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False Statement That Induced Signing of Contract

Published on July 5, 2019

False Statement
A false statement or untrue representation made by or on behalf of one party to another that induced the other party to enter into a contract or agreement is in law actionable as a "misrepresentation".

A misrepresentation covers situations when one party makes claims to a party and those claims, which was found to be false, induced the other party to enter into an agreement. An example of misrepresentation was demonstrated in the case decided in England in 1936 of With v O’Flanagan. In that decision the seller of a medical practice informed the buyer during negotiations that the income of the business was £2000 per year but failed to inform the buyer that the income had in the period immediately before the signing of the contract fallen dramatically to only 15% of its previous income. The court held in that decision that there was misrepresentation since the seller is required to inform the buyer that there has been a significant changed in circumstances such that the statement as to the income of the business is no longer true.

The law in New Zealand allows a party to cancel a contract if it can be shown that there has been a misrepresentation. That party must have been misled by the other party as to a material issue, before the contract is signed.

Before a misrepresentation is actionable, the party that alleges misrepresentation must demonstrate:
A. There has been a false statement made;
B. The false statement is a statement as to present or past fact; and
C. The statement induced that party to enter into the contract.

A: Statement of Fact
For misrepresentation to be actionable in law, the other party must have made a statement of fact that is untrue.

The other party must also be shown to have intended to be accountable for the statement. This can be shown if the other party either has or claims to have knowledge in the field or if the party has given assurances as to the truth of the party's words.

B: Present or Past Fact
Next, the statement must concern something which is currently happening or has happened. In other words, it must be a present or past fact and not an opinion or a forecast of future events. A representation as to forecast events or earnings may not amount to misrepresentation in law if the information proves to be false.

C: Inducement
The third step in proving there to be a misrepresentation is that the party who claims to have suffered a loss due to a misrepresentation must have been induced by this statement to enter into the contract. In other words, that party must have relied on the false statement and it led the party to enter into the contract.

What are the remedies to a misrepresentation?
Once this misrepresentation has been proven, it provides two options.

First, a party may claim damages for the difference in value between what that party would have received if the statement was true and what was actually received.

Another remedy would be to cancel the contract. This can be done if the party can demonstrate that it was a material to the party or can show that the misrepresentation substantially reduced the benefit that the party would have received from the contract.

Please note that the above information is intended to provide general information. The contents contained in this article do not constitute legal advice and should not be relied on as such.

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