Misrepresentation: what happens when you were misled into a deal?
You buy a home after the seller tells you there have been no neighbour disputes. After completion, you discover years of complaints and solicitors’ correspondence about access to the driveway. Or you buy a business on the strength of financial information that turns out to be inaccurate. Can you undo the deal or recover your losses?
Both situations may give rise to a claim for misrepresentation. Under the law of England and Wales, a false statement which induces someone to enter into a contract can lead to rescission, damages or both, depending on the circumstances.
An inaccurate statement does not automatically establish a claim. The important questions are what was represented, whether it was false, whether it influenced the decision to contract and what loss followed.
What is a misrepresentation?
A misrepresentation is, broadly, a false statement of fact or law which induces the recipient to enter into a contract.
Pre-contract statements can concern the condition of a property, the profitability of a business, the quality of goods or the existence of particular rights. The court examines what was actually communicated and whether the recipient relied on it.
Facts and opinions
A genuine expression of opinion is not necessarily a statement of fact. Saying that a property is “an excellent investment” may be an opinion rather than an actionable representation.
However, the description is not decisive. An opinion can imply that there are facts supporting it, particularly where the speaker has knowledge the other party does not possess.
Can silence amount to misrepresentation?
English contract law does not impose a general obligation to volunteer every fact that might influence another party’s decision.
That does not permit a party to give a misleading answer, tell a half-truth or leave an earlier representation uncorrected where a change of circumstances makes it inaccurate before the contract is concluded.
The issue is what the communication conveyed, not simply whether each sentence was technically true when read in isolation.
Misrepresentation when buying a property
Before exchange of contracts, a buyer’s solicitor will usually raise enquiries about the property. In residential conveyancing, information is commonly provided through the Law Society’s Property Information Form, known as the TA6, and replies to additional enquiries.
Consider a hypothetical purchaser who pays £450,000 for a house. The seller states that there have been no neighbour disputes. After completion, the purchaser discovers a longstanding disagreement about access to the driveway, including complaints, correspondence between solicitors and repeated confrontations.
The purchaser now faces a potential dispute and owns a property which may be worth less than the price paid. If the seller’s answer was false and induced the purchase, there may be a misrepresentation claim.
The wording of the question and answer will be important, as will the history of the dispute and the seller’s knowledge. A seller’s personal view that a disagreement was insignificant does not determine whether an answer was misleading.
Nor does an opportunity to investigate necessarily defeat a claim. The buyer’s actual knowledge, enquiries and reliance must be examined.
Three types of misrepresentation
The distinction between fraudulent, negligent and innocent misrepresentation affects the available remedies and the assessment of damages. Those categories apply to any contractual situation, not merely property or business sale and purchase transactions.
Fraudulent misrepresentation
Fraudulent misrepresentation involves dishonesty. A false representation may be fraudulent where it was made knowingly, without belief in its truth, or recklessly as to whether it was true or false.
For example, a seller who knows about extensive solicitors’ correspondence concerning a neighbour dispute but deliberately denies that any dispute has occurred may face an allegation of fraud.
An incorrect answer is not, by itself, proof of dishonesty. Fraud must be supported by evidence, properly alleged and proved.
Negligent misrepresentation
A representation does not have to be deliberately dishonest to give rise to liability.
Section 2(1) of the Misrepresentation Act 1967 provides an important remedy where a contracting party’s misrepresentation induces the other party to enter into the contract and causes loss. Broadly, once the statutory requirements are met, the person making the statement must show that they had reasonable grounds to believe, and did believe up to the time of contracting, that it was true.
An honest belief alone is therefore not necessarily enough. A business seller who supplies inaccurate financial information without a reasonable basis for believing it may face liability even without an intention to deceive.
Negligent misstatement can also arise under common-law principles. The statutory and common-law routes have different requirements and should not be treated as interchangeable.
Innocent misrepresentation
A person may make a false representation while honestly and reasonably believing it to be true, without incurring liability for fraud or negligent misrepresentation.
The recipient may nevertheless have a remedy. Rescission may be available, subject to the restrictions on that remedy. In qualifying non-fraudulent cases, section 2(2) of the Misrepresentation Act 1967 also allows the court to award damages instead of rescission.
That is a discretionary remedy, not an automatic entitlement to compensation whenever an innocent statement proves inaccurate.
What remedies are available?
The commercial objective matters. Do you want to reverse the transaction, or keep what you bought and recover the loss caused by being misled?
The answer affects the evidence needed and the way the claim should be presented. Rescission and damages can sometimes be combined, but there can be no double recovery for the same loss.
Rescission: undoing the contract
Rescission seeks to unwind the transaction and restore the parties, so far as practicable, to their pre-contract positions.
For a property purchase, that may involve returning ownership in exchange for repayment of the purchase price, with appropriate adjustments. For a business acquisition, it may involve reversing the transfer of the business or shares.
Rescission is not confined to fraud. It may also be available for non-fraudulent misrepresentation, but there are restrictions. These include:
Affirmation: treating the contract as continuing after discovering the misrepresentation, in circumstances amounting to an election to keep it.
