By Law Teacher
5.1.1 Misrepresentation – Introduction
Welcome to the fifth lesson of this module guide, misrepresentation! Misrepresentation, in a nutshell, is a false statement which induces a party to enter into a contract. If shown to have occurred, a misrepresentation will allow the contract to be set aside by the representee (made voidable). This is an important aspect of contract law and will affect other areas of this module guide, so an understanding of this is important.
There are several types of misrepresentation, each of which has effect as to the type of damages awarded and the factors considered by a court. After completion of the section, you should be comfortable with being able to identify malpresentations and understand how they relate to the contracts.
This section will begin by defining what a misrepresentation is, before moving on to an examination of what makes one actionable. Next, the different types of misrepresentation will be considered, namely: fraudulent misrepresentation, negligent misstatement, negligent misrepresentation and innocent misrepresentation. Each of these are explored in turn before finally turning to the specific damages available under them.
Below are some goals and objectives for you to refer to after learning this section.
Goals for this section:
- To understand the importance of misrepresentation and its relationship to the elements of contract law
- To understand what a misrepresentation is
- To understand what will constitute a misrepresentation and the approaches the courts will take
Objectives for this section:
- To be able to define a misrepresentation
- To understand what makes a misrepresentation actionable
- To be able to discern the type of misrepresentation that has been made
- To understand the different remedies available depending on the type of misrepresentation
- To be able to effectively apply the law surrounding misrepresentation to a scenario
- To gain an understanding of the various statutory and common law rules governing misrepresentation
5.1.2 Misrepresentation Lecture
- Defining a misrepresentation
A misrepresentation is a form of statement made prior to the contract being formed. There are two types of statement that can be made before a contract forms, these will either:
- Form part of the contract
- Not form part of the contract, therefore becoming a representation.
Intention
The courts will attempt to give effect to the parties’ intention insofar as this is possible. This will be an objectively applied standard. There are a number of presumptions related to when or how a statement is made which will help the courts when they are attempting to ascertain whether a statement is a term or a representation (Heilbut, Symons & Co v Buckleton [1913] AC 30).
Statement is reduced to writing
If a statement has been reduced to writing, there will be a strong presumption that this will form a term of the contract, as opposed to a representation (L’Estrange v F Graucob Ltd [1934] 2 KB 394).
Specialist skill or knowledge
If the statement is made by a party who has, or claims to have, specialist skill or knowledge, there will be a presumption that this statement is a term – Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 and Oscar Chess v Williams [1957] 1 WLR 370.
Lapse of time
As a general rule, if there is a longer lapse of time between the statement and the formation of the contract, the greater the presumption will be that the statement is a representation.
- What makes a misrepresentation actionable?
Unambiguous, false statement
False and unambiguous
The degree of falsity is a relevant consideration. Avon Insurance plc v Swire Fraser Ltd [2000] 1 All ER (Comm) 573 ruled that the test to apply is whether or not the statement is “substantially correct”.
Whether or not the false statement is unambiguous refers to how the claimant interpreted the statement. If, on a reasonable construction, the statement was true, however, the claimant interpreted the statement in a different way which rendered the statement false, the statement would not be unambiguously false, and the claim would fail – McInerny v Lloyds Bank Ltd [1974] 1 Lloyd’s Rep 246.
Statement
‘Statement’ does not just refer to a verbal statement; it has been held that conduct can amount to a statement for the purpose of misrepresentation – Curtis v Chemical Cleaning & Dyeing co Ltd [1951] 1 KB 805 outlined this fact.
Silence or non-disclosure will not amount to a statement, it is clear that there must be some kind of positive conduct to constitute a statement – Gordon v Selico.
Half-truths
A misleading half-truth will amount to a misrepresentation. A misleading half-truth is a true statement which is misleading due to all relevant information not being revealed – Nottingham Patent Brick & Tile Co v Butler(1885) LR 16 QBD.
Change of circumstances
If a statement is made which is true at the time of making, but subsequently becomes untrue, there is a positive duty on the statement maker to ensure to inform the relevant party of this – With v O’Flanagan [1936] Ch 575.
False statement of fact
Statements of opinion
It is irrelevant whether the statement of opinion made is unreasonable, or whether the statement maker could subsequently check the validity of the opinion and update the other party as to whether the statement was true or not (Hummingbird Motors Ltd v Hobbs [1986] RTR 276).
The question to ask is whether the statement maker is in a better position to know the truth than the plaintiff? If not, and the plaintiff is aware of this, it will likely be classified as an opinion.
If the statement maker holds themselves out to have reasonably grounds to make a statement, when in fact this is not true, it will amount to a statement of fact for the purposes of proving misrepresentation – Smith v Land & House Property Corporation(1884).
