Chapter 9: Misrepresentation

Question 1

1.1 Introduction to Representations

Answer 1

Pre-contractual statements made during negotiations leading to a contract may qualify as
‘representations’. A representation is a statement asserting the truth of a given state of facts. In some circumstances, false representations can give rise to an action for misrepresentation. The law relating to misrepresentation has developed alongside contract law, and encompasses elements of tort and statute.

Representation: A statement asserting the truth of a given state of facts.

Representor: The party who allegedly made the representation.

Representee: The party who allegedly received the representation.

Question 2

1.2 Definition of an actionable misrepresentation

Answer 2

Misrepresentation: An unambiguous false statement of fact made to the claimant and which
induces the claimant to enter into the contract with the statement maker.

An actionable misrepresentation is:
An unambiguous false statement of fact made to the claimant and which induces the claimant to enter into a contract with the statement maker

Question 3

Effect of Misrepresentation

Answer 3

The effect of a misrepresentation is, subject to limitations, to make the contract voidable but not void. In order to avoid the contract, the wronged party must take action to rescind the contract. The remedies for misrepresentation are not considered in this section

Question 4

1.3.1 Unambiguous

Answer 4

The representation must be clear and will only form the basis of a claim in misrepresentation if it
unambiguously has the meaning put forward by the representee.
The representor will not be liable if the representee has placed its own unreasonable construction
on the representation: McInerny v Lloyd’s Bank Ltd [1974] 1 Lloyd’s Rep 246.

Question 5

1.3.2 False

Answer 5

The statement must be false. It will not be false if it is substantially correct. [A] representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts

Question 6

1.3.3 Statement of fact

Answer 6

To be actionable, a representation must be a statement of fact ie ‘a representation is not an
undertaking to do, or not to do something. It is a statement asserting a given state of affairs’
Kleinwort Benson Ltd v Malaysia Mining Corp [1989] 1 WLR 379

Question 7

Representations distinguished from mere ‘puff’

Answer 7

Mere advertising ‘puff’ will not qualify as a representation. The law allows a salesperson a good
deal of latitude in their choice of language eg the ‘desirable residence’ advertised by the estate agent may leave much to be desired, but there is no misrepresentation, because this is just ‘advertising puff’. So in Dimmock v Hallett (1866) LR 2 Ch App 21, a description of land as ‘fertile and improvable’ did not amount to a representation but was viewed as mere puff.

Question 8

Conduct

Answer 8

Statements are usually made by words, but statements of fact can also be made by conduct. In
Gordon v Selico (1986) 278 EG 53, the intentional concealment of dry rot was deemed to be a
misrepresentation.

Question 9

Statement of law

Answer 9

The traditional rule was that a statement of law could not give rise to an actionable misrepresentation. However, the distinction has now been abolished and it is clear that a
statement of law can give rise to an actionable misrepresentation.

Question 10

Statements that do not amount to statements of fact

Answer 10

With some important exceptions, statements of opinion, statements of future intention and instances of silence, are not, on the face of it, actionable. The exceptions to these general rules are discussed in detail in a later section of this chapter, ‘Statement of fact’. In that section you will learn that the concept of statement of fact is at the heart of the law of misrepresentation.

Question 11

1.3.4 Addressed to the claimant

Answer 11

The misrepresentation must be addressed by the representor to the claimant.

Question 12

1.3.5 Induces the claimant to enter into the contract with statement maker

Answer 12

The representation must have caused the representee to enter into the contract in order to be an
actionable misrepresentation. This requirement was not satisfied in the case of JEB Fasteners v Mark Bloom [1983] 1 All ER 583, where the Court of Appeal held that the defendants’
representation did not play a ‘real and substantial’ part in inducing the claimants to act.

Question 13

Issue of Inducement & the Test for Materiality: Did the statement relate to an issue that would have
influenced a reasonable person (per Lord Mustill in Pan Atlantic Co Ltd v Pine Top Insurance Co
Ltd [1995] 1 AC 501) ?

Answer 13

(a) If the statement is found to be material, then inducement will generally be inferred as a
matter of fact: Smith v Chadwick (1884) 9 App Cas 187. The ‘burden’ then shifts to the defendant to rebut the inference that the claimant was induced. The defendant does this by
proving that the claimant was not subjectively induced.

