misrepresentation in contract law

Misrepresentation

Definition of misrepresentation, what is misrepresentation, three types of misrepresentation, fraudulent misrepresentation, compensatory damages, negligent misrepresentation, innocent misrepresentation, misrepresentation example involving, related legal terms and issues.

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What Is a Misrepresentation?

• How It Works

Special Considerations

• How to Prove It
• Financial Statements

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• Financial Crime & Fraud
• Definitions M - Z

What Is Misrepresentation? Types and How It Works

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Investopedia / Hilary Allison

A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void. Depending on the situation, the adversely impacted party may seek damages.

Key Takeaways

• Misrepresentations are false statements of truth that affect another party's decision related to a contract.
• Such false statements can void a contract and in some cases, allow the other party to seek damages.
• Misrepresentation is a basis of contract breach in transactions, no matter the size, but applies only to statements of fact, not to opinions or predictions.
• There are three types of misrepresentations—innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation—all of which have varying remedies.

How Misrepresentation Works

Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size.

A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller.

In higher-stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.

In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur when a fiduciary fails to disclose material facts of which they have knowledge.

A duty also exists to correct any statements of fact that later become known to be untrue. In this case, the failure to correct a previous false statement would be a misrepresentation.

Types of Misrepresentations

There are three types of misrepresentations.

Innocent Misrepresentation

Innocent misrepresentation is a false statement of material fact by the defendant, who was unaware at the time of contract signing that the statement was untrue. The remedy in this situation is usually rescission or cancellation of the contract.

Consider a situation where a seller of a piece of land mistakenly informs a buyer that there is planning permission granted for a new housing development nearby. The seller genuinely believed this to be true based on information received from a neighbor. Unfortunately, unknown to the seller, that planning permission had since been denied. Because the buyer relied on this information in deciding to purchase the land, the seller may be liable due to innocent misrepresentation since they made a mistake (even though it was an honest mistake).

Negligent Misrepresentation

Negligent misrepresentation is a statement that the defendant did not attempt to verify was true before executing a contract. This is a violation of the concept of "reasonable care" that a party must undertake before entering an agreement. The remedy for negligent misrepresentation is contract rescission and possibly damages.

Suppose a real estate agent, while showing a property to potential buyers, states that the roof was recently renovated. It turns out that the roof needs significant repairs. Despite not intending to deceive, the agent's negligent statement about the roof's condition played a part in the buyers making an offer on the property. If the buyers later discover the true state of the roof, they may have grounds to claim damages from the agent for the costs of repairing the roof as the agent was negligent in sharing incorrect information.

Fraudulent Misrepresentation

Fraudulent misrepresentation is a statement that the defendant made knowing it was false or that the defendant made recklessly to induce the other party to enter a contract. The injured party can seek to void the contract and recover damages from the defendant.

Imagine a scenario where a seller knowingly advertises a used car as having only 50,000 miles on the odometer. However, the car actually has 150,000 miles on it, and the seller has rolled back the odometer. The buyer relies on this false information and would buy the car based on the misrepresented mileage. In this case, the seller's fraudulent misrepresentation gives the buyer grounds to rescind the contract, return the car, and potentially seek damages for any losses suffered due to the deception.

How to Prove Misrepresentation

In order to recover damages due to misrepresentation, there are six legal bars for the plaintiff to overcome. The plaintiff must be able to show that:

• A representation was made.
• The representation was false.
• The defendant knew at the time that the representation was false, or recklessly made the statement without knowledge of its truth.
• The representation was made with the intention that the plaintiff would rely on it.
• The plaintiff did rely on the false representation.
• The plaintiff suffered harm by relying on the false representation.

All six of these requirements must be met in order for a plaintiff to win a case for misrepresentation. A defendant in one of these cases need not disprove all six of these claims.

Misrepresented Financial Statements

Companies and their financial statement preparers can falsify (knowingly or unknowingly) their financial performance. Misrepresentations in financial statements can impact various stakeholders, including investors, creditors, regulators, and the broader public. Here's how each group can be affected:

• Investors: Misrepresentations, whether intentional or due to negligence, can distort the true financial health and performance of a company. For example, overstating revenues or understating expenses can artificially inflate profitability metrics, leading investors to overvalue the company's stock. Conversely, concealing liabilities or risks can mask the true financial risks faced by the company, potentially leading to losses for investors when the true financial situation is revealed.
• Creditors: Creditors use financial statements to assess the creditworthiness of a company. Misrepresentations can mislead creditors about the company's ability to repay debt obligations. For instance, if a company falsely inflates its assets or understates its liabilities, creditors may extend credit thinking a company may be able to pay off its debt when, in fact, it might not be able to.
• Regulators: Regulatory bodies such as the Securities and Exchange Commission (SEC) rely on financial statements to ensure compliance with accounting standards and securities laws. Misrepresentations can undermine the integrity of financial markets and erode investor confidence, a primary concern for regulatory bodies in charge of overseeing the stability of those markets. 
• General Consumers: Misrepresentations in financial statements can undermine public trust in a company. Even if those consumers don’t own an equity stake in the company, consumers may choose to take their business elsewhere to support more honest operations if misrepresentations were to come to light.  

Misrepresented Financial Statements and Auditors

Auditors have a responsibility to provide an objective assessment of a company's financial position and performance, making sure that the information presented is reliable and follows accounting rules . To do this, auditors conduct detailed audit procedures to examine the financial statements and supporting documentation. This includes looking through financial transactions, reviewing accounting records, and testing the effectiveness of internal controls.

Through these procedures, auditors try their best to identify any discrepancies that could indicate potential misrepresentations. They focus on both quantitative things (like the accuracy of financial figures) and qualitative things (like the disclosure of significant risks). As part of the audit, auditors communicate their findings and observations to management, an audit committee, and potentially to regulatory authorities. In the end, an auditor strives to make sure no misrepresentation is happening within a company’s financial statements.

Example of Misrepresentation

In 2022, Tesla CEO Elon Musk offered to purchase X platform (formerly Twitter) for $43 billion, an offer which the company at first resisted and then accepted. A few weeks later, and after a substantial fall in the company's share price, Musk attempted to back out of the deal, claiming that X misrepresented the number of human users on the platform.

According to his termination letter, Musk alleged that the company knowingly misrepresented the number of live users on its platform and that he had relied on those false representations when he made his takeover offer. In response, the social media company claimed that Musk's allegations were "factually inaccurate" and that the billionaire was simply trying to back out of the merger that he himself had initiated.

What Is a Material Misrepresentation?

A material misrepresentation is a promise, false statement, or omission of facts that would cause another party to act differently if the whole truth were known. An example of a material misrepresentation is incorrectly stating one's income on a mortgage application or omitting key risk factors on an application for insurance coverage.

What Is Misrepresentation in Insurance?

In insurance, a misrepresentation is a lie or concealment of facts that can void an insurance contract if the insurer discovers the misrepresentation. For example, if a homeowner installs a pool but tells their insurer that they do not have a pool, the insurer may be able to void the policy if they discover the misrepresentation.

What Is Misrepresentation in Real Estate?

In real estate, misrepresentation is a lie or reckless untruth that affects the market value of a home or property. A common example of this is misrepresenting the square footage of a property. Since sales prices are often based on square footage, a buyer can often sue for misrepresentation even after a purchase is finalized.

What Are the Legal Consequences of Misrepresentation?

The legal consequences of misrepresentation vary based on the type and severity of the misrepresentation. The innocent party may have the right to cancel the contract if the misrepresentation is material. Damages may be awarded to compensate the innocent party for any losses suffered. In cases of fraudulent misrepresentation, punitive damages may be awarded to punish the party responsible.

What Steps Can Companies Take to Prevent Misrepresentations?

Companies can take proactive steps to prevent misrepresentations. They can establish and enforce ethical standards that promote honesty, integrity, and transparency. They can provide training and education to employees while also implementing robust internal controls. Companies can conduct independent reviews to verify the accuracy of the information it is reporting while also conducting due diligence and verifying information before formalizing it or communicating it.

Misrepresentation is a legal term for any type of falsehood or omission of fact that affects the behavior of a contractor or other party. Contrary to popular belief, misrepresentation does not just mean deliberate lies—it can also include accidental omissions or reckless statements without certainty of the facts. Misrepresentation can void a contract and in some cases allow the misled party to seek damages.

Cornell Law School, Legal Information Institute. " Misrepresentation ."

Campbell Law Review. " Fraudulent, Negligent, and Innocent Misrepresentation in the Employment Context: The Deceitful, Careless, and Thoughtless Employer ," Pages 61-62.

University of North Caroline, School of Government. " N.C.P.I.—Civil 800.10: Negligent Misrepresentation, General Civil Volume, March 2020 ."

