6 - Misrepresentation

Question 1

In which four stages is the law on misrepresentation considered?

Answer 1

The law on misrepresentation can be considered in the following four stages:
(a) Categories of pre- contract statements - Whether the statement made formed part of the contract (a term), or whether it was simply an inducement to enter into the contract (i.e., a representation).

(b) Definition of misrepresentation - Identify what counts as misrepresentation, define it, and apply it to the false preliminary statement that has been made.

(c) Types of misrepresentation - Determine the type of misrepresentation.

(d) Remedies - Determine the remedies available to the misrepresentee (the party who has been misled).

Question 2

What is the key terminology used in misrepresentation cases.

Answer 2

Representor: the party who allegedly made the representation

Representee: the party who allegedly received the representation

Question 3

What are the three categories that preliminary statements typically fall into in pre-contract discussions?

Answer 3

Preliminary statements generally fall into one of three categories:
Sales puff: Extravagant sales talk not meant to be believed and not actionable if untrue.
Contract term: A statement forming part of the contract, giving rise to a breach of contract action if untrue.
Representation: A statement that may be actionable as a misrepresentation if untrue.

Question 4

When is a false preliminary statement considered actionable?

Answer 4

For a false preliminary statement to be actionable, it must either amount to a term of the contract or be classified as a misrepresentation.

Question 5

What is the primary test to determine whether a preliminary statement is a term or representation?

Answer 5

The primary test is the common intention of the parties when entering into the contract.

Question 6

What are the guidelines that courts consider when the intention of the parties is unclear in determining whether a preliminary statement is a term or a representation?

Answer 6

Courts use the following guidelines:

Greater skill or knowledge:
- If the statement maker had greater expertise, the statement is more likely a term.
- Example: if an expert misleads a non-expert, the statement is more likely a term. Conversely, if a non-expert misleads an expert, it is likely to be a representation.

Repetition in a written contract:
- If a verbal statement is repeated in writing, it is definitely a term; if not, it could be just a representation.

Vital importance to the recipient:
- If the recipient highlights the statement as crucial, it is almost certainly a term.
- Example: Natasha informed the seller that the organic status of vegetables was vital, to which the seller assured her of the organic vegetables. This statement would be a term because of its importance to the buyer.

Invitation to verify:
- If the statement maker invites the other party to verify it, the statement is likely to be a representation.
- Example: The seller advising Anoushka to verify the boat’s condition through a survey implies it is a representation.

Lapse of time:
- The longer the gap between making the statement and forming the contract, the more likely the statement is a representation.
- Example: Priti’s statement about her motorbike’s manufacturing date, made before entering a written contract that did not mention the date, is more likely a representation due to the time lapse.

Question 7

What is the effect of a preliminary statement being classified as a contract term?

Answer 7

If a preliminary statement is deemed a term and is untrue, it results in a breach of contract. The innocent party can then seek remedies for the breach.

Question 8

Can a false preliminary statement still be actionable if it is not a contract term?

Answer 8

Yes, even if a false preliminary statement is not classified as a term, it may still be actionable as a misrepresentation.

Question 9

What is the definition of misrepresentation in contract law?

Answer 9

Misrepresentation is:
An untrue statement of fact made by one party to a contract, by words or conduct, to the other contracting party, which induced the other to enter the contract.

Question 10

What constitutes an untrue statement in misrepresentation?

Answer 10

The first requirement to show misrepresentation is that there be an untrue statement, which may be:
- Oral, in writing, or by conduct.

Example: In Spice Girls v Aprilia World Service BV [2000], the Spice Girls’ participation in filming a TV commercial represented that none of the members intended to leave. However, this was untrue because one member had already given notice of her intention to leave. This participation amounted to a misrepresentation by conduct, and the sponsor was entitled to damages.

Question 11

Can silence amount to misrepresentation?

