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Contracts: misrepresentation

Contractual misrepresentation is a complicated area of law. The meaning of misrepresentation and the legal remedies available depend on the specifics of the misrepresentation and the circumstances of the parties. Whether you are a contractor accused of misrepresentation or the alleged victim of the misrepresentation it’s important to understand your rights and remedies and have some knowledge of what you can do to reduce the chance of your falling victim to misrepresentation or being held liable for it.

What is misrepresentation in contract law?

In contract law, misrepresentation involves:

  • An untruth - A statement made by one contracting party (the representor) to another which isn’t true and
  • Inducement - As a result of the statement the other contracting party (the representee) is encouraged to enter into the contract and relies on the statement. The statement must have induced the representee to enter into the contract. If the representee knew the statement was a misrepresentation and didn’t rely on it then they can't say that they were induced by the statement to enter into the contract. If the representee has the opportunity to discover the truth, but doesn’t do so, this doesn’t prevent the statement from being a misrepresentation. That’s because the test is whether there was actual and reasonable reliance on the misrepresentation. Accordingly, if a representee didn’t know that a representation was untrue then there’s no defence to a claim for damages or rescission that the representee could have found out about the false representation through the exercise of reasonable care    
  • Loss - As a result of entering the contract based on the statement the representee suffers loss.

Misrepresentation, namely an untrue statement of fact or law, can also occur if made by:

  • The agent of the representor provided that the agent is acting within the scope of their authority
  • A third party who isn’t an agent of the representor but the representor knows the third party has made the misrepresentation.

Does a misrepresentative statement have to be contained in the contract?

A misrepresentation doesn’t have to form part of the contract. In many cases the statement that’s alleged to have been a misrepresentation occurred during pre-contract negotiations. To amount to a misrepresentation the statement must be a statement of fact or law as opposed to obvious sales banter, such as ‘All of our customers say how great this car looks’.

When it comes to representations and statements they can be:

  • A statement of opinion which isn’t a term of the contract; or
  • A statement made by one party which may have induced the other party or representee to enter into the contract or
  • A term of the contract.

Commercial solicitors say that whether a statement is a representation or a term of the contract is an important distinction because if the representation is a statement or a term of the contract the representee has different remedies.

The intention of the parties to the contract helps determine whether a statement is a term of the contract or a representation. When assessing if a statement is a term of the contract or a representation the following factors are important:

  • The timing of the statement; and
  • The importance of the statement; and
  • The relative knowledge and expertise of the parties to the contract and the known characteristics of the actual representee.

As a misrepresentation can be implied it is also important in the case of an implied misrepresentation to consider what a reasonable person would have understood from the statement.

An example of an implied representation is the case of Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15.

 The Spice Girls were held to have made an implied misrepresentation by entering into a contract with a representee to publicise certain products without telling the representee that a member of the group was leaving which meant that the contract could not be fulfilled.

Many business people entering contracts assume that you can't be found to have made a misrepresentation if you simply remain silent but the law on misrepresentation is complex. Silence can amount to an implied representation. Whilst there is generally no duty to disclose facts which if known by the other contracting party would influence their decision to sign the contract there are exceptions, namely:

  • Misrepresentation by conduct or implied representation.
  • Where a representor makes a statement which is true but only tells half the story so there is misrepresentation about what is unsaid.
  • There is a duty of disclosure between partners in a firm or where parties are negotiating the terms of a partnership agreement. Non-disclosure of material facts can amount to a misrepresentation. For example, failing to disclose pending bankruptcy proceedings when negotiating partnership with a professional services firm.
  • Where a contracting party makes a representation or statement that is true but before the contract is signed the statement is no longer true. For example, a statement that a house has never flooded may have been correct at the outset of the purchase but inaccurate at a later stage of the purchase. The representor has a duty to tell the representee about the change in circumstances. If the representor stays silent this could amount to a misrepresentation.
  • Where a contract is a contract of good faith or is a fiduciary relationship such as an insurance contract. In insurance contracts the insurer isn’t obliged to pay out if there was non-disclosure or misrepresentation of material facts by the insured party. The test of whether the non-disclosure was material or not is an objective one with the court assessing whether the lack of disclosure or misrepresentation would have affected the decision of the contracting insurer to enter the contract on those terms.

Who can claim loss through misrepresentation?

A representee is a person to whom a representation is made and normally a representee therefore falls within one of these three categories:

  • Someone to whom a representation was made directly and their principals.
  • Someone that the representor intended or expected the representation to be passed onto.
  • Someone who falls within a class of people at which the representation was directed.

Who is a representee can be complicated as seen in the 1970 case of Gross v Hillman [1970] Ch 445 wherethe Court of Appeal decided that a subsequent purchaser of land could not generally rely on a representation made by an estate agent to the original purchaser of the land. The subsequent purchaser wasn’t considered to be a representee of the original vendor. However, the 2016 case of OMV Petrom SA v Glencore International AG [2016] EWCA Civ 778 held that if a false representation is made in a document and the contracting party or representor knows that the information will be passed on and relied on, the person who relies on the information will be a representee.

