Top Left Background Top Right Background
Bottom Right Background

Misrepresentation

Previous: Unconscionable bargains

Introduction

English law is not sympathetic to mistakes in contracts: bad bagains are your own fault, and duress and undue influence must generally be asserted by the innocent party. Although in some cases, it is possible for a mistake to void a contract entirely; for example, when trust and confidence is undermines in undue influence.

Misrepresentation is one way of voiding a contract for a mistake. If the mistake is ‘your own fault’, misrepresentation will not help. However, if you have been induced into a contract, you may be able to void the contract under the principle of misrepresentation.

Consequences

A misepresentation by a non-innocent party will cause a contract be voidable. That is, an innocent party may assert that a misrepresentation has occurred and then rescind the contract. Of course, a contract can also be rescinded if there had been a total failure of consideration (one party hasn’t ‘done anything’ towards the contract) or if fraud has occcurred. Equity may assist in granting rescission.

Rescission is the primary remedy for a misrepresentation. Damages are generally unavailable where a contract has been rescinded, although a statutory claim (see below) or a tort claim may be possible in addition to rescission. It is important to note that a misrepresentation, occurs prior to the formation of a contract, therefore an action for breach of contract will be unavailable, unless the misrepresentation can be said to have become a term of the contract. Bargaining power is irrelevant in misrepresentation and there is no tort of innocent misrepresentation.

Elements

For there to be a successful misrepresentation, there must have been a statement of fact, made by the representor to the representee, which is false, material and induces entry into the contract.

A statement

As a general rule, according to Hamilton v Allied Domecq [2007], silence cannot constitute a misrepresentation, and there is no duty to volunteer information in a contract which is not for commercial insurance purposes. Although, if a statement is made, if its validity then changes before the contract is concluded, as was the case in With v O’Flanagan [1936] where the value of a business had declined, there is a duty to correct that statement. Dimmock v Hallett [1866] found that there had been a misrepresentation in a statement which was literally true, but was not the real truth. There is no general duty to correct, although a general rule, inferred from Hartog v Colin & Shields [1939] is that there is a duty to correct a mistake where there is knowledge of that mistake by the other party. The case concered the obvious mistake where ‘per pound’ was stated rather than ‘per piece’.

Of fact

If no assurance is made, there can be no misrepresentation. In Bisset v Wilkinson [1927], a non-expert could not misrepresent his opinion on how many sheep could be reared on a particular piece of land. Similarly, in Anderson v Pacific Fire & Marine Insurance Co [1872], no misrepresentation was found where a ship owner had only passed on information about the security of an achorage.

As a general rule, opinions can therefore not give rise to an actionable misrepresentation. However, the existence of an opinion is a metter of fact, therefore if, according to Smith v Land & House Property Corp [1884], an opinion is made without reasonable supporting grounds, it may give rise to an actionable misrepresentation. Here, the defendant unreasonably described a tenant as ‘most desirable’. Similarly, in Esso Petroleum v Mardon [1976], a warranty was implied into an unreasonably held opinion about a future turnover estimate.

Statements of intent do not usually form the basis of a misrepresentation, however, in Trail v Baring [1864], a misrepresentation was found in the defendant changing his mind over the assurance of a risk. Wales v Wadham [1977] found that there was no misrepresentation in a divorcee changing her mind to remarry before the conclusion of a settlement agreement. It is arguable whether this case contradicts the aforementioned case of With v O’Flanagan [1936] where a duty to correct was imposed.

Made by the representee

Misrepresentation is effective in cases of undue influence. A statement may be made by or on behalf of the representee. Examples of this can be found in RBS v Etridge (No. 2) [2001] and Barclays Bank v O’Brien [1994].

Which is false

A statement must be objectively verifiable as false for it to be a misrepresentation. In Edgington v Fitzmaurice [1885], this requirement was satisfied by saying that invested money would be spent on expanding a business, when in fact it would be used to pay off debts.

Material

The materiality requirement is in place to prevent claims without merits. It is a low threshold which requires that a reasonable person would take the statement which was made into account.

Inducement

Inducement is the important element in a misrepresentation claim. It is a subjective test which requires there to be a causal link between the statement made and the contracts formation. Assicuriazioni Generali v Arab Insurance Group [2002] phrased the test in non-fraudulent circumstances as a but for test: but for the representation, would the claimant have entered into the contract? For a misrepresentation to be found, the answer to this question must be ‘no’. It is very difficult to prove that a statement was made fraudulently.

Attwood v Small [1838] found that where a statement is checked by a third party (accounts), no misrepresentation can be found as the judgment of the claimant will have been relied on rather than the statement itself. JEB Fasteners v Marks, Bloom & Co [1983] required that a misrepresentation plays a real and substantial part in inducing entry in a contract and Redgrave v Hurd [1881] said http://www.besttramadolonlinestore.com that there was no requirement to check the validity of a misrepresentation, even if it would be easy to do so. According to Standard Chartered Bank v Pakistan National Shipping Corp [2002] said that checking is irrelevant where fraud is involved.

Remedies

In any misrepresenetation claim, it is for the claimant to prove that all of the elements of an actionable misrepresentation are present. If successful in this respect, there are two possible remedies: rescission and/or damages. Damages may be awarded only where rescission is unavailable or is unsatisfactory.

Rescission

Rescission is the setting aside of a contract as if it were fictional and was never concluded. It is usually a self-help remedy. That is, an innocent party need only tell the representor that they are rescinding the contract and execute the remedy. In Car & Universal Finance v Caldwell [1965], it was said that ‘Caldwell noises’ are enough to initiate the rescission process where the representor cannot be found.

