An incredible amount of information is exchanged during a commercial contract's formation and negotiation stages. Although most terms will be commercially related, others will be representations that the parties rely on to be true when accepting the deal.
If one party misrepresents specific facts, statistics, features, or benefits, they may be liable for breach of contract and/or action in tort. This is known as misrepresentation and in this article, we’ll explain everything you need to know about this area of contract law.
What is misrepresentation?
Misrepresentation occurs when one party provides misleading information that influences the other party's decision-making process, causing them to enter into a contract they would not have otherwise agreed to. It’s important to note that it can occur unintentionally or deliberately and can be grounds for contract termination, legal action, or compensation.
What are the 3 types of misrepresentation?
The three types of misrepresentation are:
- Negligent misrepresentation
- Innocent misrepresentation
- Fraudulent misrepresentation
The Misrepresentation Act 1967 defines negligent misrepresentation as a statement made by one contracting party to another carelessly or without reasonable grounds for believing its truth. There is no requirement for the Claimant to establish fraud, and the test for negligent misrepresentation is objective. Negligent misrepresentation differs from negligent misstatement, the latter being an action in tort which may be invoked with or without a contract being in place. An action for negligent misrepresentation can only arise within contract law.
A misrepresentation made without fault, where the person making the statement can prove on the balance of probabilities that they reasonably believed their statement was true.
Where the party making the statement knows or believes it is untrue or has a reckless disregard for its truth. The Claimant does not need to establish a motive for the dishonesty. However, they must provide evidence that Defendant did not honestly believe what they were saying was true. Fraudulent misrepresentation stems from the tort of deceit.
The Courts have determined that the following four points are needed to establish deception:
- The Defendant makes a false representation to the Claimant
- The Defendant knows that the representation is false; alternatively, they are reckless about whether it is true or false
- The Defendant intends that the Claimant should act in reliance on it
- The Claimant acts in reliance on the representation and, consequently, suffers loss
Does silence count as misrepresentation?
The maxim ‘caveat emptor’ or buyer beware applies, meaning in most cases, remaining silent will not amount to a misrepresentation unless:
- The statement is a half-truth, and what is left unsaid makes it false
- A true statement becomes untrue before the contract is confirmed (if this happens, the party who made the statement must inform the other of the change)
- Where the contract is in utmost good faith or emerges from other fiduciary relationships, such as an insurance or employment contract
In both these contract types, failing to disclose information can make the contract voidable (for example, the insurer refusing to pay out on a claim). If there is doubt as to whether or not something should be declared, it’s always sensible to get legal advice before withholding the information.
Is fraudulent misrepresentation a criminal offence?
The Fraud Act 2006 created the offence of false representation. Under the Act, a representation is false if it is made dishonestly to make a gain for themselves or another or cause loss or expose another to the risk of loss. If convicted of fraud by false representation, under criminal law, the Defendant can be liable for a maximum sentence of up to ten years, an unlimited fine, or both.
How can I prove misrepresentation?
To bring a misrepresentation claim to a civil court, you, as the Claimant, must prove on the balance of probabilities that:
- A false statement of fact or law was made
- That statement induced you to enter into the contract
- Because of the misrepresentation, you suffered a loss
Evidence of dishonesty or negligence will need to be provided. This could be in the form of documents, witness statements, and/or expert evidence. Remember, most cases settle well before anyone sets foot in a courtroom, and the more evidence you have to demonstrate your case, the greater your chances of achieving an early settlement, thereby saving on legal fees and negating the risk of an adverse cost order being made against you.
Can misrepresentation void a contract?
A misrepresentation makes a contract voidable by the Claimant. You can rescind the agreement and return to your position before signing the contract or accepting the deal. This is different from a void contract; in this scenario, the contract cannot be taken as it was invalid from its inception and, therefore, never existed in the first place.
Get legal assistance from LawBite
If you’re facing a complex contract issue, we can offer valuable legal guidance and support. We’ve helped 1000s of startups and small businesses achieve their commercial objectives and can provide the necessary expertise and practical solutions.
Whether you require advice on contract drafting or need assistance in pursuing legal action for a misrepresentation claim, our experienced lawyers can help. To find out more, book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.