The other day a law-firm partner who specializes in M&A called me to discuss the terms fraud and intentional misrepresentation.
He noted that it’s commonplace for both terms to be used in specifying exceptions to limits on indemnification. Here’s the sort of provision he was referring to (I haven’t attempted to clean it up):
Notwithstanding the above, the Basket and Cap shall not apply to claims for indemnification made by an Indemnified Party related to … (ii) any fraud by or intentional misrepresentation of the Indemnifying Party in connection with the transactions evidenced by this Agreement … .
But, he asked, don’t those terms mean the same thing? If so, why is it routine for drafters to use them as a couplet?
When you’re dealing with doctrinal terms of art, it can be difficult to isolate simple, universally recognized meanings. From the WestlawNext presentations I recently attended, I know that different jurisdictions use different terminology when referring to drunk driving. Due to the same dynamic, you can expect the courts and legislatures in different jurisdictions to attribute slightly different meanings to the same term of art.
So it comes as no surprise to have Williston on Contracts § 69:2 note that fraud “has been defined by many courts in slightly different language.” But it goes on to define fraud as “a deception deliberately practiced in order to unfairly secure gain or advantage, the hallmarks of which are misrepresentation and deceit, though affirmative misrepresentation is not required, as concealment or even silence can under certain circumstances constitute fraud.” I’ll make do with that definition, as for purposes of this post I’m not about to wade into an ocean of caselaw on the subject.
Because intentional misrepresentation would seem equivalent to “misrepresentation and deceit,” intentional misrepresentation would seem to constitute fraud. That much is confirmed by Restatement (Second) of Torts § 526, which states that “misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c) knows that he does not have the basis for his representation that he states or implies.”
But given the cases cited in Williston to the effect that fraud can arise not only through misrepresentation but also concealment, it would seem that intentional misrepresentation is only one kind of fraud. That suggests that for purposes of contracts, it would be more economical and less confusing simply to refer to fraud and omit any reference to intentional misrepresentation, unless for some reason you wish to convey the narrower meaning.
But that’s a bird’s-eye view of the relationship between these terms. For purposes of any given contract, you’d best check on the meaning given those terms in the courts of the governing-law jurisdiction and how the legislature uses them. Don’t be surprised if what you find is rather messy.
I wouldn’t use the phrase “intentional misrepresentation”. From an English law perspective, my understanding is that misrepresentation can be (a) innocent, (b) negligent, or (c) fraudulent. If it is fraudulent, the remedy lies in an action for deceit.
Ken:
I seem to recall that many jurisdictions have a reliance component to a fraud claim (apart from having to prove causation, which usually requires reliance). Maybe the author perceived fraud and intentional misrepresentation as overlapping sets.
Chris
Thanks for the post. This is an interesting question, which prompted a bit of research.
For practical purposes, I agree that fraud is a more broad term encompassing intentional misrepresentation. At least three state courts have used the terms “intentional misrepresentation” and “fraud” synonymously. If this is the case, then the hurdle is to show that this treatment is incorrect. This seeming redundancy may come from the varying use of these terms throughout jurisdictions.
However, there are two points in how the elements of an intentional misrepresentation differ from fraud. First, “[i]n general, the recipient of a misrepresentation need not show that he has actually been harmed by relying on it in order to avoid the contract.” Restatement (Second) of Contracts, Sec. 164, cmt. c. In contrast, fraud requires a showing of actual harm. Second, a misrepresentation may be non-fraudulent when the maker has made an “honest mistake.” Id. at Sec. 162, cmt. c. Then, the argument is whether such a mistake was “intentional,” and it may very well be found to be an innocent misrepresentation instead of an intentional misrepresentation. These distinctions may provide a buyer enough of an advantage to warrant the inclusion of “intentional misrepresentation.”
Mark and Chad, I think you both point to significant differences between fraud and intentional misrepresentation (IM). IM can be an element of fraud but IM is not necessarily fraudulent. The plain meaning of these words is clear and including the couplet would include all forms of fraud (not just those involving IM) and any IM, whether or not such IM is fraudulent.
What if the IM is communicated to a party non-lawyer in a settlement discussion and made by the attorney.(opposing party lawyer) to have the party to act (sign a settlement agreement) that results in that party’s release of liability? Would this be actionable later when discovered?