Misrepresentation: Negligent And Innocent Statements In Contract Law

• Published date: 26 January 2022
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Andrew Jackson Solicitors
• Author: Mr Mike Wilson

During pre-contractual negotiations, many things may be said in advertising, during discussions or in correspondence. Some may become terms of the contract and others may have no legal effect, but the law of misrepresentation concerns untrue or misleading statements made by one party, which induce the other to enter in to a contract.

A party entering into a contract based on a misrepresentation by the other party may be entitled to rescind (or set aside) the contract and/or claim damages for any loss, but the law on misrepresentation is complex and it is necessary to determine whether the misrepresentation was fraudulent, negligent, or innocent.

It is therefore important for businesses to understand how any pre-contractual statements they may make could leave them exposed to a legal challenge, and how those made by the other party may give them a way out of the contract and/or a right to claim damages.

What is misrepresentation?

A misrepresentation is an untrue statement made by one party (or his agent) to another party, which induces it to enter into a contract and thereby causes it loss.

A real-world example of a recent case is that of a Chinese car manufacturer who induced a prospective UK dealer to enter into a dealership agreement by telling it, falsely, that its vehicles complied with upcoming EU emissions regulations. In that case, the dealer, unable to obtain compliant vehicles to sell, suffered a substantial loss, including loss of projected sales and the costs of rebranding its dealership. The dealer was therefore able claim rescission of the contract and damages for fraudulent misrepresentation.

A misrepresentation may be a statement of fact or law. A mere statement of opinion or intention will not be treated as a misrepresentation. A misrepresentation can be express or implied by words or conduct. Silence does not usually amount to a misrepresentation, except where a party makes a statement which is a half-truth, or where a statement is true when it is made but becomes untrue before the contract is made.

For a misrepresentation to be actionable, it must have induced the other party to enter into the contract. If a party did not rely on it, he cannot claim that it was induced to enter into the contract by it. The recent case of Leeds City Council & Ors v Barclays Bank plc has clarified that the representee must demonstrate some form of awareness of the representation having been made; it had to have been actively present in their minds at the...