L UNIVERSITY

OF LONDON
L
B Bachelor of Laws Level 4 /
CertHE Common Law

CONTRACT LAW

Misrepresentation

BAC COLLEGE (SINGAPORE)

45 New Bridge Road, 2nd to 4th Floor, Singapore 059398
Tel:65-62380377 Fax:65-62380577
http://www.bac.edu.sg
 Contract Law
Misrepresentation

Misrepresentation
Learning outcomes:

By the end of this chapter and the relevant reading, you should be able to:
 understand the difference between terms and misrepresentation.
 differentiate in remedy between an action for breach and misrepresentation?
 distinguish the common law action and action under statute.
 Consider whether the remedy granted for section 2 (1) of Misrepresentation Act 1967 justified.

Essential Cases
 Royscott v Rogerson(1991) 3 All ER 294
 East v Maurer (1991) 2 All ER 733
 William Sindall plc v Cambridgeshire CC (1994) 1 WLR 1016
 Bisset v Wilkinson (1927)
 Smith v Land House Corporation (1884)
 Esso Petroleum Co Ltd v Mardon (1976)
 Edgington v Fitzmaurice (1885)
 Pankhania v Hackney LBC (2002)
 Redgrave v Hurd (1881)
 Museprime Properties Ltd v Adhill Properties Ltd (1990)
 Spice Girls Ltd v Aprilia World Services BV (2000)
 Dimmock v Hallet (1866)
 Hedley Byrne v Hellr (1964)
 Howard Marine and Dredging Co v Ogden and Sons (1978)
 Govt of Zanaibar v British Aerospace Ltd (2000)
 Thomas Witter Ltd v TBP Industries (1996)

At the end of the chapter the learner will:

- be able to define a misrepresentation

- explain how a statement of opinion be treated as a misrepresentation
- also explain how the failure to disclose information can amount to a misrepresentation
- list the potential remedies for misrepresentation
- be able to explain the limitations on the right to rescind for misrepresentation
- explain the different measures of damages for misrepresentation
- give examples of situations in which each will be applicable
- state the rules which limit the possibility of excluding liability for misrepresentation

Essential reading:
McKendrick, Chapter 13: ‘Misrepresentation’
Poole, Chapter 12: ‘Misrepresentation Section 1 Actionable Misrepresentation’
J Beatson, Anson’s Law of Contract (28th edn, 2002) Ch 6

Further Reading
 S Smith, Atiyah’s Introduction to the Law of Contract (6th edn, 2005) ch 10
 P Atiyah and G Treitel, ‘Misrepresentation Act 1967’ (1967) 30 MLR 139
 R Taylor, ‘Exception, Reliance and Misrepresentation’ (1982) 45 MLR 139
 I Brown and A Chandler, ‘Deceit, Damages and the Misrepresentation Act 1967, s2(1)’ [1992]
LMCLQ 40
 J O’Sullivan, ‘Rescission asa Self-Help Remedy:a critical Analysis’ [2000] CLJ 509
 J Cartwright, ‘Excluding Liability for Misrepresentation’ in Contract Terms (eds A Burrows and E
Peel,2007) 213

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Introduction
It is of utmost importance to distinguish between terms and representations. It is important as the
cause of action hinges upon this distinction. It is helpful to note that the distinction is not between
real entities, like a chair and a spoon, but merely separate ways of classifying what the parties had
said. Therefore, to distinguish them based on the form of words used is bound to be an exercise in
futility.

"This is a 16th century Nantgara tea set" and "This is a 35 year old Ruritanian champagne" could
both be either a term or a representation. Whether the statement is a term or a representation
depends on the intention of the parties. Since the idea of intention is elusive, a helpful tool is the
contractual cartography. - Heilbut Symons v Buckleton [1913]

Where a statement is a term of the contract and it turns out to be untrue, this would constitute a
breach of contract. There is an automatic right to at least damages. The innocent party need not
prove anything else. His exact remedies depend on the classification of the term breached.

Where a statement does not become a term of the contract, then it is a non-contractual statement.
It could either be a mere puff or a mere representation. These statements are prima-facie not
actionable in contract if they turned out to be untrue.

But the representee, although left without a cause of action for the breach of contract, could still
establish his action and pray for his remedies for actionable misrepresentation.

Note: It is possible to sue, even if the statement was not incorporated into the contract, for breach of
a collateral contract. See. Shanklin Pier v Detel Products Ltd. [1951]

1. ACTIONABLE MISREPRESENTATION.
The locus classicus of actionable misrepresentation is founded in Anson's Law of Contract, 26th
ed., as

A false statement / of existing or past fact / made by one party before or at the time of making the
contract / which is addressed to the other party and which induces the other party to enter into the
contract.

Therefore the basic key points that ought to be highlighted in the definition above are:
 The representation is false
 The representation must be a statement of existing or past fact.
 The representation must be addressed to the other party.
 The representation must induce the other party to enter into the contract.

1.1 The Representation is False.

General Rule: Silence or non-disclosure does not normally give rise to' liability.
There is no general duty on the part of the contracting parties to disclose relevant facts, which were
not known to the other party. English law does not generally require a perty to disclose to the other
thet it is making a mistake in entering into a contract. That is, there is no law requiring disclosure
sitting alongside misrepresentation.

Fletcher v Krell [1873]

The defendant was a woman who applied for the post of a governess without revealing that she was
a divorcee.

Held: The woman's silence did not amount to a misrepresentation.

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There are, however, a number of exceptions to the general rule. They are:

1.1.1 Contracts uberrimae fidei [contracts of utmost good faith]

These particular contracts are found especially in insurance contracts. In this circumstance, there is
a duty to disclose material facts. The reason is that these are contracts where one party is in a
particularly stronger position to know the facts as compared to the other party – Lambert v
Cooperative Insurance Society (1975)

1.1.2 Fiduciary Relationships.

These are relationships where the fiduciary must take care of the interest of the cestui que trust
[beneficiary]. Therefore, the fiduciary is under an equitable duty to fully disclose his interest or any
profits made in his office as a fiduciary.

Note: The duty to disclose by the fiduciary arises because of the relationship of the parties. This
must be contrasted with contracts uberrimaefidei where the duty arises from the nature of the
contract.

1.1.3 Later changes which falsify a statement, which was true when made.
A statement, which was true when it was made, might be made false by changes in circumstances.
An illustrative example is found in

With v O'Flanagan [1936]

The defendant wanted to sell his business and negotiations for the sale to the plaintiff began in
January. It was stated by the defendant that his medical practice was worth L2, 000 a year. At that
time, this statement was true.

The defendant subsequently fell ill and by May, when the contract of sale was signed, the practice
had become virtually worthless.

Held:Where there is a change of circumstances, which renders the statement untrue, the
representor is under a duty to inform the representee of the change. Therefore, the defendant's
silence in the light of the change in circumstances constituted a misrepresentation.

Spice Girls Ltd. v Aprillia World Service BV [2000] EMLR 478

Here, it was held that there was a duty to correct the representation by conduct that the group did
not know of the intention of one of the member to leave before the period of the sponsorship
agreement ended. Nothing had been done to correct this representation.

On the facts of this case, the defendant a motor scooter manufacturer had agreed to sponsor the
tour of the pop group, the spice girls. The group had participated in a photo shoot and other
promotional material before the agreement was signed at a when it was found that they knew that
one member of the band had declared an intention to leave the group before the expiry of the term
of the sponsorship agreement. The defendant sought damages for misrepresentation.

