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Fraudulent misrepresentation: How to prove it and how to deal with it

Fraudulent misrepresentation is the most grave type of misrepresentation and is taken very seriously by the courts.

It arises when someone relies on false information presented to them and as a result enters into a contract. An example would be buying something or entering into a business deal based on information that turns out not to be true and where an element of fraud was involved.

What are the different types of misrepresentation?

What is fraudulent misrepresentation?

Fraudulent misrepresentation is when a false statement is dishonestly made to someone and that person relies on the statement, enters into the deal, and then suffers a loss as a result. If you are bringing a fraudulent misrepresentation claim, you will need to demonstrate the following:

• A false representation was made to you;
• knew that it was false; or
• had no belief in its truth; or
• was reckless as to whether it was true or false
• The person who made the statement intended that you should rely on it
• You relied on the statement
• You would not have entered into the contract, but for the misrepresentation
• You have suffered loss or damage as a result of the misrepresentation

The court will presume that the fraudulent representations made in a case have induced the claimant to take up the contract, unless there is strong evidence to rebut this presumption.

The statement will be false if it has an element of deception, deceit, dishonesty or fraud or if it is misleading.

The court will look at the case and decide whether, on the balance of probabilities it has been proved, ie. it is more likely than not that fraud has taken place.

Proving fraudulent misrepresentation

Your case will need to include substantial evidence of what happened before you entered into the contract, showing each of the above points. Where the defendant genuinely believed that the statement they made was true, they will have a defence to fraud, although they may still have misrepresented the situation to you. Even if there is a valid defence to negligent misrepresentation, you could have a claim for negligent misrepresentation or innocent misrepresentation .

Examples of fraudulent misrepresentation include selling something that is faulty and claiming that it is in good working order or providing falsified or inaccurate documents, such as annual accounts, before entering into a business deal.

The misrepresentation can be verbal or written and could take place in emails, advertising content, discussions, promotions or exaggerated claims. It could be implied, provided that a reasonable person would have drawn a similar inference from the words or conduct.

It could arise because initial facts that were true subsequently changed, but the other party did not notify you of this.

Remedies for fraudulent misrepresentation

If you have been the victim of fraudulent misrepresentation, the court can choose to rescind the contract. This means that the contract will be set aside with the aim of restoring you to the position you would have been in, had you not entered into the contract.

The court can also make an order for damages. This can be instead of or as well as recission. The amount awarded will be to compensate you for your losses. All consequential losses may be covered and these losses do not have to be foreseeable.

The amount awarded will not be related in any way to whether the defendant profited from the fraud. Their profit is not taken into account, only the loss to the claimant.

A claim can generally still be brought, even if the contract contains a time restriction or exclusion clause as these will not usually override a case of fraud.

A claimant should not act unreasonably in failing to stop losses once they are aware of the breach.

Dealing with fraudulent misrepresentation

If you believe that you have entered into a contract on the basis of fraudulent misrepresentation, you are advised to seek legal advice promptly. It will be necessary to put together a substantial amount of evidence and the sooner a solicitor is able to request disclosure, the more likely it is that the relevant documents will be available.

If you ask us to represent you, we will go through what has happened with you and establish the facts. We will also look at the available evidence as well as the documents we should be able to obtain from the other party.

We will give you an assessment of the strengths and weaknesses of your case. If you decide to go ahead with a claim, we will notify the other party and ask for their response.

They may agree to enter into negotiations, in which case, we can try to resolve matters out of court. Otherwise, we will put a robust case together on your behalf. This will include making requests for disclosure of all relevant documents.

If you win your case, you can usually expect the court to award you your legal costs as well as the remedies that it considers appropriate.

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• Company & Commercial
• White Collar Crime
• Lincoln & Rowe
• Misrepresentation

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Fraudulent Misrepresentation

By Jade Chounlamountry, Esq. | Legally reviewed by Aviana Cooper, Esq. | Last reviewed June 06, 2024

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.

Legally Reviewed

This article has been written and reviewed for legal accuracy, clarity, and style by  FindLaw’s team of legal writers and attorneys  and in accordance with  our editorial standards .

Fact-Checked

The last updated date refers to the last time this article was reviewed by FindLaw or one of our  contributing authors . We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please  contact an attorney in your area .

People who own small businesses know that most deals they make, like handshakes, count as contracts.  Contract law  mainly governs how rights move from one person to another. It makes sure everyone follows the rules on which they agreed.

In any contract, both sides must understand and trust each other. But if one side lies or tricks the other into the contract and causes harm, the damaged party can sue for fraudulent misrepresentation.

Understanding Misrepresentation and Its Types

Misrepresentation  in  business law  means showing untrue information as if it's true. In small businesses, this can cause significant financial problems. It can also make you miss chances and even get you into legal trouble.

There are many types of misrepresentation. The three primary types of misrepresentation are innocent, negligent, and fraudulent misrepresentation.

• Innocent misrepresentation  occurs when a party makes a false statement, believing it to be true, without any intent to deceive. While it does not involve dishonesty, it can still lead to legal consequences.
• Negligent misrepresentation  occurs when a party doesn't check their facts. In some instances, perhaps they didn't have a good reason to believe what they said was true. This demonstrates a degree of carelessness.
• Fraudulent misrepresentation  is the most severe form. Fraudulent misrepresentation means intentionally tricking someone into a deal or agreement by knowingly giving them false information.

False representation can greatly affect you, whether you're a prime contractor working with subcontractors or a small business dealing with government contracts.

Fraudulent Misrepresentation and Contract Law

In contract law, fraudulent misrepresentation happens when someone tricks another person into signing a contract by lying or hiding important facts. This goes against the basic idea that contracts should be honest and fair.

If proven in court, the party who was tricked can:

• Cancel the contract
• Get money to cover their losses
• Make the deceptive party pay extra as a punishment (in some cases)

This concept is in place to make sure  business contracts  are made with trust and honesty between the people involved.

Fraudulent misrepresentation claims can also stem from reckless statements. For example, say a negotiator makes a claim about the company that they aren't sure is true. In these cases, the person making the statement recklessly convinces the other party to enter the contract.

The Role of Small-Business Concerns and Government Contracts

Small businesses that work with government contracts often face accusations of misrepresentation. Federal rules, such as the  Code of Federal Regulations  (CFR), stress the need to be honest when dealing with government purchases. The Small Business Act and the  Small Business Administration  (SBA) protect the interests of small businesses trying to get government contracts.

Procurement becomes a critical concern in subcontracting arrangements. Small businesses must meet criteria to benefit from set-aside contracts reserved for them. Representing the small business's status and capabilities in good faith is essential.

Protecting Small-Business Interests

To combat misrepresentation, the submission of a bid comes under scrutiny. Certifying your small business's size and qualifications is a big deal. If these certifications are false, it can lead to severe consequences. The  False Claims Act  and the  Program Fraud Civil Remedies Act  offer ways to deal with business fraud and false statements in federal contracts. This could mean hefty fines and penalties.

For small businesses, understanding misrepresentation claims is crucial to avoiding legal pitfalls. Partnering with professionals in business law and government contracts can provide essential guidance. It's important to follow the rules to reduce the risk of misrepresentation. Check whether subcontractors are eligible and do thorough research before submitting bids.

Limitation of Liability and Material Facts

In commercial disparagement, the principle of limitation of liability gains prominence. Businesses may include disclaimers to limit their exposure to specific fraud claims. However, they are still responsible for providing accurate and transparent information in good faith. Parties should disclose facts essential to the decision-making process to prevent false representation.

Remedies for Fraudulent Misrepresentation

Actual damages for fraudulent misrepresentation can include  rescission  of the contract and  damages . Rescission of the contract is the most common remedy. Rescission renders the contract voidable (instead of simply "void").

