Misrepresentation: The Restatement's Second Mistake
51 Pages Posted: 18 Sep 2012 Last revised: 12 Feb 2013
Date Written: September 18, 2012
The contract defenses of mistake and misrepresentation, while conceptually distinct in theory, contain an inefficient amount of overlap in practice. This is because a misrepresentation of one party, when believed, results in a mistaken belief of the other. Each produces a failure of consent resulting from at least one party’s misconception of the facts, and each may result in rescission coupled with restitution. The coextensiveness of the defenses suggests that, absent an overriding normative justification, the legal test and remedy should be the same for each. Such a normative justification exists only in the case of fraudulent misrepresentation which, unlike mistake or non-fraudulent misrepresentation, involves the intentional infliction of a dignitary harm. In such cases, punishment and deterrence are appropriate normative goals.
Because punishment and deterrence are best achieved through provision of a punitive remedy rather than through determination of the remedy’s availability, they present no impediment to the adoption of a single defense in lieu of separate defenses of mistake and misrepresentation. Furthermore, punishment and deterrence are not fully achieved by the commonly available remedy of rescission coupled with restitution, which may impose reputational cost but leaves the wrongdoer in a financial position no worse than if fraud had not been committed. Accordingly, this Article recommends the adoption of a single defense of misconception coupled with a grant of discretion to courts for punitive damages in cases of fraud. Eliminating separate defenses and allowing an expanded remedy on the basis of intentionally false assertions would promote simplicity, efficiency, and predictability while buttressing the unique role of the fraud defense in contract law.
Keywords: contract, mistake, misrepresentation, fraud, scienter, risk allocation
JEL Classification: K1, K10, K12
Suggested Citation: Suggested Citation