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Misrepresentation in contract law

This guide sets out in brief the concept of contract misrepresentation under English law, including what it is, where it might be found, what is involved in proving a claim and how liability for it might be restricted.

This is a very complex area of law, and you should take a commercial lawyers’ advice as soon as possible if you suspect misrepresentation has occurred or you find yourself on the receiving end of a claim. Our team of expert commercial lawyers can assist you at any stage of drafting or reviewing clauses or agreements to help you avoid claims. We can also advise on the best route for resolving disputes.

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 3 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.
  • 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.

An important point to note.

  • Criminal offence - If it is found that the dishonesty (ie. the misrepresentation) is made to make gain for the maker of the statement or another or to cause loss or risk of loss, the penalties include unlimited fines and/or a prison sentence of up to 10 years (Fraud Act 2006).

What next?

Our commercial contracts solicitors and disputes solicitors have plenty of experience in the area of misrepresentation and can provide you with sound, practical advice on any potential misrepresentation issue. Call us on 0800 689 1700, or fill out this short form with your enquiry.

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