February 19, 2023
We have previously written about fraudulent misrepresentation, often simply called fraud or civil fraud, and its ugly stepsister, negligent misrepresentation.
THE ISSUE
But what happens when the opposite party in a contract induces you to enter into the contract with a representation that is false, but which they believe to be true?
THE LAW
The primary remedy for an innocent misrepresentation is rescission, the technical term for the right to terminate the contract. We have written an entire article previously about rescission in real estate deals gone wrong. The principles discussed in that article apply generally to other contracts as well.
Because rescission originated as an equitable remedy for setting aside contracts due to misrepresentation, mistake, fraud, or unconscionability, having the moral high ground is an important factor.
The moral high ground situation does not favour you as clearly in those cases. However, you have suffered harm through no fault of your own. Should the opposing party be required to compensate you for your loss?
Rescission has the effect of terminating the contract. The judgment may include whatever additional terms that the court considers necessary to put the parties back in the position they were in before the contract began. So, if a deposit has been paid for example, that deposit must be returned. Since rescission is a restitutionary remedy, it may also be a proprietary remedy which means that if property was transferred, that property may have to be returned.
Historically rescission was only available when perfect restitution was possible and was therefore not available when the parties could not be put back in the same position they were before. For example, perhaps there was a kitchen renovation. In modern times, courts will ignore the historical rule where it is possible to make monetary adjustments to compensate one party or the other for these difficulties.
When the misrepresentation was innocent, there is no desire to punish the person who misspoke. Therefore, rescission will be more difficult to obtain in cases of innocent misrepresentation than in cases of fraud. Recission will normally only be granted in cases of innocent misrepresentation where the result of the misrepresentation is that you bought something completely different than what you bargained for.
You must also prove that you relied upon the misrepresentation to enter into the contract, which is sometimes factually more difficult than you may think. The term for these misrepresentations is “material misrepresentation” which is defined as any misrepresentation that a reasonable person would consider to be relevant to the decision to enter into the agreement. It does not have to be the only reason to enter into the agreement. As a question of fact, this will depend very much on the evidence at trial.
Recission however will not be available where there has been a significant change in the condition of the property to be returned, the agreement has been affirmed, or if rescission would unduly affect the rights of third parties (people not parties to the contract) such as mortgagees. In those cases, courts may substitute an award of damages for the equitable remedy of rescission.
Those damages would not be meant to be a determination of fault, like in negligent misrepresentation, but would reflect the equitable principles of returning the parties to their original position. Remedies in lieu of rescission by way of damages or equitable compensation will only be awarded where the right to rescind still exists but rescission would be impractical.
So if, for example, the contract has been affirmed by you, you will not be able to claim rescission or damages in lieu of rescission.
If you chose to affirm the contract after becoming aware of the innocent misrepresentation, then the contract continues as if the misrepresentation was not made at all.
As with other misrepresentations, innocent misrepresentations may be dealt with under an entire agreement clause to prevent you seeking remedies for the misrepresentation. We have written previously about the fact that entire agreement clauses will not be allowed to shield a wrongdoer. In situations where the innocent misrepresentation results in an unconscionable bargain, entire agreement clauses may also be ignored.
A CASE
Before a court will rescind the contract, they must consider the rights of innocent third parties that will be affected. Historically this was also viewed as an absolute proposition, but as illustrated in the 2022 case of Urban Mechanical Contracting Ltd. v. Zurich the modern approach is less absolute, implementing the practical approach associated with equity. In that case the court looks at the reasons for the rule and determines that some interference with third party rights can be compensated for monetarily.
Because rescission is an equitable remedy, the court has wide discretion to tailor a specific remedy or set of remedies. The concern in the Urban Mechanical case was fraudulent misrepresentation, and it is unclear at this stage how far courts will go in applying the reasoning of Urban Mechanical in cases of innocent misrepresentation. They have nudged the door ajar to allow for future arguments on new facts.
TAKEAWAYS
- If you were induced to enter into a contract by a material misrepresentation which is false, you may be entitled to rescind the contract even if the misrepresentation was innocent.
- Rescission is an equitable remedy, and the availability will depend upon flexible criteria with an objective of giving the innocent claimant full restitution.
- This flexibility is informed by the court’s goal of doing what is practically just.
- The downside of this approach is that there is less certainty as to the result that you may end up with.
- Where restitution by unwinding the contract entirely is impossible, equitable compensation through the payment of money me be ordered to achieve restitution, or to protect innocent third parties.
- Further uncertainty is created by the fact that the courts have not fully explored the extent to which equitable compensation will be used in place of rescission.
- Recent cases suggest that the goal of doing what is practically just leads to a more liberal approach and increases the likelihood that a claim for rescission will result in some favorable result if you are the innocent victim of the mistake.
- The courts have the jurisdiction to tailor the appropriate remedy for your facts.
- The particular facts of the case are even more important in equitable situations than in common law situations. This makes obtaining and presenting appropriate evidence even more crucial.
WHAT CAN WEILERS LAW DO TO HELP YOU?
Our motto of “a proud tradition, a progressive approach” is not just a tagline. It applies to situations such as this. The progressive approach is reflected in our awareness of the importance of equity, of evidence, and of the evolution of the law. Our counsel Brian Babcock has taught many classes in Remedies, including rescission, at the Bora Laskin Faculty of Law and currently teaches another equity-based course in Trusts, which includes remedies such as recission and equitable compensation.
Our proud tradition means that we work hard to help you locate the necessary evidence and present it in an appropriate fashion. It also means that we present your case vigorously and are not afraid of a tough case.
If you believe that you may have been the victim of any form of misrepresentation, whether fraudulent, negligent or innocent, give us a call and see if we are the right lawyers for you. Call now, before the facts change and may prejudice your rights.