What is the position when you enter into a contract relying on inaccurate representations made to you by the other party? What happens if the other party tries to limit its liability for any misrepresentations relating to the contract?

In this, the third part of our 'before you take the plunge - back to basics on contracts' mini series, we explore misrepresentation. What constitutes a misrepresentation? How can parties seek to limit their liability for misrepresentation? What is the significance of the final signed contract, specifically taking into account any pre-contract negotiations and representations?

What is a misrepresentation?

A misrepresentation is an untrue statement of fact made by Party A to Party B, inducing Party B to enter into a contract thereby causing it loss. A misrepresentation not made by Party A, but of which Party A has notice, can also give rise to a claim.

Whether or not a representation has been made is assessed objectively, according to the impact the statement would have been expected to have on a reasonable person in the position and with the characteristics of Party B. To be actionable, a misrepresentation must have been intended to, and must actually have, induced Party B to enter into the contract, i.e. it must have been relied upon.

Categories of misrepresentation

1.Fraudulent misrepresentation - a false representation made knowingly, or without belief in its truth, or recklessly as to its truth. The burden of proof is on the claimant in such an action.

2.Negligent misrepresentation - a statement made carelessly or without reasonable grounds for believing its truth. The test is an objective one with no requirement to establish fraud. Once it is proved that the statement was false, the representor must show that it reasonably believed in the truth of the statement.

3.Innocent misrepresentation - a statement which is false, but which is made without fault where the representor can show that it had reasonable grounds to believe its statement was true.

What remedies are available?

This depends on the category of misrepresentation.

  • For fraudulent or negligent misrepresentation, the court can award damages and rescind the contract (i.e. the contract is set aside and the parties are put back in the position they were in before the contract was made).
  • For innocent misrepresentation, the court has a discretion to either award damages in lieu of rescission or rescission. It cannot award both.

Limiting liability for misrepresentation

There are several ways for a contracting party to try to limit liability for misrepresentation - some will work, some will not:

  1. Non-reliance statement - the parties acknowledge that they have not relied on any representation which is not expressly set out in the agreement. This statement tries to prevent claims for misrepresentation regarding statements which were made before signing. The court will enforce such a clause in a contract between two commercial parties even if on the facts it thinks that there may have been representations made - the parties can choose the terms on which they contract.
  2. Entire agreement clause - provides that the signed agreement supersedes any prior agreement or negotiation.
  3. Express exclusion of liability - a statement excluding liability for misrepresentation which may relate to liability for pre-contractual statements, or for statements made in the agreement, or for both.
  4. Restriction of remedies - a statement limiting remedies for misrepresentation to those available for breach of contract. This is intended to exclude the remedy of rescission and alter the measure of damages available.

Whether or not these provisions are effective will depend upon whether they are reasonable under the Unfair Contract Terms Act 1977 (UCTA) and, if consumers are involved, whether they are fair under the Unfair Terms in Consumer Contracts Regulations 1999.

In addition, a party cannot exclude or restrict its own liability for misrepresentation resulting in death or personal injury caused by negligence or fraudulent misrepresentation.

Be careful what you sign

In Peekay Intermark v Australia and New Zealand Banking Group, the Court of Appeal concluded that an express statement in a contract, stating that the parties had agreed certain terms, formed the basis of the contract between them.

The court decided that an oral misrepresentation made before signing had, as a matter of fact, induced the investor claimant to enter into the agreement. However, it also found that the express terms of the agreement provided the true position and would have corrected the claimant's misapprehension had the terms been read prior to signing. Such circumstances gave rise to a "contractual estoppel" that prevented a claim for misrepresentation.

Points to consider

  • Where an exclusion of liability for misrepresentation would be unreasonable and ineffective, a non-reliance clause is also likely to be subject to (and fail) the reasonableness test.
  • The courts have held that simply denying contractual force to a misrepresentation does not affect its status as a misrepresentation. This means an entire agreement clause is unlikely to be enough. The parties will need to use very clear words before the courts will accept that one party has agreed to exonerate the other from all liability for making an untrue statement.
  • A buyer must take steps to ensure that it has fully understood the basis upon which it is contracting. It should read all of the contract documentation. Although limitation clauses are subject to the test of reasonableness outlined in UCTA, a buyer is better off addressing these issues at the pre-contract stage.
  • Sales forces should be educated to avoid making statements that are or could be construed as misrepresentations. The line between salesman's hyperbole and actionable misrepresentation can be thin.
  • No form of words can be guaranteed to make an exclusion of remedy for misrepresentation effective. The court will look at the substance and effect of the relevant clause, rather than its form.