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Misrepresentation

A misrepresentation is an unambiguous false statement of fact which induces the Claimant to enter into a contract. The basic proposition is easy to understand but has given rise to difficulties in the case law. For example, how central to the contract must the misrepresentation be, what if there are other factors which induce C and how does the law deal with opinions. Moreover, does a party have a duty to disclose information about the product they are selling? The answer to the latter depends on the circumstances.

Once a misrepresentation has been proved, the C is entitled to rescind the contract which is a more powerful remedy than termination upon a breach as it unwinds the contract from its start, rather than simply ending the parties' obligations of future performance (it is retrospective as well as prospective). Though rescission, like termination, can be lost if the innocent party affirms the contract. Damages are also available though they were confined to cases involving fraud until 1963. The 1967 Misrepresentation Act is now the most important source of law in this area.

It is important to note that not every misrepresentation will be included as a term in the contract.

 

What is a misrepresentation?

There are a number of requirements.

•  The statement is unambiguous. An ambiguous statement will not give rise to a misrepresentation unless the maker intended it to be misleading and was being deliberately ambiguous. This is a hard proposition to prove.

•  The statement must be false.

•  There must be a statement as opposed to a failure to disclose information. Conduct can be a statement but clearly it will be much more difficult for a C to prove the meaning of the conduct rather than the meaning of words.

•  The statement must be a statement of fact as opposed to a statement of opinion, of law or of intention. The distinction has been touched upon in the terms & representations tutorial and in the context of defamation. As regards statements of law, however, it is clear since Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 that a false statement of law can give rise to a claim if the maker ought to have knowledge and the statement is an important one.

•  The statement must be addressed to the party misled. This can either be directly where it is said by A to B, or indirectly where A says it to X who he intends to pass it on to B, as in Commercial Banking of Sydney [1972] where one bank passed information to another bank intending that they pass it on to a client.

•  There is debate as to whether the misrepresentation needs to be 'material', in the sense of significant. A statement will be significant where it affects a reasonable person in deciding whether to contract. The onus is on the C to prove that a reasonable person would have been affected and, if this is proved, it switches to D to try and prove that C was not in fact induced to enter: Museprime Properties (1991). Conversely where a reasonable person would not be induced the onus is on the C to prove that they were in fact induced.

•  The misrepresentation must have induced the C to enter the contract. This requirement is in practice the same as asking whether the misrep was material: if it was material then it is likely to have induced the C. There is, however, a conceptual distinction between the statement being material and the question whether C was induced. The misrep need not have been the only reason why C entered the contract: Edgington v Fitzmaurice (1885) as long as it was a reason. The D will not be responsible where the C placed reliance on a third party or where C was unaware of the existence of the false statement.

 

Statements of Opinion

In Bisset v Wilkinson [1927] AC 177, Wilkinson bought two plots of land from Bisset for sheep farming but was not able to make all the payments. Bisset sued for the money and Wilkinson replied saying Bisset had represented that the land could hold 2000 sheep. The Privy Council held that it was a statement of opinion. Where the facts are equally well known then a statement will frequently be an opinion. Where the facts are not equally well known then a statement of opinion will frequently contain a statement of fact within it as the maker impliedly suggests that they know the facts upon which they base their statement. The court approved Smith v Land and House Property (1884) where the seller of property stated that the tenant was 'a most desirable tenant' though the seller knew that part of the tenant's rent was unpaid and the rest had only been paid after a threat of legal proceedings. The seller argued that this was an opinion but the court held that it contained an implied assertion that he knew of no facts which would lead to the conclusion that the tenant was not 'most desirable'.

