Misrepresentation

Question 1

MISREPRESENTATION

Answer 1

An operative misrepresentation (i.e. one that has legal effect) is an unambiguous false statement of past or existing fact made by one party to the contract to the other, before or at the time of contracting, on which that other party has relied in contracting.

• Contract will be voidable – entitled to rescind and claim damages
• Role of damages to put the party back into the position they would have been in had the misrepresentation never been made.

Question 2

Types of misrepresentation

Answer 2

1. Fraudulent misrepresentation – damages available under the tort of deceit
2. A misrepresentation which is a negligent misstatement (common law) so that damages are available for the tort of negligence.
3. A misrepresentation for which damages are available under s 2(1) of the Misrepresentation Act 1967 (i.e. the misrepresentor cannot prove that he believed the truth of what he misrepresented, and that he had reasonable grounds for doing so, up until the time the contract was made).
4. Innocent misrepresentation: i.e. misrepresentations not falling within the above categories. Normally strictly rescission only and no damages are available for innocent misrepresentation as of right, but s 2(2) allows the court to award damages in lieu of rescission where the misrepresentation is non-fraudulent.

Question 3

Edgington v Fitzmaurice (1885) 29 Ch D 459, Bowen LJ said (at p 483)
(Statement of intention)

Answer 3

Facts- directors of a company issued a prospectus inviting subscriptions for debentures. It was stated that any money raised would be used to improve their buildings and buy horses. The real intention was to pay off debts. Did this prospectus amount to a misrepresentation?

Legal issues- technically it didn’t as it wasn’t a statement of fact but of their future intention but what they said at the time in their minds they knew they are lying. If in your mind you have no reasonable grounds to believe what you’re saying then this will amount to a statement of fact.

Question 4

Bisset v Wilkinson [1927] AC 177 -general rule

Statement of opinion

Answer 4

Facts- Mr Bisset wanted to sell some land in New Zealand and he told the buyer that the land would support 2000 sheep. The land had never been used as a sheep farm before. In reliance on this he purchased the land and then found it was not suitable. Was this a false statement of fact?

Legal issues- this could only ever be a statement of opinion because the land had never been used as a sheep farm as he did not know that it was an opinion. Genuine statement of opinion.

Question 5

Smith v Land & House Property Corp (1885) 28 Ch D 7, 15 (Bowen LJ)
(Statement of opinion)

Answer 5

Facts- Smith owed a hotel that was up for sale and he said it was currently be let to Mr feck who is a most desirable tenant for £400PA. In fact, he hadn’t been paying his rent and was in large arrears. He said this statement was just an opinion.

Legal issues- the court said that as owner of the hotel he was in the best position to know the truth of the situation. It was implicit in that he had reasonable grounds to believe the truth that was being said. It appears to be an opinion but he falsely represented the fact he had reasonable grounds to hold an opinion and therefore it is a misrepresentation.

Question 6

*Esso Petroleum Co Ltd v Mardon [1976] QB 801

Statement of opinion

Answer 6

Facts- Esso found a site to build a petrol station and based on the location Mr leaf he said they would sell 200,000 gallons of petrol PA. they started to build and then got refused planning permission to have the pumps by the side of the road which affected how much income they would make. When they went to lease it to Marden was told that it would still be 200,000 gallons PA. Over the years he found out this wasn’t true so he terminated his tenancy and then Esso brought an action to recover money owed.

Legal issues- at first instance the court held it was a term of the contract but on appeal they held that it was both a term and a negligent misstatement. They had special knowledge of this fact and where in the position to know the accuracy of the statement and it was reasonable to expect Marden to rely on this information.

Question 7

Turner v Green [1895] 2 Ch 205

Silence constituting misrepresentation

Answer 7

Legal issues- mere non-disclosure of a material fact did not constitute a misrepresentation.

Question 8

Notts Patent Brick and Tile Co v Butler (1886) 16 QBD 778

Answer 8

Facts- Butler wanted to sell some land that was subject to a number of restrictive covenants. One of them prevented the use of this land as a brick yard. The plaintiff are brick makers and specifically asked if the land was subject to any restrictions. The solicitor said he was not aware of any but didn’t say that he hadn’t actually checked the legal documents.