Does the misrepresentation need to be the sole inducement to enter the contract?

When you are debating whether to enter a contract it is rarely the case that one statement is the only inducement to sign up. When it comes to misrepresentation and the law (save for breach of warranty and fraud) the misleading or inaccurate statement doesn’t have to be the only matter that induced the representee to sign the contract but the representee must have been ‘materially influenced’ by the misrepresentative statement.

What is ‘material influence’? For a statement to amount to material influence the statement must be of a nature that:

  • It would have a real and substantial impact on the judgment and decision making of a reasonable person in working out whether to sign the contract and on what terms; or
  • The statement made the representee enter into the contract without thinking it necessary to conduct other investigations into the contract or its terms.

The requirement for material influence is reduced in cases involving fraud or breach of warranty. In cases of fraud, a representee has to establish that the statement was an ‘active consideration’ in determining whether to enter into the contract. There is an evidential presumption that a representee would have been induced by the fraudulent representation to enter the contract but the representee still needs to show that they suffered loss as a result of being induced to enter into the contract. It is possible to rebut the legal presumption if the representor can persuade the court that on the balance of probabilities the misrepresentation did not play a real and substantial part in the decision to sign the contract.

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What types of misrepresentation are there?

There are three different types of misrepresentation. Commercial contract solicitors say it’s important to understand the nature of the statement leading to the misrepresentation claim as the type of misrepresentation will impact on the evidence a claimant or representee needs to produce and their available legal remedies.

There are three main types of misrepresentation, namely:

  • Fraudulent misrepresentation
  • Negligent misrepresentation
  • Innocent misrepresentation

What is fraudulent misrepresentation?

Fraudulent misrepresentation is a false representation which is made knowingly, or without belief in its truth, or recklessly as to its truth. Fraudulent misrepresentation falls under common law and the tort of deceit. According to case law there are four elements to fraudulent misrepresentation, namely:

  1. A false representation
  2. Made by someone who knows that the statement is false or is reckless as to whether the statement is false; or not
  3. Made with the intention that the representee will rely on the statement.
  4. Through relying on the fraudulent misrepresentation the representee suffers loss.

Proving fraud is a high obstacle to overcome although a representee can bring a claim for fraudulent misrepresentation in circumstances where the representor only suspected that their statement might be incorrect and they didn’t make the proper checks to ascertain whether it was true or not.

If you are the director of a company you may assume that if your company is entering into a contract with a third party, the company will be liable for any fraudulent misrepresentation. However, company directors can be held personally liable for fraudulent misrepresentation. This is because they are liable, not as a director, but as an individual committing fraud.

Fraud can amount to a criminal offence under the Fraud Act 2006. If you abuse your position or make a false representation or do not disclose information, you may have committed an offence under the 2006 Act.

What is negligent misrepresentation?

Negligent misrepresentation is detailed in the Misrepresentation Act 1967 and occurs if a contracting party makes a false statement to another contracting party either carelessly or without reasonable grounds for believing its truth. It is different to the concept of negligent misstatement.

In a claim for negligent misrepresentation, the representee or claimant only has to show that the statement was incorrect. It is then for the representor to prove that they believed in the statement and that such belief was reasonable.

What is innocent misrepresentation?

Innocent misrepresentation is made with no fault on the part of the representor. For example, a statement was made during contractual negotiations which turned out to be false but the representor reasonably believed that the statement was true.

What are the remedies for misrepresentation?

The remedies for misrepresentation will depend on the type of misrepresentation that has occurred. There are three main remedies, namely:

  • Rescission – Rescission of the contract essentially unravels the contract and seeks to place the parties to the contract back in the position they were in before the contract was entered into. The claimant may choose to affirm the contract instead of rescinding it
  • Affirmation – Affirmation results in the continuation of the contract. Once the contract has been affirmed the contract can no longer be rescinded. Affirmation can occur expressly or impliedly by word or conduct. Care should therefore be taken as a representee may affirm a contract without intending to, for example, if the representee discovers the misrepresentation but does not do anything about it for a long time they may be taken to have affirmed the contract. It is therefore crucial that legal advice from commercial solicitors is sought as soon as the misrepresentation is discovered
  • Damages in lieu of rescission of contract – If there has been negligent misrepresentation or innocent misrepresentation the court can choose to award damages in lieu of rescission of the contract. In making this decision, the court will consider the fairness of making such an award, taking into account the misrepresentation made, any loss that would be caused if the contract continued and the loss that would be suffered if the contract was rescinded. The damages should be calculated to place the representee claimant in the financial position they would have been in had the misrepresentation not been made. This is different to damages awarded for a breach of contract claim which seek to place the claimant in the financial position they would have been in had the breach not occurred. The difference in approach to the award of damages can materially affect the amount of damages awarded. The claimant under any misrepresentation claim must attempt to reduce or minimise their loss arising from the misrepresentation. This is known as mitigation and failure to mitigate a loss may affect the amount of damages awarded for the misrepresentation.

