LEGAL LINE
Seller Beware: Misrepresentations During the Course of a Sale BY KEREM TIRMANDI, SHK LAW CORPORATION
During the course of selling or leasing a vehicle, representations will invariably be made regarding its features, performance, history and warranty. These representations may not be written into the contract, but if they induce the buyer to enter into the contract, they can take on a binding effect. Accordingly, when representations turn out to be false, the buyer may be able to rescind the deal altogether or have recourse against the dealership in damages. This article provides you with a few guidelines to keep you on the right side of (mis) representation.
What is a misrepresentation? A misrepresentation is an untrue, inaccurate or misleading statement of fact that induces the buyer to enter into an agreement. Misrepresentation comes in three main forms: • Fraudulent, a knowing misrepresentation by the seller intended to induce the buyer into the agreement; • Innocent, an unknowing misstatement made with no intent to deceive, but that nonetheless induces the buyer into the agreement; and • Negligent, a statement made carelessly by the seller without reasonable grounds for belief in its truth. Misrepresentations can occur in advertising, in the course of negotiations and in the written terms of the sales contract. They can occur in writing, verbally or even from conduct. For example, courts have found silence or the failure to correct the false belief of a buyer to be a misrepresentation when it induces them to enter into the agreement.
What are the consequences of a misrepresentation? The principle remedy available to buyers for misrepresentation is rescission. If a contract is rescinded, it means the buyer and seller are placed in the position they would have been in if the agreement never occurred. In the context of a car sale, this would mean that the car would be returned to the dealership and the buyer would receive his or her money back. If for some reason the sale could not be rescinded, a court could award the amount of money to put the buyer back in the position he would have been in had the agreement never been entered into.
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Signals Magazine October–December 2020
How can I limit the risks of misrepresentation? Liability for pre-contractual misrepresentations can be limited in the following ways: A “No Representations” clause indicating that the parties have not relied on any representations outside the contract of sale can have the effect of limiting the parties to the terms of the agreement and excluding liability for pre-contractual representations. An “Entire Agreement” clause similarly provides that the terms contained in the agreement represent the entire agreement between the parties. In order to maximize its effectiveness, the clause should expressly reference that pre-contractual representations are not binding. “Caveat Emptor” or “As Is” clauses may provide protection from non-fraudulent misrepresentations. Note, however, that especially in the context of consumer transactions (i.e., a sale or lease for personal use), consumer protection legislation and the courts have a very negative view of such limiting strategies, especially in the case of fraudulent and negligent misrepresentations made to the consumer. As such, they should not be relied on as a primary means to limit your liability.
Key takeaways Whether fraudulent, innocent or otherwise, dealerships can limit exposure to misrepresentations by doing the following: • Communicate honestly and avoid hyperbole—don’t overstate the merits of a vehicle simply to get the deal done; and • Clearly distinguish fact from your opinion, by stating it as such. A misrepresentation can come from a mistaken but honestly held belief. Accordingly, ensure that you and your sales team are educated and up-to-date with the products on offer. Include a “No Representations” clause or “Entire Agreement“ clause in your sales agreements to limit the potential liability from pre-contractual statements. If a representation is material to the agreement (in that it induces the buyer to enter into the agreement), set it down in writing to ensure certainty. For everyone’s sake, avoid statements like “she runs like a dream.” For more information on how best to protect yourself and your business from misrepresentation please contact one of our lawyers at SHK Law Corporation.
