Misrepresentation

Question 1

When will non-disclosure vitiate a contract?

Answer 1

The general position is that non-disclosure never vitiates a contract, even if the case is one in which “no man of tender conscience or high honour would be willing to take advantage of C’s ignorance” (Smith v Hughes). The only exception is contracts of utmost good faith (e.g. insurance) where non-disclosure of material circumstances can result in rescission.

Question 2

Chase Manhattan

Answer 2

“A combination of silence together w/ a positive representation may itself create a misrep”.

Question 3

With v O’Flanagan

Note Lord Wright’s explanation and the gloss of Spice Girls.

Answer 3

If a statement is true when made but later falsified by a subsequent event, the maker of the original statement must disclose the new position and will be liable if he keeps silent without doing so.

Lord Wright - the original statement is treated as a continuing representation since it induces a continuing belief, and if subsequently falsified the representation may become misrep. Spice Girls clarifies the representation will continue “until the transaction is completed or abandoned or the representation ceases to operate on C’s mind”.

Question 4

When will a half-truth constitute misrepresentation? Give an example.

Answer 4

Arkwright – “Every word [of the representation] may be true, but if you leave out something which qualifies it, you may make a false statement.” An example would be Butler, in which a vendor of land said he was not aware of any restrictive covenants, but he neglected to mention he had not bothered checking for such covenants.

Question 5

When may a half-truth constitute misrepresentation? Give an example.

Answer 5

Arkwright – “Every word [of the representation] may be true, but if you leave out something which qualifies it, you may make a false statement.” An example would be Butler, in which a vendor of land said he was not aware of any restrictive covenants, but he neglected to mention he had not bothered checking for such covenants.

Question 6

How does Chase Manhattan help us differentiate misrep from non-disclosure?

Answer 6

“A combination of silence together w/ a positive representation may itself create a misrep”.

Question 7

Spice Girls

Answer 7

The Spice Girls’ conduct before the contract gave the impression the group would remain a five-member band and this, coupled with express assurances about their commitment to the project, gave rise to an implied misrepresentation engaging With.

Question 8

Schneider

Answer 8

An active attempt to conceal a defect may constitute implied misrep

Question 9

Differentiate a representation from a term. What is the practical consequence of the distinction?

Answer 9

A representation asserts the existence of a state of affairs that is either true or false. A promise as to a term is an undertaking to do or not to do something, e.g. an undertaking to pay damages if a state of affairs does not exist (warranty).

A term offers C a greater level of protection than a representation; D is deemed to have promised that the state of affairs is true and if it turns out not to be true, D will be strictly liable for breach and C entitled to the expectation measure of damages.

Question 10

What remedies are open to C if the misrep has become a term of the contract?

Answer 10

S,1, 1967 Act provides for the survival of the right of rescission for misrep even if the misrep has become a term of the contract, but C may alternatively pursue remedies for breach of contract which may be more advantageous and do not require proof of actual reliance.

Question 11

What are the three ingredients of misrepresentation?

Answer 11

1. Misrep must be one of FACT (Springwell)
2. Misrep must be MATERIAL (Edgington).
3. The representation must have INDUCED the representee to enter into the contract.

Question 12

Pankhania

Answer 12

A misrep of law can found a cause of action.

Question 13

When will a statement of opinion which turns out to be unjustified give rise to liability for misrep?

Answer 13

Such a statement will not generally give rise to liability for misrep where the facts are equally known and fraud not established (Bisset) but is more likely to do so where the facts are not equally known (Smith, “most desirable tenant”) or D has some special knowledge or expertise relative to the other party (Esso Petroleum)

Question 14

Bowen LJ, Smith. When will this observation not apply?

Answer 14

“If the facts are not equally known…then a statement of opinion by the one who knows facts best often involves a statement of fact, for he impliedly states that he knows facts which justify his opinion”

Such an implied assertion will not be implied where the representor expressly refuses to assume responsibility for the accuracy of his statement (IFE Fund v Goldman Sachs)

Question 15

Bowen LJ, Smith. When will this observation not apply?

Answer 15

“If the facts are not equally known…then a statement of opinion by the one who knows facts best often involves a statement of fact, for he impliedly states that he knows facts which justify his opinion”

Such an implied assertion will not be implied where the representor expressly refuses to assume responsibility for the accuracy of his statement (IFE Fund)

Question 16

Bowen LJ, Smith. When will this observation not apply?

Answer 16

“If the facts are not equally known…then a statement of opinion by the one who knows facts best often involves a statement of fact, for he impliedly states that he knows facts which justify his opinion”

Such an implied assertion will not be implied where

1. The representor expressly refuses to assume responsibility for the accuracy of his statement (IFE Fund).
2. (At least where the representee has relevant experience and knowledge), the statement-maker makes no representation that he has objectively reasonable grounds for his opinion

Question 17

Bowen LJ, Smith. When will this observation not apply?