If this is not possible, the parties may keep the contract. This restores the parties to their pre-contractual positions. You can claim damages only for actual losses caused by the type of  fraud .

Questions About Fraudulent Misrepresentation? Contact an Attorney

If you're facing a lawsuit or think you entered into a contract under false pretenses, there's a lot at stake. Depending on the nature of your case, the key to your success in court may come down to just one tiny detail of fact. Speak with a skilled  business lawyer  today to learn about your options.

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Fraud act 2006, introduction, overlap with theft and other offences, use of cheques and cheque or credit cards, the borderline between criminal and civil liability, arguments over ownership of property, loss to a third party, fraud by false representation (section 2), drafting the charge, possession of articles for use in fraud (section 6), making or supplying articles for use in frauds (section 7), charging practice, liability of company officers for offences by company (section 12), false representation, untrue or misleading, gain or loss, failure to disclose information, establishing a legal duty, abuse of a position, possession or control, obtains for himself or another, evidence of spouse/partner (section 3).

The Fraud Act 2006 (the Act) came into force on 15 January 2007 and applies in England, Wales and Northern Ireland.

The Act repealed the following offences:

Theft Act 1968 

• Section15 (obtaining property by deception); 
• Section15A (obtaining a money transfer by deception); 
• Section 16 (obtaining a pecuniary advantage by deception); 
• Section 20(2) (procuring the execution of a valuable security by deception); 
• Reference to "cheat" in Section 25 (going equipped).

Theft Act 1978 

• Section 1 (obtaining services by deception); 
• Section 2 (evasion of liability by deception).

These offences continue to apply for any offences committed before 15 January 2007.

When it is uncertain when a relevant event occurred and it may have happened before, on or after 15 January 2007 prosecutors should request that police obtain as much information as possible to assist in identifying the date on which any relevant events occurred.

In cases when the uncertainty cannot be resolved it is proper practice to put alternative counts on the indictment under the 2006 Act and the previous legislation. R v Bellman [1989] AC 836 held that mutually exclusive counts on a single indictment can be left to the jury where there is a prima facie case on both.

Charging Practice

In many cases fraud will also be theft. Prosecutors should bear in mind: 

• Theft carries a lower maximum sentence; 
• The actus reus requirement for fraud is far less; 
• The credit/debit status of any bank accounts debited is irrelevant to the Fraud Act offences. All that is in issue is the Defendant's right to use the account; 
• It is not necessary to prove or demonstrate any consequences of fraud (though they will clearly be material to sentence, compensation and confiscation). "Preddy" type difficulties will not arise (where the property obtained had not belonged to another); 
• Fraud Act offences do not require an intent permanently to deprive; 
• A charge should describe what actually happened and reflect the true criminality; and 
• The indictment should be as simple as reasonably possible.

In some cases there will be other possible offences such as False Accounting (section 17 Theft Act 1968), Making off Without Payment (section 3 Theft Act 1978), Obtaining Services Dishonestly (Section 11 Fraud Act 2006), offences under the Computer Misuse Act 1990, Forgery and Counterfeiting Act 1981, the Identity Cards Act 2006, the Proceeds of Crime Act 2002 or the Financial Services and Markets Act 2000.

Prosecutors must decide which offence properly reflects the criminality concerned.

The focus of the charge is the false representation. In most cases this will be the same as the deception under the old Theft Act offences. Prosecutors must analyse what the representation was and importantly when it was made, as simply as possible, for example:

In the case of stolen documents the false representation may be that the defendant was lawfully in possession of the cheque/credit card/book and entitled to use it or that he was the person named on the cheque/credit card/book and entitled to use it.

If the defendant is using his own credit card knowing that he has exceeded his credit limit then the false representation will be that he had authority to use the card and that the card issuer would honour the transaction ( R v Lambie [1982] A.C. 449 HL) If the documents are forged then the false representation would be that the document was genuine and would be honoured.

If the representation was made in a letter which was discovered during the search of the suspect's property, then whether it was sent or not may be irrelevant to the fact that the representation was false, dishonest and intended to be sent.

The borderline between criminal and civil liability is likely to be an issue in alleged Fraud Act offences particularly those under Section 1. Prosecutors should bear in mind that the principle of caveat emptor applies and should consider whether civil proceedings or the regulatory regime that applies to advertising and other commercial activities might be more appropriate. Not every advertising puff should lead to a criminal conviction but it is also the case that fraudsters prey on the vulnerable.

Prosecutors should guard against the criminal law being used as a debt collection agency or to protect the commercial interests of companies and organisations. However, prosecutors should also remain alert to the fact that such organisations can become the focus of serious and organised criminal offending.

The criminal law should not be used to protect private confidences.

The criminal law is not a suitable vehicle to regulate such disputes. Before a criminal charge can proceed the ownership of any property must be absolutely clear. If that ownership is in real dispute the criminal law should not be invoked until ownership has been established in the civil courts.

However, circumstances will arise where the issues are clear and the offences are serious. If so, prosecution may be required in the public interest. Prosecutors should ensure that the state of affairs between the parties has not changed prior to any trial. This may affect both the public interest and the evidential test.

Section 80 of the Police and Criminal Evidence Act 1984 governs the compellability of spouses and civil partners in criminal proceedings. The prosecution cannot compel a spouse or civil partner to give evidence in Fraud Act offences.

Where there is a domestic relationship between the victim and an offender, there may also be a loss to a third party: for example, where a child steals and uses a parent's credit card. There may be public interest in criminal proceedings for the use of the card even where there is none for the theft.

The Offences

Section 1 creates a general offence of fraud and introduces three ways of committing it set out in Sections 2, 3 and 4. 

• Fraud by false representation (Section 2); 
• Fraud by failure to disclose information when there is a legal duty to do so (Section 3); and 
• Fraud by abuse of position (Section 4).

In each case: 

• the defendant's conduct must be dishonest; 
• his/her intention must be to make a gain; or cause a loss or the risk of a loss to another. 
• No gain or loss needs actually to have been made. 
• The maximum sentence is 10 years' imprisonment.

The defendant: 

• made a false representation 
• dishonestly 
• knowing that the representation was or might be untrue or misleading 
• with intent to make a gain for himself or another, to cause loss to another or to expose another to risk of loss.

The offence is entirely focused on the conduct of the defendant.

Fraud by failing to disclose information (Section 3)

• failed to disclose information to another person 
• when he was under a legal duty to disclose that information 
• dishonestly intending, by that failure, to make a gain or cause a loss.

Like Section 2 (and Section 4) this offence is entirely offender focussed. It is complete as soon as the Defendant fails to disclose information provided he was under a legal duty to do so, and that it was done with the necessary dishonest intent. It differs from the deception offences in that it is immaterial whether or not any one is deceived or any property actually gained or lost.

The focus will be on: 

• the prosecution assertion that there was a legal duty to disclose information; 
• the precise relationship that gave rise to that duty; 
• the information that it is alleged that the defendant failed to disclose;

Whether the facts as alleged are capable of giving rise to a legal duty will be a matter for the judge; whether on the facts alleged, the relationship giving rise to that duty existed will be a matter for the jury. For example, was there a solicitor/client relationship or an agent/ principal relationship?

It will be necessary to recite all three elements in the particulars of the charge or indictment which must be very precisely drawn.

Any gain or loss that occurred should not appear in the charge or on the indictment. The matter will, however, be relevant to sentence, compensation and confiscation.

Fraud by abuse of position (Section 4)

• occupies a position in which he was expected to safeguard, or not to act against, the financial interests of another person 
• abused that position 
• intending by that abuse to make a gain/cause a loss

The abuse may consist of an omission rather than an act.