Arden J held that the taking part in the promotions amounted to a misrepresentation by conduct,
namely a misrepresentation that the group did not know and had no reasonable ground to believe
that any member of the group had the intention to leave before the end of the agreement.

Comment:
It is academically controversial as to whether the failure to disclose would amount to a fraudulent
misrepresentation. Anson opines that it does and cited with approval Davies v London &
Provincial Marine Insurance [1878]. It is respectfully submitted that it is difficult to see how this
case lends support to Anson's assertion.

Nevertheless, Treitel views this question to be merely of academic interest as it must be read in the
light of S.2(l) Misrepresentation Act 1967. The Act gives a right to damages unless, inter alia, the
representor ‘did believe up to the time of contract was made that the facts represented were true.’

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1.1.4 Half Truths.

These are statements which are literally true but at the same time, misleading. One ought to be
familiar with the decision of

Dimmock v Hallet [1866]

A vendor of land represented that all the farms on the land were fully let. The vendor falsely
represented that he knew of no other facts which would render that statement misleading. This was
because he had knowledge that the tenants had given notice to quit. Held: The statement amounted
to a misrepresentation.

Nottingham Patent Brick Co. v Butler [1887]

The purchaser of land enquired from the vendor's solicitor as to whether the land was subjected to
restrictive covenants. The solicitor replied that he was unaware of any and did not disclose that his
[the solicitor's] ignorance was due to his failure to read the relevant documents.

Held: Although the solicitor's statement was literally true, it tantamount to a misrepresentation.

2. It must be a statement of existing or past fact.

Facts must be distinguished from; mere puffs (sales talk), mere beliefs or opinions, representation
as to the future (including statements of intention) statements of law.

Some Remarks:
It is not rewarding to merely parrot these rules without demonstrating the principles underlying the
rules as to why such statements do not constitute misrepresentation. It is crucial and certainly
rewarding to appreciate the real basis for liability in misrepresentation.

The rationale for limiting liability under actionable misrepresentation to only statements of fact is that
only facts could be objectively ascertained to be true or untrue as the time ‘the statement is made.
Furthermore, reliance could only be justified if it is based on facts and not of opinions or beliefs,
however honest and reasonable they may be.

As opposed to an action for breach of which a cause of action accrues when the promise is broken,
an actionable misrepresentation occurs when a statement is made.

It is hoped that the rationale outlined below as to why such statements do not constitute a
misrepresentation is of use to you.

2.1 Mere puffs.

Mere sales talk does not give rise to obligations because they are too imprecise. These statements
are obviously not intended to be taken literally or seriously. Simplex commendatio non obligat.

In Dimmock v Hallett the land was described as ‘fertile and improvable’. These statements were,
said the Court, ‘mere flourishing description’ by the auctioneer. In other words, they were ‘mere puff’
and objectively could not be considered as the basis for a legal claim.

2.2 Statement of opinion or belief.

Such statements are not actionable because there is nothing wrong in putting forward one's belief or
opinion. In addition, a reliance on such beliefs could not be justified. This is because an opinion or
belief could not be objectively ascertained to be either true or false at the time the statement was
made. Thus in

Bisset v Wilkinson [1927]

The plaintiff seller was selling land in New Zealand to the defendant. The land had not previously
been used as a sheep farm. The defendant knew about it. The plaintiff claimed that the land would
support 2,000 sheep.

Held: The statement was one of opinion and not of fact. Hence, there was no actionable
misrepresentation.

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Note: The above case merely reflects the situation where both parties knew that the representor
had no knowledge as to the representation he was making. These are merely statements of
opinion.

But it is very important to distinguish this from the situation where the facts are not equally well
known to both parties. In this case the statement of opinion by the person who knows the facts
involves a statement of material fact. This is a verifiable opinion. It means that the representor
impliedly asserts that he knows facts, which justifies his opinion.

Smith v Land and House Property Corp. [1884]

The statement given by the vendor of a hotel describing it as "let to a Frederick Fleck, a most
desirable tenant', whereas in fact Mr. Fleck was in arrears with his rent was not an expression of a
mere opinion. The vendor was liable because it was a verifiable opinion. This was because the
vendor impliedly stated that he knew of the facts, which justified his opinion.

Esso Petroleum v Mardon [1976]

If the representor had the expertise, skill, knowledge or experience then it cannot be said to be a
mere statement of opinion.

Comment: These cases could be reconciled because the underlying principle of the requirement of
a statement of fact is that one is only justified in relying on facts not on beliefs and opinions however
honestly and reasonably held.

2.3 Statements of Law.

A statement as to the law is not a misrepresentation because everybody is deemed to know the law.
Ignorance of the law is no excuse. Ignorantia juris haud excusat.

Note : Kleinwort Benson Ltd v Lincoln City Council (1999)

However, the view in Pankhania v Hackney London Borough Council (2002) is that restituitionary
remedies would be available for such misrepresentations as to law.

2.4 Statements of intention

There is no action in misrepresentation of the statement is merely that of intention. This is because
a person is entitled to change his mind in the future. It is important to note that since a statement of
intention refers to a particular future conduct, it is impossible for the intention to be false at the time
the statement was made.

However, a statement of intention may also involve a statement of fact. This arises when a
statement of one's intention in this situation is capable of being true or false, in the sense of whether
that person holds that intention or not.

It follows that there is clearly misrepresentation if that person made the statement without actually
holding that intention. You must appreciate the significance of the decision of

Edgington v Fitzmaurice [1885]

The directors of a company invited a loan from the public and stated that the money would be used
to expand the business. But the real intention of the directors was to use the money to pay for the
company's existing debts.

Held: The directors were liable for actionable misrepresentation of their present intention as to their
future conduct.

"The state of a man's mind is as much a fact as the state of his digestion.... if it can be ascertained
there is a misstatement of fact." Per Bowen L.J.

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3. The Representation must be Addressed to the Other Party.

Clearly where a misrepresentation has been made to the representee directly, there would be prima
facie actionable misrepresentation. But what if the statement had been made to another who then
passes on to a third party?

This must be understood in the usual objective sense. Therefore, it would be that A would have to
be liable as if he had directly misrepresented to C, even though A made the misrepresentation to B
provided that in the circumstances A ought to know that the false statement would be passed on to
C, the third party – Commercial Banking Co. of Sydney v RH Brown & Co. [1972]

Finally note that the misrepresentation can be done by an agent of the defendant - Flack v
Pattinson & Queensgate Industries Ltd (2002) CA

4. Induces the Contract.

The representee must have relied on the contract. Note that there is a great deal of interplay
between this requirement and the rationale underlying the requirement of a statement of fact. This
is because reliance cannot be justified if it is based on a non-fact. In other words, reliance must take
place.

Situations of non-reliance
There could be no reliance if it could be shown that;

1. The representee was not aware of the existence of the statement.

2. The representee relied entirely on his own independent inquiries or information.
3. The representee knew that the statement was false.

Attwood v Small [1838]

The representee here made his own enquiries. This shows that he does not rely on the statement
and thus his action for misrepresentation must fail.

What if the representee was negligent in his reliance?

Redgrave v Hurd [1881]
Where the representee was given an opportunity to investigate or verify the representation but did
not take advantage of such an opportunity. The representee can still obtain relief in
misrepresentation in this case, even if he was negligent in failing to take advantage of the
opportunity to verify the truth of the representation. In fact the representee's failure to check
reinforces the inference that he had relied on the statement because there is little point in people
exchanging information if at the end of the day, they are still under a duty to verify each other's
statements.

Treitel argues that the decision of Redgrave v Hurd must not be applied too mechanically. One
must appreciate the subtleties of the different types of misrepresentation and their interplay with the
doctrine of reliance:

[a] Representor is negligent.

