Negligent Misrepresentation vs. Fraud: Understanding the Key Differences
When you enter into a contract with another party, you should be able to rely on the representations that have been made to you before you enter into the agreement. If these statements have induced you to agree to the deal and they turn out to be false, you could be entitled to ask the court to remedy the situation on the basis of misrepresentation.
We take a look at the negligent misrepresentation and the difference between this and fraudulent misrepresentation, as well as what action you can take if you have been a victim of misrepresentation.
What is misrepresentation?
Before a contract is entered into, one or both parties will make a number of statements relating to what is to happen or the goods or services involved. Some of these statements will subsequently be incorporated into the contract. Others will not, and are known as representations.
If a statement is incorporated into the contract, it becomes a contract term. If this is breached, then the other party can take action for breach of contract. Where a statement made outside of the contract turns out to be false, the action will be for misrepresentation.
A statement of misrepresentation does not need to be in writing. It can be verbal or a gesture or made by way of conduct. It can also be a failure to advise the other party of certain facts. The party complaining of the misrepresentation does need to have been made aware of the misrepresentation however.
The statement can also refer to future conduct, for example, a statement that it is intended to use finance for a certain purpose when this was never the intention.
For more information, see Misrepresentation in contract law: a brief on negligent, innocent and fraudulent statements.
The misrepresentation must have partly or wholly induced the party to enter into the agreement for a claim to succeed. To establish this, it will need to be shown that:
- There was a material statement of a particular fact and this fact was one that induced the party to enter into the contract. A statement of opinion is not enough
- The party knew of this fact
- It was intended that the fact be relied upon
- The fact was relied upon in entering into the contract
It is not always straightforward to establish whether the statement was a fact or an opinion and this issue can be contested during a misrepresentation case. The court will look at what a reasonable person would have inferred. It may be the case that the statement of opinion is implying that the statement of fact is true, in which case it is misrepresentation.
Types of misrepresentation
There are three main types of misrepresentation:
- Innocent misrepresentation;
- Negligent misrepresentation; and
- Fraudulent misrepresentation
If you have entered into a contract and discovered that statements made to you were not accurate or you were led to believe something that is not true, you may be able to seek a remedy from the courts. You will need to establish whether it is a breach of contract or a type of misrepresentation and, if it is misrepresentation, which type it is.
This is not always straightforward and it is important to choose the correct route in seeking redress.
Innocent misrepresentation occurs when the party making the statement genuinely believes it to be true. It is easier to establish innocent misrepresentation than other types of misrepresentation. This means that it may be the best choice if you wish to end a contract.
For more information on the different types of misrepresentation, see What are the different types of misrepresentation?.
The Misrepresentation Act 1967 provides that:
“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 ground to believe and did believe up to the time the contract was made the facts represented were true.”
Negligent misrepresentation occurs when a statement is not true and is made without any reasonable belief in its truth. The party imparting the information will either have done so:
- In a careless manner; or
- Having no reasonable grounds on which to believe that the statement is true
The statement can be made by the party to the contract or by their representative or agent.
The complainant must have believed the misrepresentation and relied on this when entering into the agreement, although the statement should be reasonable. Where someone has relied on a statement that is extremely unlikely to be true, ie. unreasonable reliance, they will find it difficult to obtain redress at court.
Similarly, the person relying on the statement cannot have other information available which means that they know the statement was not true. For example, if the complainant had inspected a product and seen that the description was false, they would not be able to claim that the misrepresentation had induced them to enter into the contract.
The party making the negligent misrepresentation must have had the intent that the other party would rely on the statement or have realised that they might have relied on it. The party relying on the statement must have entered into the contract because of the statement, although it does not need to be the only inducement. The court will look to see whether they would have entered into the agreement ‘but for’ the misrepresentation.
Once the complainant has established that the fact was not true, that they relied upon the fact in entering into the contract and that they have suffered loss as a result, it is for the party who made the statement to prove that they were not negligent.
Remedies for negligent misrepresentation
If the complainant is able to establish negligent misrepresentation, they may be entitled to:
- Damages aimed at putting them back in the position they would have been, but for the negligent misrepresentation;
- Rescission of the contract, where the court states that the contract does not take effect; or
- Damages in lieu of rescission – this is separate from the damages above.
If rescission is not available for any reason, then damages in lieu of rescission cannot be awarded – only damages aimed at restoring the party to their original position. If the contract can be rescinded, then the court can decide that the contract will stand and award damages in lieu of rescission.
In some cases, a contract may seek to avoid liability for misrepresentation. Whether this clause is effective or not will depend on whether it is considered to be a fair term or an unfair term. For this reason, contracts need to be carefully drafted. It is not possible to unfairly exclude all liability.
