Misrepresentation

Misrepresentation occurs when one party induces another party to enter into an agreement by making a material pre-contractual statement of fact that is false. A pre-contractual statement is material if a reasonable person would consider the fact relevant to the decision to enter into the contract. It is an inducement if there is a causal connection between the statement of fact and the person’s decision to enter into the contract, although it does not have to be the predominant reason. Figure discusses what constitutes a statement of fact, including the role of silence.

Figure : Misrepresentation

There are three types of misrepresentation, as set out in Figure.

Figure: Types of Misrepresentation

Most misrepresentations occur during the bargaining that precedes formation of a contract, but sometimes a misrepresentation becomes incorporated into the agreement itself as a warranty. The remedy for breach of a warranty is contractual damages, and contractual damages may well be a more effective remedy than rescission or even than damages for deceit or negligence.

Misrepresentation may result in one or more of these consequences:

1. Rescission – the contract is voidable or cancellable at the option of the victim; the aim is to restore the parties to their pre-contract state.

2. Restitution – involves the giving back of benefits already received under the contract, e.g., supplies or funds; it often accompanies rescission.

3. Damages – monetary compensation for losses that a person suffered as a result of relying on a misrepresentation (arise under tort law).

Unfairness During Bargaining

A. Undue Influence

Undue influence refers to improper use by one person of the power he or she has over another person to compel the other person to enter into a certain contract. For the court to find undue influence, the mental domination by one party over the other must be of such a degree as to rob the former of his or her free will. A contract reached through undue influence is voidable at the option of the victim, provided he or she acts promptly upon being freed from the domination.

Undue influence is presumed if there is a special relationship between the parties such as accountant/lawyer/doctor and client; teacher and student; trustee and beneficiary; or parent and child. The "stronger" party may rebut the presumption by showing that no undue influence was exerted. A special relationship is one where there is a history of a relationship of trust and confidence between the parties such that the influenced party believes the stronger party is acting in his or her best interest. The courts have tended to reject allegations of undue influence where the parties have received independent legal advice at the time of the contract.

B. Duress

Duress is the use of actual or threatened violence as a means of coercing a party to enter into a contract. This conduct may well amount to a criminal offence such as extortion or assault. As far as the contract is concerned, the agreement is voidable at the option of the victim. Here again, it is up to the injured party to repudiate the contract promptly once freed of the violence or the threat of that violence.