Navigating misrepresentation in contracts: Understanding your rights

01 Mar 2024

Misrepresentation in contracts is a common issue that can lead to legal disputes and financial consequences. Understanding what constitutes misrepresentation and how it affects contractual obligations is crucial for both parties involved.

What is misrepresentation in simple terms?

In the realm of contract law, misrepresentation occurs when one party makes a false statement of fact to the other party, inducing them to enter into a contract. This false statement can be made knowingly, recklessly, or innocently. Regardless of intent, if the false statement influences the other party’s decision to enter into the contract, it constitutes misrepresentation.

Although similar, representations and misrepresentations must be distinguished from warranties and breach of warranty. While a representation and a warranty are both seen as statements of fact that are often made during contract negotiations and found in contracts, a representation is a statement of fact made during the contractual negotiation that induced the other party to enter into the contract. The consequences of and remedies for misrepresentation and breach of warranty are different.

What are the remedies for misrepresentation?

When misrepresentation is established, the innocent party has several remedies available, including:

Rescission

The innocent party may seek to have the contract rescinded or set aside, essentially undoing the agreement and returning both parties to the position they would have been in had the contract not been concluded. Rescission is often pursued when the misrepresented fact was material or of significant importance in influencing the contract’s formation, and the innocent party would not have entered into the contract had they known the truth. This remedy would not be available for a breach of warranty.

Damages

If the innocent party suffered financial losses due to the misrepresentation, they may seek monetary compensation from the party responsible for the misrepresentation. Electing this remedy means that the innocent party acknowledges the contract, and generally claims the difference between the agreed contract price, and the actual value of the deliverables received. The damages awarded aim to put the innocent party in the position they would have been in had the misrepresentation not occurred. This remedy would also be available for a breach of warranty.

Specific performance

In cases where damages are inadequate, the court may order specific performance, compelling the party responsible for the misrepresentation to fulfil their contractual obligations as originally agreed upon. This remedy would also be available for a breach of warranty.

In the event of a proven misrepresentation, the innocent party is entitled to elect the remedy that it prefers; bearing in mind that electing one remedy may result in the innocent party losing the right to claim under one of the other remedies – namely, if the innocent party elects to claim damages or specific performance, they cannot also claim rescission.

Representation clauses in contracts

Most contracts include clauses that address representations made during negotiations. Whilst these clauses may limit liability for innocent or negligent misrepresentation, stipulate the timeframe for bringing claims, or require representations to be in writing and/or expressly set out in the contract to be enforceable, such clauses do not absolve a party of liability for fraudulent misrepresentation. However, to succeed with an allegation of fraudulent misrepresentation, the innocent party would need to prove that the other party made reckless or intentional misrepresentation(s) of fact or opinion, with the intention to coerce a party into action or inaction based on the misrepresentation.

Illustrative example of a fraudulent misrepresentation

Consider a scenario where you’re purchasing a car, and you make it clear that you would not be willing to purchase a car that has been in an accident. The seller assures you that the car has never been in an accident. Relying on this statement, you agree to purchase the car, at the listed price. Later, you discover the car was involved in a major accident, and the seller knew but did not disclose it. This constitutes fraudulent misrepresentation allowing you to take legal action to cancel the contract and recover any amounts paid by you for the car.

Conclusion

Misrepresentation can have serious implications for contractual relationships, leading to disputes and legal action. By understanding the concept of misrepresentation and its consequences, parties can take steps to mitigate risks and protect their interests when entering into contracts. Seeking legal advice before concluding any agreement can help ensure that your rights are safeguarded, and that you are aware of any potential misrepresentation issues.

Article sourced from Eversheds Sutherland.

See also:

• Terminating a contract: Rights, procedures and aftermath
• Liability is a condition precedent to trigger invocation of an exclusion clause
• Beware – Pre-contractual negotiations can affect your written contract
• Legal contracts and different types of breach of contract

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)