Legal issues- what he has failed to say turns this statement into a misrepresentation. Misrepresented the fact he had reasonable grounds to believe the truth of what he was saying when he hadn’t even checked.

Question 9

Crystal Palace FC (2000) Ltd. V Dowie [2007] EWHC 1392

Answer 9

Facts- the manager of the football club in his contract there was a clause that said if he were to leave the club and join another team, he would need to pay 1 million pounds compensation. He wanted to avoid this and he got them to agree to waive it as he said he was leaving to move un north to be with his family so they agreed. He also said he had no other contracts in place with other football clubs including Charlton Athletic. After 8 days he was appointed manager at Charlton and he was then sued.

Legal issues- he claimed that at the time what he said was true and he had no contract but the court found they had been induced into this as fraudulent misrepresentation. If you partially disclose some facts and not reveal others this could bring a claim.

Question 10

With v O’Flanagan [1936] Ch 575

Change of circumstances

Answer 10

Facts- the sale of a medical practice and in January he told with that he made £2000PA in May the contract was concluded. Between that time, he had become unwell and was worth a lot less and in the 3 weeks before the contract was signed it only earnt £5 PW.

Legal issues- was there an obligation to correct his statement now it’s changed? The court said yes.

Question 11

Spice Girls v Aprilla World Service BV [2002] EWCA Civ 15, [2002] EMLR 27
(Conduct)

Answer 11

Facts- the spice girls entered into an agreement with Aprilla who make motorbikes to promote the new bike and in return their international tour would be sponsored. In negotiations they took part in photoshoots for promotional material. They knew that Ginger Spice planned to leave and she did two weeks after the contract and that made the photos useless. They sued for misrepresentation.

Legal issues- the continuing conduct of the band in the lead up to the contract amounted to an implied mis-rep and they were under a duty to correct the mis-rep once they knew it was no longer true.

Question 12

Smith v Chadwick (1884) 9 App Cas 187

Reliance

Answer 12

Facts- a company prospectus listed the directors but contained false information about the membership of the company stating Mr Grieve is a member of the board. So, the claimant brought shares on reliance on this but had never heard of him and admitted that that fact had not impacted on his decision to purchase the shares.

Legal issues- the mis-rep did not induce the defendant to enter into the contract so was not a claim.

Question 13

Horsfall v Thomas (1862) 1 H & C 90, 99; 158 ER 813, 817 (Bramwell B)
(Reliance)

Answer 13

Facts- the sale of a gun which had a defect which had been concealed with a metal plug. The buyer didn’t examine the gun or see the concealment and then when he discovered it said he had been induced my mis-rep.

Legal issues- this had no bearing on his decision to buy the gun.

Question 14

Attwood v Small (1838) 6 Cl & Fin 232

Reliance

Answer 14

Facts- the sale of a mine Small had made some untrue and exaggerated claims about the earning potential of the mine. Attwood appoints his own experts to assess the earning potential and they agree with Small.

Legal issues- there will be no mis-rep when the representee relies on his own experts as he didn’t rely on the mis statements and it didn’t induce him to enter into the contract.

Question 15

Redgrave v Hurd (1881) 20 Ch D 1

Answer 15

Facts- a solicitor selling his practice and he stated it had a high turnover of 300/400 PA. He asked the buyers if they wanted to examine the accounts but they declined. If they had they would have seen the sum was much less.

Legal issues- a mis-rep will still be operative even when an opportunity to discover it is not taken. This will not negate an action in mis-rep. He had relied on this mis-rep.

Question 16

Hayward v Zurich Insurance Co plc [2016] UKSC 48, [2017] AC 142

Answer 16

Facts- Hayward had suffered an injury at work and complained he had ongoing pain and discomfort and therefore can’t work. Zurich were his employer’s insurance company. In the dispute that followed a video emerged of him doing heavy manual work at home so contested the claim. They reached an agreement and he won £135,000 in compensation. Two years later further evidence came to life that he had completely recovered at least a year before the settlement. Whether this settlement could be rescinded on the grounds of mis-rep. They said his mis-rep had induced them into the settlement. Was their reliance and did they need to believe the truth of his injuries?

Legal issues- the representee doesn’t even have to believe the truth of the statement and it will still be operative. It was sufficient that they were influenced by the mis-rep a materially false mis-rep which induced them to their detriment.

