When you or your business enters into a contract, you need to be able to rely on the information you have been given and that induced you to enter into the contract.
If this information turns out to be incorrect and you or your business suffers a loss as a result, you may be able to make a legal claim against the other party.
We look at the three types of misrepresentation, what you need to prove to have a valid claim and the remedies that may be available to you, and answer the question, what is misrepresentation in contract law?.
Summary
This article includes:
- What is Misrepresentation in Contract Law?
- Types of Misrepresentation
- What is Representation
- The Remedies for Misrepresentation
- Misrepresentation vs Breach of Contract
- Avoiding Misrepresentation Claims
- Contact Our Contract Solicitors
- FAQ
What is Misrepresentation in Contract Law?
Misrepresentation is a false statement of fact or law made before the contract is entered into or set out in the contract that induces an individual or business to enter into the contract, but that turns out to be false or misleading. The statement does not need to be made in writing but can be by way of a verbal sales pitch, promotional material, mentioned in a conversation or stated in a meeting.
It is distinct from opinion, sales talk or puff, silence, or non-disclosure.
To show misrepresentation, you will need to show that:
- The statement is untrue or misleading
- It influenced you or your business to enter into the contract
- Had it not been for the misrepresentation, you would no't have agreed to the contract
- You or your business suffered a loss as a result
Three Types of Misrepresentation
There are three types of misrepresentation:
- Innocent misrepresentation
- Negligence misrepresentation
- Fraudulent misrepresentation
Innocent Misrepresentation
If the party who made the false or misleading statement genuinely believed it to be true and had reasonable grounds to believe it was true, the misrepresentation is innocent.
The court can choose to cancel the contract, known as rescission. When a contract is rescinded, the parties can act as though it never existed. Any money that has changed hands will need to be repaid, and the affected party put back in the position they were in before they entered into the contract. The court also has the option of awarding damages, although rescission is the usual outcome.
In the case of Redgrave v Hurd (1881), a solicitor advertised his practice and house, saying that the business brought in an income of £300-£400 per year. He provided evidence of £200 per year, and said that there were other documents showing that the income was higher. Mr Hurd did not see these documents.
When Mr Hurd found that the actual income was significantly less than Mr Redgrave had said it was, he refused to complete the purchase.
The court found that Mr Hurd did not have to look at the additional documents. Mr Redgrave had made a false representation that Mr Hurd had relied upon and that had induced him to enter into the contract.
It was not just for Mr Redgrave to be able to benefit from the false statement, and he was required to return Mr Hurd’s deposit.
Negligent Misrepresentation
Negligent misrepresentation arises when the untrue or misleading statement was made carelessly or the party making the statement did not have reasonable grounds to believe that it was true.
If you can show that the statement was incorrect, then the other party will need to prove that they reasonably believed it was true and that there was no negligence on their part if they wish to defend the claim.
The court can rescind the contract and/or award damages, including compensation for the losses arising from the misrepresentation. There are no requirements for these losses to be reasonably predictable.
Under the Misrepresentation Act 1967, a successful claimant can be paid damages instead of rescission of the contract.
Fraudulent Misrepresentation
Where the misrepresentation involves deceit, then it is fraudulent. To prove fraudulent misrepresentation, it is necessary to show the following:
- The statement of fact was false or misleading
- The person making the statement of fact knew it to be false, did not believe it was true or was reckless as to the truth
- The statement was made with the intention of deceiving the other party
- The other party relied on the false or misleading statement
- They suffered a loss as a result of their reliance on the false or misleading statement
The case of Derry v Peek (1889) emphasises the need for the defendant to know or believe their statement to be false. A tramway company printed a prospectus stating it had the right to use steam power. In fact, they did not, although they honestly believed that they would be granted that right by the Board of Trade and that it was merely a formality. When the consent was not granted, they were sued for fraudulent misrepresentation.
The House of Lords found that their misrepresentation was not fraudulent as they genuinely believed they would be able to use steam power and had reasonable grounds for this belief.
Fraudulent misrepresentation is harder to prove than negligent misrepresentation, as you will need to show that the other party had the necessary state of mind.
The court can rescind the contract and award damages for any loss that has occurred.
What is a Representation?
A representation is a statement of fact and is different to a contract term. In deciding whether a statement is a representation, the court will consider:
- If the accuracy of the statement was questioned by the party relying on it, it may show that they were relying on it
- How the statement was made, for example, whether it was written into the contract or mentioned during a meeting beforehand
- The importance of the statement
- Any intention to mislead or hide facts
- The level of understanding of the subject matter that each party has
A statement of opinion will only be held to be a misrepresentation if the individual making the statement knows that it is false or has a higher level of understanding of the subject matter than the other party.
The case of Smith v Land and House Property Corporation (1884) looked at the difference between a statement of fact and an opinion.
