What Is Misrepresentation In Contract Law?

Misrepresentation occurs when a consumer enters into a contract based on untrue or misleading information. In simple terms, it is where a false statement is made that encourages an innocent party to enter into that agreement. 

Consumers and businesses enter into contracts all the time, so when they agree to do something based on something that doesn’t turn out to be true, they may have legal rights or claims they can make against the person or business who they have contracted with. 

How Does Misrepresentation Work?

If you’re a business that engages in the sale of goods and services, it’s important to know how misrepresentation works as it can affect the way you market or sell your goods and services, and how you run your business. 

Generally, for a statement to amount to misrepresentation, it must be a purported statement of  fact, and not just an opinion). However, if it is an opinion about something you plan to do in the future, it may amount to misrepresentation if you never intended on fulfilling that plan. 

Additionally, the statement needed to have been a primary factor in convincing the other party into agreeing to the contract and must also be proven to be wrong or false. It is important to note that statements do not have to be made in words to constitute misrepresentation – they can be implied in actions or omissions (e.g. where you fail to mention something important). In some circumstances, your body language can constitute or contribute to misrepresentation.

If someone enters into a contract based on misleading information and suffers loss as a result, they may be able to make a claim for misrepresentation

Furthermore, they may also be able to make a claim for misleading and deceptive conduct under the Fair Trading Act 1986. We’ll explain this in a bit more detail later – keep reading to learn more!

Types Of Misrepresentation

There are three common types of misrepresentation. 

1. Innocent misrepresentation: This occurs when there was no intention to provide false or misleading information to the other party.
   
2. Fraudulent misrepresentation: If a party to the contract makes deliberate, false statements regarding something in order to persuade the other party into the contract, they have committed fraudulent misrepresentation.
   
3. Negligent misrepresentation: This happens when a care has not been taken to ensure something is not misrepresented. Negligent misrepresentation differs from innocent misrepresentation as there may have been no intent to deceive, but their actions broke a duty of care to ensure nothing could be misinterpreted. 

So, to avoid any type of misrepresentation, you need to take the right steps to ensure that what you communicate to your consumers around the sale of goods and services is crystal clear. 

If something should have been communicated or represented but you remained silent, this could also amount to misrepresentation. 

Misrepresentation vs Misleading & Deceptive Conduct

Misrepresentation is a concept under the law, which means that if it occurs, one party can sue another party for misrepresentation and seek damages (or other remedies). 

The Contract and Commercial Law Act 2017 talks about damages for misrepresentation that has occurred during a contractual agreement. 

In addition to this, section 9 of the Fair Trading Act contains an express prohibition on ‘misleading and deceptive conduct’, which prohibits businesses from engaging in any conduct that is misleading or deceptive to consumers inducing them to purchase those goods.

This means misrepresentation is an important concept, in both contract and consumer law. 

What Is Considered Misleading Or Deceptive Conduct?

In order for a statement to be considered misleading or deceptive, it must be some representation about your goods or services (for example, the size, quality or colour) that will, or is likely to, make the consumer draw the wrong conclusion. 

If you’re a business owner, it’s crucial that you ensure you or anyone that represents your business or its products or services doesn’t engage in misleading or deceptive conduct. In addition to creating a bad reputation, it can result in a breach of the Fair Trading Act, loss of reputation and potential legal claims from customers.

Example Let’s say Jack runs an online clothing store that specialises in selling highly valued vintage clothing.  On his site, he has a range of Champion sweaters and hoodies. There is a clear description on his site where he proudly announces that all of the clothing he sells is 100% vintage.  Nancy wants to buy one, however she is hesitant as it costs $120 and she feels that it isn’t really worth it. Jack reminds her that all the clothing is vintage and is therefore of higher value. He also tells her that he originally bought the sweater for $250, so the $120 is actually a good deal for a sweater of that brand and quality.  Nancy agrees, and purchases the sweater.  Later that week, Nancy tells a friend about her new sweater. Her friend warns her that she bought from Jack’s online store before and discovers that he simply resold sweaters that he found on Etsy that were not vintage at all.  Jack has likely engaged in both misleading & deceptive conduct as well as fraudulent misrepresentation. Nancy may be able to report Jack to the Commerce Commission, who could issue Jack with a fine or penalty, as well as make a claim in court against Jack for damages.

What Is Mere Puffery?

There can be a fine line between a misleading claim and an exaggerated sales pitch. To recognise this, courts have tried to establish a difference between representations that are ‘mere puffery’, i.e. exaggerated representations that are legally acceptable, as opposed to misrepresentation or misleading & deceptive claims, which are unlawful. 

Mere puffery is the obvious overselling and exaggeration of a product. Mere puffery is legally acceptable, and a business will not be held to be liable for misrepresentation where the statement can be shown to be ‘mere puffery’. 

Mere Puffery vs Misrepresentation: What’s The Difference?

The key difference between misrepresentation and puffery is the intention. Puffery is an indistinct, elaborate, overdone statement that cannot reasonably be taken to be true. It will not be taken to constitute a binding promise. 

Misrepresentation, on the other hand, can be taken to be true by a reasonable person. For example, if a seller of furniture or jewellery claims a product is of higher value since it is an antique, and it turns out to be a modern product made to look antique, this is misrepresentation. A reasonable person would believe this statement to be true if represented to them.

What Does Case Law Say?

The term ‘mere puffery’ actually originated from the case of Carlill v Carbolic Smoke Ball Company in 1892, where Carbolic Smoke Ball Co put out an advertisement offering anyone who caught influenza after purchasing their product. The ad also stated that Carbolic had deposited 1000 pounds in the Alliance Bank to demonstrate their ‘sincerity in the matter’.

Well, Mrs Carlill did get the flu despite using the product, and so she sued the company! Carbolic refused to pay, on the basis that the reward was simply a marketing pitch.

In this case, the court held that Carbolic did have to pay because their advertisement was not mere puffery. By depositing 1000 pounds in the bank account, and clearly offering to make a payment, the advertisement was clearly intending to appear sincere and not to be taken as mere puff.

More recently, there have been many cases where major companies have been accused of misrepresentation. 

In 2016, the popular ‘brain training’ game app Luminosity was fined for claiming to make people smarter, despite there being no real evidence for this. Volkswagen has been under the same scrutiny for making false, environmentally friendly claims (this is also known as greenwashing). 

Red Bull faced a lawsuit in 2014 for promising better concentration and reaction speeds. The energy drink manufacturer claimed it was puffery, but the courts ruled it was much too specific to be considered puffery. So, it was deemed false advertising, causing them a multimillion dollar loss. 

Consequences of Misrepresentation

Engaging in misrepresentation or misleading and deceptive conduct can result in a financial loss for your business. If someone feels they have been deceived, they may be able to sue for damages, or in some instances report you to the Commerce Commission  – which could result in fines or penalties to your business as well as loss of reputation.

Key Takeaways

When you’re planning your marketing or sales materials, it’s important to be careful about what you say and how you say it – and if in doubt, it’s best to check your wording or processes with a legal professional.

Otherwise, you may be at risk of engaging in misrepresentation or misleading and deceptive conduct, and you could face fines, penalties or loss of reputation!

If you would like a consultation on your options moving forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

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