South-Western Legal Studies in Business

Misrepresentation During Negotiations Provides Grounds for Rescission
Description Appeals court held that where a party engaged in misrepresentation to induce formation of a contract, the other party has the right to request rescission. While there may not be damages at law in such an equity suit, there may be a request for restitution.
Topic Contracts
Key Words Rescission; Misrepresentation; Restitution; Economic Loss Doctrine
C A S E   S U M M A R Y
Facts Harley-Davidson received a request from a dealer in Seminole County, Florida, of its desire to sell the dealership to PowerSports. Harley approved the sale after PowerSports provided satisfactory oral and written answers to specific questions Harley asked about PowerSport’s business model to ensure that it complied with Harley requirements of its dealers. Soon after approval of the transfer of the dealership was approved, Harley found clear evidence that PowerSports intended to operate in a manner inconsistent with the Harley business model required of dealerships. Harley sued for rescission of the transfer of the dealership based on misrepresentation during negotiations. Harley also sued for damages and punitive damages. The trial court held for PowerSports, finding that the economic loss doctrine barred Harley’s claims. Harley appealed.

Reversed. Under Wisconsin law, if a party’s assent to a contract is induced by material or fraudulent misrepresentations, that person can either seek rescission or damages, but cannot seek both; however, a party electing rescission may recover restitution to restore it to the position it would have occupied had no contract ever been made. The economic loss doctrine, which provides that a commercial buyer of a product cannot recover from a producer damages that are solely economic in nature does not bar Harley from seeking rescission of its transfer of a dealership on grounds of misrepresentation. To hold otherwise would restrict contract law from protecting the duty of good faith, fair dealing, and the requirement of mutual assent.

Citation Harley-Davidson Motor Co. v. PowerSports, Inc., 319 F.3d 973 (7th Cir., 2003)

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