Answer 11

As a general rule, silence does not amount to misrepresentation, but there are exceptions:
- Fiduciary relationship between the parties (e.g., solicitor and client, or trustee and beneficiary).
- Contracts of utmost good faith (e.g., insurance contracts).
- Where there is a half-truth (i.e., partial disclosure distorts what was actually said).
Example - If a car is advertised as having “one lady owner” but there were other previous owners, this would create a misleading impression.
- Where there is a change of circumstances that makes a previously true statement untrue, and the change is not disclosed.

Question 12

What type of statements can constitute misrepresentation?

Answer 12

The statement must be one of fact, as opposed to a statement of future intention or reasonably held opinion.

If a party lies about their intention, this would be a misrepresentation of their state of mind (which is a fact).

If an opinion is stated for which there are no facts to reasonably support it, this would be a misrepresentation.

Question 13

What is the distinction between fact and opinion in misrepresentation?

Answer 13

A statement is considered a statement of fact if the person making the statement knows something contrary to the truth.

For example, if a seller describes a tenant as a “most desirable tenant” but knows the tenant has been in arrears with rent, this would be a statement of fact and not opinion.

Question 14

Who must the statement be made by in a claim for misrepresentation?

Answer 14

The statement must be made by one contracting party to the other.

If the statement maker is not the other contracting party, there is no claim for misrepresentation, although a claim may still arise in tort for negligent misstatement or deceit.

Question 15

How does inducement relate to misrepresentation?

Answer 15

The statement must have induced the representee to enter into the contract. This is often described as the representee relying on the statement. If the statement is material, inducement will generally be inferred as a matter of fact.

The test for materiality is objective: did the statement relate to an issue that would have influenced a reasonable person?

However, the statement does not need to be the only inducement; it is enough that it was a reason for entering into the contract.

Example: If the representee appoints an expert to verify the statement and relies solely on the expert’s report, the initial statement may not be regarded as inducing the contract.

Question 16

What are the different types of misrepresentation and why are they classified?

Answer 16

Misrepresentations are classified to determine the available remedies. In particular, the remedies (especially damages) differ based on the degree of culpability with which the misrepresentation was made:

• Fraudulent misrepresentation: Deliberate lies.
• Negligent misrepresentation: Statements made carelessly, but not known to be false.
• Innocent misrepresentation: Statements made honestly and carefully, but which happen to be untrue.

The classification affects the nature of damages available, with each type entailing different legal consequences.

Question 17

What remedies are available for misrepresentation?

Answer 17

The remedies potentially available in relation to misrepresentation are those of rescission, damages in lieu of recission, and indemnity. The exact combination of remedies available depends upon the nature of the misrepresentation.

It should be noted that, in addition, the representee may refuse further performance of the contract, pleading the representor’s misrepresentation as a defence in the event of his being sued for breach of contract by the representor.

Question 18

What is fraudulent misrepresentation, and what remedies are available?

Answer 18

Fraudulent misrepresentation occurs when a statement is made:
- With knowledge that it is false; or
- Without belief in its truth; or
- Recklessly, not caring whether it is true or false.

Proof of fraud is required, which can be difficult to establish. Damages for fraudulent misrepresentation are available in the tort of deceit, and these damages cover all consequential losses.

The measure of damages is how much the misrepresentee is out-of-pocket as a result of the misrepresentation, and remoteness of loss does not limit the damages.

Example: In East v Maurer [1991] the aim of these damages is to put the innocent party in the position they would have been in if the misrepresentation had not been made.

Question 19

What is negligent misrepresentation, and how are damages assessed?

Answer 19

Negligent misrepresentation arises from carelessly made statements. s 2(1) of the Misrepresentation Act 1967 requiresw the misrepresentor to prove they made the statement on reasonable grounds.

The burden of proof is reversed, meaning the claimant must only show misrepresentation and loss, while the defendant must prove the statement was made on honest and reasonable grounds.