Question 17

Types of misrepresentation which we need to consider are:

Answer 17

• Fraudulent misrepresentations (damages are available through the tort of deceit)
• Misrepresentations which are negligent misstatements so that damages are available through the tort of negligence
• Misrepresentation coming within s 2(1) of the Misrepresentation Act 1967
• Innocent misrepresentations: i.e. misrepresentations not coming within any of the above categories.

Question 18

Derry v Peek (1889) 14 App Cas 337, 374 (Lord Herschell)

Fraudulent misrepresentation

Answer 18

Facts- the directors of a company brought out a prospectus saying they had the right to operate trams driven by steam power. You had to have consent from the board of trade. The claimant brought shares on reliance of this but the company was later refused permission to do this and were later wound up.

Legal issues- they said they were not liable the statement that they had made was given in the honest belief that it was true.
“fraud is proved when it is shown that a false representation has been made, (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”

Question 19

BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC), [2010] BLR 267
(Fraudulent misrepresentation)

Answer 19

Facts- at IT company were held liable for fraudulent mis-rep when they carried out an analysis of the amount of time needed to complete the initial delivery and go live of a customer contact centre of BSKYB. The contract was worth 50 million but the liability of the defendants was limited. In the law where a mis-rep is fraudulent you cannot exclude your liability.

Legal issues- the court approved the test from Derry v Peek and did they lack belief in the statement they made to be the truth the court said yes and they were found liable.

Question 20

Akerhielm v de Mare [1959] AC 789

Fraudulent misrepresentation

Answer 20

Facts- the defendant signed a circular inviting subscription for shares in a private company which stated “about one third of the capital has already been subscribed” in fact it had been subscribed but not in cash. The plaintiff relied on this and when the company then became insolvent, he sued for fraud.

Legal issues- it’s not about looking back objectively to see if it was true or false but it’s about the way that the statement maker understood it at the time it was made.

Question 21

Jewson & Sons v Arcos Ltd (1933) 47 Lloyd’s Report 93

Fraudulent misrepresentation

Answer 21

Legal issues- fraud should only be found if the statement maker intended this to mislead the other. You must look for the appropriate state of mind that intention to deceive is found then motive is irrelevant.

Question 22

Damages are available for a fraudulent misrepresentation

Answer 22

Taking action in the tort of deceit. Damages are measured according to tort principles rather than contractual ones.
Damages in tort aim to place the claimant in the position as if the tort had not occurred (reliance loss). (contractual damages aim to place the claimant in the position as if the contract had been performed; i.e. they cover expectation loss, the benefit the claimant would have derived from performance of the contract).

Question 23

East v Maurer [1991] 1 WLR 461

Opportunity cost

Answer 23

Facts- the claimants brought one of two hairdressing business owned by Mauer for £20,000. He stated that he would not work in the other salon except for emergencies. This was relied upon when deciding to buy. Mauer had lied and continued to work in the other salon and he never manged to earn a profit and they sold the business after 10 years for £7500 and brought an action on the basis of fraudulent mis-rep.

Legal issues- they won. The damages did not cover the amount of money they expected to make but for the profit they could have made had they purchased another business in the same area (reliance loss).

Question 24

4 Eng Ltd v Harper [2008] EWHC 915 (Ch), [2009] Ch 91

Opportunity cost

Answer 24

Facts- Harper sold shares in a company called Excel for 1 million pounds. Harper had made fraudulent misrepresentations regarding the financial position of this company. Harper was later convicted of corruption and an action was brought.

Legal issues- the measure of damages available for fraudulent mis-rep. they brought damages for their lost opportunity to make profit in another company. The court said they could claim this it was recoverable.

Question 25

Parabola Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486
(Opportunity cost)

Answer 25

Facts- a broker made fraudulent mis-rep to a securities trader who then brought an action and sought to recover both the losses occurring directly from the fraud and also the loss of profits when they could have been investing their money in other opportunities. Alternative investments.

Legal issues- The court said they could recover for the loses resulted from alternative investments. All that had to be shown was that an alternative option was available and that it would have been profitable.

Question 26

Doyle v Olby Ironmongers Ltd (1969) 2 QB 15

Measure of damages

Answer 26

Facts- the plaintiff purchased an ironmonger’s business from X relying on representations he had made about the weekly wage bill and that trade was conducted from the shop. In fact, both were false and he knew this. The plaintiff sued for damages for fraudulent misrepresentations.

