Question

Under what circumstances does fraudulent misrepresentation constitute the tort of deceit?

Answer 1

A contract is not considered valid unless all parties are in agreement to the terms. If the expressed terms are not accurate, then any agreement is based on a false premise and the contract is invalid. Knowingly making false statements -- whether in writing, verbally, through a simple gesture, or even silence -- constitutes false misrepresentation if it has a material effect on the deal.

For example, a drug company working out an acquisition by another company boasts of several "promising" drugs in clinical trials but fails to mention that they likely will not make it to market based on disappointing results. Since the acquiring company assumed these drugs would add value to the deal, it suffered damages by overpaying.

Even if the representation was made without knowledge of whether it was true, it can give rise to a fraudulent misrepresentation claim if it was made in a reckless way. In such instances, the party making the representation is acting recklessly solely to induce the other party into the contract. Using the example above, let's say the drug company boldly claims it is the only one developing a particular class of pharmaceuticals even though it isn't positive about this claim. If, in fact, other companies are working on this particular type of drug, the reckless misrepresentation would have a material impact on the deal.

Other types include negligent misrepresentation, in which one party failed to adequately ensure the accuracy of the representation, and innocent representation, which is neither fraudulent nor negligent. Keep in mind that a misrepresentation that does not have a material effect on the contract does not give rise to a legal action.

There are three types of misrepresentation: fraudulent, negligent and innocent. Fraudulent misrepresentation is the most serious and requires the false representation to have been made knowingly, or without belief in its truth, or recklessly as to its truth.

A claim for fraudulent misrepresentation is founded in the tort of deceit. The four elements are:

• the defendant makes a false representation to the claimant
• the defendant knows that the representation is false, alternatively is reckless as to whether it is true or false
• the defendant intends that the claimant should act in reliance on it
• the claimant does act in reliance on the representation and, in consequence, suffers loss