Misrepresentation Lecture 7

Introduction Vitiating factors – these are provisions, clauses or term impairing a contract or making it void or voidable. Void contract – a contract is void where from the beginning, it has no legal effect. Voidable contract – a contract is voidable where it is initially valid but one of the parties has some right to elect to avoid it. Misrepresentation

Definition ‘…..an unambiguous false statement of fact or law which is addressed to the party mislead, which is material…..and which induces the contract’. McKendrick A misrepresentation is an untrue statement of the fact by one party which has induced the other to enter into the contract. Elliott and Quinn

The Statement An untrue statement of fact must have been made by the other contracting party, ( or by their agent acting within the scope of their authority), or the other contracting party must have known of the untrue statement. The statement may be in any form – spoken or by conduct. Untrue statement can include conduct - Spice Girls Ltd v Aprilla World Service BV [2000] EMLR 478

Untrue statement of fact or law – misrepresentation of law can constitute an actionable misrepresentation. This was not the case till the ruling in; Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 Held; that money paid under a mistake of law could be recovered on essentially the same basis as money paid under a mistake of fact.

Statement (2) Pankhania v Hackney London Borough Council [2002] EWHC 2441 ‘The distinction between fact and law in the context of relief from misrepresentation has no more underlying principle to it than it does in the context of relief from mistake. Indeed, when the principles of mistake and misrepresentation are set side by side, there is a stronger case for granting relief against a party who has induced a mistaken belief as to law in another, than against one who has merely made the same mistake himself….. The survival of the ‘misrepresentation of law’ rule following the demise of the ‘mistake of law’ rule would be no more than a quixotic anachronism.’

Statement (3) Untrue statement of fact not merely one of opinion will not create actionable misrepresentation. See Bisset v Wilkinson [1927] AC 177 Held: the statement was a matter of opinion, on the grounds that both parties were aware that the land had never been used for sheep farming, and therefore neither could expect the other to know, as a matter of fact, how many sheep it could support. Esso Petroleum v Mardon [1976] QB 801

Statement (4) Smith v Land and House property corporation (1884) 28 Ch D 7 ‘in case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion…. But if the facts are not equally well known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of material facts, for he impliedly states that he knows facts which justify his opinion.’

Statement (5) There are some cases in which what looks like a statement of opinion will be considered by the courts to be a statement of fact. Example Ann wants to sell a clock to Ben, and says she thinks the clock is 200 years old, when in fact she knows it was made the week before. Her state of mind is a fact, and she is lying about it; therefore she is making a misrepresentation of fact. See the case below. Untrue statement of fact not one of future intention. However a false statement of future intention will amount to a misrepresentation. Edgington v Fitzmaurice (1885) 29 Ch D 459

Statement (6) Edgington v Fitzmaurice (1885) 29 Ch D 459 Legal principle – A statement about what a person is thinking is a statement of fact, and if it is false it can amount to misrepresentation.

Statement (7) Silence is not generally a misrepresentation – mere silence will not usually amount to a false statement, even though it may involve concealing some fact which is highly significant. Under the traditional rule of caveat emptor (Latin for ‘let the buyer beware’), a purchaser is required to ask questions about important matters if necessary – the sellers is not usually expected to volunteer information which may put the buyer off. Keates v The Earl of Cadogan (1851) 10 CB 591

Statement (8) With v O’Flanagan [1936] Ch 575 Legal principle – keeping silence about a change of circumstances can amount to a misrepresentation. Partial revelation – if one party makes a statement which is itself true, but which misrepresents the whole situation because of what is left unsaid, the statement may amount to misrepresentation. See Dimmock v Hallet (1866) LR 2 Ch App 21 Held: omitting this fact presented such a distorted picture of the true situation that the court held there had been a misrepresentation.

