It is a long established principal of contract law that where a person is induced to enter into a contract as a result of a fraudulent misrepresentation by another contracting party, the party that relied on the misrepresentation may rescind the contract, claim damages, or both. The representation must be made on the basis that the other party will rely on it.
Rescission is intended to return the contracting parties to the position they would have been in had the contract never been made. It is however not always available and the right to enforce may be lost if:
- it has become impossible to re-instate the parties to the pre-contractual position;
- the party who relied on the representation subsequently affirmed the contract; - there has been an undue delay in bringing the claim; or
- a bona fide third party has acquired rights under the contract.
In a recent case, the seller of a company became aware that one of their major customers was to cease trading, greatly decreasing the company's value. The seller did not disclose this to the buyer and continued to allow projections to be used, which included reference to the customer whom he now knew would soon cease trading. The High Court held that the buyer had been induced to enter into the contract by a fraudulent misrepresentation and was entitled to rescind the contract.
This case should be taken as a warning to those selling companies. If they obtain information regarding a material aspect of the company being sold, non-disclosure of this information may be deemed to be a fraudulent misrepresentation. This will open the door to a possible claim for rescission.