Vitiating elements - Misrepresentation

Learning Outcomes

This article explains misrepresentation as a vitiating factor in contract law, including:

• identifying the elements of an actionable misrepresentation, such as a false statement of existing fact or law, inducement, and the distinction between representations, terms, and mere sales talk;
• distinguishing fraudulent, negligent (common law and statutory), and innocent misrepresentation, with emphasis on mental elements, burden of proof, and the operation of the Misrepresentation Act 1967, particularly sections 2(1), 2(2), and 1(a);
• analysing how misrepresentation may arise through words, conduct, half-truths, and failure to update statements when circumstances change, and evaluating when opinions or intentions amount to implied statements of fact;
• evaluating the primary remedies of rescission and damages, including the deceit measure, reliance-based recovery, damages in lieu of rescission, and the specific bars that may prevent rescission in practice;
• assessing the impact and enforceability of exclusion, entire agreement, and non-reliance clauses under section 3 MA 1967, with attention to the reasonableness test and limits on excluding liability for fraud;
• applying these principles to SQE1-style multiple-choice questions and problem scenarios involving contract formation, validity, and the appropriate choice of remedy for different types of misrepresentation.

SQE1 Syllabus

For SQE1, you are required to understand misrepresentation in contract law and apply your knowledge to practical scenarios, including identifying when a misrepresentation has occurred, classifying its type, determining the available remedies, and understanding the impact of the Misrepresentation Act 1967, with a focus on the following syllabus points:

• The definition of an actionable misrepresentation, including the requirements for a false statement of existing fact or law that induces the contract.
• The distinction between a representation and a term of the contract.
• The different types of misrepresentation: fraudulent, negligent (at common law and under statute), and innocent.
• The remedies available for each type of misrepresentation, specifically rescission and damages.
• The circumstances in which the right to rescind may be lost (bars to rescission).
• The effect of sections 2(1) and 2(2) of the Misrepresentation Act 1967 on damages.
• The role of misrepresentation by conduct and the exceptions to the general rule that silence is not actionable.
• The effect of section 3 MA 1967 on clauses excluding liability or reliance (including entire agreement and non-reliance clauses), and how reasonableness is assessed.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is LEAST likely to be considered a statement of fact for the purposes of misrepresentation?
   1. "The central heating system was installed last year."
   2. "This car achieved 60 miles per gallon on my last trip."
   3. "In my opinion, this business is likely to be highly profitable next year."
   4. "The accounts accurately show a turnover of £500,000 for the last financial year."
2. A claimant seeking damages under s 2(1) Misrepresentation Act 1967 must prove:
   1. Fraud on the part of the defendant.
   2. Negligence at common law under the Hedley Byrne principle.
   3. That they entered the contract after a misrepresentation was made to them by the other party, resulting in loss.
   4. That the statement was made innocently but without reasonable grounds for belief in its truth.
3. What is the primary remedy for all types of misrepresentation, although it may be barred in certain circumstances?
   1. Damages under s 2(1) MA 1967.
   2. Rescission.
   3. Damages for breach of contract.
   4. Damages in the tort of deceit.

Introduction

A misrepresentation is a vitiating factor that can make a contract voidable. It occurs when one party makes a false statement of fact or law before the contract is formed, which induces the other party to enter into the agreement. Unlike a term of the contract, a representation is not a promise but a statement that influences the decision to contract. If such a statement proves false, the innocent party may have remedies available, depending on the nature of the misrepresentation. Understanding these rules is fundamental to contract law.

Key Term: Misrepresentation
An untrue statement of fact or law made by one party to another, before or at the time of contracting, which induces the other party to enter into the contract.

Note: In the consumer context, the Consumer Protection from Unfair Trading Regulations 2008 (as amended) and the Consumer Rights Act 2015 provide specific rights and remedies. Those regimes are distinct and not the focus here; the emphasis remains on the common law/equitable principles and the Misrepresentation Act 1967 (MA 1967) that apply generally.

ELEMENTS OF ACTIONABLE MISREPRESENTATION

For a misrepresentation to be actionable, giving rise to potential remedies, several key elements must be established.

Untrue Statement

There must be a statement that is untrue. Silence does generally constitute misrepresentation, as there is no general duty of disclosure in English contract law. However, exceptions exist, such as in contracts requiring utmost good faith (uberrimae fidei, like insurance contracts), where a fiduciary relationship exists, or where a half-truth creates a misleading impression. Also, a change in circumstances making a previously true statement false may create a duty to disclose the change.

