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Misrepresentation: the Pitfalls of Pre-Contract Statements

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Misrepresentation: the Pitfalls of Pre-Contract Statements inbrief Misrepresentation: the pitfalls of pre-contract statements Inside What makes a misrepresentation actionable? Causes of action Remedies Risk management Practical tips inbrief Introduction Prior to the conclusion of a contract What makes a misrepresentation complete the work in the stated timescale. parties will often make statements actionable? However, the statement of opinion carries with it an implied representation of fact, namely that to each other - during negotiations, There are various conditions that must be satisfied the supplier in fact held such an opinion. In an in tender documents and in a variety to make a misrepresentation actionable: appropriate context, it also carries with it an of other ways. Most pre-contract implied representation of fact that the supplier 1. There must be a statement by the statements are carefully considered. had reasonable grounds for holding that representor or his agent. The statement But sometimes statements are made opinion and perhaps also the further implied can be oral, written or by conduct. which are false or misleading. When representation that it had carried out a proper false statements induce an innocent 2. The statement must be a statement of fact analysis of the amount of time needed to (as opposed to a statement of opinion or complete the work. Proving that those implied party to enter into a contract the future intention). representations of fact were false would in consequences can be serious. principle lead to liability in misrepresentation. 3. The representation must be made to the The purpose of this guide is to representee or to a class of which the The key point is that actionable consider the litigation risks generated representee is a member. misrepresentations may not be immediately obvious. Often litigation risk arises out of by pre-contract statements, the 4. The representee must reasonably have implied misrepresentations rather than clear remedies available in connection with been induced by the representation factual statements which are deliberately false statements and the contractual or reasonably acted in reliance upon misleading. Care should therefore be taken it, believing it to be true. Usually the protections available to affected in connection with both express and implied representee will have entered into a parties. statements. If a representor creates a false contract on the basis of the representation. impression he might also create litigation risk. 5. The representor must have either intended Reliance and inducement the representee to act upon the statement, or at least the facts must be such that For a misrepresentation to be actionable, it must he or she ought to have realised that the have induced the representee to enter into the representee might have done so. contract. This is a question of fact. For example, in the case of Hartelid v Sawyer & McClintock 6. The representation must be false. Real Estate Ltd [1977] 5 WLR 481 an estate agent What is a statement of “fact”? made a false statement about the size of a garage to a potential buyer, but prior to purchasing the It is not always possible to draw a clear relevant property the buyer visited the garage and dividing line between statements of fact (which saw for himself its true size. It was held that there are actionable) and opinion (which are not was no actionable misrepresentation because actionable as misrepresentations). the representor’s false statement had no causal Often the issue is whether the representor has impact - the representee had carried out his own stated an opinion which impliedly represents investigations and knew the true position prior to that there exists some state of facts which is signing the contract. different from the truth. In such cases the court Furthermore, misrepresentation need not be must decide “what a reasonable person would the only matter which induces the other party have inferred was being implicitly represented to enter into the contract. It is sufficient if it can by the representor’s words and conduct” and be shown to have been one of the inducing whether those implied representations are false causes. In the case of Edgington v Fitzmaurice (IFE Fund SA v Goldman Sachs International (1885) 29 ChD 459 the claimant was induced to [2006] EWHC 2887 (Comm)). purchase a financial instrument partly because of For example, if a supplier states that they will a misrepresentation in the prospectus, but also be able to deliver their product or service within because of a mistaken belief of his own that the a certain time frame that will not, on its face, instrument had certain rights of security attached amount to a statement of fact; it is a statement to it. The court found that “it is not necessary to of opinion by the supplier about its ability to show that the misstatement was the sole cause of inbrief his acting as he did”. What is generally required is Appeal confirmed that the tort of deceit contains that the representee would not have entered the four ingredients: Implied representations contract but for the misrepresentation. • the defendant makes a false representation In BSkyB Ltd v HP Enterprise Services UK In cases of fraudulent misrepresentation the to the claimant; Ltd [2010] EWHC 86 (TCC) the defendant standard of causation is lower. It is sufficient if • the defendant knows that the representation successfully bid for a project to supply a there is evidence to show that the representee is false or, alternatively, he is reckless as to customer relationship management (CRM) was materially influenced by the misrepresentation whether it is true or false; system at the claimant’s customer contact merely in the sense that it had some impact on centres in Scotland. Prior to signing the CRM his thinking, or “was actively present to his mind” • the defendant intends that the claimant contract the defendant gave a response to (Hayward v Zurich Insurance Co plc [2016] 4 All should act in reliance on it; and tender which indicated that it, the supplier, ER 441). Once someone has made a fraudulent • the claimant does act in reliance on the would be in a position to go live with the new statement the court will not look too closely representation and, in consequence, suffers CRM system “on time” and “within the required at whether it caused the claimant to enter the loss. timescales”. The defendant was not able to contract. If proven, fraud unravels everything - the contract complete the contract in time, within 9 months, and the claimant ultimately went on to complete How “false” does the representation have to be? can be rescinded, damages will be payable and caps on liability will fall away. the project itself. The claimant brought a claim The relevant representation must be false. But against the defendant and the question was Negligent misrepresentation what does that mean? Does the defendant need whether a statement that the project would be to show that its statement was entirely correct Claims for contractual misrepresentation are based delivered on time was a statement of opinion or or can they defeat a misrepresentation claim on section 2(1) of the Misrepresentation Act 1967 future intention (which was not actionable) or by showing some lesser standard of truth? The (“the Act”). whether such statements carried within them answer is that representors do not need to show implied and actionable statements of fact. A claim will be made out under the Act if the that their statements were entirely correct. If a claimant can show that: At trial was that there was a detailed representor can show that their representation investigation into what evidence the defendant was “substantially correct” then that may be • a misrepresentation has been made to them; had to support its time estimates – had it sufficient to defeat a claim for misrepresentation. • they have entered into a contract in reliance actually conducted a proper analysis of the time What are the available causes of on the statement; and needed to complete the project? Were there actually any reasonable grounds for believing action? • they have thereby suffered loss. that the project could be completed within 9 Depending on the facts of the case and The burden of proof then shifts to the defendant months? the representor’s degree of fault, different to prove that they had reasonable grounds to causes of action are available with regard to The judge found that the statement that believe (and did believe up to the time of the misrepresentation. The key causes of action are: the CRM system would be delivered on time contract) that the facts represented were true. contained two implied statements of fact: • fraudulent misrepresentation; Given that the burden of proof can switch to the defendant in these types of claim, it can be very • that the defendant had carried out a proper • negligent misrepresentation; important for them to retain contemporaneous analysis of the amount of time needed to • innocent misrepresentation; documents evidencing the basis upon which they complete the project; and believed their representations to be true. • breach of contract; • that the defendant had reasonable grounds Once the requirements of the Act are met, for holding the opinion that they could and • breach of collateral contract; and a right to damages is conferred as if the would deliver the project within the timescales • negligent misstatement. misrepresentation had been fraudulent. The Act, referred to in the tender response. in effect, transforms a negligent misrepresentation Fraudulent misrepresentation The judge found that these implied statements into a fraudulent one for the purposes of were false because there had been no proper This is the most serious kind of misrepresentation. calculating damages (see below under Remedies). analysis of the time needed to go live and there An action for fraudulent misrepresentation is Innocent misrepresentation were no reasonable grounds for holding the founded in the tort of deceit.
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