Like the other two Section 1 offences, Section 4 is entirely offender focused. It is complete once the Defendant carries out the act that is the abuse of his position. It is immaterial whether or not he is successful in his enterprise and whether or not any gain or loss is actually made.

As with all the Section 1 offences, though there need be no consequences to the offending, the existence and extent of those consequences will be very material to sentence, compensation and confiscation. It will still therefore be necessary to gather that evidence. In many instances it is the fact of the gain or loss that will prove the Defendant's dishonesty beyond reasonable doubt.

The focus will be on the nature of the relationship and of the specific abuse. If there is more than one instance or variety of abuse, additional charges will be required.

The nature of the relationship and of the abusive conduct alleged must be recited in the particulars of the charge or indictment.

• had possession or control of;
• an article;
• for use in the course of or in connection with any fraud.

The wording draws on Section 25 of the Theft Act 1968. The proof required is that the Defendant had the article for the purpose or with the intention that it be used in the course of or in connection with an offence.

A general intention that he or another will commit fraud (meaning an offence under Sections 1-4 of the Act) will suffice. In R v Ellames 60 Cr App R. 7 (CA) the Court of Appeal said:

"In our view, to establish an offence under Section 25 (1) the prosecution must prove that the Defendant was in possession of the article, and intended the article to be used in the course of or in connection with some future burglary, theft or cheat. But it is not necessary to prove that he intended it to be used in the course of or in connection with any specific burglary, theft or cheat; it is enough to prove a general intention to use it for some burglary, theft or cheat; we think that this view is supported by the use of the word "any" in Section 25 (1). Nor, in our view, is it necessary to provide that the defendant intended to use it himself; it will be enough to prove that he had it with him with the intention that it should be used by someone else."

Section 6 will apply in any case where "Going equipped to cheat" would previously have been charged.

The principal distinction between Section 25 and Section 6 is that Section 6 does not require the defendant to be away from his place of abode.

There is no defence of "reasonable excuse". Those who are, in particular, properly in possession of or involved in the development of computer software or other items for use to test the security of computer or security systems must rely on their lack of intention that the items or programmes are "for use in the course of or in connection with any fraud." Prosecutors will be alert to such circumstances and the possible abuses.

• makes, adapts, supplies or offers to supply any article;
• for use in the course of or in connection with fraud;
• knowing that it is designed or adapted for use in the course of or in connection with fraud (Section 7 (1) (a)) or 
• intending it to be used to commit or assist in the commission of fraud (Section 7 (1) (b).

"Knowledge" in Section 7 (1) (a) is a strict mens rea requirement. The House of Lords in Montila [2004] UKHL 50 said:

"A person may have reasonable grounds to suspect that property is one thing (A) when in fact it is something different (B). But that is not so when the question is what a person knows. A person cannot know that something is A when in fact it is B. The proposition that a person knows that something is A is based on the premise that it is true that it is A. The fact that the property is A provides the starting point. Then there is the question whether the person knows that the property is A."

In practice, the use to which the article can be put is likely to provide sufficient evidence of the defendant's state of mind. For example, articles such as: 

• the kits that are attached to ATM machines to capture card details; 
• forged credit cards or the equipment for making them; 
• lists of credit card numbers; 
• counterfeit goods presented as genuine;
• do not have an innocent purpose that readily springs to mind.

A person who makes an article specifically for use in fraud, for example, a software programme to create a phishing website or send phishing email, may be ambivalent about whether the person to whom it is supplied actually uses it for fraud. He will fall foul of Section 7 (1) (a) but will not have the necessary intention for Section 7 (1) (b).

The manufacturer of articles that are capable of being used in or in connection with fraud but have other innocent uses will not fall foul of this section unless he intends that it should be used in a dishonest way (Section 7 (1) (b)). The makers of credit card readers are one example. The readers have an innocent purpose they are commonly used by traders who "store up" the details of all the transactions carried out during a day and submit them all together at the end of the day. The card reader merely verifies the validity of the card at the point when it is read and stores all the necessary information about the transaction. The other, dishonest, use is by point of sale staff who use the readers to "skim" credit card details either for use or sale. The dishonest manufacturer who intended a dishonest use would be guilty of Section 7 (1) (b) offence.

Participation by sole trader in fraudulent business (Section 9)

Section 9 makes it an offence for a person knowingly to be a party to the carrying on of a fraudulent business where the business is not carried on by a company. The offence parallels the offence of fraudulent trading in section 458 of the Companies Act 1985.

Non-corporate traders covered by the new offence include sole traders, partnerships, trusts and companies registered overseas.

A defendant may commit an offence under Section 9 (2) (b) in the following ways: 

• knowingly being party to the carrying on of a company's business;
• with intent to defraud creditors of any person; or 
• for any other fraudulent purpose.

The phrase "to defraud creditors of any person" covers the situation where creditors are creditors of the business, but the business is not a legal person. The creditors could be creditors of individuals or of other related companies.

The term "fraudulent purpose" connotes an intention to go "beyond the bounds of what ordinary decent people engaged in business would regard as honest" R v Grantham [1984] 1Q.B. 675; 79 Cr App.R.86.CA; or "involving, according to the current notions of fair trading among commercial men, real moral blame" Re Patrick & Lyon Lt d [1933] Ch. 786, Ch D, per Maugham J. at p.790

Section 9 (3) (c) refers to section 718 (1) of the Companies Act 1985 which exempts certain types of bodies from fraudulent trading. That exemption also applies to section 9. The only exemption likely to concern prosecutors is that in section 718 (2) (b)

"Any body not formed for the purpose of carrying on a business which has for its object the acquisition of gain by the body or its individual members" i.e. a non profit making body cannot be guilty of fraudulent trading, though for example, the individual trustees of a charity can be guilty of offences.

Prosecutors should consider charges under this section where: 

• an individual conducts a "long firm fraud"; 
• a business has continued to trade and run up debts knowing that there was no reasonable prospect of those creditors ever being paid; 
• a business is being run for a fraudulent purpose, for example, rogue "cold calling" traders who regularly submit inflated bills to customers for shoddy work (and who often target the elderly or vulnerable).

Obtaining services dishonestly (Section 11)

The defendant:

• obtains for himself or another;
• dishonestly;
• knowing the services are made available on the basis that payment has been, is being or will be made for or in respect of them or that they might be; and 
• avoids or intends to avoid payment in full or in part.

This offence replaces obtaining services by deception in Section 1 of the Theft Act 1978 which is repealed by the Act.

The defendant must have the necessary intention at the time that the service is obtained (section 11 (2) (c)).

In many cases, the defendant will also have committed an offence under Section 2 of the Act by making a false representation that payment will be made or made in full. Prosecutors must decide which offence better reflects the criminality involved. The maximum sentence for the Section 11 offence is five years' imprisonment.

Section 11 will cover circumstances where the defendant: 

• obtains chargeable data or software over the internet without paying; 
• orders a meal in a restaurant knowing he has no means to pay; 
• attaches a decoder to his TV to enable him to access chargeable satellite services without paying; 
•  uses the services of a members' club without paying and without being a member.  

This section repeats the effect of Section 18 of the Theft Act 1968. It provides that company officers who are party to the commission of an offence by the company will be liable to be charged with the offence as well as the company.

The Elements of the Offences

Section 2 (2) defines the meaning of "false" and Section 2 (3) defines the meaning of "representation".

A "representation" means any representation as to fact or law, including a representation as to the state of mind of the person making the representation or any other person (Section 2 (3)). An example of the latter might be where a defendant claims that a third party intends to carry out a certain course of action perhaps to make a will in someone's favour. It may be difficult to prove to the necessary standard that the Defendant knew the state of mind of a third party, but easier to prove that he knew what it might be.

A representation may be express or implied (Section 2 (4)). It can be stated in words or communicated by conduct. There is no limitation on the way in which the representation may be expressed.

