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Can a business get out of a contract misled into agreeing?
- AuthorNeil Largan
If your business finds out that it agreed to enter a commercial contract based on factual or legal statements that now turn out to be untrue, what can you do? It may be possible for you to bring the contract to an end and to claim compensation for any losses that you have sustained.
According to Claire Matthews, one of our dispute resolution lawyers at Crombie Wilkinson Solicitors. ‘Your rights will depend on whether you have been deliberately duped or simply misled due to an honest mistake or misunderstanding, and also on whether the statement was made before the contract was agreed or it forms part of the contract itself.’
To determine where you stand, it is important to take legal advice as soon as you realise that something may be amiss and preferably before you do anything which could prejudice your legal rights in respect of the misrepresentation you allege has occurred.
Types of misrepresentation
There are three types of misrepresentation, each of which give rise to different rights of redress. These are:
- fraudulent misrepresentation – which occurs where a false statement has knowingly been made to you, or where the maker of the statement did not believe in (or was reckless as to) the truth of what was being said or communicated;
- negligent misrepresentation – which occurs where a false statement has been made carelessly and without reasonable belief in its accuracy or truth; and
- innocent misrepresentation – which occurs where a false statement has been made, but in circumstances which cannot be classed as fraudulent or negligent.
Criteria for misrepresentation
To take action in respect of an alleged misrepresentation, you need to show that:
- an untrue factual or legal statement has been made to you, either by the party you have contracted with or by their authorised agent, or by someone else who they knew were making statements on their behalf;
- you relied on that statement and it either materially influenced your decision to enter into the contract or, where fraud is alleged, it was an active consideration; and
- as a result of entering the contract on the basis of the misrepresentation, your business has suffered some sort of loss.
In some cases, it may also be possible to bring a claim based on misrepresentation where a statement has been made which, while true, does not tell the whole story about a particular issue and so it misrepresents the actual state of play.
A claim may also be possible where a statement has been made prior to a contract being formed which, while true at the time it was said, subsequently becomes untrue before the contract is formally agreed. For example, you may have been told by a supplier that there have been no reported safety concerns with a particular product. This may have been true at the time, but if a safety issue subsequently comes to light then any failure by the supplier to correct their previous statement could amount to misrepresentation.
In certain cases, failure to say something could amount to an implied misrepresentation. For example, a failure to correct an obvious and important misunderstanding.
Where fraudulent or negligent misrepresentation has occurred, then it may be possible for you to get the contract rescinded (i.e. bought to an end) and to claim compensation. Where you are keen to claim rescission then it is important that you take legal advice straight away. This is to ensure that you do not do anything which could be taken as affirming the contract by intimating to the other party that you are happy for the contract to continue.
For innocent misrepresentation the nature of the redress you are entitled to will depend on the circumstances but in most cases a court will order compensation rather than rescission, particularly where no real harm has been caused. The amount awarded will be designed to try to put you into the position that you would have been in had the misrepresentation not occurred, for example by reimbursing you for any overpayment that you might have made.
Where you propose to make a claim against a company and you allege fraudulent misrepresentation, your claim can be made against the company and against any individual director who made the statement.
It is important to note that where the alleged misrepresentation is contained within the contract itself, then as an alternative to bringing a misrepresentation claim you may be able to bring a claim based on breach of contract. In this case, the available remedies will depend on whether the statement can be classed as a condition, warranty, or something in between (known as an innominate term). The key thing to note with a breach of contract claim is that the compensation available will usually be higher than for misrepresentation.
Effect of exclusion clauses
Businesses cannot exclude liability for fraud or for any misrepresentation which ultimately results in death or personal injury. However, they can seek to exclude or limit liability for negligent or innocent misrepresentation, providing any contractual provision to this effect can be said to have been fair and reasonable in regard to the circumstances which were (or ought reasonably to have been) known or contemplated at the time when the contract was made.
How we can help
Our team of specialist business disputes solicitors have a wealth of experience in dealing with cases of misrepresentation and in achieving commercially sensible resolutions, whether it be through an exchange of correspondence, attendance at a voluntary mediation or via the instigation of formal legal proceedings.
Determining whether misrepresentation has occurred and, if so, what potential rights of redress you may have and how they might be impacted by any relevant contractual exclusion or limitation of liability provisions, is something that requires specialist legal knowledge. It is therefore vital that if you believe that misrepresentation has taken place, you speak to an experienced business disputes lawyer as soon as you can.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.