Crossing the line – when does a misrepresentation become fraudulent?
This article explores the different types of misrepresentation and at what stage a misrepresentation will cross the line to being fraudulent as opposed to an innocent or negligent misrepresentation.
What is a misrepresentation?
A misrepresentation is an untrue statement of fact or law made by one party to another which induces that party to enter into a contract which ultimately causes them loss.
Types of misrepresentation
There are three types of misrepresentation: fraudulent, negligent and innocent. An overview of each type is detailed in the table below:
| Type | Founded in | Constitute Elements |
| Fraudulent | The tort of deceit | 1. Party A makes a false representation to Party B 2. Party A knows that the representation is false or is reckless as to whether it is true or false. 3. Party A intends that Party B should act in reliance on it. 4. Party B does act in reliance on it and suffers loss. |
| Negligent | The Misrepresentation Act 1967 | 1. Party A makes a false representation to Party B 2. Party A makes the statement carelessly or without reasonable grounds for believing its truth. 3. Party A intends that Party B should act in reliance on it. 4. Party B does act in reliance on it and suffers loss. |
| Innocent | The Misrepresentation Act 1967 | 1. Party A makes a false representation to Party B 2. Party A makes the statement entirely without fault and can show that it had reasonable grounds to believe its statement was true. 3. Party A intends that Party B should act in reliance on it. 4. Party B does act in reliance on it and suffers loss. |
A misrepresentation claim is dependent upon Party A and Party B being contracting parties. If there is no contract then an alternative claim of negligent misstatement may be available, but this will depend upon the nature of the relationship between the parties. In order to pursue a claim in negligent misstatement there must exist a duty of care on the part of the representor which has been breached. However, the existence of a duty of care is notoriously difficult to prove.
Case study [1]
An individual entered into a contract for the sale of a number of buy to let properties on a new build site. Various representations were made to the buyer, including when the property builds would be complete and ready for transfer to the buyer. The proposed date for completion had significantly passed and the buyer was being met with radio silence from the seller / its selling agent as to the property completions. The individual approached us to consider their position and any potential claims they might have.
At the early stages of investigation, it was apparent that there was a misrepresentation made in respect of property completion dates, in which the seller confirmed the properties would be built and completion taking place within 12 months of exchange of contracts. This did not occur. Upon reviewing the communications between the seller and the buyer, it was apparent the seller had not factored in any possibility for delay. Based on the evidence available, we considered there was a potential innocent misrepresentation. The delays which arose in the construction process ought to have been reasonably foreseeable but had not been considered by the seller and there was a genuine belief that completion would take place within 12 months.
Further evidence then came to light regarding misrepresentations as to the square footage of the properties. The buyer had relied on this when proceeding with the sale as this affected lending criteria. Evidence came to light that it was apparent each flat could not possibly have had the square footage that was suggested on the plans. Whilst the evidence did not indicate the sellers knew or were reckless as to this fact, there was sufficient evidence to show carelessness giving rise to a potential negligent misrepresentation.
During the course of investigations, an agent was instructed to attend site with a view to ascertaining that the site genuinely existed. If it had been discovered that the site did not exist and the property investment opportunity was fictitious, the line will almost certainly have been crossed into fraudulent misrepresentation territory as the seller or its agents would have known or were reckless as to the representations made on the investment, which did not exist.
[1] This article focuses on the consideration of misrepresentation (other claims that may exist do not form part of this article).
Fraudulent misrepresentation
The main elements of each type of misrepresentation are largely the same but it is the belief / knowledge of the person making the statement as to its truth that alters which category it falls under.
As can be seen from the above, fraudulent misrepresentation occurs where the false representation is made knowingly or recklessly as to its truth.
In certain circumstances, trying to demonstrate fraudulent misrepresentation may not be the best option for example as a result of cost resource, limited evidence or insurance policy coverage. However, the benefits of pursuing a claim in fraudulent misrepresentation are felt in the assessment of damages which are wider in scope.
Practical advice
To assist in establishing a claim in misrepresentation (particularly in fraudulent misrepresentation where the evidential burden is higher) it is important to retain as much information and evidence as possible from the outset as to:
- What representations were made
- Who the representations were made by
- How the representation was made
- Documents and evidence in support of the representation made
- Documents and evidence in support of showing the representation was false
- Documents and evidence showing that the representation was relied on and the defendant knew that you would rely on it
Tenet are specialists in reviewing evidence to establish if a misrepresentation has been made, what category or categories it may fall under and providing advice on pursuing such claims. If you would like to discuss any issues in relation to misrepresentation, please feel free to contact us at hello@tenetlaw.co.uk
Author, Kelly Stott is an experienced commercial litigation lawyer advising on commercial contractual disputes, claims arising out of sale of goods and services, fraudulent misrepresentation, professional negligence, breach of fiduciary duties and debt recovery matters for both UK and international clients.