Esso Petroleum v Mardon [1976] QB 801, Court of Appeal. In 1961 Esso found a site for a new petrol station which they believed would have a throughput of 200,000 gallons per year. Once development was complete they interviewed Mr Mardon as a potential tenant and he agreed to enter a 3 year rental contract based on the assumption that there would be a throughput of 200,000 gallons. Despite his best efforts, Mr Mardon could not get the throughput higher than 78,000 and ended his contract after only two years. Esso offered a lower rent for a one year contract but he continued to make losses. When Mr Mardon refused to pay for petrol Esso sued and he counterclaimed for damages for breach of term and for negligent misrepresentation. At first instance the judge held that the throughput statement was not a term but was a negligent misrepresentation. The Court of Appeal held that the statement was both a term and negligent misrepresentation. The leading judgment was again delivered by Lord Denning. He stated that Esso knew the traffic in the town, the importance of the location and all the factors needed to determine the throughput. Esso did not guarantee that the throughput would be 200,000 but they had the knowledge and skill to estimate it accurately and they based the rent upon it. The Claimants cited Bisset v Wilkinson [1927] AC 177, a Privy Council case where it was held that saying "this field will hold 2000 sheep" was simply an opinion. Lord Denning distinguished the case on the basis that both the C and D were equally in a position to judge the capacity of the field. Whereas they were not in this case. The term was that the estimate about the throughput was accurate and this was breached. Mr Mardon was compensated for the losses he received rather than the profit he would have made had the throughput been attained as there was never a guarantee that it would. Had there been a guarantee, the breach of that guarantee would have allowed the measure of damages to put Mr Mardon in the position he would have been in.

 

Statements of Intention and Inducement

In Edgington v Fitzmaurice (1885) Court of Appeal, C was a shareholder in a company in which D were officers. The directors issued a prospectus advertising shares which stated that the shares were being sold to generate money for renovating property and improve the business. The C wrote asking if the shares would have first charge on the property (meaning that shareholders would be entitled to the first cut of money upon sale of the property in insolvency) and the company secretary said they would. The company was later wound up and there weren't enough assets to pay the shares fully. The CA said that was entitled to recover his money in the tort of deceit (as the misrepresentation had been fraudulent). The CA held that the real purpose of the shares was to pay off debts and that C would not have bought the shares if he knew the real purpose and that there was no charge. The D argued that these representation were mere statements of intention as opposed to statements of fact and could not give rise to a claim. The CA agreed with this but held that where the D misrepresents their present intention it can be actionable, as opposed to future intention. Bowen LJ said that a statement of present intention is just as much a statement of fact as any other statement of fact.

 

Statements made by Conduct

In Spice Girls v Aprilla [2002] Court of Appeal, the Spice Girls contracted with D on 6 th May, a motorcycle manufacturer, for sponsorship in return for some promotional work. One member of the band, Geri Halliwell, left the band before the date for performance and had informed other members of the band. D argued that they had been induced to enter the contract by representations of the band. In reply the Spice Girls relied on a term in the contract which said that endorsement would be provided by the band called Spice Girls "currently comprising [a list of the members]". It was held at first instance that there had been a misrep by conduct in that all 5 members had been involved in a photo shoot which D paid for at a time when they knew Geri was leaving (they knew by 9 th March). CA agreed holding that there was misrepresentation by conduct for the following reasons: (1) posters were used with all of the singers, (2)the contract was signed after they knew she was leaving, (3) a fax was sent on 30 th March which suggested they were all committed and (4) their participation in the commercial shoot.

The Spice Girls case would have been much simpler if English law recognised a duty of disclosure, though of course there are good reasons for not recognising such a duty, in particular, certainty between the parties and speed of negotiations. It is clear that the D was prepared to take the risk of one member leaving (as indicated by the clause) but not that one member had decided to leave before the contract was concluded.

 

Duty of Disclosure

English law does not recognise a duty of disclosure except for in very limited circumstances: Keates v Cadogan (1851). This is in contracts of 'utmost good faith', which very few contracts fall into. The main example is insurance contracts where the insured is under a duty to divulge any facts which the insurer would regard as material. Mere silence, without any conduct amounting to a representation, cannot be misrepresentation.

