What if the fraudulent representation I made was actually correct?

What if the fraudulent representation I made was actually correct?

Yair Aloni, Adv.
February 15, 2022

Everybody knows that a seller may not mislead a purchaser. But what happens if the seller intends to mislead but unintentionally (due to its own mistake) tells the truth? Is it still considered to be a fraudulent misrepresentation?

Israeli law sets that a negotiating party is required to act “in an acceptable manner and in good faith” and, out of such general obligation, a seller is obliged to disclose to a purchaser all information relevant to the transaction. If full disclosure was not made to the purchaser, the seller may be liable for damages caused due to the failure to provide the information. However, the seller’s liability will only apply when the purchaser relied on a misrepresentation or other false data given in relation to the transaction. For example, if the seller does not disclose the fact that there is a defect in the apartment that impairs the true value of the property, the purchaser is entitled to sue for the damage caused as a result of the transaction. But, if the ‘misrepresentation’ turns out to be wrong by itself, what does that mean?

Such an issue arose in a case heard in the Krayot Magistrate’s Court in January, 2022, where a seller of an apartment “neglected” to tell the purchaser that an engineer gave a professional opinion stating that the building is a dangerous uninhabitable structure. The purchaser learnt about the opinion and therefore disposed of the apartment at a low price, but in retrospect it was discovered that the opinion was incorrect. The Court held that in the first transaction, despite the fact that the opinion was not disclosed, in fact no error of the side of the purchaser was made, as the opinion was found to be erroneous and thus the price set in that transaction did reflect the value of the property as assessed by the parties. As for the second transaction, in which the apartment was sold at a reduced price , no liability can be attributed to the sellers. The sellers did not give any representation, accurate or misleading, but the purchasers chose to rely on the erroneous opinion they discovered by themselves and which was not given to them by the sellers. The purchasers chose to rely on a false opinion without conducting a thorough examination by another expert and therefore can not blame the sellers for their loss.

Note, that presenting an opinion based on unverified information, obtained from a third party and which in retrospect turns out to be incorrect, may in fact establish liability towards a party who relied on it and was harmed as a result. For example, in a case heard in the Supreme Court in March, 1990, a contractor was ordered to compensate purchasers who relied on speculative information provided to the contractor by the Jerusalem municipality officials regarding the possibility of obtaining a business license for the store they were interested in. As a result, the purchasers chose to purchase another store. It was held that when transferring information to a particular party that is supposed to act upon it, extra care must be taken. In contrast, there are cases where presenting estimates was not considered a misrepresentation. For example, in a case decided in January, 2022, at the Tel Aviv Court, it was found that a business forecast that later did not materialized is not a "misrepresentation," because a misrepresentation deals with a description of past or present facts or a statement about an existing fact and therefore a statement that is a prediction, an assessment or an opinion does not constitute such a representation.

In any case, before entering into a transaction, it is recommended to distinguish between assessments and verified information that requires disclosure due to its relevance to the purchaser for the purpose of entering into the specific transaction. For example, there is a difference between a determination by the engineering department of a local authority that the apartment is in a "dangerous structure" and an opinion based on information that is not verified and is only an assessment. Similarly, a distinction must be made between an appraiser's assessment with factual determinations in relation to the planning or physical condition of the property and an assessment regarding the value of the property or its economic potential. Although an assessment or opinion is not information that a seller has an obligation to provide to the other party in contract negotiation proceedings, it is always suggested to exercise discretion and consult a lawyer specializing in sale transactions in order to review the information on the merits and recommend on the scope of disclosure under law. In addition, it is always advisable to also carry out an independent expert assessment of the property (such as: an appraiser or home inspector) and not rely on opinions prepared for others, so that the appraiser who is an expert on ones behalf will thoroughly examine all factors that may affect the value of the property.