What happens if I enter a contract when false statements have been made?

When you enter into a contract with another individual or an organisation, each party must be truthful in their negotiations, and any statements made before a contract is entered into. Where false statements or misrepresentations are made and a contract follows, the aggrieved party may be able to break the contract, because it goes to the very heart of what is required before and during the formation of a contact.

There are different degrees of false statements and misrepresentations, each with different outcomes in law. For a misrepresentation to be actionable in law, there must have been a false statement of fact which has been made by one party to the other which induced that party to enter into the contract.

Will the contract automatically become void if there has been a misrepresentation?

Where there has been a misrepresentation, the contract will be ‘voidable’ meaning that it will remain valid until voided by the party who relied on the misrepresentation in entering into the contract. This means that if the innocent party decides to void the contract they will be entitled to rescind (end) the contract and/or claim damages.

Fraudulent misrepresentation

Fraudulent misrepresentation takes place where a false statement as to fact or law is made either knowingly, or without the maker of that statement believing it to be true (or being reckless as to its truth).

What is a false statement of fact?

A false statement of fact must relate to an existing fact or a past event. The false statement of fact may be made through the spoken word, or communicated via email, letter, etc. The following do not fall within the definition of a statement of fact:

  • statement in relation to future conduct or intention (unless it can be proved that the maker of the statement never had the stated intentions);
  • statement of opinion (with the exception where the maker of the statement has specialist knowledge and is in a position to know the true facts);
  • statement of law;
  • silence.

A statement made negligently with the intention that they be relied upon will also amount to a misrepresentation of fact.

Occasionally, a contractual party may make a statement of fact which subsequently becomes false due to a change of circumstances, or a lapse of time. In such cases, there is a duty on that party to correct the statement. If they do not, this could be construed as a fraudulent misrepresentation.

Mere silence, including a failure to speak up, will not amount to a misrepresentation as there has been no statement made. Flowing from this is the fact that there is no duty to disclose facts which may affect the other party’s decision to enter into the contract.

However, active concealment of a fact could constitute a fraudulent misrepresentation. For instance, if you enter into a contract for the supply of goods which may have a defect of which you are aware, and you remain silent on the issue, this could well be fraudulent misrepresentation.

Inducement

To prove fraudulent misrepresentation, a false statement is not sufficient on its own to sustain a claim. The statement must have induced the other party to enter into the contract. To show this, the following conditions must be satisfied:

  • there must have been a material statement;
  • this statement must have been made known to the claimant;
  • the maker of the statement intended it to be acted upon;
  • the claimant must have actually acted upon the statement.

Material Statement

The statement must be a fact which has caused the party to enter into the contract. It does not have to be the sole reason for that person to enter into the contract but it has to be one of the reasons. If, for instance, the other party was going to enter into a contract regardless of the false statement of fact, this would not be regarded as a material statement.

Statement made known

The individual relying on the statement must have been made aware of the false statement of fact.

Intended to be acted upon

The false statement of fact made by one party to the other must have been intended for the party to rely upon it and enter the contract on the back of that statement.

Actually acted upon

Where the claimant simply relies on the statement without checking its validity (even if they were able to), and enters into the contract, this will amount to inducement. If the other party does fact check, but still enters into the contract, there will be no inducement as they cannot be said to have relied on the false statement made.

Negligent or innocent misrepresentation

Sometimes, a negligent or innocent misrepresentation may be made during the formation of a contract which may be a mere statement with no contractual effect, or it can become a term or condition of the contract.

A negligent misrepresentation is where a statement is made without reasonable grounds for believing it to be true. It is for the person making the statement to prove they had reasonable grounds for their belief in its truth.

Innocent misrepresentation is where the person making the statement can prove reasonable grounds for belief in the truth of the statement they have made.

In these cases, rescission of the contract is available to the aggrieved party.