A representation can be made by omission, for example, by omitting to mention previous convictions or County Court Judgements on an application form.

An offence may be completed when the defendant fails to correct a false impression after a change in circumstances from the original representation (if the representation may be regarded as a continuing series of representations).

A representation can be made to a machine (Section 2 (5)), for example, where a person enters a number into a CHIP and PIN machine or a bank ATM; or gives false credit card details to the voice activated software on a telephone line; or gives false credit card details to a supermarket website to obtain groceries.

Evidence is necessary to prove that the defendant communicated the false representation to a person or to a machine. It is not relevant whether the false representation is believed or has any affect on any other person.

In some cases it will not be necessary to call evidence from a victim, but prosecutors should bear in mind that a victim who is not named on an indictment or in a TIC cannot be compensated.

A representation is defined as "false" if it is untrue or misleading and the person making it knows that it is, or might be, untrue or misleading. Actual knowledge that the representation might be untrue is required not awareness of a risk that it might be untrue.

In Ivey v Genting Casinos (UK) (trading as Cockfords Club) [2017], Lord Hughes of Ombersley suggested that the Ghosh test was wrong. At paragraph 74 he said ‘the Ghosh test does not correctly represent the law and that directions based upon it ought no longer to be given’.

He went on to provide an alternative two-stage test:

• what was the defendant’s actual state of knowledge or belief as to the facts; and
• was his [the defendants] conduct dishonest by the standards of ordinary decent people.

In R. v Barton and Booth [2020] EWCA Crim Mr Barton and Mrs Booth appealed their convictions on the grounds that the trial Judge had erred in directing the Jury on the issue of dishonesty by applying Lord Hughes’ new two stage test, which was obiter dictum, and not the two stage test set out in R v Ghosh [1982] EWCA Crim 2.

In dismissing Barton and Booth’s appeal against conviction, the Lord Chief Justice said: ‘We are satisfied that the decision in Ivey is correct, is to be preferred, and that there is no obstacle in the doctrine of stare decisis to its being applied as the law of England and Wales’.

In Barton and Booth , the Court of Appeal has changed the test for dishonesty from a subjective test to an objective test. The fact-finding tribunal must now decide the actual state of the individual’s knowledge or belief as to the facts and then determine whether his conduct was honest or dishonest by the (objective) standards of ordinary decent people. There is no longer a requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.

"Gain "and "loss" are defined in section 5 of the Act. The definition is essentially the same as in Section 34 of the Theft Act.

Gain and loss extends only to gain and loss in money or other property (Section 5 (2) (a)), whether temporary or permanent (Section 5 (2) (b)) and means any property whether real or personal including things in action and other intangible property (Section 5 (2) (b)).

"Gain" includes a gain by keeping what one has, as well as a gain by getting what one does not have (Section 5 (3)).

"Loss" includes a loss by not getting what one might get as well as a loss by parting with what one has (Section 5 (4)).

The Defendant must intend to make the gain or cause the loss by means of the false representation.

The breadth of conduct to which Section 2 applies is much wider than the old Theft Act deception offences because no gain or loss need actually be made. It is the Defendant's ultimate intention that matters. If the Defendant gets information by making a false representation, intending ultimately to make a gain or cause a loss within the meaning of Section 5 by doing so, he will have committed a Section 2 offence.

There is no requirement that the failure to disclose must relate to "material" or "relevant "information, nor is there any de minimis provision. If a Defendant disclosed 90% of what he was under a legal duty to disclose but failed to disclose the (possibly unimportant) remaining 10%, the actus reus of the offence could be complete. Under such circumstances the Defendant would have to rely on the absence of dishonesty. Such cases can be prosecuted under the Act if the public interest requires it, though such cases will be unusual.

It is no defence that the Defendant was ignorant of the existence of the duty, neither is it a defence in itself to claim inadvertence or incompetence. In that respect, the offence is one of strict liability. The defence must rely on an absence of dishonesty and the burden, of course, lies with the prosecutor.

Prosecutors must be acutely aware of the public interest in such cases, bear in mind the relative standing of the parties and pay particular regard to any explanation for the failure given by the Defendant.

A legal duty to disclose information can arise as a result of a contract between two parties or because of the existence of a particular type of professional relationship between them; for example, a solicitor/client relationship. In its report on fraud ( No. 276 Cm 5560 2002 ) the Law Commission made the following comments about the circumstances in which a legal duty might arise:

7.28 ... Such a duty may derive from statute (such as the provisions governing company prospectuses), from the fact that the transaction in question is one of the utmost good faith (such as a contract of insurance), from the express or implied terms of a contract, from the custom of a particular trade or market, or from the existence of a fiduciary relationship between the parties (such as that of agent and principal).

7.29 For this purpose there is a legal duty to disclose information not only if the defendant's failure to disclose it gives the victim a cause of action for damages, but also if the law gives the victim a right to set aside any change in his or her legal position to which he or she may consent as a result of the non- disclosure. For example, a person in a fiduciary position has a duty to disclose material information when entering into a contract with his or her beneficiary, in the sense that a failure to make such disclosure will entitle the beneficiary to rescind the contract and to reclaim any property transferred under it.

There are three considerations:

• Whether the facts as alleged are capable of creating a legal duty is a matter for the judge;
• Whether the relationship that would create any legal duty exists on the facts alleged is a matter for the jury directed by the judge;
• Where the matter is not in issue the judge may direct the jury that a legal duty exists.

The Explanatory Notes to the Fraud Act provide the following examples of a breach of a legal duty: 

• The failure of a solicitor to share vital information with a client in order to perpetrate a fraud upon that client;
• A person who intentionally failed to disclose information relating to his heart condition when making an application for life insurance.

The "position" required by section 4 is one that may be described as a position of trust.  It could include company directors, trustees, business partners or employees. In many cases it will be one where there is a legal 'fiduciary' duty; but such a duty is not essential. It is, however, a position that carries something more than a moral obligation.

The Law Commission explained the meaning of "position" as follows:

"The necessary relationship will be present between trustee and beneficiary, director and company, professional person and client, agent and principal, employee and employer, or between partners. It may arise otherwise, for example within a family, or in the context of voluntary work, or in any context where the parties are not at arm's length. In nearly all cases where it arises, it will be recognised by the civil law as importing fiduciary duties, and any relationship that is so recognised will suffice. We see no reason, however, why the existence of such duties should be essential. This does not, of course, mean that it would be entirely a matter for the fact finders whether the necessary relationship exists. The question whether the particular facts alleged can properly be described as giving rise to that relationship will be an issue capable of being ruled on by the judge and, if the case goes to the jury, of being the subject of directions."

Examples of the type of conduct that would give rise to a charge under section 4 are: 

• an employee of a software company who uses his position to clone software products with the intention of selling the products on his own behalf; 
• where a person is employed to care for an elderly or disabled person and has access to that person's bank account but abuses that position by removing funds for his own personal use. (This may also be theft);
• an attorney who removes money from the grantor's accounts for his own use. The Power of Attorney allows him to do so but when excessive this will be capable of being an offence under Section 4; 
• an employee who fails to take up the chance of a crucial contract in order that an associate or rival company can take it up instead;
• a trustee who dishonestly acts outside the terms of a trust deed in order to produce a gain or loss for himself or others; 
• a director of a company who dishonestly makes use of knowledge gained as a director to make a personal gain;
• an employee who abuses his position in order to grant contracts or discounts to friends, relatives and associates; a waiter who sells his own bottles of wine passing them off as belonging to the restaurant R v Doukas [1978] 1 All E.R. 1071.;
• a tradesman who helps an elderly person with odd jobs, gains influence over that person and removes money from their account (This may also be theft but see the guidance on the Public Interest criteria above for the Fraud offences);
• the person entrusted to purchase lottery tickets on behalf of others again, this will probably be theft as well.

