Misrepresentation and mistake

Question 1

Mistake

Answer 1

An exception to the general rule of contract that parties are bound by the terms of their agreement and must rely on the contract for protection from the effect of facts unknown from them.

Question 2

Consequence of mistake

Answer 2

• If a contract is affected by mistake in the way the word is used in contract law (called an ‘operative’ mistake), then the contract is void meaning the contract will be declared a nullity from its beginning (void ab initio)
• The parties have not truly reached an agreement: either the parties cannot be said to have reached agreement because of the mistake, or the mistake renders the agreed contract something other than that which was intended.

Question 3

Definition of ‘operative mistake’

Answer 3

A mistake which is recognised in the law of contract as preventing a contract from taking legal effect.

Question 4

Definition of ‘void’

Answer 4

The contract has no legal effect from the outset.
- different from ‘voidable’; this means that the contract can be brought to an end/avoided, but until that happens, it remains in force.

Question 5

Categories of mistake

Answer 5

(1) Common mistake - where both parties to the agreement are suffering from the same misapprehension
(b) Mutual mistake - where both parties are mistaken but they are mistaken about different things; they have negotiated at cross-purposes
(c) Unilateral mistake - where only one party is mistaken, and the other knows, or is deemed to know, of the mistake.

Question 6

Common mistake

Answer 6

• where both parties to an agreement are suffering from the same misapprehension
• necessary to consider whether the underlying common mistake is sufficiently fundamental to affect the validity of the contract

Question 7

Common mistake as to existence of the subject matter

Answer 7

• At the time of the contract and unbenknownst to both parties, the subject-matter of the contract is not in existence (res extincta) e.g. if it has been destroyed.
• Associated Japanese Bank v Credit du Nord: must first determine whether the contract itself, expressly or impliedly, stipulates who should bear the risk of the mistake. If the contract is silent, the contract can be declared void.

Question 8

Common mistake as to the subject-matter being owned by the buyer

Answer 8

If, at the time of the contract and unbeknown to the parties, the subject-matter of the contract already belongs to the person attempting to purchase it (res sua), similarly there can be no contract.

Question 9

Common mistake as to a fact or quality fundamental to the agreement

Answer 9

• In the absence of contractual misrepresentation, generally mistake about quality of goods does not void the contract. This is the case even if the mistake as to quality affects the utility of the goods to the buyer, or alternatively affects the goods in question so that the seller obtains less than the value of the goods or the buyer pays more (Harrison & Jones v Bunten)
• e.g. Leaf v International Galleries: both the buyer and the seller thought they were buying/selling a painting of Salisbury Cathedral by Constable. The court suggested (obiter) that even a mistake like this would not lead to the contract being void on the grounds of mistake as to quality.
• has been suggested that there is a limited category of cases where the mistake is so severe it would be void for mistake as to quality e.g. where the subject matter is ‘essentially different’ from that intended (Bell v Lever Brothers)

Question 10

Mutual mistake

Answer 10

• where both parties are mistaken but they are mistaken about different things
• they have negotiated at cross-purposes e.g. A agrees to sell a horse to B. A intended to sell his brown horse, but B thought he was agreeing to buy A’s grey horse.
• where A and B have negotiated completely at cross-purposes, it cannot be said that they were ever in agreement and the contract will be void.
• the court will employ an objective test; what a reasonable third party would believe the agreement to be, based on the words and conduct of the parties.

Question 11

Unilateral mistake

Answer 11

• where only one party is mistaken and the other party knows, or is deemed to know, of the mistake.
• where this occurs, the acceptance does not correspond with the offer, and there is consequently no real agreement.

Question 12

Unilateral mistake as to the expression of intention

Answer 12

Where the offeror makes a material mistake in expressing his intention, and the other party knows, this is likely to lead to the contract being void.

Hartog v Colin & Shields: offered items for sale at 10d per pound rather than 10d per piece as they intended. The court found that there was no binding contract.

Question 13

Unilateral mistake as to the nature of the document signed

Answer 13

The general rule is that a person is bound by the terms of any instrument which he signs or seals even though he did not read it or did not understand its contents (L’Estrange v Graucob)

An exception is where a person signs a document under a mistaken belief as to the nature of the document. In such instances, he may raise the defence of non est factum (‘it is not my deed’).

It seems a plea of non est factum may be available where the mistake is due to either:

(a) the blindness, illiteracy, or senility of the person signing;
(b) a trick or fraudulent misrepresentation as to the nature of the document (provided that person took all reasonable precautions before signing)

Question 14

Unilateral mistake as to the identity of the person contracted with

Answer 14

One party mistakenly believes they are contracting with a person that the other party is pretending to be. Whether such a contract is void depends on the precise circumstances.

Question 15

Unilateral mistake as to the identity of the person contracted with: Lewis v Averay

Answer 15

• man came in to buy car and told claimant he was Richard Greene, a well-known film actor
• the claimant asked for proof and the fraudster produced a special pass of administration to Pinewood Studios, bearing his own photo and the name of Richard A.Greene. He was satisfied and let the fraudster take the car in return for the cheque.
• the cheque was worthless. In the meantime, the fraudster sold the car to the defendant, and then disappeared. The claimant brought action against the defendant
• held that it is presumed that the seller intended to deal with the person in front of them identified by sight and hearing so the contract was not void for mistake, although voidable for misrepresentation (fraudster had misrepresented who he was)

Question 16

When will the presumption in Lewis v Averay be rebutted?