Cornell Law School, Legal Information Institute. " Fraudulent Misrepresentation ."

Legal Information Institute. " Fraudulent Misrepresentation ."

The Hill. " Twitter Slams Musk Countersuit: 'Factually Inaccurate, Legally Insufficient, and Commercially Irrelevant .'"

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A misrepresentation is a false or misleading statement or a material omission which renders other statements misleading, with intent to deceive. Misrepresentation is one the elements of common law fraud , and other causes of action for fraud, such as securities fraud .

Misrepresentation through the act of making a false statement can take may forms. For example, in Commonwealth v. Scott , a Massachusetts Supreme Court case, a forensic drug laboratory chemist made a number of affirmative misrepresentations by signing drug certificates and testifying to the identity of substances in cases in which she had not in fact properly tested the substances in question. However, statements of pure opinion are generally not considered misrepresentations. For example, in Virginia Bankshares v. Sandberg , the Supreme Court held that statements of reasons, opinion, or belief are not per se misrepresentations, but may be if there is a context of trust or reliance between the person alleged to make the misrepresentation and the recipient and the statement is objectively false. Additionally, in Omnicare, Inc. v. Laborers District Council Construction , the Supreme Court held that statements of opinion, such as statements prefaced by “we believe,” may be misrepresentations if the speaker does not actually hold that opinion. Also, the opinion stated, if the statement of opinion contains underlying factual assertions (e.g. we believe that our product is the best [statement of opinion] because it outranked other competing products in our laboratory testing [factual assertion]), that factual assertion may be a misrepresentation if untrue.

An omission which renders statements misleading may also be a misrepresentation. For example, in Striker v. Graham Pest Control Co. , the Appellate Division of the Supreme Court of New York held that a sellers’ agent who did not disclose a carpenter ant infestation misrepresented the buyers, since “[n]ondisclosure of a material fact is tantamount to an affirmative misrepresentation when a party is duty-bound to disclose pertinent information.” Material omissions in marketing a product may also be misrepresentations. For example, in Drew v. Sylvan Learning Center, Corp. , a New York state court found that a tutoring service’s failure to disclose that they measured “grade level” with their own standards in their brochures, as opposed to the common connotation of public school system grade levels, was a misrepresentation through omission.

[Last updated in December of 2020 by the Wex Definitions Team ]

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Misrepresentation | Practical Law

Misrepresentation

Practical law uk glossary 9-107-6848  (approx. 4 pages).

IPSA LOQUITUR

Contract: Misrepresentation

Misrepresentation, establishing misrepresentation, the importance of misrepresentation.

If a statement is a term of the contract , the innocent party can sue for breach if it is untrue. However, in many cases a statement which induced the contract will not be part of the contract itself. This means that no action for breach of contract will arise. In those circumstances, the innocent party may find a remedy by relying on misrepresentation as a defence or action.

The Requirements

To establish misrepresentation, the innocent party must establish that:

• The other party made a false statement of fact or law;
• The statement induced the innocent party to enter into the contract.

False Statement

The false statement must be one of law or fact, and not a statement of opinion: Bisset v Wilkinson [1927] AC 177. There is an exception to this where:

• The statement is one of opinion based on false facts which the representor was in a position to know: Smith v Land & House Property Corp (1884) 28 Ch D 7; or
• The statement was one of future intent which the representor had no intention to carry out: Edgington v Fitzmaurice (1885) 29 Ch D 459.

Conduct which conveys information can amount to a statement of fact or law: Spice Girls v Aprilia [2000] EWHC Ch 140. Silence cannot normally be an actionable misrepresentation: Smith v Hughes (1871) LR 6 QB 597. This is so unless the contract is one of ‘utmost faith’ (e.g. insurance contracts): HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6.

If a statement of fact or law was true at the time it was made but later becomes false, it will be a misrepresentation not to correct it: With v O’Flanagan   [1936] Ch 575. However, there is no duty to disclose relevant information in the absence of a misleading representation: Turner v Green [1895] 2 Ch 205.

The innocent party must show that they knew about and relied on the representation when deciding to enter into the contract: Horsfall v Thomas [1862] 1 H&C 90. This means that but for the representation, the innocent party must show he would not have entered into the contract had he known the truth.

The courts will presume, in the absence of contrary evidence, that the innocent party relied on the statement if it was ‘material’. A statement is material if a reasonable person would have relied on it: Museprime Properties Ltd v Adhill Properties Ltd (1991) 61 P & CR 111.

However, in fraudulent misrepresentation cases, the innocent party only needs to prove that the representation was actively in their mind when they made the decision – a lower threshold. The court will also presume that a fraudulent misrepresentation induced the contract if the representor intended it to induce a contract: BV Nederlandse Industrie Van Eiprodukten v Rembrandt Entreprises [2019] EWCA Civ 596.

Reliance will not exist if the innocent party made checks to verify the statement himself: Attwood v Small [1838] UKHL J60. However, the fact that the innocent party could have verified the statement but failed to does not mean he did not rely it: Redgrave v Hurd (1881) 20 Ch D 1.

Remedies for Misrepresentation

Effect of misrepresentation.

If the innocent party establishes misrepresentation, the contract becomes voidable at their election.

A contract which is voidable is not treated as never existing. Rather, it is treated as existing until the innocent party communicates that they are terminating the contract or take reasonable steps to do so. Reasonable steps include reporting the goods stolen if the defendant has vanished.

Types of Misrepresentation

The exact range of remedies which are available for misrepresentation depends on whether it was fraudulent, negligent or innocent.

Fraudulent Misrepresentation

A fraudulent misrepresentation is one which the representor knows is false, does not believe is true or which the representor is reckless as to its truth or falsity: Derry v Peek (1889) 5 TLR 625.

The remedy for fraudulent misrepresentation is to rescind the contract and claim damages under the tort of deceit. These damages do not need to be foreseeable: Doyle v Olby [1969] 2 QB 158.

Negligent Misrepresentation

A negligent misrepresentation is one which the representor cannot prove he had reasonable grounds to believe was true: Howard Marine v Ogden [1978] QB 574.

As a result of section 2(1) of the Misrepresentation Act 1967, the remedy for a negligent misrepresentation is the same as the remedy available for a fraudulent misrepresentation: Royscott Trust v Rogerson [1991] 2 QB 297. Alternatively, the court may refuse an application for rescission and grant damages ( assessed according to contractual principles ) in lieu , if it thinks this is equitable in light of the potential harm rescinding/not rescinding would cause to each party: Misrepresentation Act 1967, s 2(2).

Innocent Misrepresentation

An innocent misrepresentation is one which is neither fraudulent or negligent.

The remedy for innocent misrepresentation is rescission . Alternatively, the court may refuse an application for rescission and grant damages ( assessed according to contractual principles ) in lieu , if it thinks this is equitable in light of the potential harm rescinding/not rescinding would cause to each party: Misrepresentation Act 1967, s 2(2).

Because misrepresentation renders the contract voidable rather than void, the right to rescind may be lost . The court is also likely to refuse rescission and grant damages in lieu under the Misrepresentation Act 1967, s 2 where:

• The innocent party’s real reason for seeking rescission is to escape a bad bargain unrelated to the misrepresentation: William Sindall plc v Cambridgeshire County Council [1993] EWCA Civ 14;
• The misrepresentation has not caused the innocent party any loss.

Contract Defences Quiz

Test yourself on the principles governing when a party to a contract has a defence.

When establishing that the defendant's influence was undue for the purposes of the defence of undue influence, the claimant must show that the transaction was manifestly to their disadvantage. True or false?

Incorrect . This requirement was abolished in Royal Bank of Scotland plc v Etridge (No 2).

When determining if the defence of misrepresentation applies, the courts will presume, in the absence of contrary evidence, that the claimant relied on the statement if a reasonable person would have relied on it. True or false?

Incorrect . See Museprime Properties Ltd v Adhill Properties Ltd.

Maisy enters into a contract over the phone with a man falsely claiming to be her estranged cousin, John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

Incorrect . If the parties are not contracting face-to-face, such as by telephone or internet, the defendant's identity is only a core term of the contract if the claimant intended to contract with an identified, real person who the defendant was pretending to be: Cundy v Lindsey.

For the purposes of unilateral mistake, when is a term 'vital' to the contract?

Incorrect . A vital term is a term which is objectively central to the contract, such as (but not limited to) the price of the goods: Hartog v Colin & Shields.

What two conditions must be met before a transaction is void for unilateral mistake?

Can a person rely on any of the three categories of presumed influence when trying to establish undue influence to challenge the will of a deceased person?

Incorrect . Only actual undue influence may be proved: Nutt v Nutt .

When dealing with the defence of undue influence in a case where a presumption of influence has been raised, can the defendant rebut the presumption?

