The legal term for an untrue statement is a misrepresentation. There are three types of misrepresentations – innocent, negligent and fraudulent.
The most serious type of misrepresentation is a fraudulent misrepresentation. A fraudulent misrepresentation involves a deliberate lie. To successfully sue for a fraudulent misrepresentation the Plaintiff (the person suing) needs to prove not only that an untrue statement was made but that the Defendant (person who is being sued) knew that the statement was untrue. The Plaintiff must prove that he or she relied on the misrepresentation and that the Defendant intended that he or she would rely on the misrepresentation. Finally, the Plaintiff must prove that he or she suffered damages because of the misrepresentation.
One example of a fraudulent misrepresentation is a Ponzi scheme. Suppose you meet a well-dressed and smooth-talking businessman who tells you that you can earn amazing returns from a new investment. The statement is intended to lead you to invest your money and you rely on the statement by doing so. It turns out that the money has not been invested at all but has instead been spent by the businessman to fund his exotic lifestyle. As a result, you have lost your investment. You could then sue for fraudulent misrepresentation to recover the amount of your investment. Importantly, a judgment for fraudulent misrepresentation will survive bankruptcy. In other words, even if the Defendant becomes bankrupt and all of his or her other debts are cancelled, your judgment will remain in effect and you can still collect what you are owed.
The second most serious type of misrepresentation is a negligent misrepresentation. A negligent misrepresentation is not a deliberate lie but the person who made it should have been more careful to make sure it was accurate. To successfully sue for a negligent misrepresentation, the Plaintiff needs to prove that the statement was untrue, inaccurate or misleading and that the statement was made negligently (ie. the person who made it did not take sufficient care to make sure it was accurate). The Plaintiff needs to demonstrate that he or she suffered damages from relying on the misrepresentation. Finally, the Court needs to be satisfied that, in the circumstances, the Defendant had a responsibility to avoid harming the Plaintiff.
Suppose you are purchasing a house and you intend to rent out the basement. Your real estate agent tells you that she has the perfect house which is properly zoned. In actual fact, the real estate agent is only assuming that the zoning permits renting the basement because other houses in the same neighbourhood are used that way. You proceed to purchase the house only to find out that you are not allowed to rent out the basement. You could sue for negligent misrepresentation because, although the real estate agent didn’t know that the zoning did not permit the use you wanted, she should have made proper inquiries to find out. This is because, since the real estate agent was the “expert” you had hired to assist you with your purchase, she had a duty to protect your interests.
The third type of misrepresentation is an innocent misrepresentation. This is an untrue statement which was not known to be untrue and which was not made negligently. For example, suppose you are buying a house and the seller tells you that the house has been properly maintained and is in good condition. Although the seller has no idea of this, the foundations of the house are actually on the verge of collapsing. The Court will not award damages for an innocent misrepresentation (ie. order the seller to pay you money) but it may undo the sale of the house. As a result, you would return the house to the seller and the seller would return the purchase price to you. The Court can also undo a sale if there has been a fraudulent or negligent misrepresentation (rather than awarding damages).
If you have suffered damages because of a misrepresentation, please feel free to contact us to discuss your legal rights.
Andrew Ostrom contributed to this article.