Halpert v. Rosenthal
267 A.2d 730 (1970)
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Rule of Law:
A party who is induced to enter into a contract by an innocent but material misrepresentation of fact may rescind the contract and recover any consideration paid.
Facts:
- In early February 1967, a real estate agent for the seller, Halpert, told the prospective buyer, Rosenthal, that the house had no termite problem.
- Later that month, Halpert herself told Rosenthal's family members that there were no termites in the house.
- Just before signing the sales agreement, Halpert's agent again assured Rosenthal that a termite inspection was unnecessary because the house was free of termites.
- On February 21, 1967, Halpert and Rosenthal executed a contract for the sale of the house for $54,000, and Rosenthal paid a $2,000 deposit.
- On May 17, 1967, a termite inspection revealed that the house was infested with termites.
- Upon learning of the termite infestation, Rosenthal notified Halpert that he would not proceed with the purchase.
- Rosenthal did not appear for the scheduled closing on June 30, 1967.
Procedural Posture:
- Halpert, the plaintiff-vendor, filed a civil action against Rosenthal, the defendant-vendee, in the Rhode Island Superior Court (trial court) for breach of a real estate contract.
- Rosenthal filed a counterclaim seeking the return of his $2,000 deposit, alleging misrepresentation.
- At trial, Halpert sought monetary damages, having since sold the property to a third party.
- The case was tried before a jury, which found in favor of the defendant, Rosenthal.
- The trial justice denied Halpert's motion for a directed verdict on the counterclaim.
- Halpert, the appellant, appealed the judgment directly to the Supreme Court of Rhode Island, the state's highest court.
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Issue:
Does an innocent, non-fraudulent misrepresentation of a material fact permit a party who relied upon it to rescind a contract?
Opinions:
Majority - Kelleher, J.
Yes, a contract may be rescinded due to a material misrepresentation, even if the misrepresentation was made innocently and not fraudulently. The court distinguished between an action for deceit, which is a tort requiring proof of knowledge of falsity (scienter), and an action for rescission, which sounds in contract. Adopting the overwhelming majority view and the Restatement of Contracts, the court held that where one party induces another into a contract by means of a material misrepresentation, the contract is voidable by the misled party. The court reasoned that it is inequitable to permit a person who has made a false representation, even innocently, to retain the benefits of a bargain induced by it. The focus is on the effect of the untrue statement upon the person to whom it is made, not the motive of the person making it. A merger clause in the contract does not bar rescission for innocent misrepresentation, as the same policy considerations that prevent it from barring rescission for fraud apply. The court concluded that responsibility for an innocent misrepresentation is a form of absolute liability, where the risk of the statement's falsity lies with the speaker.
Analysis:
This case established for the first time in Rhode Island that innocent misrepresentation is a valid basis for contract rescission, aligning the state's jurisprudence with the majority of American jurisdictions and the Restatement of Contracts. By rejecting the need to prove scienter (knowledge of falsity) for rescission, the decision significantly lowers the burden for a party seeking to void a contract based on a false statement. This holding places the risk of factual incorrectness squarely on the party making the assertion, thereby encouraging greater diligence and accuracy in pre-contractual negotiations. The decision also clarifies that standard 'merger' or 'integration' clauses cannot shield a party from a claim of rescission based on such innocent misrepresentations.
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