Misrepresentations are an essential topic in both contract and tort law.  Where a party makes a misrepresentation to another that causes harm, that misrepresentation may be actionable as a tort.  Such tortious misrepresentations are generally categorized as either fraudulent or negligent, and if proven, entitle the plaintiff to resulting damages.  They also have consequences in contract law.  These nuances are explored in this post, along with the question of whether financial forecasts can ever give rise to such claims.

Misrepresentations in Tort

The tort of fraudulent misrepresentation involves the same legal requirements as the torts of deceit and civil fraud (see Paulus v. Fleury).  Generally speaking, to establish a fraudulent misrepresentation, a plaintiff must prove that the defendant made a false representation of fact and did so either knowing it was false or being reckless as to whether or not it was true.  The plaintiff must also prove that the defendant made the representation intending that the plaintiff act upon it and that the plaintiff actually relied upon it.  Lastly, the plaintiff must prove they suffered damage as a result of the false representation (see 1000425140 Ontario Inc. v. 1000176653 Ontario Inc.).  If these requirements are met, the plaintiff will be entitled to any resulting damages.

The tort of negligent misrepresentation is a subset of the general tort of negligence, involving somewhat similar principles.  To establish the tort, a plaintiff must prove five elements:

1. The party that made the representation and the party that acted upon it must have been in a “special relationship” that gave rise to a duty of care;

2. The representation in issue must have been “untrue, inaccurate, or misleading”;

3. The party that made the representation must have been negligent in making it;

4. The other party must have reasonably relied upon the representation; and

5. The party that acted upon the representation must have suffered damage as a result (see Doumouras v. Chander).

Misrepresentations in Contract Law

In the context of contract law, if a plaintiff can establish that they were induced to enter into a contract by a fraudulent or negligent misrepresentation, they may be entitled to rescind the contract.  This is in addition to any entitlement to damages they may have.  Note that rescission of a contract may also be possible where a party entered into a contract as a result of an innocent misrepresentation – that is, a false representation made by someone who genuinely believed it to be true.  However, such a misrepresentation will not give rise to any corresponding tort.

What Constitutes a Misrepresentation?

A misrepresentation is a “statement of objective fact that was not true” (see the recent decision of the Ontario Superior Court of Justice in Argyle v. Dickinson).  

Certain types of statements, such as “opinions and sales puffery,” do not constitute statements of objective fact and therefore cannot constitute a representation for the purpose of the tort (see Argyle).  Likewise, neither statements of judgment, expectation, or probability, nor statements that are “loose, conjectural or exaggerated,” generally constitute actionable representations (see Hembruff v. Ontario (Municipal Employees Retirement Board)).  This is because parties are not justified in placing reliance on such statements.

In light of this, can a financial forecast form the basis for a misrepresentation claim?

When Might a Financial Forecast Give Rise to a Claim for Misrepresentation?

Generally speaking, and subject to the discussion below, a statement will not ground a claim for misrepresentation if it is a statement as to “future occurrences” (see Datile Financial Corp. v. Royal Trust Corp. of Canada).  Predictions are not actionable because they are not based on current facts.  As such, a negligent misrepresentation claim “cannot be based on a forecast about the future” (see Healy v. Canadian Tire Corporation, Limited).

Having said this, a financial forecast may give rise to a claim for misrepresentation if it “contains an implicit current representation of fact that it was prepared by a person of skill and experience who exercised reasonable care and skill in its preparation” (see Argyle).  If the forecast then turns out to have been one that “no person of reasonable skill or experience should have made,” that implied representation may ground a claim for misrepresentation.  In considering whether this is the case, courts will generally consider whether the forecast in question falls within a “range of acceptable opinion” or “range of reasonableness” (see Healy).

At least one court has suggested that “some measure of caution” be taken before a conclusion is drawn that a particular forecast is one “that no person of skill or experience should have made” (see J.R.K. Car Wash Ltd. v. Gulf Canada Ltd.).  The Court in J.R.K. Car Wash made this comment in light of the fact that projections are based upon “historical or present data” and are not intended to be guarantees.

Forecast’s Author Not the Only Consideration; Representations as to Reasonability Important

Ultimately, as the Court recently commented in Argyle, the assessment must involve consideration of the “merits of the forecast and whether a defendant implicitly represented that the forecast fell within the range of reasonableness.”  It is not enough simply to consider the identity of the forecast’s author.  Instead, the assessment “aims at the behaviour of the defendant in delivering an unreasonable forecast.”

In Argyle, the Court explained this using a hypothetical situation.  For example, if someone selling a business says that it will be worth a certain amount of money in the near future, even though they actually believe it will be dead by then, that person’s “belief or intention at the time she makes a representation about the future can be a current objective fact.”  The tort of misrepresentation might therefore be engaged.

In short, circumstances involving financial forecasts can ground a claim for misrepresentation, but must meet the criteria discussed above to do so.

As a practical matter, a party to a commercial transaction that wishes to rely on a statement made by the other party should ensure the statement is included in the contract itself to avoid the prospect of having to prove a misrepresentation.  This gives the relying party much more solid ground on which to litigate any damage arising from such reliance, since it may give rise to a claim for breach of an express term of the contract.

Milosevic & Associates: Providing Multifaceted Support in Complex Commercial Litigation and Civil Fraud Cases in Toronto

Financial forecasts often play a central role in commercial negotiations, investments, and business sales. However, when those projections are misleading, the legal consequences can be significant. If you relied on a financial forecast that caused you harm, or if you are facing a claim based on projections you provided, experienced legal advice is critical. The commercial and fraud litigation lawyers at Milosevic & Associates regularly advise clients on negligent misrepresentation and complex commercial disputes. Contact us online or call (416) 916-1387 to discuss your situation and understand your rights and risks.