The representor in Redgrave v Hurd was not fraudulent, but merely negligent. Therefore, if the
representor is negligent and the representee is also negligent in failing to check the statement, there
would be an actionable misrepresentation.

[b] Representor is wholly innocent,

If the representor is wholly innocent but the representee is negligent in not verifying the truth of the
statement, it is fair and serves no injustice to conclude that rescission should not be available.

[c] Representor is Fraudulent.

Treitel is of the opinion that if the representation is made fraudulently, even if the representee takes
steps to check the statement, there would still be actionable misrepresentation and the right to
rescind would not be lost.

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This view can be justified on the basis that fraudulent statements are usually interpreted to be strong
inducements. The inducement is so great that independent investigation will not mean no reliance
at all is placed on the fraudulent statement. But note that the moral behind Treitel's view is merely
deterrent in nature in that it does not want to encourage fraud.

What about partial reliance?

For non-fraudulent misrepresentation, it is not enough to say that there was no reliance just because
the misrepresentation was not the sole reason for entering into the contract and that the representee
also relied on other statements. In other words, partial reliance on the misrepresentation is allowed
in certain circumstances.

JEB Fasteners Ltd v Marks, Bloom & Co. [1983] per Woolf J.
Treitel cites this case for the proposition that if the representee would still have entered into the
contract even if the misrepresentation had not been made, then there would be no liability. In other
words, the misrepresentation did not cause the reliance because "but for" the misrepresentation,
the representee would have still entered into the contract.

But in Barton v Armstrong, the House of Lords opined that a misrepresentation could still be an
inducement even though without it there would still have been sufficient inducement to enter into the
contract.

It is important to reconcile the case of JEB Fasteners Ltd v Marks, Bloom & Co. [1983] with the
case of Barton v Armstrong [1976] (the latter case concerning duress but the House of Lords
opined that the same principles are applicable to misrepresentation.).

There are academic quarters that respectfully submit that JEB Fasteners was wrongly decided

But the more rewarding view in terms of examination marks would be as follows. The decision of
JEB Fasteners v Marks concerns a prayer for damages where the "but for' test of causation must
be satisfied whereas in a claim for rescission such as that in Barton's case, it hinges on the
question of inducement rather than causation.

But nevertheless it could be argued based on Barton v Armstrong that there is also reliance, or at
least inducement, in situation A if P takes into account of the misrepresentation as an additional
reason - if it helps him to enter into the contract much more confidently.

But on the other hand, if P takes no account at all of the misrepresentation, e.g. his reasoning is "I
have reasons I to 7 for entering into the contract and I really don't care whether the statement is true
or false", then clearly he hasn't in any real sense relied on the statement. There was no inducement
and rescission would not be allowed.

Thus even where there was partial reliance, there could be actionable misrepresentation. See also
Edgington v Fitzmaurice and Raiffesen v Royal Bank of Scotland.

Likewise, there is no requirement that the representee must have believed the misrepresentation. In
Zurich Insurance Co plc v Hayward [2016] UKSC 48, the Supreme Court stated that it was not a
requirement of an action for deceit that the representee must show that he believed the
misrepresentation. Inducement is a question of fact and the presumption of inducement is a very
strong one On the facts, the court found that the ‘qualified belief or disbelief does not rule out
inducement’.

Must the misrepresentation be material?

In general, the misrepresentation must be material. If a reasonable person would be induced then
the courts will presume that the misrepresentee was induced (Museprime v Adhill) and the
misrepresentor would need to prove it did not in fact induce them. If it would not induce the
reasonable person then the misrepresentee can prove that it did in fact induce them.

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Would pre-contract inquiries prevent misrepresentation?

There may still be actionable misrepresentation even where the representor (seller) had made
attempts to prevent any inducement or reliance. It is common for a seller to respond to an enquiry
relating to the physical state of the property by stating: “Not to the seller’s knowledge but no
warranty is given and the buyer must rely on his own inspection and survey.” The denial of any
warranty and the statement that the buyer should inspect or carry out a survey will not protect the
seller if the reply also contains a misrepresentation, namely that the seller is not aware of the
particular matter enquired about: see Morris v Jones [2002] EWCA Civ 1790.

Morris v Jones & Ors [2002] EWCA Civ 1790

In response to pre-contract enquiries by M, the representee, S represented that the basement had
been "tanked" (properly sealerd and waterproofed) and produced what purported to be a
contractor's guarantee in support of that representation. M also received three survey reports which
identified problems of dampness within the basement.

The court held that even though representee had had the benefit of the survey reports, which
identified problems of dampness within the basement. he was nevertheless entitled to rely upon S's
clear representation which was untrue.

5. REMEDIES FOR MISREPRESENTATION.

This area may be examined as an essay question, focusing either in respect of the measure of
damages of the different types of misrepresentation and the relative advantages as compared with
an action for breach of contract; or in relation to the bars to the equitable remedy of rescission.

One of the most common reason of why students find it difficult to grapple this topic is because they
practice breaking down the material according to the type of misrepresentation made (i.e. whether
the state of mind of the representor is fraudulent, negligent or innocent) and asking what remedy is
available to the injured party. Rather, you must firstly classify them according to the type of remedy
and asking in what circumstances that remedy is available.

5.1 Rescission.

[a] The rule that a contract may be rescinded for misrepresentation means that it is voidable at
the representee's option. The equitable remedy of rescission sets the contract aside for all the -
purposes so that the previous state of affairs is restored as far as possible. You ought to distinguish
rescission from repudiation for breach at common law.

NOTE: This remedy is available for all types of actionable misrepresentation.

In order to achieve a more precise result, the courts could order the representor to indemnify the
representee in respect of expenses incurred in discharging obligations created by the contract. The
"indemnity" is a money claim, but not for damages as such because an indemnity is more restricted.
 Adam v Newbigging
 Whittington v Seale Hayne.

[b] You should also be familiar with the rule requiring the representee to communicate to the
representor that he cancels the contract. It is also important to note the controversial decision in
Car and Universe Finance v Caldwell [1961] that permitted rescission where communication to the
police as to the fraud was held to be sufficient. There was no actual communication and this
prejudices the interest of the third party.
[c] Rescission is a very powerful weapon as it effectively terminates the whole contract. Partial
rescission in a non-severable contract is not allowed. See the recent decision of

 T S.B. Bank Plc v Camfield [1995] 1 W.L.R. 430 - CA.

(Note the particularly interesting judgment of Roch L.J.)

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More importantly, you ought to be familiar with the limitations to rescission because rescission is
subject to certain bars.

Bars to Rescission are:

5.1.1 Restitution is Impossible.
If the previous state of affairs could not be returned, where the subject matter had been consumed
or destroyed, rescission is clearly impossible. Clarke v Dickson.

The problem arises where the subject matter of the contract could literally be returned but in a
different form, either it has deteriorated or improved in quality. It is suggested that the court may still
order rescission but to compel the other to pay the balance, taking into account the improvement or
deterioration.

5.1.2 Third Party Rights.

Rescission is a personal right against the representor and could not be transferred to a third party.
Therefore the plaintiff could not claim the return of the property so as to take free of the rights of a
bonafide third party. Phillips v Brooks

The moral of the story is - Act Fast! Recission would be allowed if it is prayed before the third party
acquires rights to the said property. In the controversial decision of Car & Universe Finance v
Caldwell, the Court of Appeal held, rather generously, that it was sufficient to give notice to the AA
and the police of the fraud. The "innocent" third party would then be deemed to have knowledge of
the fraud and must take the property subject to the true owner's rights. This decision is harsh on the
third party and was heavily criticised. It is respectfully submitted that this decision ought to be
confined to only cases involving fraud.

