What Is Misrepresentation?
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What Is Misrepresentation?

A misleading statement of a substantial fact made by one party that influences the other party’s decision to accept a contract is called a misrepresentation. Should the falsehood be uncovered, the agreement may be deemed null and void. The party that was negatively harmed may demand damages, depending on the circumstances.

How False Information Is Spread

Opinions and projections are not considered forms of misrepresentation; only assertions of fact are. In any transaction, regardless of magnitude, misrepresentation is a foundation for contract breach.

In a private transaction, an automobile seller may give false information to a potential buyer about the car’s mileage, leading the buyer to make the purchase. The buyer has the right to sue the vendor if they discover afterwards that the car had significantly more wear and tear than was stated.

A Material Misrepresentation: What Is It?

A promise, a misleading statement, or the omission of information that, if the complete truth were known, would lead a third person to behave differently constitutes a significant misrepresentation. Giving a false impression of one’s income on a mortgage application or leaving out important risk variables on an insurance application are two examples of substantial misrepresentations.

What Does Insurance Misrepresentation Mean?

A falsehood or concealing of facts that, if discovered by the insurer, renders an insurance contract worthless is known as a misrepresentation in the insurance industry. For instance, in the event that a homeowner installs a pool but falsely reports to their insurer that they do not, the insurer may be entitled to cancel the policy upon discovering the misrepresentation.

What Does It Mean to Misrepresent in Real Estate?

A fib or careless untruth that lowers a home’s or property’s market value is referred to as misrepresentation in the real estate industry. Misrepresenting a property’s square footage is a typical example of this. A buyer can frequently file a lawsuit for misrepresentation even after a deal is finalized because sales prices are frequently dependent on square footage.

What Effects Does Misrepresentation Have on the Law?

Depending on the nature and extent of the deception, different legal ramifications apply. In the event that the deception is substantial, the innocent party might be able to terminate the agreement. Damages may be granted in order to make up for any damages incurred by the innocent party. Punitive damages may be granted in fraudulent misrepresentation proceedings in order to penalize the guilty party.

What Actions Can Businesses Take to Stop Deception?

Businesses may avoid deception by acting proactively. They have the power to set and uphold moral principles that uphold decency, honor, and openness. They can establish strong internal controls and offer staff education and training. In addition to performing due diligence and validating information before to formalizing or conveying it, companies can carry out independent evaluations to confirm the veracity of the information they are reporting.

A misrepresentation may, under higher stakes circumstances, be deemed an event of default by a lender, for example, in a credit arrangement. Meanwhile, a large break fee may be required if misrepresentations are used as justification for ending a mergers and acquisitions (M&A) agreement.

Particular Points to Remember

In some circumstances, misrepresentation by omission may occur, such as when a fiduciary relationship is involved. In other words, a fiduciary may commit misrepresentation if they withhold important information about which they are aware.

Additionally, there is a need to retract any factual claims that turn out to be false later on. It would constitute a misrepresentation in this instance to neglect to retract a prior erroneous statement.

Categories of False Statements

Non-Misleading Statement

A false statement of substantial fact made by the defendant, who did not know at the time of contract signing that the statement was false, is considered innocent misrepresentation. Rescission or cancellation of the contract is typically the appropriate course of action in this case.

Imagine a scenario in which a land seller advises a buyer that a new house development has been approved nearby due to planning approval errors. The vendor got information from a neighbor and sincerely thought this to be accurate. Regretfully, the vendor was unaware that the planning clearance had subsequently been rejected. Even though it was an honest error, the seller may be held accountable for benign misrepresentation since the buyer relied on this information when making the decision to buy the land.

Incompetent Falsification

When a defendant makes a statement that they did not bother to confirm was accurate before signing a contract, that is known as negligent misrepresentation. A party must exercise “reasonable care” before entering into an agreement, and this is a violation of that principle. In cases of negligent misrepresentation, damages and contract revocation may be the remedies.

