:

  • innocent misrepresentation (honest mistake);
  • negligent misrepresentation (carelessness); and
  • fraudulent misrepresentation (deceit).

INNOCENT MISREPRESENTATION

Innocent misrepresentation occurs where a party who made the statement reasonably believed that his or her statement was true. In these circumstances, the party who relied on the innocent misrepresentation may be provided a right of rescission, which means that he or she is not required to perform his or her obligations outlined in the contract. The aim of rescission is to return the parties back to their pre-contract positions.

For example, in Keen v. Alterra Developments Ltd. two purchasers contracted with a builder, Alterra Developments, to build their dream home. The purchasers clearly described their dream home as a French country-style home with a one or two step entry. The purchasers were assured by the Sales Manager that the house would look exactly like what was shown in the brochure with a one to two step entry.

During the framing stages of the build, the purchasers were informed that because of grading problems, a four-step entry was required. As a result, the purchasers refused to close on the transaction and requested the return of their deposit. In this case, the Judge agreed with the purchasers and found that the changes constituted a fundamental breach of contract. The purchasers were granted the return of their deposit. This decision was confirmed by the Ontario Court of Appeal.

NEGLIGENT (CARELESS) MISREPRESENTATION

Negligent misrepresentation occurs where a party who made the representation does not take care to ensure that it is true. Where there is negligent misrepresentation, the innocent party may be entitled to compensation for their loss. To determine whether the misrepresentation was a negligent misrepresentation, the following five elements must be shown:

  1. there was a duty of care between the representor and the representee;
  2. the representation was untrue, inaccurate, or misleading;
  3. the representor acted carelessly in making the representation;
  4. the representee relied on the negligent misrepresentation; and,
  5. the representee suffered a loss because he or she relied on the negligent misrepresentation.

In Dean v. Rise ‘N Bake Pastries Inc., the purchasers agreed to buy the Markham Rise N’ Bake store if financial targets were met. During negotiations, the Rise N’ Bake accountant prepared an accounting statement for the purchasers but mistakenly changed the numbers in the financial statements to meet the targets. The top of the accounting statement stated that it was “for discussion purposes only”.

Based on the accounting information the purchasers received, they placed an offer on the store and signed the franchise agreement. The purchasers later discovered and challenged the inaccuracy of the accounting statement that the accountant had prepared. In this case the Judge found that the accountant was so carless in his attitude toward the preparation of the accounting statements, that he acted negligently without taking time to check the accuracy of his figures. This decision was also affirmed by the Ontario Court of Appeal.

FRAUDULENT MISREPRESENTATION

Fraudulent misrepresentation occurs where a party who made the representation did so knowing that the statement was false or was reckless as to whether the statement was false. To determine whether the misrepresentation was fraudulent, the following four elements must be shown:

  1. the representation or statement was made;
  2. which was knowingly false;
  3. which was made with the intention to deceive the plaintiffs; and,
  4. materially induced the representee to act causing them to suffer a loss.

The reason why the Judge in Dean v. Rise N’ Bake found that the accountant’s statement constituted negligent misrepresentation and not fraudulent misrepresentation was because he acted with honest belief that the figures provided to him were accurate and reliable. The accountant in no way intended to deceive the purchasers.

SOLUTIONS GOING FORWARD

Going forward, if you are the person who is relying on the representation or statement, you should always let the person making representation know that you are relying on their statement and state the specific information that you are relying on.

If you are the representor, always let the representee know what assumptions you are making in the representation. For example, whether they are familiar with managing a business, their expertise in a subject area, etc.

If you have any further questions or comments about representations, please feel free to contact us at info@tcwalkerlawyers.com or call us at 647-342-2334.

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