Not All Misrepresentations Face Equal Legal Consequences

In our litigation practice, there are situations where business owners and individual investors allege that they were induced by the opposing party into a deal. When disputes arise, one party often blames the other for presenting false information, intentionally or negligently, before the business relationship was formed.

These allegations can be categorized as claims of misrepresentation. Under Canadian common law, misrepresentation generally means a false or misleading statement that induces another party to enter into a contract.

Not all misrepresentations lead to the same remedy

However, from a legal perspective, not all “lies” trigger entitlement to legal remedies. The established law identifies three major types of misrepresentation: innocent, negligent, and fraudulent.

Innocent misrepresentation

Innocent misrepresentation occurs where a false statement is made honestly, without fraud or negligence. The only possible remedy is rescission — undoing the contract — but it can only be granted when certain preconditions are met, including a positive misrepresentation of existing fact, inducement, prompt action to disaffirm the contract, no impact on innocent third-party rights, and the ability to restore the parties substantially to their pre-contract position. Rescission may be similarly available for other types of misrepresentation. Damages are not available.

Negligent misrepresentation

Negligent misrepresentation occurs where a party carelessly makes an inaccurate statement in circumstances where the other party reasonably relies on it. The Supreme Court of Canada in Queen v. Cognos Inc. confirmed a five-part framework for negligent misrepresentation, including a special relationship, an untrue or misleading statement, negligence, reasonable reliance, and resulting loss. One possible remedy is damages to put the wronged party in the position that party would have been in but for the misrepresentation.

Fraudulent misrepresentation

Fraudulent misrepresentation is the most serious category. It involves a knowingly false statement, or recklessness as to truth, that causes another party to act and suffer loss. The Supreme Court of Canada in Bruno Appliance v. Hryniak confirmed the core civil fraud test. In fraudulent misrepresentation cases, the representor may be held liable for all damages flowing from the misrepresentation, not just those reasonably foreseeable when the representation was made.

At Henderson & Lee Law Corporation, we assist clients in identifying the correct legal claim, choosing the appropriate remedy, and building the evidence needed to pursue or defend misrepresentation claims.