Answer 16

If the seller is able to establish that identity, rather than attributes, was of ‘vital importance.’ Held that in this case, what the seller really cared about was Mr Greene’s creditworthiness, not his actual identity.

Question 17

Why does it matter whether the contract is void for mistake or voidable for misrepresentation?

Answer 17

‘Void’ means the contract will be declared a nullity from its beginning, whereas ‘voidable’ means that the contract can be brought to an end/avoided, but until that happens, it remains in force.

Where the identity of the buyer is fundamental and the contract is void for mistake, it is void from the outset. The buyer has no title and cannot give any sort of title to a third party, because nemo dat quod non habet (‘no one gives who possesses not’). As the third party has no title, he must return the goods to the duped seller, even if he knew nothing of the deception.

Question 18

If the parties don’t contract face to face

Answer 18

• Case law seems to suggest the situation may be different where the parties do not contract face to face. It is more difficult to allege that you are mistaken as to the identity of the other party when they are in front of you.
• Cundy v Lindsay: held that the respondents at all times believed they were dealing with Blenkiron and not the fraudster, Blenkarn. The contract was void for mistake as to identity.
• Shogun Finance v Hudson: the fraudster signed a draft finance agreement in the name of Mr Patel and produced an unlawfully obtained driving license. The car dealer sent the signed document and licence to the finance company. The finance company checked the credit rating of Mr Patel and approved the sale. The contract was void for mistake.

Question 19

Actionable misrepresentation

Answer 19

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

Question 20

Effect of misrepresentation

Answer 20

Makes the contract voidable but not void. The wronged party must take action to rescind the contract.

Question 21

Unambiguous

Answer 21

• must be clear and unambiguously have the meaning put forward by the representee
• representor will not be liable if the representee has placed his own unreasonable interpretation on the representation (McInerny v Lloyd’s Bank)

Question 22

False

Answer 22

‘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 claimant to enter into the contract’ (Avon Insurance v Swire Fraser)

Question 23

Statement of fact

Answer 23

• ‘a representation is not an undertaking to do, or not to do something. It is a statement asserting a given state of affairs’ (Kleinwert Benson v Malaysia Mining)
• has to be distinguished from mere puff
• intentional concealment of dry rot has been deemed to be a misrepresentation (Gordon v Selico)
• it is clear a statement of law can give rise to an actionable misrepresentation e.g. a false statement as to the existence of an Act of Parliament
• statements of opinion, future intention and instances of silence are not, on the face of it, actionable.

Question 24

Addressed to the claimant

Answer 24

Misrepresentation must be addressed from the representor to the claimant.

Question 25

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

Answer 25

• Test for materiality: did the statement relate to an issue that would have influenced a reasonable man? (Pan Atlantic v Pine)
• If the statement is found to be material, then inducement will generally be inferred as a matter of fact (Smith v Chadwick)

Question 26

Inducement

Answer 26

• Either: the representor shows that the statement would have influenced a reasonable man + representor cannot show that the statement did not influence this particular representee
• Or: representee shows that it personally was induced by that statement (subjective test)

Question 27

No actionable misrepresentation when…

Answer 27

(a) the statement was not actually communicated to the representee
(b) the statement did not affect the representee’s decision to enter the contract
(c) the statement was known to be untrue by the representee
The misrepresentation does not have to be the only reason for entering the contract.

Question 28

Cases

Answer 28

Edgington v Fitzmaurice: successfully claimed for fraudulent misrepresentation even though he admitted he would not have lent the money if it were not also for his own mistaken belief

Attwood v Small: a party cannot bring a claim in misrepresentation when it has not relied on the misrepresentation, but on its own investigations

Redgrave v Hurd: if a representee does not check, where the court considers it reasonable for them to have done so, this would open up the defence of contributory negligence. Contrib neg cannot be pleaded where the misrepresentation is fraudulent.

Question 29

Negligent misstatement

Answer 29

Where there is a relationship of sufficient proximity between the 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.

Question 30

Statement of opinion

Answer 30

• Usually cannot form the basis of a claim in misrepresentation
• Bisset v Wilkinson: when someone expresses an opinion, he also suggests two factual matters: he impliedly states he knows facts which justify his opinion. Where the same facts are known to both parties, this statement is unlikely to have much impact on the representee but 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.
• Brown v Raphael: so where the representor is in a position of superior knowledge or experience, a statement of opinion may be held to involve a statement of fact that there are reasonable grounds for this opinion. If there are no reasonable grounds, then a false statement has been made.