The court may find that there has been misrepresentation where there is an active attempt to conceal a defect. In Schneider v Heath (1813) a ship was sold "to be taken with all faults". After purchasing it the C had it examined and it was discovered that the bottom was worm-eaten and the keel was broken. It was held that c could recover his deposit as the captain had deliberately removed the vessel form dry dock and put it in the water to conceal the keel. This was held to be fraudulent misrepresentation.

A partial non-disclosure may amount to misrepresentation as in Peek v Gurney (1873) where it was said that a half truth can amount to a real falsehood. This could be where every word you say is true but you omit something which would qualify the statement. Similarly a statement can be a misrepresentation where it is true but implies facts which are not: Goldsmith v Rodger [1962] where a buyer said he had found defects in the keel of a vessel and the price was reduced. This implied that the buyer had actually taken the vessel out and tested it which he hadn't and this amounted to a misrepresentation.

A statement which is true when made, but becomes false because of a change in circumstances, will impose a duty of disclosure. In With v O'Flannagan [1936, CA, D told C that a medical practice which he was selling made ?2000 per annum. This was true when said but the Defendant doctor later became ill and a number of locums ran the practice and the profit fell. This change was not revealed to C before the contract was concluded and the court held that a misrepresentation had been made.

 

Rescission

A contract which is rescinded is set aside retrospectively and prospectively; any future obligations are cancelled and any past dealings are unwound so that the parties are in the same position they were in before the contract was entered into. Rescission is in principle available in all cases of misrepresentation, including innocent misrep: Redgrave v Hurd (1881).

It is important to note that the right of rescission, just like the right of termination in a breach of contract case, can be lost. The circumstances are called "bars to rescission". The first and most obvious bar is that the C cannot rescind if he has chosen to affirm the contract. The second is where a bona fide purchaser for value acquires the subject of the property (i.e. goods) before the contract can be set aside. A third bar to rescission is the lapse of time (except for fraudulent misrep). In Leaf v International Galleries [1950] C purchased a painting in 1944 after being told that it was the work of John Constable which it later turned out not to be. The CA was held that he was not entitled to rescind as a reasonable time had elapsed from when the misrep occurred. C had kept the painting for 5 years before without discovering its authenticity. C was entitled to damages.

The right to rescind may be lost when it is impossible to restore the parties back to their original positions. Consider the situation where the C has already received performance from D of a service or of the construction of a building, rescission of the contract cannot result in the services being given back of the building demolished and so the C will be unjustly enriched. Another example would be where C has used the goods or land. The courts remedy this situation by making C pay damages to compensate D for any element of the contract which cannot be rescinded. The courts will do "practical justice" as required by the case: Erlanher v New Sombrero Phosphate (1878).

Finally, rescission may be lost where the court uses its power under s2(2) Misrepresentation Act 1967 to award the C damages in lieu of rescission. It may be very harsh to allow rescission in a case where only an innocent misrepresentation has been made. Section 2(2) provides that,

"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 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."

The courts have used this provision where a party was seeking to rescind simply in order to escape a bad bargain (though clearly it can be used whenever it would be equitable to do so). In William Sindall v Cambridgeshire CC [1994], CA, Sindall agreed to buy land from the County Council for around ?5 million. Sindall made various enquiries of the council before completing the contract about easements and other public rights which might affect the land. The council replied that as far as it was aware there were no rights except those which had already been disclosed. A few months after the sale a privately owned sewer was discovered and Sindall alleged that this constituted a misrepresentation. By this stage the value of the land had halved (though not because of the sewer) and Sindall sought to rescind the contract. The Court of Appeal held that there had not been a misrepresentation by the council but even had there been they would only have awarded damages and not rescission pursuant to section 2(2). The court said that the misrepresentation must be looked at in the context of the transaction as a whole. The ?18,000 that it would have cost to rectify the sewer was small in light of the ?5 million deal. Also, the disparity between the loss that would be suffered by Sindall as opposed to the loss suffered by the council if rescission was granted, would be "gross" and an award of damages would have been fairest. The court has a broad discretion under section 2(2).