In Salt v Stratstone (2015), the Court of Appeal concluded that neither depreciation nor intermittent
enjoyment of a car should be regarded as reasons for saying restitution is impossible. Rescission is,
the court said, prima facie available if “practical justice” can be done. Such “practical justice” might
require a defendant to be compensated for depreciation, or for the use enjoyed by the claimant, but
that would be for the defendant to assert and prove.

On the facts of that case, the court found that the absence of evidence about depreciation or the
value of the use of the car should not operate to the disadvantage of the claimant, who should never
have been put in the position of having a troublesome old car rather than a brand new one.

5.1.3 Affirmation.
Once the representee indicates his wish to continue with the contract, it would be unjust for him to
subsequently turn around and terminate the contract. The representee cannot blow hot and cold.
Again the moral of the story is - Act Fast! This is because delay could be interpreted to be an
affirmation, particularly where the value of the subject matter fluctuates in a relatively short span of
time. See Long v Lloyd [1958]

5.1.4 Lapse of Time.

Do not confuse this bar with affirmation. The difference lies as to when time runs. In situations of
lapse of time, time runs from the date of contract. This means that time would effectively start
running even thought the representation had not been discovered to be false yet. Leaf v
International Galleries.

This is different from the bar of affirmation where time runs from the time of the discovery that the
statement is untrue.

In Salt v Stratstone (2015), the court doubted the case of Leaf and held that lapse of time in itself is
not a bar to rescission and that there must have been a lapse of reasonable time.

Note: The bar of lapse of time does not apply to situations of fraud!

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5.2 Damages
In contrast to rescission – which is available to whatever type of misrepresentation – it is important
in relation to damages to distinguish between fraudulent, negligent and purely innocent
misrepresentations. This is not least because the causes of action in play differ.

Damages is compensation in monetary form and the basic principles of assessment are:

In contract:
The plaintiffs damages should be such as will put him in the position he would have been if the
contract had been carried out - what his position would be if the representation had been true.

In Tort.
The damages should put the plaintiff in the position he would have been if the tort had not been
committed - what his position would be if the representation had not been made.

Whether damages would be allowed and the extent of damages depends on the state of mind of
the representor.

If the state of mind of the representor is:

5.2.1 FRAUDULENT.
The action lies in the tort of deceit.

 Derry v Peek [1889] per Lord Herschell L.C.

This is the leading case on the definition of a fraudulent misrepresentation. It establishes that a
fraudulent misrepresentation is one made knowing that it is false, or reckless as to whether it is
true or false.

The extent of damages are calculated in

 Doyle v Olby (Ironmongers) [1969] per Lord Denning M.R.
The defendant is bound to make the reparation for all the actual loss or damages directly flowing
from the fraudulent inducement. It is subjected to a very restricted test of remoteness because it
would not avail the defendant to say that the damage is not foreseeable.

This case clarifies two points on the principles of damages for the tort of deceit.

(i) The measure of damages is the tort ‘reliance’ measure which seeks to put the claimant
into as good a position as if no representation had been made; it is NOT the contractual
expectation measure which seeks to put the claimant into as good a position as if th
erepresentation had been true;
(ii) The remoteness test for the tort of deceit is not ‘reasonable forseability’ as in the tort of
negligence (as was established in The Wagon Mound) but rather the wider test of
‘directness’.

Comment: note that under the head of damages for fraud an awarded could be made for;
Injured feelings => Shelley v Paddock [1979]
Exemplary damages => Arclier v Brown [1984]
Loss of profit => East v Maurer [1991]

There is no reason in principle why loss of profit (which was thought to be available only under an
action for breach) could not be recovered in an action for deceit. Since the effect of the fraud was
that the plaintiff was trapped in an unprofitable business for a considerable number of times, it was
perfectly proper to compensate them for the loss of the profit, which they would otherwise
have earned.

The burden and standard of proof rests on the representee.

A high standard is required. If the representee fails to prove fraud, no damages would be awarded
under this head. One must be aware, of the inherent difficulty in establishing that the representor

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was fraudulent since fraud is a serious allegation and if fraud is not made out, the representee may
be penalised in costs.

Note: Although this action is also available to the plaintiff who has a contractual relationship with the
representor, in practice it is rarely worth the trouble of proving fraud in the light of S.2 (l)
Misrepresentation Act 1967.

Consider:

Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd [1977]
This importance of this case lies in: first, it is clear confirmation that Doyle v Olby had been correct in
what it had said on the iam of, and remoteness test for, damages in the tort of deceit; and secondly,
its rejection of any rigid rule that a court has to assess the value of shares (or other property) bought
at the date when bought.

While Lord Steyn stressed the difference between the tortious and contractual measures of
damages, he also recognised, giving East v Maurer as an example, that it is INCORRECT to think
that loss of profits can only be recovered in contract.

Subsequent to Smith New Court, there was an interesting example of the recovery of lost of profits
in the tort of deceit in Clef Acqutaine SARL v Laporte Material (Barrow) Ltd (2001)

The claimant entered into two profitable distributorship contracts with the defendant . The defendant
had induced the claimant to agree to the particular terms by a fraudulent misrepresentation. Had the
fraudulent misrepresentation not been made, the claimant would have entered into contracts with
the defendant or on more favourable terms and would have made greater profits than it in fact did
make. In an action in deceit, it was held that the claimant was entitled to those gains foregone (that
is, the greater profits lost). It was no bar to awarding damages for those lost profits that the claimant
had still entered into profitable, rather than loss-making, contracts with the defendant.

While it has been traditionally thought that it is not easy to establish fraudulent representation, the
recent case of BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2018]
EWHC 1857 (Comm) seem to suggest otherwise.

Here the parties had reached an agreement in principle for a supplier based in the Netherlands
(the representor) to supply egg products to a company based in the US (the representee), but that
was dependent on the US regulatory authorities approving the supply. When the approval was
granted, contract price renegotiations ensued. The representor then provided an ‘estimate’ of its
increased costs associated with complying with US regulatory requirements as a justification for a
price increase. In fact, the cost increased figure did not represent a genuine estimate and the
representor knew that. The representor also knew that the increased figure included additional
profit. There was no doubt, therefore, that there had been a fraudulent representation, but the
question for the court was whether that induced the representee to enter into the contract.

Held:
 The court held that the relevant test is whether, ‘but for’ the representation, the representee
would not have entered into the contract.
 In addition, the court specifically clarified that it is sufficient for a representee to establish that a
misrepresentation was a factor in its decision to enter the contract – importantly it need not be
the only or the deciding factor.
 All that effectively translates to there being a presumption that the fraudulent misrepresentation
did induce the claimant to enter the contract. It is, of course, notoriously difficult to prove a
negative, plus there is a high evidential burden in any case involving fraud.

The court here referred to the Supreme Court’s decision in Zurich Insurance v Hayward (2016),
which demonstrate how difficult it is to rebut the presumption or inference where the
misrepresentation is fraudulent. In particular, the dicta in Zurich suggest that a party who has made
a fraudulent misrepresentation in order to achieve a particular result and does so cannot be
permitted to question that his fraudulent misrepresentation was in fact causative.

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5.2.2 NEGLIGENCE.
There was a "boom" in the development of this area of law in the 60s. It could not be denied that
there is a certain amount of irony and indeed borders an overkill in that both the courts and
parliament provided independent right about roughly the same time. It is proposed that each action
is examined in turn.