Question 31

Statement of future intention

Answer 31

• A representation is an assertion of the truth that a fact exists or did exist. It can therefore have no reference to future events or promises.
• However: if the representor states that he intends to do something, then he is making a limited statement of fact: he is stating that he does have that intention. So if at that point he knows he cannot do what he states, or he does not intend to do it, he misrepresents his existing intention (Edgington v Fitzmaurice)

Question 32

Silence

Answer 32

• In most cases, silence cannot give rise to an action for misrepresentation.
• There is no general duty to disclose facts which, if known, might affect the party’s decision (Keates v the Earl of Cadogan)

Question 33

Exceptions to general rule on silence

Answer 33

(a) Half truths
(b) Continuing representations
(c) Contracts uberrimae fidei

Question 34

Half-truths

Answer 34

It is a misrepresentation to make statements which are technically true but misleading (Nottingham Patent Brick & Tile)

Question 35

Continuing representations

Answer 35

If at the beginning of representations a statement is made which is true but then prior to entering the contract becomes false, the representor is under an obligation to correct the representation. If he fails to do so, he will be liable for misrepresentation.

Question 36

Contracts uberrimae fidei (utmost good faith)

Answer 36

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

• most common type is a contract for insurance
• contracts for the sale of land
• family arrangements
• a confidential relationship (sometimes known as the equitable doctrine of constructive fraud)

Question 37

Three categories of misrepresentation

Answer 37

(1) Fraudulent (tort of deceit)
(2) Negligent (statutory claim under s 2(1) of the Misrepresentation Act 1987
(3) Innocent (statutory claim under s 2(1))

Question 38

Fraudulent misrepresentation

Answer 38

Must be proof of fraud. This is proved when it is shown that a false representation has been made (a) knowingly, (b) without belief in its truth, or (c) recklessly, careless whether it be true or false. (Derry v Peek)

To find fraud it has to be shown that the level of recklessness required was a ‘flagrant disregard for the truth.’ (Thomas Witter v TBP)

Court more reluctant to use fraud for failure to disclose. Would have to be satisfied that it was deliberate and dishonest (With v O’Flanagan)

Burden of proof is on the claimant and so difficult to discharge.

Question 39

Negligent misrepresentation

Answer 39

Section 2(1) MA 1967: 'if the person making the representation would be liable for 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.' 
- reverses the burden of proof by requiring the defendant to prove that he had reasonable grounds to believe his statement.

Question 40

Innocent misrepresentation

Answer 40

One that was not made fraudulently or negligently. 
Section 2(1) MA 1967: A statement made where the representor (a) proves that he had reasonable grounds for belief in the truth of his statement and (b) proves that he believed up to the time of the contract that what he was saying was true.

Question 41

Damages available for misrepresentation

Answer 41

Recission, damages and indemnity

In addition, the representee may refuse further performance of the contract.

Question 42

Recission

Answer 42

• renders the contract voidable but not void
• contract still valid until representee decides to set it aside
• available in principle for any type of misrepresentation
• an equitable remedy given and withheld entirely at the discretion of the court
• generally, recission will be awarded only when the parties can be restored to their original pre-contract positions
• Available to a party misled by innocent misrepresentation notwithstanding that the misrepresentation has become a term of the contract (s 1 MA 1967)
• A party misled by an innocent misrepresentation is entitled to rescind even where the contract has been performed (s 1 MA 1967)

Question 43

Bars to recission

Answer 43

(a) Affirmation
(b) Lapse of time (delay defeats equities)
(c) Restitution is impossible
(d) Third party rights accrue e.g. if someone else has bought the goods

Question 44

Indemnity

Answer 44

• may be awarded to cover expenses for obligations assumed as a direct result of the contract
• the obligations must have been created by the contract
• generally where an action for misrepresentation gives a right to damages, an indemnity will not be awarded

Question 45

Damages

Answer 45

• potentially the greatest where the misrepresentation is a fraudulent one
• innocent misrepresentation does not afford damages per se, although damages in lieu of recission may be available under s 2(2) MA 1967

Question 46

Damages for fraudulent misrepresentation

Answer 46

Damages are calculated on a tortious basis i.e. the measure of damages is what is needed to put the innocent party in the position he would have been had the misrepresentation not been made.

Question 47

Damages for negligent misrepresentation

Answer 47

• correct measure of damages must be based on the tort of deceit
• the claimant is entitled to cover all losses even if they were unforeseeable
• damages may be reduced for contributory negligence
• damages in lieu of recission is only available at the discretion of the court
• 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 recission would cause to the other party

Question 48

Damages for innocent misrepresentation

Answer 48

• the representee is only entitled to the remedy of recission and if applicable, an indemnity to cover the lost of legal obligations arising from the contract
• there is no automatic right to damages but as with negligent misrepresentation, the court has the discretion to award them in lieu of recission

Question 49

Misrepresentation and exemption clauses

Answer 49

• The clause will be of no effect in so far as it satisfies the requirement of reasonableness under s 3 MA 1967, as substituted by s 8 UCTA 1977

Question 50

Non-reliance clauses

Answer 50

• A party may wish to exclude liability for misrepresentations.
• The exclusion of liability for misrepresentation has to be clearly stated so unlikely just an ‘entire agreement’ clause would be sufficient.
• There would have to be a ‘non reliance’ clause where the part agrees that neither party has made any representations to the other in relation to the contract or its subject matter, and neither has either party relied on any representation from the other.