As a business owner, you must avoid misrepresenting your business. When entering a commercial contract, parties exchange a lot of information and make many statements and promises. While they might make these statements as mere exaggerations, some can often be outright wrong. This is known as misrepresentation. Therefore, this article will explore misrepresentation and how it may be fatal for your commercial contracts.
What is a Misrepresentation?
The term ‘misrepresentation’ refers to giving false or misleading information to a party that leads them to enter into a contract. A misrepresentation might occur in writing or orally. Essentially, for an untrue statement to be considered misrepresentation, the party must enter the contract relying on the misrepresentation.
For example, consider you are entering a contract for the purchase of a business. The seller may provide false information about the value of the business’ assets. As a result, you purchase the business, relying on the value of the assets being accurate as per the seller’s statement. In that case, the seller’s statement amounts to misrepresentation.
Defences to Misrepresentation
If someone accuses you of making a misrepresentation, you can rely on a range of defences. These include that:
- you did not intend the other party to rely on the statement;
- you believed that the misrepresenting statement was true;
- someone else made the misleading statement, and you did not know that they made such a misrepresentation, or
- they would have entered into the contract irrespective of the misrepresented information.
Conversely, due to the range of defences, it can be difficult to prove another party misrepresented a situation to you. Nevertheless, any misrepresentation claim may be detrimental to your business’ reputation. Subsequently, this may cause issues with future commercial contracts and business relations. Therefore, you must ensure statements are thought-out and accurate when negotiating contracts.
Continue reading this article below the formRemedies
In the context of a commercial contract, there are three main types of misrepresentation. The remedies available will depend on the type of misrepresentation. Specifically, misrepresentation may be innocent, negligent or fraudulent. For each, a finding of misrepresentation will allow parties to rescind the contract. This means that your commercial contract will cease to exist if you prove that a misrepresentation occurred.
Innocent and fraudulent misrepresentations, and the specific remedies available for each, are outlined below.
1. Innocent Misrepresentation
This refers to situations where the misrepresenting party does not believe they are deceiving the other party. Indeed, they will genuinely believe what they say is true and have no malicious intentions. In these cases, the parties will be able to rescind the contract. This means the contract will be cancelled, restoring parties to their positions before entering it. Additionally, the innocent party may be entitled to claim damages if they suffer a loss.
2. Fraudulent Misrepresentation
Fraudulent representation is when the misrepresenting party intentionally or carelessly misrepresents something. The fraudulent conduct must be what induced the misrepresented party to enter the contract. Remedies available include rescission of the contract and damages to compensate the other party. Moreover, the misrepresenting party might also face fraud charges in some instances.
3. Negligent Misrepresentation
This occurs when the misrepresenting party has a duty of care to provide accurate information. In breaching this standard of care, they cause loss or damage to the innocent party. For example, consider you are purchasing a car and requesting a vehicle that has driven less than 10 000km. If the salesperson states that a car has done less than 10 000km without confirming this fact, the salesperson has engaged in negligent misrepresentation. Where negligent misrepresentation has occurred, damages for economic loss are available.
Avoiding Misrepresentation
You can take several practical measures to avoid misrepresentation and save your commercial contracts from rescission. This might include the insertion of different clauses in the contract.
Entire Agreement Clause
This clause will suggest that the agreement in question constitutes the entirety of the agreement between the two parties. This prevents any prior statements or terms from being considered part of the contract, reducing the risk of a misrepresentation claim.
Non-Reliance Clause
This clause will suggest that the parties entering the contract do not rely on any information not established in the contractual agreement itself.
Transparency
Finally, the best way to avoid misrepresentation is to be transparent. By not hiding any significant issues with the other party, you will avoid any issues with misrepresentation. Furthermore, having a professional such as a lawyer or an accountant revise the information you provide can help ensure you are as transparent as possible.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Key Takeaways
When entering a commercial contract, parties exchange a lot of information and make several statements and promises. Often, this information will be wrong and be considered a misrepresentation. Where misrepresentation occurs, a party might, depending on the circumstances:
- seek to rescind the contract;
- sue for damages; or
- initiate criminal proceedings.
If you need assistance understanding misrepresentations and commercial contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Misrepresentation refers to the giving of false or misleading information to a party that results in them entering a contract. A misrepresentation might occur in writing or orally. For a false statement to be considered misrepresentation, the party must enter the contract relying on the misrepresentation.
In the context of a commercial contract, misrepresentation might lead to the rescission of the contract. This means that your commercial contract will cease to exist where misrepresentation has occurred, restoring parties to the positions they were in before entering the contract. Further, misrepresentation might have a detrimental impact on your business relationships and the reputation of your business.
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