Common Law
The action is in Negligent Misstatement under the rough head of the tort of negligence.
=> Hedley Byrne v Heller [1964]

The requirements is that there must be:

I. A duty of care
II. Breach of the duty of care
III. Causation
IV. The loss caused is not too remote. (See below)
I. Duty of Care.

There used to be a requirement of a "special relationship" to find the existence of a duty of care.
You must note the much-criticised decision in
=> Mutual Life v Evatt.

However. The recent decisions of the House of Lords plunges this area of the law into uncertainty to
the position of the law today. The decisions are

=> Spring v Guardian Assurance [1995]

=> Henderson v Merrett [1995]
=> White v Jones [1995]

The unclear position-could be roughly summed up to two views.

a) Lord Goff of Chieveley opines that there must be an "assumption of responsibility" by the
maker of the statement for the duty of care to arise.
b) However the other law lords seem to rely on the "three pronged test" enunciated in the
House's own decision in Caparo v Dickman [1990] to give rise to a duty of care.

The "three pronged test" is:

* Forseeability
* Proximity
* Fair, just and reasonable.

The Extent of Damages.

The measure is a tortious one - to put the parties in the position they would have been as if the
misstatement had not been made.
It is susceptible to the test of forseeability (it must not be too remote)
=> The Wagon Mound (No. 2)

Comment: It would be seen that the measure of damages under this category is lower than that
which is available for loss under deceit.

The burden of proof,

It still lies on the representee. The standard of proof is not as high as that of fraudulent
misrepresentation but nevertheless; it is still not easy to prove.

In Cramaso LLP v Viscount Reidhaven's Trustees [2014] UKSC 9, the Supreme Court
considered a claim based on negligent misrepresentation made in pre-contractual negotiations. The
court held that the defendant had a continuing responsibility for the negligent misrepresentation until
the contract was concluded, and that the defendant was liable for the losses suffered by the
contracting party as a result of a negligent misrepresentation made earlier to the party's agent.

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5.3 THE STATUTORY RIGHT

5.3.1 S.2 (l) Misrepresentation Act 1967.

The action is in negligent misrepresentation.

[You must distinguish the terminology used here from the common. law action of [negligent
misstatement".]

The requirements are

a) The existence of a contract.
b) The representee must have suffered loss.

=> Howard Marine & Dredging v Ogden [1978] per Bridge LJ.

A brief comment,
There are overwhelming academic views that the decision that laid down the common law right in
Hedley Byrne v Heller [1964] poses as the courts response to cushion the harshness of the
common law then which was only confined to the very strict requirements of deceit. The courts
acknowledged that plaintiffs are often left without a remedy of damages because of the difficulty of
establishing that the representor is fraudulent.

Hence, the adoption of negligence (which was limited to negligent acts or conduct) to cover
negligent words or statements - a standard which is much lower than that of fraud.

This decision is seen as a "slap in the face of parliament"

Thus it, is not surprising that the enaction of the Misrepresentation Act 1967 is not only
parliaments reply to Hedley Byrne but marks legislative awakening to see the lack of adequate
remedies (damages in particular) to the plaintiff for actionable misrepresentation.

Note: Although an action under S.2 (l) Misrepresentation Act 1967 is more advantageous than the
common law action for "negligent misstatement" in terms of establishing liability and the measure of
damages is more generous [see below as to the extent of damages allowed); it loses out in respect
of the requirement of a contract. This is because the common law action dispenses with the need of
a contractual relationship. Furthermore, the common law action in Hedley Byrne is not limited to
mere statements if fact but can encompass statements of opinions or advice made negligently.

The Extent of Damages

S.2 (l) of the Misrepresentation Act 1967 reads;
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 grounds to believe and did believe up
to the time the contract was made that the facts represented were true.

As could be seen above, it is lamentable that S.2 (l) is expressed in such convoluted language. It
has led to too much confusion and controversy as to the exact scope of damages available.

There is the problematic of Watts v Spence [1976], which, troubled by the "fiction of fraud" and the
shackle of the rule in Bain v Folhergill [1874], suggested that the measure is a contractual one.
(See, further Davies v AFA Minerva).

But it is crystal clear today that the measure is a tortious one following the decisions in"
 Sharneyford v Edge [1987]
 Cliesneau v Interhome Ltd [1984]
 Royscot Trust v Rogerson [1990]
 Cemp Prop. Ltd v Dentsply [1994]
 William Sindall v Cambridgeshire [1994]

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The exact measure of damages under the statutory S.2 (l) MA 67 action is the same as the rule in
deceit. The decision in Royscot Trust v Rogerson finally lies to rest the confusion through a literal
interpretation of the provision of the 1967 Act. It held that the deceit rule would apply. in virtue of the
"fiction of fraud" found in the plain words of the subsection.

Royscot Trust v Rogerson

D, a car dealer, agreed to sell a car on hire-purchase to a customer, C, for GBP 7,600, of which
GBP 1,200 was paid as a deposit. D, in its proposal to the finance company P, mis-stated these
figures as GBP 8,000 and GBP 1,600 respectively. On the basis of these figures P (who required a
minimum deposit of 20 per cent of the purchase price) purchased the car from the dealer for GBP
6,400 and entered into a hire-purchase agreement with C. In August 1987, C dishonestly sold the
car and paid no further instalments. GBP 3,625.24 remained to be paid by C to P. Judgment in
default was entered for P for GBP 1,600 on the basis of the sale of a car at GBP 6,000. D appealed
and P cross-appealed.

Held, dismissing the appeal and allowing the cross-appeal, that (1) the measure of damages
recoverable for innocent misrepresentation under s. 2(1) of the 1967 Act was the measure for
fraudulent misrepresentation rather than for negligence; (2) P was entitled to recover damages for
all losses suffered by it, flowing from the dealer's misrepresentation, provided that they were not too
remote; (3) since it was reasonably foreseeable by D that C might wrongfully sell the car and P
thereby would suffer loss, the sale by C was not a novus actus interveniens; accordingly the judge's
order was varied (Doyle v. Olby (Ironmongers) [1969] 2 Q.B. 158 applied).

This means that the representor is liable for all the losses that directly flow from the fraudulent
inducement even if those losses are unforeseeable, provided that they were otherwise not
too remote. [Note that causation must be present i.e. the misrepresentation did cause the loss]

Comment: In other contexts, the courts are reluctant to find the "fiction of fraud". This is because it is
unduly harsh under policy grounds to justify the finding of fraud to a defendant who is merely
negligent.

In Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management), L. Browne-
Wilkinson and L. Steyn noted the serious doubts about the correctness of the decision in Royscot
v Rogerson but did not expressly overrule it since it was not necessary of the decision of the case.

L. Steyn had made it clear that in his view, fraud and negligence should be treated differently in that
the remoteness for fraudulent misrepresentation allows for the recovery of all losses resulting from
having entered into the contract. However, in the context of negligent misrepresentation would be
limited to allowing for recovery of losses resulting from that negligent statement.

Nonetheless, in the recent decision of Spice Girls Ltd. v Aprillia World Service BV (Damages)
[2001], Arden J had to assess damages under S 2(1) MA 1967 and was bound to follow Royscot v
Rogerson. It was accepted that the damages had to be calculated as if the misrepresentation was
fraudulent and on the basis of compensating Aprillia for losses flowing from the contract. Therefore,
all direct loss and consequential loss was recoverable but not the payment of the sponsorship fees
made to the Spice Girls before the contract was concluded since this payment had not been induced
by the misrepresentation.