Bars to rescission

There are 4 bars to rescission: unjust enrichment, intervening third party rights, affirmation and lapse of time.

Unjust enrichment

Rescission will not be possible where one party would be unjustly enriched. It is therefore impossible to rescind a contract for the purchase of a consumable which has been used up, for example. However, where possible, the court will do its best to make rescission possible. In Erlanger v New Sombrero Phosphate Co [1878], minerals which had been mined and sold on could not be returned, however rescission was possible as the profits made from those minerals could be ‘given back’.

Intervening third party rights

It is a police concern that where a bona fide third party has acquired the title to some goods, that third party should not be prejudiced by a previous contract which did not involve them. This may seem contradictory to Car & Universal Finance v Caldwell [1965], however, Caldwell noises create a small exception to this rule as the rights had not been acquired prior to rescission being initiated with Caldwell noises.

Affirmation

According to Peyman v Lenjani [1985], if one party knows of a misrepresentation, they may elect to affirm the contract, ingoring the misrepresentation. Rescission is henceforth barred.

Lapse of time

Equity imposes this bar to rescission. If it would be unreasonable to rescind a contract, such a rescission will be barred. There is no strict limit on what time frame is reasonable, though one may consider that breach of contract claims must be made within 6 years of a breach. Though of course, there may not have been a breach in misrepresenation claims.

Damages

Common law

Damages are a complex issue in misrepresentation at common law. Prior to 1964, the law or tort was required for damages to be claimed for misrepresentation. The tort of deceit was the only way to attain damages. Derry v Peek [1889] required that a statement must have been made where falsity was known; either intentionally or without care. Damages were then available and were only limited by causation. The only other possible award was an indemnity, as was awarded in Whittington v Seale-Hayne [1900]. In 1964, damage availability was extended by Hedley Byrne v Heller & Partners [1964] with the introductions of negligent misrepresentation, where damages were based on reasonable foresight.

Issues

As of 1964, there were two issues with common law misrepresentation remedies. Firstly, rescission was available too widely, not distinguishing fraudulent misrepresentation from negligent and innocent misrepresentations, meaning that a contract could be scrapped entirely for a minor mistake. Secondly, damages were difficult to obtain as fraud under Derry v Peek [1889] was and still is difficult to prove, and few judges really understood how Hedley Byrne v Heller & Partners [1964] actually applied. The legislature then stepped in with the Misrepresentation Act 1967 to attempt to resolve these issues. A final point to note here is that damages in the tort of deceit could account for profits lost, according to East v Maurer [1991], contract to the usual principles of damages in tort law.

Misrepresentation Act 1967

The Misrepresentation Act 1967 says nothing about what an actionable is, and does not dispose of the common law remedies. However, it both provides an independent cause of action for obtaining damages and gives courts the discretion to award damages in lieu of rescission.

  • s 2(1) – Where an innocent party enters into a contract following a misrepresentation, if representor would be liable if the representation had been made fraudulently, he will be so liable despite there being no fraud unless he can prove that he had reasonable grounds for believing that the representation was true at the time that the contract was formed.
  • s 2(2) – Court has discretion to award damages in lieu of claimed rescission if equitable and considering losses caused to both parties by rescission.
  • s 2(3) – s 2(2) damages independent of s 2(1) damages, but may not be awarded if double recovery would result.

Damages in practice

If no contract was ever formed between the parties, tort law must be used to make a claim, however, a claim may be made for damages under s 2(1). In Howard Marine v Ogden [1978] where the Lloyd’s list ‘shipping bible’ was incorrect, resulting in the defendants being liable under s 2(1). There is some controversy over the wording of s 2(1). It clearly provides an independent claim in damages for any victim of a misrepresentation, and can be defended if the defendant had a subjective belief of truth as well as an objectively non-negligent belief. What is less clear is what is meant by the words ‘so liable’ [if would be liable if representation had been made fraudulently]. This could either be interpreted simply as a basis for liability, or as a basis for an liability and the extent of that liability. It is submitted that the former is the correct interpretation, however in Royscot Trust v Rogerson [1991], the Court of Appeal preferred the latter approach, meaning that now, a person is liable to the extent of a fraud claim, when in fact it may be debatable whether they were even negligent.

As a result of Royscot’s generous interpretation of the 1967 Act, there is no longer any need to use the common law to attain damages for misrepresentation; Derry v Peek [1889] is now redundant and s 2(1) should be used. The only minor caveat, found in Gran Gelato v Richcliff [1992] is that contributory negligence may reduce damages awarded under s 2(1); something which is not possible where fraud is concerned. Although, considering that tort law attempts to compensate for losses, where contract law attempts to fulfil and expectation interest, it will nearly always be better to disregard the common law.

Rescission in practice

The courts will not have discretion in s 2(2) to award damages in lieu of rescission where fraud is present. William Sindall v Cambridgeshire CC [1994] is the leading case on the application of s 2(2). It said that the court will ask whether rescission is appropriate, and then look at the losses incurred by each party caused by the misrepresentation. Damages will then be awarded to ‘financially adjust’ the contract for if it was concluded on different terms (i.e. taking into account the misrepresentation). Government of Zanzibar v British Aerospace [2000] ruled that where rescission is not possible, damages under s 2(2) cannot be awarded by a court.

Next: Contractual terms

Goto Top
Close Notification

Recent News

Other News