In practice, a statement can be made not only by words but also by conduct. Actions which present a false impression are capable of amounting to misrepresentation (for example, covering up defects in property being sold). The law also recognises “half-truths” as actionable: a technically true statement which omits material facts can still mislead and therefore misrepresent the position.

• Misrepresentation by conduct: Acts that convey a false impression may be actionable. Examples include disguising defects in goods or property so that an ordinary inspection would not reveal them. Courts have treated such behaviour as an implied statement that the defect does not exist.
• Half-truths: A statement that is literally true but misleading because it omits relevant facts can be actionable. For instance, saying an asset is “let to X at £Y per annum” where notice to terminate has already been given conveys a continuing state of affairs that no longer exists.
• Change of circumstances: Where a statement was accurate when made but becomes false before the contract is concluded, the maker must correct it; failure to do so is a misrepresentation. This is often described as a continuing representation principle.

In limited relationships, the law imposes a positive duty to disclose material facts (for example, fiduciary relationships). Contracts of insurance have historically involved duties of utmost good faith, ensuring full disclosure of material facts. In consumer insurance, the Consumer Insurance (Disclosure and Representations) Act 2012 modifies the traditional disclosure duty by requiring consumers to take reasonable care not to make a misrepresentation.

Statement of Fact or Law

The statement must be one of existing fact or law, not merely an opinion or a statement of future intention.

Key Term: False Statement of Fact
An assertion about a specific state of affairs that is demonstrably untrue. This excludes mere 'puffs' (sales talk), statements of opinion, or statements of future intention, unless the maker did not genuinely hold that opinion or intention, or implied facts they knew to be untrue.

A statement of opinion may be treated as a statement of fact if the person making it possesses special knowledge or skill relating to the subject matter, implying they have reasonable grounds for their opinion. Where the representor is better positioned to know the facts (for example, a seller describing a tenant as “most desirable” while knowing rent arrears exist), the description can amount to a representation of existing facts.

Similarly, a statement of intention can be a misrepresentation if the person did not actually hold that intention at the time; the state of one’s mind is itself a fact and can be misrepresented if dishonestly stated. Statements of law can also be actionable; the modern position is that a misstatement of legal status (for example, describing a protected tenancy as a terminable licence) can amount to misrepresentation.

It is also important to distinguish between a representation and a term. The more a statement appears promissory in nature, is of central importance to the bargain, is made close to contract formation, and is made by a party with superior knowledge or control of the relevant facts, the more likely it is to be characterised as a contractual term. If it is a term and is untrue, the remedy is for breach of contract; if it is only a representation, the remedy lies in misrepresentation (subject to classification and bars). Note that section 1(a) MA 1967 preserves the right to rescind for misrepresentation even where the misrepresentation is also incorporated as a term, provided rescission would otherwise be available.

Inducement

The false statement must have induced the claimant to enter into the contract. It does not need to be the sole reason, but it must be one of the reasons the claimant contracted.

Key Term: Inducement
The requirement that the misrepresentation played a real and substantial part in persuading the claimant to enter into the contract. The claimant must have relied on the statement.

In determining inducement:

• Materiality: A representation is more likely to be found to have induced the contract where it would influence a reasonable person. However, even unreasonably relying on a false statement can suffice if, in fact, it did influence the claimant’s decision.
• Awareness: A claimant unaware of the statement cannot have been induced by it. If a defect is concealed but the buyer does not inspect or encounter the concealment prior to contracting, there may be no awareness and hence no inducement.
• Reliance and investigations: Where a claimant relies entirely on their own investigation or the advice of their agents, their claim may fail for want of reliance on the misrepresentation. Conversely, the mere fact that the claimant could have investigated, but did not, does not bar a claim; a party may rely on what they were told. The critical question is whether the statement actually played a real and substantial part in the decision to contract.
• Fraudulent cases: If the misrepresentation is fraudulent and material, there is a strong evidential presumption of inducement which is difficult to rebut. The representor must show the claimant was not induced.

Reasonableness of reliance is not, in principle, an element of the cause of action in misrepresentation. However, contractual terms (for example, entire agreement and non-reliance clauses) may attempt to allocate risk or limit reliance; such clauses are subject to section 3 MA 1967 (reasonableness).

TYPES OF MISREPRESENTATION

Once an actionable misrepresentation is established, it is classified into one of three types, which affects the available remedies.

Fraudulent Misrepresentation

This is the most serious type, involving deliberate deceit. It is defined based on the case of Derry v Peek (1889) 14 App Cas 337.

Key Term: Fraudulent Misrepresentation
A false statement made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false. The burden of proof is on the claimant to prove fraud.

