Misrepresentation: how to spot and avoid it

Introduction

This article will guide you through misrepresentation, describing what it is, how to limit your liability, and discuss what remedies are available to you if you have suffered loss due to misrepresentation. 

What is misrepresentation?

Misrepresentation, at its most basic level, is the act of making a false statement to another party. The recipient party must rely on that statement in some way, to their detriment. Such circumstances give rise to a claim against the party that made the false statement. 

That action can be brought in the context of a contract (where a party makes statements meant to induce another to enter into a contract), as a claim in tort at common law (civil harms caused to another), or under the Misrepresentation Act 1967.

Where the phrase “misrepresentation” is used by lawyers, it refers to statements made between contracting parties. Therefore, contractual and tortious/statutory liability will arise at the same time. Where two parties are not in a contractual relationship, “misstatement” is the relevant term (and cause of action). We do not discuss misstatement in this blog.

Types of misrepresentation

There are three types of misrepresentation: fraudulent, negligent, and innocent. 

Fraudulent misrepresentation

Fraudulent misrepresentation refers to a false statement made knowingly, recklessly as to its truth, or without belief in its truth. In tort, fraudulent misrepresentation is known as the ‘tort of deceit’. The Court in Eco3 Capital Ltd & Ors v Ludsin Overseas Ltd [2013] EWCA Civ 413 set out four core factors that must be met in order to succeed in a claim for misrepresentation in tort: 

(1) the defendant makes a false representation to the claimant; 

(2) the defendant knows that the representation is false (or reckless to its veracity); 

(3) the defendant intends that the claimant should act in reliance on the representation; and

(4) the claimant does act in reliance on the representation and in consequences suffers loss.

These requirements are applicable to all forms of misrepresentation, to a greater or lesser degree as explained below. As factors (2) and (3) indicate, the party that made the fraudulent misrepresentation must have had a concrete ‘intention to deceive’. The burden is on the claimant to demonstrate the fraudulent intention of the defendant. It is the most serious form of misrepresentation. 

Negligent misrepresentation

Negligent misrepresentation is a claim brought under the Misrepresentation Act 1967. It arises where a false statement is made by one party to another recklessly or without grounds for believing in its truth. Unlike fraudulent misrepresentation, there is no need to demonstrate dishonesty. The burden of proof is also reversed: once the claimant has demonstrated that a representation was untrue, the defendant must demonstrate that it had reasonable grounds to believe in the statement. 

Innocent misrepresentation

Innocent misrepresentation is also a claim brought under the Misrepresentation Act 1967. It covers a situation where a statement is false, but the defendant had reasonable grounds to believe its truth. This is likely made out during the defence of a claim for negligent misrepresentation. 

The contractual context

As stated above, misrepresentation occurs in the context of a contractual negotiation between parties. Put simply, this means that a representation is a statement that would induce (in non-legal language: encourage) a party to enter into the contract. This applies to any contractual situation – a statement to sell a good, to provide a service, to provide insurance, and so on. 

The representation does not need to be the only statement that encouraged the party to enter into the contract, but it does have to be at least a “material influence” on that party’s decision. Where fraud is concerned, the statement need only be an “active consideration” of the party in its decision. Practically, the latter is an easy hurdle to get over. 

Statements made prior to entering the contract may or may not be included in the final written agreement (if there is one at all). If the statement is included in the final written contract, or is vital to the contract itself (whether written or oral) then the Court will consider it to be a term of the contract. If it is not included, or not central to the contract, it will be considered to be a warranty. The Court will look at the intentions of the parties to determine whether a statement in negotiations is of sufficient importance to be considered a term.  

A good way to think about the difference between terms and warranties is in a sales context. If a representation is only marketing ‘puff’ (e.g “0 – 60 in five seconds!”), then it is unlikely to be more than a warranty. The same thinking can apply to statements of fact that is not about the good or service being offered for sale (e.g “we are the largest car manufactures in the UK!”) – it is unlikely that would be a term, if incorporated into the contract at all. 