Similarly, in Forest International Gaskets Ltd v Fosters Marketing [2005], the Court of Appeal
noted that while there has been criticsms of Royscot, the case has not been overulled.

The more pertinent question today is can the representor disprove negligence falling within the
proviso of S.2(1)?

It must be noted that the liability of the representor under s. 2(1) Misrepresentation Act 1967 does
not depend upon his being under a duty of care. In negotiations leading to a contract, the statute
imposes an absolute obligation not to state facts which the representor cannot prove he had
reasonable grounds to believe. To do this, the representor must show that he had reasonable
grounds for believing and did believe up to the time the contract was made that the facts
represented were true.

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You must address the inherent difficulty of the representor in discharging this burden. Bridge LJ in
Howard Marine Dredging v Ogden pointed this out.

 If he succeeds in discharging his burden in disproving negligence, he is only liable for innocent
misrepresentation.
 If he fails to disprove negligence, he is liable in damages for negligent misrepresentation
"notwithstanding that the misrepresentation was not made fraudulently" provided that he would
have been liable "had the misrepresentation have been made fraudulently." - S.2 (l) MA 67.

In Howard Marine,
A Ltd, civil engineering contractors, entered negotiations with H Ltd for the hire of two sea-going
barges, owned by H Ltd, for carrying vast quantities of clay out to sea. At a meeting on July 11,
1974, the owners' marine manager orally represented to A Ltd that the capacity of the barges was
1,600 tonnes deadweight. He based that figure on his recollection of an entry in Lloyd's Register
which gave the capacities as 1,800 tonnes. The Register was erroneous, and the correct
deadweight capacity was 1,055 tonnes, which could have been ascertained from the ship's
document in possession of H Ltd

A Ltd continued negotiations without obtaining any other figure for the vital matter of deadweight
capacity, and took the barges into use under a charterparty. The charterparty included an exception
clause that the charterers' acceptance at handing over the barges should be conclusive that they
had examined them and found them fit for their purpose.

After about six months' use, A Ltd discovered the correct capacity and paid GBP 20,000 for the hire,
refusing to pay any more. H Ltd withdrew the barges and issued proceedings claiming outstanding
hire charges. A Ltd denied liability, and counterclaimed for damages alleging, inter alia, (1) breaches
of collateral warranties in the representations before contract; (2) negligence arising from a special
relationship between the parties and (3) liability under s. 2(1) of the Act.

The court found that the misrepresentation at the meeting of July 11, 1974, as to the deadweight
capacity, was a most material matter and H Ltd had not proven that their marine manager had
reasonable grounds for believing, and did believe, that the facts represented were true. Also, H Ltd
could not escape liability by reliance on the exception clause, since it was a provision which came
within s. 3 of the Act and was therefore of no effect unless the court allowed reliance upon it as
being "fair and reasonable in the circumstances of the case" and since it was not "fair and
reasonable" to allow reliance upon it, the cross-appeal should be dismissed.

NB: Per Shaw L.J., A Ltd also had a cause of action in negligence at common law.

Comment:
1. The above case stresses the burden of proof advantage in claiming for negligent
misrepresentation under section 2(1) rather than at common law under Hedley Byrne.

2. The further possible advantage of section 2(1) is that it is obviates the need to establish
that a duty of care is owed in making the statement. That is, it is arguable that not every
representation by a contracting party to the other that induces the contract triggers a Hedley Byrne
duty of care. Rather it is arguable that the ‘special relationship’ neede for a Hedley Byrne duty of
care requires something more that that the parties are negotiating a contract. Bridge LJ’s judgment
is a practical illustration because he went on to say,’I doubt if the circumstances surrounding the
misrepresentation …were such as to impose on Howards a common law duty of care for the
accuracy of the statement’.

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Comment on Royscott v Rogerson

1. The case is highly controversial in laying down that the remoteness test for damages under
section 2(1) of the Misrepresentation Act 1967 is the same as that applicable to the tort of
deceit. That is, all loss directly caused is recoverable even if not reasonably foreseeable
(although note that the judges thought that the sale of the car was in any event reasonably
foreseeable). In terms of policy this is bizarre. The wider test for deceit is based on the fact that
the tort is intentional and that the moral fault involved is higher than for negligence: see, e.g.,
Lord Steyn in Smith New Court. That does not apply to section 2(1) where the
misrepresentation is merely negligent and indeed has a reversed burden of proof. The judges
thought that they were bound so to hold because of the wording of section 2(1). Do you agree?

2. R Hooley, 'Damages and the Misrepresentation Act 1967' (1991) 107 LQR 547, in a
persuasive criticism of the Court of Appeal's reasoning, argues that 'the subsection establishes
liability in damages but not their quantum'; and goes on to say, 'Even if the arguments against
this alternative interpretation prevail it is submitted that there is a strong case for Parliament to
intervene and remove the reference to fraudulent misrepresentation from s 2(1).

3. Fraudulent misrepresentation is an intentional tort where the public policy of deterring deliberate
wrongdoing dictates the shift in emphasis from foreseeability to causation. No such
considerations dictate that the same emphasis apply under section 2(1).' Note that, although
Parliamentary intervention is most unlikely, a judicial departure from Royscot may be thought to
be encouraged by Lord Steyn's comments in the Smith New Court case [1997] AC 254, 283, in
which, after referring to Hooley's casenote, his Lordship said, 'Since this point does not directly
arise in this case, I express no concluded view on the correctness of the Royscot case.' See
also the article by Brown and Chandler.

4. If Royscot is correct, it provides yet another advantage to a claimant in basing a claim for a
negligent misrepresentation on section 2(1) rather than on Hedley Byrne v Heller.
Furthermore, it would seem to render the tort of deceit largely redundant in the context of
representations inducing a contract: would there be any point in a claimant taking on the difficult
burden of proving fraud, if the same damages were going to be awarded in a claim under
section 2(1)?

5.3.2 INNOCENT – Section 2(2)

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 the contract subsisting
and award damages in lieu of rescission, if of the 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 representor would be deemed to be innocent if he could discharge the burden of disproving
negligence. The plaintiff has no automatic right to damages. The only remedy available, as of right,
is the right to rescind the contract => S.2 (2) Misrepresentation Act 1967.

But S.2 (2) MA 67 gives a power to the court or arbitrator to uphold the contract by declaring the
contract to be subsisting and award damages in lieu of rescission instead, if of the opinion that it
would be equitable to do so.

Comment:
You must be aware that this provision was adopted as a result of the Tenth Reform of the Law
Reform Committee (1962) (Cmnd. 1782), which reported at:

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Para. 11:
The Law Reform Committee identified the existence of an anomaly that a breach of warranty, which
is embodied in the contract, only gives a right to damages whereas the same statement as a
representation inducing the contract enables the latter to be rescinded. This is unduly harsh on the
representor.

Para. 12:
To meet the objection was raised in Para. 11. The Committee recommended a discretionary
power to award damages as an alternative to ordering rescission, if these would afford adequate
compensation to the plaintiff.

In William Sindall v Cambridgeshire County Council [1994] 1 WLR 1016 Hoffman LJ. cited with
approval the reasoning of the Committee. In his dicta, his lordship identifies the discretion conferred
by S.2 (2) to be a broad one, to do what is equitable. The learned judge further approved of the
three matters, outlined in S.2 (2), that the courts must have regard to in exercising the discretion.

They are:
1. The nature of the representation. This means that the court was meant to consider the
importance of the representation in relation to the subject matter of the transaction.
2. The loss that would be caused by the representation if the contract were upheld.
3. The loss that rescission would cause to the other party.