The table below summarises the remedy position for the different misrepresentation claims and the remedies for breach of contract and negligent misstatement.

Type of claimRemedy
Fraudulent misrepresentationRescission and misrepresentation damages. The loss does not have to be reasonably foreseeable
Negligent misrepresentationRescission (or damages in lieu of rescission) and misrepresentation damages. The loss does not have to be reasonably foreseeable
Innocent misrepresentationRescission (or damages in lieu of rescission)
Breach of contractContract damages
Negligent misstatementMisrepresentation damages. The loss has to be reasonably foreseeable

What are the alternatives to a misrepresentation claim?

Parties to a contract may be able to bring a breach of contract claim rather than a misrepresentation claim if the false representation forms part of the contract between the parties. To bring a breach of contract claim the representee must be able to show that the representation was included in the principal contract between the contracting parties or in a separate collateral contract.

The remedy for a breach of contract claim will depend on the nature of the representation and whether it is classed as a condition or warranty.

  • Condition - If the representation forms a vital part of the contract then it will be classified as a condition of the contract. The breach of contract may result in the termination of the contract and contractual damages being payable or rescission of the contract.
  • Warranty - If the representation is of less importance than a condition to the contract then the remedy should be contractual damages payable under a breach of contract claim.

What is negligent misstatement?

Negligent misstatement is a claim that may arise where:

  • The representor owes some form of duty of care to the representee; and
  • The representor makes a false statement carelessly to the representee.

Unlike a negligent misrepresentation claim the contract between the parties does not need to have been entered into as a result of the statement. There is no right of rescission as a remedy in a negligent misstatement claim. In addition, when calculating the damages the damages are limited to the loss that was reasonably foreseeable as a result of the misstatement.

Can a business exclude or limit liability for misrepresentation?

Contracts often attempt to exclude or limit a party’s liability for misrepresentation in a contract. However, commercial contract solicitors advise that it isn’t possible to limit or exclude liability for fraud or for misrepresentation which results in death or personal injury.

Common ways of limiting or excluding liability for misrepresentation include:

  • A specific exclusion clause in the contract; or
  • An entire agreement clause in the contract; and/or
  • A non-reliance statement in the contract.

Some attempts to exclude or limit liability in a contract for misrepresentation may not be effective either because of statute or case law. For example, wording which excludes liability for misrepresentation is subject to section 3 of the Misrepresentation Act 1967. Section 3 of the 1967 Act provides that for the exclusion of liability to be effective it must satisfy a reasonableness test as set out in section 11(a) of the Unfair Contracts Terms Act 1977. To be effective and upheld by the courts, any contractual wording which seeks to limit or exclude liability for misrepresentation needs to be drafted extremely clearly and precisely.

Tips on avoiding misrepresentation claims

No one likes to think that they have been fraudulent or misleading when entering into a contract. These tips may help you and your business avoid a misrepresentation claim:

  • If you are entering into a contract, ensure that you are fully aware of its terms and what you are agreeing to. This applies whether you are entering into a contract as an individual, business, or as an agent.
  • Consider what you or your employees are saying when negotiating a contract. You should not assume that contractual limitation clauses will keep you and your business in the clear from any misrepresentation claims.
  • Be particularly careful of how you phrase things if you have specialist knowledge and the other contracting party doesn’t. If you offer a comment about something of which you have limited knowledge and the other party knows of this then misrepresentation is less likely to be an issue. However, if you hold yourself out as a specialist, then a misrepresentation issue could arise.
  • Ensure that all staff and employees involved in any sales or negotiations are fully trained and aware of the implications of making false statements in pre-contract or contract negotiations.
  • Review all marketing materials, presentations, leaflets and sales brochures to ensure that they are fact-checked and don’t contain any misrepresentations. This exercise should be repeated at regular intervals to ensure that all marketing materials remain accurate.
  • If, prior to entering into the contract, any statement that you or your employees or agents made becomes false, disclose this immediately to your commercial solicitors and to the other contracting party. A record of correspondence or discussions on the issue should be retained so you can prove that you disclosed the misrepresentation before the contract was entered into.
  • Read and check through the contract again just before signing to check for any discrepancies or any statements that may no longer be correct and may amount to a misrepresentation.
  • If you are told by the other party to the contract that they believe that they have been the victim of a misrepresentation which induced them to enter into a contract, seek legal advice from commercial contract solicitors as soon as possible.
  • If you are seeking to reduce or limit liability for misrepresentation in the contract then specific and clear wording is required as well as legal advice from a commercial law solicitor on whether limitation can be avoided.

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 the short form below with your enquiry.

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