This is quite a useful document with regard to Misrepresentation .......contains refernces to relevant case laws too.......
Misrepresentation.
> Contract law generally >
A misrepresentation maybe in writing, orally, or by conduct. Silence will no usually amount to a misrepresentation.
Misrepresentation requires:
1) False statement of fact.
2) Relied on by the innocent (e.g. if you know better- no misrepresentation).
3) The misrepresentation induces the party into the contract.
4) The misrepresentation precedes the contract -
Amalgamated Investment & property v John Walker (1977) 1 WLR 164 Misrepresentation of fact or opinion
A party that gives a misrepresentation of fact will generally be liable while a party who makes a misrepresentation of opinion only will generally not. Essentially this is used as a tool to control the number of claims.
Bisset v Wilkinson (1927) AC 177
A false statement of opinion is not a misrepresentation of fact. It had been suggested that a farm could hold 2000 sheep, when in fact this was not correct. Both parties knew that the farm had never been used for sheep farming so the number may have been difficult to predict. It was held that suggesting the farm could hold 2000 sheep was only a misrepresentation of opinion, and so there was no remedy available.
Sometimes a misrepresentation of opinion will be regarded as misrepresentation of fact. The rule was set out in the following case.
Edgington v Fitzmaurice (1885) 29 Ch D 459
The defendant tried to obtain loans from members of the public with the stated purpose of these loans being the improvement and extension of buildings. The defendant did not in fact intend to use the loans for this purpose. It was held that this was a misrepresentation and that “the state of a man’s mind is as much a fact as the state of his digestion”. A statement of fact was defined as an existing fact at the time the statement was made, not something to happen in the future. Although as in this case, a statement of intention is an exception to the general definition of a misrepresentation of fact.
Smith v Land & House Property Corp (1884) 28 Ch D 7
If you know the statement you are making is wrong there maybe a misrepresentation. A house seller had described a troublesome tenant as “most desirable.” It was held that there was a Misrepresentation. “There are facts that justify an opinion [being taken as fact]”. Namely that they knew the tenant was troublesome in failing to pay the rent.
Leaf v international galleries (1950) 2 KB 86
Innocent misrepresentation. The claimant had brought a painting believing it to be a Constable when in fact it was another artist. There was a time lapse of 5 years before this misrepresentation was discovered. The claimant sought rescission. It was held that misrepresentation must be claimed within reasonable time. No rescission was allowed in this case.
Reliance and inducement.
The innocent party must have been
induced to
rely on the statement.
Redgrave v Hurd (1881) 20 Ch D 1
A Solicitor wishing to sell their legal practice informed a potential buyer that it was worth £300. The seller invited the buyer to look at papers to check the value, but the buyer declined. Had he looked he would have noticed the Legal practice was in fact only worth £200. It was held that he was entitled to rely on the Solicitors statement as to the value of the practice and the buyer was entitled to recover.
If a contracting party has real knowledge that there is a misrepresentation to them by the other party before contracting then there is no remedy. The misrepresentation will be actionable if there is only a suspicion, or information which might, if checked, lead to the revealing of the misrepresentation.
Cf Attwood v small (183
7 ER 684
A seller exaggerated the capacity of a mine. The buyer was also misled by an independent surveyor. It was held that the claimant had not relied on the statement of the seller, but on the independent surveyor. It was held there was no misrepresentation in this case as the claimant had relied on the independent surveyor not the seller.
Cf Edgington v Fitzmaurice (1885) 29 Ch D 459
Although a party must rely on the statement, it need not be the only reason for entering contractual relations. In this case the defendant tried to obtain loans from members of the public with the stated purpose of these loans being the improvement and extension of buildings. The defendant did not in fact intend to use the loans for this purpose. The buyer had relied on this statement but had also wrongly believed he would gain property rights over the buildings, and he would not have entered the contract had he known he was not to get property rights. It was held that it was still a misrepresentation to obtain the loan on the statement used to induce the buyers, and the claimant was entitled to recover.
Non-disclosure
There is no general duty to disclose.
With v O'Flanagan (1936) 1 ALL ER 727
A Doctor was selling his medical practice and told a potential purchaser it was worth £200 which was true at the time. The Doctor fell ill and a number of patients left the practice reducing the value of the practice. By the time of contracting for the sale the business was worth considerably less than the £200 originally stated, but the Doctor did not inform the purchaser of this fact.
It was held if the statements are made in the course of negotiations, and then there is a change of circumstances, there is a duty to disclose the change of circumstances.
Dimmock v Hallet (1866) 2 Ch App 21
A seller of land containing a number of farms that also had tenants, failed to inform the buyer that these tenants were about to leave. This none disclosure was held to be a misrepresentation.