Damages for negligent misrepresentation are assessed as for fraudulent misrepresentation, covering all consequential losses.

Example: In Howard Marine & Dredging v Ogden [1978], the defendant failed to prove reasonable grounds for the incorrect statement about barge capacity because they relied on Lloyd’s Register rather than consulting the ship’s documents.

Question 20

What is innocent misrepresentation, and what remedies are available?

Answer 20

• Innocent misrepresentation occurs when a statement is made with reasonable grounds to believe it is true.
• Although still a misrepresentation, it is not negligent, and as such, no damages are available as of right.
• However, the misrepresentee may still be able to rescind the contract if rescission is not barred.
• Rescission is the primary remedy for innocent misrepresentation, offering a way to undo the contract.

Question 21

What is rescission in misrepresentation?

Answer 21

Rescission is the remedy that allows the misrepresentee to set aside the contract, effectively making it voidable.

This remedy is available for all types of misrepresentation (fraudulent, negligent, and innocent).

Rescission restores both parties to their pre-contractual positions by returning any benefits received.

Question 22

What are the four bars to recission in misrepresentation claims?

Answer 22

There are four bars to rescission:

1. Affirmation: If the innocent party affirms the contract after discovering the misrepresentation, they lose the right to rescind.
2. Undue delay: Taking too long to rescind the contract can bar rescission, as illustrated in Leaf v International Galleries [1950], where a five-year delay after buying a misrepresented painting prevented rescission.
3. Innocent third-party acquisition: If an innocent third party acquires an interest in the subject matter of the contract before rescission, as in Car & Universal Finance v Caldwell [1964].
4. Impossibility of restoration: If it is impossible to restore the parties to their pre-contractual positions, rescission may be barred, as seen in Crystal Palace FC v Iain Dowie [2007], where practical considerations prevented rescission. Further, Car & Universal Finance v Caldwell [1964], the seller of a car rescinded the contract by notifying the police and AA before the rogue buyer resold the car, preventing the bar to rescission.

Question 23

What is an indemnity in the context of remedies for misrepresentation?

Answer 23

An indemnity may be awarded as part of the equitable process of rescission to cover expenses for obligations directly assumed due to the contract.

Example: If induced by misrepresentation to buy a leasehold property, obligations such as council tax and service charge would be covered by an indemnity.
Indemnity is awarded for obligations created by the contract.

Damages (as of right) for fraudulent or negligent misrepresentation generally preclude indemnity.

No automatic right to damages for innocent misrepresentation, making indemnity more likely in such cases.

Distinction between indemnity and damages is critical (Whittington v Seale-Hayne (1900) 82 LT 49).

Question 24

What are the different types of damages available for misrepresentation?

Answer 24

• Damages are potentially greatest for fraudulent misrepresentation.
• Damages under s 2(1) MA 1967 for negligent misrepresentation often match those available for fraudulent misrepresentation.
• Damages in lieu of rescission may be available under s 2(2) for negligent or innocent misrepresentation, but not for fraudulent misrepresentation.

Question 25

How are damages assessed for fraudulent misrepresentation?

Answer 25

Fraudulent misrepresentation is part of the tort of deceit.

Damages aim to place the innocent party in the position they would have been in had the misrepresentation not been made.

The Court of Appeal in Doyle v Olby (Ironmongers) Ltd [1969] ruled that the claimant can recover all damage directly flowing from the fraudulent inducement, even if the loss was not foreseeable.

The claimant must mitigate once fraud is discovered.

Damages are reduced by the value of any benefit obtained from the contract.

Contributory negligence is not a defence to fraudulent misrepresentation (Standard Chartered Bank v Pakistan National Shipping Corporation (No.2) [2003] 1 AC 959).

Question 26

What damages are available for negligent misrepresentation under s 2(1) MA 1967?

Answer 26

Section 2(1) of the MA 1967 allows for damages if a person suffers a loss due to negligent misrepresentation, even if the statement was not made fraudulently, unless the representor proves they had reasonable grounds to believe the facts were true.

