During pre-contractual negotiations, many things may be said in advertising, during discussions or in correspondence. Some may become terms of the contract and others may have no legal effect, but the law of misrepresentation concerns untrue or misleading statements made by one party, which induce the other to enter in to a contract.
A party entering into a contract based on a misrepresentation by the other party may be entitled to rescind (or set aside) the contract and/or claim damages for any loss, but the law on misrepresentation is complex and it is necessary to determine whether the misrepresentation was fraudulent, negligent, or innocent.
It is therefore important for businesses to understand how any pre-contractual statements they may make could leave them exposed to a legal challenge, and how those made by the other party may give them a way out of the contract and/or a right to claim damages.
What is misrepresentation?
A misrepresentation is an untrue statement made by one party (or his agent) to another party, which induces it to enter into a contract and thereby causes it loss.
A real-world example of a recent case is that of a Chinese car manufacturer who induced a prospective UK dealer to enter into a dealership agreement by telling it, falsely, that its vehicles complied with upcoming EU emissions regulations. In that case, the dealer, unable to obtain compliant vehicles to sell, suffered a substantial loss, including loss of projected sales and the costs of rebranding its dealership. The dealer was therefore able claim rescission of the contract and damages for fraudulent misrepresentation.
A misrepresentation may be a statement of fact or law. A mere statement of opinion or intention will not be treated as a misrepresentation. A misrepresentation can be express or implied by words or conduct. Silence does not usually amount to a misrepresentation, except where a party makes a statement which is a half-truth, or where a statement is true when it is made but becomes untrue before the contract is made.
For a misrepresentation to be actionable, it must have induced the other party to enter into the contract. If a party did not rely on it, he cannot claim that it was induced to enter into the contract by it. The recent case of Leeds City Council & Ors v Barclays Bank plc has clarified that the representee must demonstrate some form of awareness of the representation having been made; it had to have been actively present in their minds at the point of entering into the contract.
Types of Misrepresentation
There are three different types of misrepresentation, each giving rise to different remedies:
- Fraudulent misrepresentation – this occurs where a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth. As action in fraudulent misrepresentation is founded in the tort of deceit.
- Negligent misrepresentation – an action for negligent misrepresentation is based on the Misrepresentation Act 1967 and occurs where a statement is made by one party to another carelessly or without reasonable grounds for believing its truth.
- Innocent misrepresentation – this occurs where a misrepresentation is made entirely without fault, i.e. where the maker can show that it had reasonable grounds to believe its statement was true.
Remedies for misrepresentation
The remedies for misrepresentation are rescission of the contract and/or damages. Rescission is available for all types of misrepresentation and the claimant has a choice to rescind the contract or to affirm it and claim damages. In cases of fraudulent or negligent misrepresentation the relevant measure of damages is to put the claimant back in the position it was in before the misrepresentation, i.e. all losses flowing directly from the contract. For innocent misrepresentation, the claimant is entitled to rescission only, or damages in lieu of rescission.
Limiting liability and practical tips
Steps that can be taken to limit or exclude liability for misrepresentation include:
- Inserting an exclusion, entire agreement and/or non-reliance clause into any contractual documents or terms and conditions.
- Ensuring that facts and claims made on websites, in promotional and marketing documents and in pre-contractual discussions and correspondence are true and reviewed regularly.
- Checking, before making any contract, whether any circumstances or key terms have changed since discussions and negotiations began and, if they have, making sure that all parties are aware.
- Training and educating sales and other staff about the risks of misrepresenting facts and making unsubstantiated claims.
If you think you may have a claim for misrepresentation it is important to act quickly and take specialist legal advice to ensure that you do not prejudice any claims or remedies you may have including any right to rescind the contract.
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.