Statements of intention
A misrepresentation as to future intention is usually not actionable for misrepresentation, as it will not amount to a statement of fact. The statement of future intent will not be held to be a fact even if the defendant intentionally changes their mind as to their intentions (Inntrepreneur Pub Co v Sweeney[2002] EWHC 1060 (Ch)).
A statement of future intention made with absolutely no intention at the time of the statement, however, will amount to a misrepresentation – Edgington v Fitzmaurice(1885) 24 Ch D 459.
Statements of law
A statement of law which is incorrect will amount to a false statement of fact for the purpose of misrepresentation – Pankhania v Hackney London Borough[2002] NPC 123.
Inducement of the claimant
There are three requirements of inducement:
- The representation made must be material
- The representation must be known to the representee
- The representation must be acted upon
The representation must be material
The representation must not be an inconsequential statement which is of irrelevance to the plaintiff –Smith v Chadwick(1884) 9 App Cas 187.
The test for whether or not a representation is an objective one is contained within JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583.
The representation must be known to the representee
A representation will not be actionable and will not have induced the representee unless the representee was aware of the representation – Horsfall v Thomas(1862) 1 H & C
A representation made to one party which then induces a third party may be amount to a misrepresentation under Yianni v Edwin Evans and Sons [1981] 3 All ER 593.
The representation must be acted upon
The representor may attempt to prove the representee was induced by another factor, and not the misrepresentation – Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386.
If the statement is made fraudulently and is material, there is a strong presumption that this statement has been relied upon – Barton v County Natwest Ltd[1999] Lloyd’s Rep Bank 408
If the representee chooses to validate the truth of the representor’s statement, unless the representation was made fraudulently, the statement will not act as a misrepresentation – S Pearson & Son Ltd v Dublin Corporation [1907] AC 351.
- What type of misrepresentation has been made?
There are four different types:
- Fraudulent Misrepresentation – Common Law Tort of Deceit
- Negligent Misstatement – Common Law via Hedley Byrne v Heller
- Negligent Misrepresentation – Statutory under the Misrepresentation Act 1967
- Innocent Misrepresentation – Statutory under the Misrepresentation Act 1967
Fraudulent misrepresentation
The significance of a misrepresentation being classified as a fraudulent one is that the measure of damages may be greater under certain circumstances. There are two remedies available for fraudulent misrepresentation: recession and damages.
Representees should attempt a claim for fraudulent misrepresentation with caution, as the courts impose a much higher standard of proof due to the serious allegations. There may also be penalties in the event the claim is not made out.
A fraudulent misrepresentation was defined in Derry v Peek(1889) 14 App Cas 337 as a false statement which is ‘made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false’.
In order to assess whether a statement has been made fraudulently, you should consider whether:
- The statement maker knows that the statement he has made is false
- The statement maker has reasonable grounds to believe his statement is true even if it is false
In the case of a, there will clearly be a fraudulent statement.
In the case of b, if the statement maker has made a false statement, but has reasonable grounds to believe his statement, it will not amount to a fraudulent statement, as it has not been made recklessly or carelessly. A statement made recklessly or carelessly needs to be a statement made which the statement maker has no belief in the truth of (but does not know for sure that it is true or false).
Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 clarified that where a statement is made where the statement maker has no idea whether or not it is true or false, this statement would be fraudulent due to the recklessness asserting it is true when it may not be.
True statements which become false
In With v O’Flanagan [1936] Ch 575 it was suggested that misrepresentation as a result of a change of circumstances might result in either a fraudulent misrepresentation or a negligent one. Here are the circumstances in which this can happen:
Fraudulent: The statement maker is aware there is a duty to notify the representee of a change in circumstances (Banks v Cox (No 2) unreported)
Negligent: The statement maker is not aware there is a duty to notify the representee of a change in circumstances.
Negligent misrepresentation
Negligent misstatement
A claim for a negligent misrepresentation that is based in tort under the common law is usually referred to as a ‘negligent misstatement’ – Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. See Caparo Industries plc v Dickman [1990] 2 AC 605 for the test for duty of care.
Subsequent case law which considered negligence of misrepresentations in the context of duty of care concluded there would be a duty of care owed if there was an ‘assumption of responsibility’ on the part of the statement maker (Henderson v Merrett Syndicates Ltd [1995] 2 AC 145). Whether or not there is an ‘assumption of responsibility’ considers determining whether the statement maker has held themselves out as possessing expertise or special skill, and is aware the other party will rely on this information. It is irrelevant whether or not the statement maker is an actual expert, only that they hold themselves out to be one.
Negligent misrepresentation
An alternative approach to a claim for negligent misrepresentation is to pursue the claim under statute. The Misrepresentation Act 1967 Section 2(1) allows for such a claim and contains the key components.