R v Kylsant ( )
A half truth misleads by non-disclosure of the full facts.
Words or conduct Gordon v Selico (1986) 11 HLR 219
A owner of a property asked an independent contractor to rid their property of dry rot to get it ready for sale. They did not do so instead electing to simply cover it up so no one could see it. When the property was sold the purchaser later noticed the concealment of dry rot that had been covered up and it was held to be a fraudulent misrepresentation by both the independent contractor and the vendor.
Constructive notice of misrepresentation
There are circumstances where a party maybe considered to have ‘constructive knowledge’ of a misrepresentation before contracting even though they did not actually know. This occurs when one party becomes aware of something that should put them on further investigation or enquiry to discover the full facts- they are said to have ‘constructive notice.’ This typically happens in mortgage agreements where one partner in a
marriage re-mortgages the house without informing the bank that their partner has an
interest in the property. See also
equity and trust notes; particularly
co-ownership and
constructive trusts but see also contract undue influence notes in
remedies.
Kingsnorth Finance Co v Tizard (1986) 1 WLR 783
Cf Barclays Bank v O’Brien (1993) 4 ALL ER 417
To avoid constructive notice the lender should arrange a private meeting with the other partner in the relationship (usually the wife) without her husband being present to avoid him putting undue influence on her. The mortgage lender should inform her of the possible consequences of the mortgage on her
interest in the property and her possible liability. The lender should then inform her it would be advisable that she takes independent advice.
In this case the husband had used undue influence on the wife and the bank failed to arrange a private meeting with the wife. It was held that because the bank had failed to arrange a private meeting with the wife the bank’s application for sale of the property was subject to the wife’s
interest in the same property.
Utmost faith or uberrimae fidei
There are some agreements that require ‘utmost faith’. In such cases a failure to disclose entitles the affected party to rescind the contract but no damages are available.
Examples of ‘utmost faith’ contracts include:
- Insurance (any fact which might affect the insurance results in a duty to disclose and the contract becomes voidable (e.g. taking out a life insurance policy but ingnot inform the insurer that they are terminally ill). See e.g. Lambert v Home Insurance Co above.
- Acquiring shares in a company.
- Contracts for the sale of land.
Seaman v Forerean (1743) 2 Stra 1183
This case concerned obtaining insurance for a ship while England was at war with Spain. The seller did not inform the buyer that the ship was currently in a vulnerable position at sea, and was subsequently captured by the Spaniards. It was held the contract was voidable on option to the buyer.
fiduciary relationships
There is a duty to disclose where there is a fiduciary relationship.
Examples of fiduciary relationships include:
- Solicitor - client.
- Trustee - beneficiary.
- Principal - agent.
This list is not exhaustive but essentially includes relationships that require trust.
Lambert v Co-operative Insurance (1975 ) 2 Lloyds Rep 485
The test for what should be disclosed is such facts as is reasonable or prudent for them to have regarded as material facts. In this case a woman had failed to inform an insurance company that her husband had been convicted of theft. She later claimed on her
home insurance for loss or theft of items. It was held that she should have disclosed these facts as no prudent insurer would continue with the agreement had they known that her husband was a convicted thief.
Consumer contracts
The Sale of Goods Act 1979 implies two terms of significance here where the seller is ‘in the course of business’. Therefore the terms do not apply to private sales.
Firstly, under s.14(2) there is an implied condition into consumer contracts that the goods must be of a satisfactory quality except where the goods are damaged or faulty and this
IS brought to the buyers attention, or where the buyer ought to have been aware of the defect because it was fairly obvious (s.14(2C)). Secondly, under s.14(3) there is an implied condition that the goods must be ‘fit for the purpose’ for which the buyer expressly stated they wanted the goods to by used for.
In the case of the two implied terms above the protection is better because the seller will be liable even if they did not know of a defect or damage, provided the goods were not of a satisfactory quality or not fit for the purpose.
The Supply of Goods and Services Act 1982 extends this requirement as does Part 1 of the Consumer Protection Act 1987 which also imposes strict liability for dangerous products.
Types of Misrepresentation
There are four types of misrepresentation.
(1) Fraudulent Misrepresentation Derry v Peek (1889) 14 App Cas 337
requirements:-
a) the defendant knowingly misrepresented or;
b i) without the defendant having belief in its truth or
ii) recklessly misrepresented without care as to whether it was true or not.
The claimant may seek damages, rescission or indemnity.
(2) Negligent Misrepresentation common law
In action for damages for misrepresentation the plaintiff must generally proof that the misrepresentation induced them into a contract.