Whether a representation is a term or a warranty will affect the available remedies, discussed below. 

General points to remember 

When considering whether you have made, or are being adversely affected by, a misrepresentation there are general points to keep in mind. These points are applicable to all types of misrepresentation: 

• Three types of representee: there are three ways a misrepresentation can be made to an individual – (1) directly to the contracting party or to someone acting on their behalf; (2) indirectly, where the party making the representation knew it would be passed on; and (3) a member of a class to which the representation was directed, such as a purchaser of goods.

• Assessing whether a representation has been made is objective: the Court will consider the impact the statement may have been expected to have on a reasonable person in the position and with the same qualities as the actual claimant. 

• Statements of opinion are not representations: a representation must be of a fact, otherwise it would be impossible to assess whether it is true or false. However, the Court in Pankhania & Anor v London Borough of Hackney [2002] EWHC 2441 (Ch), following an earlier decision in the House of Lords, did permit an action in respect of a misrepresentation of the law.

• Misrepresentations can be implied: the Court can imply that a representation was offered, even where it is unsaid or not stated expressly. A good example is the statement that a used car is in good working order. A reasonable person would have understood that as part of that statement, the used car would have a running engine. If you pay for the used car and pick it up the next day, and the car doesn’t start, an actionable misrepresentation will arise. 

• No doubling back: if a party knew at the time that a representation was untrue, but went ahead anyway, it will not be possible for the claimant to “double back” and later claim misrepresentation. 

Consequences of misrepresentation

Knowing what you can seek in an action for misrepresentation, or to understand your potential liabilities, is fairly complex. This is because the available remedies can be in both contract and in tort. 

The starting point to have in mind is that misrepresentation can be framed as a pure breach of contract, if, as discussed above, the representation forms part of the contract itself. Remember, there is a subtle distinction between representations that induced someone to sign a contract, and representations that did so and subsequently formed part of the signed contract. For example: an insurance salesperson stated to you that your property is in a flood zone as a way to encourage you to take out flood insurance. This is a statement of fact, but that fact is unlikely to have any bearing on the terms of the contract itself. 

If the misrepresentation is treated as an express term of the contract, the claimant can choose whether to (1) terminate the contract and claim damages, (2) to rescind the contract (to be treated as if the contract was never entered into), or (3) to affirm the contract. If the contract is terminated, the contractual measure of damages will apply. Contractual damages are assessed by reference to the value of the contract to the claimant had it been carried out. So, if the claimant had purchased a car that wasn’t functional, it would be entitled to the difference in value between the non-functional car it obtained and a functional one. 

Irrespective of whether the claimant could claim for breach of contract, it could seek remedies for a claim in tort. Any successful claim in tort would entitle the claimant to rescind the contract. This has a practical effect; if someone took delivery of a helicopter that didn’t fly, it would be entitled to return the helicopter back to the seller. If the misrepresentation was fraudulent or negligent, the claimant would also be entitled to damages using the tortious measure. This measure enables the claimant to be put in a position as if the wrong had never occurred (e.g be given their money back). This means that the claimant would be entitled to recover all of its loss as a result of the misrepresentation whether or not that loss was foreseeable at the time. It is to be noted that the Court may, in respect of negligent and innocent misrepresentation, decide to only award damages and not treat the contract as rescinded. 

The difference between the contractual or tortious measure of damages usually influences whether a claimant brings an action for breach of contract or the tort of misrepresentation. For example, if the value of the difference between a functioning car and a non-functioning car was less than what the claimant originally paid, then the tortious measure of damages would be preferable. 

Defences

There are a few ways in which a defendant can mitigate or defend a claim for misrepresentation. 

The starting point is to deny liability in respect of one of the limbs of a misrepresentation claim. To the extent possible, a defendant should seek to demonstrate that the representation was true, that regardless the claimant did not rely on the statement, that the misrepresentation did not cause the loss, and so on. 