Legal issues- the normal rules of remoteness and foreseeability will not count as this was fraud and there was an intention to deceive. So, they don’t have the benefit of limiting the damages.

Question 27

Smith New Court Securities Ltd v Scrimgeour Vickers [1996] 3 WLR 1051
(Measure of damages)

Answer 27

Facts- Smiths brought shares in a public company FIS at an inflated share price in reliance of on false misrepresentations made by R who acted as broker for SVAM and who was also an employee of the second defendant C. A fraud involving FIS caused the value of the shares to slump and SNC sold the shares at a substantial loss.

Legal issues- reparation for all the damage directly flowing from the transaction even though they may not have been foreseeable it must have been directly caused by the transaction.

Question 28

*Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Negligent misrepresentation

Answer 28

Tort of negligent misrepresentation

Facts- a firm of advertising agents and they asked their bank to investigate the solvency of a company the defendants are easy powers bank they stated that they were good for ordinary business and engagements. They provide a good reference but they included an exclusion clause saying that they give it without responsibility. In reliance on this they book with them and they lost money when they went into liquidation. There is no contractual relationship so the action will have to be based on tort.

Legal issues- can there be a duty of care owed to the defendants and the court said yes it could be established as a special relationship but on the facts of the case the exclusion clause stood.
Must have a special relationship and they must have professed some special skill; it must have been reasonable that they would rely on it and that they did in fact rely on it.
It requires not only proof of a lack of reasonable grounds for the representor’s belief in the truth of what he asserted but also that he owed the representee a duty of care. When damages are awarded in tort for negligent misstatement it will be on the tort basis of returning the injured party to the position as if the tort had not occurred (reliance loss). Liability in negligence is limited to harm that was foreseeable. In an action for negligence, it is for the representee to prove that the representor was negligent.

Question 29

Statutory Misrepresentation. Section 2(1) of the Misrepresentation Act 1967

Answer 29

Section 2(1) states:
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.
This deals with the situation where X states a false fact and Y enters into a contract with X in reliance upon it, but X cannot establish that he or she had reasonable grounds for believing the fact to be true.

Advantages/Disadvantages of the action under s 2(1)
Section 2(1) reverses the burden of proof from that which applies under the tort of negligence.
Section 2(1) does not require a duty of care to have existed between the parties.

Question 30

Howard Marine & Dredging Co Ltd v A Ogden & Sons Ltd [1978] QB 574
(Misrepresentation act)

Answer 30

Facts- Ogden wanted to hire some barges and was told the carrying capacity was 1600 tones based on the managers memory of the Lloyds register but this was incorrect and he could have easily found the correct number by looking at the document. They entered into a contract and fell behind schedule and found that the capacity was only 1000 tones so refused the pay the hire charge.

Legal issues- this was successful under section 2(1) of mis-rep act because Howard marine could not discharge the burden to show they had reasonable grounds to believe the figure they had given. He could have just checked the document.

Question 31

Naughton v O’Callaghan [1990] 3 All ER 191

Assessment of Damages under s 2(1) on a tortious basis rather than contractual) (fiction of fraud

Answer 31

Facts- Naughton brought a pedigree horse for a high price. He trained the horse and it ran in races but never won and the value fell significantly. He discovered that the pedigree of the horse would not have been worth the same. He decided to claim in mis-rep under section 2(1) act claiming all losses flowing from the mis-rep which would be more than under breach of contract.

Legal issues- he was awarded all the damages that flowed directly from the mis-rep.

Question 32

Royscot Trust Ltd v Rogerson [1991] 2 QB 297- controversial judgement
(Misrepresentation act)

Answer 32

Facts- D a car dealer agreed to sell a car on hire purchase to a customer C for 7600 GBP of which 1200GBP was paid as a deposit. D, in the proposal to the finance company P mis stated these figures as 8000GBP and 1600 deposit. Relying on this P purchased the car from the dealer for 6400 GBP and entered into a hire purchase agreement with C. C dishonestly sold the car and paid no further instalments. P sued, D appealed and P cross appealed.