Let’s say a real estate agent mentions the roof was recently renovated to prospective buyers while showing them a property. It appears that the roof requires extensive maintenance. The purchasers made an offer on the house in part because of the agent’s careless statement regarding the roof’s condition, even though they had no intention of lying. The buyers may be able to sue the agent for damages for the cost of roof repairs if they later learn the real condition of the roof and the agency was careless in providing false information.

Deceptive Misrepresentation

A statement made intentionally or carelessly to persuade the other party to engage into a contract constitutes fraudulent misrepresentation. The harmed party may attempt to have the contract voided and pursue damages against the defendant.

Consider a situation in which a vendor purposefully misrepresents the mileage on a used vehicle as being merely 50,000. The vendor has rolled back the odometer, so the car actually has 150,000 miles on it. Based on the overstated mileage, the buyer would purchase the car, relying on this misleading information. Due to the seller’s dishonesty, the buyer is entitled to cancel the agreement, get their money back, and maybe sue for damages for any losses they may have incurred as a result of the deception.

How to Show That Something Was Missed

There are six obstacles that the plaintiff must clear in order to obtain damages for deception. The claimant needs to demonstrate that:

There was a statement made.
It was an inaccurate representation.
The defendant either made the remark carelessly without realizing it was untrue at the time, or they knew it was wrong at the time.
The plaintiff was supposed to rely on the representation, which is why it was made.
The erroneous representation was relied upon by the plaintiff.
By depending on the erroneous representation, the plaintiff was harmed.

To prevail in a misrepresentation lawsuit, a plaintiff needs to satisfy each of these six conditions. It is not necessary for a defendant in one of these situations to refute each of these six assertions.

Financial statements that have been falsified

Businesses and the people who compile their financial statements may intentionally or unintentionally misrepresent their financial performance. Financial statement fraud can affect a number of parties, including creditors, investors, authorities, and the general public. Each of the following groups may be impacted:

Investors: False statements can misrepresent a company’s actual financial performance and health, whether they are deliberate or the result of carelessness. For instance, inflating profitability measures artificially through overstated revenues or understated expenses may cause investors to overvalue the company’s shares. On the other hand, hiding liabilities or risks might conceal the real financial risks that the company is facing, which could result in losses for investors when the real financial picture is disclosed.

Creditors: Creditors evaluate a company’s creditworthiness based on its financial statements. Creditors may be misled by false statements about a company’s capacity to pay back debt. For example, creditors may issue credit believing a company can pay off its debt when, in reality, it might not be able to if it falsely inflates its assets or understates its obligations.

Regulators: To guarantee adherence to securities laws and accounting standards, regulatory organizations like the Securities and Exchange Commission (SEC) rely on financial statements. For regulatory agencies tasked with monitoring the stability of the financial markets, misrepresentations have the potential to damage investor trust and compromise the integrity of the markets.

Consumers in General: Financial statement fraud can erode public confidence in an organization. In the event that misrepresentations are discovered, customers may decide to patronize more ethical businesses even if they do not have an equity investment in the company.
Financial statements and auditors that were misrepresented.

It is the duty of auditors to offer an unbiased evaluation of the performance and financial status of an organization, ensuring that the data they present complies with accounting regulations. Auditors carry out thorough audit procedures to look at the financial statements and related paperwork in order to accomplish this. This include examining accounting records, going over financial activities, and evaluating how well internal controls are working.

Auditors make every effort to find any disparities that might point to any misrepresentations using these techniques. They pay equal attention to qualitative and quantitative factors, such as the disclosure of material risks and the accuracy of financial numbers. Auditors share their findings and observations with management, an audit committee, and maybe regulatory bodies as part of the audit process. Ultimately, the goal of an auditor is to ensure that the financial statements of a corporation are accurate.


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Craig Cherney is a trusted client advisor and a sought after real estate lawyer and expert witness who is hired by the nation’s top Real Estate Litigation Attorneys to help resolve their litigated real property matters.  Craig has appeared as a testifying expert witness before judges and juries in California, Arizona, Nevada and other jurisdictions across the country. Craig Cherney, Esq. Expert Witness Real Estate480-399-2342.  If you are litigating an easement case, Craig Cherney might be able to help you advance and win your case.

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