Answer 17

“If the facts are not equally known…then a statement of opinion by the one who knows facts best often involves a statement of fact, for he impliedly states that he knows facts which justify his opinion”

Such an implied assertion will not be implied where

1. The representor expressly refuses to assume responsibility for the accuracy of his statement (IFE Fund).
2. (At least where the representee has relevant experience and knowledge), the statement-maker makes no representation that he has objectively reasonable grounds for his opinion (Springwell)

Question 18

Edgington/Chandra

Answer 18

• One may misrepresent the fact of what one’s opinion is (Edgington) but if the belief is genuinely held it matters not that it was unreasonable (Chandra).

Question 19

Edgington/Chandra

Answer 19

One may misrepresent the fact of what one’s opinion is (Edgington) but if the belief is genuinely held it matters not that it was unreasonable (Chandra).

Question 20

Wales (statement of present intention)

Answer 20

In the absence of a binding promise not to change his mind, he who states correctly his present intention is free to change his mind later

Question 21

When will the requirement of materiality not apply?

Answer 21

Ross River – if the representation was fraudulent.

Question 22

What is the function of materiality, if any?

Answer 22

McK suggests that where the misrepresentation is “material”, in the sense that it would have induced a reasonable person to enter into the contract, then this raises a presumption of inducement (Lord Blackburn, Smith v Chadwick - this is a “fair inference” from the finding of materiality), but where it is objectively “immaterial”, the onus is on C to show he was induced (Dadourian Group).

OSH and McK observe that the requirement should be elided w/ that of inducement, for if C purports to rely on a representation most would regard as trivial the requirement of inducement is unlikely to be satisfied.

Question 23

What is the test of inducement? (JEB Fasteners/Raffeisen)

Answer 23

JEB Fasteners – A misrepresentation need only play a real and substantial part in inducing the plaintiff to act. It need NOT be the sole or decisive cause.

Raffeisen - The court asks what the representee would have done had no representation been made rather than what he had done had he been told the truth

Question 24

Peekay

Answer 24

1. Here C, an EXPERIENCED INVESTOR, was induced to enter into the contract not by the earlier “rough and ready” description (which was a misrep) of the investment product, but by his own assumption that the product description in the documents he had been given, which on its face corrected the earlier misrep, corresponded to that which he had been given earlier.
2. By signing the risk disclosure statement Peekay had certified that it understood the nature of the investment product; by virtue of L’Estrange this was actually a term of the contract.

Question 25

What is the relevance of C’s negligence in the case law? What does Atiyah think?

Answer 25

Redgrave– if C had an opportunity to discover the truth w/ greater diligence but did not take it, he can nevertheless be said to have relied on the representation. A presumption of reliance is raised by showing that the representation was made to induce C to enter into the contract and C did enter into the contract, rebuttable only by showing that the misrep was brought to C’s attention or that C in fact did not rely on it.

However, Peekay indicates that if C’s negligence was so great that his loss can be said to be caused by his negligence rather than the misrep (as here) then D will not be liable.

Atiyah – all the same, an extreme want of due care by the representee would show that his reliance was unreasonable and courts will be less likely to find inducement or materiality.

Question 26

What is the principal remedy for misrep? How does Redgrave explain this?

Answer 26

The principal remedy for misrepresentation, available whatever D’s state of mind, the rule in equity being that “a man is not allowed to get a benefit from a statement which he now admits to be false” (Redgrave)

Question 27

A wishes to rescind a contract under which he bought B’s shares on the grounds that B lied to him about the company’s future investment plans. However, B has fled to Argentina, being suspected of embezzlement. Discuss.

Answer 27

As a general rule a party who wishes to rescind must bring his decision to the attention of the other party, w/ an exception operating where the representor has absconded and thus cannot be so informed (Caldwell).

The justification is that by absconding the representor indicates he does not expect to be communicated with as a matter of right or requirement; in fact he is deliberately doing all he can to evade any such communication being made

Question 28

What is the effect of rescission as outlined in Johnson?

Answer 28

Restoration of the status quo ante by operating BOTH retrospectively and prospectively (cf repudiation) such that executory obligations no longer have to be performed and executed obligations are “undone”

Question 29

Mothew

Answer 29

“Misrepresentation makes a transaction voidable not void…unless and until the representee elects to rescind the representor remains fully bound”.

Question 30

Discuss briefly the 5 bars to rescission.

Answer 30

1. After the misrep has been discovered, C does something unequivocal, expressly or impliedly affirming the contract.
2. Delay (suggests affirmation) as in Leaf
3. 3rd party rights intervene before rescission has occurred
4. The court exercises its discretion under S.2(2) of the 1967 Act.
5. The status quo ante is impossible to restore.

Question 31

Discuss briefly the 5 bars to rescission (NOTE - fill in blanks in notes!)

Answer 31

1. After the misrep has been discovered, C does something unequivocal, expressly or impliedly affirming the contract.
2. Delay (suggests affirmation) as in Leaf
3. 3rd party rights intervene before rescission has occurred
4. The court exercises its discretion under S.2(2) of the 1967 Act.
5. The status quo ante is impossible to restore.

