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Chapter 9 - Representations & Terms.doc

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Department
Accounting
Course Code
ACC 110
Professor
Marla Spergel

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Chapter 9: Representations & Terms P RE -C ONTRACTUAL & C ONTRACTUAL S TATEMENTS  Not every statement communicated during the negotiation process is a contractual term. A statement becomes a contractual term only if it is 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.  In contrast, a pre-contractual representation is a statement one party makes by words or conduct with the intention of inducing another party to enter into a contract.  It may induce the creation of a contract, but it does not form part of the contract. M ISREPRESENTATION  The distinction b/t the contractual term and pre-contractual representation is especially important if a statement is false.  The distinction is important b/c misrepresentation and breach of contract have different legal effects.  Pre-contractual representation may result in a form of legal liability, such as actionable misrepresentation, but not in an action for breach of contract. The Nature of Misrepresentation o Misrepresentation: is a false statement of an existing fact that causes the recipient to enter into a contract.  In contrast, a contractual term is not mean to describe an existing state of facts, but rather it provides a promise of future performance.  Given promissory nature, a contractual term cannot be false when it is given. Nor can a breach of contract occur as soon as such a promise is made. A breach occurs only when one of the parties fails to perform precisely as promised. Misstatement of Fact  Not every misstatement during pre-contractual negotiation is a misrepresentation. A misrepresentation occurs only if the speaker claimed to state a fact.  The difficulty of that requirement is that ppl often make non-factual statements during negotiations. o Opinion: is the statement of belief or judgment. Opinions can range from carefree speculation to deliberate assessments based on a substantial body of evidence.  It is not usually misrepresentation, even if it’s false.  It is sometimes risky to offer an opinion; e.g. if you state an opinion in a way that leads me to think that it must be true, a court may find that your statement includes not only an opinion but also an implied statement of that can be treated as a misrepresentation.  It is also risky to offer an opinion if you have no reason to believe that it is actually true.  During pre-contractual negotiation, a person may describe how they will act in the future o Future Conduct: is a second type of non-factual statement. It is a non-promissory statement as to a party’s future conduct & is usually not usually treated as a misrepresentation.  However, a statement of future conduct is a misrepresentation if it is made fraudulently or if the future conduct is described in terms of present intention. 1 of 6 Chapter 9: Representations & Terms  However, the court may find a misrepresentation if you inaccurately describe the consequence of a law. E.g. Suppose you are trying to persuade me to buy your land. It is not a misrepresentation if you in incorrectly tell me that the zoning laws do not apply to the property. That is a matter of law. However, it may be a misrepresentation if you inaccurately tell me that zoning approval has been granted and that I therefore would be able to develop the land. Silence as Misrepresentation  As a general rule, parties are not required to disclose material facts during pre-contractual negotiations, no matter how unethical non-disclosure may be.  There are, however, at least 4 occasions when failure to speak will amount to misrepresentation: i. When silence would distort a previous assertion: A party’s silence sometimes has the effect of falsifying a statement that was previously true. 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. Failure to do so amounts to a misrepresentation. A misrepresentation may also occur if a party tells half of the truth and remains silent on the other half. ii. When the contract requires a duty of utmost good faith: the requirement of utmost faith arises when one party is in a unique position to know the material fact. The best e.g. involves insurance contracts. Since the customer is the only person that has the info required by insurance comp., the law imposes an obligation of good faith that requires the customer to disclose all of the relevant facts. A breach of that obligation = insurance comp can avoid the contract. iii. When a special relationship exists b/t the parties: When the relationship b/t two 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. E.g. pg 195 iv. When a statutory provision requires disclosure: Some statute requires the disclosure of material facts in a contractual setting. Insurance legislation in many provinces contains statutory conditions that are deemed to be part of every insurance contract and must be printed on every document. Many provinces have statutes that automatically insert certain conditions into every insurance contract. Some financial officers have a duty to disclose material facts. E.g. an officer or director has to speak up if they have an interest in a contract with their own company. If they fail to do so, the company may be entitled to set aside the contract. The same holds true for some Crown corporations. A similar disclosure requirement arises in the securities law. Many provinces have legislation regulating the formation of domestic contracts. If a party failed to disclose significant assets or significant liabilities that existed when the domestic contract was made, the court can set aside the agreement or a provision in it. Inducement  For a statement to be actionable as a misrepresentation, the deceived party must prove that the false statement induced the contract. The statement does not have to be the only inducing factor.  However, a statement will not be actionable if it didn’t affect the recipient’s decision, even if the other party made the representation with the intention to deceive. The Legal Consequences of Misrepresentation  There are 2 possible consequences of an actionable misrepresentation. The deceived party may receive: 1. The remedy of rescission 2. The right to damages 1. Rescission 2 of 6 Chapter 9: Representations & Terms  Is the only contractual consequence of misrepresentation o Rescission: is the cancellation of a contract by the court with the aim of restoring the parties, to the greatest extent possible, to their pre-contractual state.  It is sometimes difficult to know in advance whether the court will grant the rescission b/c it is a discretionary remedy, one that is not available as of right. The remedy Is awarded on the basis of the court’s judgement about what is best according to the rule of reason and justice.  The order of rescission is often accompanied by an order for restitution. o Restitution: involves a giving back and taking back on both sides.  E.g. you want to buy waterproof paint to make snowboards. A supplier represents that it has waterproof paints to sell but insists you buy 4 shipments over the next 2 years. When the first shipment comes you discover that the paint is not waterproof. Thus you want your money back, and the supplier wants it paint back after it gives u your money back.  The victim of misrepresentation may be disqualified from rescission in certain circumstances. i. 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 act as though it is bound by it. E.g. If discover the 1 shipment of paint is not waterproof but you do nothing about it, but six month later you receive the 2 shipment then complain that neither shipment was waterproof. That 6 month lapse of time suggests that you affirmed the contract. ii. Rescission may be disqualified if restitution is impossible. If a party cannot be substantially returned to their pre-contractual positions, a court is reluctant to grant rescission. – The more that has been done under the contract; the less likely the court is to grant rescission. iii. Rescission may be unavailable if it would affect a third party. In this case, it is the right of the rd 3 party that makes restitution impossible. 2. Damages  A court may responds to misrepresentation by awarding damages against the party that made the statement. o Damages: are intended to provide monetary compensation for the losses that a person suffered as a result of relying upon a misrepresentation.  Damages may be awarded for a breach of contract. However, if damages are awarded for misrepresentation, the plaintiff’s claim arises not in contract, but a tort.  Tort law is based on the principle that “a person who by his/her fault causes damage to another may be held responsible. – depends upon the nature of misrepresentation. Type of Misrepresentation 1. Innocent Misrepresentation: is a statement a person makes carefully and without knowledge of the fact that it is false.  If the speaker is innocent of fraudulent or negligent conduct, the general rule is that the deceived party is not entitled to recover damages.  The only legal remedy available for innocent misrepresentation is rescission which is only available when there is a substantial diff b/t what the deceived party had bargained for and what was, in fact, obtained. 2. Negligent Misrepresentation: is a false, inducing statement made in an unreasonable or careless manner.
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