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What is misrepresentation in contract?

Misrepresentation refers to a false statement of fact made by one party to another party, which induces the other party to enter into a contract. For a statement to qualify as misrepresentation, the statement must be false, made by one contracting party to the other, concern a fact, and induce the other party to enter the contract. If misrepresentation is proven in a contract, the injured party may be able to void or rescind the contract, or claim damages.

What are the elements of misrepresentation?

There are four key elements that must be present for a statement to qualify as misrepresentation:

  1. The statement must be false – if the statement is true, there is no misrepresentation
  2. The false statement must concern an existing fact – statements of opinion or intention do not qualify
  3. The false statement must have induced the injured party to enter the contract – there must be reliance on the false statement
  4. The false statement must have been made by one party to the contract to the other – third party statements do not qualify

If any of these elements are not present, there is no viable claim for misrepresentation.

What are the types of misrepresentation?

There are three main types of misrepresentation:

Fraudulent Misrepresentation

This occurs when a party makes a false statement of fact intentionally in order to deceive the other party and induce them into the contract. The party making the false statement must know that the statement is untrue.

Negligent Misrepresentation

This occurs when a party makes a false statement of fact while failing to exercise reasonable care in obtaining or communicating the information. The party is under a duty to provide accurate information but negligently provides false information.

Innocent Misrepresentation

This occurs when a party makes a false statement of fact while reasonably believing the statement to be true. Here, the party is under an honest belief that the information provided is correct.

What remedies are available for misrepresentation?

There are several potential remedies available to an injured party under a claim of misrepresentation:

  • Rescission – the contract is set aside and the parties are put back in their pre-contract positions. Any benefits exchanged must be returned.
  • Damages – monetary compensation for losses suffered as a result of the false statement.
  • Rectification – the contract is modified to reflect what the parties’ agreement would have been absent the misrepresentation.
  • Reliance damages – compensation restoring the injured party to the position they would have been in had the contract not been entered.

The available remedies will depend on the nature and gravity of the misrepresentation, as well as the intentions of the party making the false statement.

What defenses are available?

There are defenses a party can raise in response to a claim of misrepresentation, such as:

  • The statement was not false
  • The false statement did not induce the other party to enter the contract
  • The other party did not rely on the false statement
  • The false statement concerned a matter of law, not fact
  • The other party knew the statement was false
  • The false statement was not material

If a party can successfully raise one of these defenses, a claim of misrepresentation will be defeated. The burden of proving misrepresentation falls on the party making the allegation.

What are some leading court cases on misrepresentation?

There are several key court decisions that have helped shape misrepresentation doctrine:

Derry v Peek (1889)

This UK House of Lords case established that fraud must be proven for rescission. Negligent or innocent misstatements allow for damages but not rescission.

Edgington v Fitzmaurice (1885)

This UK case held that any false statement made to induce a contract will be presumed fraudulent if the statement is material to inducing the contract.

Esso Petroleum v Mardon (1976)

This UK case held that silence can constitute misrepresentation if it relates to a material fact that should have been disclosed.

R v Kylsant (1932)

This UK case held that a half-truth can amount to fraudulent misrepresentation if it is used to give false impression to the other party.

Redgrave v Hurd (1881)

This UK case held that a statement of opinion made by one party can be actionable as misrepresentation if it implies knowledge of objective facts.

What makes a misrepresentation material?

For misrepresentation to be actionable, the false statement must relate to a material fact. A material fact is one which would be likely to induce a reasonable person to manifest their assent to the contract. If the false statement does not relate to such a material fact, there are no actionable misrepresentation grounds. The key considerations for materiality are:

  • Would a reasonable person find the fact important in deciding whether to enter the contract?
  • Was the fact central to the subject matter of the contract?
  • Did the misrepresentation go to the root of the contract?

If the answer to one or more of these questions is yes, the false statement will likely be deemed material and actionable if the other elements of misrepresentation are present.

What statements are most likely misrepresentation?

The following types of false statements are most likely to be considered misrepresentations if they induce a party to enter a contract:

  • False statements about the nature or quality of the subject matter of the contract
  • False statements about the price, value or condition of the subject matter
  • False statements about the ability to perform contractual obligations
  • False statements about the existence of contractual requirements or conditions
  • False statements about relevant third party actions or events
  • False statements about the commercial viability or benefits of the subject matter

Statements on these subjects are likely material and parties often rely on them in deciding whether to enter contracts. However, any sort of factual false statement could potentially qualify if it induces a party.

How can businesses protect against misrepresentation claims?

There are steps businesses can take to minimize the risk of misrepresentation claims:

  • Ensure sales staff do not exaggerate claims or make false statements about products/services
  • Have clear disclaimers on terms like price estimates, product suitability, projected performance
  • Note clearly when statements are opinion, estimates or sales puffery rather than facts
  • Ensure advertising and marketing materials are accurate
  • Document any important statements made during pre-contract negotiations
  • Include entire agreement or integration clauses to limit claims
  • Include liability limitations clauses to limit damages if misrepresentation occurs

No business can entirely eliminate the risk of misrepresentation claims. However, taking reasonable care and precautions can help businesses minimize this risk in contractual dealings.

Conclusion

Misrepresentation is an important legal doctrine that provides remedies when a false statement induces a party to enter a contract. While misrepresentation claims can be complex, the key elements focus on falsity, materiality, reliance and inducement. Businesses should be diligent to avoid any conduct that could amount to misrepresentation and implement safeguards to limit risks. With proper precautions, businesses can help mitigate potential liability.