Claim 4: Misrepresentation - A Type of Products Liability

What triggers Misrepresentation?

False statement made to induce the transaction

Step 1: Identify the Type of Fraud

1. Define the type of fraud

2. What effect does it have?

3. Provide an example.

1. Fraud in the Factum: Contract misrepresentation. P doesn’t know what they’re agreeing to and has no reasonable opportunity to discover it.

• Effect: Contract is VOID as if it never existed. P recovers provable damages,

• Example: Life insurance agent asks customer, “Sign this so I never come to your door. P ends up signing contract to purchase life insurance.”

2. Fraudulent Inducement: The false statement CAUSES P to knowingly enter the contract.

3. Effect: Contract is VOIDABLE at P’s discretion.

4. Example: P is looking for a car with CarPlay. Seller lies saying the car has CarPlay when it doesn’t. P purchases the car.

What is the first element of misrepresentation? What’s the Rule?

1. Misrepresentation of an Existing Fact

RULE: A non-factual assertion designed to induce another to act or refrain from acting. Must be a statement of fact (not an opinion or prediction).

1. What is an Opinion?

2. Are they actionable for Misrepresentation of an Existing Fact?

1. Belief without certainty about the existence of a fact (judgements on quality, value, or authenticity).

• Hidden Fact: The opinion always reflects the speaker’s true, honest belief.

2. No.

When is an Opinion actionable?

CAST

• C — Claims: The speaker claims to have special knowledge.

• A — Actual: The speaker has actual special skill, judgment, or knowledge the recipient lacks.

• S — Susceptible: The speaker knowingly preys on a susceptible person.

• T — Trust: The speaker is in a relation of trust with the recipient.

Is there a duty to disclose for Arm’s Length Transactions?

No

Swinton - The Termite Case

A seller who failed to disclose a serious termite infestation was not liable for misrepresentation

Seller knows of termites but doesn’t disclose anything to buyer. Misrepresentation?

No. Generally speaking, mere silence is not fraud.

Generally speaking, mere silence is not fraud. What are the 6 exceptions to this baseline rule?

1. Active Concealment

2. Failure to Correct a Basic Assumption

3. True Statement Becomes Untrue

4. Fiduciary Duty

5. Statement Not Expected to be Acted Upon

6. Ambiguous or Partial Statements

Fraud by Silence Exception: What is the rule for Active Concealment, and what is a classic example?

Active Concealment: Party takes affirmative steps to prevent the other from acquiring material information.

• Example: Seller glues a broken bumper back on and says nothing.

Fraud by Silence Exception: What is the rule for a Failure to Correct, and what is a classic example?

Failure to Correct: Disclosure is required to correct the other party’s mistaken belief about a basic assumption.

• Example: Buyer tells Seller they are glad to be getting “toxic-free” land. Seller knows about toxic waste buy remains silent. Seller is liable.

Fraud by Silence Exception: What is the rule for when a True Statement Becomes Untrue, and what is an example?

True Statement Becomes Untrue: A party must correct a statement that was true when made but becomes false before the transaction is completely executed.

• Example: Company president truthfully states there are no pending lawsuits, but a $10M suit is filed before the bank finalizes the loan. Continued silence = fraudulent misrepresentation.

Fraud by Silence Exception: What is the rule for when the speaker owes a Fiduciary Duty to the recipient, and what is an example?

Fiduciary Duty: Silent party must disclose if owes a fiduciary duty.

• Example: Attorney secretly buys client’s land for $65K knowing it’s worth $200K.

Fraud by Silence Exception: What is the rule for when the speaker makes a Statement Not Expected to be Acted Upon, and what is an example?

Statement Not Expected to be Acted Upon: Party makes misrepresentation not expecting reliance, but later learns the innocent party will actually act on it.

• Example: Dave lies about Jill’s financial reliability, thinking Pete just wants to date her. Dave learns Pete plans to borrow $5K from Jill but remains silent. Liable.

Fraud by Silence Exception: What is the rule for when the speaker makes an Ambiguous or Partial Statement, and what is an example?

Ambiguous or Partial Statements: Giving only part of the truth, or making an ambiguous statement triggers duty to disclose full context.

• Ambiguous Example: Buyer asks if the car was ever painted. Seller says “of course,” referring to the original factory paint, while knowing it was never repainted.

• Partial Statement Example: Seller discloses bumper damage but omits that the front camera (housed in the bumper) is also broken.

The speaker portrays an opinion, but doesn’t actually hold the opinion. Is Element 1 (Misrepresentation of Fact) satisfied?

Yes, because there’s always a hidden fact in every opinion

1. What is Puffery?

2. Is it actionable under Misrepresentation/does it satisfy Element 1?

1. Exaggerated praise (e.g. “the best peanut butter you can buy”)

2. No. Not reasonable to rely on vendor’s high self-praise.

Does a Prediction of a Future Event satisfy Element 1 (Misrepresentation of an Existing Fact)?

