Most businesses don’t make decisions based solely on the words written in a contract. Long before an agreement is signed, you will probably have meetings, emails, presentations, product demonstrations and conversations that help you decide whether the deal is right for your business. You rely on that information when assessing risk, negotiating price and deciding whether to move forward.
If some of that information turns out to be false, the consequences can be expensive. You could find yourself tied into a contract you would never have signed, paying more than something was worth or facing unexpected costs that could have been avoided.
This guide discusses when an inaccurate statement may give rise to a legal claim and what options are available if you have entered into a contract based on information that was not true. You will also learn how the different types of misrepresentation are treated by the courts and what steps to take if you discover a problem after signing that contract.
If you are concerned that you have been misled during the pre-contract negotiations, or someone has accused your business of making misleading statements, our business dispute solicitors can help you understand your position and find a practical way forward.
Jump to:
- What is misrepresentation in a contract?
- What are the different types of misrepresentation?
- What is the difference between fraudulent, negligent and innocent misrepresentation?
- When does a statement become a misrepresentation?
- Can I claim if I relied on verbal promises that were not included in the contract?
- What happens if I discover a misrepresentation after signing the contract?
- Can I claim compensation for misrepresentation?
- What remedies are available for misrepresentation?
- What is the time limit for bringing a misrepresentation claim?
- Can directors or employees be personally liable for misrepresentation?
- When should I seek legal advice about a potential misrepresentation?
- Summary
What is misrepresentation in a contract?
Commercial negotiations often involve a degree of persuasion. Sellers want to present their business in the best possible light, suppliers want to win work and buyers naturally ask questions before committing to a deal. That’s all part of doing business. The line is crossed when a false statement persuades another party to enter into a contract.
In legal terms, misrepresentation happens when one party makes an untrue statement of fact or law before the contract is signed and the other party relies on that statement when deciding to proceed. It’s important to highlight that this statement doesn’t need to appear in the final contract. It may have been made during a meeting, in an email, in marketing material or even over the phone.
Imagine you are buying a software company. During negotiations, you are told it has secured long-term contracts with several major customers. Those contracts are a big reason for your agreement on the purchase price. After completion, you discover that most of the customers had already given notice that they intended to leave. That inaccurate information may amount to misrepresentation if it influenced your decision to buy the business.
Not every inaccurate statement will give rise to a claim. Businesses make predictions, estimates and commercial judgments every day. The law recognises that negotiations are rarely perfect. The question is whether the statement was false, whether it induced the contract and whether it falls within one of the recognised categories of misrepresentation.
What are the different types of misrepresentation?
Not every misrepresentation is treated in the same way. English law recognises three types, each reflecting the state of mind of the person making the statement.
The first is fraudulent misrepresentation. This is where someone knows what they are saying is false, doesn’t believe it’s true or simply doesn’t care whether it’s true or false. It’s the most serious category because it involves dishonesty.
The second is negligent misrepresentation. Here, the person making the statement believes it to be true but hasn’t taken reasonable care to check whether it actually is. Many commercial disputes fall into this category. A sales director might repeat figures provided by another department without checking they are accurate, or a seller may make claims about regulatory compliance without verifying the position.
The third category is innocent misrepresentation. This applies where the statement is false but the person making it genuinely had reasonable grounds for believing it was correct.
The distinction matters because it affects the remedies available and, in some cases, the amount of compensation that may be recovered. One inaccurate statement can lead to very different legal outcomes depending on why it was made and what the person knew at the time.
What is the difference between fraudulent, negligent and innocent misrepresentation?
From a business owner’s perspective, all three can leave you facing unexpected costs. From a legal perspective, the difference lies in the conduct of the person who made the statement.
Fraudulent misrepresentation involves deliberate deception or recklessness. Someone may knowingly exaggerate sales figures, conceal a significant problem with a business or make promises they never intended to keep. Courts take a particularly serious view of dishonest conduct and have broad powers to award damages where fraud is established.
Negligent misrepresentation doesn’t involve dishonesty. Instead, the problem is carelessness. Businesses are expected to take reasonable care before making statements that others are likely to rely upon. If they fail to do that, they may still be liable for the losses caused.
