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When you engage with your customers, you will likely have terms and conditions which outline each parties’ rights and responsibilities. You will also frequently enter into contracts with other stakeholders, such as manufacturers, suppliers, contractors, and investors. When you enter a contract, both parties rely on the other party’s representations to decide whether they want to proceed. Where one party makes a false or misleading statement to induce the other party to enter into a contract, this is called a misrepresentation. In these scenarios, the parties may have protection under the common law. However, keep in mind that 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 the consequences for each party when they make a misrepresentation. 

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.  Statements as to what would happen in the future would also be considered an opinion. Therefore, the court is unlikely to find this to be a misrepresentation. However, the court may find a future statement to be a misrepresentation if the party makes the statement without any genuine intention of fulfilling it, or there are no reasonable prospects of fulfilling the expectation.

For example, saying that your car is worth $10,000, when it is really worth $5,000, is not a misrepresentation as you are expressing an opinion. However, telling the other party that you paid $10,000 for it when you only paid $5,000 would be a misrepresentation, as you are falsely stating 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. 

What Are the Different Types of Misrepresentation?

Misrepresentation can be innocent, negligent, or it can be 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 that was made must have ‘induced’ the person to enter into the contract. 

Innocent misrepresentation

The trader believes that what they are saying is true at the time and they have no intention to deceive the other party. 

Fraudulent misrepresentation

The trader knows what they are saying is incorrect, or without any care or thought as to whether the statement would be correct or incorrect. 

How Can a Misrepresentation Be Made?

A misrepresentation can be made in many ways, including orally, by conduct or in writing. However, it must be a false statement of fact stated to induce the innocent party to enter the contract. This must result in the party being induced into the contract. These factors will deem it to be a misrepresentation. 

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) set out in the Competition and Consumer Act 2010. When you are selling your goods online or otherwise, you will make representations about the quality of the goods and services, its features, inclusions, its appearance and origination. If you make a false representation about 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. 

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 contract or claim for damages. This can be either by negotiating this solution with the seller or if this is not effective, going to court. A common remedy for a wronged party is ‘rescission‘. In this case, the contract is cancelled and the parties are brought back to the position they were in previously.

Innocent Misrepresentation

Rescission of the contract. The parties are effectively restored to the position they were in before the contract. 

Fraudulent Misrepresentation

The representor may be liable to pay damages to the innocent party. The representor may also be charged with fraud.

Breach of the Australian Consumer Law 

The representor may be liable to pay damages to the innocent party. In addition, the court could order an injunction to stop further damage caused by the misrepresentation.

Key Takeaways

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. Unbelievable statements that are clearly untrue are not sufficient, as they are not based on fact. Misrepresentation can be innocent, negligent, or it can be fraudulent. The type of misrepresentation will certainly impact the damages available to the wronged party.

If you need assistance with misrepresentation, call LegalVision’s contract lawyers on 1800 532 904 or fill out the form on this page.

Frequently Asked Questions

What is a misrepresentation?

A misrepresentation is made where someone makes a false statement to induce someone into entering a contract. 

What are the consequences of misrepresentation in a contract?

There are various consequences for misrepresentation, including a rescission of the contract, paying damages to the innocent party, a charge of fraud, or a claim for breach of the Australian Consumer Law.

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