When you enter into a contract, you expect all parties to be honest. But if false or misleading information was shared – even unintentionally – it could amount to misrepresentation, and that can have serious legal and financial consequences.
Whether an untrue statement amounts to a misrepresentation for legal purposes can be a complex issue and may result in court action if it causes loss to the party on the receiving end of it. If you're concerned about the terms of a contract or suspect a misrepresentation, our commercial law solicitors are here to help you understand your rights and options.
Jump to:
- What is misrepresentation in contract law?
- Where might I come across misrepresentation?
- Does silence count as misrepresentation?
- How would I deal with it?
- What are the available remedies for misrepresentation?
- Can you exclude or limit liability for misrepresentation?
- How to avoid misrepresentation?
- Misrepresentation and criminal liability
- Need help dealing with misrepresentation?
What is misrepresentation in contract law?
A misrepresentation can be a statement of fact (for example, misstating the technical capacities of a product) or of law (such as misleading someone about the legal effect of a document). In either case, if the statement provides misleading information which influences someone to enter into a contract they would not otherwise have agreed to, as a result of which they suffer loss, this will be classed as a misrepresentation.
There are three types of misrepresentation:
Negligent: under the Misrepresentation Act 1967, there may be a negligent misrepresentation where a statement is made:
- Carelessly, or
- With no reasonable grounds for believing it’s true.
Fraudulent: if one party makes a false representation:
- Either knowingly, without belief in its truth, or recklessly as to whether or not it’s true
- Intending the other party to act in reliance on it
- If the other party relies on it and suffers a loss as a result, there will be a fraudulent representation.
Innocent: Even if the party making the statement believes it to be true, it may still be a misrepresentation for legal purposes if the other party:
- Relied on it
- Entered into the contract, and
- Suffered a loss because of it.
The distinction between the three types is crucial because it determines the remedies available.
Where might I come across misrepresentation?
Pre-contract negotiations are a fertile ground for misrepresentations, inadvertent or otherwise. Discussions might include marketing materials, commitments made in sales negotiations, or statements written into the contract itself. Some of what is said will be mere ‘sales patter’ which has no legal effect. However, if one party is materially influenced by what the other side says and relies on their statements, as a result of which they enter into the contract and suffer loss, then there may have been a misrepresentation.
In this situation, if the parties are unable to settle the matter through negotiation, the matter may ultimately need to be resolved by the courts. Our commercial law experts can advise you on what to do if you believe that you have been the victim of a misrepresentation, or if you are accused of making a misrepresentation by the other side.
Does silence count as misrepresentation?
It can do. Although there is generally no duty to disclose facts which, if known, would affect the other party’s decision to enter into the contract, in certain circumstances, not saying something can constitute misrepresentation.
For example, if:
- Half the story is told (being ‘economical with the truth’), misrepresentation can arise over what was left unsaid.
- A true statement becomes untrue before the contract is signed. For example, stating that a software bug has been fixed might have been correct at the time of initial discussions. Still, if it proves inaccurate at a later stage (and is not corrected), a misrepresentation could have been made.
The contract is based on good faith, and material facts were not disclosed at the start. Examples include insurance contracts, employment contracts and partnership matters.
Access legal support from just £149 per hour
Our commercial law solicitors and disputes resolution solicitors can provide you with sound, practical advice on any potential misrepresentation issue.
How would I deal with it?
If your business is claiming loss for misrepresentation, you must prove that the other party didn’t honestly believe the statement.
You would need to show that, on the balance of probabilities:
- A false statement of fact or law was made
- It induced you to enter into the contract, and
- You suffered a loss because of the misrepresentation.
Keeping notes of conversations and correspondence is essential. You should also request complete clarification and transparency about anything stated on which you rely before signing the contract, rather than hoping to claim misrepresentation later on.
Once the contract is signed, it may be that a party’s best interests are served by bringing an action for breach of contract rather than misrepresentation. This is where a dispute solicitor can help you decide on the best course of action for your business.
If you are on the receiving end of an allegation of misrepresentation over a statement that you made, you will need to show that:
- The statement in question was true
- The other party didn’t rely on it, and
- The statement didn’t cause them any loss.
Making sure you have complete and accurate notes of conversations and a record of all correspondence between the parties is vital to supporting your case. It’s essential to act quickly, so you should seek specialist legal advice as soon as you are aware of any allegations.
What are the available remedies for misrepresentation?
The remedies for misrepresentation are:
- Rescission (where the contract is set aside and the parties are put back into the position they were in before it was made), and/or
- Damages. Damages which are awarded instead of rescission aim to put the person claiming misrepresentation in the position they would have been in had no misrepresentation been made. If the statement is also a term of the contract, the person claiming misrepresentation may additionally be able to claim damages for breach of contract.
If the misrepresentation was fraudulent or negligent, both remedies are available; however, for innocent misrepresentation, the court can’t award both and has discretion to award damages instead of rescission.
Rescission may not be possible if there have been any clear words or conduct showing an intention to keep the contract alive (for example, by performing or demanding performance of the contract). This is known as affirmation. Beware of unintentionally affirming the contract, for example, by leaving it a long time before complaining of the misrepresentation and performing the agreement in the meantime.
Can you exclude or limit liability for misrepresentation?
It is not possible to exclude liability for fraud or misrepresentation caused by negligence, which results in death or personal injury.
Subject to that, you can endeavour to limit liability for misrepresentation by using:
- A specific exclusion clause (subject to certain statutory controls, depending on whether your contract is with a consumer or another business).
- An entire agreement clause (to try to prevent statements or representations that aren’t written in the contract from having contractual effect).
- A non-reliance clause (to try to prevent claims based on statements, representations or warranties made outside the terms of the contract or in pre-contractual negotiations).
- A limitation clause which sets a financial cap on the level of liability in the contract (again, this is subject to statutory controls).
These clauses need meticulous drafting to ensure that any exclusion:
- Would be regarded as reasonable, by reference to the circumstances that were (or ought reasonably to have been) known to the parties when the contract was made, and
- Does not breach any of the statutory controls.
The law in this area is complex and nuanced. Our commercial solicitors can help you draft practical clauses to limit your liability in commercial contracts.
How to avoid misrepresentation?
Follow these practical steps to avoid a misrepresentation arising:
- Know what your employees are saying! Review your sales scripts and training processes.
- Review the statements made in your marketing materials.
- Get legal advice on your contract before signing.
- Act quickly if anything comes to light that you believe is false. Raise the issue with your commercial lawyer and the other side immediately.
Misrepresentation and criminal liability
Potentially, yes. The Fraud Act 2006 created a general criminal offence of fraud which can be committed by:
- False representation
- Failing to disclose information, and
- Abuse of position.
An offence is committed if someone:
- Dishonestly makes a false representation
Intends, by making the representation, to make a gain for himself or someone else, or to cause loss (or the risk of it) to another.
Need help dealing with misrepresentation?
Misrepresentation can cause significant harm to your business, ranging from wasted time and broken deals to legal claims and reputational damage. If you think a contract was based on false information or you're unsure of your legal position, it’s essential to act quickly and get the right advice.
Our specialist commercial law solicitors work with businesses across the UK to resolve misrepresentation disputes and prevent them from happening in the first place. Contact us to discuss how we can help protect your business.