Damages for negligent misrepresentation are calculated on the same basis as fraudulent misrepresentation, applying the tort of deceit (Royscot Trust v Rogerson (1991)).

There may be a reduction in damages for contributory negligence, unlike in fraudulent misrepresentation cases.

Question 27

How are damages assessed for innocent misrepresentation?

Answer 27

For innocent misrepresentation, the representee is entitled to rescission and possibly an indemnity, but there is no automatic right to damages.

Damages in lieu of rescission may be awarded at the discretion of the court under s 2(2) MA 1967.

Question 28

What are damages in lieu of rescission under s 2(2) MA 1967?

Answer 28

Section 2(2) allows the court to award damages in lieu of rescission for negligent or innocent misrepresentation.

The court considers the nature of the misrepresentation, the loss caused if the contract were upheld, and the loss to the other party if rescission occurred.

This remedy is available only at the discretion of the court and is not applicable to fraudulent misrepresentation.

Damages under s 2(2) are distinct from those awarded under s 2(1), which compensate for loss flowing directly from the misrepresentation.

Question 29

What are the rules regarding exemption clauses and misrepresentation?

Answer 29

Exemption clauses that attempt to limit liability for misrepresentation must meet the reasonableness test under s 3 Misrepresentation Act 1967, as substituted by s 8 of the Unfair Contract Terms Act 1977.

A clause that restricts liability for misrepresentation or limits remedies must be shown to be reasonable.

The burden of proving reasonableness lies with the party relying on the exemption clause.

Question 30

What is the role of non-reliance clauses in excluding liability for misrepresentation?

Answer 30

Non-reliance clauses attempt to exclude liability for misrepresentation by stating that no representations were made or relied upon.

Such clauses may be subject to the reasonableness test under the Unfair Contract Terms Act 1977.

Courts will not allow liability for fraudulent misrepresentation to be excluded through such clauses.

Question 31

How are representations distinguished from terms of a contract?

Answer 31

A representation may become a term of the contract if the court decides it is incorporated into the contract.

If a representation is a term and is false, it can lead to an action for both breach of contract and misrepresentation (if the misrepresentation is actionable).

If the representation is not incorporated into the contract, it remains a representation, and the only option is to pursue a claim for misrepresentation.

Question 32

What is a negligent misstatement at common law, and how does it relate to the tort of negligence?

Answer 32

Negligent misstatement is part of the tort of negligence and applies to false statements made by one party to another.

Where there is a relationship of sufficient proximity, a party may owe a duty of care to ensure statements made are accurate.

This duty extends to statements during contractual negotiations, but it can also apply to other statements causing loss.

Although misrepresentation is typically the preferred claim, a negligent misstatement claim may arise, but it is generally harder to establish and may result in a less favourable damages calculation.

Question 33

Provide a summary of the key points to consider when determining misrepresentation.

Answer 33

For a false preliminary statement to be actionable it must either amount to breach of a contract term or be a misrepresentation.

The test for deciding whether a preliminary statement is a term or representation is the intention of the parties. To determine this the courts use the following guidelines:
- Relative skill and knowledge of the parties.
- Whether the maker of the statement suggested the other party check the accuracy.
- Timing of the statement.
- If there is a written contract was any earlier statement included in it?
- Did the innocent party stress the importance of the statement?

The definition of misrepresentation is technical. There must be an untrue statement of fact made by one contracting party to the other that acted as an inducement to enter the
contract.

The effect of misrepresentation is to make the contract voidable. The aim of rescission is restitution but rescission may be barred eg by undue delay.

Damages are available for fraudulent misrepresentation in the tort of deceit and for negligent misrepresentation under s 2(1) of the MA 1967. All consequential losses are recoverable and the aim of damages is to put the innocent party in the financial position it would have been in if the misrepresentation had not been made.