In William Sindall v Cambridgeshire,

In a contract for the sale of land incorporating the National Conditions of Sale, there is no action in
mistake or misrepresentation when an encumbrance that was not within the knowledge of the
vendor at the time of the contract is subsequently discovered to have existed at the time of the
contract. A contract was concluded for the sale and purchase of development land. The contract
incorporated the National Conditions of Sale (20th ed.). The property was sold subject to, inter alia,
any easements, liabilities and public rights affecting it. This was subject to V's duty to disclose all
latent liabilities and easements known to it. P was deemed to have full notice of all easements,
rights and privileges affecting it, with no obligation on V to define them. V replied to enquiries before
contract stating that so far as it was aware there were no rights of easement or public rights affecting
the property other than as disclosed in the contract. After completion a private foul sewer was
discovered running under the property. P purported to rescind on the grounds of misrepresentation
and common fundamental mistake. P applied for a declaration that the contract had been rescinded
and for repayment of the purchase price, the value of the site having halved in value since
completion. The declaration was granted and V appealed.

Held, allowing the appeal, that (1) V was required to disclose easements and encumbrances of
which it had knowledge or means of knowledge. The National Conditions of Sale left no room for
rescission on the grounds of mistake and cast the risk on to P as to the existence of encumbrances;
(2) there was no evidence of misrepresentation by V, either negligent or otherwise; (3) the presence
of the sewer did not seriously interfere with the use of the land so it would be inequitable for the
contract to be rescinded. Damages would have been awarded in lieu of rescission under the
Misrepresentation Act 1967 s. 2(2), had there been misrepresentation

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Comment:

1. While parts of the reasoning in William Sindall are helpful – especially the recognition that the
main purpose of section 2(2) is to protect a misrepresentor against a contract being rescinded for a trivial
or wholly innocent misrepresentation – some of what was said on the measure of damages under
section 2(2) is puzzling. Evans LJ explicitly said that the contract measure applies and Hoffmann LJ also
saw a close link to the measure for breach of warranty. It surely cannot be correct that damages under
section 2(2), which can be given for a wholly innocent misrepresentation, can go beyond the tort
measure that applies for the tort of deceit and for a negligent misrepresentation at common law or under
section 2(1). That ought to be the maximum that can be awarded and the real question should be
whether even that full tort measure is merited under section 2(2). The reasoning may have become
distorted because of the court's desire to disallow damages for the sharp fall in the market value of the
land (an issue that, in a series of subsequent claims for damages against negligent valuers in tort and
contract, led to the controversial decision in South Australia Asset Management Corpn v York
Montague Ltd CSAAMCO') [1997] AC 191, HL: see A Burrows, Remediesfor Torts and Breach of
Contract (3rd edn, 2004) 109-22».

2. The references to the Law Reform Committee are to its Tenth Report, Innocent Misrepresentation
(1962) (Cmnd. 1782) which led to the Misrepresentation Act 1967.

3. H Beale, 'Damages in Lieu of Rescission for Misrepresentation' (1995) 111 LQR 60 comments on
the different approaches to the measure of damages under section 2(2) taken in this case. He
criticises Evans LJ's view that the measure should be the contractual measure. He argues that
Evans LJ's suggestion (in the final paragraph set out above) of awarding reliance loss, but ignoring
any post-contract fall in the market, is to be preferred as being consistent with the principle of
section 2(2) and with Hoffmann LJ's speech.

The Measure of Damages.

S.2 (2) speaks in terms of loss suffered rather than damages. But it clearly contemplates that if the
contract is upheld; such loss would be compensated by an award of damages.

It would seem that S.2 (2) creates a power to award damages "in a wholly new situation" - sui
generis. [Treitel views that damages are neither tortious nor contractual.]

You must be able to distinguish the measure of damages awarded under S.2 (l) from the extent of
damages in lieu under S.2 (2). Hoffman LJ outlined the distinction. In William Sindall's case. There
are essentially three differences.

(1) S. 2(l) is concerned with the damage flowing from having entered into the contract while S.
2(2) is concerned with damage caused by the property not, being what it was represented to be.

(2) S.2 (3) contemplates that damages under S.2 (2) may be less than damages under S.2 (l)
and should be taken into account when assessing damages under, the latter subsection [S.2 (l)].

(3) The Law Reform Committee report makes it clear that S.2 (2) was enacted because it
creates hardship on the representor to be deprived of the whole benefit of bargain on account of a
minor misrepresentation. In view of the "anomaly" [see * above], which existed, damages under
S.2 (2) should never exceed the sum, which would have been awarded if the misrepresentation had
been a warranty.
Comment: Treitel views that if the dicta above are to be adopted, consequential losses are not
recoverable at all. It follows that a wholly innocent misrepresentor would be liable only for the
amount by which the actual value was less than the price. Consequential losses are only available
under S.2 (l) and not S.2 (2).

The view in William Sindall v Cambridgeshire is that the appropriate measure of damages
awarded in lieu of rescission under the Misrepresentation Act 1967, s. 2(2), is different from that
under s. 2(1), being the difference in value between what P was misled into thinking he was buying

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and the value of what he in fact received, and damages should therefore never exceed the sum
which would have been payable had the representation been a warranty.

In the recent case of UCB Corporate Services Ltd v Thomason [2005], the court defined ‘loss’
within s.2(2) to include ‘financial loss’ and was capable of including ‘detriment’

Note : In Govt of Zanzibar v British Aerospace (2000) the reasoning – that damages cannot be
awarded under section 2(2) if rescission is barred – is to be preferred to the rejected view of of
Jacob J in Thomas Witter case. This is essentially because the purpose of section 2(2) was not to
add the misrepresentee’s remedies but to give the courts a discretion to cut back the remedy of
rescisiion where the misrepresentation has been, for example, trivial or wholly innocent and
rescission would cause undue hardship to the misrepresentor.

In the 1st case to the COA on this issue, the court in Salt v Stratstone (2015) conflicting first
instance decisions relating to damages awarded in lieu of rescission under section 2(2) of the
Misrepresentation Act, and in particular whether damages may be awarded under this section if
there is a bar to rescission. The Court of Appeal confirmed that if rescission is not available as a
matter of law, a court will have no discretion to award damages under section 2(2) of the Act.

6. EXCLUSION OF LIABILITY
This is regulated by S.3 of the MA 1967 and requires for such clauses to be reasonavle within s.11
UCTA 1977.

Cases have demonstrated that the courts are inclined to strike down such clauses as unreasonable
especially if there are widely drafted.

Thomas Witter Ltd v TBP Industries Ltd (1996)

In December 1989, D, a conglomerate negotiated the sale of a carpet company to P. In the course
of so doing D negligently misrepresented that there was a special one off expense of GBP 120,000
in accounts produced, and that those accounts spread the bi-annual expense of producing pattern
books over two years instead of immediately writing it off. The sale contract included a provision
stating that P acknowledged it had not been induced to enter into the agreement by any
representation or warranty, and a contractual limitation clause that D was not liable for a breach of
the agreement unless written notice was given by January 1, 1992. When P sued for negligent
misrepresentation, D sought to rely on those two contractual provisions.

Held, giving judgment for P, that (1) the representation and warranty clause did not have the
purported effect of excluding liability or remedies for misrepresentation as the Misrepresentation Act
1967 s. 1 rendered ineffective a clause intended to exclude liability for a misrepresentation which
had become a warranty of the agreement, and even if that was not so, the clause would have been
ineffective under s. 3 of the 1967 Act as attempting to exclude all forms of misrepresentation
including fraudulent misrepresentation and (2) the limitation clause only applied to breaches of the
agreement or claims on warranties in the contract, not misrepresentations inducing P to enter into
the contract. Rescission was not available, as, on the facts, the parties could not be restored to their
pre-contract positions. Significant changes had been made to the business following the sale and
third party interests would be affected.