Where negligent misrepresentation is relevant, it is a defence to hold that the claimant should have discovered the breach had it made reasonable enquiries. Therefore, any award of damages should be mitigated to the extent that the claimant contributed to the loss by its own lack of diligence or negligence. 

Although not strictly a defence, there is a six-year limit for damages in tort or for breach of contract from the date of the breach (i.e when the contract was entered into) or the negligence giving rise to the loss. This limit does not apply in respect of fraudulent misrepresentation; in such circumstances the time limit runs from the date that the fraud is discovered. 

Can I limit my liability?

Yes – you can limit your liability. There are various steps which can be taken to try to minimise or exclude liability for misrepresentation, including exclusion clauses, non-reliance statements and entire agreement clauses. 

A non-reliance statement is often used to restrict any liability for misrepresentation. It works by a statement being set out in a written statement whereby the parties agree that a certain state of affairs is the reason why they are entering into the agreement. This prevents a party from claiming against that statement if it turned out not to be true. A good example of this is the case of Aquila WSA Aviation Opportunities II Limited v Onur Air Tasimacilik AS [2018] EWHC 519 (Comm). In this case, the parties agreed to lease an airplane engine would be delivered “as is”. The leasing party, on delivery, signed a certificate waiving all rights to a claim. The engine failed and the leasing party sought to claim for breach of contract as a result of a misrepresentation as to the state of the engine. This was denied by the Court on the basis that the parties clearly indicated that the engine was supplied as the leasing party had accepted the delivery it could not subsequently complain about the state of the engine. 

An entire agreement clause is a provision also made in commercial contracts between both parties to the contract, which means that any previous conversations or statements made which are not included in the written contract, are no longer relevant. The purpose of entire agreement clauses is that both parties are aware that anything not written in the contract cannot be relied upon in the future, despite the depth of any conversations or previous statements made. Once again, for an entire agreement clause to be valid, it must be clearly drafted.

An exclusion clause in a contract expressly excludes certain types of liability, although fraud cannot be excluded, and such a clause is not always binding. Liability can also be expreslly limited to a certain fixed value. 

Real world examples

The following is a selection of real word cases that demonstrate the wide range of misrepresentations that can lead parties into a dispute:

1. Edwards v Ashik [2014] EWHC 2454 – the claimant bought a nightclub from the defendant. The defendant failed to say, when asked, that the local council had received a complaint about the club. At the first Court, a claim for fraudulent misrepresentation was dismissed because the claimant couldn’t demonstrate that he wouldn’t have gone ahead had he known of the complaint. On appeal, it was held that the silence amounted to a fraudulent misstatement. 

• Esso Petroleum v Mardon [1976] QB 801 – Esso forecast that a certain petrol station could pump 200,000 gallons by the third year of operation. It could only reach 70,000 gallons by that time, and the defendant could not keep up the lease payments. Esso sought to repossess the petrol station, the defendant claimed that it had been persuaded to take up the tenancy of the basis of a deficient forecast. The defendant was successful.

• Thorp v Abbots [2015] EWHC 2142 (Ch) – sellers of land had ticked “no” on a box asking them whether they received notice or had communications about anything that could affect (i.e undermine the value in) the land, even though they knew a planning application had been submitted for a residential property development nearby. When the buyers found out, they sued for fraudulent misrepresentation. This was not upheld, largely on the basis that there was little likelihood of any appreciable effect on the land. 

Conclusion

Misrepresentations in contract law are difficult to understand, however, hopefully this article has assisted with your understanding of them.

If you have any further questions or queries related to this article, get in contact with us. Our lawyers at EM Law are experts in contract law and can help you draft a clear commercial or corporate contract, as well as assisting with any problems (not just misrepresentation!) that have arisen from a signed contract. Contact us here for further information.