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Misrepresentations in Contract Law

A misrepresentation is a statement made during contract negotiations that is put forward as a fact or as law but is untrue, that induces a party to enter into a contract resulting in loss to the relying party.

The law in this area is extremely complex. It is governed by a combination of legislation (the Misrepresentation Act 1967), equity and a considerable body of case law.
Misrepresentations can take many forms. They can be made expressly (oral or written) or they can be implied by words or conduct.

They usually arise where full disclose and good faith is being relied upon, such as contractual arrangements.

They also occur where there has been a change in circumstances and knowledge and a duty to notify of the change arises – where the statement was true when made, but has since ceased to be true.

This makes legal advice critical in ascertaining the merit of any potential claim, and in building and pursing a robust case to help you achieve your desired outcome.

What types of misrepresentation are there?

An important first step is to ascertain the type of misrepresentation you have been victim of, as this will determine how you approach your claim and the remedies available to you.

There are three main types of misrepresentation:

  • Fraudulent misrepresentation– when a representation has been made knowing that it is false, or being reckless as to its truth. Where this is established – and the bar is high – the claimant can seek to rescind (ie set aisde) the contract and claim unlimited damages.
  • Negligent misrepresentation– when a representation is made carelessly without thought to the validity of the representation. Rescission and/or damages may be claimed. Note, breach of contract issues may also arise here.
  • Innocent misrepresentation– when the party making the representation can legitimately say they were unaware the representation was untrue. In this case, damages won’t be available, but the contract may be rescinded or damages awarded in lieu of rescission.

What doesn’t count as misrepresentation

There are certain exemptions that can’t be considered misrepresentations. These include:

  • Opinions– it is deemed to be unfair to assume that a personal opinion is a fact. However, opinions may be treated as fact if the seller has specialist knowledge of the topic at hand and it is reasonable for the buyer to rely upon the opinions and knowledge of the seller for them to decide. This is also known as a negligent misstatement.
  • Statements of intention– misrepresentation cannot be claimed if a statement of intention never happens, there may be extraneous factors that influence its outcome that cannot be controlled. However, if a statement of intention is made but was never going to be carried out, this could be classed as a misrepresentation.

Warranty versus representation

When looking at a case of misrepresentation, it is important to be aware of the difference between a warranty and a representation as this can affect the outcome of a potential claim.

Warranty

A warranty is a term that is written into a contract, but that is a secondary element of the contract. This could be, for example, details about the condition or age of an item being sold. If a warranty is untrue, this is a breach of contract. Normally, this entitles the party who entered into the contract to claim for damages, but it doesn’t usually void the contract. The level of damages awarded is commonly the value of the product had the contract not been breached, less its actual value.

For instance, if you buy a house for £100,000 on the condition that it is new and there are no structural issues present, but later find this to be false, you cannot undo the contract, but you could be awarded damages. These damages would usually equate to the difference in value of the property had those issues been declared and written into the contract. This could be, the house would be worth £80,000 if the issues were declared, so then the buyer would receive a refund of £20,000 to compensate them for the breach of contract.

Representation

A representation is a statement about a product or service that is generally made before a contract it entered into that influences whether the contract is agreed or not.
If a buyer agrees to a contract based on a representation that turns out to be false, the contract can be rescinded (made void) and a claim for damages could be made.

As with our house example above, if the seller had told the buyer that the house was new prior to the contracts being agreed, but there was no mention of the condition of the house in the contract, this could be a misrepresentation. In this instance, the buyer would be able to void the contract and claim damages that would put them back into a position similar to how they had been before they entered into the contract.

This would result in the seller returning the monies paid back to the buyer and paying any other losses that occurred because of the misrepresentation.

Making a claim

If you believe you entered into a contract on the basis of a misrepresentation, and suffered loss having relied on that misrepresentation, seek specialist legal advice immediately.

You will need to ensure that you have sufficient evidence to support your claim, that you relied on the misrepresentation when entering the contract and that for example it is indeed a misrepresentation that you are claiming for and, not a breach of contract (a warranty being untrue).

Claims for misrepresentation must be made within a reasonable timeframe. This is generally within six years of the misrepresentation being made. In cases of negligent and innocent misrepresentation, this time limit starts from the time the contract was agreed. However, fraudulent misrepresentation differs in that a case can be brought against the guilty party from the time the fraud was (or could have been reasonably) discovered.

Rescinding a contract is intended to put you back into the position had you never entered into the contract.

There are circumstances where the injured party may lose their right to rescission despite a misrepresentation being made. Some examples of how this may arise are:

  • Affirming the contract, if the aggrieved party acknowledges their right to rescission but accepts the goods of the contract, they are seen to have affirmed the contract and so cannot unwind the terms of the contract;
  • When restitution is not possible, where the goods provided as part of the contract are not able to be restored (say, in the case of consumables or if the goods have been destroyed);
  • When too much time has elapsed between the misrepresentation (or awareness of misrepresentation) and the case being brought;
  • When a third party becomes involved in the contract, for example if the aggrieved divests their goods to a third party before they have unwound the contract with the party that made the misrepresentation.

There may also be instances where the contract expressly excludes claims for misrepresentation. ‘Entire agreement clauses’ however will not by themselves prevent a party from claiming that it was misled into signing the agreement due to a misrepresentation of fact. In these cases it is important to seek legal advice to assess whether liability has in fact been limited, and whether for example the term satisfies the requirement of reasonableness under the Unfair Contract Terms Act.

In the case of fraudulent misrepresentation, it is highly unlikely that any contractual limit of liability will withstand scrutiny in court.

As with any legal challenge, suitable legal representation is important in how cases are handled. It is advisable that legal representation is sought if you are intending to bring a claim of misrepresentation against a person or company.

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