Question 32

What are the three ways in which C may obtain damages for misrep?

Answer 32

1. At common law for fraudulent misrep, under the tort of deceit.
2. Under S.2(1) for non-fraudulent misrep, unless D can show that he had reasonable grounds to believe and did believe up to the time of contracting that the representation was true.
3. The court exercises its discretion to award damages in lieu of rescission under S.2(2).

Question 33

Define fraudulent misrep and note two examples that will not suffice.

Answer 33

Derry v Peek - where the representation is made
(i) knowingly
(ii) w/o honest belief in its truth
(iii) recklessly, careless whether it be true or false
it is fraudulent.

Making a false statement through want of care or honestly believed on insufficient grounds does not suffice.

Question 34

When is C likely to claim damages for the tort of deceit rather than under the 1967 Act?

Answer 34

He MUST do so where the misrepresentor is a 3rd party (S.2(1) only applying where the misrepresentor is the other contracting party) and will prefer to do so if he has been careless, to avoid the defence of CN.

Question 35

What is the measure of damages for fraudulent misrep? What about non-fraudulent misrep?

Answer 35

Smith New Court - the measure of damages for fraudulent misrep is all losses C would not have incurred but for the deceit, even if not reasonably foreseeable, unless caused by C acting w/o reasonable prudence or common sense.

Royscot confirms that the measure of damages under S.2(1) is that under the tort of deceit - the “fiction of fraud”.

Question 36

What is the aim of damages for misrep? (2 cases)

Answer 36

East - C is to be put in the position she would have been in had the misrep not been made, rather than if the misrep had been true (East)

Yam Seng – it is relevant to consider what, if any, transaction C would have entered to but for the misrep

Question 37

Under S.2(1), is C always entitled to the full measure of damages under the tort of deceit? Give further detail on CN.

Answer 37

Reduction may be made for contributory negligence (Gran-Gelato, though NOTE the court said it will be exceptional that C’s failure to make further inquiries to verify the accuracy of the representation will qualify, for this amounts to saying that C’s reliance on the representation is CN when that reliance was the very thing D intended C should do) and where C has failed to mitigate his loss (Pankhania).

Question 38

Howard Marine (defence of “reasonable grounds to believe under S.2(1))

Answer 38

It is not sufficient for D to show he was not negligent, for liability under the act “does not depend on his being under a DoC the extent of which may vary according to the circumstances surrounding the representation”. Here D had the correct info in his possession when the representation was made and so he could not rely on the defence.

Question 39

What is the measure of recovery under S.2(2)? (NOTE - fill in blanks in revision notes)

Answer 39

William Sindall – the measure of recovery under S.2(2) is the loss flowing from the property not being what it was represented to be, rather than the loss flowing from C having entered into the contract as w/ the measure of recovery under S.2(1)

Question 40

What is the measure of recovery under S.2(2), and when is C’s loss to be assessed? (NOTE - fill in blanks in revision notes)

Answer 40

William Sindall – the measure of recovery under S.2(2) is the loss flowing from the property not being what it was represented to be, rather than the loss flowing from C having entered into the contract as w/ the measure of recovery under S.2(1). C’s loss is to be assessed at the date at which the property was transferred.

Question 41

What is the measure of recovery under S.2(2), and when is C’s loss to be assessed? (NOTE - fill in blanks in revision notes)

Answer 41

William Sindall – the measure of recovery under S.2(2) is the loss flowing from the property not being what it was represented to be, rather than the loss flowing from C having entered into the contract as w/ the measure of recovery under S.2(1); i.e. it compensates reliance loss and NOT expectation measure. C’s loss is to be assessed at the date at which the property was transferred.

Question 42

Can S.2(2) operate where rescission has become barred?

Answer 42

The language of the Act suggests rescission must be potentially available (British Aerospace) and William Sindall clarified that S.2(2) is to protect D, but in Witter it was held that it need not, based on legislative history and fairness to the representee. McK notes that in British Aerospace C’s claim to damages were far less meritorious.

Question 43

Blount (differentiating terms from representations)

Answer 43

Statements made by sellers of real estate in pre-contract negotiations do not normally have contractual force, as the buyer is expected to rely on a survey.

Question 44

Barton (fraudulent misrep)

Answer 44

Reliance is presumed for fraudulent misrepresentation.

Question 45

When will C be able to claim damages for loss of opportunity (e.g. loss of potential profits from investing in a more profitable business)

Answer 45

Smith New Court suggests that an award for loss of opportunity could be made on the basis of a hypothetical profitable business in which C would have invested but for the deceit, but Harper clarified that such an award can only be made if J had an opportunity to purchase a particular alternative business

Question 46

Beasley (exclusion of liability for fraudulent misrep)

Answer 46

“Fraud unravels all”, so any clause that D relies on to exclude D’s liability for fraud or C’s remedies against D’s fraud – even if the clause does not specifically provide for fraud – is unenforceable in that respect.