• Greyfriars Solicitors

Beware of contractual misrepresentation when entering into negotiations

When it comes to negotiating a contract, a number of things are said and done by both parties. Whilst some of these things will become contractual terms, others may be only exaggeration or sales discussions. However, some of these statements may be considered representations or statements of opinion. Whilst not contractual terms, they are used to induce the other party to enter into the contract.

It is important to understand if a statement is a representation or becomes a contractual term. This is because the remedies for breach of a contractual term differ from those remedies available for a contract entered into due to misrepresentation.

What is a misrepresentation?

A misrepresentation occurs when:

  • an untrue statement of fact/law is made by one party (A) to another party (B);

  • the untrue statement induces B to enter into a contract; and

  • as a result, B suffers loss.

Misrepresentations may:

  • arise as a result of express written terms or oral statements;

  • be implied by words or conduct;

  • occur when future plans or projections are made;

  • be the result of half-truths; or

  • happen when a statement was true when made, but later becomes untrue when circumstances change. In this instance party A has a duty to update/revise their statement, unless it's clear to party B that party A does not accept responsibility for the accuracy/review of the statement.

What are the types of misrepresentation?

Fraudulent misrepresentation

Fraudulent misrepresentation occurs when an untrue representation is made, and the party making the representation (A) knows it to be false or is reckless as to the truth of the statement. A lack of honest belief in the truth of the statement will make it fraudulent.

If A honestly believes the statement is true, negligence in making the false statement will not amount to fraud. If it can be proven that A believed the statement may be inaccurate or wrong but made no enquiries to check this, that will be enough to prove fraudulent misrepresentation. It will not be necessary to prove a dishonest motive.

Negligent misrepresentation

Negligent misrepresentation occurs when a statement is made by one party (A) to another (B). This statement is made carelessly or without reasonable belief in its truth.

There is no requirement to establish a fraud. However, if B can prove the statement to be false, A must show that they reasonably believed in the truth of the statement.

Innocent misrepresentation

An innocent misrepresentation is a misrepresentation made without any fault. A must show they had reasonable grounds to believe the statement to be true. If A cannot, the misrepresentation will be either fraudulent or negligent.

Remedies for misrepresentation

Remedies available for misrepresentation will depend upon the type of misrepresentation.

The remedies available for fraudulent or negligent misrepresentation are court awarded damages, and the right to rescind the contract. However, the court has discretion to award damages in lieu of rescission where negligent misrepresentation has occurred.

A rescinded contract is set aside and the parties are returned to the position they would have been in had the contract not been entered into.

Where an innocent misrepresentation occurs, the court may award rescission or damages in lieu of rescission. The court cannot award both. If the court allows the contract to be rescinded, B has the choice of rescinding the contract or affirming it, in which case it will continue.

Damages in lieu of rescission can only be awarded where the right to rescind the contract still exists.

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