Remedies include rescission of the contract and damages in the tort of deceit. Damages aim to put the claimant back in the position they were in before the misrepresentation occurred and can cover all direct losses flowing from the fraudulent inducement, even if not reasonably foreseeable. This includes consequential losses and, where appropriate, loss of profits attributable to entering the transaction rather than an alternative profitable one. Contributory negligence is not a defence to deceit.

Negligent Misrepresentation

This occurs when a false statement is made carelessly or without reasonable grounds for believing it to be true. There are two potential routes: common law and statute.

1. Common Law (under Hedley Byrne v Heller [1964] AC 465)
Requires demonstrating a ‘special relationship’ between the parties giving rise to a duty of care. The claimant must prove the defendant was negligent in making the statement. This typically depends on an assumption of responsibility by the representor and reasonable reliance by the representee for a known purpose. Disclaimers (for example, “without responsibility”) may negate any duty. Damages are awarded based on the tort of negligence, covering reasonably foreseeable losses, subject to remoteness principles and potential reduction for contributory negligence.

2. Statute (Misrepresentation Act 1967, s 2(1))
This is often easier for a claimant to use. If a party enters a contract after a misrepresentation by the other party and suffers loss, the party making the misrepresentation is liable for damages as if it were fraudulent, unless they can prove they had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.

Key Term: Negligent Misrepresentation
A false statement made carelessly or without reasonable grounds for believing its truth. Liability can arise under common law (requiring a special relationship and duty of care) or statute (s 2(1) MA 1967, which shifts the burden of proof to the misrepresentor).

Key points under s 2(1):

• The burden of proof shifts to the defendant to establish both honest belief and reasonable grounds for that belief at the time of contracting. This is a heavy burden.
• The belief must be that of the contracting party; an agent’s belief alone will not suffice unless attributable to the principal.
• The measure of damages mirrors deceit (“fiction of fraud”): losses directly flowing from entry into the contract are recoverable, without the constraints of reasonable foreseeability. In practice, courts have also allowed a reduction for contributory negligence in some s 2(1) cases, though this sits uneasily with the deceit analogy.
• Section 2(1) applies only where the misrepresentation is made by the other contracting party. It does not apply to misrepresentations by third parties (who may be liable in tort) and cannot apply if, in law, there is no contract at all (for example, where the contract is void ab initio).

Rescission is also available in addition to damages, subject to bars.

Worked Example 1.1

Anya is selling her cafe. She tells Ben, a potential buyer, that the weekly turnover is £5,000, based on a quick look at recent takings but without checking the verified accounts, which show an average of £3,500. Ben relies on Anya's statement and buys the cafe. He quickly discovers the true turnover. Advise Ben.

Answer:
Anya made a false statement of fact (£5,000 turnover) which induced Ben to contract. As Anya made the statement without checking the accounts, she likely lacked reasonable grounds to believe it was true. Ben can likely claim under s 2(1) MA 1967 for negligent misrepresentation. The burden will be on Anya to prove she had reasonable grounds for her belief. Ben can seek rescission (subject to bars) and/or damages assessed on the fraud basis.

Innocent Misrepresentation

This is a misrepresentation made entirely without fault.

Key Term: Innocent Misrepresentation
A false statement made by a person who genuinely believes it is true and has reasonable grounds for that belief.

This covers false statements where the maker can satisfy the court that they believed the statement was true and had reasonable grounds for that belief up until the time of the contract (satisfying the defence under s 2(1) MA 1967). The primary remedy is rescission. However, under s 2(2) MA 1967, the court has discretion to award damages in lieu of rescission if it considers it equitable to do so, considering the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as the loss rescission would cause to the other party. Damages under s 2(2) are compensatory and, in principle, limited to loss caused by the property or contractual subject matter not being as represented (often approximating a diminution-in-value measure). The jurisdiction to award s 2(2) damages arises only where rescission is (or was) available; if rescission is barred, the court has no power to award damages in lieu.

Exam Warning

Be careful to distinguish the requirements and remedies for each type of misrepresentation. Pay particular attention to the burden of proof under s 2(1) MA 1967 (negligent misrepresentation) and the availability of damages in lieu of rescission under s 2(2) MA 1967 (negligent and innocent misrepresentation).

REMEDIES FOR MISREPRESENTATION

The primary remedies are rescission and damages. The availability and extent depend on the type of misrepresentation.

Rescission

Rescission is an equitable remedy available for all types of misrepresentation. It aims to restore the parties to their pre-contractual position by unwinding the contract.

