Law and Economics of Fraudulent Misrepresentation

Abstract

Intentional misrepresentation (IM) or fraudulent misrepresentation in this paper is defined as a type of behaviours that one contracting party (representor) intentionally presents untrue information to another party (representee) for inducing the latter to contract with him. Why are IMs socially undesirable? How should the law regulate IMs, and what are the economic effects of current English private law of IMs? This paper intends from the perspective of law and economics to seek the answers to these three questions. The whole paper proceeds as follow.

Section II provides an economic account for the undesirability of IMs. There are three reasons to justify the legal remedies for IMs. First, the contract concluded on the basis of an IM will lead to a misallocation of resource. Second, IMs incur considerable precautionary costs. Third, the resources used for making IM are wasted. Section III explores the relevant economic theories on the law of IMs in current law and economics literature. Section IV analyses the deterrence of two legal remedies for IMs, viz. damage and rescission. The analysis speculates that because of imperfect enforcement of private legal remedy in reality, the deterrence of damage is likely to be more effective than rescission. The costs incurred by the legal remedies are examined in Section V. Finally, a very brief remark is made in Section VI.

Keywords: contract law, misrepresentation, law and economics

JEL Classification: K00, K12, K13