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Lecture 9

LAW 122 Lecture Notes - Lecture 9: Parol Evidence Rule, Golden Rule, Risk Management

Law and Business
Course Code
LAW 122
Avi Weisman

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Pre-contractual Statements
- Which statements are part of the negotiation vs. which are part of the actual contract?
- Distinguish between contractual terms and pre-contractual reps
- Not every statement communicated during the negotiation is a contractual term
- Contractual term = a provision in an agreement that creates a legally enforceable
- Pre-contractual rep = a statement made by words or conduct with the intention of
inducing another party to enter into a contract \
- Misrepresentation
- A statement of an existing fact (not an opinion)
- That is false when made
- May be actionable if it induced a contract
Misrepresentation vs. breach of contract
- If a non-contractual statement (representation) is false, one of the parties has made a
- Karl is looking to buy a house in the Salt Lake City area of Utah. Karl contacts John, a
realtor, and arranges to see several houses that are on sale. After picking out the house
he likes, Karl asks the owner if the house has a termite problem. The house does have a
termite problem but the owner, knowing that Karl will not buy the house if he knows
about the termite problem, tells Karl that there is no termite problem. Karl and the owner
sign a contract under which Karl will buy the house for $250,000. After the contract is
signed, Karl finds out about the termite problem. In this case, the contract will be
voidable by Karl because the owner made a fraudulent misrepresentation that Karl relied
on and, based on that misrepresentation, Karl entered into the contract.
- If contractual obligation is not fulfilled, one of the parties is in breach of contract
- They have legal consequences and remedies
Not a Misrepresentation
- Personal opinion is not a misrepresentation (even if false)
- What if you offer an opinion within your area of expertise?
Silence as Misrepresentation
- General rule = parties not required to disclose material facts during pre-contractual
negotiations (even if unethical)
- Some Exceptions, where silence will amount to misrepresentation
1. Silence would distort a previous assertion
- I.e if you represent that there is no mould in house then you find mould in house,
you can’t be silent you need to disclose
2. When a statement is a Half- Truth
- Misrepresentation if party tells half-truth and remains silent on other half; party
cannot give partial account if unspoken words alter meaning
3. When contract requires Duty of Utmost Good Faith
- Some contracts require a party to make full disclosure of material facts
- One party is in unique position to know the material facts
- I.e. insurance contracts need to know as much info as possible
4. When a special relationship exists between parties
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- When relationship is one of trust, or if there is some form of influence over the
other party there may be duty of disclosure
- I.e. an accountant selling her cottage to her client vs. a stranger
5. When facts are actively concealed
- Party to contract can’t actively conceal the truth
- I.e. building vendor can’t take steps to hide evidence of structural damage
- In order to raise a cause of action (i.e. claim) on the grounds of misrepresentation, must
prove the false statement induced the contract
- Statement must have mislead recipient into creating or entering into contract
- No cause of action if the misrepresentation did not affect decision to enter into contract
(even if there is intent to deceive)
- What happens if recipient has opportunity to investigate the statement?
- Generally, not obliged to investigate every representation
Remedies for Misrepresentation
- There are 2 possible remedies of an actionable misrepresentation
1. Rescission
- Is the cancellation of a contract with the iam of resties to their pre-contractual
- Contract treated as if it never existed
- Available for all types of misrepresentation (innocent, negligent and fraudulent)
- Is often accompanied by order of restitution
- Restitution = a giving back and taking back on both sides
- Restoration could be money, land, goods
- Court tries to restore the pre-contractual situation
- I.e. paid for waterproof paint and realised that it was not
- Restitution may be denied
- Restoration is impossible (i.e. paint had already been applied to
- Restoration would affect 3rd party (i.e. boards may already be
resold to another)
- Contract is affirmed or viewed to have been carried out (i.e. do
nothing about the paint, then wait til next shipment before
2. Damages
- Court may award damages against the party that made the misrepresentation
- Damages are designed to provide monetary compensation for the losses
suffered as a result of relying upon a misrepresentation not for a breach of
- Even though the misrepresentation induced the contract
- This is a misrepresentation of a statement not a breach of a contractual
Types of Misrepresentation
- Law distinguishes between three types of misrepresentation
1. Innocent
- A statement a person makes carefully and without knowledge that it is false
- No carelessness in making statement
- General rule is that deceived party is not entitled to recover damages
- Only remedy available is rescission (possibly with restitution)
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