Incorrect . Different judges in Royal Bank of Scotland plc v Etridge (No 2)  took different approaches to the issue, and there has been no case settling the matter.

Complete this sentence: The defence of economic duress renders the contract...

Incorrect .

If a contract is voidable, can either party rely on its terms?

Incorrect . Voidable contracts are treated as having never existed only once the innocent party rejects the contract. If the contract is affirmed, both parties can rely on it.

Can the innocent party prove that a misrepresentation caused them to enter the contract if they used their own resources to verify whether the statement was true?

Incorrect . See Attwood v Small.

Katie and Andrew enter into a contract which states that Andrew will deliver Thompson apples to Katie. The parties are not aware that there are actually two kinds of Thompson apples - Virginia Thompson apples and Alabama Thompson apples. The two types of apple taste very different and have very different uses. Andrew intends to ship Virginia Thompson apples, while Katie is expecting to receive Alabama Thompson apples. Is the contract void for mutual mistake?

Incorrect . The law is normally concerned only with what the contract objectively appears to mean, so it does not matter that the parties were subjectively mistaken as to each other's intentions. The court will look at what a reasonable person would take the parties to have agreed to, and that will be the contract. However, if a reasonable person would see the contract as completely ambiguous, the contract is void for mutual mistake: Raffles v Wichelhaus.

When establishing the defence of undue influence, how does the claimant demonstrate the category of presumed influence established in Malik (Deceased) v Shiekh ?

Complete this sentence: The defence of duress to the person renders the contract...

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2B' presumed influence?

Richard offers to sell Michael a book. Richard knows that Michael believes that the book is signed by the author. Richard did nothing to make him believe this, but nor does he correct Michael. Michael relies on his belief that the book is signed when deciding to buy it. Can Michael rely on the defence of misrepresentation?

Incorrect . There is no duty to disclose relevant information in the absence of a false representation by the other party: Turner v Green [1895] 2 Ch 205. Richard did nothing to make Michael believe the book is signed, so he has no duty to correct him.

Does a defence of duress to property exist?

Incorrect . The historical rule was that it did not exist, but this may no longer be the case after the development of the defence of economic duress.

David induces Mary to enter into a contract to buy a car by promising that he will service the car before he gives it to her. He has no intention of doing so. Is this an actionable misrepresentation?

Incorrect . A statement of future intent can be an actionable statement so long as the maker of the statement had no intention of carrying it out: Edgington v Fitzmaurice.

When are damages available for innocent misrepresentation?

Incorrect . See the Misrepresentation Act 1967 , s 2(2).

What are the two requirements of the defence of misrepresentation?

Complete this sentence: The defence of mistake renders the contract...

ABC Bank is advancing money to a debtor. An individual tells the bank that they wish to act as a guarantor or surety for that debt. The debtor has unduly influenced this individual. When is the bank taken to have constructive notice of the presence of undue influence in the transaction?

Incorrect . A bank is taken to be on notice if they are aware that the surety and the debtor have a non-commercial relationship, unless the money is being advanced to both of them: Royal Bank of Scotland plc v Etridge (No 2).

David offers to sell Mary a house, representing that it has a conservatory. Mary relies on this representation when deciding to buy the house. Prior to the sale, there is a fire, and the conservatory burns down. David does not tell Mary. Can Mary rely on the defence of misrepresentation?

Incorrect . If a statement of fact or law was true at the time it was made but later becomes false, it will be a misrepresentation not to correct it: With v O'Flanagan.

When establishing the defence of undue influence, how does the claimant demonstrate actual influence?

Celestine is an elderly woman whose eye-sight is failing. Her niece, Laura, persuades her to sign a document claiming that it will authorise Laura to remove £50 for Celestine's bank account to enable her to pay Celestine's bills. In reality, it is a contract transferring Celestine's house to Laura. Celestine did not bother to read it as she trusts Laura (who has helped her out with bills before) and her eyesight makes reading very difficult. Can Celestine rely on the defence of non es factum ?

Incorrect . Non es factum applies if the claimant can show that they were reasonably mistaken as to the fundamental nature of the document they were signing: Foster v Mackinnon (1869) LR 4 CP 704 . The mistake must be reasonable, meaning the claimant must not have been negligent. In this case Celestine thought she was signing a bank transfer, when really she was signing a document transferring her house. She might be deemed negligent for not reading it, but she had reasonably good reasons not to, so it is possible that she can rely on the defence of non es factum .

Joanie has established a presumption that her lawyer, Richard, influenced her when she sold her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

Incorrect . If the claimant relied on one of the presumptions they only need to prove that the transaction 'calls for explanation' because it is not obviously an act of independent judgement or a normal incident of the parties' relationship: Royal Bank of Scotland plc v Etridge (No 2) . If they show this, the burden shifts to the defendant to show that the influence was not undue.

Joanie has established that a neighbour of hers, Richard, pressured her into selling her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

Incorrect . Joanie has shown actual influence, so she must also demonstrate that the Richard acted unduly.

Complete this sentence: The defence of undue influence renders the contract...

If a contract is void ab initio , can either party rely on its terms?

Incorrect . Void ab initio contracts are automatically treated as having never existed.

Can silence be an actionable misrepresentation?

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. The contract is in writing and signed, and the man signed his name as 'John'. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Can Maisy rely on the defence of mistake in relation to the man's identity?

Incorrect . The parol evidence rule means that if the written contract identifies the parties by name, then the claimant is taken to have contracted with that named individual and the defendant cannot admit evidence that the named individual is really them: Shogun Finance v Hudson.

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2A' presumed influence?

Xavier is a busy taxi driver who purchases a new car from Dodgy Dealers Inc. He signs their standard term car-purchase contract without reading it, not realising that it contains an onerous clause requiring him to pay a penalty fee if he gets the car serviced by anyone else within the first year. Can Xavier rely on the defence of non es factum to get out of the contract?

Incorrect . Non es factum only applies if the claimant can show that he was reasonably mistaken as to the fundamental nature of the document he was signing: Foster v Mackinnon. Xavier knew what kind of document he was signing, so it is irrelevant that he did not know the specific terms.

In what two scenarios are the courts likely to refuse to rescind a contract which has been rendered voidable by misrepresentation?

For the purposes of the defence of economic duress, can a lawful threat be illegitimate?

Incorrect . See DSND Subsea Ltd v Petroleum Geo Services ASA .

What must a third-party bank do to rid themselves of constructive notice of undue influence?

Incorrect . The bank must ask the surety who their legal adviser is, and provide them with sufficient information about the transaction to enable them to give competent advice. They may not proceed with the transaction until they have received a written confirmation from that adviser stating that the surety has been advised and understood the advice.

Can the innocent party prove that a misrepresentation caused them to enter the contract if they had the opportunity to verify the statement, but did not?

Incorrect . See Redgrave v Hurd.

Hannah is applying for a loan for the family business. Her girlfriend Celestine tells the bank that she will act as surety for the loan. The money is to be advanced to a company which Hannah and Celestine hold joint shares in. The bank is aware that Celestine is Hannah's girlfriend and that she has shares in the company, but they are not aware that Hannah has unduly influenced Celestine. They grant the loan. Can Celestine rely on the defence of undue influence against the bank?

Incorrect . Constructive notice arises when the bank knows there is a non-commercial relationship between the debtor and surety. While this does not apply if the money is being advanced to both, banks are not entitled to assume that a person is benefiting from money advanced to a business they have shares in, because they might have no real role in the business: Royal Bank of Scotland plc v Etridge (No 2).

Maisy enters into a contract over the phone with a man falsely claiming to be her long-lost cousin, John. In reality, Maisy does not have a long-lost cousin named John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not her cousin. Is the man's identity a vital term of the contract?

Incorrect . If the parties are not contracting face-to-face, such as by telephone or internet, and the defendant creates an entirely fake identity, the the claimant is taken to be solely concerned with their attributes and mistake will not be available: Kings Norton Metal v Edridge, Merrett.

Complete this sentence: The defence of illegality renders the contract...

What three elements must an innocent party show to establish the defence of economic duress?

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

Incorrect . If the parties are contracting face to face, there is a presumption that each intends to contract with the person in front of them: Phillips v Brooks . This can be rebutted by showing that the claimant would only have transacted with a particular individual: Ingram v Little. Maisy could establish a mistake as to a vital term if she can show that she would not have made that contract with anyone but her real cousin.

Julie is applying for an overdraft on a joint account controlled by herself and her husband Johan at ABC Bank. Her husband Johan offers to act as surety. The bank is unaware of the fact that Johan has been unduly influenced by Julie, but knows that the two are married. The overdraft is granted. Does the bank have constructive notice of the undue influence?

