When your business enters a transaction, it’s natural to expect some salesmanship. Still, the parties involved must trust any factual representations made to each other and have open and transparent communications. Misrepresentations erode trust between the parties, and a business that relies on another’s misrepresentation might face significant losses through no fault of its own.
What is misrepresentation?
First and foremost, representations apply to facts in that they can be proven true or false. When someone makes a false factual representation, it is a form of misrepresentation.
Mistaken opinions are not misrepresentations. For example, saying, “Our beams carry up to 100 tons,” could constitute a misrepresentation if it is proven false. But saying, “Our beams are the best in the business,” constitutes a statement of opinion instead of a representation of fact.
Altogether, business misrepresentations can take three forms:
Fraudulent Misrepresentation
Fraudulent misrepresentation happens when a party intentionally makes a false statement of fact with the intent of having another party rely on it. Thus, fraudulent intent turns a falsehood into a fraudulent misrepresentation.
Negligent Misrepresentation
Negligent misrepresentation happens when a party misstates a fact due to a lack of reasonable care, which could happen in a few ways. A party may believe something but fail to exercise due care to verify it before representing it as true to the other party. Alternatively, a party may blind itself to avoid learning the truth before making a representation.
Innocent Misrepresentation
An innocent misrepresentation happens when a party sincerely believes something to be true and represents it as such, only for that sincere belief to be false. The party had no intent to mislead, exercised reasonable care, and did not blind itself to the truth, so its misrepresentation was an honest mistake.
The Legal Framework Surrounding Misrepresentation
The effect of misrepresentation often depends on the intent, as does the difference between fraud and negligence. Proving intentional fraud is often difficult, but it may be possible if you have access to the other party’s communications. Otherwise, you may need to rely on negligence to prove your case. Innocent misrepresentations require the lowest standard of proof but also provide the weakest remedies.
Identifying Misrepresentation in Business Deals
Identifying misrepresentations can be difficult. In any transaction, you want your lawyer to negotiate a level of access to the other party’s records so you can conduct thorough due diligence to uncover potential misrepresentations. By reviewing financials, vendor and customer lists, and other documents, you can uncover many misrepresentations.
Preventative Measures to Avoid Misrepresentation
Before entering into transactions, verify who you are doing business with. Background checks, accounting reviews, and even financial audits can often reduce your risk of falling victim to misrepresentation. However, you must perform these measures with transparency and the other party’s knowledge. If you hide your efforts, you risk an ethical breach and accusations of corporate espionage.
Legal Remedies for Victims of Misrepresentation
Fraudulent and negligent misrepresentations make a contract voidable by the defrauded party. That means it can choose whether to void it or perform its terms. If the party voids the contract, it may also seek damages to return it to its original position. In other words, a party can void the contract and recover damages.
When a party makes an innocent misrepresentation, the remedy is typically to void the contract or award damages. That said, the affected party typically cannot get both.
You will typically resolve your contractual dispute with negotiation, arbitration, or litigation. You can negotiate a settlement or submit to binding or non-binding arbitration in which an arbitrator listens to both sides and crafts a resolution. If these efforts fail, you may end up in court before a judge or jury.
The Role of Legal Counsel in Managing Misrepresentation Risks
Your business litigation attorney will play a key role in conducting due diligence, negotiating an agreement that protects you from the effects of misrepresentations, and representing you in any disputes that arise. Some ways in which a lawyer will mitigate risks include drafting warranties that involve an escape clause when the other party misrepresents a key fact.
Preparing for Transparent Transactions
Your business cannot base deals upon misrepresentations. You must prepare before entering into transactions and stay informed of the law.
As such, you need a system to recognize, prevent, and address misrepresentations. It must include an ethical process for conducting due diligence and the professionals to carry it out.
Comments 0