The terms "financial interests" and "abuse" are not defined in the Act and so may be taken to have their ordinary meaning.

Note that the section refers to a person who "occupies a position in which he is expected ... ". The person who no longer occupies that position when, for example, he uses information properly gained while "in post" dishonestly, does not commit an offence. He may do so if there is a contractual obligation that extends beyond his departure from the post. He will, however, be guilty of an offence if he took steps to plan his actions while "in post" and put the plan into action after leaving the post or after the relationship ceased.

For example, an employee who transferred sensitive commercial information from his office laptop to his home computer while in employment and used it after that employment had ended will commit the offence. At that stage he will no longer be "occupying a position " but he was when the offence was committed (transferring the information intending to make a gain or cause a loss) and so can be prosecuted.

In these circumstances prosecutors must be particularly mindful that the criminal law is not invoked by complainants for purely commercial purposes.

The Act does not offer a definition of "possession or control".

It is probable that the case law on possession of drugs will apply. The phrase "possession or control" suggests something looser than the absolute "possession" in the Proceeds of Crime Act 2002. Under that Act "possession" means having physical custody of criminal property.

Section 37(3) of the Misuse of Drugs Act 1971 provides that for the purposes of that Act "the things which a person has in his possession shall be taken to include anything subject to his control which is in the custody of another". DPP V Brookes [1974] A.C 862 PC. In the case of R v McNamara 87 Cr App R 246 the Court of Appeal acknowledged the difficulties in expressing the concept of “possession” and summarised the position by saying that possession is established against the defendant once the prosecution have proved that he had in his control a package that in fact contained the drug alleged, that he knew that he had the package in his control, and that he knew it contained something; and secondly that once possession is thus established an evidential burden is cast upon the defendant.

Although the Fraud Act does not contain a similar section, the reference to "control" suggests that items in the possession of others but over which the Defendant retains control would qualify as being in the defendant's "possession". It is sufficient therefore that the person from whom the property is appropriated was at the time in fact in possession or control: R v Turner (No.2), 55 Cr. App R 336 CA. It is not necessary to prove that the person’s possession or control was lawful: R v Kelly and Lindsay [1999] Q.B 621, CA.

The law on possession of indecent images will also apply particularly to the possession of software and material stored on computers for use in fraud (covered by virtue of section 8). Prosecutors should bear in mind the judgement of the Court of Appeal in R v Porter [2006] EWCA Crim 560, in which it was held that an image (and, by analogy, a document) will only be considered to be in the possession of the defendant (in the sense of custody or control) if it is accessible to him. In the case of a deleted image, where the Defendant could not retrieve or gain access to it he would no longer have custody or control of it. It follows that it would not be appropriate to say that a person who could not retrieve and image (or document) from a hard disk drive would be in possession of the image by reason of his possession of the hard disk drive itself.

In cases where the prosecution will rely on evidence of material stored on computers, it will be necessary to obtain expert evidence as in cases involving indecent images.

"Article" has its ordinary meaning subject to Section 8. It is extremely wide covering anything from pen and paper to blank credit cards, credit card numbers and sophisticated computer programmes.

Section 8 provides further definition of the term "article". For the purposes of Sections 6 and 7 and the provisions listed in Section 8 (2) which include Section 1 (7) (b) of the Police and Criminal Evidence Act 1984 ("prohibited articles" for the purposes of stop and search powers) "article" includes any program or data held in electronic form.

If a successful Section 2 fraudster has succeeded in obtaining information held either as hard copy or in data form from those he has duped, he will also be guilty of a Section 6 offence in relation to that information.

The Act does not define “services”, but it is likely that that it will encapsulate at least all those benefits which had been said to fall within the definition which was provided under Section 1of the Theft Act 1978.The service must be provided on the basis that it will be paid for. The same restrictions will therefore apply to the obtaining of banking services under this section as before they must be chargeable to fall within the ambit of Section 11 ( R v Sofroniou [2003] EWCA Crim 3681). If the banking services obtained are free, Section 11 cannot be charged. The same restriction does not apply to Section 2 fraud by making a false representation.

Section 11 differs from the offences under section 1 in that it requires the actual obtaining of a service (by a dishonest act).

It is not possible to commit the offence by omission alone. This avoids the situation where unscrupulous service providers might feel able to pressure anyone who had been given services they had not requested. 

Section 13 is similar to Section 31(1) of the Theft Act 1968. A person is protected from incriminating himself or his spouse or civil partner for the purposes of offences under the Act and related offences, while nonetheless being obliged to co-operate with certain civil proceedings (for example, civil confiscation) relating to property. This section goes beyond Section 31 (1) of the Theft Act 1968 in removing privilege in relation to "related offences" as well as the offence charged. "Related offences" are defined in Section 13 (4) as conspiracy to defraud and any other offence involving any form of fraud or fraudulent conduct or purpose. 

The maximum penalty for offences under Sections 1, 7 and 9 and is 12 months' imprisonment on summary conviction and 10 years' imprisonment on conviction on indictment.

Section 10 of the Act increases the maximum penalty for offences contrary to Section 458 of the Companies Act 1985 to 10 years' imprisonment.

The maximum penalty for an offence under Sections 6 and 11 is 12 months' imprisonment on summary conviction and 5 years' imprisonment on conviction on indictment.

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A misrepresentation is a false or misleading statement or a material omission which renders other statements misleading, with intent to deceive. Misrepresentation is one the elements of common law fraud , and other causes of action for fraud, such as securities fraud .

Misrepresentation through the act of making a false statement can take may forms. For example, in Commonwealth v. Scott , a Massachusetts Supreme Court case, a forensic drug laboratory chemist made a number of affirmative misrepresentations by signing drug certificates and testifying to the identity of substances in cases in which she had not in fact properly tested the substances in question. However, statements of pure opinion are generally not considered misrepresentations. For example, in Virginia Bankshares v. Sandberg , the Supreme Court held that statements of reasons, opinion, or belief are not per se misrepresentations, but may be if there is a context of trust or reliance between the person alleged to make the misrepresentation and the recipient and the statement is objectively false. Additionally, in Omnicare, Inc. v. Laborers District Council Construction , the Supreme Court held that statements of opinion, such as statements prefaced by “we believe,” may be misrepresentations if the speaker does not actually hold that opinion. Also, the opinion stated, if the statement of opinion contains underlying factual assertions (e.g. we believe that our product is the best [statement of opinion] because it outranked other competing products in our laboratory testing [factual assertion]), that factual assertion may be a misrepresentation if untrue.

An omission which renders statements misleading may also be a misrepresentation. For example, in Striker v. Graham Pest Control Co. , the Appellate Division of the Supreme Court of New York held that a sellers’ agent who did not disclose a carpenter ant infestation misrepresented the buyers, since “[n]ondisclosure of a material fact is tantamount to an affirmative misrepresentation when a party is duty-bound to disclose pertinent information.” Material omissions in marketing a product may also be misrepresentations. For example, in Drew v. Sylvan Learning Center, Corp. , a New York state court found that a tutoring service’s failure to disclose that they measured “grade level” with their own standards in their brochures, as opposed to the common connotation of public school system grade levels, was a misrepresentation through omission.

[Last updated in December of 2020 by the Wex Definitions Team ]

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Fraud By False Representation

Table of Contents

• 1 What is Fraud by False Representation?
• 2 Recognising the Signs of False Representation
• 3 Legal Framework Surrounding False Representation
• 4 Preventative Measures for Businesses
• 5 Reporting Instances of Fraud by False Representation
• 6 How a Lawyer Can Help with Fraud by False Representation

What is Fraud by False Representation?

