Introduction to Business Law: Misrepresentation

Misrepresentation

•       An actionable misrepresentation may be defined as:

(1) a statement

(2) of fact

(3) made by or on behalf of the representor

 (4) to the representee

(5) that is false,

(6) that is material and

 (7) that induces the representee to enter into the contract.

•       Misrepresentation and mistake

Effect of misrepresentation

•       Contract voidable (comes into existence but liable to be set aside with retrospective effect through the remedy of rescission)

•       Rescission

•       Damages available in tort at common law

•       Statutory entitlement to damages under s 2(1) Misrepresentation Act 1967.

Misrepresentation & Contractual Terms

•       Pre-contractual statement can also be a contractual term.

•       Heart of the distinction: intention of representor as objectively apparent. Would a reasonable person in the position of the recipient of the statement believe that the other party was undertaking its truth as a matter of contract? 

•       Medina v Stoughton (1700) 1 Salk 210 ‘an affirmation made at the time of a sale is a warranty, provided it appears on evidence to be so intended’.

A Statement

•       Must be a statement. Silence is not a misrepresentation. 

•       Thus, if you sell some faulty goods keeping silent about their condition, at common law your buyer has no remedy for what you did not say.

•       A statement does not necessarily require a direct representation. It may be committed by conduct: if you sell your animals at a market, you are impliedly representing that they do not suffer from any contagious disease.

Consider the following situations:

–      A sells his business to B. Six months prior to the sale, A correctly represents to B that the business is worth £x. By the time the contract is in fact concluded, the value has fallen considerably to £y. A knows this, but does not tell B. (With v O’Flanagan [1936] Ch 575)

–      A sells land divided into farms to B. Prior to the contract being concluded, A states that all the farms are fully let. This is accurate, but all the tenants have given notice to quit. (Dimmock v Hallett (1866) LR 2 Ch App 21)

•       Note the rule in Smith v Hughes’ (1871) LR 6 QB 597: a mistake as to the terms of the contract known to the other party prevents a contract from coming into existence (the so-called ‘contract’ is void).

Of Fact

•       To be actionable, the statement must be one of fact. A distinction must be drawn between fact and (a) opinion or belief, (b) intention

Statements of opinion or belief

A statement of opinion is never actionable. After all, even experts are allowed to be wrong. The distinction between opinion and fact can be hard to draw.

–      Bissett v Wilkinson [1927] AC 177

 

–      Smith v Land & House Property Corp (1884) 28 ChD 7

 

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

Where the representor lies about having an opinion in truth not held, clearly there is a misrepresentation of fact.

Statements of intention

•       The mere fact that you do not do something you have stated you would do is not itself a basis of liability. A promise is not a representation.

Edgington v Fitzmaurice (1885) 29 ChD 459: A borrows money from B on the basis that A intends to use it to improve and expand A’s company. In fact, A’s intention is different, namely the payment of existing company debts.

–      Traill v Baring (1864) 4 DJ & S 318: insurance company sought reinsurance 

–      Wales v Wadham [1977] 1 WLR 199: divorce case

Made By Or On Behalf Of The Representor To The Representee

•       If C  induced into a contract by something false said by a third party, that in general constitutes no ground for challenging the resulting contract. The exception is where the other contracting party (D) has notice of the misrepresentation and fails to take reasonable steps.

Royal Bank of Scotland (No 2) v Etridge [2001] UKHL 44, [2002] 2 AC 773

Even if made by D, C cannot invoke that representation against D unless D made the representation to C. A statement made by D to a third party that C happens to overhear cannot be relied upon by C.

False

•       The statement must be false.

•       Can be extremely hard to judge

e.g. best horse available to sell at the moment.

What does that mean?

Materiality

•       Except where fraudulent, a misrepresentation is actionable only if material.  

•       A representation is material if a reasonable person in the position of the representee would regard the misstated fact as relevant in deciding whether to enter the contract

•       It is an objective concept and to be distinguished from the subjective requirement of inducement of the actual representee

Inducement/Reliance/Causation

A misrepresentation is actionable only if the representee relies on it and is thereby induced to enter into the contract, ie the misrepresentation causes the conclusion of the contract

The required causal link- Fraud

Edgington v Fitzmaurice (1885) 29 ChD 459: investment in a company on the bases

(a) of fraudulent representations as to purpose for which the money being raised and

(b) mistaken belief that investment would be secured by a charge on the company’s land.

Only invested because of both (a) and (b).

Defence: the fraud was not therefore the decisive inducement.

CA: irrelevant that fraud not the sole inducement. It suffices that the fraudulent statement was actively present in the misrepresentee’s mind when deciding to conclude the contract.

•       Barton v Armstrong [1976] AC 104, 118 per Lord Cross

‘If … Barton relied on the [fraudulent] misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision to execute the deed, for in this field the court does not allow an examination into the relative importance of contributory causes. “Once make out that there has been anything like deception and no contract resting in any degree on that foundation can stand”: per Lord Cranworth in Reynell v Sprye (1852) 1 De G M & G 660, 708.’

•       Approved Standard Chartered Bank v Pakistan National Shipping Corp [2002] UKHL 43 at [14]-[16].

Non-fraudulent - Demonstrating no inducement

•       If the representee does not believe what is represented, or conducts its own investigations into the matter there is no reliance and the misrepresentation is not actionable: Attwood v Small (1836) 6 Cl & F 232. 

•       If the representee would still have concluded the contract on the same terms had it known the truth, it cannot claim to have been induced into the contract by the representation: JEB Fasteners Ltd v Marks, Bloom & Co [1983] 1 All ER 583. 

