In Short
- Misrepresentation is a false statement of fact made during contract negotiations, inducing one party to enter into the agreement.
- Misrepresentation can be innocent, negligent, or fraudulent, with varying consequences for damages and remedies.
- Under Australian Consumer Law (ACL), misleading or deceptive conduct can lead to severe penalties, including damages and contract cancellation.
Tips for Businesses
Protect your business from misrepresentation claims by fact-checking all communications, training staff on accurate representations, and maintaining records of negotiations. Ensure marketing materials and contract statements are clear, truthful, and supported by evidence. Seek legal advice when drafting key contracts to avoid accidental misstatements or breaches of consumer law.
Table of Contents
- What is Misrepresentation?
- Key Elements
- What are the Different Types of Misrepresentation?
- How Can a Misrepresentation Be Made?
- Misrepresentation in Consumer Law
- What are the Consequences of Misrepresentation in a Contract?
- Breach of the Australian Consumer Law (ACL)
- Protecting Your Business from Misrepresentation Claims
- Key Takeaways
- Frequently Asked Questions
When engaging with customers, suppliers, or other stakeholders, you often define rights and responsibilities with contractual terms and conditions. The integrity of these agreements depends upon the accuracy of information exchanged between parties. A misrepresentation can occur when one party makes a false or misleading statement to induce the other to enter a contract. Misrepresentation can have significant legal and financial implications. Under consumer law in Australia, misrepresentation overlaps with misleading and deceptive conduct.
This article will explore what misrepresentation in a contract is and how a contracting party can make a misrepresentation. It will then examine each party’s consequences when they misrepresent.
What is Misrepresentation?
A misrepresentation is a false statement that one party gives to another before entering into the contract. This can result in one party inducing the other party to enter into the contract.
The statement must be based on a past or present fact. Misrepresentation differs from breach of contract. While a breach occurs after the contract is formed, misrepresentation happens during the negotiation phase.
Key Elements
Key elements of misrepresentation include:
- a false statement of fact (not opinion or future intention);
- made to induce the other party to enter the contract; and
- the other party relies on this statement when deciding to enter the contract.
Statements about what would happen in the future or opinions are unlikely to be found to be misrepresented in court.
However, the court may find a future statement to be a misrepresentation if the party makes it without any genuine intention of fulfilling it or if there are no reasonable prospects of fulfilling the expectation.
Example
For example, saying that your car is worth $10,000 when it is worth $5,000 is not a misrepresentation, as you are expressing an opinion. However, telling the other party you paid $10,000 for it when you only paid $5,000 would be a misrepresentation, as you falsely state a fact.
A misrepresentation is different from mere ‘puffery.’ For example, wild promotional statements made during advertising would not be a misrepresentation. This is because a reasonable person would not believe that to be a statement of fact.
For example, if you are selling coats and state to your customers that the coat is the ‘best-looking coat in the world,’ this would not be a misrepresentation. This is because a reasonable person would not believe this as a fact. However, if you stated that the coat was 100% cashmere when it was a polyester blend, this would be a misrepresentation.
Continue reading this article below the formWhat are the Different Types of Misrepresentation?
Misrepresentation can be innocent, negligent, or fraudulent. The critical difference is whether the person making the statement believed it to be true when they made the statement. In addition, the statement must have ‘induced’ the person to enter into the contract.
Innocent misrepresentation occurs when the trader believes that what they are saying is accurate at the time and has no intention of deceiving the other party.
Fraudulent misrepresentation occurs when the trader knows that what they are saying is incorrect or does not care or consider whether the statement is correct or incorrect.
How Can a Misrepresentation Be Made?
A misrepresentation can be made in many ways, including orally, through conduct, or in writing. However, a false statement of fact must induce the innocent party to enter the contract. These factors will deem it a misrepresentation.
Beyond negotiations, misrepresentation can occur via:
- marketing materials or advertisements;
- on product labels or packaging; or
- in financial reports or disclosures.
Silence or omission can sometimes amount to misrepresentation, particularly if it renders other statements misleading or if there’s a duty to disclose certain information.
Misrepresentation in Consumer Law
In consumer law, the sale of goods and services is a contract between the seller and buyer. If you sell goods or services in Australia, you must adhere to the Australian Consumer Law (ACL) in the Competition and Consumer Act 2010. The ACL provides broad consumer protections and imposes strict obligations on businesses to ensure their representations are accurate and not misleading.
When selling your goods online or otherwise, you will make representations about the quality of the goods and services, their features and inclusions, their appearance, and their origination.
If you falsely represent the good or service, which induces the buyer to purchase it, you could be liable for its misrepresentation. This would amount to ‘misleading or deceptive conduct’. It would also be misleading or deceptive conduct if the conduct is deemed by the court to ‘likely’ mislead or deceive.
For example, if you advertise that the phone you are selling has a front and back camera but really only has one at the back, this could amount to a misrepresentation.
Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.
Key Points
Key points to consider include:
- the ACL applies to all forms of marketing and promotion, including social media and online advertising;
- even unintentional misrepresentations can lead to legal consequences under the ACL; and
- the test is whether the conduct is likely to mislead or deceive, not whether it actually did so.
What are the Consequences of Misrepresentation in a Contract?
Suppose the buyer enters into a contract relying on this misrepresentation and consequently suffers loss. In that case, they may be able to cancel the agreement or claim damages. They can either negotiate a solution with the seller or go to court. A common remedy for a wronged party is ‘rescission‘. In this case, the contract is cancelled, and the parties return to their previous position.
Innocent Misrepresentation: The contract is revoked, effectively restoring the parties to their position before the contract.
Fraudulent Misrepresentation: The representer may be liable to pay damages to the innocent party. The representer may also be charged with fraud.
Breach of the Australian Consumer Law (ACL)
The representer may be liable for damages to the innocent party. In addition, the court could order an injunction to prevent further damage caused by the misrepresentation.
The high potential penalties reflect the seriousness with which Australian law treats misleading and deceptive conduct, including misrepresentations. You should be aware that non-compliance with the ACL can result in severe financial consequences, as well as potential reputational damage and loss of customer trust.
Protecting Your Business from Misrepresentation Claims
To minimise the risk of misrepresentation claims, businesses should:
- implement robust fact-checking processes for all marketing materials and contract negotiations;
- train staff on the importance of accurate representations and the risks of misrepresentation;
- maintain clear and accurate records of all communications with potential customers or business partners;
- include appropriate disclaimers and qualifications where necessary, without relying on them as a complete defence; and
- seek legal advice when drafting important contracts or making significant representations
Key Takeaways
A misrepresentation is a false statement one party makes to another before entering into the contract. This can result in one party inducing the other party to enter into the contract. Unbelievable statements that are clearly untrue are insufficient, as they are not based on fact. Misrepresentation can be innocent, negligent, or fraudulent. This type of misrepresentation will certainly impact the damages available to the wronged party.
Misrepresentation in contracts is a serious issue with potentially significant consequences. Understanding the different types of misrepresentation and their legal implications is crucial for businesses operating in Australia. By ensuring all statements made during contract negotiations and in marketing materials are accurate and truthful, businesses can protect themselves from potential legal action and maintain their reputation in the marketplace.
If you need advice regarding contract misrepresentation, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A misrepresentation is made when someone makes a false statement to induce someone into entering a contract.
There are various consequences for misrepresentation, including a rescission of the contract, paying damages to the innocent party, fraud charges, or a claim for breach of the Australian Consumer Law.
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