During contractual negotiations, many statements will be made that are intended to entice the other party to enter the contract. Where a party enters into a contract in reliance on a statement that later turns out to be false, they may be able to obtain a civil remedy under the law of misrepresentation. However, if the statement forms part of the contract, the appropriate cause of action would be a breach of contract.

A statement will amount to misrepresentation if it was false, factual, and induced the innocent party into the contract. Therefore, the statement “this is the best car in the world” cannot be a misrepresentation because it is an opinion, not fact.

Further, mere “advertising puffery”, such as the phrase “Red Bull gives you wings”, cannot amount to misrepresentation, as it is clearly intended to be taken as a marketing statement, and cannot be taken literally.

The three types of misrepresentation are:

1. Fraudulent misrepresentation;

2. Negligent misrepresentation; and

3. Innocent misrepresentation.

Fraudulent misrepresentation occurs where the maker of the statement made it knowing it to be false, not believing it to be true, or being reckless as to its truth. Fraudulent misrepresentation entitles the innocent party to damages and to rescission. The effect of rescission is that the contract is “unwound” or “set aside”. This puts the parties back into the position they were in before the contract was made.

Negligent misrepresentation occurs where the false statement was made either carelessly or without reasonable grounds for believing its truth. Negligent misrepresentation also entitles the innocent party to damages and rescission; however, the court may choose to award damages only if it takes the view that this would be sufficient.

Innocent misrepresentation is where a misrepresentation was made without fault. If the maker of the statement can show it had reasonable grounds for believing the statement was true, the misrepresentation is taken as “innocent”. A party who entered into a contract in reliance of an innocent misrepresentation will not be entitled to damages but will be entitled to rescind the contract unless the court takes the view that damages would be more appropriate than rescission, in which case, damages would be awarded, and the contract would not be rescinded.

For further information or advice regarding contractual agreements and misrepresentation, contact BHW’s Dispute Resolution team on 0116 289 7000.

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