The inducement Misrepresentation will only be actionable under contract law if it is at least one of the reasons for which the claimant entered into the contract. Materiality – misrepresentation must have been such as would affect the judgment of a reasonable man in deciding whether or not to enter into the contract on these terms Pan Atlantic Co Ltd v Pine Top Insurance Co Ltd [1994] 3 All ER 581 Museprime Properties Ltd v Adhill Properties Ltd (1999) 61 p & CR 111

The inducement (2) (b) No reliance on own investigation – where the innocent party does not rely on the other’s statement, and instead conducts their own investigations, or simply relies on their own judgment, the party making the misrepresentation will not be liable. Attwood v Small (1836) 6 CI & F 232 The owners of a mine made rather exaggerated statements as to its earning capacity to the prospective buyers. The purchasers had these statements checked by their own surveyors, who wrongly reported that they were correct. Held: that the claimants had been induced to enter the contract by their surveyors’ report and not by the vendor’s statement; if they had believed those statements they would have not have had them checked.

The inducement (3) A fraudulent misrepresentation does not need to be the only reason why the innocent party entered the contract. In Edgington v Fitzmaurice the claimant was induced to loan money to the company, partly by a misstatement in the prospectus and partly by his own (mistaken) belief that the contract would give him some rights over the company’s property. The claimant admitted that he would not have lent the money if he had not believed he would gain rights in the property. Held: that the statement made in the prospectus was still an actionable misrepresentation.

The inducement (4) (c) Means of verification irrelevant Redgrave v Hurd (1881) 20 Ch D 1 A solicitor wanted to sell his law practice. He told the buyer that it was worth £300 a year and invited him to check this by inspecting the papers in his office. Had the buyer done this, he could have learnt that the practice was actually worth no more than £200 a year. Held: that the buyer had relied on the seller’s word, and was entitled to do so , even if he had the means to discover that it was untrue. (d) Extent of reliance JEB Fasteners v Marks, Bloom & Co Ltd [1983] 1 All ER 583

Types of Misrepresentation Fraudulent misrepresentation Derry v Peek (1889) 14 App Cas 337 ‘I think the authorities establish the following propositions: first, in order to sustain an action for deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.’ Lord Herschell. Legal principle – if a person makes a false statement which he or she does not at the time believe to be true, this is a fraudulent misrepresentation.

Types of Misrepresentation (2) (b) Negligent At common law – this was established by the House of Lords in; Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465 Legal principle – the House of Lords stated, obiter, that there can be liability for negligent misrepresentation on the normal principles of tort, where there was a special relationship between the parties. It is still not completely clear what precisely is a ‘special relationship’ but, broadly speaking, it appears that such a relationship will only arise where the maker of a statement has some knowledge or skill relevant to the subject matter of the contract, and reasonably foresee that the other party will rely on the statement.

Types of Misrepresentation (3) Esso Petroleum Co Ltd v Mardon [1976] QB 81 Esso sales representative, who had over 40 years’ experience in the industry, had assured the defendant that a new petrol station would be able to sell around 200,000 gallons of petrol a year. After this statement was made, the local authority insisted on changes to the plans of the cite, and these meant the sales potential of the site was less than that detailed by the representative. Mardon fell into arrears and Esso sued him, so Mardon counter-claimed for damages for negligent misrepresentation. Held: the court applied the Hedley Byrne principle and Mardon recovered on his counter-claim.

Types of Misrepresentation (3) (c) Under s.3 Misrepresentation Act, CAP 69 ‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto, and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts as represented were true’. Howard Marine and Dredging Co Ltd v A Ogden and Sons Excavation Ltd [1978] Held; that the was liability under s2(1) MRA 1967; the defendants had failed to prove they had not been negligent. Bridge LJ, ‘statutes imposes an absolute obligation not to state facts which the representor cannot prove he had reasonable ground to believe.’ The Spice Girls Case [2002]

Types of Misrepresentation (3) (d) Innocent Misrepresentation According to McKendrick, this type of misrepresentation is a residuary category; that is one which is neither fraudulent or nor negligent. Innocent representation now only applies to misrepresentations that are made entirely without fault. Where one party has entered into a contract because of the other’s false statement, the other party can avoid liability for damages by proving that at the time the contract was made the believed the statement to be true, and had reasonable grounds for that belief – this is the statutory defence laid down in s.3 MRA CAP 69

Remedies for Misrepresentation Rescission (available for all types of misrepresentation) This is an equitable remedy – it sets the contract aside and puts the parties back in the position they were in before the contract was made. It is available for all four types of misrepresentation. How to rescind Car & Universal Finance Ltd v Caldwell [1965] 1 QB 525 Held: that by contacting the police and Automobile Association, the defendant had made his intention to rescind very the contract sufficiently clear.

