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This month, we continue our theme on the basics of Contract Law with an article on misrepresentation. Businesses enter into contracts on a daily basis, and this is a term you should be aware of.

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In our February newsletter, we described the different types of contractual term. Of course, some statements that are made in the course of business are not actually terms which are incorporated into a contract. They might also be:

1. A sales puff to exaggerate product virtues, such as “the best product for you”, which cannot be a misrepresentation;

2. An opinion, which cannot amount to misrepresentation unless it is a statement of fact made without reasonable belief in its truth;

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4. A statement of law, which can be a misrepresentation;

5. A representation, being a statement intended to induce the other party to enter into the contract.

A misrepresentation is therefore a false statement of fact or law made by one party to another which induces the other party to enter into a contract and ultimately causes that party loss.

Inducement

Once a statement is confirmed as a representation, it must be shown that it was made to the other party who then relied upon it, i.e. inducement. The statement must be the actual inducement; it need not be the only inducement but (save in cases of fraudulent misrepresentation) the party must be materially influenced by the misrepresentation.

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Types of misrepresentation

There are three types of misrepresentation:

1. Fraudulent: (based on the tort of deceit): where a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth;

2. Negligent: where a statement is made without reasonable grounds for believing its truth. The test is an objective one;

3. Innocent: where a misrepresentation made entirely without fault, i.e. where the maker can show that it had reasonable grounds to believe its statement was true.

The specific remedies available for misrepresentation will depend on the type.

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The moral of the story is that you should take care when making statements in pre-contractual negotiations. You can, however, take steps to limit your liability if a false statement is made and relied upon:

1. Use exclusion and limitation of liability clauses to do just that.

2. Include wording to exclude liability for misrepresentation.

3. Use a non-reliance clause so that the other party confirms it has not relied upon any statement which is not contained in the contract itself.

Be aware, however, that a clause attempting to limit or exclude liability for misrepresentation must satisfy the test of reasonableness to be enforceable.

See last month’s newsletter for more information on the lawfulness of exclusion clauses.

Whether you are putting together a set of terms and conditions for clients, suppliers, for website use or a contract for a specific transaction or relationship, Fortune Law has the necessary expertise to advise and assist you with all aspects of Contract Law. Please get in touch by telephone on020 7440 2540 or by e-mail at enquiries@fortunelaw.com.

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