Misrepresentation and the 11 facts you need to know

When someone is induced to enter into a contract because of a false statement made to them by the other party to the contract and they subsequently suffer a loss because of their reliance on that false statement, they are a victim of misrepresentation. A legal claim can be made requesting that the court award damages or rescission of the contract.

The best way to avoid falling into the misrepresentation trap is by understanding exactly what it is and how it can arise, even without intention. The 11 essential points below will explain what you need to know to protect your business and even your personal assets from legal action.

1. Fraudulent misrepresentation

If one party to a contract makes a false statement knowingly, or without belief in its truth or recklessly as to its truth, this can amount to fraudulent misrepresentation. Four points need to be established, as follows:

• the defendant made a false statement to the claimant;
• the defendant knew that the statement was false or was reckless as to whether it was true or false;
• the defendant intended that the claimant should act in reliance on the false statement; and
• the claimant acted in reliance on the false statement and suffered loss as a result.

It is for the claimant to prove that the defendant had no honest belief in the false statement. On occasion the court has held that it was enough that the defendant suspected there was no truth in the statement or that they neglected to make enquiries as to its truth.

2. Negligent misrepresentation

Negligent misrepresentation occurs when the false statement was made carelessly or without reasonable grounds for the defendant to believe it to be true.

Once the statement has been shown to be false, it is for the defendant to prove that they were not negligent and that they had reasonable grounds to believe the statement to be true.

3. Innocent misrepresentation

If the defendant had legitimate reasons to think that the false statement was true, this constitutes innocent misrepresentation. The claimant can ask for the contract to be cancelled and that they be restored to their position before the contract took place.

4. Can misrepresentation arise from pre-contract discussions?

Pre-contractual statements of fact that turn out to be false can constitute misrepresentation. The statement can be written or oral or even implied from words or conduct. For this reason, great care should be taken in all pre-contract communications.

It is recommended that initial negotiations, statements, replies to enquiries and draft contracts be dealt with via an experienced commercial solicitor, who will be able to help the parties avoid taking on any unwanted liability and who can advise on what information to provide.

5. Are all false statements misrepresentation?

Opinions and half-truths are not always considered misrepresentation. Similarly, silence is generally not considered to be misrepresentation, although misleading conduct can be. If the claimant was aware that a statement was false, but entered into the contract anyway, then the defendant may be able to show that the statement did not induce the claimant to enter into the contract and that they did not rely on it.

6. Can a director be personally liable for fraudulent misrepresentation?

Where the director of a limited liability company makes a fraudulent representation, they can be held personally liable. The deceit is said to pierce the corporate veil, meaning that they cannot hide behind the company and a court may order that they pay compensation from their own personal assets.

At Lincoln & Rowe we have extensive experience in commercial law and understand the importance of protecting company officers from litigation. If you would like to talk to an expert contract solicitor, ring us on 020 3968 6030. We will be able to advise on the best way to proceed to minimise your liability.

7. Should the claimant have checked whether the statement was true?

In all claims for misrepresentation, the claimant will have to show not only that they reasonably relied on the false statement, but also that it influenced their decision to enter into the contract. However they are not expected to have taken any steps to ascertain whether the statement was true or false, even if they had the opportunity to do so.

8. Can liability arise even if the misrepresentation is made by a 3rd party?

Where a false statement was made by someone other than the party to the contract, for example their agent, the party to the contract can still be liable for fraudulent or negligent misrepresentation. If the agent was acting within their authority, the claimant can pursue the party to the contract for a remedy.

This extends to fraudulent misrepresentation made by a third party, where the party to the contract had knowledge of the false statement.

For this reason, it is important to monitor exactly what communications are made by agents and other parties in pre-contract statements.

9. Can the contract contain clauses to limit liability for misrepresentation?

A well-drafted contract will seek to limit liability for statements made in pre-contract negotiations or side agreements. This is usually done by way of an ‘entire agreement’ clause or a ‘non-reliance’ clause.

It should be noted however that no clause can exclude or limit liability for fraudulent misrepresentation.

An entire agreement clause seeks to exclude from the contract any statements that are not expressly included within the contract and to limit remedies for misrepresentation to contractual remedies only.

A non-reliance clause attempts to prevent claims for misrepresentation by obtaining the parties’ signed agreement that they are not relying on any statements made to them.

Both clauses need to be carefully drafted to have the best chance of protecting signatories to a contract.

10. What are the remedies that will be awarded for misrepresentation?

It is important to bring a claim on the correct basis to obtain the best remedy. If the claimant is successful in bringing an action for misrepresentation, the defendant will be liable for all losses flowing from the inducement, whether or not they were foreseeable.

The claimant is also entitled to rescission of the contract, unless the court orders damages in lieu of this. It is advisable to request rescission early in proceedings if this is a preferred outcome, as failing to do so can be construed as consent to the contract continuing.

If the contract is rescinded, the claimant can still make a claim for damages to compensate any losses.

Our expert commercial lawyers at Lincoln & Rowe have wide experience of misrepresentation claims. If you need help or advice in bringing or defending an action, ring us on 020 3968 6030 to speak to a leading contract expert.

11. Choosing between misrepresentation and breach of contract

The choice between an action for misrepresentation or breach of contract should be made carefully.

The aim of a successful misrepresentation case is to put the claimant back in the position they would have been in before the misrepresentation was made. In respect of fraudulent misrepresentation, damages can be awarded for all losses which have occurred, even those which were not foreseeable.

The aim of a successful breach of contract case is to put the claimant in the position they would have been in had the contract been properly performed. This could include payment for loss of profits and might therefore be preferable to a misrepresentation claim.

A further consideration is that the burden of proof is not the same each type of claim. It is advisable to seek early legal advice to ensure that the most suitable claim is made.

Alternative Dispute Resolution 

The legal costs and especially in cases that involve allegations of fraud can be substantial so it is always important for the parties to consider alternative dispute resolution from the outset. The court can penalise parties in respect of costs at the end of a case if they have unreasonably refused to engage in forms of alternative dispute resolution such as mediation.

At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. As well as in-depth commercial expertise we provide an excellent service to our clients and practical advice and guidance.

We have wide-ranging experience in litigation and corporate law, and were named as winner of the Global 100 for Best Firm for Commercial Disputes of the Year 2024 and Gamechangers Global Awards for Boutique Litigation Law Firm of the Year 2023.

If you would like to talk to one of our expert legal team about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 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.