Unit 7: False Preliminary Statements and Mistake Flashcards
Which ONE of the following statements best defines a misrepresentation?
A) A false statement of fact which induces a party to enter into a contract
B) A statement made by the other contracting party which was an inducement to enter into the contract
C) A false statement made by the other contracting party which was an inducement to enter into the contract
D) A false statement of fact made by one contracting party to the other and which induced the contract
CORRECT ANSWER D
best defines a misrepresentation.The other statements are all slightly inaccurate
You see a vase in an antique shop. You think it is very rare and worth far more than the price asked. The owner of the shop hears you telling your friend your views about the vase but does not say anything. You buy the vase but it turns out to be worth less than the price asked for it.
Which ONE of the following statements is CORRECT?
A) The owner of the shop has made a misrepresentation as she should have corrected your mistake.
B) The owner of the shop has made a misrepresentation as she was under a duty to disclose all material facts.
C) The owner of the shop has made a negligent misstatement.
D) The owner of the shop has not made a misrepresentation or a negligent misstatement.
CORRECT ANSWER D
The owner of the shop has not made a misrepresentation or a negligent misstatement as there was no false statement.
Which ONE of the following is CORRECT?
A) A misrepresentation makes a contract void
B) A misrepresentation makes a contract illegal
C) A misrepresentation makes a contract voidable
D) A misrepresentation makes a contract uncertain
CORRECT ANSWER C
If there has been a misrepresentation the contract is voidable ie it is a good contract unless and until the innocent party rescinds it.
Which ONE of the following statements is WRONG?
A) The court can order rescission even if the parties cannot be restored to exactly their original positions.
B) The court cannot order rescission if a bona fide purchaser has acquired rights in the property before the contract is avoided.
C) Delay is a bar to rescission if the misrepresentation is non-fraudulent but not if the misrepresentation is fraudulent.
D) The court cannot order rescission once the innocent party has affirmed the contract with full knowledge of the facts.
CORRECT ANSWER C
The court may order rescission if the parties can be restored substantially to their original position. Delay is still a bar to rescission in cases of fraudulent misrepresentation but time begins to run from when the innocent party discovers the misrepresentation.
Barbara bought Simon’s hairdressing business for £50,000. Before the contract Simon told her that the business made an annual profit of about £40,000. A few months after buying the business Barbara found out that the statement was false and she sold the business for £40,000. Assume that Simon’s statement is a misrepresentation.
Which ONE of the following statements is CORRECT?
A) Barbara can rescind the contract with Simon.
B) If Barbara sues for damages under s.2(1) Misrepresentation Act 1967 she will have to prove that Simon did not have reasonable grounds for his belief.
C) If Barbara sues for damages under s.2(1) then damages will be assessed on tort principles and the usual forseeability rule will apply.
D) Barbara cannot rescind her contract with Simon.
CORRECT ANSWER D
A is not correct because Barbara has sold the business and so rescission is no longer possible as the parties cannot be restored to substantially their original positions.
B is not correct because the onus of proof is on Simon i.e. Simon is liable to pay damages unless he can prove that he had reasonable grounds for his belief.
C is incorrect as the usual foreseeability rules do not apply.
Which ONE of the following is WRONG?
a) Under s.2(1) Misrepresentation Act 1967 damages are assessed on a contract basis.
b) Under s.2(1) Misrepresentation Act 1967 damages are assessed on a tort basis.
c) When assessing damages under s.2(1) Misrepresentation Act 1967 the usual forseeability rule does not apply.
d) Damages under s.2(1) Misrepresentation Act 1967 are assessed in the same way as for fraudulent misrepresentation.
CORRECT ANSWER A
When assessing damages under s.2(1) the court aims to put the innocent party in the position he would have been in if the statement had not been made, which is the tort method of assessment. The case of Royscot Trust Ltd (1991) made it clear that damages under s.2(1) should be assessed in the same way as damages for fraudulent misrepresentation in the tort of deceit. The effect of this decision is that the usual foreseeability rule does not apply.