Remedies for Misrepresentation (2) (ii) Bars to rescission The wronged party may lose rights to rescission when it is unreasonable or impossible to put the contracting parties back into their pre-contractual position. The four circumstances in which this will be the case are where: The innocent party affirms the contract (affirmation); There is lapse of time; The parties cannot go back to their original, pre-contractual position; and Rescission would deprive an innocent party of the rights acquired over the property which is subject of the contract.

Remedies for Misrepresentation (3) Affirmation – once the innocent party becomes aware of a misrepresentation, it can rescind or affirm the contract. Long v Lloyd [1958] 2 All ER 402 Lapse of time – claimants are barred from rescinding a contract if a long time has passed after the contract was made. Leaf v International Galleries Ltd [1950] 2 KB 86 The claimant bought a painting of Salisbury Cathedral, which the seller said was by Constable. When, five years later, he tried to sell it, he discovered that it not a Constable at all, and so he immediately applied for the contract to be rescinded. The courts refused to grant rescission, stating that it behoves the purchaser either to verify or, as the case be, to disprove the representation within reasonable time, or else stand or fall by it.

Remedies for Misrepresentation (4) Impossible to restore the parties to their pre-contractual position – rescission will not be ordered where it is impossible to return the parties to their original, pre-contractual position (known as counter- restitution) Erlanger v New Somberero Phosphate Co Ltd (1878) 3 App Cas 1218 Third party rights acquired – rescission is not possible after a third party has acquired rights under the contract.

Remedies for Misrepresentation (5) Damages – parties have a right to damages for any loss, unless the misrepresentation is innocent, where an award of damages is at the judge’s discretion. Damages are calculated using the tort measure, rather than contract measure. When are damages available? The measure of damages in Contract and Tort.

Fraudulent Misrepresentation The measure Smith New Court Securities Ltd v Scrimegour Vickers (Asset Management) Ltd [1977] AC 254 HOL held that the claimant could recover the larger sum, stating that the damages had to be assessed to include all the loses flowing naturally from the original fraud.

Remedies for Misrepresentation (3) Negligent misrepresentation under s3(1) MRA CAP 69 The measure Royscot Trust Ltd v Rogerson [1991] 2 QB 297 Held; that the same remoteness test should apply as for fraudulent misrepresentation. Innocent Misrepresentation

Remedies for Misrepresentation (4) Damages in lieu of rescission when? S3(2) MRA CAP 69 ‘Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled by reason of the misrepresentation to rescind the contract, then, if it is claimed in any proceedings arising out of the contract that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.’

Remedies for Misrepresentation (5) (ii) The measure? Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 Williams Sindall plc v Cambridgeshire County Council [1994] 1 WLR A misrepresentation which becomes a term of the contract. S2 MRA CAP 67 Indemnities – the courts can order a payment of money as an indemnity. It is important to note that this payment is not damages; it is designed to put the parties back into their former positions. See; Whittington v Seale – Hayne (1900) 82 LT 49

Excluding Liability for Misrepresentation S4 MRA CAP 69  If any agreement (whether made before or after the commencement of this Act) contains a provision which would exclude or restrict- (a)        any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b)        any remedy available to another party to the contract by reason of such a misrepresentation; that provision shall be of no effect except to the extent (if any) that in any proceedings arising out of the contract, the court or arbitrator may allow reliance on it as being fair and reasonable in the circumstances of the case. Walker v Boyle [1982] 1 WLR 495