When entering into a business contract, a number of discussions and negotiations take place before any deal is done. As part of this pre-contract process, representations are made, some of which could give rise to liability.
It is important to understand the types of representations, as well as the elements of each of them, in order to avoid being held inadvertently open to a misrepresentation claim.
Types of misrepresentation
A misrepresentation is an untrue statement of fact or law made by Party A to Party B, which induces Party B to enter into a contract which, in turn, causes Party B loss.
There are three types of misrepresentation:
- Fraudulent misrepresentation – this occurs where a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth.
- Negligent misrepresentation – this occurs where a statement is made by one contracting party to another carelessly or without reasonable grounds for believing in its truth.
- Innocent misrepresentation – this is used to describe a misrepresentation made entirely without fault, that is, where the maker can show reasonable grounds to believe its statement was true.
Limiting liability for misrepresentation
There are a number of steps that can be taken to try to limit or exclude liability for misrepresentation. Most commonly, these include drafting an “entire agreement clause” or “non-reliance clause” into a business contract (although the effectiveness of such provisions will depend on the application of the Consumer Rights Act 2015 and Unfair Contract Terms Act 1977, both of which are outside of the scope of this note).
- Entire agreement clause – this is a provision in a written agreement which provides that, when the agreement is signed, it constitutes the entire agreement between the parties and supersedes any prior agreements and negotiations.
- Non-reliance clause – this is an acknowledgement by a contracting party that it has not relied on any representations made by the other party, or has only relied on specified representations.
Fraudulent misrepresentation
However, a term in a business contract which restricts or excludes liability for fraudulent misrepresentation is wholly ineffective as a matter of public policy. This means that an entire agreement clause or non-reliance clause will never be effective against a claim for fraudulent misrepresentation.
Whilst this might seem like good news for a Claimant (as it allows them to overcome the obstacles of an entire agreement clause or non-reliance clause), it is by no means foolproof.
- By its very definition, an allegation of fraudulent misrepresentation requires a false representation to have been made knowingly, without belief in its truth, or recklessly as to its truth, which is difficult to prove.
- It is not enough to simply cry fraud. Cogent evidence must be provided in order to substantiate any proposed claim for fraud.
- Lawyers have regulatory obligations which prevent them from supporting their client’s case alleging fraud where the solicitor does not reasonably believe they have evidence to show, on the face of it, a case of fraud.
- A poorly brought claim for fraudulent misrepresentation is susceptible to summary judgment and / or strike out and could leave a Claimant exposed to an adverse costs order.
The Courts will not accept allegations of fraud at face value, just because someone says it has happened. Cogent evidence is required to justify a finding of fraud or other discreditable conduct. For more information on civil fraud, please see our “guide to civil fraud”.
Practical advice
There are a number of practical steps that can be taken to minimise the risk of claims for misrepresentation including:
- Taking care that all forms of pre-contract communications are accurate, including marketing material. It will be important to check the accuracy of such material on an ongoing basis.
- Prior to the conclusion of a contract, check whether any circumstances or key terms have changed since discussions and negotiations began. If they have, bring these to the attention of the other contracting party and ensure that they are happy with them before completing.
- Careful drafting is required if you wish to limit or exclude liability for misrepresentation. The party relying on the clause will have the burden of proving its effect, so we would always recommend seeking legal advice at an early stage.
For advice on claims concerning alleged misrepresentation, or for more information on the contents of this article, please contact Cara White at c.white@ashfords.co.uk.