Incorrect . A bank is taken to be on notice if they are aware that the surety and the debtor have a non-commercial relationship, unless the money is being advanced to both of them: Royal Bank of Scotland plc v Etridge (No 2). In this case the money was advanced to both parties since it was an overdraft on an account controlled by both.

In which of the three following circumstances would the defence of common mistake apply?

In which two scenarios can a person rely on the defence of undue influence against a third-party?

For the purposes of the defence of duress, what factors are relevant to whether the innocent party has a practical choice? (Three answers)

Can undue influence be demonstrated in cases where the parties had no relationship prior to the transaction?

Incorrect . See Moursi v Doherty.

For the purposes of the defence of unilateral mistake, when can a term as to the quality of the goods be considered 'vital'?

Incorrect . Secondary terms, such as those relating to the quality of the goods, are not vital: Shogun Finance v Hudson.

When are damages in deceit available for a misrepresentation?

Does the claimant need to establish that but for the threat, they would not have entered into the contract if they are trying to prove duress to the person?

Incorrect . See Barton v Armstrong.

Marcus has shown that he reposed a large amount of trust in his partner, Adrian, when it comes to financial affairs. He also shows that his decision to transfer his inheritance to Adrian is a transaction which calls for explanation. To avoid the transfer being affected by the defence of undue influence, what must Adrian do to show that the influence was not undue?

Incorrect . To show that the influence was not undue, the defendant must show that the claimant was able to make an independent, fully-informed and voluntary decision to enter into the contract: Royal Bank of Scotland plc v Etridge (No 2) . It is not enough to show that the claimant would have consented to the contract even if they were free from influence: UCB Corporate Services Ltd v Williams.

Complete this sentence: The defence of misrepresentation renders the contract...

When will the defence of illegality bar a claim?

Incorrect . See Patel v Mirza.

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Misrepresentation in contract law: A brief on negligent, innocent and fraudulent statements

Contracts govern most of the transactions that a business carries out. When the representations that have induced someone to enter into a contract turn out not to be true or are misleading, this is misrepresentation.

If the person who has entered into the contract on the strength of a misrepresentation suffers loss, then they may be able to bring a legal claim for recission of the contract and/or damages.

What constitutes a misrepresentation?

A misrepresentation in contract law is a statement of fact that is not true and that persuades someone to enter into a contract. The contract does not have to be in writing, it can be a verbal agreement. The untrue statement can be made by an agent or employee on the part of their principal or employer.

A statement of opinion is not enough to constitute a misrepresentation, nor is a sales puff.

There are three types of misrepresentation, namely negligent misrepresentation, innocent misrepresentation and fraudulent misrepresentation.

Negligent misrepresentation

Where misrepresentation is made carelessly or without reasonable grounds for believing it to be true, this can constitute negligent misrepresentation. The claimant will need to show that the statement was not true and in defending a claim, the party making the statement will have to prove that they believed the statement and demonstrate that this belief was reasonable.

If the court grants the claim, then it can order rescission of the contract or damages instead, as well as damages for losses caused, even if they were not foreseeable.

Innocent misrepresentation

When someone unknowingly gives false information and this is not done fraudulently or negligently but the information induces someone to enter into a contract, this is innocent misrepresentation.

Where it can be proved that the information was not true, then a court can intervene to remedy the situation. This is usually done by rescinding the contract, with the aim of putting the parties back into the position they would have been in, but for the contract.

If rescission is not possible, then damages may be considered.

Fraudulent misrepresentation

Fraudulent misrepresentation, being founded on deliberate deceit, is the most serious type of misrepresentation. To bring a successful claim, the claimant will need to show that the untrue statement was made knowingly or recklessly, that they relied upon it and that it induced them to enter into the contract.

Because of the seriousness of the allegation, the standard of proof is high. The fraudulent allegation will need to have been clearly stated and it will need to be shown that the person making the statement knew it was false or had no belief in its truth or was reckless as to whether it was true or false.

It also needs to be demonstrated that the defendant intended the claimant to rely on the representation. The court will generally presume that, had it not been for the fraud, the claimant would not have entered into the contract.

The claimant must also show that, as a result of their reliance on the claim, they suffered loss and damage.

Proving a case of fraudulent misrepresentation is not simple and could require a substantial amount of evidence from the period leading up to the making of the contract, such as what each party knew, what was discussed or disclosed by way of marketing materials, emails, meetings and correspondence and what promises were made.

If the court finds fraudulent misrepresentation, then it can order rescission of the contract and damages for any losses caused. The losses do not have to be reasonably foreseeable.

Statements made in cases of misrepresentation

In cases of misrepresentation, the false statement or representation does not need to be made in writing, although the claimant must be able to prove to the court what was said.

It can be stated expressly or implied by conduct. Where the statement is implied, the context in which the inference is made can be important.

The court will ask what a reasonable person would assume were the facts in the circumstances.

While silence does not of itself constitute misrepresentation, when a statement is true in part but silent as to another aspect, then misrepresentation can be inferred from the fact that something was left out.

Bringing a claim for misrepresentation

If you believe that you have experienced loss because of misrepresentation in a contract you have entered into, then you are advised to seek legal advice as soon as possible. There are strict deadlines

for starting a claim. It may also be more likely that you are able to resolve issues without the need for litigation if you ask a legal expert to intervene on your behalf.

At Lincoln & Rowe, our dispute resolution team have in-depth experience of solving difficult problems across a range of sectors. We will give you our honest opinion of your case and discuss your options with you so that you have a good idea of the best course of action.

We can negotiate with the other party on your behalf to try and reach an agreed settlement. Where this is not possible, we can assist you through alternative dispute resolution, such as mediation or adjudication, to seek agreement.

In the event that your case goes to court, we will ensure that you have a strong case and expert representation. For more information in respect of our services, see Misrepresentation .

We are pleased to announce that we have won the Global Awards by ACQ5 award for Best Firm for Commercial Disputes London 2023. We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5 . Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards .

If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030 , email us at [email protected] or fill in our contact form and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor .

Dipesh Dosani Partner

Dipesh advises clients on a wide range of commercial disputes including breach of contract, directors’ disputes, shareholder remedies, partnership issues, professional negligence and intellectual property. he is also able to provide clients with advice on all aspects of insolvency as well as investigations including misfeasance, undervalue transactions, preferences, transactions to defraud creditors and wrongful trading..

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Hall Ellis Solicitors

Misrepresentation in Contract Law: negligent, innocent and fraudulent statements (and the remedies)

What is misrepresentation in contract law.

Before a contract is formed, statements can be made by one party to induce the other to enter into the contract.

Statements can be made during sales pitches, casual conversations and formal meetings. It doesn't matter when, where or how they're made. 

And they may be made in contracts themselves. They can begin with the words, "The [party name] represents: ...".

There are legal consequences when representations or statements are made to induce a business to enter a contract, and they're false. 

The misrepresentation misleads a party into signing the contract, when they otherwise might not have. 

They give rise to legal claims for rescission of the contract and damages.

Elements of Misrepresentation

The law of misrepresentation operates when:

• a pre-contractual statement of fact is made
• to a party intending to enter a contract, and  
• the statement is relied on to enter the contract, and
• the statement is false.

The misrepresentation doesn't even need to be made by the person benefiting from it.

Representations become misrepresentations when they're false. There are 3 types of misrepresentation:

• innocent misrepresentation
• negligent misrepresentation, and
• fraudulent misrepresentation

The meaning and effect of a statement or conduct is interpreted by the circumstances in which the misrepresentation was made. Those circumstances will include the course of the negotiations and any representations made before the contract was finalised.

If a person making a representation realises that it is false, they are under a legal duty to correct the mistake or misunderstanding, and inform their counterpart.  They can also modify or withdraw a prior representation at any time before it is relied on.

Representations can be found in advertisements, sales literature, material published on a website stating capabilities of software, products or services.

If the statement isn't correct, it may be an actionable misrepresentation.

Forms of Misrepresentation

The misrepresentation will usually be in words, written or spoken. But other forms of communication will be sufficient to amount to a misrepresentation. 

In precontractual discussions, statements might be:

• made verbally
• communicated with gestures
• in the terms of draft contracts, which end up being signed, or
• statements that have no legal effect or consequence.

In written contracts , the more important statements made prior to the contract are - or should be - written into the contract. These will be the warranties and conditions.

In agreements made verbally :

• a condition of the contract, a warranty or an innominate terms and form part of the contract, or 
• a representation, and not form part of the contract
• whether it is a term of the contract or a representation is decided by reference to the relative importance of the term to the parties in the context of the contract.

Conduct of can also amount to a misrepresentation. For example, production of promotional material can amount to a misrepresentation by conduct.

A series of misrepresentations may have cumulative effect . The effect of a series of continuing representations made throughout months of negotiations might lead to an overwhelming misleading impression of a state of affairs, and make it an actionable misrepresentation.

