The Basics: Negotiating a contract? Misrepresentation or just exaggeration?

9 minute read
27 March 2018

Many things can be said when a contract is being negotiated. Some things become terms of the contract, others will be recognised as mere sales talk or harmless exaggeration. However, some statements may be representations, statements of opinion and other statements which, while not terms of the agreement, will induce a party to enter into a contract.

Whether a statement becomes a term of the contract or remains a representation is very important. The remedies available for breach of a contract term are different to the remedies that may be available if the contract was entered into as a result of a misrepresentation. It is important to understand what can amount to a misrepresentation, the consequences for a representor when a misrepresentation is made and any remedies available to a party who enters into a contract as a result.

What is a misrepresentation?

A misrepresentation occurs when:

  • an untrue statement of fact or law is made by one party (A) to another party (B);
  • that untrue statement induces B to enter into a contract; and
  • B suffers loss as a result.

Misrepresentations can:

  • arise as a result of express written terms or oral statements;
  • be implied by words or by conduct;
  • occur when plans or projections are made for the future;
  • be the result of half-truths; or
  • happen when a statement was true when made, but later becomes untrue when circumstances change - Party A will have a duty to update/revise his or her statement, unless it is clear to the recipient of the information that A accepts no responsibility for its accuracy or for reviewing it.

What are the different types of misrepresentation?

Fraudulent misrepresentation

Fraudulent misrepresentation will occur when a false representation is made and the party making the representation (A) knew it was false or was reckless as to whether it was true or false - the lack of an honest belief in its truth will make it a fraudulent one.

If A honestly believes the statement is true it cannot be a fraudulent misrepresentation, negligence in making a false statement will not amount to fraud. However, if it can be shown that A suspected the statement might be inaccurate or wrong, but made no enquiries to check the position, that will be enough. It will not be necessary to prove a dishonest motive.

Negligent misrepresentation

A negligent misrepresentation under the Misrepresentation Act 1967 (MA 1967) occurs where a statement is made by one contracting party to another carelessly or without reasonable grounds for believing its truth. The test is an objective one.

There is no requirement to establish fraud. If the innocent party can prove the statement was in fact false, it will be for the maker of the statement to establish that it reasonably believed in the truth of the statement (that is, the representation).

A remedy for negligent misrepresentation does remain at common law, however its use in contractual situations has been greatly diminished as a result of section 2 (1) of the MA 1967.

Innocent misrepresentation

Only a misrepresentation made entirely without fault can be described as an innocent misrepresentation.

If A is unable to show it had reasonable grounds to believe its statement was true the misrepresentation will be fraudulent or negligent.

Are there any remedies available for misrepresentation?

Whether the misrepresentation was fraudulent, negligent, or innocent will determine what remedy may be available.

If the misrepresentation is fraudulent or negligent the court can award damages and rescind the contract, although where negligent misrepresentation occurs the court does have discretion to award damages in lieu of rescission.

If the contract is rescinded it is set aside and the parties are put back into the position they would have been in had the contract never been entered into.

If the misrepresentation is an innocent one, the court has discretion to award rescission or damages in lieu of rescission; the court cannot award both damages and rescission.

Where the right to rescission arises the claimant will have a choice whether to rescind the contract or affirm it. If the contract is affirmed it will continue.

Damages in lieu of rescission can only be awarded where the right to rescind the contract still exists. If that right has been lost (for example if the contract has been affirmed) the right to damages in lieu of rescission will also be lost.

Can you limit liability for misrepresentation?

There are a number of ways a party to a contract can attempt to limit liability for any misrepresentation.

There is no guarantee that a limitation or exclusion of liability clause will work. Some ways will work but others may not.

Whether an exclusion or limitation of liability is successful will depend on whether the clause is reasonable under the Unfair Contract Terms Act 1977 (UCTA) - for business to business contracts - or the Consumer Rights Act 2015 (CRA) - for business to consumer contracts.

The following are some of the most common ways liability for misrepresentation can be limited, however, whether the clauses are reasonable and will be effective cannot be looked at in isolation. Whether they are deemed to be reasonable will depend on the facts of each individual case.

Non-reliance statements

Non-reliance statements are commonly used to try and restrict liability for misrepresentation. They work by the parties acknowledging that they are not relying on any representation unless it is expressly provided for in the contract. The parties will agree that the contract is being entered into on the basis of certain agreed facts and they will then be 'stopped' - by the non-reliance statement - from asserting that the position is different and a different set of facts occurred.

Entire agreement clauses

An entire agreement clause in a written contract will provide that the written contract (as signed by the parties) constitutes the entire agreement between them and will supersede any prior agreements or negotiations (including any heads of terms).

The purpose of an entire agreement clause is to prevent claims that pre-contractual statements / discussions constitute additional terms of the agreement, a collateral warranty or some other side agreement.

Entire agreement clauses can also include specific wording intended to prevent pre-contractual statements from giving rise to claims for misrepresentation. They will also often attempt to restrict liability in misrepresentation in respect of representations and statements that are included in the final agreement.

Express exclusion clauses

The parties can agree to include an express term which excludes any liability for misrepresentations made, both in statements made before a contract is entered into or even statements made in the contract itself.

Very clear wording must be used and the clause must meet the reasonableness criteria required by UCTA or the CRA.

Limitation of available remedies

A clause can be included in a contract that limits the remedies that will be available where a party has the right to make a misrepresentation claim. For example such a clause could limit the remedies to those available for breach of contract - effectively excluding the right of the innocent party to rescind the contract.

What do I need to think about?

  • Make sure that all contracts accurately reflect the terms upon which they are entered into. Always read the contract before signing.
  • If a statement / representation is a decisive factor in you entering into a contract make sure it becomes a term to ensure certainty.
  • Do not elaborate or exaggerate just to get the deal done. You must give accurate information and remember to update all interested parties if key information changes before the contract is executed.
  • Educate any procurement / sales teams to do the same.
  • Consider whether an appropriate non-reliance and / or exclusion clause should be included in the contract to exclude or limit any liability that may arise from misrepresentation - although remember that the effectiveness of any exclusion or limitation will depend on whether the terms are reasonable.
  • Exclusion or limitation of liability cannot be guaranteed, to have any chance very clear and unambiguous wording must be used. There must be no doubt as to what the parties have agreed.
  • Take prompt action if you think you are a victim of misrepresentation.
  • Take independent legal advice as soon as possible to ensure you don't lose any right to rescind the contract.

Need more help negotiating a contract? Contact James Sidwell or Michael O'Shea, in our Commercial Litigation team for help navigating the contract law.

Contact the team

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