A legally binding contract or agreement is usually formed of written and / or verbal terms setting out, more or less precisely, what the parties to the contract intend to do. During the process of reaching an agreement the parties may also make representations of fact. For example, a retailer selling a sit-on lawnmower may tell an interested customer that he will be “the fastest gardener in the West and the envy of all his neighbours” if he purchases the GrassNemesis 5000.

Representations and Terms

The contractual status of such a statement may depend on the intention of the person who makes it. If the person making the statement intends it to be contractually binding it will be a term of the contract. If he does not intend it to be binding it may be a representation. It can sometimes be difficult to determine whether a statement is a term of the contract or a representation – a trial examining the words and actions of the parties may be required.

A statement of opinion is unlikely to constitute a representation. Further, a statement which forms part of the advertising patter of a salesman may be classed as “mere puff” and not a representation. (The gardener, who bought the GrassNemesis 5000 because of the salesman’s statement above, may have trouble convincing a court that he is entitled to damages simply because several of his neighbours think he looks like an idiot on his new lawnmower.)

Representations and Misrepresentations

If a representation is untrue it is described as a misrepresentation and it may entitle the other party to end the contract. For a misrepresentation to result in this entitlement it must generally be shown that the misrepresentation induced the person to enter into the contract.

Different Types of Misrepresentations

Misrepresentations may be:

  • Innocent – where the party who made it did not realise it was untrue;
  • Fraudulent – where the party who made it knew that it was untrue or was careless as to whether or not it was true;
  • Negligent – where the party who made it has a duty towards the other party arising out of a special relationship and, therefore, is expected to take additional care where it is foreseeable that the other party will rely on the statement.

Misrepresentation and Inducement to Enter a Contract

A misrepresentation may be made with the intention that it will induce the other party to enter into a contract. If it does induce the other party to enter into the contract it may then be an “actionable misrepresentation”. The party who was induced by the misrepresentation may then be entitled to a legal remedy.

Remedies for Misrepresentation

A misrepresentation may entitle the person who was thereby induced to enter the contract to set aside – or rescind - the contract. Alternatively a misrepresentation by one party may mean that the other party is entitled to damages.

The Case of Hedley Byrne v Heller and the Misrepresentation Act 1967

Historically, a person was only entitled to legal remedies due to fraudulent misrepresentations. Subsequently, in the 1963 case of Hedley Byrne Co. Ltd v Heller, it was decided that there could be circumstances in which damages could follow negligent misrepresentations. This would generally be where a ‘special relationship’ exists between the parties - probably due to some particular skill or duty on the part of the person making the representation.

The Misrepresentation Act 1967 may give an entitlement to damages for a negligent misrepresentation unless the person who made it can prove that he believed that the representation was true and that he had reasonable grounds for this belief.

Misrepresentation and Rescission of a Contract

The purpose of the remedy of rescission is to put the person back into their pre-contract position. Generally, a person is not entitled to both rescind the contract and to claim damages. However, they may be entitled to monetary recompense if they incurred other obligations whilst bound by the contract.

A person may lose the right to rescind the contract if they discovered the misrepresentation and then expressly continued with – or affirmed - the contract. Rescission may also not be available if it has subsequently become impossible to return the parties to the position they were in before the contract.

Damages for Misrepresentation

The type of damages available to a person who has entered into a contract because of a misrepresentation may depend on both the type of misrepresentation and the effect of that misrepresentation. The purpose of the damages will generally be to compensate the innocent party for loss suffered in relying on the misrepresentation. However, the test applied by the courts may vary depending on whether a misrepresentation was fraudulent, negligent or innocent – and whether the claim is brought pursuant to the Misrepresentation Act.