Legal issues- looked at what parliament intended under the act and they concluded that damages under the act must be calculated in the same way as fraudulent mis-rep even when it was not actually present.

Question 33

Innocent Misrepresentation

Answer 33

Since Hedley, Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and the Misrepresentation Act 1967, the category of innocent misrepresentation has ceased to encompass every non-fraudulent misrepresentation. An innocent misrepresentation is now only one not covered by any of the above categories. Damages are not available as of right, but the court has the discretion to award them in lieu of rescission under s 2(2) of the Misrepresentation Act 1967.

Question 34

Car & Universal Finance Ltd v Caldwell [1965] 1 QB 525

Rescission

Answer 34

Facts- sold his car to a fraudster who paid a deposit of £10 and a cheque for the remainder which bounced. Mr Caldwell telephoned the police and AA and the fraudster sold the car on to Car universal finance. Had he validly rescinded the contract before it was brought by the finance company?

Legal issues- court held that he had by his actions of contacting the police and the AA. He had taken all steps possible to demonstrate that he wished to rescind and his claim would not be frustrated just because he could not contact the fraudster.

Question 35

Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218, 1278-9
(Restitutio in integrum impossible)

Answer 35

Legal issues- the fact that complete restoration of the pre contractual position is not possible will not always be a bar for rescission. Substantial restoration and a small payment may be sufficient.

Question 36

Spence v Crawford [1939] SC (HL) 52, 77 (Lord Wright)

Restitutio in Integrum impossible

Answer 36

Legal issues- court less ready to rescind when the defendant is innocent.

‘The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefits of his fraud at the expense of the innocent plaintiff.’

Question 37

Long v Lloyd [1958] 1 WLR 753

Affirmation

Answer 37

Facts- the condition of a van was misrepresented as being in good condition and when the buyer brought it, it broke down so she contacted them and they agreed to pay half the cost of the repair but it then broke down again at which point he sought to rescind the contract.

Legal issues- the court said that the buyer could have rescinded after the first time but he affirmed the contract when they took the van back and allowed them to pay half the costs of repair. This is affirmation by conduct. This was inconsistent with an intention to rescind.

Question 38

Leaf v International Galleries [1950] 2 KB 86

Lapse of time

Answer 38

For fraud it starts from when the fraud is discovered or when you should reasonably have discovered it in other forms the time starts ticking from when the contract is completed

Facts- gallery innocently told Leaf a painting was buy a famous artist so brought the painting. When he went to sell it 5 years later it was discovered that it was actually only a copy. Could Leaf rescind the contract?

Legal issues- the time started ticking when the contract was made as there was no question of fraud so the court found 5 years to be an unreasonable amount of time and therefore was barred from rescission.

Question 39

Section 2(2) of the Misrepresentation Act 1967

Answer 39

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 40

Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy) [1983] 1 Lloyd’s Rep 188
(Misrepresentation Act 2.2)

Answer 40

Facts- O let his vessel to C for a period of 33-39 months. The charter provided that it was only to be employed within institute warranty trading limits although C had the privilege to break these against paying any extra insurance incurred. H ordered the vessel outside of the IWL and O refused. When he found out what the intention had been of O and C, he claimed to rescind the contract. C claimed it that rescission was invalid.

Legal issues- if one of the common law bars to rescission applies you cannot rely on section 2(2) to claim damages instead,

Question 41

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

Misrepresentation Act 2.2.

Answer 41

Facts- D a conglomerate negotiated the sale of a carpet company to P. D negligently misrepresented that there was a special one-off expense of 120,000GBP. The sale of contract included a clause stating that P had not been induced to enter into the agreement by any representation and had a contractual limitation clause that said D was not liable for a breach of the agreement unless written notice was given. P sued for negligent misrepresentation and D sought to rely on those two contractual provisions.

Legal issues- they said you can claim for damages under section 2(2) despite the fact you were barred from rescinding.

Question 42

Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745, [2016] RTR 17
(Misrepresentation Act 2.2.)

Answer 42

Facts- the appellant company appealed against a decision that the respondent was entitled to rescind a contract to buy a car and recover the purchase price and an order that it pay the respondents costs on the indemnity basis.

Legal issues- they court reasserted the position from the Atlantic Lines case they said that the whole point of the act was to give the courts the power to award damages as an alternative so rescission must be available in the first place.