Misrepresentations made before contract

Contract misrepresentation

If you have discovered something really important in your contract where you were misled on the issue before agreeing the contract, you may have a claim for misrepresentation.

This is a complex area of law. We summarise some of the important aspects below but legal advice is recommended. We regularly advise on misrepresentation law issues and claims so please do get in contact.

3 types of misrepresentation

The legal rights and remedies which result from a misrepresentation depend on the classification of the factual assertion made in legal terms. The 3 types are :

• Fraudulent misrepresentation
• Negligent misrepresentation
• Innocent misrepresentation

In simple terms, it is harder to establish a fraudulent misrepresentation than an innocent misrepresentation. Depending on which of the 3 types of misrepresentation the innocent party alleges as part of a legal claim also impacts the degree of reliance the Claimant must prove on the facts misrepresented. This burden is lower for innocent misrepresentation than with fraudulent misrepresentation.

Some of the contract misrepresentation issues we have recently dealt with include :

Rescinding a contract for misrepresentation

With all 3 types of misrepresentation, if proven, the claimant will have the remedy of rescission, which means the contract is cancelled and the parties should be put back into the position they would have been had the contract not been entered into.

Claims for misrepresentation are often made together with a claim for breach of contract and damages in lieu of rescission as an alternative to breach of contract damages may be pleaded in the court claim.

With potential misrepresentation claims there are strategic, legal and evidential traps and pitfalls. Getting good and experienced legal advice before taking legal action for misrepresentation is strongly advisable. We’d be happy to assist, so please do get in contact.

Have you affirmed the contract and lost the right to rescind?

In some situations  the potential right to rescind the contract may be lost, including :

• If, after discovering the incorrect pre-contract information,  statements or representations you continue on with the contract in a way inconsistent with the misrepresentation being important enough to terminate. In legal terms this is known as affirming the contract.
• Where there has been a substantial delay in seeking the remedy;
• Where a third party has acquired rights; or
• Where it is impossible to restore the parties to their pre-contract position.

How to minimise the risks of a misrepresentation before a contract

Pre-contract misrepresentations, whether they are innocent, negligent or less commonly fraudulent are quite common. The bigger difficulty often in having an actionable claim for misrepresentation is the burden of proving that you entered into the contract in reliance on the misrepresentation.

In other words, the burden of proof is on the person alleging a misrepresentation to provide evidence that the facts misrepresented were a key aspect of the decision whether to enter into the contract in the first place.

This is why it’s really important, with any high value or importance contract to formally conduct pre-contact enquiries and due diligence on key points of information and clarity and to insist answers are put in writing.

Without documented evidence a claim for misrepresentation can come down to higher risk evidence such as your word against the defendants about any verbal discussions.

A word of caution – it isn’t enough just to ask the right questions pre-contract. The other party, or their lawyers may simply counter this with opaque or unclear replies. This is common in property law transactions where many pre-contract enquiries are met with a response of “not to the seller’s knowledge, please rely in your own enquiries”. Whilst in this sort of situation you could demonstrate the question was important, by accepting this type of answer you would find it impossible to claim misrepresentation later.