Hedley Byrne & Co Ltd v Heller & Partners (1964) AC 465
Easipower Ltd asked Hedley Byrne to advertise on its behalf. Hedley wanted to know the financial standing of Easipower and asked their bankers. Heller, the bankers, negligently stated “considered good for its ordinary business engagements”. Easipower went into liquidation. It was held that their was a special relationship between Hedley Byrne and Heller that was “equivalent to a contract”. Heller therefore owed Hedley Byrne a duty not to make negligent statements. For liability to occur for negligent misstatement it was held that the statement must occur in the following circumstances:
1) The claimant must have relied on the special skill and judgement of the defendant (L. Devlin suggested it does not matter where the defendant is a professional or not).
2) the defendant knew it would be relied on (per Lord Reid).
3) it was reasonable for the claimant to rely on the statement (per Lord Reid).
4) the parties were not strangers and have a “special relationship”. Lord Devlin talked of a relationship “equivalent to a contract” which might be defined as a voluntary assumption of responsibility such as when Heller decided to reply to Hedley Byrne.
5) It is an unqualified statement. That is that the defendant did not say something like, “I'm not sure, you should check yourself”.
The difference being that the plaintiff does not have to show a contract with Hedley Byrne, but a 'special relationship' instead (see tort notes).
On claiming damages for negligent misrepresentation at common law, the test of remoteness in the tort of negligence is for liability for only reasonably foreseeable loss.
ESSO Petroleum v Mardon (1976) QB 801
An ESSO Sales Representative with 40 years experience told a prospective leaseholder that a particular petrol garage sells 200,000 gallons. If fact this was not true as the local authority had insisted on changes to the plans which were not communicated to the buyer, but were to significantly reduce the capacity of the garage. ESSO had sued for rent arrears, Marden brought a counter-claim for negligent misrepresentation. The Court held that when applying Hedley Byrne v Heller Mardon may recover for negligent misrepresentation.
Statute The Misrepresentation Act 1967 s2(1)
s.2(1) reverses the burden of proof. The defendant must then prove they believed the statement to be true and had reasonable grounds to believe it to be true.
Spice girls v Aprilia world services (2000) The Times, Sept 12
The spice girls knew Geri (Ginger Spice) would be leaving the band, but failed to tell the advertisers before contracting with them and who were to use the Spice girl brand to advertise their product. It was held that this ought to have been declared so the advertisers could make a decision as to whether or not to contract.
Howard Marine and Dredging Co v Ogden & Sons (197
QB 574
Ogden hired barges for dumping clay in the north sea. There was liability for a misrepresentation of the barge weight capacity which was crucial in determining the cost and time of the work to be done.
The case was brought under The Misrepresentation Act 1967 s2(1) which reverses the burden of proof. It was held that the defendant had not proven no negligence was involved.
Royscott Trust v Rogerson (1991) 2 QB 297
The measure for damages is the measure used for the tort of deceit.
(3) Innocent Misrepresentation
Innocent non-fraudulent misrepresentation must be entirely without fault. Where there is fault the Hedley Bryne & Heller principles will apply. s2(2) of the Misrepresentation Act 1967 gives the court a discretion, where entitled to rescind, it may instead award damages in lieu of rescission. Rescission or damages in lieu of rescission or indemnity.
Exclusion clauses for misrepresentation Unfair Contract Terms Act 1977
S3 provides any exclusion clause for misrepresentation, or restriction of remedy, is subject to s11(1)-the test for reasonableness
An exclusion clause cannot include restriction for personal injury or death.
Remedies for Misrepresentation.
A misrepresentation generally makes the contract voidable, not void. The contract will therefore continue unless the innocent party decides to rescind the contract.
Rescission
Rescission is an equitable remedy that sets the contract aside putting the contracting parties back in the position they occupied prior to contracting- as if they had never contracted in the first place. Rescission was only available for negligent and fraudulent misrepresentation. Under s.1 Misrepresentation Act 1967 a contracting party may now claim rescission for innocent misrepresentation where the misrepresentation became a term of the contract, or the contract has been performed if he would otherwise be entitled to rescind the contract without claiming fraud.
Requirements
For rescission to be accepted the innocent parties must inform the other party that they rescind the contract, or demonstrate rescission by other action if informing the other party is impractical.
Car & Universal Finance Co Ltd v Caldwell (1965) 1 QB 525
The claimant had sold a car that was paid for by cheque. The cheque bounced. The claimant immediately informed the Police and the Automobile Association. The buyer sold the car on to a third party. It was held that the contract had been rescinded by the claimant expressing their intention to rescind by informing the Police of the situation. This occurred before the car was sold to an innocent third party so the claimant was still the rightful owner of the car. Had the claimant told the Police after the car had been sold to a third party then it is likely that the chance of rescission would have been lost.