Question 14

Issue of Inducement & the Test for Materiality

Answer 14

(b) Alternatively, if the statement is not found to be material, then inducement of the claimant
cannot be inferred as a matter of fact. In these circumstances, the claimant must prove that
they were subjectively induced. If the claimant can prove this, then they will be held to have
been induced by the misrepresentation: Museprime Properties Ltd v Adhill Properties Ltd
(1990) 61 P. & C.R. 111.

Question 15

No actionable representation (Exceptions)

Answer 15

(a) The statement was not actually communicated to the representee; or
(b) The statement did not affect the representee’s decision to enter the contract; or
(c) The statement was known to be untrue by the representee.

The misrepresentation need not be the only reason the claimant entered the contract.

Question 16

Edgington v Fitzmaurice (1885) 29 Ch D 459

Answer 16

The plaintiff was induced to lend money to the company by a misrepresentation contained in the company prospectus. However, he was also induced by his own mistaken belief that he would have a charge on the assets of the company in relation to the loan. Nevertheless, he was able successfully to claim for fraudulent
misrepresentation even though he admitted that he would not have lent the money had he not
held this mistaken belief.

Question 17

Attwood v Small (1838) 6 CL & F 232)

Answer 17

A representor may seek to argue that the representee was not induced where the representee
chooses to test the validity of the representor’s statement by making its own investigations. The vendor of a mine made wildly exaggerated statements about its earning capacity. The purchaser did not believe the glowing reports made by the vendor and, therefore, sent his own agent to make an independent report. The agent produced a similarly positive report to that of the vendor. The mine then turned out to be virtually worthless and the
purchaser brought a claim maintaining that the prospects of the mine had been misrepresented
to him.

Judgement: The claim was dismissed. The purchaser had not relied on the statement of the vendor but had been induced to purchase the mine on the strength of his own agent’s report: a party cannot bring a claim in misrepresentation when it has relied not on the misrepresentation, but on its own investigations.

Question 18

Redgrave v Hurd (1881) 20 Ch D 1

Answer 18

Clarified that the key point in Attwood is not that separate
enquiries were made or could have been made – the crucial point is that the separate enquiries showed that the vendor’s statements were not relied upon. In other cases, separate enquiries might not be such as to show that the purchaser did not also rely on the vendor’s statements –
the separate enquiries do not automatically prevent a claim for misrepresentation. Redgrave also
established that there is no general duty to check the misrepresentor’s statement.

Question 19

Contributory Negligence

Smith v Eric Bush [1990] 1 AC 831

Answer 19

However, still on the topic of checking representations, if a representee does not check, where the court considers it reasonable for them to have done so, or carries out a negligent investigation,
this would open up the possibility of a defence of contributory negligence being mounted against
the representee for failing to investigate or for investigating negligently. Note that contributory
negligence cannot be pleaded where the misrepresentation is fraudulent. It may well be that the
more commercial the representee is (and therefore the more resources they have at their disposal
to carry out an investigation), the more likely it is that the court will consider it reasonable for the
representee to have investigated.

Question 20

1.3.6 Summary

Answer 20

• An actionable misrepresentation is an unambiguous, false, statement of fact, addressed to the
  claimant which induces the claimant to enter into the contract with the statement maker.
• ‘Unambiguous’ means clear.
• ‘Statement of fact’ means an assertion of a state of affairs. There are special rules for statements of law, opinion, future intention or silence.
• ‘Induced’ means formed one of the reasons for entering into the contract. If the statement is
  material, inducement will be inferred. If not material, then inducement must be proved.

Question 21

2 Statements of fact

Answer 21

At the heart of the law of misrepresentation is the concept of a false statement of fact.
As a general rule, statements of opinion, statements of future intention and silence will not
normally amount to statements of fact on which a claim for misrepresentation can be based. In
this section, we will consider some of the exceptions to these general rules.

Question 22

2.1 Statement of opinion (not a statement of fact)

Answer 22

A statement of opinion is not a statement of fact. Usually, it cannot form the basis of a claim in
misrepresentation. For example, in Bisset v Wilkinson [1927] AC 1977 the claimant agreed to purchase land from the defendant for the purpose of sheep farming. The defendant made a statement that his ‘idea was that [the land] would carry two thousand sheep’.

The claimant was aware that neither the defendant nor anybody who had owned the land previously had used it for sheep farming. The court held that the statement was merely an opinion that the defendant
honestly held and the claim for misrepresentation failed.