A hotel was offered for sale, and described as having a ‘most desirable tenant.’ In fact, the tenant was facing bankruptcy and had stopped paying rent. The vendor sued for specific performance to try to force the buyer to complete. The defendant claimed misrepresentation and refused to complete the purchase.
The Court of Appeal said that the claim was a statement of fact, as the plaintiff had superior knowledge of the tenant’s financial situation and was fully aware that they were not ‘most desirable.’ The statement had induced the defendant to go ahead with the purchase.
Where a party has superior knowledge of the facts, its opinion can be construed as a statement of fact.
The Remedies for Misrepresentation
Contract Rescission
If the court rescinds the contract, then the affected party should be put back in the position they were in before entering into the contract and the contract is treated as if it never existed. It must be possible for the contract to be undone, and the party objecting to the contract cannot have affirmed the contract.
Damages
Damages can be combined with rescission to put the party back in the position they would have been in had they not entered into the contract. In claiming damages for losses arising from misrepresentation, the affected party will need to show that the losses were caused by the misrepresentation and that the loss was not too remote.
As usual, a claimant should take all reasonable steps to mitigate their losses.
In the case of fraudulent misrepresentation, damages for any direct losses are payable. This can include consequential losses and losses because a bad bargain has been made, even if the claimant should have known that it was not a good deal.
In negligent misrepresentation, the claimant can ask for the contract to be rescinded or damages in lieu of rescission, plus a payment of a sum that would put them in the position they would be in had the misrepresentation not occurred.
In respect of innocent misrepresentation, it is usual to rescind the contract. However, the Misrepresentation Act 1967 allows the payment of damages in lieu of rescission. Again, this is intended to restore the claimant to their earlier position.
Personal Liability for Misrepresentation
If a director has induced someone to enter into a contract by way of fraudulent misrepresentation and this individual has suffered a loss as a result, the director may be held personally liable for the losses. This means that they may have to pay damages personally and could stand to lose a substantial amount.
Limits in Remedies for Misrepresentation
There are certain bars to rescission in misrepresentation cases, including:
- Affirmation: If the claimant has taken action after becoming aware of the misrepresentation that affirms the contract, they cannot usually rescind the contract.
- Time Limits: If the statutory time for taking action has passed, usually six years from the date of the contract, then action can only be taken with leave of the court. This will usually only be given if there is a good reason for the delay.
- Impossibility: In some cases, it may be impossible to undo a contract and put the parties into the position they would have been in, but for the contract.
- Rescission: Where rescission would negatively impact a third party and breach their rights, the court may decline to rescind a contract.
Misrepresentation vs Breach of Contract
Misrepresentation is centred around statements made before the contract is entered into, and their validity. Breach of contract refers to a failure of one party to the contract to perform their duties or obligations under the contract.
Avoiding Misrepresentation Claims
It is essential to take great care when making statements prior to entering into a contract. The document should be clearly drafted, and relevant disclaimers included. If you are considering entering into a contract, you should carry out the necessary due diligence to check the validity of the information provided as far as possible.
An experienced commercial solicitor will be able to provide advice, including drafting contracts, collating relevant information, and guiding the due diligence process.
If you are concerned that you have been induced to enter into a contract based on a false statement, you are advised to seek legal advice. You may be entitled to rescind the contract and/or claim damages, but it is essential to avoid breaching the contract or affirming it by your actions. Speaking to a solicitor straightaway will help you protect your rights.
Contact Our Contract Solicitors
Contract disagreements can be damaging and disruptive. Our contract dispute solicitors can work on your behalf to resolve matters promptly before the situation becomes harder to deal with. We will give you clear advice on your position and the options open to you.
Where possible, we will try and find a solution without the need for legal action.
If you wish to consult with one of our contract solicitors, feel free to reach out to us by calling 0330 173 3980, sending an email to info@witansolicitors.co.uk, or completing our contact form. We'll gladly discuss your situation with you and explore how we can be of assistance.
FAQ
What is misrepresentation in contract law UK?
Misrepresentation in UK contract law refers to a false statement that induces someone to enter into a contract that they would not otherwise have entered into.
What are the three types of misrepresentation?
Misrepresentation can be fraudulent, negligent, or innocent.
What is innocent misrepresentation?
Innocent representation is when a false statement is made, inducing someone to enter into a contract, but the individual making the statement honestly believed that the statement was true, and can show that they had reasonable grounds for that belief.
What are the remedies for misrepresentation?
The remedies available for misrepresentation are cancelling the contract, known as rescission, and the payment of damages. It is important not to simply ignore a contract, as you could then be breaching the contract terms and face a claim. Similarly, you should not continue to take action under the contract, as this could be construed as your acceptance of the contract, and you could lose your right to rescind it or claim damages.
What is the difference between misrepresentation and breach of contract?
Misrepresentation refers to false statements made before the contract is entered into, while breach of contract relates to one party’s failure to carry out their obligations under the terms of the contract.