A contracting party who wishes to rescind a contract can also apply to the court for an order to rescind. The claimant can only obtain indemnity, putting the claimant back in the position they were in before, and not damages unless they claim under the Hedley Bryne and Heller principles above.
Whittington v Seale-Hayne (1900) 82 LT 49
The difference between indemnity and damages was highlighted. The claimant purchased a poultry farm from the defendant. The defendant stated that the farm was hygienic. In fact the water supply was poisoned and the poultry died as a result. The farmer also fell ill, and the Local Authority ordered the claimant to fix the drains. The claimant claimed £1,525 for loss of the poultry, profit, costs, medical expenses, and for repair to the drains. The defendant offered £20 for rent, rates, and repair of the drains. It was held that £20 was adequate as only expenses which inevitably flowed from the contract will be paid by indemnity. Not damages which the claimant was effectively asking for.
Bars to rescission impossibility Vigers v Pike (1842) 8 ER 220, HL
This case involved a Mine, which by the time the claimant had wanted to rescind had been completely “worked out”. There was nothing left to return.
Cf Erlanger v New Sombrero Phosphate Co (187
3 APP Cas 1218
This case also involved a Mine which by the time the claimant had wanted to rescind the contract was partly used up. The court ordered that the Mine be returned and compensation for the part of the mine that had been used to put the claimant back in the position they would have been in before contracting.
Third party rights
This might be the case if a car is fraudulently obtained by misrepresentation but the car is sold to a third party before the contract is rescinded. The third party, assuming they are innocent, would then be entitled to the car.
Affirmation
Affirmation occurs when the innocent party becomes aware of the misrepresentation but continues with the contract. No rescission is allowed.
Leaf v International Galleries (1950) 2 KB 86
The claimant brought a painting after the defendant seller had informed him it was a “Constable”. In fact it was not a Constable but the claimant was unaware of this until they tried to resell the painting five years later. The court held that it was too late to rescind the contract as there was no evidence of fraud by the seller who had honestly believed that the painting was a “Constable”.
Damages
Damages maybe available where there is no rescission or indemnity.
Benefits of damages under s.2(1) Misrepresentation Act 1967- Damages for Misrepresentation under s.2(1) are calculated by the tort method.(Royscott Trust v Rogerson (1991) 2 QB 297 The measure for damages is the measure used for the tort of deceit.)
- The statement maker is liable unless he shows he had reasonable grounds to believe the statement he was making. Where as with damages at common law it was for the receiver of the statement to prove the statement maker was negligent.
- It is also not necessary to prove a ‘special relationship’ under Hedley Bryne and Heller.
Gosling v Anderson (1972) EGD 709 a woman was selling her flat and represented through her Estate agent that there was planning permission to build a garage next to the flat, when in fact this was not true. Under the common law the purchaser would have had difficulty proving fraud. But it was not necessary under s.2(1) Misrepresentation Act 1967.
Damages are now available for all types of misrepresentation except innocent misrepresentation.
Damages for negligent misrepresentation South Australia Asset Management Corp. v Montague York Ltd (1996) 3 ALL ER 365.
The claimant lent money to buy commercial premises based on the reliance of a negligent misrepresentation by the defendant surveyor who valued the properties. After the claimant brought the property the property market also collapsed causing the value of the premises to fall even further. The properties were sold for less than the amount lent. The lenders were unable to recover their losses, and so sued the defendant surveyor for negligent misrepresentation. The Court of Appeal held that the claimant could claim the difference between the amount lent and the sum recovered by the sale of the property, putting them back in the position they were in before they contracted, and included the amount lost due to the collapse in the property market. The House of Lords held that the claimant could only claim what was naturally lost from the contract, and not from the collapse in the property market.
Fraudulent misrepresentation Smith New Court Securities Ltd v Scrimgeour Vickers (asset management) Ltd (1996) 3 WLR 1051
The shares in Ferranti company had been valued at 78 pence per share. The claimant brought £23 million shares in Ferranti at 82.25 pence a share because the seller of the shares had fraudulently claimed there were other buyers for the shares. Additionally another company was sold to Ferranti; the selling Company fraudulently claimed the company was valuable, but in fact it was worth nothing. Subsequently the shares then nose-dived, and were sold for a loss of £11 million. The issue for the court was whether or not the claimant could recover for ALL losses including for the losses caused by the purchase of the worthless company by Ferranti, or whether the claimant could only recover for the losses caused by the initial fraud that there were other buyers, but not for the losses caused by Ferranti’s purchase of a worthless company. It was held that as the initial misrepresentation regarding many people being interested in the shares was fraudulent the claimant was entitled to recover ALL losses.
It is often said that contract protects a good bargain while tort protects a bad bargain.
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