In your contractual arrangements with parties of all kinds, it is common to see a clause that stops a party from relying on representations or forward-looking statements or seeks to allow such a thing (depending on which party wrote the contract). This article will consider what this clause means. It will also explore the risks associated with making a representation that the other side can rely upon.
Representations and Forward-Looking Statements
Representations are a statement of fact, made orally or in writing, by one party to the other party either before they have entered into a contractual arrangement or around that time. These statements will usually relate to some subject matter of the relevant contract.
Forward-looking statements are similar. They intend to represent something that may happen in the future. For example, suppose you run a software business. You may make a forward-looking statement to your business client that your projections show that your product will make a significant market advance in the coming year.
When parties enter a contract, it is common and expected that both parties would rely on the other’s representation to decide whether they want to proceed. However, a critical risk to bear in mind is when you provide a false or misleading statement. We will discuss this risk below.
What are the Risks?
Suppose you provide a false or misleading statement to the other side, particularly to induce them into entering a contract. In that case, this is known as a misrepresentation. It may be based on past or present facts, but it is ultimately a false statement. It goes further than mere ‘puffery’, or wild promotional statements, as it is expected a reasonable person would not believe that to be a statement of fact.
Forward-looking statements are more likely to be treated as opinions under the common law. This means they may not be construed as a misrepresentation. However, they are not without risk. As with any statement made about events in the future, they are mere speculations. You are not able to confidently assure that something you predict will occur.
As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.
ASIC’s Position
The Australian Securities and Investments Commission (ASIC) have made statements aimed primarily at mining companies that may have flow-on effects for other businesses providing forward-looking statements. Here, ASIC defined a ‘forward-looking statement’ as any statement about a future matter, including production targets, forecast financial information, and income-based valuations.
This indicates that the misleading and deceptive conduct regime may apply if you lack evidence to back up your statements. This may result in claims for damages and a general loss of business as clients terminate.
How Can I Reduce My Risk?
Your contract can be the first point of defence against claims of reliance on representations you provide. Contracts commonly seek a warranty from customers that they have not relied on any representations except those expressly stated in the agreement. However, it is essential to remember that customers’ consumer law rights cannot be excluded and will still apply.
Similarly, you can disclaim forward-looking statements. If you provide forward-looking statements in writing, it is advisable to disclaim that they are subject to risk and uncertainty. Accordingly, this may mean that outcomes can differ materially from the statements.
Furthermore, although disclaimers and warranties protect your business, they cannot exclude the impact of the common law or consumer law. Therefore, as with any uncertain area, you must tread carefully.
Key Takeaways
Representations and forward-looking statements are a common, and maybe even essential, part of entering into a contract with your customers. However, they can be dangerous if you stray from the facts. Remember that customers always have consumer law rights. Furthermore, even if you ask them not to rely on your statements, they may still be influenced by them.
If you need assistance in avoiding misleading representations in your 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
Misleading or deceptive conduct is when a business makes representations that create or are likely to create a false impression in consumers (including other businesses) regarding the price, value or quality of goods or services. The Australian Consumer law prohibits it. Additionally, you can carry it out without intent and face punishment even without evident loss.
Forward-looking statements will often be identifiable as they use language such as: “could”, “may”, “intend”, “project”, believe”, expect” “anticipate,” “estimate”, “plan,” “would,” or “should”. Some common examples include statements about economic trends, expectations of future growth or revenue, future product expansion, potential targets, projects or expansion plans and estimated returns on future acquisitions.
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