Innocent misrepresentation sits at the other end of the spectrum. The statement is still false, but the person making it honestly believed it was true and had reasonable grounds for doing so. That doesn’t always mean they are free from liability, although the remedies available are usually more limited.
Understanding which category applies is often one of the first tasks for solicitors dealing with a commercial dispute. It’s rarely obvious at the outset. Internal emails, board papers, financial records and witness evidence may all help establish what someone knew when the statement was made.
When does a statement become a misrepresentation?
Businesses exchange huge amounts of information during negotiations. Some of it is factual, some of it is optimistic and some of it is little more than sales talk. A statement becomes legally significant when it goes beyond marketing language and influences the other party’s decision to enter into the agreement.
For example, telling a potential customer that your software is "market leading" is unlikely to amount to misrepresentation. Saying the software already integrates with a particular accounting platform, when it doesn’t, is much more likely to raise legal issues.
Timing also matters. Misrepresentation happens before the contract is formed. Once the agreement has been signed, later conduct is more likely to give rise to a breach of contract rather than a misrepresentation claim.
Businesses sometimes assume that anything discussed before signing disappears once the contract is complete. That’s a risky assumption. Courts frequently examine negotiations to understand why the parties entered into the agreement in the first place. Emails, presentations, heads of terms and meeting notes can all become valuable evidence if a dispute develops.
Silence can also create problems. In most situations there’s no general duty to volunteer information during commercial negotiations. Even so, if a statement was true when it was made but later becomes false before the contract is signed, failing to correct it may amount to misrepresentation. That often catches businesses by surprise. Circumstances can change quickly during negotiations and it’s easy to overlook an earlier statement that is no longer accurate.
Can I claim if I relied on verbal promises that were not included in the contract?
This is one of the questions we hear most often. Commercial negotiations rarely happen entirely in writing. Decisions are shaped by conversations, Teams calls, site visits and presentations long before the final contract is signed.
Many businesses assume verbal promises automatically disappear once the written agreement is in place. That’s not always the case. If a verbal statement persuaded you to enter into the contract and amounts to a misrepresentation, you may still have a claim even if it wasn’t written into the agreement.
The position becomes more complicated where the contract contains an entire agreement clause. These clauses are common in commercial contracts and are designed to limit reliance on statements made before signing.
They don’t automatically prevent a claim. Much depends on how the clause has been drafted and whether it satisfies the legal tests that apply to clauses restricting liability for misrepresentation.
If your decision to sign the contract was heavily influenced by promises made during meetings or negotiations, don’t assume you’ve lost your rights simply because those promises never appeared in the final document. For more information on this topic, read our guide on verbal agreements.
What happens if I discover a misrepresentation after signing the contract?
Discovering you’ve been misled can be frustrating, particularly if your business has already invested significant time or money in the agreement.
Your first instinct may be to terminate the contract immediately. In many cases, taking a step back and understanding your legal position first is the better commercial decision.
Start by preserving as much evidence as possible. Emails, draft agreements, marketing material, presentations, handwritten notes and messages exchanged during negotiations may all become relevant. They can help establish exactly what was said, when it was said and whether it influenced your decision to proceed.
It’s also worth thinking about what outcome your business actually wants. Walking away from the contract isn’t always the right answer. You may want to renegotiate the commercial terms, recover financial losses or preserve an important business relationship while resolving the dispute.
The sooner you understand your options, the more flexibility you’ll usually have. Waiting too long can affect the remedies available and make it harder to gather evidence while events are still fresh in everyone’s minds.
Can I claim compensation for misrepresentation?
If you have suffered a financial loss because you relied on a misrepresentation, you may be able to claim compensation. The amount you can recover depends on the type of misrepresentation, the losses you have suffered and whether those losses were caused by the inaccurate statement.
The aim isn’t to give you a better deal than you originally negotiated. It’s to put you back, as far as money can, in the position you would have been in if the misrepresentation hadn’t happened.
Take the example of a business acquisition. If the seller overstated recurring revenue and you paid more for the business than it was really worth, your losses may include the difference in value, together with other losses that flowed from entering into the transaction.