The difference between negligent misrepresentation and fraudulent misrepresentation
Fraudulent misrepresentation occurs when the party making the false statement knows or believes that the statement is untrue or has a reckless disregard for whether it is true or not. No reason needs to be established for the fraud, but the complainant must show that the other party had no honest belief in the truth of the statement made.
Where the following exists, it will be possible to bring a fraudulent misrepresentation claim:
- One party to the contract made a false statement to the other
- The party making the statement knew that it was false or was reckless as to whether it was true or false
- The party making the statement intended that the other party should act on it
- The complainant acted in reliance on the false statement
- The complainant suffered loss as a result of their reliance on the false statement
Fraudulent misrepresentation can be a criminal offence under the Fraud Act 2006 where an individual dishonestly makes a false representation that causes loss to another or exposes them to the risk of loss in return for a gain for the dishonest individual. If proved, the offence is punishable by up to ten years in prison and/or an unlimited fine. For more information on fraud and private prosecutions, please see Benefits of bringing a private prosecution if you are a victim of fraud or financial crime.
To bring a civil case for fraudulent misrepresentation, it is necessary to prove that:
- A false statement was made
- It was made dishonestly or negligently
- You were induced to enter into the agreement because of the false statement
- You suffered a loss because of the false statement
This means that the main difference between negligent misrepresentation and fraudulent misrepresentation is the knowledge and intention of the individual making the false statement. Where they made the false statement knowingly or without belief in its truth or they were reckless as to whether it was true, there is a case for fraudulent misrepresentation.
If the party making the false representation has no reasonable grounds for believing that the statement is true and the statement is made carelessly, then you may be able to establish negligent misrepresentation.
For more information on fraudulent misrepresentation, see Fraudulent misrepresentation: how to prove it and how to deal with it.
Bringing a claim for misrepresentation and rescinding the contract
It is generally preferable to try to resolve misrepresentation cases out of court where possible. This is usually a faster and more cost-effective way of finding a solution. An expert misrepresentation solicitor will be able to explore the available options with you, such as alternative dispute resolution. This could be mediation, arbitration or early neutral evaluation.
However, where it is not possible to agree on an outcome with the other party, it may be necessary to bring legal proceedings. The normal remedy for misrepresentation is to rescind the contract.
An example of a misrepresentation case is Salt v Stratstone Specialist Ltd (2015). Mr Salt, a car enthusiast, purchased a car from Stratstone in 2007, who claimed it was a ‘brand new’ vehicle. Over time, it became apparent that the car had numerous defects. In fact, it had been manufactured in 2005 and had been involved in a serious collision that had caused wheel damage. Stratstone had carried out repairs and stored the car until Mr Salt purchased it.
Mr Salt had originally claimed that the vehicle was not of merchantable quality, but when it was revealed that the car was not in fact new and the garage had known this, he amended his claim to one for misrepresentation and asked the court to rescind the contract.
Initially, the high court found in favour of Mr Salt but said that it could not order rescission of the contract because several years had passed since the purchase and the car had been registered to Mr Salt. It was therefore not possible to return it unregistered. He was awarded damages amounting to the estimated difference between a new car and the used car that he had purchased.
Mr Salt appealed to the Court of Appeal for the contract to be rescinded. The court confirmed that damages in lieu of rescission could only be awarded where rescission was a potential remedy. Rescission was to be the usual remedy for misrepresentation unless this was not possible.
However, a lapse of time was only a bar to rescission where so much time had passed that it would not be equitable to grant rescission. In this case, it was equitable to rescind the contract, even though three years had passed. In fact, much of the delay was because Mr Salt had not initially been aware that the car was not brand new.
The fact that the car had been registered and had depreciated in value and that Mr Salt had had some use of it did not make it impossible to rescind the contract as Stratstone could be compensated for this. However, in this case, Stratstone had not provided any evidence of depreciation, so there would be no compensation. The lack of evidence should not disadvantage the complainant, who should never have been put in the position of having to bring the case.
The appeal was successful contract was rescinded and Stratstone were required to repay the full purchase price to Mr Salt, who was to return the car to them.
You are strongly advised to speak to a contract law expert if you are dealing with what you believe to be misrepresentation. It is crucial to identify whether it is in fact a misrepresentation case or whether you could make a claim for breach of contract.
You will also need to establish what type of misrepresentation has taken place and ensure you have sufficient evidence to make your case. Having the strongest possible evidence at the outset will also make it more likely that your claim can be settled satisfactorily out of court. Your solicitor will be able to put your case to the other side in robust terms and work to negotiate a settlement on your behalf.
Further reading: Misrepresentation and the 11 facts you need to know.
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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.