Question 23

Smith v Land and House Property Corporation (1885) LR 28 Ch D 7 (CA)

Answer 23

When someone expresses an opinion, they impliedly state that they know facts which justify their opinion. Where the same facts are known to each party, this implicit statement is unlikely to have much impact on the representee, as the representee can determine whether the facts justify the opinion themselves. However, if the representor is considered to have greater knowledge than the representee, then the implied statement that there are facts which justify the opinion can significantly mislead the representee

Question 24

Representor is in a position of superior knowledge or experience

Answer 24

A statement of opinion by
them may be held to involve a statement of fact that there are reasonable grounds for their
opinion. If there are no reasonable grounds for that opinion (or, to put it another way, the opinion
is one which someone with the knowledge of the representor, could not have reasonably held),
then a false statement has been made

Question 25

Esso v Mardon [1976] QB 801

Answer 25

Mardon took a lease of a petrol station after being assured by an
Esso representative that the annual throughput would be 200,000 gallons of petrol per year. This
estimate was not accurate. The estimated gallonage was never reached and, as a result, the
petrol station was uneconomic. Mardon alleged misrepresentation. Esso argued that, as there had
not previously been a petrol station on that site, the estimated throughput was merely a
statement of opinion

Question 26

Court of Appeal on Esso v Mardon [1976] QB 801

Answer 26

The Court of Appeal held that the statement as to the maximum sales contained within it a statement that Esso had carefully estimated, based on their substantial skill and expertise in estimating potential sales, the throughput at 200,000 gallons per year. In fact, the assessment had not been carried out carefully.

Question 27

Bisset v Wilkinson

Answer 27

Esso could be distinguished from that of Bisset v Wilkinson where the land had never been used as
a sheep farm, and both parties were equally able to form an opinion as to its carrying capacity. An expression of opinion is a representation that the statement maker believes the opinion that they express. Such a representation will be a misrepresentation if in fact the opinion expressed is not one which the representor held.

Question 28

2.2 Statement of future intention

Beattie v Ebury (1872) LR 7 Ch App 777, per Mellish LJ

Answer 28

A representation is an assertion of the truth that a fact exists or did exist. It is a statement of fact.
It can, therefore, have no reference to future events or promises. There is a clear difference between a representation of fact and a representation that something will be done in the future. A representation that something will be done in the future cannot be true or false at the moment it is made; and although you may call it a
representation, if anything it is a contract or promise

Change of circumstances: Consequently, it is not a misrepresentation if the representor makes a promise regarding a future
intention but is prevented from following that course of conduct or if circumstances alter so that they change their mind about that intention.

Question 29

Wales v Wadham [1977] 1 WLR 199

Answer 29

A husband left his wife to live with another woman. Prior to
and during divorce proceedings, the wife asserted that she would not remarry after divorce as she
had a conscientious objection to remarriage. The divorce settlement was negotiated on the more
generous basis that she would remain single. Prior to the conclusion of the settlement, the wife agreed to marry another and did not communicate this change of intention to the husband. The
husband sought to rescind the agreement on the ground of his wife’s non-disclosure of her
intention to remarry. The court upheld the settlement and dismissed the husband’s claim. The wife had not misrepresented her then current intention when she told her husband that she would not
remarry, and she was under no duty to disclose her change of intention.

Question 30

Edgington v Fitzmaurice (1885) 29 Ch D 459

Answer 30

However, if the representor states that they intend to do something, then they are making a limited statement fact: they are stating that they do have that intention. So if, at that point in time, they know that they cannot do what they state, or they do not intend to do it, they
misrepresent their existing intention

They are stating that they have an intention to do something (which is a statement of fact) and this is
untrue. They have not only made a promise which is ultimately broken but one which they never intended to keep. Bowen LJ put it this way: ‘The state of a man’s mind is as much a fact as the state of his digestion […]’

Question 31

2.3 Silence

Answer 31

It is hard to conceive of silence as a statement of fact (or of anything else). In most cases, mere
silence will not give rise to an action for misrepresentation. It is not a statement, whether of fact or
otherwise. Accordingly, the general rule is that there is no duty to disclose facts which, if known,
might affect the other party’s decision to enter the contract.

Question 32

Keates v The Earl of Cadogan (1851) 10 CB 591

Answer 32

The defendant let a house to the
plaintiff knowing that the plaintiff wanted it for immediate occupation but did not tell the plaintiff
that the house was in fact uninhabitable. It was held that in the absence of fraud, the defendant
was under no implied duty to disclose the state of the house.

Recognised exceptions to the general rule in Keates:
(a) Half-truths;
(b) Continuing representations; and
(c) Contracts uberrimae fidei.

Question 33

2.3.1 Half-truths: exception to silence (Nottingham Patent Brick & Tile Co v Butler (1866)

Answer 33

An exception to the rule that silence does not amount to a misrepresentation occurs where there is a half-truth (Nottingham Patent Brick & Tile Co v Butler (1866)). Consequently, it is a
misrepresentation (ie a false statement of fact) to make statements which are technically true but misleading. Thus, to describe property which is the subject of negotiations for sale as ‘fully let’ without disclosing that, although the property is indeed fully let at that time, the tenants have
given notice to quit, is a misrepresentation: Dimmock v Hallett (1866) LR 2 Ch App 21.

Question 34

2.3.2 Continuing representations: exception to silence

Answer 34

If, at the beginning of negotiations, a statement is made which is true but which prior to entering into the contract becomes false, the representor is under an obligation to correct the representation. If they fail to do so and allow the other party to enter into the contract still
believing that the representation is true, then they will be liable for misrepresentation

Question 35

With v O’Flanagan [1936] Ch 575

Answer 35

A professional man was selling his medical practice. At the
beginning of negotiations, he stated that the income of the practice was at a certain level but during the course of negotiations he became ill and the income had fallen to virtually nothing by the time of the sale. He did not reveal this fact. HELD: By remaining silent, he had made a continuing representation, holding out his original statement as still being true. There was a duty
to disclose the change in circumstances and the consequent change in income.

Question 36

Contrast With v O’Flanagan and Wales v Wadham

Existing fact v Future Intentions

Answer 36

With v O’Flanagan is concerned with a representation relating to existing fact, whereas Wales v Wadham related to a statement of future intention. In other words, the statement in With v O’Flanagan was actionable because it related to an existing fact which was true at the time it was made but later became false. Consequently, the statement maker was required to disclose the
change of circumstances. This can be contrasted with Wales v Wadham, which concerned a
statement of future intention. The wife was not obliged to disclose her change of intention. Her
statement was not actionable.

Question 37

2.3.3 Contracts uberrimae fidei (utmost good faith): exception to silence

Answer 37

There is a duty to disclose material facts in some types of contracts in which one party is in a particularly strong position to know the material facts which form the basis of the contract. Such contracts are known as contracts uberrimae fidei (utmost good faith). The most common example of this type of contract is a contract of insurance where (at common law) disclosure of all material facts must be made to the insurer.

Question 38

Fiduciary relationships

Answer 38

A particularly close relationship characterised by trust and obligations of good
faith. Examples of such a relationship are that between a company and its directors, or between a trustee and beneficiaries of a trust.

Question 39

3 Categories of misrepresentation and its importance

Answer 39

Once the essential elements of an actionable misrepresentation have been established, the remedies available depend upon the category of the misrepresentation in question

1) Fraudulent Misrepresentation (Tort of Deceit)
2) Negligent Misrepresentation (Statutory Claim under 2(1) of MA 1967)
3) Innocent Misrepresentation (Statutory Claim under 2(1) of MA 1967)

Question 40

3.1 Fraudulent misrepresentation

Derry v Peek (1889) 14 App Cas 337

Answer 40

The classic definition of fraudulent misrepresentation was given in Derry v Peek (1889) 14 App Cas
337 in the House of Lords. A tramway company was empowered by a special Act of Parliament to operate certain tramways
by using animal power. The Act further provided that, with the consent of the Board of Trade,
mechanical power might be used. The directors of the company, wishing to raise more capital,
included the following statement in a prospectus the company has the right to use steam or mechanical motive power instead of horses, and it is fully expected that by means of this a considerable saving will result […]

Question 41

Lord Herschell’s Judgement on Fraudulent Misrepresentation

Answer 41

First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (a) knowingly, or (b) without belief in its truth, or (c) recklessly, careless whether it
be true or false. Thirdly, if fraud be proved, the motive of the
person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the
person to whom the statement was made.

Question 42

Recklessness in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573

Answer 42

The level of recklessness required was a ‘flagrant disregard for the truth’. Difficulties in categorizing a misrepresentation based on change of circumstances. It might be thought that failure to disclose a change in circumstances will be easy
to argue as being fraudulent, simply on the basis that the representor has the new information
and does not disclose it.

Question 43

With v O’Flanagan, Lord Wright MR

Using the word Fraud

Answer 43

[…] the Court is more reluctant to use the word ‘fraud’ and would not generally use the word ‘fraud’ in that connection because the failure to disclose, though wrong and a breach of duty, may be due to inadvertence or a failure to realise that the duty rests upon the party who has made the representation not to leave the other party under an error when the representation
has become falsified by a change of circumstances.

Accordingly, the Court would need to be satisfied that the failure to disclose was, in fact, deliberate or dishonest, and not just due to inadvertence or a failure to realise the requirement of
disclosure

Question 44

Non-Fraudulent Misrepresentation

Answer 44

Note that where a misrepresentation is not fraudulent, it may still be negligent, as considered later in this section under the requirements of s 2(1) of the Misrepresentation Act 1967 (see below). In terms of proving fraudulent misrepresentation, the burden of proof on the claimant is a difficult burden to discharge. An allegation of fraud is treated with extreme seriousness by the court and it is therefore more difficult to persuade a court that a defendant has done something fraudulent
than (for example) negligent.

Question 45

3.2 Negligent misrepresentation (Misrepresentation Act 1967) Section 2(1) of the MA 1967

Answer 45

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
represented were true

In summary, the defendant will be liable for negligen misrepresentation under s 2(1) unless they can prove that they had reasonable grounds to believe, and did believe up to the time the
contract was made, that the statement was true.

Question 46

Royscot Trust Ltd v Rogerson [1991] 2 QB 297, s 2(1)

Answer 46

Moreover, following the (sometimes criticised) decision in Royscot Trust Ltd v Rogerson [1991] 2 QB
297, s 2(1) also has the effect that, where a representor is found liable for a negligent misrepresentation, they will be treated to all intents and purposes as if they had made a
fraudulent misrepresentation. This has important ramifications as regards damages.

Question 47

Howard Marine and Dredging Co. Ltd. v A. Ogden & Sons (Excavations) Ltd. [1978] 2 WLR 515

Answer 47

Ogden hired two barges from Howards. Howards told Ogden that the barges’ capacity was 1600
tonnes when in fact it was 1055 tonnes. The figure had been derived from Lloyd’s Register which
was wrong. The Court of Appeal held that it was a negligent misrepresentation under MA 67 s 2(1). The true figures were in the ships’ documents and Howards had failed to show any ‘objectively
reasonable ground’ for disregarding the figure in the documents and relying instead on the
Register.

Clearly, this makes negligent
misrepresentation under s 2(1) MA 1967 an easier claim for the representee to establish than that
of fraudulent misrepresentation.

Question 48

3.3 Innocent misrepresentation (Misrepresentation Act 1967)

Answer 48

An innocent misrepresentation is one which is not made fraudulently or negligently. The definition
of innocent misrepresentation also derives from s 2(1) of the MA 1967. Logically therefore, the
definition of an innocent misrepresentation is a statement made where the representor:
(a) Proves that they had reasonable grounds for belief in the truth of their statement; and
(b) Proves that they believed up to the time of the contract that what they were saying was true.

Question 49

3.4 Summary

Answer 49

• The categories of misrepresentation are fraudulent, negligent and innocent.
• A fraudulent misrepresentation is one that has been made (a) knowingly, or (b) without belief
  in its truth, or (c) recklessly, careless whether it be true or false.
• The burden of proving that a misrepresentation was fraudulently made is on the claimant, and
  it is a heavy burden to discharge.
• Where a representation is not fraudulent, it will be deemed negligent unless the defendant can
  prove that they had reasonable grounds to believe and did believe up to the time the contract
  was made, that the statement was true.
• An innocent misrepresentation is one that was made neither fraudulently nor negligently

Question 50

4 Remedies

Answer 50

The remedies potentially available in relation to misrepresentation are those of rescission,
damages 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 representator.

Question 51

4.1 Rescission

Answer 51

The effect of misrepresentation is to render the contract voidable but not void. Accordingly, the
contract is still valid and subsisting until the representee decides to set it aside (rescind the
contract). The remedy of rescission is available in principle for any type of misrepresentation.