 

Damages

Until 1963 damages could only be claimed for fraudulent misrepresentations. The House of Lords in Hedley Byrne v Heller made it clear that damages were possible (note that tort is still the proper avenue where the misrep was made by a third party). The law has now been codified in s2(1) which allows a generous right of recovery. Section 2(1) provides that,

"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 ground to believe and did believe up to the time the contract was made the facts represented were true."

Thus damages can be awarded where the misrepresentation is negligent or merely innocent unless the D can show that they had reasonable grounds for believing what they did. In Royscot Trust v Rogerson [1991], CA, a car dealer agreed to sell a car to D on a hire purchase basis. Royscot was a finance company which would buy the car and enter the hire purchase agreement with Rogerson. The car dealer innocently misrepresented the car price to Royscot. Royscot had a policy of not entering into hire purchase unless the deposit was 20% of the purchase price which, according to the innocent misrep, it was. Rogerson dishonestly sold the car later on and Royscot brought an action under s2(1) against the car dealer and won. The measure of damages awarded was as if D had been fraudulent; a very strong proposition given that some years earlier negligent and innocent misreps didn't give rise to damages at all, let alone a fraudulent measure. Though it is clear that the starting point should be the amount needed to put C back in the position they would have been in before the misrep.

In Howard Marine & Dredging [1978], CA, the C owned two barges. D were contractors who wanted to hire the barges to carry clay out to sea for dumping. In negotiations for the hire of a barge an employee of C said that the boat capacity was about 1600 tons. This figure was based on Lloyd's Register, a very reputable guide, but there was a mistake in it and the capacity was lower. C had the ship's documents in his possession which stated the correct figure but did not consult them. D refused to pay the full amount and C brought an action. The D won in the Court of Appeal who held that there was a misrepresentation and that C had no reasonable grounds for believing the statement was true (Lord Denning dissenting on this point). Even though Lloyd's Register was extremely reputable the fact that C had the boat's documents in his possession meant that he did not have reasonable grounds for believing what he did: an arguably harsh judgment which imposes a very high standard on the maker of the representation. The duty expected of the C seemed to go beyond mere reasonableness.

It is noteworthy that contributory negligence can be argued in an action under s2(1): Gran Gelato v Richcliff [1992].

 

Section 2(2) of the 1967 Act

Section 2(2) permits the court to grant damages instead of rescission " if of 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". The issue was considered by the CA in Sindall v Cambridgeshire CC which is discussed above. In South Australia Asset Management [1997] the HL said that the correct valuation for damages was the difference between the actual price and the misrepresented price but not taking into account any fall in value. So if a property was bought for ?1000 when the actual price was ?800, the amount recoverable will be ?200 despite the fact that the property has fallen to ?700 since the contract. The problem with recovering the additional loss of value is causation as this loss of value would have occurred anyway.

Exclusion of Liability

A party cannot exclude liability for a fraudulent misrepresentation. Though it may be possible for a party to exclude liability for fraud done by a third party (an agent) if sufficiently clear wording is used: Chase Manhattan Bank [2001].

Section 3 of the Act governs exclusion clauses; it provides,

"If a contract contains a term which would exclude or restrict -

•  Any liability to which a party to a contract may by subject by reason of any misrepresentation made by him before the court was made; or

•  Any remedy available to another party to the contract by reason of such a misrepresentation.

That term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

It would be unwise for a draftsman to seek to exclude liability for "any representation" as this wording would cover fraudulent misrepresentations which cannot, as a rule, be excluded as it would be unreasonable (though see Zanzibar v British Aerospace [2000] where it was said that such a phrase might not include fraud as it is understood to be non-excludable).