A Practical Guide To Ending Contracts Early: Misrepresentation, Mistake And Illegality (Part 3)

This is the third and final part of our series on the ways in which parties may attempt to avoid unfavourable contractual terms, when their contract does not contain an express right to do so. Having previously considered termination at common law and frustration, this final part considers misrepresentation, mistake and illegality.

Misrepresentation

A misrepresentation occurs where one party makes an untrue statement of fact or law which induces the other party to enter a contract, causing that other party to suffer loss. The innocent party may have the right to rescind (i.e. set aside and unwind) the contract as a result.

1. Fraudulent misrepresentation – where the untrue statement is knowingly or recklessly false.
2. Negligent misrepresentation – where the untrue statement is made carelessly.
3. Innocent misrepresentation – where the untrue statement is not fraudulent or negligent.

The law of misrepresentation is lengthy and complex and beyond the scope of this article. However, there are some important points of emphasis when considering whether the right to rescind the contract may arise:

The statement must be one of fact or law, not merely an opinion

A statement of opinion or a promise about future intentions will not generally amount to a misrepresentation, even if it ultimately proves to be wrong. However, where someone states an opinion that they do not genuinely hold, this may itself constitute a false statement of fact about their true state of mind.

The misrepresentation must have played a part in the innocent party’s decision to enter the contract

It need not have been the only reason, but it must have had some real influence.

The right to rescind may be lost in certain circumstances

Even where a misrepresentation is established, the right to rescind can be extinguished: where the innocent party affirms the contract by continuing to act under it after discovering the misrepresentation; where too much time has elapsed since the innocent party became aware of the misrepresentation; where it is no longer possible to restore the parties to their pre-contractual positions; or where a third party has since acquired rights in good faith.

Only a fraudulent misrepresentation gives an absolute right to rescind the contract

Otherwise, the court has a discretion to award damages instead of rescinding the contract. This is more likely where the misrepresentation is minor and the consequences of unwinding the contract would be disproportionate to the wrong suffered.

Contracts frequently contain clauses attempting to restrict or exclude liability for misrepresentation

These restrictions/exclusions can take various forms, and their effect will depend on the wording of the contract and the relevant circumstances. That said, any clause purporting to exclude liability for fraudulent misrepresentation will be automatically unenforceable as a matter of public policy.

The court granted rescission for fraudulent misrepresentation in the recent and high-profile case of Patarkatsishvili v Woodward-Fisher [2025] EWHC 265 (Ch). The claimants purchased a large London townhouse for £32.5m. The seller had not disclosed a serious clothes moth infestation in replies to pre-contract enquiries, despite knowing of the problem from pest control reports. The court found that this amounted to a fraudulent misrepresentation, rejected the seller's defences of delay, affirmation, and impossibility of unwinding the sale, and ordered rescission of the sale contract and damages.

A contract can be voided for a mistake which is fundamental to the subject matter of the contract and makes performance impossible or radically different from what the parties intended.

English law recognises three types of mistake:

1. Common mistake – where the same mistake is made by both parties.
2. Mutual mistake – where each party is mistaken but in different ways.
3. Unilateral mistake – where only one party is mistaken, and the other party takes advantage of that.

The precise test for each type of mistake differs, as do their consequences. The key point in practice will often be whether the mistake is sufficiently serious as to call into question the very basis on which the parties contracted. Many contracts contain minor errors or leave (sometimes considerable) scope for interpretation which may differ between the parties. However, the English courts very rarely void contracts for mistake, preferring instead to uphold the contract by determining how its express and any implied terms are to be interpreted or, in rare cases, rectifying (i.e. correcting) its terms.

Where performing a contractual obligation requires a party to do something illegal (or contrary to public policy), this may provide that party with a way of avoiding the consequences of not performing that obligation. Those circumstances do not bring an end to the relevant contract, but they provide a defence for the defaulting party because the courts will not enforce a contract (or tortious duty) which requires unlawful acts.

The English courts can consider whether the law of illegality will apply of their own volition, whether or not the defence is raised by a party. The courts will consider a range of factors, including the underlying purpose of the law or policy in question and the proportionality of the consequences for each party (Patel v Mirza [2016] UKSC 42). Ultimately, the key issue will be whether allowing the claim in the circumstances would undermine or be inconsistent with the law or policy in question.

The court has a wide discretion, as demonstrated in the following examples.

• Grondona v Stoffel & Co [2020] UKSC 42, in which the claimant had committed mortgage fraud, but made a claim for professional negligence against their solicitors for their conduct in the course of the mortgage procurement. The court refused the solicitors’ illegality defence on the basis that it would not seriously deter the illegal action in question (i.e. it would not make the commission of mortgage fraud less likely), but would undermine other public policy concerns (i.e. solicitors’ duties to their clients).

• Okedina v Chikale [2019] EWCA Civ 1393, where an employer argued that the illegality defence applied to a claim by an employee who did not have the required immigration status to work legally. The court refused to apply the defence, holding that it was not Parliament’s intention to render an employment contract entirely unenforceable in all situations where there could be illegal working. Instead, public policy required there to be certain contractual remedies available against employers in cases of poor treatment.

• Henderson v Dorset Healthcare University NHS Foundation Trust [2020] UKSC 43, in which an illegality defence was successful against a claim for medical negligence (which, it was asserted, led to the claimant being convicted of manslaughter due to a lack of proper care for her paranoid schizophrenia). The Supreme Court held that the illegality doctrine meant that the claimant could not be compensated for losses suffered as a result of her own criminal act.

An important practical point is that the English courts will generally only determine whether performance would be illegal by reference to what would be illegal under English law, and not by reference to any other law. There is, however, a limited exception where a contractual obligation necessarily requires actual performance (and not merely preparatory steps to perform) in a place where it would be unlawful. The exception was recently applied in Beneathco DMCC v RJ O'Brien Ltd [2025] EWHC 3079 (Comm), where a Dubai-based derivatives trader sought the return of $16.5m held by its broker after being designated with US sanctions. The court found that returning the funds would have involved a US correspondent bank processing the payment unlawfully, meaning that the obligation to return the funds was suspended.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.