No. It’s just an opinion. However, if the speaker knows the prediction is false or misleading, it may constitute misrepresentation.

A real estate agent tells you, "I confidently predict this neighborhood will skyrocket in value over the next five years." You buy the house. The market unexpectedly crashes, and your house loses half its value.

Is Element 1 satisfied for Misrepresentation? Why?

No. The realtor merely offered an opinion about the future.

The same real estate agent tells you, "I confidently predict this neighborhood will skyrocket in value over the next five years." However, the agent is secretly holding a confidential city council letter stating that a massive, foul-smelling sewage treatment plant is breaking ground right next to the neighborhood next month.

Is Element 1 satisfied for Misrepresentation? Why?

Yes. Realtor used a "prediction" to disguise a lie about present circumstances.

When a defendant does that, the court strips away the "it was just an opinion" defense, and the statement is treated as an actionable misrepresentation of an existing fact.

Is assertion of intention to do something Misrepresentation of an Existing Fact?

No. But if the person does not actually have that intention, that’s misrepresentation.

You agree to buy a small car dealership lot in Los Angeles. The seller asks if you plan to keep their current sales manager on staff. You say, "Yes, I intend to keep him." At that moment, you genuinely mean it. Two weeks later, you review the manager's terrible sales numbers and decide to fire him. Misrepresentation of an Existing Fact? Why?

No. Only an assertion of true intent

You agree to buy a small car dealership lot in Los Angeles. The seller says they will only sell you the lot if you promise to keep the manager. You say, "Yes, I intend to keep him." However, you have already signed a secret contract with your own friend to take over that exact management position the day you get the keys. Misrepresentation of an Existing Fact? Why?

Yes, because you didn’t actually have that intention

What is Element 2 of Misrepresentation? What’s the rule?

Fraudulently Made: Must satisfy scienter—a conscious lie knowing you lack basis for the statement OR reckless disregard for the truth. If negligently made, claim becomes Negligent Misrepresentation.

What are the Three Mental States under Element 2? Is contributory negligence a defense for any of them?

1. Fraud & Deceit: Scienter. You know the statement is false or your acting with reckless disregard for the truth.

• Contributory negligence NOT a defense—fraudster cannot reduce liability by pointing to P’s carelessness.

2. Negligent Misrepresentation: NOT fraud. Breach of duty required. D should’ve known the truth but was careless (e.g. mixing up records, relying on unverified surveys).

• Contributory negligence IS a valid defense.

3. Innocent Misrepresentation: Speaker honestly believed what turns out not to be true (e.g. relying on faulty manufacturer report).

• Contributory negligence IS a valid defense.

What is Element 3 of Misrepresentation? What’s the rule?

Actual Reliance: P changes position (e.g. makes purchase, enters contract)

What is Element 4 of Misrepresentation? What’s the rule?

Justifiable Reliance: 1) Reasonable reliance on a fact 2) material to either a reasonable person OR knowingly to this Plaintiff.

If P knew statement is false —> not justifiable reliance.

Plaintiff could’ve discovered the falsity through an investigation. Was the reliance justified?

Yes. A recipient of fraudulent misrepresentation is justified in relying even if they could have easily discovered the falsity through an investigation.

Does Contributory Negligence bar recovery for Justifiable Reliance?

No

A buyer purchases a business for $50,000. The seller fraudulently presented forged financial records showing the business generates high margins and is objectively worth $100,000. After taking over, the buyer discovers the business is actually completely dead and worth $0. Before discovering the fraud, the buyer also spent $5,000 on non-refundable specialized inventory software to run the storefront.

What Remedies & Damages are available for P for Misrepresentation?

1. Rescission - Undo and Make the Contract Whole: P rescinds contract and recovers their money back OR recovers the difference between what they received and the price they paid. ($50K)

2. Pecuniary Loss: P recovers any other losses incurred by the misrepresentation ($5K software)

3. Benefit of the Bargain: P recovers the value he expected from the agreement ($100K)

4. Warranty Damages: Value of promise - value received ($100K - $0)

What differentiates contract and tort remedies for Misrepresentation?

Contract Law: Aim to avoid the transaction

Tort Law: Avoid transaction + sue for provable damages caused by the misrepresentation

Buyer purchases a commercial warehouse. The seller explicitly guarantees the building has a newly installed and structurally reinforced roof. The statement is a material misrepresentation.

The buyer moves in, and during the first rainstorm, the rotting roof collapses. The collapse destroys $100,000 worth of the buyer's inventory.

1. What can the Buyer recover under Contract Law?

2. What can the Buyer recover under Tort Law?

1. Rescind the transaction

2. Rescind the transaction + recover for his inventory