Understanding misrepresentation in business contracts: a quick guide

Understanding the legal implications of misrepresentation is essential when entering into business contracts. This knowledge helps you avoid mistakes and ensures that the information you provide is honest and accurate.

Knowing your legal rights also puts you in a position to take action if you have been a victim of misrepresentation, such as seeking to cancel a contract or claiming damages.

It is important to realise that a false or misleading statement not only applies to a formal written contract; it can also be information given in other ways, such as during a business meeting, sales presentation, or promotional materials.

If you believe you were induced into a contract by misrepresentation or are facing a claim, contact our solicitors. We will help you understand your options and guide you through the process to ensure your rights are protected.

Misrepresentation in contracts

If you enter into a contract based on a statement that turns out to be untrue, this is classed as misrepresentation.

There are three main types of misrepresentation:

• Innocent misrepresentation
• Negligent misrepresentation
• Fraudulent misrepresentation

If misrepresentation is proved, the contract may be rescinded, and if loss has occurred, the court may also award damages.

Innocent misrepresentation

The definition of an innocent misrepresentation is a statement made where the representor:

1. Proves that they had reasonable grounds for belief in the truth of their statement; and
2. Proves that they believed up to the time of the contract that what they were saying was true.

If innocent misrepresentation is proved, the court can order rescission of the contract, or may exercise their discretion to award damages in lieu of rescission if applicable.

Negligent misrepresentation

Negligent misrepresentation occurs when the person making the statement has made it carelessly or without reasonable grounds for believing it to be true.

This means that the party who made the statement must show that they had reasonable grounds for believing it to be true to avoid a negligent misrepresentation claim.

Under Section 2(1) of the Misrepresentation Act 1967, if negligent misrepresentation is proven, whilst ordinarily the court will order rescission of the contract, again, they may exercise their discretion to award damages instead. Misrepresentation damages may also be ordered concerning the loss arising.

Fraudulent misrepresentation

Fraudulent misrepresentation is categorised under the tort of deceit and applies when false representation has been made to induce a person into a contract.

This is proved when it is shown that the false representation was made:

1. Knowingly, or
2. Without belief in its truth, or
3. Recklessly, without caring whether it be true or false.

The court must be satisfied that the failure to disclose was deliberate or dishonest and not just due to inadvertence or failure to realise the disclosure requirement.

It must also be shown that the claimant relied upon the statement when deciding to enter into the contract and would not have entered into the contract but for the misrepresentation.

If fraudulent misrepresentation is proved, the court can order the rescission of the contract and damages for the loss that arises from it.

Proving misrepresentation as a claimant

Proving misrepresentation can be challenging as a claimant and involves demonstrating several vital elements. Here are the core requirements to establish a misrepresentation claim:

• False statement of fact: You must prove that the other party made a false statement of fact. This statement can be in writing, verbal, or through conduct. Opinions, intentions, or future promises generally do not qualify unless made fraudulently.
   
• Materiality: The false statement must be material, meaning it was significant enough to influence your decision to enter into the contract.
   
• Reliance: You must show that you relied on the false statement when entering the contract. This reliance must be reasonable; your claim may fail if a reasonable person in your position would not have relied on the statement.
   
• Inducement: You must demonstrate that the false statement made you enter the contract. This means that you would not have entered into the contract, or you would have entered into it on different terms if the statement had not been made.
   
• Proof of loss (if seeking damages): If you are claiming damages, you need to show that you suffered a loss directly due to the misrepresentation.

An expert solicitor can help you assess the merits of your misrepresentation claim by reviewing key evidence. This may include documents like contracts, emails, and promotional materials where the false statement was made, witness testimonies from those who can corroborate your reliance on the statement, and expert witnesses who can confirm the statement's falsity and your reasonable reliance on it. 

How our solicitors can help

Becoming involved in a contract dispute can hold up projects, affect business relationships, and have a significant financial impact if the right outcome cannot be achieved.

We can offer valuable legal guidance and support if you're facing a complex contract issue. If you believe you were induced into a contract by misrepresentation or are facing a claim, our friendly solicitors will help you understand your options.

We have solicitors in London, Brighton, East Sussex, and Cumbria, and we work with clients nationwide.