Seller Misrepresentation May Be Grounds to Avoid Contract

Every great business person knows that presenting a product or service in a favorable light is key to a successful sale. But, some companies cross the line between skillful presentation and outright misrepresentation.

When Misrepresentation Excuses Buyer From Contractual Duties

Almost every transaction — from a used car sale to a multimillion-dollar business purchase — involves reliance on mutual promises. For a seller, this usually means trusting in the availability of the agreed-upon payment, and in turn, the buyer expects a product or service that lives up to expected standards. The terms of such transactions are often spelled out in an oral or written contract.

The seller is typically much more familiar with the object of a sale than the buyer. This information disparity means that, to a large extent, the buyer must rely on the seller’s acute knowledge when making a purchasing decision.

False seller representations can be disastrous to a buyer, especially if the buyer is a business that has relied on the purchase for business success. Yet, misrepresentations are often not discovered until after a contact has been signed. Fortunately, there are recourses available to misled buyers.

There are two types of situations in which a seller may be responsible for a false statement:

  1. Fraudulent misrepresentation, which involves a statement the seller knew to be false
  2. Negligent misrepresentation, which involves a statement the seller should have known to be false.

Under the right circumstances, either situation could justify a buyer backing out of a contract. An otherwise valid contract may be “avoided” if a false statement from the seller about a material (important) term induced the buyer to act. The seller must have made the statement knowingly or recklessly and the buyer must have suffered some loss as a result.

A Business Law Attorney Can Help Determine Whether Nonperformance Is Justified

A seller’s fraud may excuse the buyer from performing on the contract — i.e., from making payment. But, there are many factors that go into a determination of fraud. Did the seller act innocently? Was the false statement really material to the agreement? When did the buyer learn of the misrepresentation? For example, if the buyer became aware of the false statement and proceeded with the contract anyway, he or she may be unable to rely on the misrepresentation for avoidance.

A buyer who wrongly fails to perform is liable for breach of contract. Determining whether a seller misrepresentation justifies nonpayment can be complex; if you suspect a false claim has been made in a transaction, consult a business law attorney before taking any action.