When you enter into a contract, you expect all parties to be honest and upfront. But if false or misleading information was shared – even unintentionally – it could amount to misrepresentation, and that can have serious legal and financial consequences.
In this article, we explain what misrepresentation means in contract law, the different types to look out for, and how they might affect your business agreements. 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 a business exclude or limit liability for misrepresentation?
- Misrepresentation and criminal liability
- Need help dealing with misrepresentation?
What is misrepresentation in contract law?
A misrepresentation is a statement in a contract that:
- provides misleading information which
- influences one party
- to enter into a contract
- that they would not otherwise have agreed to
- as a result of which they suffer loss.
There are three types of misrepresentation:
Negligent - the offending party:
- had no reasonable grounds for believing the statement themselves or
- didn’t care - was ‘reckless’ - as to whether it was true or not (Misrepresentation Act 1967).
Fraudulent - the offending party:
- knows or believes that the statement is untrue (or is reckless whether it is or it isn’t),
- intends the other party to act in reliance on it and
- the other party does act in reliance on it and
- they suffer loss as a consequence.
Innocent - the offending party can:
- prove that they believed the statement was true at the time it was made.
Where might I come across misrepresentation?
Misrepresentation arises out of ‘contractual discussions’ in which one party was ‘materially influenced’ by a statement(s) made by the other party, relied significantly on such statement(s) made by the other party, entered into a contract as a result of that reliance and suffered loss as a consequence.
These discussions might include marketing materials, commitments made in sales negotiations or statements written into the contract itself.
Its resolution would be a litigation matter and would ultimately go to court if the parties did not settle it beforehand.
Does silence count as misrepresentation?
In certain circumstances, not saying something can constitute misrepresentation.
For example:
- if half the story is told, misrepresentation can arise over what was left unsaid eg. being ‘economical with the truth’ or
- a true statement becomes untrue prior to the contract being signed, such as stating that a house has never been flooded might have been correct at the time of initial discussions but inaccurate at a later stage (and is not corrected).
- if the contract is one of ‘good faith‘ and material facts were not disclosed at the start, eg. under an insurance contract the insurer would not be obliged to pay out on a claim.
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How would I deal with it?
The onus of proof is on the person claiming loss to prove that the offending party did not honestly believe the statement.
They would need to prove that, on the balance of probabilities
- a false statement of fact or law was made
- it induced them to enter into the contract
- they suffered loss because of the misrepresentation.
Keeping notes of conversations and correspondence is essential but it is far more advisable to request complete clarification and transparency in relation to anything stated or which you really rely prior to 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.
If you are on the receiving end of an allegation of misrepresentation over a statement that you made, you should be prepared to prove:
- that the statement in question was true
- that the other party didn’t rely on it and
- that the statement did not cause the loss.
What are the available remedies for misrepresentation?
A court can choose from four main remedies:
- Rescission - if misrepresentation is found to have occurred, the court can ‘rescind’ the contract which means returning both parties to the position they were in before the contract was signed.
- Affirmation - ie. the continuation of the contract. Beware of ‘affirming without intending to’ eg. leaving it a long time before complaining of the misrepresentation.
- Damages in lieu of rescission - these aim to put the person claiming misrepresentation in the position they would have been in had the misrepresentation not been made.
- Contract damages - if the statement is decided to have been a term of the contract, the person claiming misrepresentation may also have the right to claim damages for the loss suffered by what is effectively a breach of contract.
Can a business exclude or limit liability for misrepresentation?
It is not possible to exclude liability for fraud or misrepresentation which results in death or personal injury.
Subject to that, you can endeavour to limit liability for misrepresentation by using:
- a specific exclusion clause.
- an ‘entire agreement‘ clause.
- a ‘non-reliance clause.
- a financial cap on the level of liability in the contract.
However, these clauses need very careful drafting to ensure that the exclusion would be regarded as ‘reasonable’; you should take legal advice as soon as possible from a commercial lawyer if you want to limit your liability.
- Know what your employees are saying! Review your sales scripts and training processes.
- Review the statements made in your marketing materials.
- Review the contract - again! - before signing.
- If anything comes to light that you believe is false, tell the other party and your commercial lawyer immediately.
Misrepresentation and criminal liability
If someone knowingly makes a false statement to gain something for themselves (or someone else), or to cause a loss to another party, it could be a criminal offence under the Fraud Act 2006. In severe cases, this can lead to unlimited fines and/or a prison sentence of up to 10 years.
Need help dealing with misrepresentation?
Misrepresentation can cause real damage, from wasted time to broken deals and legal claims. 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 contract 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.