Fraud by false representation involves deliberately making false statements or representations to deceive and gain a dishonest advantage, typically financial, over another party. In the business context, this could range from falsifying financial documents to secure loans, to misrepresenting a product’s quality or origin to increase sales. The essence of this fraud lies in the intention to make the other party act or refrain from acting to their detriment based on the false representation.

This form of fraud can manifest in various transactions, affecting businesses across all sectors. It undermines the trust that is fundamental to commercial relationships and can lead to significant financial losses, legal penalties, and reputational damage.

Recognising the Signs of False Representation

Identifying fraud by false representation requires vigilance and an understanding of its common signs, which include:

• Unusually favorable deals that seem too good to be true, often pressured with urgency.
• Inconsistencies in documentation or verbal representations.
• Lack of transparency about the origins of goods, services, or financial records.
• Unverified or suspicious references provided for verification of goods, services, or individuals.
• Requests for payments to unusual accounts or in unconventional manners.

Educating staff on these signs and encouraging a culture of scrutiny can be pivotal in early detection of fraudulent activities.

Legal Framework Surrounding False Representation

In England and Wales, fraud by false representation is primarily governed by the Fraud Act 2006, which outlines the specific elements constituting this offense. Under Section 2 of the Act, a person is guilty if they dishonestly make a false representation, and intend, by making the representation:

• To make a gain for themselves or another, or
• To cause loss to another or expose another to a risk of loss.

The legal framework emphasizes the importance of dishonesty and intention behind the false representation, rather than the actual loss or gain. The penalties for individuals found guilty of this offense can be severe, including imprisonment, fines, and reputational damage.

Preventative Measures for Businesses

To safeguard against fraud by false representation, businesses can implement several preventative measures:

• Due Diligence: Conduct thorough background checks on all new clients, suppliers, and partners.
• Internal Controls: Establish strong internal controls, including regular audits and segregation of duties among employees.
• Education and Training: Regularly educate and train employees on recognizing and preventing fraud.
• Secure Transactions: Utilize secure and verified payment methods and document transactions meticulously.
• Policy Implementation: Develop and enforce a clear company policy regarding fraud prevention, detection, and response.

Incorporating technology, such as AI and machine learning for anomaly detection, can further enhance a business’s ability to prevent fraudulent activities.

Reporting Instances of Fraud by False Representation

When fraud is suspected or detected, it’s crucial to act promptly. Businesses should:

• Document Everything: Keep detailed records of all transactions, communications, and evidence related to the suspected fraud.
• Report Internally: Follow the company’s internal procedures for reporting suspected fraud.
• Contact Authorities: Report the fraud to relevant law enforcement agencies, such as Action Fraud, the UK’s national reporting center for fraud and cybercrime.
• Legal Consultation: Seek legal advice to understand the implications and guide the response to the fraud.

Reporting not only helps in dealing with the immediate incident but also contributes to broader efforts against fraud.

How a Lawyer Can Help with Fraud by False Representation

A lawyer specializing in fraud can offer invaluable assistance in several ways:

• Preventative Advice: Providing guidance on legal and regulatory compliance to prevent fraud.
• Investigation: Helping to conduct or advise on the investigation of suspected fraud.
• Legal Representation: Representing the business in any legal proceedings, whether criminal or civil.
• Recovery of Losses: Advising on and pursuing recovery of financial losses or damages caused by the fraud.

Moreover, a lawyer can help businesses to implement robust contracts and agreements that deter fraudulent activities and protect the business’s interests.

In conclusion, fraud by false representation poses a severe risk to businesses in England and Wales. Recognizing the signs, understanding the legal framework, taking preventative steps, and knowing how to respond are crucial for businesses to protect themselves. Legal advice plays a vital role in navigating the complexities of fraud prevention, detection, and response, ensuring businesses can operate securely and successfully.

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What is Fraudulent Misrepresentation?

This page has been peer-reviewed, fact-checked, and edited by qualified attorneys to ensure substantive accuracy and coverage.

Fraudulent misrepresentation is a civil tort arising out of contract law. It is a false statement of fact that causes or induces someone to enter into a contract. A defendant commits fraudulent misrepresentation when he or she lies or misrepresents an important fact about in order to cause or induce the other party to enter into a contract. The misrepresentation can be in the form of anything that is designed to deceive the other party including innuendos, half-truths, or silence when there exists a duty to speak.

What Constitutes Fraudulent Misrepresentation?

• The defendant made a false representation or lied;
• The misrepresentation is material to the transaction;
• The defendant made the misrepresentation with malice (the defendant made the statement with knowledge that the statement was false or the defendant made the statement with a reckless disregard as to the veracity of the statement);
• The defendant made the misrepresentation with the intention of inducing the other party to enter into a contract;
• The other party reasonably relied on the misrepresentation; and
• The defendant’s lie was the proximate cause for the plaintiff’s injury.

Generally, in order for an action for misrepresentation to proceed, the statement at issue must be one of present or past fact. Although there are exceptions, statements of opinion and statements which are made about the intention of a party or occurrence of some event in the future do not constitute the tort of misrepresentation. Fraudulent misrepresentation is one of the three recognized forms of misrepresentation in contract law. The other two are negligent misrepresentation and innocent misrepresentation.

Fraudulent misrepresentation is a distinct legal claim from defamation . Fraudulent misrepresentation is a contract claim arising out of fraud that occurs in breach of contract cases, while defamation is a false assertion of fact made about someone.

Damages for Fraudulent Misrepresentation

Fraudulent misrepresentation is a civil offense that may result in damages for the plaintiff and may allow for rescission of a contract depending on the circumstances.

Fraudulent Misrepresentation Attorneys

Do you have a legal issue that involves a claim of fraudulent misrepresentation? Call the experienced internet defamation attorneys at Minc Law to evaluate your case. Call (216)373-7706 or fill out our online contact form today to find out more information.

★★★★★ “Minc Law did an outstanding job on our case, particularly Daniel and his team. They guided us through the entire process of unveiling the individual who was defaming our business online, and then all the way through to getting a satisfactory settlement. They always returned calls and offered sound advice for whatever came up during our case. If I ever need these types of services again, I will definitely go to them first.” Jason Moore, May 11, 2021

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Fraud by false representation is when someone dishonestly makes an untrue or misleading representation with the intention of making a gain for himself or causing loss to another.

Fraud solicitors London

If you have been charged with fraud by false representation, or you are currently released under investigation , please contact us at Ashmans Solicitors. Our specialist fraud solicitors can represent you throughout proceedings, securing a positive outcome on your behalf. We are available to take your call 24 hours a day, seven days a week.

What is fraud by false representation

Fraud is a criminal offence in the UK, as governed by the Fraud Act 2006. The legislation introduces three main ways of committing fraud – one of which is fraud by false representation. This is dealt with under Section 2 of the Act.

Fraud by false representation is when someone:

• Dishonestly makes a false representation, and he/she
• Knows that the representation is (or might be) untrue or misleading, and he/she
• Does so with the intention of making a gain for himself/herself, or to cause a loss to another, or expose another to a risk of loss

The court is not concerned as to whether a gain or loss actually occurred. If the defendant intended to bring about either scenario, the charge of fraud by false representation can be upheld.

Examples of fraud by false representation

There are various actions that might amount to fraud by false representation. Really, it is any situation in which false statements are made for your own advantage, or to cause another party loss. Examples include:

• Exaggerating your income on a mortgage application form
• Falsifying details to obtain a credit card
• Selling assets that are not yours to sell, or that do not exist
• Claiming for costs that were never incurred

What are the penalties for fraud by false representation?

Fraud is considered a serious offence in the UK. Being convicted of fraud by false representation carries a maximum sentence of 10 years in prison and a fine. However, the maximum sentence is only handed out in the most serious of cases. It is possible for minor charges can be dealt with on a summary basis, at the Magistrates Court.

