When entering into a business contract, a variety of statements are usually made setting out the details and background of the deal. If someone enters into a contract in reliance on a statement that later turns out to be untrue, this is misrepresentation.

The false statement does not need to be in a formal written document, it can be information given in a conversation, meeting or sales pitch.

If misrepresentation can be proved, then the contract may be rescinded by the court and if a loss has occurred, damages may also be awarded.

There are three main types of misrepresentation:

• Fraudulent misrepresentation
• Negligent misrepresentation
• Innocent misrepresentation

Fraudulent misrepresentation

Fraudulent misrepresentation is based on deceit, where a false representation has been made which has induced someone to enter into a contract. It applies to a false statement that is made:

• Knowingly;
• Without belief in its truth; or
• Recklessly or carelessly as to whether it is true or false

This type of misrepresentation is taken seriously by the courts, who will look for evidence of the following:

• A false representation was made to the claimant;
• The defendant knew that the representation was false or was reckless as to whether it was true or not;
• It was intended that the claimant rely on the false statement;
• The claimant suffered loss as a consequence of their reliance on the representation.

The claimant must show that the defendant had the requisite state of mind, ie. that they knew the statement was false or were reckless as to whether it was true or false, which is generally shown by inference. Where the allegation is of serious misconduct, the court may be more inclined to infer the necessary state of mind.

It is also necessary to demonstrate that the claimant would not have entered into the contract, but for the misrepresentation. When coming to a decision, the court will ask, ‘But for the misrepresentation, might the claimant have acted differently?’

If fraudulent misrepresentation is proved, the court can order rescission of the contract as well as damages for loss arising from the misrepresentation. The loss does not have to be reasonably foreseeable.

Negligent misrepresentation

Where a statement is made that is found to be negligent and the claimant relied on this statement and suffered a loss as a result, this is negligent misrepresentation.

Negligence occurs when the person making the statement makes it carelessly or without reasonable grounds for believing it to be true.

If the statement can be shown to be false, then the party who made the statement will have to show that they reasonably believed it was true to defend the allegation of negligent misrepresentation.

The Misrepresentation Act 1967 provides that damages can be paid instead of rescission of the contract where negligent misrepresentation is proved. Misrepresentation damages may also be ordered in respect of the loss arising. Again, the loss does not have to be reasonably foreseeable.

Innocent misrepresentation

Innocent misrepresentation occurs when a false statement is made by someone who genuinely believes it to be true and the statement then induces someone to enter into a contract.

Where the case is proved, the court can order rescission of the contract as a remedy or, where this remedy is available, damages instead of rescission, although the court will usually prefer to make an order for rescission.

Bringing a misrepresentation claim

Understanding which type of misrepresentation you can prove and whether you may instead have a claim for breach of contract is not always straightforward.

If a false statement is part of the contract that you have signed, you may be able to bring a claim for breach of contract. This may be easier to prove than fraudulent or negligent misrepresentation.

Damages for breach of contract seek to put a claimant back in the position they would have been in, but for the breach. It is also possible to include losses that have arisen from the breach. It is important to consider carefully all of the losses that have occurred, for example, a business may have occurred expenses because of the breach.

The usual remedy for misrepresentation is rescission of the contract, also with the aim of putting the claimant in the situation they would have been in if they had not entered into the contract.

Damages will be awarded on this basis, with the claimant required to show the causation of loss and that the loss was not too remote from the misrepresentation.

Representation or contract term?

A representation is a statement of fact that is not a term of the contract and where the truth is not guaranteed. No contractual obligation arises from a representation, but it could give rise to the tort of misrepresentation.

A contract term is a provision of a contract.

The court will decide whether a statement made before a contract is entered into is a representation or a contract term by looking at the following issues:

• Whether the person to whom the statement was made challenged it to check its accuracy. This gives weight to the claimant’s assertion that they have relied on it;
• Whether the statement was intended to prevent the claimant from discovering a flaw;
• How important or significant the statement is to the claimant;
• Whether it is a written contract term or something that was included in an oral agreement before the contract was entered into;
• Whether one party has special knowledge in respect of the subject matter. If the claimant has greater knowledge, the statement may be more likely to be classified as a representation.

Director’s Personal Liability

If a director has made a fraudulent misrepresentation, he may not be able to hide behind the company and could be personally liable for the misrepresentation. In the case of Contex Drouzhba Ltd v Wiseman and another [2007] EWCA Civ 1201, a director had signed payment terms for goods on behalf of the company. 

However, when signing the agreement, the director knew that the company could not pay for the goods and as the agreement amounted to a statement in writing, the director fell foul of 6 of the Statute of Frauds (Amendment) Act 1828, as stated below:

“No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade, or dealings of any other person, to the intent or purpose that such other person may obtain credit, money, or goods upon, unless such representation or assurance be made in writing, signed by the party to be charged therewith.”

When directors are concerned about a company’s insolvency, they need to consider whether to stop trading and avoid entering into contracts which cannot be fulfilled as they may be personally liable. For further information, please see Directors’ personal liability for misrepresentation and What Are Directors’ Duties When a Company Is Insolvent?  

It is recommended that you seek legal advice in deciding whether your case is one of misrepresentation or breach of contract. Bringing the correct action is vital and understanding which remedy is best for your situation is also important. For more information, see our article, Misrepresentation and the 11 facts you need to know.

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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 the ‘Commercial Disputes Specialists of the Year” in the Corporate Livewire Innovation & Excellence Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. 

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.