Key Term: Rescission
The setting aside of a contract, making it voidable. The aim is to return the parties to the position they were in before the contract was made (restitutio in integrum).

Key practical points:

• Election and notification: Rescission does not occur automatically; the innocent party must elect to rescind and communicate that decision to the other party, or obtain a court order. In urgency (for example, where the misrepresentor absconds), clear and unequivocal notice to relevant authorities or public bodies can suffice to effect rescission.
• Indemnity: Upon rescission, the court may order an indemnity to reimburse necessary expenses or obligations incurred under the contract that were required by the contract itself (for example, rates or repairs). This is distinct from damages and is limited in scope.

However, the right to rescind can be lost through certain 'bars':

• Affirmation: The innocent party, with knowledge of the misrepresentation and of the right to rescind, declares their intention to continue with the contract or acts in a way consistent with affirmation (for example, continuing to use goods or accept benefits).
• Lapse of Time: For non-fraudulent misrepresentation, an unreasonable delay in seeking rescission after the contract may bar rescission; in fraudulent cases, time runs from the discovery of the fraud. Modern authority emphasises that it is only inequitable delay that bars rescission and the equitable context is important.
• Restitution Impossible: Rescission may be refused where the parties cannot be substantially restored to their pre-contract positions. The focus is on practical justice and substantial restoration; money adjustments can be made where appropriate.
• Third-Party Rights: A bona fide purchaser for value without notice (or equivalent third-party rights) may defeat rescission if their rights have intervened before rescission is effected.

These bars reflect equity’s concern for fairness and commercial certainty. They are not applied mechanistically; where practical justice can still be achieved (for example, by monetary allowances for use or depreciation), rescission may be granted.

Worked Example 1.2

Chloe buys a painting from David, who innocently misrepresents it as being by a famous artist. Chloe discovers the truth six months later but, hoping its value might increase anyway, waits another year before deciding she wants to return it. Can Chloe rescind?

Answer:
Possibly not. Although the misrepresentation was innocent, Chloe's delay of one year after discovering the truth could be seen as an unreasonable lapse of time, barring rescission. Furthermore, her conduct in waiting might be interpreted as affirmation of the contract.

Damages

Damages aim to compensate the claimant for losses suffered due to the misrepresentation. The measure depends on the type:

• Fraudulent: Damages in the tort of deceit. Covers all direct losses flowing from the inducement, regardless of foreseeability. The aim is to restore the claimant to the position they would have been in had the misrepresentation not been made (a reliance/out-of-pocket measure). Loss of profits from alternative opportunities may be recoverable where causally linked. Contributory negligence is not a defence.
• Negligent (s 2(1) MA 1967): Damages calculated on the same basis as fraud (deceit measure), reflecting the statutory “as if fraudulent” language. Although there is authority allowing reduction for contributory negligence in s 2(1) claims, that sits in tension with the deceit analogy. The safer exam view is that deceit-style recovery is available, subject to case-specific arguments on contributory negligence.
• Negligent (Common Law): Damages in the tort of negligence. Covers reasonably foreseeable losses within the scope of the duty of care; contributory negligence may reduce the award.
• Innocent: No automatic right to damages, but the court may award damages in lieu of rescission under s 2(2) MA 1967 if it is equitable. Such damages are generally limited to losses caused by the subject matter not being as represented (often the difference in value), rather than the broader reliance losses recoverable under fraud or s 2(1).

Attempts to exclude or limit liability or remedies for misrepresentation are regulated by section 3 MA 1967. A term which excludes or limits liability or remedies (including non-reliance clauses that deny inducement) is of no effect unless it satisfies the reasonableness test (aligned with the Unfair Contract Terms Act 1977 standard). Excluding liability for one’s own fraud is not permitted as a matter of principle, and any attempt to exclude liability for an agent’s fraud requires the clearest words and will almost always be unreasonable. Entire agreement and non-reliance clauses are scrutinised for reasonableness in light of bargaining power, legal advice, and how fairly they were agreed.

Revision Tip

Remember that damages under s 2(1) MA 1967 provide the same advantageous measure as for fraud, but without the claimant needing to prove fraudulent intent. The burden shifts to the misrepresentor to show they had reasonable grounds for belief. This makes s 2(1) a powerful tool for claimants. However, s 2(1) applies only to misrepresentations made by the other contracting party; for third-party statements, consider a common law negligence (Hedley Byrne) claim.

