Pre-Contractual Statements: When Can They Come Back To Bite You?

Parties may say all sorts of things when negotiating a contract. Where sophisticated commercial parties are involved, most pre-contractual statements will, no doubt, be both carefully considered and accurate. But as we all know, things can go wrong.

Where a pre-contractual statement turns out to be false, the implications can be serious. The counterparty may have a right to unwind the contract, or to claim damages, or both. In an extreme case, there may be criminal liability for fraud.

1. Misrepresentation

The most obvious risk, where a false statement is made in the course of negotiating a contract, is that the counterparty will be able to bring a claim in misrepresentation.

In essence, the counterparty will have a potential claim if it can show that it was induced by the false statement to enter into the contract. The test is both objective and subjective. The court will consider what a reasonable person would have understood from the relevant words and/or conduct in the relevant context. But it will also look at whether the counterparty in fact understood the statement in that sense and was influenced by it; if it played no part in the decision to enter into the contract, there will be no claim in misrepresentation.

Even where the counterparty was induced by the statement, the party who has made the misrepresentation may...