A seller of a small business provided financial statements to a buyer that overstated the company’s annual revenue by 30%. The seller knew these statements were inaccurate but did not disclose this to the buyer. Relying on these financial statements, the buyer signed a contract to purchase the business. After discovering the discrepancy in the financial statements, the buyer seeks to have the contract rescinded. Which of the following legal principles is most relevant in determining whether the buyer may avoid the contract?
The correct answer is based on the principle of fraudulent misrepresentation. Fraudulent misrepresentation occurs when one party makes a false statement of fact with knowledge of its falsity or reckless disregard for the truth, intending to induce the other party to rely on it, and the other party does rely on the statement to their detriment. In this case, the seller knowingly provided false financial information, and the buyer relied on that false information to their detriment by entering into the contract. Other answers are incorrect because they either involve scenarios without intentional deception or misunderstand key elements like active concealment.
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How does reliance factor into fraudulent misrepresentation?
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