Worked Example 1.3

Dev, an experienced seller of a small hotel, tells Lara that the long-term tenant is “a most reliable payer.” He knows the tenant is three months in arrears. Lara buys. She could have asked for the rent schedule but did not. After completion she discovers the arrears and seeks rescission or damages.

Answer:
The statement is more than opinion: given Dev’s superior knowledge, it implied facts that were untrue. Lara’s failure to investigate does not bar a misrepresentation claim if she relied on Dev’s statement. Rescission should be available (subject to bars). Alternatively, damages under s 2(1) could be claimed, with the burden on Dev to show reasonable grounds for belief. He cannot, given his knowledge of arrears.

Worked Example 1.4

A finance company will transact only if a customer provides a 20% deposit. A dealer falsely states to the finance company that the car costs £10,000 and the customer has paid £2,000, when in fact the car costs £9,000 and the customer paid £1,000. The finance company enters the agreement and later suffers loss when the customer defaults. What measure applies under s 2(1) if the dealer cannot prove reasonable grounds for belief?

Answer:
Damages are assessed as if the misrepresentation were fraudulent, covering all loss directly flowing from having entered the transaction, not limited by foreseeability. The finance company can recover its actual loss arising from the induced contract (subject to avoiding double recovery).

Worked Example 1.5

A rogue buys Nora’s car using a false identity, induced by misrepresentation. Nora discovers the fraud the next day, immediately informs the police and motoring organisations of her intention to rescind. The rogue has already sold the car to an innocent purchaser. Who owns the car?

Answer:
Nora’s prompt, unequivocal steps can effect rescission. If rescission occurred before the sale to the innocent purchaser, title revests in Nora and she can recover the car. If the sale occurred before rescission, the innocent purchaser’s rights intervene as a bar to rescission; Nora’s remedy would then be against the rogue in damages.

Worked Example 1.6

A share purchase agreement contains an entire agreement and non-reliance clause stating that the buyer has not relied on any pre-contractual statements. The seller’s pre-contractual statements about key customer contracts were false. The buyer sues for misrepresentation. The seller relies on the clause.

Answer:
A non-reliance clause seeks to negate inducement. Under s 3 MA 1967, such a clause is of no effect unless reasonable. Courts adopt a purposive approach: clauses aimed at excluding liability for misrepresentation must satisfy reasonableness, having regard to bargaining power, legal advice, the nature of the statements, and whether the clause was fairly drawn to the buyer’s attention. If unreasonable, the clause will be ineffective and the misrepresentation claim proceeds.

Key Point Checklist

This article has covered the following key knowledge points:

• A misrepresentation is an untrue statement of fact or law that induces a contract.
• A statement may be made by words or conduct; half-truths and failure to update a statement that has become false can be actionable.
• Statements of opinion or intention are generally not actionable unless they implicitly misstate facts or the maker’s state of mind, particularly where the representor has superior knowledge.
• Statements of law can be actionable misrepresentations.
• The distinction between a representation and a term affects available remedies; a statement can be both, and misrepresentation remedies may survive incorporation (s 1(a) MA 1967).
• The statement must have induced the claimant to enter the contract; awareness and reliance are essential. In fraud, inducement is strongly presumed if the statement is material. A claimant need not prove it was reasonable to rely if they in fact relied.
• Misrepresentations can be fraudulent, negligent (common law or statutory), or innocent.
• Fraud requires proof of dishonesty (knowledge of falsity or recklessness); damages are in deceit and not limited by foreseeability.
• Statutory negligent misrepresentation (s 2(1) MA 1967) shifts the burden of proof to the defendant to show reasonable grounds for belief; damages are assessed on the deceit measure.
• Common law negligent misrepresentation requires a special relationship (assumption of responsibility) and reasonable reliance; damages are subject to remoteness and contributory negligence.
• The primary remedy is rescission, aiming to restore parties to their pre-contract position; it may be lost by affirmation, inequitable delay, impossibility of substantial restitution, or intervening third-party rights.
• Courts focus on practical justice in deciding whether substantial restoration is possible; monetary adjustments can assist.
• Damages in lieu of rescission under s 2(2) MA 1967 are discretionary, available only when rescission is (or was) available, and are generally limited to loss caused by the property not being as represented.
• Clauses which seek to exclude or limit liability or reliance for misrepresentation (including non-reliance and entire agreement clauses) are regulated by s 3 MA 1967 and must be reasonable to be effective; liability for one’s own fraud cannot be excluded.

Key Terms and Concepts

• Misrepresentation
• False Statement of Fact
• Inducement
• Fraudulent Misrepresentation
• Negligent Misrepresentation
• Innocent Misrepresentation
• Rescission