Legal Implications of Misrepresentation for Businesses

In Short

• Misrepresentation can be fraudulent, negligent or innocent, each with different legal consequences.
• Misrepresentation can lead to contract cancellation, financial penalties and reputational damage.
• Accurate communication, employee training, and clear documentation are key to avoiding misrepresentation.

Tips for Businesses

To prevent misrepresentation, ensure all business communications are clear and accurate. Train employees on legal obligations and maintain detailed records of all representations made to clients. This can help reduce potential legal risks and protect your business reputation.

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Table of Contents

• What is Misrepresentation? 
• What Are the Relevant Laws?
• What Are the Consequences of Misrepresentation?
• How Can My Business Avoid Misrepresentation? 
• Key Takeaways
• Frequently Asked Questions

Misrepresentation has significant legal implications for businesses. As such, understanding the different types of misrepresentation and the consequences of such practices is critical for running your business. This article will take you through each of these types as it relates to New Zealand businesses.

What is Misrepresentation? 

Misrepresentation happens when one party makes a false statement that invokes another party to enter into a contract. In NZ, misrepresentation can be categorised into three different types:

1. Fraudulent: This is when a false statement is made knowingly or recklessly, without caring if it is true or false. In these cases, the intent is to deceive the other party. Businesses guilty of fraudulent misrepresentation face severe legal consequences, such as damages or criminal charges.
2. Negligent: Negligent misrepresentation is when a false statement is made by a party who has no reasonable grounds to believe the statement to be true. Negligence does not require an intention to deceive. Despite this, it still comes with significant legal risks, such as compensation for losses.
3. Innocent: Innocent misrepresentation is when a false statement is made without knowledge of it being false. This misrepresentation is less severe but can still lead to the contract being voided or altered. The business may also be required to compensate the other party.

What Are the Relevant Laws?

The legal framework overseeing misrepresentation in New Zealand is primarily found in the Contract and Commercial Law Act 2017 (CCLA). 

Under the CCLA, a misrepresentation made by one party that induces another to enter into a contract can void the contract. This means the misled party has the right to cancel the contract. The Act also provides remedies.

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What Are the Consequences of Misrepresentation?

The consequences of misrepresentation can be severe and have a major impact on your business’ reputation and finances. These consequences will vary depending on the type and severity of the misrepresentation. 

If you are found guilty of misrepresentation, you will primarily face various legal consequences. Firstly, the misled party may have the right to cancel the contract and seek damages. In cases of fraudulent or negligent misrepresentation, these damages will be substantial. You may also face fines under the Fair Trading Act, particularly if you have engaged in regular misrepresentation. This may have a severe financial impact on your business. 

Other implications include: 

• Reputational Damage: Misrepresentation can severely damage your business’ reputation. This is particularly noticeable in a small market like NZ, where trust is a critical part of business relationships and can be difficult to build back up.  
• Operational Issues: Your business may also face operational disruptions. You may have to cancel contracts that are relevant to the misleading conduct and could lose other business relationships. This can disrupt operations and impact the business in the long term.

How Can My Business Avoid Misrepresentation? 

Your businesses will need to implement best practices to avoid making false or misleading statements. This will help avoid the serious implications that come with misrepresentation. Some of the best practices include: 

• Accurate Communication: You must ensure that all communications are accurate and truthful. This includes marketing materials, product descriptions and any statements made during negotiations.
• Employee Training: It is essential to educate your employees on the importance of honesty in business dealings. This ensures that all staff understand the importance of accurate communication.
• Clear Documentation: You must maintain clear documentation of all business transactions. This includes keeping records of all representations made to customers, including disclaimers.

Key Takeaways

Understanding the different types of misrepresentation and the consequences of such practices is critical. Each type involves a different level of intention and, consequently, has implications that vary in severity. Severe misrepresentation may have significant consequences for your business, including:

• legal consequences;
• reputational damage;
• financial loss; and
• operational issues.

You should implement proactive practices to prevent misrepresentation at your business, including training your employees and keeping accurate records of all transactions, marketing materials and other customer representations. 

If you need assistance understanding how to navigate misrepresentation for your business, our experienced disputes and litigation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions