Misrepresentation Flashcards
When is a statement 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.
What is 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.
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.
What is a statement of fact?
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’
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 a description of land as ‘fertile and improvable’ did not amount to a representation but was viewed as mere puff.
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.
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.
Statements that do not amount to statements of fact With some important exceptions, statements of opinion, statements of future intention and
instances of silence, are not, on the face of it, actionable.
What constitutes inducement?
The representation must have caused the representee to enter into the contract in order to be an actionable misrepresentation. This requirement was not satisfied, where the Court of Appeal held that the defendants’
representation did not play a ‘real and substantial’ part in inducing the claimants to act. When considering the issue of inducement, the first question for the court is whether the representation was material.
The test for materiality is an objective one: did the statement relate to an issue that would have influenced a reasonable person? There are two possible outcomes to this inquiry.
(a) If the statement is found to be material, then inducement will generally be inferred as a matter of fact. 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.
(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.
The misrepresentation need not be the only reason the claimant entered the contract. 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.
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.
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.
When is something not considered misrepresentation?
As the representation must have induced the representee to enter the contract, there is no actionable misrepresentation where:
(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.
What is and is not a statement of fact?
Statements of fact include some conduct and statements of law.
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.
What is a statement of opinion?
A statement of opinion is not a statement of fact. Usually, it cannot form the basis of a claim in misrepresentation. For example, 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.
However, 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. For example a seller stated that the property they were selling was let to a ‘most desirable tenant’. The seller was aware of information that directly contradicted his statement. The implied statement made by the seller was that he had facts to back up his opinion. As the seller did not have such facts this amounted to a false statement of fact for the purposes of misrepresentation.
If a representor is in a position of superior knowledge or experience, 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.
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.
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.
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.
What is a statement of future intention?
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.
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. 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.
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.
What constitutes silence?
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.
So, for example, 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. This rule may be justified by saying that a general duty of disclosure would be too vague since it would be impossible to specify precisely what should be disclosed. However, there are a number of recognised exceptions to the general rule in Keates. These are:
(a) Half-truths;
(b) Continuing representations; and
(c) Contracts uberrimae fidei.
An exception to the rule that silence does not amount to a misrepresentation occurs where there is a half-truth. 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.
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. This is the
principle of ‘continuing representations’. 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.
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.
There can similarly be an obligation to disclose information between parties who are in a fiduciary relationship – 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.
What constitutes fraudulent misrepresentation?
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. Although I 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 […].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.
The claimant had failed to show knowledge that the statement was false or an absence of belief in its truth, and therefore the false statement in the prospectus was not fraudulent.
Recklessness was defined in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573, where it was held that to find fraud it had to be shown that the level of recklessness required was a ‘flagrant disregard for the truth’.
Difficulties can arise in trying to categorise 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. However, in With v O’Flanagan, Lord Wright MR noted that:
[…] 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.
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.
What is negligent misrepresentation?
In summary, the defendant will be liable for negligent 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.
Moreover, 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.
In Howard Marine and Dredging Co. Ltd. v A. Ogden & Sons (Excavations) Ltd. [1978] 2 WLR 515 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.
It is important to note that the statutory right to damages for negligent misrepresentation reverses the normal burden of proof by requiring the representor to prove that they had reasonable grounds to believe their statement and did believe their statement. Clearly, this makes negligent misrepresentation under s 2(1) MA 1967 an easier claim for the representee to establish than that of fraudulent misrepresentation.
What is innocent misrepresentation?
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.
What remedies are available for misrepresentation?
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.
When will recission be awarded?
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.
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.
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.
There are several reasons why rescission will not be awarded (‘bars to rescission’) as follows:
(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.
When will indemnity be awarded?
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.