The significance of a negligent misrepresentation claim under statute is that the burden of proof from the common law claim is reversed. The representor cannot escape liability simply by proving that he was not negligent, it must be proven that he had reasonable grounds to believe the statement -Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574.
Innocent misrepresentation
With the development of the Misrepresentation Act the claim for innocent misrepresentation is extremely limited. A claim for innocent misrepresentation will arise when a claim for negligent misrepresentation under the Misrepresentation act has failed. The remedy for an innocent misrepresentation will usually be rescission of the contract.
- The remedies for misrepresentation
Rescission
When a contract has been induced by misrepresentation of any kind, the contract does still confer obligations upon the parties, but the contract will be voidable. Voiding the contract as this stage is using the remedy of rescission. There are a number of restrictions to the use of this remedy. These are known as ‘bars’ to rescission.
Affirmation
Affirmation refers to an affirmation of the contract, whereby despite the misrepresentation, the representee had held themselves out to be happy with the contract as it is, therefore affirming the misrepresentation (Long v Lloyd [1958] 2 All ER 402.
In the event of a misrepresentation, it is expected that the representee, if they are not happy with the contract, will take action to remedy the contract.
Lapse of time
There is a differing approach by the courts for different types of misrepresentation.
In the case of fraudulent misrepresentation, the lapse of time will begin at the time the fraud was either discovered, or could have been discovered.
As for misrepresentation which is negligent or innocent, the lapse of time will begin from the date of the contract – Leaf v International Galleries [1950] 2 KB 86.
Restitutio in integrum
This bar to rescission refers to where a rescission of the contract is no longer possible. This is the case where the goods under the contract have been used, consumed or have perished – Clarke v Dickson (1858) 120 ER 463.
In the event that the goods have only been partially consumed rescission is a more complicated issue – TSB Bank plc v Camfield [1995] 1 WLR 430. In De Molestine v Ponton [2002] 1 All ER (Comm) 587 this approach was rejected, and it was argued a partial rescission may be possible where you can split the contract into multiple parts.
Third party interests
Where rescission would encroach on the rights of a third party, the remedy will be unavailable – Crystal Palace Football Club (2000)Ltd v Dowie [2007] EWHC 1392
Damages
The measure of damages differs for each of the types of misrepresentation, therefore each will be considered in turn.
Fraudulent misrepresentation
A fraudulent misrepresentation requires a high standard of proof. Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 is authority to the effect that damages are awarded on a tortious basis, aiming to put the aggrieved party in the position they would have been if the misrepresentation was true.
This standard is usually subject to a test of ‘reasonable forseeability’, where a loss will only be claimable if the statement maker could have reasonably foreseen that the fraudulent statement would have resulted in such a loss.
Negligent misrepresentation under the common law
Negligent misrepresentation claimed under Hedley Byrne v Hellerand the tort of deceit are extremely limited in comparison to those for fraudulent misrepresentation. Unlike damages for fraudulent misrepresentation, under the tort of deceit the damages are limited by the test of remoteness.
The test of remoteness, from Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon Mound))[1961] AC 388, only allows damages to be claimed that are “reasonably foreseeable”.
If the claimant has also been negligent to some extent, damages may be reduced by way of contributory negligence, apportioning some of the blame to the claimant.
Negligent misrepresentation under the Misrepresentation Act
Under Section 2(1) of the Misrepresentation Act, damages are awarded on exactly the same basis as fraudulent misrepresentation. Therefore, the statement maker will be liable in damages for all consequential losses as a result of the statement, irrespective of their foreseeability – Sharneyford Supplies Ltd v Edge[1987] Ch 305.
Section 2(2) of the Misrepresentation Act clarifies the relationship between rescission and damages. The courts have identified that rescission can often result in unfair consequences, and therefore, damages may be awarded as an alternative to rescission. This means that there cannot be a claim for rescission and damages; it must be one or the other.
Can liability from misrepresentation be excluded in the contract?
In order for liability for misrepresentation to be excluded, Section 8 of the Unfair Contract Terms Act 1977 rules that the term must be:
- Reasonable
- Clear and precise as to the exclusion of misrepresentation
5.1.3 Misrepresentation Lecture – Hand on Example
The following section will be a test of your knowledge and understanding of the principles of misrepresentation. After studying the detailed notes, you should be able to recognise a misrepresentation, identify when one is actionable, identify what type of misrepresentation has been made, and explain the remedies available for that type of misrepresentation. The problem scenario will include a mix of these issues, and the answers can be found at the bottom of the page.
The key characteristic of a problem question relating to misrepresentation is a statement made by a party, not found in the contractual terms, which turns out not to be true. This will indicate that there has been a potential misrepresentation. Be careful, because if the statement is found in the contractual terms, it will be a breach of contract issue, not misrepresentation.
