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Lecture 8

LAW 122 Lecture 8: Week 8

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Law and Business
LAW 122
Nick Iannazzo

LAW 122 Chapter 9 – Representation and Terms PRE-CONTACTUAL AND CONTRACTTUAL STATEMENTS  It’s hard to identify which part of the parties’ statements are part of the negotiations and which are part of the actual contract.  Therefore, we need to distinguish contractual terms and pre-contractual representations.  A statement becomes a contractual term only if it’s included in the agreement as a legally enforceable obligation.  A contractual term is a promissory statement. The person who makes it voluntarily agrees to do something in the future.  A pre-contractual representation is a statement one party makes by words or conduct with the intention of including another party to enter into a contract.  It doesn’t impose a contractual obligation nor form part of a contract. MISREPRESENTATION  The distinction between both is important if a statement is false.  If a non-contractual statement is false, we say one of the parties has made a misrepresentation.  When a contractual statement isn’t fulfilled, we say that one of the parties is in breach of contract. THE NATURE OF MISREPRESENTATION  A misrepresentation is a false statement of an existing fact that causes a recipient to enter a contract.  A contract terms is not meant to describe an existing state of facts, but it provides a promise of future performance.  It cannot be false when it’s given nor can a breach of contract occur as soon as such a promise is made.  Breach happens only when one of the parties fails to perform precisely as promised. Misstatement of Fact  A misrepresentation occurs only if the speaker claimed to state a fact.  Difficulty with that requirement is that people often make non-factual statements during negotiations, such as stating their opinion.  Personal opinion isn’t usually a misrepresentation even if it’s false.  If you state an opinion that leads someone to think it must be true, a court may find that your statement includes not only an opinion, but also an implied statement of fact that can be treated as misrepresentation.  A statement of future conduct isn’t a statement of fact. It’s a statement about a person’s future intentions.  Such statements aren’t usually treated as misrepresentation but it is one if it’s made fraudulently or if the future conduct is described in terms of a present intention. LAW 122  A misrepresentation doesn’t arise because merely because you inaccurately describe a particular law because we all are presumed to know the law.  However, the court may find a misrepresentation if you inaccurately describe the consequences of a law, because those are treated as fact rather than a law. Silence as Misrepresentation  As a general rule, parties aren’t required to disclose material facts during pre-contractual negotiations, no matter how unethical non-disclosure may be.  There are 6 occasions when the failure to speak will amount to misrepresentation. 1. When silence would distort a previous assertion – When a change in circumstances affects the accuracy of an earlier representation, the party that made that statement has a duty to disclose the change to the other party. 2. When a statement is a half-truth – A party cannot give a partial account if the unspoken words would substantially alter the meaning of the actual statement, even if that half was true. 3. When the contract requires a duty of utmost good faith – Some contracts require a party to make full disclosure of the material facts (i.e. insurance). 4. When a special relationship exists b/w the parties – When the relationship b/w 2 parties is one of trust, or when one of the parties has some other form of special influence over the other, a duty of disclosure may arise. 5. When a statutory provision requires disclosure – Some statures require the disclosure of material facts in a contractual setting. 6. When facts are actively concealed – If a party to a contract actively conceals the truth it may be treated as a misrepresentation.  i.e. Building vendor hides evidence of structural damage. Inducement  For a statement to be actionable as a misrepresentation, the deceived party must prove that it misled them into creating the contract.  The statement doesn’t have to be the only inducing factor. A party can claim relief for misrepresentation even if other factors were influential.  A statement won’t be actionable if it didn’t affect the recipient’s decision, even if the other party made the representation with an intention to deceive.  Also won’t be if the recipient conducted an independent inquiry into the matter. THE LEGAL CONSEQUENCES OF MISREPRESENTATION LAW 122  There’s 2 possible consequences of an actionable misrepresentation:  The remedy of rescission  The right to damages Rescission  It’s the cancellation of a contract with the aim of restoring the parties, to the greatest extent possible, to their pre-contractual state.  The remedy is awarded on the basis of the court’s judgement about what’s best according to the rules of reason and justice.  The remedy of rescission is often accompanied by an order for restitution, which involves a giving back and taking back on both sides.  Victim of a misrepresentation may be barred from rescission in certain circumstances: A. If the misled party affirmed the contract, then rescission is not available.  Affirmation occurs when the misled party declares an intention to carry out the contract or otherwise acts as though it were bound by it.  i.e. waiting six months to complain that paint isn’t waterproof B. Recession may be barred if restitution is impossible.  The more that’s been done under the contact, the less likely a grant of rescission.  i.e. using substantial amount of paint before noticing it’s not waterproof C. Recession may be unavailable if it would affect a third party.  It’s the rights of a 3 party that makes restitution impossible. Damages  A court may respond to a misrepresentation by awarding damages against the party that made the statement.  Damages are intended to provide monetary compensation for the losses that a person suffered as a result of relying upon a misrepresentation.  If damages are awarded for a misrepresentation, the plaintiff’s claim arises not in contract, but rather in tort. TYPES OF MISREPRESENTATION Innocent Misrepresentation  It’s a statement someone makes carefully and w/o knowledge of the fact that it’s false.  If the speaker is innocent of any fraudulent/negligent conduct, the rule is that the deceived party isn’t entitled to recover damages.  Only legal remedy for this misrepresentation is rescission, and is available when there’s a substantial diff. b/w what the deceived party bargained for and what was obtained. Negligent Misrepresentation  It’s a statement made carelessly or unreasonably. The person doesn’t have to know that it’s false to be liable.  Remedy can be rescission or a tort that supports an award of damages. LAW 122 Fraudulent Misrepresentation  Occurs when someone makes a statement that they know is false or have no reason to believe is true or recklessly made without regard to the truth.  Liability will arise under the tort of deceit.  The courts will require an allegation of fraud to be supported by very clear evidence. CONTRACT TERMS  Contractual terms arise from statements that impose obligations under the contract.  If a statement is intended by both parties to form a part of the contract, then it’s a term of the agreement.  If it’s made by one party to induce the other to enter the contract, and the party understands it that way, then it’s a representation or misrepresentation.  There’s two types of contractual terms: terms expressed by the parties and those implied by a court or a statute. EXPRESS TERMS  It’s a statement made by one of the parties that a reasonable person would believe was intended to create an enforceable obligation. Proof of Express Terms  When an agreement is unwritten and unwitnessed, a court is required to determine whose version of events is more believable.  If an agreement is written, oral evidence cannot be used to add to, subtract from, qualify, or vary the terms of the document (parol evidence rule).  Parol evidence refers to evidence that’s not confined within the written contract.  Business people often sign a written agreement on the assurance that some of its terms will not be enforced, or on the assurance that certain items discussed duri
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