What happens if a Borrower makes a Misrepresentation under a Loan Agreement?

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Table of Contents

• Misrepresentation
• Remedies
• Event of Default
• Conclusion

A loan agreement will typically include a number of statements made by the borrower.  The lender relies on these statements in deciding whether or not to enter into the loan agreement with and whether to advance money to the borrower.  These statements are referred to as representations and warranties.

Misrepresentation

Misrepresentation is when a false statement of fact made by one party (here the borrower) to another party (here the lender) has the effect of inducing that party to enter into a contract (here the loan agreement). For example, under certain circumstances, false statements or promises made by a borrower regarding the profitability of its business may constitute misrepresentation.

For an action to be successful, some criteria must be met in order to prove a misrepresentation. These include:

• A false statement of past or existing fact has been made;
• The statement was directed at the suing party (here the lender); and
• The statement had acted to induce the suing party (here the lender) to contract.

Remedies

A finding of misrepresentation allows for a remedy of rescission (intended to restore the parties to the position they were in prior to entering into the contract) and sometimes damages depending on the type of misrepresentation.  In addition, if the representation is found to be a term of the contract then the normal remedies for breach of contract will apply (including specific performance, damages and/or termination, where applicable).

Event of Default

In addition to the above remedies, if the borrower makes a misrepresentation this will generally (and indeed you should make sure it does if you are the lender) constitute an event of default under the loan agreement.  If an event of default occurs, it means that the loan is immediately due and payable on demand by the lender and any security provided by or on behalf of the borrower is enforceable.

Conclusion

There are many important clauses in a loan agreement.  The representations and warranties clause is a very important clause and, due to the repercussions of misrepresentation, the borrower must ensure prior to entering into a loan agreement that any representations and warranties in the loan agreement are true and, if they are to be repeated, will remain true.

To find out more about loan agreements, or for any other finance law related matters, please contact us on 1300 544 755.  One of our finance law specialists would be delighted to assist!