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Misrepresentation

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Contract law
Formation
Defences
Interpretation
Dispute resolution
Rights of third parties
Breach of contract
Remedies
Quasi-contractual obligations
Duties of parties
Related areas of law
By jurisdiction
Other law areas
Notes

In contract law, a misrepresentation is a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.[1] If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.[2]

Representation is not a term, its a semester

As enacted by the Misrepresentations Act[3], the statement in question may constitute a representation even if later incorporated into the contract as a term (i.e. a warranty, condition or innominate term).

An alternative approach, applied in parallel but in exclusivity to, is to find a collateral contract by interpreting the representation as a promise accompanied by some sort of consideration (see Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 (H.L.)). The collateral contract will have the effect of adding the representation as a term to the contract.

If the representation is found to be a term then the normal remedies for breach of contract apply.

Types of misrepresentation

Four types of misrepresentations are identified with different remedies available:

  • Fraudulent misrepresentation (Derry v Peek) occurs when one makes representation with intent to deceive and with the knowledge that it is false. An action for fraudulent misrepresentation allows for a remedy of damages and rescission. One can also sue for fraudulent misrepresentation in a tort action. Fraudulent misrepresentation is capable of being made recklessly.[4]
  • Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true. This type of misrepresentation is relatively new and was introduced to allow damages in situations where neither a collateral contract nor fraud is found. It was first seen in the case of Hedley Byrne v. Heller [1964] A.C. 465 where the court found that a statement made negligently that was relied upon can be actionable in tort. Lord Denning in Esso Petroleum Co. Ltd. v. Mardon [1976] Q.B. 108 however, transported the tort into contract law, stating the rule as:
if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another…with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable
  • Negligent misrepresentation under Statute, enacted by the Misrepresentation Act 1967. When dealing with a negligent misrepresentation it is most lucrative[5] (joint with fraudulent misrepresentation, Contributory Negligence notwithstanding[6]) for an action to be brought under statute law as the burden of proof that is required passes to the person who made the statement. So it is for the person who made the negligent statement to prove that the statement was either not one of fact but opinion and that "had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true"[7] - the so-called innocent defence.

This creates an inconsistency of law due to the low burden and damages being calculated as extensive as those under fraudulent misrepresentation whereby a "wicked mind"[8] is the basis of action. It is, to use the words of Rix J, "a mighty weapon"[9]. Due to academic and judicial criticism in this area, the law is ripe for reform - probably adjusting the measure of damages to that of negligent misrepresentation at common law.[10]

  • Innocent misrepresentation occurs when the representor had reasonable grounds for believing that his or her false statement was true.[11] Prior to Hedley Byrne, all misrepresentations that were not fraudulent were considered to be innocent. This type of representation primarily allows for a remedy of rescission, the purpose of which is put the parties back into a position as if the contract had never taken place. Section 2(2) Misrepresentation Act 1967, however, allows for damages to be awarded in lieu of rescission if the court deems it equitable to do so. This is judged on both the nature of the innocent misrepresentation and the losses suffered by the claimant from it.

Remedies

Rescission

Main article: Rescission

Generally, the effect of misrepresentation is that it makes the contract voidable not void ab initio. This is important for two reasons. Firstly because the representee can continue to be bound by the contract at her will. Secondly because the transactions and effects of the (voided) contract are recognised as to have taken place, therefore if a party transfers title of property to a third party of which the former only holds title to pursuant to the voided contract, the third party can retain legal title.[12] Rescission can be done either by informing the representor or by requesting an order from the court. There are certain circumstances where rescission is not possible though. The idea behind rescission is that the parties are restored to the positions they were before entering into the contract. Therefore, if this is not possible, rescission is not an option.[13]

If the representee discovers the misrepresentation and fails to take steps to avoid the contract, then he may not be able to rescind it.[14] The time limit for taking such steps varies depending on the type of misrepresentation. In cases of fraudulent misrepresentation, the time limit runs until when the misrepresentation ought to have been discovered, whereas in innocent misrepresentation, the right to rescission may lapse even before the representee can reasonably be expected to know about it.[15]

In certain circumstances, third party rights may interfere with rescission and render it impossible. For example, if B contracts with A to sell a house with a misrepresentation and then A sells the house to C, the courts are not likely to permit rescission as that would require C to give up the house.

In England and Wales, under Misrepresentations Act 1967 s. 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages instead of rescission.

Damages

In cases of fraudulent misrepresentation, a claim for damages is under the tort of deceit, making the damages tortious, in other words, only actual losses are recoverable. If the losses are calculated under the Misrepresentation Act 1967, damages for misrepresentation are calculated as if the defendant had been fraudulent, even if he has been only negligent. This is a wider scope than usual tortious liability, as it protects the claimant's loss even if not reasonably foreseeable. Inclusion of the representation into the contract as a term will leave the remedy for breach in damages as a common law right. The difference is that damages for misrepresentation usually reflect C's reliance interest, whereas damages for breach of contract protect C's expectation interest, although the rules on mitigation will apply in the latter case. In certain cases though, the courts have awarded damages for loss of profit, basing it on loss of opportunity.[16]

See also

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Authorities

  1. ^ See Bisset v Wilkinson and others [1927] AC 177.
  2. ^ See Esso Petroleum Co Ltd v Mardon [1976] 2 Lloyd's Rep 305.
  3. ^ Misrepresentation Act 1967 s1(a): "Where a person has entered into a contract after a misrepresentation has been made to him, and the misrepresentation has become a term of the contract, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to butt the provisions of this Act"
  4. ^ See Derry v Peek (1889) 14 App. Cas. 337.
  5. ^ Due to the 'fiction of fraud, see Guenter Treitel, G.H & Atiyah, P.S ‘Misrepresentations Act 1967’ (1967) 30 MLR 369
  6. ^ applicable for statutory misrepresentation but not fraudulent per Lord Hoffman, Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 AC 959, para 17 and 18, respectively, at 967
  7. ^ Misrepresentation Act 1967 s2(1)
  8. ^ per Lord Esher, Le Lievre v Gould [1893] 1 QB 491 at 498
  9. ^ Avon Insurance Plc v Swire Fraser [2000] 1 All ER (Comm) 573 at 579
  10. ^ see, inter alia, Stuart-Smith, J & de Chassiron, A, ‘Recovery of Damages After Misrepresentation’ (2000) 150 NLJ 865; Rix J, op cit supra
  11. ^ Misrepresentation Act 1967 s2(1)
  12. ^ For legal reasoning application of the difference see Shogun Finance Ltd v Hudson [2004] 1 AC 919; Brooks, O & Dodd, A ‘Shogun: A Principled Decision’ (2003) 153 NLJ 1898
  13. ^ See Erlanger v New Sombrero Phosphate Co (1878) 3 App. Cas. 308.
  14. ^ See Long v Lloyd [1958] 1 WLR 753
  15. ^ See Leaf v International Galleries [1950] 2 KB 86.
  16. ^ See East v Maurer [1991] 2 All ER 733.
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