Misrepresentation in contract law: What is it and how might it protect you?

The parties to a contract negotiation will often make many statements, representations and promises to try and persuade the other to enter into a contract.

Some of these statements will become terms of the contract. However, what happens when a statement that is made during a contract negotiation, which isn’t incorporated as a term of the contract, but which influenced your decision to enter into the contract, turns out to be false? Whilst you’re unlikely to have any contractual remedies to terminate or sue of damage, there is a body of law which can offer protection to parties who find themselves in this situation – this is known as the law of misrepresentation.

What is misrepresentation?

Misrepresentation is a complex area of contract law but at a basic level, involves the following elements:

• An untrue statement: a statement of fact or law is made by one party (the “Representor”) to another (the “Representee”) which turns out to be untrue.
• Inducement: as a result of the Representor’s statement, the Representee, believing that the statement is true and relying on the statement, is induced to enter into a contract with the Representor.
• Loss: as a result of entering into the contract based on the statement, the Representee suffers a loss.

A mere statement of opinion which proves to be unfounded will not be treated as a misrepresentation unless the opinion is determined to amount to a statement of fact or law and it can be shown that the person who gave the opinion did not genuinely hold that opinion or could not have reasonably held that opinion.

Similarly, a statement of intent which is subsequently not acted upon would not be classed as a misrepresentation.

Types of misrepresentation

There are three main types of misrepresentation, and these determine what remedies are available to a Representee if a misrepresentation claim can be established.

1. Fraudulent misrepresentation

There are 4 key elements to fraudulent misrepresentation. These are:

• the Representor makes a false representation to the Representee;

• the Representor knows that the representation is false or is reckless as to its truth;

• the Representor intends the Representee to rely on the representation;

• the Representee does rely on the representation and as a result, suffers a loss.

There is no fraud if the Representor honestly believes its statement to be true and mere negligence in making a false statement does not amount to fraud – there must be proof that the Representor do not honestly believe the statement to be true, or that it suspected the statement might not be true and failed to make enquires.

2. Negligent misrepresentation

A negligent misrepresentation occurs where a statement is make by the Representor to the Representee carelessly or without reasonable ground for believing its truth. There is no requirement to establish fraud and the Representee must only prove that the statement was false. It is then for the Representor to prove that it reasonably believed in the truth of the statement.

3. Innocent misrepresentation

Where a misrepresentation is made entirely without fault, that is, where the Representor can show that it has reasonable grounds to believe its statement was true, this is considered an innocent misrepresentation.

What are the remedies for misrepresentation?

The remedies available to a Representee who has suffered loss as a result of a misrepresentation will depend on what type of misrepresentation was give. In each case, a misrepresentation allows for the contract to be rescinded, which has the effect of voiding the contract and requiring each party to be returned to the position they were in before the contract was entered into, and in and in some cases, a Representee can also claim for damages.

The specific remedies available in each case are as follows:

• Fraudulent misrepresentation: rescission of contract and damages

• Negligent misrepresentation: rescission of contract and damages

• Innocent misrepresentation: rescission of contract

Our Commercial Team are experienced in advising clients on misrepresentation and other contractual issues, so please do not hesitate to contact us.