The following method to approaching a problem question on misrepresentation should allow you to answer the question fully:
- Does the statement form part of the contract or not – Is it a representation of a term?
- Does the statement amount to an actionable misrepresentation? (Is it an unambiguous, false statement of fact which induced the contract)
- Is the misrepresentation fraudulent, negligent, or innocent?
- What remedies are available?
This approach will cover all of the issues and ensure you do not miss any out. This problem scenario will not include any issues from the first bullet-point, as these have been covered in the ‘terms’ chapter. This will allow this problem question to focus on issues of misrepresentation itself.
Scenario
Lewis has recently had a big win on the lottery and has decided to purchase a company. He is extremely disappointed with the result of the contract and would like to know if there is anything that can be done about them.
Contract one was with John, for the purchase of the company. During negotiations for the contract, Lewis enquired about the state of the accounts of the company, specifically, whether the company was profitable. John said this – “I’m unsure, but it is my opinion that the company is profitable. However, I will check the accounts in the next week, if you do not hear from me you can assume all is well”. After a week, Lewis hears nothing. The contract is then signed, but when Lewis receives the accounts he is upset to find the company has not profited in the last 6 months.
Would Lewis’ conduct amount to a misrepresentation? If so, is it actionable, and could you ascertain what type of misrepresentation has been made?
Answer: The first issue is whether Lewis’ conduct could amount to a representation. It is clear from Curtis v Chemical Cleaning & Dyeing co Ltd that a misrepresentation need not be made verbally; it can be implied from the conduct of a party. In this case, the fact John promised he would contact Lewis if the company was not profitable, and did not contact him, would amount to a representation that the company was profitable.
For a representation to be actionable it must be an unambiguous, false statement of fact, which induced the claimant to enter the contract. There is no question as to whether the statement is false, the representation that the company was profitable was not “substantially correct” as per Avon Insurance plc v Swire Fraser Ltd, as the company had not profited in 6 months. As for whether it was a statement of fact, John did state that it was only his opinion that the company was not profitable. However, this was before he had checked the accounts, which he had promised to do. A statement can only be considered an opinion if the statement maker holds themselves out as having no expertise related to the statement, but in this case, John has stated he will check the state of the accounts, therefore suggesting he will have expertise once he checks the accounts. Therefore, the actual misrepresentation in question (not contacting Lewis), could not amount to an opinion.
There may be a question of whether John’s statement would amount to a statement of intention and therefore not be actionable. However, the actual misrepresentation was not a statement of intention, it was a statement of fact regarding the accounts. The fact there was a statement of intention to check those facts is not damning on Lewis’ argument.
Next, it needs to be considered whether the statement induced Lewis into the contract. To do so, the statement must be material, made to the representee, and acted upon. It is clear the representation was objectively material. The accounts of a company will be one of the most important factors in a purchase, and there is no indication from Lewis that he had any other interest in the company. However, if Lewis was purchasing the company for reasons unrelated to the accounts, it representation would not be material (JEB Fasteners Ltd v Marks Bloom & Co. The fact that Lewis took positive action to query the accounts of the company suggests it was material.
Lewis was not expressly aware of the representation, but John not contacting Lewis has made that representation by conduct, therefore it would be known to Lewis. Lewis also clearly acted upon the representation, as because he has not heard from John in the promised week time-frame, he assumes the company’s accounts are fine, and therefore goes on to sign the contract for the purchase. Therefore, it is clear the misrepresentation is actionable as it is a false statement of fact which induced Lewis to enter the contract.
As for the type of misrepresentation, this is dependent on the particular facts and the intentions of John. The misrepresentation was made via the conduct of John, when he did not conduct Lewis. If John had checked the accounts, but decided to purposely withhold this information, this would amount to a fraudulent misrepresentation. As per Derry v Peek, his conduct would amount to a statement that John knows it false.
If John did not bother to check the accounts, or forgot, this would therefore amount to a negligent misrepresentation, which could either be pursued under the tort of deceit or the Misrepresentation Act 1967.
Under the tort of deceit, it is clear there would have been a breach of reasonable care and skill, as John was on a duty to check the accounts, either by forgetting or intentionally not checking he has breached this duty, as he knew the importance of it to the contract. (Hedley Byrne & Co Ltd v Heller & Partners Ltd. John had held himself out as having the expertise to check the accounts, which Lewis relied upon (Henderson v Merrett Syndicates Ltd).
Under Section 2(1) of the Misrepresentation Act, we have already established that if the statement was made fraudulently it would be actionable as fraudulent misrepresentation. Therefore, the only defence John will have, is to prove he had reasonable grounds to believe the statement was true. The fact that John says he ‘unsure’ about the accounts of the company suggests he had no reasonable grounds to believe it was profitable, and needed to check.