Question 52

Communication of Intention

Answer 52

The general rule is that, in order to rescind, the representee must communicate the intention to do so to the representor. Alternatively, the representee may initiate proceedings for rescission of the contract, the object being to obtain from the court an order that the contract is rescinded.

Question 53

Rescission is an equitable remedy

Answer 53

Rescission is an equitable remedy and is given (or withheld) entirely at the discretion of the court
– so a party can establish misrepresentation but the court still has the discretion not to award rescission. Generally, rescission will be awarded only where the parties can be restored to their original position by returning all the property transferred between the parties under the contract.

Question 54

Reasons for not awarding rescission

Answer 54

(a) Affirmation: a contract is affirmed if the representee declares their intention to proceed with the contract or does some act from which such an intention may reasonably be inferred.

(b) Lapse of time: an action for rescission must be brought promptly, for delay defeats the equities. Lapse of time without any attempt to effect rescission does not in itself constitute
affirmation but it may be treated as evidence of such an intention.

(c) Restitution is impossible: The right to rescind is lost if it is no longer possible to restore the parties to their previous position before the contract was made. This will be the case where the nature of the subject matter has been changed or it has declined in value.

(d) Third party rights accrue: the effect of a misrepresentation is to make the contract voidable, not immediately void, and so the contract remains valid up until the time notice is given of the intention to rescind. Consequently, at any time prior to rescission, a person acquiring goods under such a contract is able to pass good title to those goods to an innocent third party who
purchases the goods without notice of the misrepresentation. This would prevent restitution.

Question 55

4.2 Indemnity

Answer 55

It is possible that, as part of the equitable process of rescission, an indemnity may be awarded to cover expenses for obligations assumed as a direct result of the contract.
For example, if a representee is induced into buying a leasehold property by a misrepresentation, obligations arising from the purchase such as council tax, service charge and so forth would be covered by an indemnity. The obligations must have been created by the contract. Generally, where an action for misrepresentation will give a right to damages (ie an action for fraudulent or
negligent misrepresentation), an indemnity will not be awarded. However, no damages as of right are available for an innocent misrepresentation and in this type of action an indemnity is more likely to be awarded. It is important to appreciate the distinction between an indemnity and the common law right to damages (Whittington v Seale Hayne (1900) 82 LT 49).

Question 56

4.3 Damages

Answer 56

Damages for misrepresentation are potentially the greatest where the misrepresentation is a fraudulent one. However, it must be borne in mind that damages for an action for negligent misrepresentation, under s 2(1) MA 1967, will often match those that would be available for fraudulent misrepresentation. In addition, damages in lieu of rescission may be available under s 2(2) for an action brought under s 2(1). Finally, innocent misrepresentation does not afford any
damages per se, although damages in lieu of rescission may be available under s 2(2) (see below for further discussion on this issue).

Question 57

4.3.1 Damages for fraudulent misrepresentation

Answer 57

A party who has been deceived by a fraudulent misrepresentation may sue for damages. Fraudulent misrepresentation is part of the tort of deceit, and this is reflected in the way damages are calculated on the ‘tortious’ basis. The measure of damages is that which is necessary to place the innocent injured party in the position they would have been in had the misrepresentation not
been made

Question 58

Court of Appeal in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158

Answer 58

[…] All the damage directly flowing from the tortious act of fraudulent inducement which was not rendered too remote by the plaintiff’s own conduct, whether or not the defendant could have foreseen the loss.

To this have been added requirements that the claimant must mitigate as soon as the fraud is discovered and, second, that any damages awarded to the claimant will be reduced by the value of any benefit the claimant has acquired as a result of the contract.

Question 59

Contributory Negligence in Fraudulent Representation

Answer 59

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

Question 60

4.3.2 Damages for negligent misrepresentation under s 2(1) MA 1967

Answer 60

Section 2(1) of the MA 1967 provides:
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 represented were true.

Question 61

Effect of s 2(1) of the MA 1967

Answer 61

The court has confirmed that the effect of s 2(1) of the MA 1967 is that the correct measure of damages for negligent misrepresentation must be based on the tort of deceit (Royscot Trust v Rogerson (1991)).

