Misrepresentation in contract law refers to a false statement of fact made by one party that induces another party to enter into a contract.

Key Takeaways 

• There are three main categories of misrepresentation - fraudulent, negligent, and innocent.
• To establish a misrepresentation claim, certain key elements must be present, including a materially false statement, reasonable reliance on that statement, quantifiable harm, and a direct link between the reliance and the harm. 
• Under certain circumstances, the deliberate concealment of or failure to disclose information can be deemed misrepresentation.

Types of Misrepresentation

There are three main categories of misrepresentation which include: 

• Fraudulent Misrepresentation: Fraudulent misrepresentation occurs when a party makes a false statement either knowingly or with reckless disregard for its truth. This means that the misrepresenting party is aware that the statement is false, or they exhibit a conscious indifference to the truth, deliberately avoiding verifying the truthfulness of the statement despite having reasons to doubt its accuracy.
• Negligent Misrepresentation: Negligent misrepresentation occurs when a party makes a false statement without having reasonable grounds to believe it is true due to a failure to exercise reasonable care or diligence in ascertaining the facts. This form of misrepresentation does not involve an intent to deceive but rather stems from carelessness or a lack of thoroughness in verifying the information. For instance, if a real estate agent states a property's square footage based on incorrect or unchecked information from the seller and does not take steps to verify this information themselves, it would be considered negligent misrepresentation.
• Innocent Misrepresentation: Innocent misrepresentation occurs when a party makes a false statement while genuinely believing it to be true. In this case, there is neither an intent to deceive nor negligence in ascertaining the statement's truth. For example, during the sale of a business, the seller provides certain annual revenue figures in good faith based on their accounting records, believing them to be accurate, but it is later discovered that there were unintentional errors in the accounting that skewed those figures.

Elements of a Misrepresentation Claim

While the specific details can differ depending on jurisdiction and context, generally, establishing a misrepresentation claim requires demonstrating the existence of the following four elements:

• The claim must be based on the opposing party's materially false statement of fact. 
• The misled party must have reasonably relied on the false statement of fact such that the information played a significant role in their decision-making process.
• The misled party must demonstrate that they suffered some form of quantifiable harm due to the misrepresentation, whether in the form of direct financial losses, missed business opportunities, or reputational damage, etc. 
• The misled party must be able to establish a direct link between the reliance on the false statement and the harm suffered. 

Failure to Disclose as Misrepresentation 

As a corollary to the first element mentioned above (i.e., that misrepresentation must include a false statement), it should be noted that sometimes the failure to disclose, or the deliberate concealment of, specific facts or information can also be grounds for establishing a misrepresentation claim. For example, in many jurisdictions, real estate sellers have a statutory duty to disclose certain information about the property, such as known defects or past damage, and therefore, failure to disclose such information, like a previous flood in the basement that led to mold, even if not asked directly by the buyer, can constitute misrepresentation, even though the seller did not make any explicit statement of fact that would be deemed false. 

Another situation where failure to disclose can be deemed misrepresentation is when one party is aware of information that would significantly impact the other party's decision to enter the contract, yet that party intentionally withholds it. 

Example: A used car dealership sells a vintage sports car to a buyer who explicitly states their intention to use it for high-performance racing competitions. The dealership, however, knowingly fails to disclose that the vehicle has a history of engine overheating and frame damage, both of which would significantly compromise its safety and performance at racing speeds, and this undisclosed information would have likely deterred the buyer from purchasing the car altogether, as it is unsuitable for its intended purpose. This would likely be considered misrepresentation, even though it did not involve an outright statement of fact.