Nature of the Representation

Not all precontractual representations have legal consequence if they are false.

Words which are used might include sales talk (aka 'puffery') or laudatory words in respect of the goods or services such as:

• "Best pies in the UK" or
• "Finest after-sales service this side of Newcastle".

These sorts of statements are vague, not specific and lack any specific contractual meaning and not actionable in law. 

But they may be statements of fact , which are able to be verified .  They are actionable, because they to induce the other party to enter into the agreement.

Type of Statement

Statements of fact.

The representation must be a statement of fact, which relates to an existing or past event.

Statements of Future Intentions

Statements of future conduct or intention can amount to statements of fact, because they frequently contain implied representations with regard to the present state of affairs , or the knowledge of the person making the representation.

So where the person never had an intention he claims to have had, it will a misrepresentation as an exception to the rule. 

Here's an example:

Statements were made by company directors that money to be raised to buy assets for a business to improve its profitability. In fact, the money invested was used to pay the company’s debts. The directors never intended to acquire the assets for the business. It was said in the course of judgment: A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact. The real purpose of raising the money for the business was not as stated before the contract was signed. The statement induced the investor to invest his money. The directors had lied about their intentions, and were liable for fraudulent misrepresentation.

Statements of Opinion

Statements of opinion don't qualify unless the maker of the statement knows that their expressed opinion:

• is false or
• if they have special knowledge, and in a better position to know the true facts regarding the subject matter. 

In Smith v Land and House Property Corporation (1884) a vendor lied about the tenant being ‘most desirable’. He knew it wasn't true.  It was held that there was a misrepresentation of fact as the vendor was in a position to know the true facts .

In contrast, an owner of a farm stated that he believed it would hold 2,000 sheep, even though it was not a sheep farm.  It was held to be a statement of opinion, and therefore there was no misrepresentation of fact.

Can silence be a misrepresentation?

The general rule is that silence will not amount to a misrepresentation.  There is no duty to disclose facts which would affect the other party’s decision to enter into the contract. 

This general rule has exceptions, such as:

• Half truths: Where a statement is true, but does not reveal the whole truth which therefore makes the statement misleading, it will probably be a misrepresentation
• Change of circumstances: Where a statement is true when made, but due to a change of circumstances or lapse of time it becomes false, there is a duty on the maker of the statement to correct it.  Failure to do so will amount to a misrepresentation.
• Contracts u berrimae fidei (of the utmost good faith, such as contracts of insurance):  Where a party is in a strong position to know the truth, there is a duty to disclose all material facts.  The most common type of contract in this class are contracts of insurance.
• Fiduciary relationship: Where a fiduciary relationship exists between the parties, there is a particular duty to disclose all material facts upon the fiduciary to discharge their fiduciary duties to their principal.
• Active concealment: This involves going beyond remaining silent and involves concealment of a defect, such as painting over a cracked wall to hide the defect.  

In the law of misrepresentation, the representation can be express or implied, ambiguous and state the literal truth - and still be misleading in the relevant sense.

Once made for the purpose of an intended transaction, the effect of the misrepresentation will continue until the transaction is completed or abandoned or the representation ceases to be operative on the mind of receiver of the representation.

Essential Element: Inducement

Just because a false statement has been made is not enough to succeed in a claim for misrepresentation.

The false statement must have induced the other party to enter into the contract. 

There are four conditions which need to be satisfied in order for there to have been an inducement:

• Material statement: There will only be an inducement if the statement made is material.  It must represent a fact upon which a party decides to enter into the contract. It does not have to be the sole inducement: it is enough if it is one of the inducements.
• Known to the Claimant:  There can't be an inducement unless the misrepresentation made was known to the claimant.  In Horsfall v Thomas (1862), the active concealment of a defect in a gun was held to be a misrepresentation, but the buyer did not inspect the gun - so he was not to know about the misrepresentation, therefore it did not induce the buyer to enter the contract.
• Intended to be acted upon by the defendant: The statement made must be intended by the making it to be acted upon by the other party.
• Actually acted upon: If the claimant relies upon the misrepresentation when entering into the contract, this will amount to an inducement, even where the claimant did not take advantage of an offer to check the statement made.

There can be no inducement when a person:

• relies upon their own judgement, or
• made their own investigations to ascertain the true state of affairs.

The overall effect of the misrepresentation is assessed as a whole, throughout the precontractual period, which includes documents and the conduct of the person making the misrepresentation.

Different Types of Misrepresentation

Precontractual misrepresentations come in 3 types. Each of them are different causes of action .

1. Innocent Misrepresentation

The pre-contractual statement was false, but the maker of the statement wasn’t negligent in making the statement.

The maker of the statement must reasonably believe that what was stated to be true. Then, the statement will be regarded as ‘wholly innocent’.

Rescission can be claimed as a remedy for innocent misrepresentation where:

the statement has become a term of the contract

the contract has been performed, according to s 1 of the Misrepresentation Act 1967, and

common law tests are satisfied.

The remedy of rescission entitles the affected party to an indemnity (or court orders to a similar effect) to restore them to the position they were in before the contract was made (known as restituio in integrum).

2. Negligent misrepresentation

 Traditionally, damages could only be claimed for fraudulent misrepresentation.  Not negligent misrepresentation. Only the remedy of rescission was available.

Section 2(1) of the Misrepresentation Act 1967 changed that. It introduced the availability of damages as a remedy for negligent misrepresentation. Also, a court has a discretion to refuse the remedy of rescission and award damages instead.

The Misrepresentation Act 1967 enables statutory damages for negligent misrepresentation: 

Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.

The burden of proving that there was no negligence falls on the maker of the statement.

Further, in Hedley Byrne and Co v Heller and Partners Ltd (1994), the law of negligence (which is a different cause of action to negligent misrepresentation) was extended. Negligent statements which cause loss became actionable.

The duty of care owed must arise from a "special relationship", that is to say, where one party has special knowledge about the subject matter, that person can reasonably assume that the other party will rely on the statement.

3. Fraudulent Misrepresentation

What constitutes Fraud?

When a false statement is made:

• knowingly, or 
• without belief in its truth, or
• recklessly, careless as to whether it be true or false.

The first two obviously amount to fraud.

For the purpose of making a reckless statement, there is no need to prove dishonesty or fraud: only that the statement was made without caring whether the statement was true or not.

The difference between fraudulent misrepresentation and negligent misrepresentation is the existence of a fraudulent intention . 

There's no reason in principle why a fraudulent misrepresentation can't also be a negligent misrepresentation, provided the facts of the case satisfy the test for each cause of action. 

Consequences of Misrepresentation

The primary remedy for misrepresentation is rescission , which places the parties in the position they would have been in, if the contract had not been made. The effect of the contract is reversed.

Damages are not available for innocent misrepresentation. A higher scale of recovery of damages is available for fraudulent misrepresentation, because of the deceit involved by the person inducing the other contracting party to enter the contract in the first place.

A series of bars apply to obtain misrepresentation, where a party would be prevented from rescinding the contract. These are usually referred to as bars to rescission .

Damages for negligent and fraudulent misrepresentation are calculated in accordance with the usual law of damages. When coupled with rescission, an award of damages is designed to put the party in the position they would have been, had the misrepresentation not been made. Damages for not calculated on the basis that the misrepresentation was true.

In an assessment of damages, the claimant bears the burden of proof on the balance of probabilities to show:

• causation of loss , and
• that the loss suffered is not too remote, aka  remoteness of loss .

Those principles apply to reduce the amount of compensation which may be awarded.

The defendant bears the burden of proof to show that the claimant has not mitigated its loss. 

Difference between a representation and a term of a contract

In negotiations which lead to an oral contract, there can be some doubt whether something said or communicated was intended to be a representation or a term of the contract. (If it is a term of the contract, the false statement will lead to a breach of contract , rather than a claim for misrepresentation).

Firstly, it’s a question of law (and decided by a judge), and not fact whether a statement made before a contract is a representation or a term of the contract.

There are a series of factors at work to decide whether it's a misrepresentation or a term of contract:

• challenges to verify: whether the receiver of the statement challenges the person making it, to check the accuracy of the statement. The challenge ordinarily gives weight to its credibility and importance to the person relying on it. The request to verify the truth of the statement may involve third parties, such as an independent valuer, surveyor, architect, depending on the facts of the case
• effect of the statement: a statement designed to prevent the receiver from discovering a flaw in the subject matter of the agreement
• importance of the statement: when a statement is made which is of significant importance to the claimant, such as a special requirement or performance capability
• written agreements: the parties have reached in an oral agreement and the term is later reduced to written form. Statements incorporated into the written version are likely to be terms of the contract. Those not includes are probably representations
• skill and expertise: where one party has a technical expertise or special knowledge on the subject matter of the contract and the other party does not.