•       Is there any onus on the representee to check a statement? No. Nocton v Ashburton [1914] AC 932  

REMEDIES FOR MISREPRESENTATION (1): RESCISSION

REMEDIES FOR MISREPRESENTATION (1): RESCISSION

Rescission is the primary remedy for any misrepresentation, regardless of whether the misrepresentor is fraudulent, negligent or innocent.

It involves each party restoring to the other what has been received under the contract.

Recission

Theretrospective setting aside of the contract.

There are a number of reasons for a contract being said to be voidable.

The innocent party asserts that its assent was not valid, thus undermining the basis of the contract as a bundle of rights and duties rendered legally enforceable by reason of the consent to the creation of a contract.

 

How Is A Contract Rescinded?

•       Rescission is an act of the representee. It is a self-help remedy, not one that is granted by the court, albeit that the court now may have a statutory discretion to deny the remedy

•       In principle, a voidable contract is rescinded by the representee communicating its decision to rescind to the representor.

4 bars to recession

(1) Unjust enrichment

 Rescission being retrospective, each party must hand back to the other what has been received under the contract.

Recission will not be barred simply because it is not possible to return exactly that which has been received

Erlanger v New Sombrero Phosphate Co (1878)

2) Intervening third party rights

Rescission will not be allowed if it would prejudice the accrued rights of a bona fide third party.

(3)          Affirmation

This is an election by the representee, evidenced by some unequivocal act, not to rescind when it knows about the misrepresentation and about the right to rescind:

Peyman v Lenjani [1985] Ch 457

(4)          Lapse of time

•       Equity’s limitation period. The idea here is that although the right to rescind was available, the representee has waited so long that it would not be fair to allow rescission now.

REMEDIES FOR MISREPRESENTATION (2): DAMAGES AND INDEMNITY

•       Damages for misrepresentation are awarded at common law where the facts that generate an actionable misrepresentation fulfil the requirements of a tort.

Types of Misrepresentation & Remedies

•       Misrepresentation incorporated into the contract = term = damages for breach of contract

•       Fraudulent Misrepresentation:  Derry v Peek (1889):  statement made either with/without knowledge of it being untrue, recklessly without caring whether true/false

–      Rescission

–      Damages – tort of deceit

•       Negligent misrepresentation:  statement made believing it true without grounds for belief

–      Rescission

–      Damages – tort of negligent misstatement

•       Liability requirement of duty of care – special relationship

–      Hedley Byrne & Co Ltd v Heller & Partners (1963)

•       Negligent misrepresentation:

–      Section 2(1) Misrepresentation Act 1967 – no need to prove ‘special relationship’ + burden proof on defendant

•       Howard Marine & Dredging Co Ltd v Ogden Ltd (1978) – false statements about barges capacity

•       Spice Girls Ltd v Aprillia World Service (2002) – failed to inform of Geri Halliwell’s departure

•       Innocent misrepresentation:  statement reasonably believed to be true.

–      Rescission

–      Damages under s.2(2) Misrepresentation Act 1967

Rescission:  if awarded injured party can ‘rescind’ the contract – parties restored to original position

Measure of Damages

•       Fraudulent misrepresentation:

–      Damages for tort of deceit:  award = restore injured party to previous position; including unforeseen losses if closely related

•       Negligent misstatement:

–      Damages for tort of negligence:  restores injured party to previous position.  Loss must be foreseeable

•       Innocent misrepresentation:

–      Damages – less than for tort of deceit – difference in value between believed acquiring & acquired

Mistake

A mistake about the law never invalidates a contract:  ‘ignorance of the law is no excuse’

•       Mistake about the facts usually does not invalidate a contract:  Leaf v International Galleries (1950)

•       Type of mistake is important as to whether a contract is void or voidable

Void and Voidable Contracts

•       A void contract is treated as if it never existed:  parties returned to pre-contract positions

•       A voidable contract is a valid contract:  innocent party has the right to set it aside

Distinguish type of mistake

Look at type of mistake to see if contract is void or voidable

Distinguish mistakes:

•       Relating to subject matter

•       Existence of subject matter

•       Identity of the parties

•       Mistaken signing of a written document

Mistakes – Subject Matter

•       Mistake:  nature or value of subject matter is insufficient but

•       Mutual mistake as to identity of subject = void contract

•       Cross purposes:  Raffles v Wichelhaus (1864) – cargo of cotton on same named ship two sailed out of Bombay

•       Where subject has ceased to exist – contract void

•       Courtier v Hastie (1856) – cargo of corn already sold

Mistake – Identity of parties

•       Unilateral mistake – e.g. fraud of one of the parties

•       Identity of party is material to contract?

•       Intention to only deal with that party:

–      Cundy v Lindsay & Co (1878):  Blenkarn not Blenkiron & Co – contract void intended to deal with Blenkiron & Co not

–      Kings Norton Metal Co. Ltd v Edridge Merrett & Co (1987):  goods sold to non-existent company – contract voidable, not void

More difficult to prove if dealt with face to face:

•       Phillips v Brookes (1919):  worthless cheque based on ‘mistaken identity’ – contract not void but voidable

•       Lewis v Averay (1971): car sold to someone purporting to be a famous actor for a worthless cheque - contract not void but voidable

•       Shogun Finance v Hudson (2003) – fraudulent HP agreement, therefore contract void 

Mistake – written documents

Assumption:  read & understood document therefore agreed.

Exception:  non est factum – ‘it is not my deed’

•       Protect vulnerable people, i.e. blind, illiterate

•       Not those who are careless

In order for non est factum to apply:

•       Fundamental difference

•       No carelessness

•       Fraudulently induced

Position in equity

•       Rectification:

1. Parties had a common intention
2. Document does not reflect common intention

•       Compromise to achieve fairness

•       Specific performance – order to carry out contract – he who seeks equity must do equity