Misrepresentation in Contract Law: How Does it Work?

Author: Zeinab Farhat, Progressive Legal

When dealing with contracts understanding the implications of certain acts or omissions at every stage of the transaction is vital, particularly when considering the validity and enforceability of a contract. Where misrepresentations have been made, the aggrieved party may be entitled to various remedies.

This article will consider: what is misrepresentation under contract law, what are the implications of misrepresentation, what can be done if misrepresentation has occurred, how to avoid making misrepresentations, other causes of action available where a misrepresentation has been made and key takeaways.  

What is misrepresentation in contract law? 

Misrepresentation in contract law refers to a situation where one party provides false information to another party prior to the formation of a contract, and the provision of such information induces that person to enter into the contract.  

There are different types of misrepresentation that can occur: 

1. Negligent misrepresentation

This is where a party fails to satisfy its standard of care by ensuring that a misrepresentation is not made. An intention to make a negligent misrepresentation is also not necessary.  

2. Innocent misrepresentation

This is where a party did not have the intention to provide the misrepresentation and believed that the statement is actually true.

3. Fraudulent misrepresentation

This occurs when a party deliberately makes a misrepresentation to the aggrieved party and is aware that it is false.

What needs to be shown in order to claim that there has been a misrepresentation in contract law?

What should the statement include in order to amount to a misrepresentation?

Ascertaining whether a statement amounts to a misrepresentation under contract law is largely fact specific. However, it is important that the alleged misrepresentation amounts to a false statement of past or present fact rather than a statement of opinion.  

Statements of (present) fact

A promise as to a future matter is not a statement of fact, and, therefore cannot amount to a misrepresentation. This is because a statement regarding the future cannot be true or false at the time it is made, thus, it cannot be held to be a statement of presently existing fact for the purpose of misrepresentation.   

Case example:  

Commercial Bank of Australia v Amadio [1983] HCA 14 – misrepresentation generally

This case considered a bank guarantee which had been given by elderly immigrant parents for their son. The bank manager had attended the property of the parents in order to obtain their signatures on a mortgage but failed to provide an explanation of what the document included. The bank later demanded payment of the guarantee, to which the parents did not pay. The bank then served a notice to the parents that it would exercise the power of sale under the mortgage. 

Among other things, the Amadio’s claimed that it was induced by representation, or ‘concealment of facts’ which the bank had a duty to disclose. Put simply, in addition to finding that the bank had engaged in unconscionable conduct, it was also held that misrepresentation had taken place.  

Statements of opinion

Generally, a statement of opinion is not a statement of fact and consideration should be given as to the circumstances surrounding the transaction, the knowledge of the parties, the words used etc.  

If the person making the representation makes a statement of opinion based on facts which were known to that person, but not the party who had the representation made to it, then the statement may be taken to be one of fact and therefore a misrepresentation.  

Case example: 

Smith v Land & House Property Corporation (1884) 28 Ch D 7 (“Smith”) – statement of opinion based on facts known to representor may be a statement of fact

In Smith, the Land & House Property Corporation (LHP) had contracted with Smith to purchase a hotel. Smith had advertised that the hotel was being leased to a person who was the “most desirable tenant”. LHP agreed to purchase the hotel, however, the tenant soon went into bankruptcy prior to the completion of the transfer of title. LHP no longer wanted to complete the transaction and counterclaimed against Smith (who sought specific performance) on the basis that the statement describing the tenant amounted to misrepresentation.  

It was held that LHP did rely on a misrepresentation made by Smith and, therefore, specific performance was not available. Ultimately, Smith had enough knowledge to state whether the tenant was desirable or not. Smith also knew that the tenant owed large amounts of rent, and as such, the statement made regarding the tenant’s desirability was false.  

What can be done if misrepresentation has occurred?

Recission

Recission refers to a situation where a contracting party elects to cancel a contract due to some vitiating factor (i.e. misrepresentation). A party can rescind a contract under equity for misrepresentation. A right to rescind a contract is conditional on restituto in integram, which means that the transaction must be able to be unwound so both parties are restored to their original position.   

It is important to note that a right to recission can also be lost for other reasons, such as the party seeking to rescind the contract having acted unfairly.  

Damages

Alternatively, a party can elect to sue the representator for damages arising as a result of the reliance on the misrepresentation.  

Defences to misrepresentation in contract law

A party may be able to defend a claim of representation where it can be shown that: 

1. they had reasonable grounds to believe that a statement was true;  
2. if someone else made the statement, that they did not know the misrepresentation was made; or
3. the other party would have entered into the contract regardless of the misrepresentation.

How to avoid making misrepresentations? 

A party can minimise the likelihood of a misrepresentation being made by ensuring they have received tailored legal advice on the contract, including any oral statements made between the parties which could be classified as a misrepresentation.

Other causes of action available where a misrepresentation has been made? 

Where a misrepresentation has been made, a claim may also be available for misleading or deceptive conduct under section 18 of the Australian Consumer Law. 

Where a misrepresentation is made fraudulently, the representation may also be guilty of fraud under the relevant criminal laws.

Key takeaways

Ascertaining whether a misrepresentation has been made can be complicated and it is important to carefully consider any commercial contracts you are entering into to ensure that you are not making any misrepresentations.  

If you are the other side to the contract (receiving the goods and services), you should conduct your due diligence and obtain any necessary professional advice in order to ensure that a misrepresentation is not taking place.

For tailored advice and guidance regarding a contractual dispute, or if you need a contract drafted or reviewed, reach out to our experienced contract lawyers below.

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