What remedies are available to a party misled into a contract?

The legal position

Misrepresentation. A misrepresentation is a false statement of fact, made by one party to the other before the contract is concluded, which induces the other party to enter into it. It need not have been the sole inducement. Three kinds of statement are ordinarily not actionable misrepresentations: statements of opinion honestly held, statements of future intention, and mere commendatory statements, or "puffs", which no reasonable person would take literally.

Silence. As a general rule, silence does not amount to misrepresentation, and a seller is under no general duty to disclose defects: caveat emptor ("let the buyer beware"). The rule is subject to important exceptions:

• a half-truth, that is, a statement that is literally true but misleading by reason of what it omits;
• a statement that was true when made but which, to the knowledge of the party who made it (the representor), became false before the contract was concluded, where the representor failed to correct it;
• active concealment of a defect; and
• contracts uberrimae fidei ("of the utmost good faith"), such as contracts of insurance, in which there is a positive duty of disclosure.

Remedies. A contract induced by misrepresentation is voidable, not void. It remains in force unless and until the misrepresentee elects to rescind it. Rescission is available whether the misrepresentation was fraudulent, negligent or wholly innocent. Damages are recoverable for fraudulent misrepresentation. Under s 3(1) of the Misrepresentation Act, damages are also recoverable against the other contracting party for a non-fraudulent misrepresentation. The exception is where that party proves that it had reasonable ground to believe, and did believe up to the time the contract was made, that the facts represented were true. The burden of proof therefore rests on the representor. Where the misrepresentation was not fraudulent, the court may declare the contract subsisting and award damages in lieu of rescission, if it considers that equitable (s 3(2)). The right to rescind is not lost merely because the misrepresentation has become a term of the contract or the contract has been performed (s 2).

Bars to rescission. The right to rescind is lost in four situations:

• the misrepresentee affirms the contract with knowledge of the misrepresentation;
• there has been undue delay;
• an innocent third party has acquired rights in the subject matter for value; or
• restitutio in integrum, the restoration of both parties to their original positions, is no longer possible.

In the case of an innocent misrepresentation, delay may bar rescission even before the truth is discovered, where the misrepresentee failed to verify the statement within a reasonable time.

Exclusion of liability. A contract term that excludes or restricts liability for misrepresentation, or the remedies available for it, is of no effect except in so far as it satisfies the requirement of reasonableness. The burden of establishing reasonableness lies on the party relying on the term (ss 4 and 5).

Practical implications

Misrepresentations commonly concern the history or condition of property sold, or the turnover or existing contracts of a business that is sold. They also arise where a positive statement about a business's circumstances omits a material qualification, such as notice that a key contract is to be terminated.

A clause stating that goods are sold "as is", or that the buyer has not relied on any representation, does not automatically protect a seller who made false statements. Such a clause must satisfy the requirement of reasonableness.

Where the statement was incorporated as a term of the contract, the misrepresentee may also have a claim for breach of contract.

Recommended steps

Upon discovering the misrepresentation, the misrepresentee should refrain from any use of or dealing with the subject matter that may be construed as affirmation of the contract.

The misrepresentee should notify the other party in writing, without delay, that the contract is rescinded on the ground of misrepresentation, and should offer to restore what was received under it.

The evidence should be preserved: advertisements and listings, brochures, correspondence and messages, and the names of any persons who witnessed the representations. Online listings should be captured immediately, since they are liable to be altered or removed.

Advice should be obtained at an early stage on whether to rescind or to affirm the contract and claim damages. The appropriate course depends on the consequences of each.