Misrepresentation is the giving of false information by one party (or their agent) to the other before the contract is made, which induces them to make the contract. If a person makes a contract in reliance on a misrepresentation and suffer loss as a result, they can cancel the contract or claim damages.
The false statement must be one of fact, as opposed to a statement of opinion or a promise. For example, a seller saying that their property is worth $150 000 is expressing an opinion, but a seller saying that they paid $150 000 for it is making a statement of fact. A promise cannot be a misrepresentation because the statement made is about the future, and cannot be true or false at the moment it is made. Some factual statements in advertisements, such as 'this vehicle is equipped with passenger airbags and ABS braking' are statements of fact and can be misrepresentations if false.
Some latitude is allowed to people selling privately to make statements commending an article in order to arouse interest in potential buyers. Rather than relying on the seller's statements, a person should carefully inspect the item themselves, and if necessary, have an expert examine, test or value it prior to purchase.
A misrepresentation is innocent where a trader believes that the statement they are making is true and consequently has no intention to deceive the buyer. It is fraudulent where the trader makes the statement knowing it to be false or without believing in its truth, or without caring whether it is true or false. In that case, the trader may be guilty of the offence of fraud as well as misrepresentation.
Disputes often arise over whether a misrepresentation has occurred and the nature and extent of that misrepresentation. Legal advice should be sought in these circumstances.
It is a defence to misrepresentation if the person making the statement can show that they believed on reasonable grounds that it was true, or that someone else made the statement and they had no reason to know that it was made, or was not true.
If a misrepresentation is relied upon in entering a contract, a person can:
- seek to rescind (cancel) the contract; or
- sue for damages to compensate for any loss.
Rescinding a contract
It is important to attempt to rescind the contract as promptly as possible once a misrepresentation is discovered. The right to rescind may be lost if a person waits too long to seek to rescind it. The right can also be lost if:
- the person trying to rescind the contract has in some way acted unfairly; or
- the person trying to rescind the contract knows of the misrepresentation and of the entitlement to rescind, but does something which shows that they still want to continue with the contract; or
- a party to the contract cannot be restored to substantially to the position they were in before the contract was made, for example, if the goods have been used or damaged; or
- a person who is not a party to the contract has obtained some right over the goods and would suffer if the contract were set aside.
A contract can be rescinded by one party advising the other party. If the contract deals with goods, the goods should be returned in good condition. If the other party accepts this, the contract ends. However, if the other party still wants to go on with the contract, there may be a dispute which could result in court proceedings.
As an alternative to rescission, a person can sue for damages as a result of relying upon a misrepresentation. The court will consider whether the statement was a misrepresentation, whether it was relied upon in entering the contract, and whether loss has been sustained. The person accused of misrepresentation may not be ordered to pay damages if they can prove either of the following:
- that they had reasonable grounds to believe and did believe the statement was true; or
- that someone else made the statement, for example an employee, and the person did not know and could not reasonably be expected to know that the representation had been made or that it was untrue.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.