There may also be other consequences of a conviction. Most notably, the authorities may pursue Proceeds of Crime Act proceedings against anyone convicted under the Fraud Act 2006. This could lead to a  Confiscation Order , whereby you are tasked with repaying any money made by way of fraudulent activity.

What happens if I’m investigated for fraud by false representation?

You might not realise you are being investigated for fraud by false representation until you are invited for a police interview. In the meantime, you may be placed under surveillance. The police can also get a search warrant for your home and your workplace.

If you are asked to attend the police station for an interview, you should ask a fraud solicitor to accompany you. You will be asked questions about your activity. These can be difficult to answer, as the police may withhold certain information from you, in the hope that you incriminate yourself. A fraud solicitor can guide you through police interviews, ensuring you do not accidentally damage your case.

You may also be subject to a  Restraint Order . This effectively freezes your assets, pending the outcome of the investigation. This can make life very difficult, particularly as fraud investigations can continue for months, even years. A fraud solicitor can apply to the court to vary the order, alleviating the pressure on you and your family (and, if applicable, your business).

If the police decide there are sufficient grounds to lay charges, your case will be passed to the Crown Prosecution Service (CPS). A date will be set for a hearing at a Magistrates Court. Most cases then proceed to the Crown Court where there will either be a trial (if you plead not guilty) or a sentencing hearing (if you plead guilty).

Defending allegations of fraud by false representation

Fraud solicitors can help you defend allegations of fraud by false representation. There are times when the authorities mistakenly accuse people of fraud. These errors need to be brought to light as soon as possible, thereby quashing the prosecution’s case. Doing so can be a long and complicated process, often necessitating the help of a forensic accountant.

This is precisely what happened in the case of R –v- CV , in which our client was accused of claiming transport goods on behalf of his company. The prosecution argued that another company had in fact completed the work. We analysed our client’s company records, a painstaking exercise that resulted in us creating a comprehensive defence bundle. Thanks to this analysis, the judge ruled in our client’s favour and one of the charges against him was dropped.

As this case goes to show, defending allegations of fraud by false representation are possible. However, it takes a specialist fraud solicitor to succeed.

Speak to our fraud solicitors London

Fraud by false representation is one of the most common types of fraud. If such allegations have been made against you, you need a fraud solicitor on your side. We will work alongside some of the country’s leading barristers and forensic experts to overturn the charges. We will also address any other consequences that sometimes arise during fraud proceedings, such as Restraint Orders and Confiscation Orders.

Contact our fraud solicitors now

Accused of fraud by false representation ? For a free initial enquiry, call us now on 0333 009 6275. We are available 24 hours a day, 7 days a week. Accused of Benefit Fraud ?

You can also email us on [email protected] or complete our Free Online Enquiry Form and we will contact you.

By Ashmans Solicitors

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The FindLaw Legal Dictionary -- free access to over 8260 definitions of legal terms. Search for a definition or browse our legal glossaries.

False Representation

false representation n

Source: Merriam-Webster's Dictionary of Law ©1996. Merriam-Webster, Incorporated. Published under license with Merriam-Webster, Incorporated.

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What Is a Misrepresentation?

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• Definitions M - Z

What Is Misrepresentation? Types and How It Works

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Investopedia / Hilary Allison

A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract. If the misrepresentation is discovered, the contract can be declared void. Depending on the situation, the adversely impacted party may seek damages.

Key Takeaways

• Misrepresentations are false statements of truth that affect another party's decision related to a contract.
• Such false statements can void a contract and in some cases, allow the other party to seek damages.
• Misrepresentation is a basis of contract breach in transactions, no matter the size, but applies only to statements of fact, not to opinions or predictions.
• There are three types of misrepresentations—innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation—all of which have varying remedies.

How Misrepresentation Works

Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size.

A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller.

In higher-stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.

In some situations, such as where a fiduciary relationship is involved, misrepresentation can occur by omission. That is, misrepresentation may occur when a fiduciary fails to disclose material facts of which they have knowledge.

A duty also exists to correct any statements of fact that later become known to be untrue. In this case, the failure to correct a previous false statement would be a misrepresentation.

Types of Misrepresentations

There are three types of misrepresentations.

Innocent Misrepresentation

Innocent misrepresentation is a false statement of material fact by the defendant, who was unaware at the time of contract signing that the statement was untrue. The remedy in this situation is usually rescission or cancellation of the contract.

Consider a situation where a seller of a piece of land mistakenly informs a buyer that there is planning permission granted for a new housing development nearby. The seller genuinely believed this to be true based on information received from a neighbor. Unfortunately, unknown to the seller, that planning permission had since been denied. Because the buyer relied on this information in deciding to purchase the land, the seller may be liable due to innocent misrepresentation since they made a mistake (even though it was an honest mistake).

Negligent Misrepresentation

Negligent misrepresentation is a statement that the defendant did not attempt to verify was true before executing a contract. This is a violation of the concept of "reasonable care" that a party must undertake before entering an agreement. The remedy for negligent misrepresentation is contract rescission and possibly damages.

Suppose a real estate agent, while showing a property to potential buyers, states that the roof was recently renovated. It turns out that the roof needs significant repairs. Despite not intending to deceive, the agent's negligent statement about the roof's condition played a part in the buyers making an offer on the property. If the buyers later discover the true state of the roof, they may have grounds to claim damages from the agent for the costs of repairing the roof as the agent was negligent in sharing incorrect information.

Fraudulent Misrepresentation

Fraudulent misrepresentation is a statement that the defendant made knowing it was false or that the defendant made recklessly to induce the other party to enter a contract. The injured party can seek to void the contract and recover damages from the defendant.

Imagine a scenario where a seller knowingly advertises a used car as having only 50,000 miles on the odometer. However, the car actually has 150,000 miles on it, and the seller has rolled back the odometer. The buyer relies on this false information and would buy the car based on the misrepresented mileage. In this case, the seller's fraudulent misrepresentation gives the buyer grounds to rescind the contract, return the car, and potentially seek damages for any losses suffered due to the deception.

How to Prove Misrepresentation

In order to recover damages due to misrepresentation, there are six legal bars for the plaintiff to overcome. The plaintiff must be able to show that:

• A representation was made.
• The representation was false.
• The defendant knew at the time that the representation was false, or recklessly made the statement without knowledge of its truth.
• The representation was made with the intention that the plaintiff would rely on it.
• The plaintiff did rely on the false representation.
• The plaintiff suffered harm by relying on the false representation.

All six of these requirements must be met in order for a plaintiff to win a case for misrepresentation. A defendant in one of these cases need not disprove all six of these claims.

Misrepresented Financial Statements

Companies and their financial statement preparers can falsify (knowingly or unknowingly) their financial performance. Misrepresentations in financial statements can impact various stakeholders, including investors, creditors, regulators, and the broader public. Here's how each group can be affected:

• Investors: Misrepresentations, whether intentional or due to negligence, can distort the true financial health and performance of a company. For example, overstating revenues or understating expenses can artificially inflate profitability metrics, leading investors to overvalue the company's stock. Conversely, concealing liabilities or risks can mask the true financial risks faced by the company, potentially leading to losses for investors when the true financial situation is revealed.
• Creditors: Creditors use financial statements to assess the creditworthiness of a company. Misrepresentations can mislead creditors about the company's ability to repay debt obligations. For instance, if a company falsely inflates its assets or understates its liabilities, creditors may extend credit thinking a company may be able to pay off its debt when, in fact, it might not be able to.
• Regulators: Regulatory bodies such as the Securities and Exchange Commission (SEC) rely on financial statements to ensure compliance with accounting standards and securities laws. Misrepresentations can undermine the integrity of financial markets and erode investor confidence, a primary concern for regulatory bodies in charge of overseeing the stability of those markets. 
• General Consumers: Misrepresentations in financial statements can undermine public trust in a company. Even if those consumers don’t own an equity stake in the company, consumers may choose to take their business elsewhere to support more honest operations if misrepresentations were to come to light.  