Adam was induced to buy a desk because Polly, an antique dealer, misrepresented that the desk was Georgian. Adam paid £5,000 for the desk.
He has now found out that it is a fake and worth only £500. Had it really been Georgian, it would have been worth £6,000.
Adam does not wish to rescind the contract.
Which ONE of the following statements is CORRECT?
Hide answer choices
A) Damages assessed under s.2(1) Misrepresentation Act 1967 would be £5,000.
B) Damages assessed under s.2(1) Misrepresentation Act 1967 would be £5,500.
C) Damages assessed under s.2(1) Misrepresentation Act 1967 would be £4,500
D) Damages assessed under s.2(1) Misrepresentation Act 1967 would be £6,000
CORRECT ANSWER C
Under s.2(1) the court uses the tort method of assessment. This means the court aims to put Adam in the position he would have been in if the statement had not been made. If the statement had not been made Adam would still have £5,000. He has a desk worth £500, so he needs £4,500 in damages.
TRUE OR FALSE? :
A clause in a business-to-business contract exempting liability for misrepresentation will be upheld if it satisfies the reasonableness test in the Unfair Contract Terms Act 1977.
TRUE
s.3 Misrepresentation Act 1974.
Which ONE of the following statements is WRONG?
A) A unilateral mistake as to identity will only render the contract void where the identity (as opposed to a specific attribute) of the other party is of fundamental importance.
B) In order to make a contract void, a mistake must precede the contract.
C) When deciding whether or not there has been a mistake sufficient to make the contract void the courts will look at the facts subjectively.
D) A mistake can only negate consent if it induced the mistaken party to enter the contract.
CORRECT ANSWER C
As always in contract law the courts adopt an objective test when deciding whether or not a mistake is sufficiently fundamental to void a contract.
TRUE OR FALSE?:
Covenants in restraint of trade are prima facie void as being contrary to public policy but may be enforceable if they go no further than reasonably necessary to protect a legitimate business interest.
TRUE
There must be a legitimate interest to protect (e.g. trade secrets and customers) and the restraint is reasonable in terms of geographical area, duration and scope of prohibited activities.
A client saw a vase in an antique shop. The client thought it was very rare and worth far more than the price asked. The owner of the shop overheard the client telling someone this on the phone. The owner knew the vase was not rare and valuable but did not tell the client. The client bought the vase and has now discovered the vase is worth less than the price paid.
Does the client have a cause of action against the owner of the shop?
A) Yes, because the owner of the shop made a misrepresentation: the owner should have corrected the mistake.
B) Yes, because the owner of the shop would be in breach of an implied term that the sale price was a reasonable price for the vase.
C) Yes, because the owner of the shop made a fraudulent misrepresentation by positively deceiving the client.
D) No, because the general rule when selling goods is ‘buyer beware’.
E) No, because the client acted unconscionably in trying to buy the vase for less than it was worth.
CORRECT ANSWER D - The general rule when selling goods is ‘buyer beware’
A is wrong. The owner of the shop had not made a misrepresentation. Generally there is no obligation to say anything unless specifically asked.
B is wrong. The price was agreed. Consideration need not be adequate - see Chapter 3.1.1.
C is wrong as there was no positive deception; indeed there was no misrepresentation at all.
E is wrong. There is nothing wrong in trying to secure a good bargain.
A client, a sheep farmer, recently bought a farm. Before buying the farm the client had asked the seller how many sheep he believed the farm would sustain. The farm had never held sheep, but the seller said that in his judgement it would support 2,000 sheep. The client now realises the farm will only sustain 1,500 sheep maximum and wants compensation from the seller.
Which ONE of the following best describes whether the client has a cause of action against the seller for damages?
A) Yes, the false preliminary statement would be actionable as a misrepresentation.
B) Yes, the client would have an action for breach of an express term as the matter was an important factor in deciding to enter the contract.
C) Yes, the client could sue for breach of contract as the client reasonably relied on the seller’s judgement.
