Misrepresentation and the dangers of inadequate contractual protections

14th November 2017

When parties consider doing business together, a multitude of enquiries, discussions and negotiations take place before any deal is done. Marketing campaigns, promotional offers and other communications have often also been undertaken prior to the contemplation of any particular enquiries or leads. At this pre-contract stage, myriad representations are made, many of which could give rise to liability. The law of misrepresentation is not straightforward.  It comprises elements of common law, equity and statute (the Misrepresentation Act 1967, MA) and it includes characteristics of both contract law and tort.  To avoid inadvertently leaving itself open to legal challenge, therefore, it is important for any business to understand the types of statements and representations that can found the basis of a claim.

A misrepresentation is an untrue statement of fact or law upon which a party relies in being induced to enter a contract, which thereby causes the relying party to suffer loss. Misrepresentations can be express written or oral statements; they can be implied by words or by conduct; made when making plans or projections for the future; arise via half-truths; or arise where a statement was true when it was made, but later becomes untrue if circumstances change. Misrepresentations can occur more readily in relationships of utmost good faith, such as partnerships or contractual arrangements requiring full disclosure.  It is also possible for a statement made in negotiations to be a representation that becomes a binding term of the contract itself.  Liability can therefore arise both under the MA and for breach of contract.

There are certain steps, however, that can be taken to exclude or limit liability for misrepresentation.

Potential contractual protections

It is possible to insert an exclusion clause into a contract which seeks to exclude or limit liability for misrepresentation [1].  If an exclusion clause is ambiguous or uncertain, it will generally be construed against the party trying to rely on it (the contra proferentem rule) and so, to be on the safe side, the clause should expressly state that is covers misrepresentation or tort, as well as breach of contract. As with the general laws on exclusion clauses, whether or not a clause which purports to restrict liability for misrepresentation is effective will depend upon the application of the Consumer Rights Act 2015 (in the case of business to consumer contracts) and UCTA.

An ‘entire agreement’ clause (often forming part of the standard ‘boilerplate’ of a commercial contract) attempts to provide that the contract constitutes the entire agreement between the parties, such that it supersedes any prior agreements, negotiations, or heads of terms. Entire agreement clauses have their limitations, however, and it is a common misconception that they will necessarily prevent liability for misrepresentation.  Instead, as reliance on a statement as an inducement to enter into a contract is one of the requirements of an actionable misrepresentation, parties should expressly exclude liability by means of a ‘non-reliance statement’.

Salutary warning for buyers and sellers

A very recent case, Djurberg (t/a/ Hampton Riviera) v Small [2], is an example of entire agreement clauses falling short, and serves as a salutary warning which is applicable in commercial and consumer transactions alike.

The seller made representations that the sale and purchase of luxury houseboats included 125 year mooring licences. The buyer relied on those representations, which were untrue.  The contract specifically stated that mooring licences were sold by separate agreements and it contained an entire agreement clause.  Nevertheless, the court found that the seller was liable for both misrepresentation and breach of contract.  The buyer recovered, as damages, the difference between the sums paid for the houseboats and their value without the moorings.  (That effectively amounted to the buyer recovering the full purchase price).

The court reasoned:

• The entire agreement clause could not be construed as excluding the moorings representations as they were crucial to the decision to purchase;
• If the entire agreement clause could be so construed, it would unreasonably exclude liability for misrepresentation and would therefore be unenforceable under UCTA; and
• The representations had become contractual terms as per the parties’ intentions, objectively ascertained.

Practical advice

There are a number of practical points and best-practice tips of which all businesses should be aware:-

• Take care to ensure that marketing material and all forms of pre-contract communications are accurate…
• …and that they are kept accurate and up to date on an ongoing basis.
• Prior to conclusion of any contract, check whether any circumstances or key terms have changed since communications and negotiations began. If they have, make sure that all parties are aware and remain happy to proceed before you complete.
• Prior to conclusion of any contract, check that all of the contractual terms – including the boilerplate – accurately reflect and cater for the parties’ intentions. Take specialist legal advice if necessary.
• Educate sales staff and negotiators as to the dangers of misrepresenting facts or projections.
• If you think you may have suffered loss having relied on a misrepresentation, act quickly. Different requirements and remedies can apply in different circumstances, so take specialist legal advice immediately to ensure that you do not prejudice your position.
• Any potential claimant must ensure that its claim is formulated correctly. Ask your legal advisor to consider which type or types of misrespresentation should found your action and whether there may also be any potential to bring a breach of contract or tortious negligent misstatement claim.
• Consider limiting or excluding liability for misrepresentation by inserting exclusion, entire agreement and/or non-reliance clauses into your commercial contracts – but make sure that these are properly drafted. Your legal advisor should be able to assist with ensuring that your clauses are reasonable and effective.

[1] albeit a term which excludes or restricts liability for fraudulent misrepresentation is wholly ineffective as a matter of public policy, and a term which excludes or restricts liability for misrepresentation resulting in death or personal injury caused by negligence is wholly ineffective under section 2 (1) of the Unfair Contract Terms Act 1977 (UCTA).
[2] (unreported, Ch D, 1/9/17)