Misrepresentation: What businesses need to know
When parties consider doing business together, a multitude of enquiries, discussions and negotiations take place before any deal is done. Marketing campaigns and promotional offers and communications have often been undertaken and information has been displayed online prior to the contemplation of any particular enquiries or leads. As part of the entire pre-contract process, myriad representations are made, many of which could give rise to liability.
However, the law of misrepresentation is not straightforward – it comprises elements of common law, equity and statute 1; it includes characteristics of both contract law and tort; and it is developing all the time.
To avoid inadvertently leaving your business open to legal challenge, therefore, it is important for any business to keep up to date with the law of misrepresentation, and to understand what remedies might flow when a misrepresention occurs.
In this briefing, Gwendoline Davies, Nick Lees and Nick McQueen provide an essential legal update, along with important practical advice, in relation to misrepresentation claims.
What is misrepresentation?
A misrepresentation is:
- an untrue statement of fact or law;
- of which a party is aware (this criteria represents a recent development in the law of misrepresentation. See below for more information);
- upon which a party relies in being induced to enter a contract; and
- which thereby causes the relying party to suffer loss.
- be express written or oral statements
- be implied by words or by conduct
- be made when making plans or projections for the future
- arise via half-truths
- arise where a statement was true when made, but later becomes untrue if circumstances change. Here, the representing party has a duty to update/revise his or her statement
- occur more readily in relationships of utmost good faith (such as partnerships or contractual arrangements requiring full disclosure).
By way of example, consider the following real-life scenario. A patient required cosmetic surgery after being involved in a serious accident. Having read a manufacturer's brochure given to her by her doctor, the patient decided to go ahead with treatment involving a cosmetic product described in that brochure. The brochure stated that the product, which would be administered by injection, included only the patient's own skin cells. That was not true – the product also included some foetal calf serum ("FCS"). Post-treatment, the patient (a vegan) discovered that the product had contained FCS. The manufacturer had made an express written representation. The doctor had made an implied representation that the brochure was correct by handing it over without a disclaimer. The patient could therefore sue either or both the manufacturer and the doctor in misrepresentation.
Another very common real-life occurrence of misrepresentation is where replies are given to enquiries in a conveyancing transaction, but they are not then updated when circumstances change prior to completion.
The fact that 'awareness' of a representation is an essential pre-requisite of a misrepresentation claim has, for some time, been the subject of debate. The 2021 case of Leeds City Council & Ors v Barclays Bank plc 2 has now clarified that representee claimants must be able to prove their awareness of the representation having been made (that is, the representation had to have been actively present in their mind) at the point of being induced to enter the contract. Importantly, the case confirmed that it is not sufficient to rely on an assumption about the representation in question, to found a claim.
There are three different types of misrepresentation, each giving rise to different remedies for the party who has suffered loss. Fraudulent misrepresentation; negligent misrepresentation; and innocent misrepresentation:
- Fraudulent misrepresentation is the most serious and requires the false representation to have been made knowingly, without belief in its truth, or recklessly as to its truth. The threshold is high, but the claimant may have the contract set aside (or 'rescinded') and seek unlimited damages. Damages for fraudulent misrepresentation should put the claimant in the position it was in before the misrepresentation, which means that the 'guilty' defendant is bound to make reparation for all damages directly flowing from the transaction.
The recent case of Glossop Cartons and Print Ltd v Contact (Print & Packaging) Ltd & Ors 3 has confirmed that calculation of loss for fraudulent misrepresentation requires the court to ascertain the actual value of assets purchased at the relevant date and to deduct that figure from the price paid. Any subjective commercial judgments (or misjudgements!) made by the purchaser are irrelevant and should not be taken into account. That means that, unusually within commercial law, a fraudulent misrepresentation claimant can be compensated for making a bad bargain.
- Where the parties have entered into a contract, a claim for negligent misrepresentation under section 2 (1) of the MA is available, in addition to any possible breach of contract claim, where the misrepresentation was made carelessly or without the representor having reasonable grounds for believing its truth. Here, the claimant may seek rescission and/or damages. The measure of damages will be the tortious measure (that is, to restore the claimant to its pre-misrepresentation position), as well as any possible breach of contract damages.
- An innocent misrepresentation occurs where a misrepresentation was made but the representor can show that he had reasonable grounds to believe its statement was true. In these circumstances, a claimant is not entitled to damages, but may be entitled to rescind the contract or to obtain damages in lieu of rescission.
What practical advice arises?
When it comes to misrepresentation liability, there are a number of practical points and best-practice tips of which all businesses should be aware.
- Take care to ensure that marketing material and all forms of pre-contract communications are accurate...
- ...and that they are checked and kept accurate and up-to-date on an ongoing basis.
- Beware providing 'estimates' of costs, facts or figures as a negotiating tactic unless these can be confidently backed-up with reliable evidence/calculations.
- Prior to conclusion of any contract, check whether any circumstances or key terms have changed since communications and negotiations began. If they have, make sure that all parties are aware and remain happy to proceed before you complete.
- Educate sales staff and negotiators as to the dangers of misrepresenting facts or projections.
- If you think you may have suffered loss having relied on a misrepresentation, act quickly. Take specialist legal advice immediately to ensure that you do not prejudice your rights to claim any particular remedies.
- Any potential claimant must ensure that its claim is formulated correctly. Ask your legal advisor to consider which type or types of misrepresentation should found your action and whether there may also be any potential to bring a breach of contract or tortious negligent misstatement claim.
- When considering any negligent or innocent misrepresentation claim, assess whether or not the right to rescind the contract remains.
- Parties may also limit or exclude liability for misrepresentation by inserting appropriate contractual protections, such as exclusion, non-reliance or entire agreement clauses 4.
1. the Misrepresentation Act 1967 (MA)
2.  EWHC 363 (Comm). The case arose from the LIBOR rigging scandal. The claimants alleged that the bank had made implied fraudulent representations that LIBOR was set honestly and properly and that the bank had not engaged, and had no intention of engaging, in improper conduct in connection with LIBOR. The High Court concluded that, to say that key people within the claimant assumed that LIBOR would be set in a straightforward and proper manner was simply not enough. The representation in question had to be actively present in the claimant's mind in order for it to be relied upon at the point of the claimant being induced to enter the contract.
3.  EWCA Civ 639
4. with the caveat that liability cannot be excluded for fraudulent misrepresentation
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.