The litigation risks of greenwashing: what would a misrepresentation claim in England and Wales look like?
Published on 26th Apr 2023
Alongside growing regulatory, investor and consumer scrutiny of green claims, businesses face increasing risk of a misrepresentation action
Recent guidance issued by the Law Society has highlighted that in the UK, in-house lawyers may "need to develop a broad understanding of climate risks and climate legal risks to provide holistic advice to the organisation". Elsewhere, industry regulators are increasingly focusing on the veracity of statements made by companies about their sustainability credentials, and there is a growing threat of civil litigation brought by consumers, investors, shareholders and other stakeholders intent of ensuring those companies remain on the hook.
There is no statutory or case law definition of "greenwashing" under English law. It has been defined in the European Commission's proposal for a Green Claims Directive as "the practice of making unclear or not well-substantiated environmental claims" to consumers and been defined more broadly by financial media website Investopedia as "the act of providing the public or investors with misleading or outright false information about the environmental impact of a company's products and operations". Such "misleading or false information" might arise not just from advertisements, but also, for example, from responses relating to supply chain due diligence or queries raised by ethical investors, or from statements made in annual reports, share offer documents, sustainability reports, prospectuses or the like.
But how might a misrepresentation claim be framed under English law? In particular, what hurdles will potential claimants face and what defences might be relied on?
The key elements of misrepresentation
The cause of action triggered by an alleged greenwashing, or misrepresentation, claim (leaving aside negligent misstatement actions in tort or claims based on misrepresentations which have become contractual terms), depends on the mindset of the defendant, which in turn leads to different remedies.
Fraudulent misrepresentation requires a false statement to be made without belief in its truth or recklessness as to its truth, which the representor intends the representee to act on. As such, an honest belief in the truth of a statement would defeat a fraudulent misrepresentation claim.
By contrast, negligent misrepresentation requires only that a false statement is made carelessly or without reasonable grounds for believing its truth, and a duty of care is owed to the representee.
Innocent misrepresentation requires only a false statement – there is no need to demonstrate fraud or negligence and the defendant has to show that it had reasonable grounds for believing the truth of the statement in order to defeat a claim. This can be particularly relevant in a greenwashing context, where companies may act in a well-meaning way but make statements which are ultimately false – in this area, that may mean unsubstantiated by science.
What must a claimant establish?
To succeed, a claimant must establish:
A false statement or representation of fact or law
The statement will not be false if it is "substantially", but not entirely, correct.
"Mere puff" or "sales talk" (not just in advertisements but in other documents too), which is not meant to be taken seriously, will not count. Arguably, though, statements made about a company's green credentials are inherently linked to scientific bases and presented as fact, and so this defence might be hard to run, depending on the exact circumstances of a claim.
That the false statement was made by the defendant to the claimant
Typical claimants are likely to be consumers who have purchased products based on green statements or counterparties to a contractual arrangement.
Misrepresentations can be continuing and it is possible to inadvertently carry on misrepresenting something to new consumers or businesses until the misrepresentation is corrected.
Outside of consumers who rely upon advertising of green credentials, shareholders and investors, and even the general public, may also seek to bring claims.
That the false statement induced the claimant to enter into a contract with the defendant
This is primarily a question of fact and this will be a high bar for claimants. For negligent and innocent misrepresentation, recent case law has suggested that the relevant test is whether the representee would not have entered into the contract "but for" the misrepresentation. However, for fraudulent misrepresentations, there is a presumption of inducement.
That the false statement caused the claimant to suffer a loss
This is likely to be a significant issue for greenwashing claims. For example, if a consumer buys a product based on a false "green" claim, the loss might be the difference (if any) between the purchased product and a competitor's product which was not said to have the same green claim. There may be difficulty in showing that the product would not have been bought at all and, at consumer level, losses are likely to be relatively low (although class actions might be a possibility).
If shareholders or investors were to bring a claim based on false green credentials, they would need to show what impact those false claims had on the value of a company's shares – in practice (and in the absence of a major scandal) that might be negligible in many situations and it might even be the case that greenwashing increased the company's finances: a truly greener company may be less profitable.
The final hurdle for claimants is proving that a loss is recoverable.
Remedies
The remedies available to claimants are various.
For fraudulent misrepresentation or negligent misrepresentation: tort damages and rescission (meaning an unwinding of the contract, such as return of goods with a full refund), or damages in lieu of rescission.
Tort damages seek to restore claimants to the pre-representation position but do not compensate claimants for the loss of a bargain (which claimants bringing contractual claims can obtain). For fraudulent misrepresentation claims, there is no remoteness limit so claimants can recover for non-foreseeable losses such as wasted expenditure and even, possibly, damages for distress.
Claimants will often choose to claim negligent misrepresentation rather than fraudulent misrepresentation (which carries a higher evidential burden) – although some claimants may choose to allege fraudulent misrepresentation as well, in order to embarrass a defendant.
For innocent misrepresentation the remedy is rescission only (or payment in lieu).
Consumers are also entitled to additional statutory remedies. Complications may arise in cross-border transactions, where the governing law and jurisdiction of a claim will need to be determined. Where a contract has been concluded, there may also be contractual terms which limit or exclude liability.
Osborne Clarke comment
We have already seen the emergence of activist shareholders in the UK seeking to shape and ensure the authenticity of companies' stated commitments to sustainability. It is likely to be only a matter of time before we start to see misrepresentation claims brought in England testing the same. This is so, despite the difficulties mentioned above. Claimants may see such legal actions as a way of driving forward change and bringing greater pressure to bear on companies, even if they do not ultimately result in a favourable judgment or monetary compensation.
The issues above were discussed in more detail in our recent "Sustainability litigation – the risks of greenwashing" talk as part of the Osborne Clarke Disputes Week series. A link to that talk can be found here For an international look at the risks and likelihood of sustainability litigation, follow the link to the second part of the talk.