Working out the value of a claim is rarely straightforward. Businesses often suffer a combination of immediate financial losses and longer-term commercial consequences. You may have committed management time to the deal, invested in new staff or entered into related contracts on the assumption that the information you received was accurate.
That’s why it’s worth obtaining legal advice early. Understanding the likely value of your claim can help shape settlement discussions and influence the commercial decisions you make as the dispute develops.
What remedies are available for misrepresentation?
The right remedy depends on both your legal position and your commercial objectives.
In some situations, your priority may be to unwind the agreement and walk away. In others, keeping the contract in place while recovering your losses makes better business sense.
One remedy available is rescission. This allows the contract to be set aside so that, as far as possible, both parties are returned to the position they were in before the agreement was made. Rescission isn’t available in every case. If too much time has passed, you have continued with the contract after discovering the problem or it isn’t possible to restore the parties to their original position, the court may decide that rescission is no longer appropriate.
Damages are another possible remedy. These compensate you for the losses caused by the misrepresentation. The way damages are assessed depends on whether the misrepresentation was fraudulent, negligent or innocent.
Many commercial disputes never reach trial. Once both sides understand the strengths and weaknesses of their legal position, they often negotiate a settlement that allows them to avoid the cost and uncertainty of litigation. That settlement might involve a financial payment, changes to the contract or an agreed exit from the commercial relationship.
Every dispute is different. The best outcome isn’t always the most aggressive one. Sometimes preserving an important customer, supplier or investor relationship has greater commercial value than pursuing every legal remedy available.
What is the time limit for bringing a misrepresentation claim?
Businesses often discover problems months, or even years, after signing a contract. That’s one reason it’s sensible to seek advice as soon as concerns arise.
For many misrepresentation claims, the limitation period is six years. The date from which that period runs depends on the nature of the claim.
Where fraud is involved, the position is slightly different. Time will usually begin to run when the fraud was discovered, or when it could reasonably have been discovered.
Calculating limitation periods isn’t always straightforward, particularly where several claims may arise from the same facts. Waiting too long could affect your ability to pursue compensation, even if your claim would otherwise have been successful.
Can directors or employees be personally liable for misrepresentation?
Businesses negotiate through people. Directors, sales teams, account managers and senior employees all make statements during commercial discussions. In some circumstances, those individuals may be personally liable if they make fraudulent or negligent misrepresentations.
This is particularly relevant during business sales, investment rounds and high-value commercial negotiations where directors are closely involved in presenting financial information and answering detailed due diligence questions.
Personal liability can come as a surprise. Many directors assume the company alone is responsible for statements made during negotiations. That’s not always the case.
For growing businesses, this is another reason to make sure everyone involved in contract negotiations understands the facts they’re presenting and avoids making assumptions or promises that haven’t been properly checked. A cautious approach during negotiations is often far less expensive than dealing with a dispute later.
When should I seek legal advice about a potential misrepresentation?
Many businesses delay seeking advice because they hope the issue will resolve itself. Others continue performing the contract while trying to work out what happened. That can limit your options.
Early legal advice isn’t just about preparing for court. It’s about understanding your commercial position before making decisions that may affect your rights.
You should consider speaking to a business dispute solicitor if you have discovered information that appears to be false, you’ve suffered financial losses after relying on statements made during negotiations or you’re being accused of making misleading statements yourself.
A business dispute solicitor can help you assess the strength of your position, preserve evidence, review the contract and identify the most commercially sensible way forward. In many cases, disputes can be resolved through negotiation long before formal court proceedings become necessary.
Summary
Commercial relationships are built on trust. Every contract relies on the assumption that the information exchanged during negotiations is accurate enough for both parties to make informed decisions.
When that trust breaks down, the consequences can be significant. Misrepresentation claims often involve substantial financial losses, damaged business relationships and difficult commercial decisions. They also raise questions that aren’t always easy to answer. Was the statement genuinely false? Did it influence the decision to sign the contract? Is the best option to end the agreement, renegotiate it or seek compensation?
Every situation turns on its own facts. Taking advice early can help you understand where you stand, protect your commercial interests and resolve the issue before it develops into a more expensive dispute.
