In Short
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Negligent misrepresentation arises where a false statement carelessly made induces a business to enter a contract.
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Claims under the Misrepresentation Act 1967 can lead to rescission of the contract and damages.
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Contract terms and delay in acting can limit or prevent these remedies.
Tips for Businesses
Before signing a contract, verify important statements and keep written records of what you relied on. Ask for evidence where claims affect price, performance, or risk. Review contracts for entire-agreement or non-reliance clauses, as these can restrict remedies. If you make statements to customers, ensure sales and marketing materials are accurate and regularly reviewed.
Summary
This article explains negligent misrepresentation under the Misrepresentation Act 1967 for business owners operating in England and Wales and outlines how it can affect contractual rights and remedies. Prepared by LegalVision, a commercial law firm specialising in advising clients on contract disputes and misrepresentation claims, it guides businesses through the legal principles, risks, and practical steps to reduce exposure.
Table of Contents
When negotiating contracts, businesses will often rely on what the other party says about:
- products;
- services; or
- any specific guarantees.
If any statements turn out to be false and a business signs the contract, there may be important legal remedies available to the innocent party under the Misrepresentation Act 1967.
Negligent misrepresentation can have serious financial and legal consequences. Understanding how negligent misrepresentation works can help you protect your business before signing agreements and understand your options if problems arise.
This article provides a high-level introduction to negligent misrepresentation, potential implications for a business, and practical steps to help reduce risk.
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Understanding Negligent Misrepresentation
The business market is highly competitive, with many suppliers offering similar services and trying to stand out to win new clients. During negotiations, meetings, or marketing correspondence, businesses will often make statements that influence decisions to sign contracts. Some of these statements will ultimately become part of the final written agreement, while others do not. But if a false or misleading statement persuades a business to enter a contract, it can result in significant legal consequences.
Negligent misrepresentation under the Misrepresentation Act 1967 arises when one party carelessly makes a false statement (or lacks reasonable grounds for believing it to be true), and the other party relies on that statement when entering the contract. The test is objective, and once the relying party shows that the statement was false, the person who made it must prove that they had reasonable grounds to believe that the statement was true.
Negligent misrepresentation can arise when a person fails to verify facts before making claims. The misrepresentation must go beyond sales talk; it should involve an untrue statement of fact or law that induces a party to enter the contract.
Negligent Misrepresentation and Misstatement Differences
There is often confusion between the legal terms ‘negligent misrepresentation’ and ‘negligent misstatement’.
A negligent misstatement happens when someone makes a careless statement in circumstances where they owe the other party a duty of care. This can exist even when no contract is in place.
By contrast, a claim for negligent misrepresentation under the Misrepresentation Act 1967 only arises between contracting parties or their agents.
Continue reading this article below the formHow Can Negligent Misrepresentation Affect a Business?
Negligent misrepresentation can cause significant legal and business problems. It may result in:
- financial losses;
- reputational damage; and
- complex disputes that consume time and resources.
If a business makes a negligent misrepresentation, the innocent party may pursue remedies such as rescission of the contract and damages. Rescission allows both sides to return to the position they held before the agreement, effectively cancelling the contract. Damages seek to compensate the innocent party for the loss they suffer because of the false statement.
However, there are important obstacles that can potentially impact negligent misrepresentation remedies, for example:
- Contracts may include clauses that limit liability for pre-contractual statements, such as entire-agreement or non-reliance clauses. These clauses could limit or exclude remedies for misrepresentation.
- If a business continues to perform under a contract after discovering a false statement, courts may treat that conduct as acceptance of the false statement. This could affect the business’s legal rights.
Reducing the Risk of Negligent Misrepresentation
Negligent misrepresentation claims can be challenging and uncertain; therefore, it is sensible to take practical steps to mitigate risk when entering into new agreements.
You can take practical steps to reduce your everyday risk of negligent misrepresentation as a business customer. For example, you can reduce risk by negotiating carefully and keeping clear records. You should record key statements and verify information that affects your decision to enter into a contract through robust due diligence. Remember to ask for written confirmation or supporting evidence if a statement seems:
- unclear;
- exaggerated; or
- uncertain.
Before signing a new contract, check whether it includes terms that limit or exclude liability for misrepresentation. Clauses stating the contract is the entire agreement, or that you did not rely on earlier statements, can reduce your options if a negligent misrepresentation later arises. If you are unsure how any clauses could affect your rights or remedies, seek legal advice before signing.
If you act as a supplier, it is important to take proactive steps to avoid negligent misrepresentation. Ensure that your staff (especially in sales and marketing) understand the risks of making unverified claims. Train employees to review every statement in brochures, materials, and emails to ensure they are:
- accurate;
- up to date; and
- supported by evidence to avoid the risk of negligent misrepresentation.
Taking Action If You Suspect Misrepresentation
If you think a contract you entered into was based on false information or are unsure about your legal position, your business should act quickly and seek professional legal advice. Before making any decisions, a disputes lawyer can:
- review your situation;
- explain your rights and potential remedies;
- determine whether any type of misrepresentation claim applies; and
- support you in making a claim.
Key Takeaways
The law provides important remedies for parties who enter into contracts based on false or misleading information. Negligent misrepresentation occurs when a party carelessly makes a statement that another party relies on when entering into the contract. While the law offers remedies, proving them can be challenging and may lead to disputes. Prevention is therefore essential, and you should take steps to avoid negligent misrepresentation risks as both a business customer and supplier.
Negligent misrepresentation is highly complex, and businesses should take legal advice if they require support in understanding how this may apply to their circumstances.
LegalVision provides ongoing legal support for businesses through its fixed-fee legal membership. Our lawyers help businesses in the recruitment industry manage contracts, employment law, disputes, intellectual property, and more. Members receive unlimited access to specialist lawyers for a fixed monthly fee. To learn more, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Negligent misrepresentation can occur through statements made before a contract is signed, such as claims made during negotiations, in emails, or in marketing materials. To avoid risk, ensure all facts about products, services, or abilities are accurate and verified. Even an honest but careless mistake can create liability if it affects the other party’s decision to sign.
If your business makes false statements during negotiations and customers rely on them when deciding to sign a contract, then those customers may be able to make a misrepresentation claim against your business. Negligent misrepresentation is one such claim and essentially concerns careless statements made without grounds for believing they are correct.
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