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No matter what kind of activities your business is engaging in, it’s likely you’ll be entering into a contract to protect yourself from key risks. So, when entering into contracts, it’s important for all parties involved to be as transparent with each other as possible.

What you say outside of the contract can be just as important as the terms of the contract itself as one party may end up signing a contract based on this, even if it is not true. When this happens, it can amount to fraudulent misrepresentation, which is something that should be avoided at all costs. Keep reading to learn more.

What Is Misrepresentation?

Misrepresentation is an action or a statement that depicts a false statement regarding something. Essentially, it’s a lie either by statement or omission.

Example
Charlie is selling clothing on an online marketplace. A potential buyer asks Charlie if the garments are made from 100% organic cotton. Charlie is unsure about this but decides to reply yes in order to secure the purchase. Charlie blatantly misrepresented the items.

What Is Fraudulent Misrepresentation?

Fraudulent misrepresentation can occur when creating a contractual relationship. In order to get a party to sign the agreement, one party may make a misrepresenting statement in order to get the other party to sign the contract. This is known as fraudulent misrepresentation, and it is highly unethical.

This is enforceable under Australian law.

However, it’s common to confuse misrepresentation with misleading and deceptive conduct. While they are similar, they are not to be used interchangeably as they represent different concepts.

Misrepresentation Vs Misleading And Deceptive Conduct

Misleading and deceptive conduct is largely seen in consumer law, where the seller misrepresents something to their buyer. Misleading and deceptive conduct is forbidden under section 18 of the Australian Consumer Law (ACL). There are a range of things that can constitute as misleading and deceptive conduct, such as:

Statements
Omissions
Body language
Predictions

While this is similar to misrepresentation, they are different. Misrepresentation is found in common law, whereas misleading and deceptive conduct is legislated and enforceable under the ACL.

It’s more common for people to rely on the ACL when making misrepresentation claims due to the broad wording of the legislation, as opposed to the law of misrepresentation.

However, it’s important to note that the ACL has limits. More specifically, it applies strictly to ‘consumer contracts’ (according to their definition) and the price of the goods does not exceed $40,000. It is also a requirement that the goods are not for resale purposes.

The key takeaway here is that misrepresentation becomes the better option where the ACL doesn’t apply. So, it’s important to understand how both of these legal concepts work.

Fraudulent Misrepresentation In Contract Law

As fraudulent misrepresentation is not a term of the contract itself (the misrepresentation was made outside of the contract), it cannot constitute a breach of the contract. However, this does not make it legal or mean there aren’t remedies for it.

A court can grant damages or rescind a contract that was found to be signed under fraudulent misrepresentation. In order to assess whether fraudulent misrepresentation has occurred, courts look to see whether three elements have been satisfied:

The misrepresentation must be a statement of fact
It must be a positive and active statement (unless a duty of disclosure applies)
The deceived party must signed the contract by relying on that statement

In other words, they will look to assess whether a reasonable person would have been led to believe the misrepresentation.

Remedies For Fraudulent Misrepresentation

As stated above, the remedies for fraudulent misrepresentation include seeking damages or rescinding the contract.

If a contract is rescinded, it will cancel the contract completely. The parties will be put in the position they were in before they signed the contract, meaning it will be as if the contract never existed. Neither party will be obligated to perform their contractual obligations.

However, there are times where rescinding the contract simply won’t suffice as a party has already incurred a loss due to the misrepresentation. In this case, the available remedy is to seek payment for damages.

If the contract has been found to breach the ACL(specifically evading the principles of the section 18, which deals with misleading and deceptive conduct), then much higher damages can be sought.

How Can I Avoid Fraudulent Misrepresentation?

It’s important to take steps that will prevent you from becoming an instigator or victim to fraudulent misrepresentation. Even though courts can offer remedies, it’s often a long and draining process – the best case scenario is avoiding it altogether.

As fraudulent misrepresentation occurs in contracts, the terms of the contract are very important here. If you want to avoid getting caught up in someone else’s misrepresentation, make sure all your contracts have all the agreed upon terms written out clearly in the contract itself.

Getting accused of fraudulent misrepresentation can be extremely damaging to your business’ finances and reputation. As a business owner, it’s important to be transparent and clear when dealing with customers, clients and other businesses.

Once again, make sure your contracts reflect your intentions and avoid making false statements to secure an agreement.

Should I Have My Contract Reviewed?

It is essential to have your contracts reviewed by a legal professional to keep your business protected. An expert in contracts can take a look at your contractual terms and assess whether they are working in your best interests.. If not, you can always get them redrafted.

Our friendly team of contract lawyers are happy to chat with you – reach out to us today!

Key Takeaways

Fraudulent misrepresentation is not only detrimental to your business – it’s also illegal. Get your contracts reviewed to prevent such situations from arising. To summarise what we’ve discussed:

Misrepresentation is when a party is made to believe something that is untrue
Fraudulent misrepresentation is when someone enters into a contract based on a lie
Misleading and deceptive conduct applies mainly to consumer contracts and is enforceable under the ACL
Fraudulent misrepresentation cannot amount to a breach of contract law as the misrepresentation occurred outside of the terms of the contracts, however, courts can still award damages or rescind the contract
In order to avoid fraudulent misrepresentation, get your contracts reviewed by a legal professional

If you would like a consultation on fraudulent misrepresentation, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Sapna Goundan

Sapna has completed a Bachelor of Arts/Laws. Since graduating, she's worked primarily in the field of legal research and writing, and she now writes for Sprintlaw.

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