D) No, because the preliminary statement was neither a term of the contract nor a misrepresentation.
E) No, the general rule is ‘buyer beware’ so the client should have checked how many sheep the farm could sustain before entering the contract.
CORRECT ANSWER D
If the seller had simply expressed an honest and reasonably held opinion the false statement would not amount to breach of an express term or a misrepresentation- Bissett v Wilkinson. This also explains why Statements A, B and C are wrong.
Statement E is wrong as there is no obligation to check the accuracy of preliminary statements.
In May a buyer entered into a contract to buy a farm shop having been deliberately misled by the seller as to the gross profit made by the shop over the previous three years. The buyer made extensive alterations to the shop including the addition of a tea room. Then in August the buyer discovered the fraudulent misrepresentation and decided he no longer wanted the shop.
Could the buyer rescind the contract of sale?
A) No, because rescission would be barred by undue delay.
B) No, because rescission is an equitable remedy and damages would adequately compensate the buyer.
C) No, because restitution is impossible.
D) Yes, because rescission is potentially available for all forms of misrepresentation and the buyer has not affirmed the contract.
E) Yes, because rescission is always available for fraudulent misrepresentation.
CORRECT ANSWER C - As the buyer made extensive alterations to the shop including the addition of a tea room restitution would be impossible.
A is wrong as rescission would not be barred by delay. With fraudulent misrepresentation time runs from discovering the misrepresentation.
B is wrong as rescission may be awarded in addition to damages.
D is wrong. Rescission is potentially available for all forms of misrepresentation but would be barred on the facts as restitution is impossible.
E is wrong as rescission is not available as of right for any misrepresentation.
A client bought a business for £250,000 having been deliberately misled by the seller as to the gross profit made by the business. After running the business for a few months the client discovered the fraudulent misrepresentation. The client was advised to continue running the business (albeit at a loss) and to try to sell it. The sale of the business went through last week. It sold for £170,000.
If the client sues for misrepresentation which of the following best explains how damages would be assessed?
A) On an expectation loss basis.
B) On a reliance loss basis for wasted expenditure that was not too remote.
C) On a tortious basis for all consequential losses.
D) On a tortious basis and so would not extend to any loss of profit.
E) For any loss that was not too remote the client would get damages to put him in the same position as if the misrepresentation had not been made
CORRECT ANSWER C - Damages under s2(1) are awarded on the same basis as if the misrepresentation had been made fraudulently and so extend to all consequential losses and the measure is as if the misrepresentation had never been made.
A and B are wrong as they are ways of assessing damages for breach of contract.
D is wrong as damages for loss of profit may be assessed on a tortious basis (East v Maurer).
E is wrong as all consequential losses are recoverable – remoteness is not an issue.
A client recently bought a tenanted house. Before buying the property he had enquired about the tenant and was told by the seller that he was ‘a most desirable tenant’. The client has now discovered that the tenant is seriously in arrears with the rent and has only ever paid under pressure.
If the client sues the seller which ONE of the following is the most likely outcome?
A) The contract of sale will be set aside and the client will be awarded damages for breach of contract.
B) The claim will fail as the seller was simply expressing an opinion which is not actionable.
C) The client will be awarded damages assessed on a tortious basis.
D) The claim will be dismissed on the basis the client should have undertaken proper due diligence.
E) The client will be awarded damages in lieu of rescission.
CORRECT ANSWER C - the client will be awarded damages on a tortious basis. The seller could not have reasonably believed the tenant was ‘most desirable’ and so the statement would be actionable as a misrepresentation. This explains too why Statement B is wrong.
The preliminary statement would not be deemed to be a term of the contract; hence Statement A is wrong. Also, the court might not order rescission which is an equitable remedy awarded at the discretion of the court and which may be barred in any event.
Statement D is wrong. There is no obligation to check the accuracy of preliminary statements.
Statement E is wrong. The statement is unlikely to have been made innocently and in any event rescission may not be available.