In contrast, where the expertise levels are about equal or the receiver of the statement has a greater knowledge, the statement is more likely to be a representation.

Misrepresentation in contract law is a cause of action geared to address misleading statements, whether innocent, negligent or made by fraudulent intention. 

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Knowledge Hub for Growth

Misrepresentation in contract law.

This guide sets out in brief the concept of contract misrepresentation under English law, including what it is, where it might be found, what is involved in proving a claim and how liability for it might be restricted.

This is a very complex area of law, and you should take a commercial lawyers’ advice as soon as possible if you suspect misrepresentation has occurred or you find yourself on the receiving end of a claim. Our team of expert commercial lawyers can assist you at any stage of drafting or reviewing clauses or agreements to help you avoid claims. We can also advise on the best route for resolving disputes.

An important point to note.

What is misrepresentation in contract law.

A misrepresentation is a statement in a contract that

• provides misleading information which
• influences one party
• to enter into a contract
• that they would not otherwise have agreed to
• as a result of which they suffer loss .

There are 3 types of misrepresentation:

Negligent - the offending party

• had no reasonable grounds for believing the statement themselves or
• didn’t care - was ‘reckless’ - as to whether it was true or not (Misrepresentation Act 1967).

Fraudulent - the offending party

• knows or believes that the statement is untrue (or is reckless whether it is or it isn’t),
• intends the other party to act in reliance on it and
• the other party does act in reliance on it and
• they suffer loss as a consequence.

Innocent - the offending party can

• prove that they believed the statement was true at the time it was made.

Where might I come across misrepresentation?

Misrepresentation arises out of ‘contractual discussions’ in which one party was ‘materially influenced’ by a statement(s) made by the other party, relied significantly on such statement(s) made by the other party, entered into a contract as a result of that reliance and suffered loss as a consequence.

These discussions might include marketing materials, commitments made in sales negotiations or statements written into the contract itself.

Its resolution would be a litigation matter and would ultimately go to court if the parties did not settle it beforehand.

Does silence count as misrepresentation?

 In certain circumstances, not saying something can constitute misrepresentation.

For example:

• if half the story is told , misrepresentation can arise over what was left unsaid eg. being ‘economical with the truth’ or
• a true statement becomes untrue prior to the contract being signed, such as stating that a house has never been flooded might have been correct at the time of initial discussions but inaccurate at a later stage (and is not corrected).
• if the contract is one of ‘ good faith ‘ and material facts were not disclosed at the start, eg. under an insurance contract the insurer would not be obliged to pay out on a claim.

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How would I deal with it?

The onus of proof is on the person claiming loss to prove that the offending party did not honestly believe the statement.

They would need to prove that, on the balance of probabilities

• a false statement of fact or law was made
• it induced them to enter into the contract
• they suffered loss because of the misrepresentation.

Keeping notes of conversations and correspondence is essential but it is far more advisable to request complete clarification and transparency in relation to anything stated or which you really rely prior to signing the contract rather than hoping to claim misrepresentation later on.

Once the contract is signed, it may be that a party’s best interests are served by bringing an action for breach of contract rather than misrepresentation.

If you are on the receiving end of an allegation of misrepresentation over a statement that you made, you should be prepared to prove:

• that the statement in question was true
• that the other party didn’t rely on it and
• that the statement did not cause the loss.

What are the available remedies for misrepresentation?

 A court can choose from four main remedies:

• Rescission - if misrepresentation is found to have occurred, the court can ‘rescind’ the contract which means returning both parties to the position they were in before the contract was signed.
• Affirmation - ie. the continuation of the contract. Beware of ‘affirming without intending to’ eg. leaving it a long time before complaining of the misrepresentation.
• Damages in lieu of rescission - these aim to put the person claiming misrepresentation in the position they would have been in had the misrepresentation not been made .
• Contract damages - if the statement is decided to have been a term of the contract, the person claiming misrepresentation may also have the right to claim damages for the loss suffered by what is effectively a breach of contract.

Can a business exclude or limit liability for misrepresentation?

It is not possible to exclude liability for fraud or misrepresentation which results in death or personal injury.

Subject to that, you can endeavour to limit liability for misrepresentation by using:

• a specific exclusion clause.
• an ‘ entire agreement ‘ clause.
• a ‘non-reliance clause.
• a financial cap on the level of liability in the contract.

However, these clauses need very careful drafting to ensure that the exclusion would be regarded as ‘reasonable’; you should take legal advice as soon as possible from a commercial lawyer if you want to limit your liability.

• Know what your employees are saying!  Review your sales scripts and training processes.
• Review the statements made in your marketing materials .
• Review the contract - again! - before signing .
• If anything comes to light that you believe is false tell the other party and your commercial lawyer immediately.
• Criminal offence - If it is found that the dishonesty (ie. the misrepresentation) is made to make gain for the maker of the statement or another or to cause loss or risk of loss, the penalties include unlimited fines and/or a prison sentence of up to 10 years ( Fraud Act 2006 ).

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Kevin Manship

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3 Types of Misrepresentation and Why They Matter

A contract largely depends on the honesty and goodwill of those who have agreed to it. If a party to a contract makes a misrepresentation of fact without suffering any repercussions for that misrepresentation, then few people would feel comfortable binding themselves to that contract. Misrepresentation is an important concept in the contract laws of England, Wales, and certain other Commonwealth countries. There are three main types of misrepresentation : 

Below is a brief overview of each type and the remedies for them.

But first…

Before talking about the three types of misrepresentation , however, it’s important to first define what misrepresentation means in the context of contract law. A misrepresentation is an untrue statement of fact that induces a party to enter a contract. Furthermore, to pursue a claim against the person who made the misrepresentation , the claimant must show that he or she relied on the untrue statement of fact when deciding to enter the contract and that the misrepresentation led to damages to the claimant. An opinion, it is important to keep in mind, even if considered false, is not the same as a fact and generally does not figure in cases surrounding misrepresentation. With that in mind, it’s time to look at the three types of misrepresentation .  

Fraudulent misrepresentation  

Fraudulent misrepresentation is very serious. Fraudulent misrepresentation occurs when a party to a contract knowingly makes an untrue statement of fact which induces the other party to enter that contract. Fraudulent misrepresentation also occurs when the party either does not believe the truth of his or her statement of fact or is reckless as regards its truth. A claimant who has been the victim of alleged fraudulent misrepresentation can claim both rescission, which will set the contract aside, and damages.

Negligent misrepresentation

A party that is trying to induce another party to a contract has a duty to ensure that reasonable care is taken as regards the accuracy of any representations of fact that may lead to the latter party to enter the contract. If such reasonable care to ensure the truth of a statement is not taken, then the wronged party may be the victim of negligent misrepresentation . Negligent misrepresentation can also occur in some cases when a party makes a careless statement of fact or does not have sufficient reason for believing in that statement’s truth. As with fraudulent misrepresentation, claimants can pursue both damages and a rescission of the contract.  

Innocent misrepresentation  

In innocent misrepresentation , a misrepresentation that has induced a party into a contract has occurred, but the person making the misrepresentation had reasonable grounds for believing it was true at the time the representation was made. A claimant who has been the victim of innocent misrepresentation can still pursue damages, but he or she cannot pursue rescission. Again, to pursue damages it must be shown that the claimant suffered a loss because of the misrepresentation.

The three types of misrepresentation described above are fundamental to understanding contract law in England and many Commonwealth countries. Claims based on allegations of misrepresentation help ensure that contracts are ultimately honored and that unscrupulous or negligent behavior does not go unpunished. To learn more about misrepresentation, check out Misrepresentation vs. Fraud: What’s The Difference?  

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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Misrepresentation in contract law: A brief on negligent, innocent and fraudulent statements

Contracts govern most of the transactions that a business carries out. When the representations that have induced someone to enter into a contract turn out not to be true or are misleading, this is misrepresentation.

If the person who has entered into the contract on the strength of a misrepresentation suffers loss, then they may be able to bring a legal claim for recission of the contract and/or damages.

What constitutes a misrepresentation?

A misrepresentation in contract law is a statement of fact that is not true and that persuades someone to enter into a contract. The contract does not have to be in writing, it can be a verbal agreement. The untrue statement can be made by an agent or employee on the part of their principal or employer.

A statement of opinion is not enough to constitute a misrepresentation, nor is a sales puff.

There are three types of misrepresentation, namely negligent misrepresentation, innocent misrepresentation and fraudulent misrepresentation.

Negligent misrepresentation

Where misrepresentation is made carelessly or without reasonable grounds for believing it to be true, this can constitute negligent misrepresentation. The claimant will need to show that the statement was not true and in defending a claim, the party making the statement will have to prove that they believed the statement and demonstrate that this belief was reasonable.