Question 62

Loss Recovery

Answer 62

For example, the claimant is entitled to recover all losses even if those losses are unforeseeable. Concern has been expressed that to place such an interpretation on s 2(1) draws no distinction between the honest but careless representor and the fraudulent representor, but that is the current state of the law. Note however that in relation to negligent misrepresentation, damages
may be reduced for contributory negligence where the loss was in part the fault of the
representee.

Question 63

Section 2(2)

Answer 63

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 the 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.

Question 64

Remedy of Damage

Answer 64

The remedy of damages in lieu of rescission is available only at the discretion of the court and is only available for negligent and innocent misrepresentation (ie not fraudulent misrepresentation).
In exercising its discretion, the court must have regard to the nature and seriousness of the misrepresentation, the loss that would be caused if the contract were upheld, and the loss that rescission would cause to the other party: UCB Corporate Services v Thomason [2005] 1 All ER (Comm) 601

Question 65

Section 2(2) MA 1967

Answer 65

Damages are a separate award of damages to those awarded under s 2(1)
(discussed above). Section 2(1) damages are intended to compensate the claimant for the loss directly flowing from the negligent misrepresentation. Section 2(2) damages are intended to compensate the representee where the court has decided, at its discretion, not to award rescission

Question 66

Damages in lieu of recission

Answer 66

Where damages in lieu of rescission are awarded, the damages awarded under s 2(1)
will be reduced to reflect those awarded under s 2(2). This is made clear by s 2(3) which states:
Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) therefore, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1).

Question 67

4.3.3 Damages for innocent misrepresentation

Answer 67

Where an innocent misrepresentation has been made, the representee is only entitled to the remedy of rescission and, if applicable, an indemnity to cover the cost of the legal obligations arising from the contract entered into. There is no automatic right to damages for an innocent
misrepresentation but, as with negligent misrepresentation (above), the court has the discretion under s 2(2) to award damages in lieu of rescission –

Question 68

4.4 Misrepresentation and exemption clauses

Answer 68

If a contract contains an exemption clause purporting to protect a party from liability for misrepresentation or purporting to exclude or restrict any remedy available to the other party, the clause will be of no effect except in so far as it satisfies the requirement of reasonableness: s 3
Misrepresentation Act 1967 (MA 1967) as substituted by s 8 of the Unfair Contract Terms Act 1977.

Question 69

Section 3 of MA 1967

Answer 69

Section 3 provides:
If a contract contains a term 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 term shall be of no effect except in so far as it satisfies the requirement of reasonableness
as stated in s 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.

Question 70

4.5 Non-reliance clauses

Answer 70

A party may wish to exclude liability for misrepresentations. It is doubtful whether an ‘entire agreement’ clause, which states that the agreement constitutes the entire agreement between the parties, would be sufficient to exclude liability for any misrepresentations. If a party wants to exclude liability for misrepresentations, a clause such as the following might be desirable.

Question 71

5 Alternative claims to misrepresentation

Answer 71

5.1 Representations distinguished from terms of a contract: A representation may become a term of the contract if the court decides it is incorporated into the
contract. How terms are incorporated into a contract is not addressed in this chapter. If the court decides that a representation is a term, and it is false, this will give rise to an action for both breach of contract and potentially for misrepresentation (if the misrepresentation is actionable).

If, on the other hand, a representation is not deemed to be incorporated into the contract then it will remain a representation. In this case, the only option is to pursue an action for misrepresentation.

Question 72

5.2 Negligent misstatement at common law (tort of negligence)

Answer 72

The law of misrepresentation intervenes in relation to false statements which induce the
representee to enter into a contract. That is the law of negligent misstatement, which is part of the law of negligence. Very broadly, where there is a relationship of sufficient proximity between two parties, the court might find that one party owes a duty of care to the other to take reasonable care that statements made are accurate. This duty would extend to statements made during contractual negotiations, but it would not be limited to such statements

Question 73

5.3 Summary

Answer 73

• If this statement is important, is made close in time to the conclusion of a contract, and is
  made by a car dealer, it may become a term of the contract for the sale of the car (which has been breached) as well as amounting to a misrepresentation.
• If it is not a term, then the only option is a claim for misrepresentation.
• A representation which is incorporated into a contract as a term gives rise to a potential claim in breach of contract.
• Where there is a relationship of sufficient proximity between two parties, the court might find that one party owes a duty of care to the other to take reasonable care that statements made are accurate. A breach of this duty of care may give rise to a claim in negligent misstatement. If you study a tort module, you may study this area of law as part of that module.