Misrepresentation: the truth, the half-truth and anything but the truth

Exploring these issues, this morning Andrew Wanambwa and Frances Simm from our commercial dispute resolution team hosted a seminar on misrepresentation claims, including the legal risks associated with pre-contract statements, the types of claims that can be made when things go wrong and the different remedies available. This is a summary of some of the key points discussed.

You can read in more detail about the legal issues in our guide to “Misrepresentation: the pitfalls of pre-contract statements”.

Misrepresentation: causes of action

First, Andrew reminded us of the conditions that must be satisfied to make a misrepresentation actionable. In summary, there must be a statement of fact by the representor (or his agent) to the representee (or to a class of which the representee is a member) who is either reasonably induced by the representation or reasonably acted in reliance upon it, believing it to be true. The representor must have either intended the representee to act upon the statement, or ought to have realised that the representee might do. Critically, the representation must be false.

Andrew then ran us through the key causes of action available in relation to pre-contract statements:

• fraudulent misrepresentation – the most serious kind, founded on the tort of deceit;
• negligent misrepresentation – much more common and based on section 2(1) of the Misrepresentation Act 1967 (“the Act”) (not to be confused with a claim for negligent misstatement brought at common law in negligence, which may also be available);
• innocent misrepresentation – best defined negatively – if a misrepresentation is not fraudulent or negligent, it will be innocent; and
• breach of collateral contract – where the courts are prepared to treat a pre-contract statement as a separate contract or warranty, collateral to the main transaction.

Remedies: rescission and damages

Andrew discussed that the precise remedies available for misrepresentation depends on whether the misrepresentation was fraudulent, negligent or innocent. Broadly speaking, the two types of available remedy are rescission and damages.

Rescission is available in principle for fraudulent, negligent or innocent misrepresentation. The effect is that the contract is completely reversed as if it had never existed. However, Andrew highlighted various bars which can prevent claimants accessing it, noting in particular the issues that arise where parties cannot be put back in their original position. Rescission (subject to these bars) is a right of the claimant in cases of fraud. However, in cases of negligent or innocent misrepresentation the court has a discretion to award damages in lieu of rescission under section 2(2) of the Act.

In summarising the damages available, Andrew pointed out that the Act effectively transforms a negligent misrepresentation into a fraudulent one for the purposes of calculating damages, meaning that claimants are entitled to recover more extensive damages than would otherwise be the case. Damages for both fraudulent and negligent misrepresentation are awarded on the tortious basis (i.e. to restore a claimant to the position it would have been in had the misrepresentation not been made) and no deductions will be made for remoteness of loss or for contributory negligence by the claimant. Claimants will, however, be expected to mitigate their losses in the usual way.

In cases of innocent misrepresentation, the remedy is rescission unless the court awards damages in lieu under statute. The measure of damages is undefined, but leading texts suggest that the tort measure applies. The aim of the award should be to put the claimant in the position they would have been in if rescission had been ordered.

Risk management clauses

Andrew concluded this segment of the seminar by discussing the effectiveness of different risk management clauses that parties may insert into their contracts, including:

• entire agreement clauses – which provide that, when the agreement is signed, it constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations. This kind of clause will be effective to prevent pre-contract statements becoming terms of the contract and can protect against collateral contract cases, but will not prevent a claim for misrepresentation.
• non-reliance clauses – which say something along the lines that each party acknowledges that in entering into the agreement it does not rely on any statement or representation that is not set out in the agreement. These clauses aim to knock out one of the required elements of a misrepresentation claim – the claimant’s reliance on the representation.
• exclusion of liability clauses – by which each party acknowledges that in entering into the agreement it has no remedies in respect of any statement or representation not set out in this agreement. These clauses are drafted very directly and do what they say on the tin!

Andrew also discussed the requirement for both exclusion of liability clauses and (as of relatively recently) non-reliance clauses to satisfy the statutory test of reasonableness set out in the Unfair Contract Terms Act 1977, which is a topic in and of itself.

Discussion points

Taking everyone through a case study, Frances then highlighted a number of key issues to have in mind when handling a misrepresentation case in practice, including:

• Investigate. Whether you’re thinking of making a misrepresentation claim, or are on the receiving end of one, you will need to carry out some internal investigations as a starting point to identify any relevant pre-contract statements of fact and to put you in the best possible position to assess the key question of whether those statements are misrepresentations. Find out what was said, when and by whom.
• Consider what wasn’t said. Misrepresentations can be implied based on a party’s actions. Further, while silence cannot be the basis for a misrepresentation claim, a claim can be brought in relation to a statement that is true in part but which becomes a misrepresentation by virtue of what is left unsaid.
• Contract, contract, contract. In a misrepresentation claim, a key part of your investigation will be to analyse the terms of the contract at the outset. First, it may contain written misrepresentations which may give rise to a breach of contract claim. Secondly, you need to check whether there are any contractual bars to rescission, caps on liability, risk management clauses and/or any other clauses that would prevent a misrepresentation claim being brought.
• Consider all possible causes of action. Once you’ve concluded your investigation, you may decide to write a “letter before action” to the proposed defendant(s) setting out your claims before commencing court proceedings. Remember, making allegations of fraud is a very serious matter which should not be taken lightly, and proving fraudulent misrepresentation is challenging in practice. You will need to consider the benefits of arguing a number of causes of action in the alternative, such as breach of contract and negligent misstatement. Frances also emphasised the importance of completing any contractual pre-litigation steps before pushing the button on litigation.
• Mitigation. Frances reminded us of the need to mitigate losses suffered.

In responding to a question from the audience, Andrew explained that to fulfil the criteria for a successful claim, claimants must genuinely have believed that a statement was true when it was made – they cannot later rely on a statement which they knew at the time was incorrect.

Practical tips

The team rounded off the session with some practical risk management tips for contracting parties.

What parties should do included taking care of what you say when negotiating a contract and ensuring those negotiating on your behalf have been trained on the breadth of potential misrepresentation claims and are aware of the risks of making over enthusiastic claims. You should also ensure any information provided to the counterparty pre-contract is properly verified and correct the position if you later realise any information previously provided is false or misleading.

In terms of what parties should not do, the team warned against assuming that contractual protections will always be effective to avoid liability, nor should it be assumed that there can be no liability for statements of opinion or intention – implied representations are just as dangerous as express statements and promises.

Ultimately, remember that an actionable misrepresentation could result in the whole transaction being unwound and, in the case of fraud, liability caps will fall away.