If the court grants the claim, then it can order rescission of the contract or damages instead, as well as damages for losses caused, even if they were not foreseeable.

Innocent misrepresentation

When someone unknowingly gives false information and this is not done fraudulently or negligently but the information induces someone to enter into a contract, this is innocent misrepresentation.

Where it can be proved that the information was not true, then a court can intervene to remedy the situation. This is usually done by rescinding the contract, with the aim of putting the parties back into the position they would have been in, but for the contract.

If rescission is not possible, then damages may be considered.

Fraudulent misrepresentation

Fraudulent misrepresentation, being founded on deliberate deceit, is the most serious type of misrepresentation. To bring a successful claim, the claimant will need to show that the untrue statement was made knowingly or recklessly, that they relied upon it and that it induced them to enter into the contract.

Because of the seriousness of the allegation, the standard of proof is high. The fraudulent allegation will need to have been clearly stated and it will need to be shown that the person making the statement knew it was false or had no belief in its truth or was reckless as to whether it was true or false.

It also needs to be demonstrated that the defendant intended the claimant to rely on the representation. The court will generally presume that, had it not been for the fraud, the claimant would not have entered into the contract.

The claimant must also show that, as a result of their reliance on the claim, they suffered loss and damage.

Proving a case of fraudulent misrepresentation is not simple and could require a substantial amount of evidence from the period leading up to the making of the contract, such as what each party knew, what was discussed or disclosed by way of marketing materials, emails, meetings and correspondence and what promises were made.

If the court finds fraudulent misrepresentation, then it can order rescission of the contract and damages for any losses caused. The losses do not have to be reasonably foreseeable.

Statements made in cases of misrepresentation

In cases of misrepresentation, the false statement or representation does not need to be made in writing, although the claimant must be able to prove to the court what was said.

It can be stated expressly or implied by conduct. Where the statement is implied, the context in which the inference is made can be important.

The court will ask what a reasonable person would assume were the facts in the circumstances.

While silence does not of itself constitute misrepresentation, when a statement is true in part but silent as to another aspect, then misrepresentation can be inferred from the fact that something was left out.

Bringing a claim for misrepresentation

If you believe that you have experienced loss because of misrepresentation in a contract you have entered into, then you are advised to seek legal advice as soon as possible. There are strict deadlines for starting a claim. It may also be more likely that you are able to resolve issues without the need for litigation if you ask a legal expert to intervene on your behalf.

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Article 16 – Legal Topic – Misrepresentation in Contract Law

By: Sherisse Walker

       Attorney-at-Law

       Martin George and Co.

       Attorneys-at-Law

• INTRODUCTION

According to the author, Gilbert Kodilyne in Commonwealth Caribbean Contract Law ; material statements made by parties during negotiations leading up to a contract may constitute either contractual terms or mere representations .

A contractual term is defined as a statement by which the parties intend to be bound and which therefore forms part of the Contractual Agreement.

On the other hand a mere representation is a statement of fact, made by one party (“the Representor”) to another party (“the Representee”) during negotiations leading to the contract, which was intended to operate and Did Operate, as an inducement to enter into the contract; but which was not intended to be a binding contractual term. Where such a statement turns out to be false, this is referred to as a “misrepresentation.”

A misrepresentation is therefore defined as a positive statement of fact, which is made or adopted by a party to a contract and is untrue. It may be made fraudulently, carelessly or innocently. Where one person (‘the Representor’) makes a misrepresentation to another (‘the Representee’) which has the object and result of inducing the Representee to enter into a contract or other binding transaction with him, the Representee may generally elect to regard the contract as capable of being rescinded (‘the act of setting aside the contract’). In these circumstances, if the person who made the misrepresentation does not want to accept the recission of the Contract, the Representee may invoke the aid of the Court, which may confirm by declaration, his entitlement so to rescind the contract and the Court may grant him such other relief as may flow directly from the fact of rescission; for example, the return of money paid or chattels delivered by him pursuant to the terms of the contract: Halsbury’s Laws of England, Volume 76 paragraph, 701 .

• FALSE STATEMENT ADDRESSED TO THE PARTY MISLED

It must be noted that a party who is misled by a misrepresentation must be able to show that the false statement was addressed to him, either directly or through another person intended by the Representor to convey the statement. In the case of Peek v Gurney (1873) LR 6 HL 377 the Claimant purchased shares in a company in reliance on certain false statements contained in the company’s prospectus; and he thereafter brought an action against the promoters of the company for rescission on the basis of misrepresentation. It was held that the statements in the prospectus had been addressed only to the original allottees of shares on the formation of the company; and since the Claimant was not one of those original purchasers, but one to whom the shares had been resold, his action failed as the representation had never been made to him in the first place.

• STATEMENT OF OPINION

A statement of opinion on a matter will not be considered to be a statement of fact and generally will not be treated as a misrepresentation. In the case of Bissett v Wilkinson [1927] AC 177 the Defendant entered into a contract to purchase land in New Zealand from the Claimant in reliance on the Claimant’s statement that he estimated the land “would carry two thousand sheep.” The land however had not previously been used for sheep farming by the Claimant or by anyone else and so when the Claimant sued the Defendant for the balance of the purchase price, the Defendant counterclaimed for rescission of the contract on the ground of misrepresentation. The Privy Council held that the Claimant’s statement was merely one of honest opinion and that the claim of misrepresentation failed.

In the local case of Angela Alexander (Trading as Prestige of Maritime Centre) v Maritime Leasing Company Limited CV 2006-02235 Stollmeyer J ( as he then was) asserted;

‘… A mere statement of opinion, which proves to be unfounded, will not be treated as a misrepresentation, nor will a simple statement of intention which is not put into effect; for as a general rule these cannot be regarded as representations of fact, except insofar as they show that the opinion or intention is held by the person expressing it.

There are, of course, exceptions to this general position. One is where the person expressing the opinion did not hold it. Another is where that person could not, as a reasonable person, having his knowledge of the facts, have held that opinion. It will be for the person to whom the representation was made to prove this.”

So even if it’s a representation of Opinion, then it may be possible to sue on it where the person who expressed the opinion, ought not, reasonably to have held such an Opinion. An example of this, could be like an experienced Surgeon expressing his opinion which induces a patient to have a wholly unnecessary surgery done by him. Once it can be shown, that with that Surgeon’s knowledge and experience, he ought properly to have known better, then he can possibly be held liable for same. A relevant example of this type of contrast though not strictly within Contract Law, would be where the US President recently mentioned the ingestion of Bleach and Disinfectant as a possible cure for the Corona Virus. No matter how much power and prestige his Office holds and no matter how much people may have relied on his words, they would be seen as merely Opinion (as reckless as they may be) of someone lacking Medical training and knowledge. On the other hand, if Dr. Anthony Fauchi had made such a statement, then of course everyone would have said he ought to have known better and should be held responsible for same. Of course when one considers the law under Negligence, the President’s words and actions could be examined in a different light, but that’s another Legal Lesson.

• REPRESENTATION MUST INDUCE THE CONTRACT

A misleading statement will not give sufficient reason to take legal action unless the said statement:

• Was intended to be an inducement to the other party to enter into the contract; and
• It Did in fact operate as an inducement.

If however the representee does not rely on the representor’s false statement; but on his own independent investigations about the subject matter of the contract, the representor will not be held liable.

It is stated further in Halsbury’s Laws of England 4 th Edition at page 492 paragraph 778 that:-

“In order to sustain any claim or proceeding for misrepresentation it is necessary for the representee to establish that he was induced by it, not merely to alter his mind, but to alter his position, that is to say, to effect a change in his material or temporal interests or situation ”.

• TYPES OF MISREPRESENTATION

There are three types of Misrepresentation:

• Fraudulent Misrepresentation;
• Negligent Misrepresentation; and

Innocent Misrepresentation

Fraudulent Misrepresentation

A misrepresentation is considered to be fraudulent when it is made:

• Without belief in its truth; or
• Recklessly careless whether it be true or false

The Author of Snell’s Equity 31st Edition paragraph 8-06 defines a ‘fraudulent misrepresentation’ as—

“a false statement of fact which is made by D to C knowingly, or without belief in its truth, or recklessly, without caring whether it is true or false, with the intent it should be acted upon and which is in fact acted upon by C. D will be liable in such a case even though the misrepresentation was made with no corrupt motive and with no expectation of profit and even though the person defrauded had a full opportunity of discovering the fraud or had an agent who knew the truth.”

Section 3 of the Section 3 of the Misrepresentation Act of Trinidad and Tobago Chapter 82:35 confers liability for loss suffered arising out of misrepresentations whether made fraudulently or otherwise.