Restoration difficulties: where the parties cannot sufficiently be restored to their former positions.
Intervening third-party rights: where rights acquired by others prevent the transaction from being unwound.
Delay: where the circumstances make it inequitable to grant rescission.
Restoration does not always require an exact return to the original position. In Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745, the Court of Appeal emphasised the importance of practical justice and the possibility of financial adjustments. Depreciation or use of an asset does not necessarily prevent rescission.
The decision also confirms an important limit on section 2(2) of the Misrepresentation Act 1967: damages instead of rescission are not a fallback under that provision once the right to rescind has been lost.
If you may want to unwind the transaction, seek advice before taking steps which could amount to affirming it.
Damages: recovering financial loss
A buyer may prefer to keep the property or business and seek compensation. Alternatively, rescission may no longer be available, while a damages claim remains possible.
For fraudulent misrepresentation, damages compensate for losses directly flowing from the induced transaction. They do not automatically give the claimant the benefits they would have received if the representation had been true.
In Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254, the House of Lords explained the approach. The assessment can include the price paid, credit for the value or benefits received and other losses directly caused by the transaction. The valuation exercise is not governed by an inflexible rule in every case.
For claims under section 2(1) of the Misrepresentation Act 1967, Royscot Trust Ltd v Rogerson [1991] 2 QB 297 establishes that damages are assessed on the fraud basis even though actual dishonesty has not been established.
That does not make every consequence of an unsuccessful purchase recoverable. The claimant must establish the connection between the representation, the transaction and the loss. Mitigation and credit for benefits received also matter.
What if you would have negotiated a lower price?
Suppose the purchaser in our example would still have bought the £450,000 property, but says they would have offered less had the neighbour dispute been disclosed.
That raises a different factual question from saying that the purchase would never have happened. It is important to identify the true position rather than adopt whichever version appears to produce the largest claim.
A valuation may show that the undisclosed dispute reduced the property’s value at the time of purchase. That can provide evidence of an overpayment. A hypothetical discount based only on what the purchaser now says they would have offered is not, by itself, proof of that loss.
Where a claim depends on different terms being negotiated, the evidence must address whether those terms could have been achieved and the legal basis for recovering the alleged lost opportunity.
The same distinction arises in business acquisitions. Accurate financial information might have led to a lower price, additional contractual protection or withdrawal. Those alternatives need to be examined, not treated as interchangeable.
Misrepresentation or breach of contract?
A misrepresentation concerns a false statement which induced the decision to contract. A breach of contract concerns a failure to comply with a contractual obligation.
The same statement can sometimes support both claims, particularly if a pre-contract representation also became an express term. But the remedies and measures of damages may differ:
Contract damages generally seek to put the claimant in the position they would have occupied had the contract been performed.
Misrepresentation damages generally focus on the consequences of entering into the transaction because of the false representation.
The agreement must also be checked for warranties, entire agreement clauses, non-reliance provisions and limitations of liability.
Those provisions do not all perform the same function, and they do not automatically defeat a misrepresentation claim. Their effect depends on their wording and the applicable statutory controls. Section 3 of the Misrepresentation Act 1967 is particularly relevant to contractual attempts to exclude or restrict misrepresentation liability or remedies, with separate controls applying to consumer contract terms.
For more on breaches of contract, see here.
What evidence do you need?
The starting point is what was said before the contract was concluded. Preserve the original documents and communications, including material which may not support your account.
Useful evidence commonly includes:
The representation: emails, messages, sales particulars, property information forms, replies to enquiries, financial statements, presentations and meeting notes.
Why it was false: earlier correspondence, records of disputes, underlying accounts or other documents contradicting the statement.
Reliance: records showing how the information affected the decision to proceed, including advice received and discussions with those involved in the transaction.
The contract: the signed agreement, warranties, schedules and relevant earlier drafts.
Knowledge and verification: evidence of what the person making the statement knew and the basis on which it was made.
Loss: valuations, accountancy evidence, invoices and records of expenditure or other financial consequences.
Discovery and subsequent conduct: when the problem emerged and what happened afterwards, particularly if rescission is being considered.
A representation need not necessarily have been the only reason for entering into the contract. It must, however, have played the legally required part in the decision. Proving that a statement was false is not a substitute for establishing reliance and the remedy claimed.
What should you do if you think you were misled?
Identify the statement, preserve the evidence and establish when you discovered the true position. Consider whether your objective is to reverse the transaction or retain what you acquired and seek compensation.
Take advice promptly, particularly before conduct which might affect a right to rescind. Time limits and the consequences of delay depend on the claim and remedy: do not assume that discovering the problem gives you an unrestricted period in which to act.
A disappointing bargain is not necessarily a misrepresentation claim. A false statement which induced the deal can, however, have serious legal consequences—even where deliberate dishonesty cannot be proved.
RM Clayton advises and represents businesses and individuals in commercial, contractual and property disputes, including claims involving misrepresentation, fraud and breach of contract.
If you believe you were misled into entering a contract, or are facing an allegation of misrepresentation, contact RM Clayton to arrange a free initial 30-minute consultation.