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Contract Law: Negligent Misrepresentation

Thursday, 3 May 2012

Misrepresentation is a false statement of fact made by one party to another, which can induce a party to enter into a contract. A negligent misrepresentation is a statement that is made carelessly or without reasonable grounds for believing it to be true.

Negligent misstatement existed first under the common law and was later introduced into statute as misrepresentation in the Misrepresentation Act 1967. The evolution of this area of law produced subtle changes that have important implications for contracting parties today.

Misrepresentation at Common Law

Hedley Byrne v Heller [1964] is an early case that dealt with the concept of misstatement and its use as a basis for founding an action in negligence based on verbal or written statements. Originally, the claimant had to show proof of a special relationship existing between the parties that gave rise to a duty of care. The claimant then had to show that defendant's negligent misstatement had caused financial loss.

According to Esso Petroleum v Mardon [1976], such a duty of care could exist in a relationship where the representor had, or purported to have, a special skill or knowledge that he knew, or reasonably ought to have known, would be lead to the claimant relying on his representation to enter into a contract.

Misrepresentation Act 1967

The introduction of the Misrepresentation Act 1967 saw the evidential requirements change and the burden of proof shift somewhat; section 2(1) states:

"Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true."

This meant that a person induced to enter into a contract due to a misrepresentation no longer needed to establish a duty of care. It also reversed the burden of proof in that the defendant had to show he believed, and had reasonable grounds to believe, that the statements he made were true rather than the claimant having to show that the defendant knew the statements were not true.

The reference in s2(1) to damages for fraudulent misrepresentation effectively meant that the damages available in a claim for negligent misrepresentation would be the same as those available for fraudulent misrepresentation.

If you need advice regarding misrepresentation or other contractual issues, Rollingsons has experienced lawyers who can assist you; for more information please contact James Crighton via e-mail or by telephone on 0207 611 4848.