Negligent misrepresentation

A Negligent Misrepresentation refers to a representation that is made carelessly and in breach of a duty owed by one party to another to take reasonable care that the representation is accurate.

In the case of Hedley Byrne and Co. v Heller and Partners Limited [1963] 2 All ER 575 the Court laid down the principle that a negligent misrepresentation, which causes financial loss may give rise to an action in damages for negligence, despite the absence of any contractual relationship between the parties; as long as there is a “special relationship” between the Claimant and the Defendant which seems to require reasonable reliance by one party on the representation made by the other.

In the said case, the Claimants, who were advertising agents, asked their bankers to inquire into the financial stability of E Co, with whom the Claimants were contemplating entering into certain advertising contracts. In answer to inquiries by the Claimants’ bankers, the Defendants, who were E Co’s bankers, carelessly gave favourable references about E Co. The Claimants then relied on these references and proceeded with the advertising contracts, but shortly afterwards E Co went into liquidation and the Claimants lost a large sum of money. In this case, the Claimants’ action against the Defendants for Negligence failed only because the Defendants had expressly disclaimed responsibility for the references. However, the Court held that, had it not been for the express disclaimer, the Defendants would have certainly owed a duty of care to the Claimants not to cause financial loss by their statements.

In relation to Bankers and Lenders generally, it’s important to note that the 2008 Financial Crash which was triggered by US mega-Lenders Fannie Mae and Freddie Mac who negligently offered and issued sub=prime Mortgages and Loans to Borrowers who really ought not to have qualified for same and then worse yet, wrapped them up in attractive glitzy packages of 100% financing with no interest for the first year and other goodies. What the Borrowers did not realize was that there was a massive sting in the tail in that after the first year interest-free Honeymoon period was over, they were hit with massive escalations on their interest rates which most Borrowers could not manage and soon all these Mortgages were under water. When looked at, it is clear that there was some element of Misrepresentation by both Fannie Mae and Freddie Mac in their Mortgage Lending material, and it was indeed designed to induce persons to enter into the Mortgages. However it is not as simple as that because there is also a responsibility on Borrowers; so if your Banker assesses your Business proposal and assesses your ability to repay their Loan and decides thereupon, to grant you a Loan facility – if you subsequently fail at that Business and thereafter can’t the Loan, you CANNOT seek to hold your Banker liable for your default by saying they should have known better than to lend you the money. The due diligence done by the Bankers in such a scenario is for their benefit and they are not in any way seeking to act as your Financial advisors and the responsibility for the success or failure of your Business remains yours. This is to be contrasted with a scenario such as the much Ballyhooed First Citizens Bank IPO, where the Bank of itself was actually encouraging persons to invest in itself, therefore the Bank in putting out the prospectus for the IPO, had a duty and responsibility to ensure that the statements it was putting out in the IPO prospectus were accurate and contained no misrepresentations for which it could later be held liable.

Innocent misrepresentation is defined as a representation that is made in good faith and believed to be true by the Representor. Innocent misrepresentation therefore occurs when a person unknowingly conveys false information which causes someone to enter into a Contract. Notwithstanding how innocent the Misrepresentation may be, once it is indeed a Misrepresentation that was relied upon and caused someone to enter into a Contract, then that contract can be rescinded on the basis of that Misrepresentation.

• SILENCE AS A MISREPRESENTATION

Generally, silence cannot amount to a representation and so the mere non-disclosure of the truth is not misrepresentation. However, the author, Gilbert Kodilyne in Commonwealth Caribbean Contract Law , expressed that silence may constitute misrepresentation in the following cases:

• Where silence distorts a positive representation.
• Where a statement, though true when made, later becomes false to the Representor’s knowledge and the Representor fails to inform the Representee of the change of circumstances.
• Where there is an active concealment of a fact, for example where the seller covers up defects in an article in order to mislead the buyer into believing that the article is in a good condition
• Where the contract requires uberrima fides (the Utmost Good Faith) – This refers to the duty in contracts to disclose material facts which are likely to influence the decision of the other party whether or not to enter into the contract; for example in contracts of Insurance. Thus in filling out an Insurance proposal, it is often required that the intended Insured be as forthcoming as possible in filling out the information, because Insurance Companies are notorious for pouncing upon the slightest material non-disclosure as a means to void an Insurance Contract and to not pay your claim. So for example if on a proposal for motor vehicle Insurance, you state that the car is kept at nights in your yars, but you fail to state that your yard is not fenced, and someone walks into your yard and steals your car – you will most likely be met wit the Insurer refusing to pay and saying that by your silence, you misrepresented the facts as you failed to disclose that your yard was not fenced.
• MERE “PUFFS”

The author, Gilbert Kodilyne explained further that advertisements containing exaggerated descriptions of products being offered for sale (such as the laundry detergent manufacturer that advertises its product as ‘washing the whitest’, or the manufacturer of a beverage that proclaims its product ‘fortifies and strengthens’) are not treated as representations of fact, but are regarded as mere puffs and as part of the advertisement aggrandizement  and wholly without legal effect such as products which are supposed to make you look more Beautiful, Handsome, sexy or attractive.

• REMEDIES FOR MISREPRESENTATION

A contract which has been induced by misrepresentation is voidable, not void. Therefore, the contract will remain in force unless and until it is set aside by the Representee. The act of setting aside the contract is known as ‘rescission’, the effect of which is that ‘the contract is terminated as if it had never existed. The remedy of rescission is available whether the misrepresentation is fraudulent, negligent or innocent: Cheshire, Fifoot and Furmston, Law of Contract, 15 th Edition. At common law, damages (‘money compensation for loss caused’) are available only for fraudulent and negligent misrepresentation, and not for innocent misrepresentation. Under the Misrepresentation Act however, the Court has power to award damages to the victim of an innocent misrepresentation instead of, but not in addition to, rescission, if the court considers it equitable to do so. In cases of fraudulent or negligent misrepresentation, the Claimant may claim both rescission of the contract and damages for loss suffered .

© 2020 MARTIN ANTHONY GEORGE & CO

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• > Commercial Contract Law
• > Misrepresentation, Breach, and Remedies

Book contents

• Commercial Contract Law
• Copyright page
• Brief Contents
• Contributors
• Part I The Role of Consent
• Part II Normative Views of Contract
• Part III Contract Design and Good Faith
• Part IV Implied Terms and Interpretation
• Part V Policing Contracting Behavior
• Part VI Misrepresentation, Breach, and Remedies
• Part VII Harmonizing Contract Law

Part VI - Misrepresentation, Breach, and Remedies

Published online by Cambridge University Press:  05 February 2013

This chapter endeavours to integrate the two principal remedies for misrepresentation, namely rescission and damages. Its principal thesis is that legal certainty requires a reasonably clear delineation of the losses to be remedied by rescission and those by damages. Discretionary remedialism is to be deplored as is any tendency to treat rescission as a holistic remedy for misrepresentation. A contract is rescinded for misrepresentation because it would not have been entered into but for the misrepresentation. This justifies only the cutting away of the contract itself and the restoration of the parties to the position they were in before contract so far as the contract is concerned.

Consequential losses should be remedied by damages, but under contract law that requires an independent justification. That justification may be found in the law of torts through the actions of deceit and negligent misstatement. The chapter contends that the Misrepresentation Act 1967 does not provide a sound basis for the award of damages for misrepresentation and should in the main be repealed. The power to declare a contract subsisting under section 2(2) where rescission would be excessive should be retained but there should be no damages awarded in lieu. The treatment of misrepresentation in other common law jurisdictions, particularly in the United States, will be considered, especially in the context of remedies for losses lying beyond rescission.

A coherent system of remedies should clearly delineate the job each remedy is to do. So rescission should be confined to ‘cutting away’ the vitiated contract and should not be fashioned into a holistic remedy for misrepresentation. Rescission should thus be combined with damages by allowing it in cases where the claimant wants specific (as opposed to monetary) relief. Damages should only be awarded in a case of misrepresentation where there has been a tort, i.e. where the defendant has been dishonest (the tort of deceit) or is in breach of a duty of care (the tort of negligent misstatement). This is broadly the position in the United States and in Australia. The Misrepresentation Act 1967 and the Misrepresentation Act (NI) 1967 should be repealed so far as they provide for a damages remedy beyond the torts of deceit and negligent misstatement. These more extensive damages remedies lack moral and policy based justification and provide for more extensive relief than is available for breach of contract.

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• Misrepresentation, Breach, and Remedies
• Edited by Larry A. DiMatteo , University of Florida , Qi Zhou , University of Sheffield , Severine Saintier , University of Sheffield , Keith Rowley , University of Nevada, Las Vegas
• Book: Commercial Contract Law
• Online publication: 05 February 2013

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