Chapter 9 Representation and Terms
Pre-contractual and Contractual Statements
• Not every statement communicated during the negotiations 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 by its very nature, 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 inducing another party to enter into a contract. By definition, it does
not impose a contractual obligation.
Contractual Term Pre-contractual Representation
(Promise of future (Statement of Existing Fact)
Breach of contract if Misrepresentation if
• The distinction between contractual terms and pre-contractual representations is
especially important if a statement is false.
• If a non-contractual statement is false, we say that one of the parties has made a
misrepresentation. Where a contractual statement is not fulfilled, we say that one of the
parties is in breach of contract.
• This distinction is important because misrepresentation and breach of contract have
different legal effects. Pre-contractual representations may result in a form of legal
liability, such as actionable misrepresentation.
The Nature of Misrepresentation
• A misrepresentation is an incorrect statement of an existing fact. In contrast, a
contractual term is not meant to describe an existing state of facts, but rather it provides
a promise of future performance. Given its 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
• Misstatement of Fact- A misrepresentation only occurs if the speaker claimed to state a
fact. The difficulty with that requirement is that people often make non-factual statements
during negotiations. E.g. they sometimes state their own opinions.
• A personal opinion is not usually a misrepresentation, even if it is false. There are
exceptions in which it is risky to offer an opinion. If you state an opinion that leads
people to think it is fact a court may find that the statement not only includes an opinion,
but also an implied statement of fact that can be treated as a misrepresentation. That is
true especially if you offer an opinion within your area of expertise. It is also risky to offer
an opinion if you have no reason to believe that it is actually true.
• During pre-contractual negotiations, a person may describe how they or someone else
will act in the future. A statement of future conduct is not a statement of fact. Rather, it is
a statement about a person’s future intentions. Such statements are not treated as
misrepresentations, however only if it is made fraudulently or if the future conduct is
described in terms of a present intention. E.g. You do not intend to sell your piece of
property to another customer. That statement contains an indication of your present
state of mind that will be characterized as an implied statement of present fact. If it is
false, it may be classified as a fraudulent misrepresentation.
• We are all presumed to know the law. However, the court may find a misrepresentation
if you inaccurately describe the consequences of a law, because those consequences
are treated as matter of fact rather than law.
• Silence as Misrepresentation- As a general fact, parties are not required to disclose
material facts during pre-contractual negotiations, no matter how unethical non
disclosure may be. There are at least six occasions when the failure to speak will
amount to misrepresentation:
o Silence distorts 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 describe the change to the other party.
o Statement is Half Truth- A party cannot give a partial account if the unspoken
words would substantially alter the meaning of the actual statement.
o Contract Requires Duty of Utmost Good Faith- Some contracts require a party
to make full disclosure of the material facts. Best examples are insurance
contracts. An insurance company needs to know as much as possible about the
situation to assess risk of loss and how much to charge. o Special Relationship Exists Between the Parties-When the relationship
between two parties is one built on trust, or when of the parties has some sort of
special influence over the other, a duty of disclosure may arise. Suppose your
accountant sells her cottage to a stranger. She does not need to disclose
information to the purchaser about its structural defects if the purchaser does not
ask relevant questions. However, she must disclose it to you because you would
trust her on the basis of your special relationship.
o Facts are actively Concealed- If a party to a contract actively conceals the truth
it may be treated as a misrepresentation. E.g. you try to hide structural damages
from the purchaser.
• For a statement to be actionable as misrepresentation, the deceived party must prove
that the false statement induced the contract. In other words, the statement must have
misled its recipient into creating the contract. The statement does not only have to be the
• However, a statement will not be actionable if it did not affect the recipient’s decision,
even if the other party made the representation with an intention to deceive. Nor will it be
actionable if the recipient conducted an independent inquiry into the matter. In that case,
the contract is induced by the results of the party’s own investigation rather than the
other party’s representation.
Legal Consequences of Misrepresentation
• The deceived party may receive:
• Recission- The cancellation of a contract with the aim of restoring the parties to the
greatest extent possible, to their pre-contractual state. The remedy of recission is often
accompanied by an order for restitution. Restitution involves a giving back and taking
back on both sides.
• The victim of a misrepresentation may be barred from rescission in certain
circumstances. First, if the deceived party affirmed the contract, then recission is not
available. A person who is misled is said to affirm the co