Misrepresented Financial Statements and Auditors

Auditors have a responsibility to provide an objective assessment of a company's financial position and performance, making sure that the information presented is reliable and follows accounting rules . To do this, auditors conduct detailed audit procedures to examine the financial statements and supporting documentation. This includes looking through financial transactions, reviewing accounting records, and testing the effectiveness of internal controls.

Through these procedures, auditors try their best to identify any discrepancies that could indicate potential misrepresentations. They focus on both quantitative things (like the accuracy of financial figures) and qualitative things (like the disclosure of significant risks). As part of the audit, auditors communicate their findings and observations to management, an audit committee, and potentially to regulatory authorities. In the end, an auditor strives to make sure no misrepresentation is happening within a company’s financial statements.

Example of Misrepresentation

In 2022, Tesla CEO Elon Musk offered to purchase X platform (formerly Twitter) for $43 billion, an offer which the company at first resisted and then accepted. A few weeks later, and after a substantial fall in the company's share price, Musk attempted to back out of the deal, claiming that X misrepresented the number of human users on the platform.

According to his termination letter, Musk alleged that the company knowingly misrepresented the number of live users on its platform and that he had relied on those false representations when he made his takeover offer. In response, the social media company claimed that Musk's allegations were "factually inaccurate" and that the billionaire was simply trying to back out of the merger that he himself had initiated.

What Is a Material Misrepresentation?

A material misrepresentation is a promise, false statement, or omission of facts that would cause another party to act differently if the whole truth were known. An example of a material misrepresentation is incorrectly stating one's income on a mortgage application or omitting key risk factors on an application for insurance coverage.

What Is Misrepresentation in Insurance?

In insurance, a misrepresentation is a lie or concealment of facts that can void an insurance contract if the insurer discovers the misrepresentation. For example, if a homeowner installs a pool but tells their insurer that they do not have a pool, the insurer may be able to void the policy if they discover the misrepresentation.

What Is Misrepresentation in Real Estate?

In real estate, misrepresentation is a lie or reckless untruth that affects the market value of a home or property. A common example of this is misrepresenting the square footage of a property. Since sales prices are often based on square footage, a buyer can often sue for misrepresentation even after a purchase is finalized.

What Are the Legal Consequences of Misrepresentation?

The legal consequences of misrepresentation vary based on the type and severity of the misrepresentation. The innocent party may have the right to cancel the contract if the misrepresentation is material. Damages may be awarded to compensate the innocent party for any losses suffered. In cases of fraudulent misrepresentation, punitive damages may be awarded to punish the party responsible.

What Steps Can Companies Take to Prevent Misrepresentations?

Companies can take proactive steps to prevent misrepresentations. They can establish and enforce ethical standards that promote honesty, integrity, and transparency. They can provide training and education to employees while also implementing robust internal controls. Companies can conduct independent reviews to verify the accuracy of the information it is reporting while also conducting due diligence and verifying information before formalizing it or communicating it.

Misrepresentation is a legal term for any type of falsehood or omission of fact that affects the behavior of a contractor or other party. Contrary to popular belief, misrepresentation does not just mean deliberate lies—it can also include accidental omissions or reckless statements without certainty of the facts. Misrepresentation can void a contract and in some cases allow the misled party to seek damages.

Cornell Law School, Legal Information Institute. " Misrepresentation ."

Campbell Law Review. " Fraudulent, Negligent, and Innocent Misrepresentation in the Employment Context: The Deceitful, Careless, and Thoughtless Employer ," Pages 61-62.

University of North Caroline, School of Government. " N.C.P.I.—Civil 800.10: Negligent Misrepresentation, General Civil Volume, March 2020 ."

Cornell Law School, Legal Information Institute. " Fraudulent Misrepresentation ."

Legal Information Institute. " Fraudulent Misrepresentation ."

The Hill. " Twitter Slams Musk Countersuit: 'Factually Inaccurate, Legally Insufficient, and Commercially Irrelevant .'"

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Misrepresentation vs. Fraud: What’s the Difference?

Misrepresentation and fraud are highly related and often overlapping concepts in law. In fact, many people make the mistake of assuming that misrepresentation and fraud are largely interchangeable and synonymous terms. While there are many instances where these two terms can be used interchangeably, and there is even an offense called fraudulent misrepresentation , it is important to realize that there are nuanced differences between fraud and misrepresentation. Understanding the differences between these two concepts is essential for anybody working in legal areas related to fraud and misrepresentation, particularly contract law.

The same or different?

Confusing fraud with misrepresentation is understandable since, in many relevant criminal and civil cases, accusations of both fraud and misrepresentation are often at stake. In fact, almost every instance of fraud is also an instance of misrepresentation. The subtle difference between the two concepts is that not all forms of misrepresentation are acts of fraud. Let’s look closer at why this difference matters.

All fraud is a misrepresentation

In cases of fraud, the defendant is being accused of tricking a person or organization into believing that something has a certain value when that defendant knows or should know that the item’s value is actually much less. In such cases, the defendant is being accused of misrepresenting the value of the item in question. Therefore, all cases of fraud are essentially cases of misrepresentation. For example, if a person sells another person a ring claiming it is 24 karat gold when, in fact, the seller knows the ring is fake, then the seller has committed an act of fraud.

3 Types of Misrepresentation and Why They Matter

Is misrepresentation always fraud?

If all fraud is a misrepresentation, then it is tempting to assume that all misrepresentations are likewise acts of fraud. This, however, is not the case. Obviously, many cases of misrepresentation are also cases of fraud, but there are also many cases where a person may misrepresent the facts without having committed fraud. In most cases, the difference between fraud and misrepresentation comes down to what the accused knew or should have known when the act of fraud or misrepresentation took place.

Returning to the example of the gold ring, let’s say that the seller this time genuinely believed that he was selling a 24 karat ring and that he was provided documents by a reputable source attesting to the ring’s purity. Because the seller had reason to believe that the ring was 24 karats, if it later emerges that the ring is a fake then the seller cannot be considered to have committed fraud despite the fact that he unintentionally misrepresented the value of the ring to the buyer.

While the difference between fraud and misrepresentation is subtle, it is nonetheless important. This importance stems from the fact that fraud is often considered a much more serious offense than misrepresentation alone–especially if such misrepresentation was unintentional. In some cases, a fraud conviction can lead to:

• Massive fines

Substantial prison sentences

As such, knowing how to distinguish between fraud and misrepresentation is essential for anybody involved in contract law or other legal areas where fraud and misrepresentation are especially serious charges.

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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mis rep re sen ta tion

Legal definition of misrepresentation, dictionary entries near misrepresentation.

misrepresent

misrepresentation

Missouri Compromise

Cite this Entry

“Misrepresentation.” Merriam-Webster.com Legal Dictionary , Merriam-Webster, https://www.merriam-webster.com/legal/misrepresentation. Accessed 13 Sep. 2024.

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2 Fraud by false representation E+W+N.I.

(1) A person is in breach of this section if he—

(a) dishonestly makes a false representation, and

(b) intends, by making the representation—

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss.

(2) A representation is false if—

(a) it is untrue or misleading, and

(b) the person making it knows that it is, or might be, untrue or misleading.

(3) “ Representation ” means any representation as to fact or law, including a representation as to the state of mind of—

(a) the person making the representation, or

(b) any other person.

(4) A representation may be express or implied.

(5) For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).

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