This has been followed and upheld by the House of Lords in:

HIH Casualty & General Insurance Ltd v Chase Manhatten Bank & Others [2003] UKHL 6
HL (Lords Bingham, Steyn, Hoffmann, Hobhouse and Scott) 20/2/2003

The insured ('Chase') was the representative of a syndicate of lending banks that advanced
substantial sums to finance the making of films. Chase obtained insurance from the insurers ('HIH')
and others covering the risk of the films not recouping their investment. The insurance was brokered
by an agent of the insured ('Heath'). The policies were governed by English law and contained a
"truth of statement" clause which provided that Chase would not have any duty or obligation to make
any representation, warranty or disclosure of any nature express or implied (such duty and
obligation being expressly waived by HIH); that Chase would have no liability of any nature to HIH

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for any information provided by any other parties; and that any such information provided by or non-
disclosure by other parties including but not limited to Heath would not be a ground for avoidance of
HIH's obligations under the policy or the cancellation thereof.

When the films did not make a sufficient return to repay the banks, Chase claimed on the policies.
HIH repudiated liability on the grounds of misrepresentation and non-disclosure, either fraudulent or
negligent, on the part of Heath as broker. Both sides issued proceedings which were consolidated.
Chase claimed that, even if the allegations made by HIH against Heath were true, any right of HIH to
avoid was excluded by the "truth of statement" clause
HELD: (Lord Scott dissenting)

(1) As the judge held, HIH's waiver of Chase's duty to disclose in the "truth of statement" clause did
not also relieve Heath of its disclosure duty, for which Chase could be liable as principal.

(2) It was accepted that the clause precluded avoidance by HIH on the ground of innocent
misrepresentation by Heath but, as the judge and Court of Appeal rightly held, there was nothing in
the clause that denied or restricted the implied and apparent authority of Heath as Chase's agent.
However, in relation to liability for negligent misrepresentation by Heath, the provision that Chase
should have "no liability of any nature" was intended to and did preclude the liability of Chase for
damages under s.2(1) Misrepresentation Act 1967 for any negligent misrepresentation by Heath and
also any right of HIH to avoid the policy on that ground.

(3) The judge and Court of Appeal were right that liability for fraudulent misrepresentation was not
excluded. It was not necessary to decide whether a party could by contractual words exclude the
fraud of its agent in inducing the making of the contract that could be done it would require clear and
unmistakable terms and the general words in this clause were insufficient for that purpose.

(4) Innocent or negligent non-disclosure by Heath gave HIH no right to avoid. Since an agent to
insure was subject to an independent duty of disclosure, the deliberate withholding from the insurer
of information, which the agent knew or believed to be material to the risk, if done dishonestly or
recklessly, could amount to fraudulent misrepresentation. If HIH established non-disclosure of that
kind, there was nothing in the "truth of statement" clause that would deprive HIH of their ordinary
right to avoid the policy and recover damages from Chase and Heath. Whether on the facts of this
case HIH could establish any deliberate and dishonest or reckless non-disclosure by Heath which
did not amount to a misrepresentation was doubtful.

(5) The answer to the preliminary issues was that HIH would be entitled to avoid only on grounds of
fraudulent misreprensentation or non-disclosure by Heath as agent for Chase and would be entitled
to damages from Chase only for fraudulent misrepresentation by Heath as agent of Chase or
fraudulent non-disclosure amounting to fraudulent misreppresentation.

(6) On the Court of Appeal's narrow point relating to fraudulent non-disclosure not amounting to
misrepresentation, HIH's appeal succeeded, but not otherwise.

“Entire Agreement” and “Non-Reliance” clauses

In Thomas Witter’s case, the clause in question consisted of an - “entire agreement” component
and a “non-reliance” component.

An “entire agreement” clause essentially states that the full contractual terms to which the parties
agree to bind themselves are to be found in the agreement and nowhere else; there cannot be a
claim based on a side agreement or collateral contract. It may also purport to supersede and
extinguish any representations that may have been made but not found in the contract.

An entire agreement clause usually serves two purposes: (i) to exclude collateral warranties and (ii)
to exclude remedies for misrepresentation.

Such clauses has been held not to preclude a claim in misrepresentation. It merely denies
contractual force to statements which are not contained in the contract since it does not purport to
affect the status of any statement as a pre-contractual misrepresentation.

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On the other hand, in relation to “non-reliance” clauses, this is a clause of the type which operates
by negativing an element necessary to establish liability; in this case inducement. It might also be
formulated to negative reliance on representations.

In Thomas Witter, the clause was, “This Agreement sets forth the entire agreement and
understanding between the parties or any of them in connection with the Business and the sale and
purchase described herein. In particular, but without prejudice to the generality of the foregoing, the
Purchaser acknowledges that it has not been induced to enter into this Agreement by any
representation or warranty other than statements contained or referred in schedule 6 (Disclosure)”

The court held that, on any literal interpretation, the first sentence of the clause could not operate as
an exclusion of any remedies available at law for pre-contractual misrepresentation because the
clause did not say that such remedies are excluded. To be effective, such a clause must therefore
state expressly that the remedies the seller is seeking to exclude are excluded. As such the clause
was not an effective attempt to exclude from misrepresentation and the seller would be liable for his
statements. In any event, even if it is an exclusion from misrepresentation, S.3 MA 1967 would apply
and the clause would be deemed ineffective as it was unreasonable since it did not distinguish from
fraudulent representations.

Entire agreement clauses cannot successfully deny the existence of the relevant reliance when it
was present. 'What [is] relied on is a question of fact' (Thomas Witter v. TBP Industries Ltd.
Jacob J at 597) and the fact situation as such cannot be changed by a promise - even a contractual
one. Of course, such a clause would be effective to prevent a misrepresentation if it was read and
understood by the relevant party, before they contracted, and actually did result in them not relying
upon the relevant statement in making the contract

Similarly, in the case of Deepak Fertilisers and Petrochemicals Corp v ICI Chemicals and
Polymers Ltd. [1999] 1Llyods Rep 387 where it was held that the following clause was effective:
“This contract comprises the entire agreement between the parties and there are not any
agreements, understandings, promises or conditions, oral or written, express or implied, concerning
the subject matter which are not merged into this contract and superseded thereby”

In Inntrepreneur Pub Co (GL) v East Crown Ltd [2000], the Court has said, "The purpose of an
entire agreement clause is to preclude a party to a written agreement from threshing through the
undergrowth and finding in the course of negotiations some (chance) remark or statement (often
long forgotten or difficult to recall or explain) on which to found a claim."

Here, I applied for an injunction to restrain E from breaking a beer tie contained in its lease and for
an account of damages for breach of the clause. E counterclaimed that, notwithstanding an "entire
agreement" clause in the lease, I had given a collateral warranty that the tie would be released. E
had relied upon the undertaking given by I to the Secretary of State for Trade and Industry that the
number of pubs owned by I, which were subject to a tie in agreement, would be restricted by 1992
and, that all pubs still under I's ownership would be released from the tie by 1998.

Held, giving judgment for I and dismissing the counterclaim, that the "entire agreement" clause
contained in the lease was valid, and not only had the effect of rendering evidence of the alleged
collateral warranty inadmissible, but also deprived the warranty of all legal effect.

Further, the agreement clause was not in breach of the Misrepresentation Act 1967 s. 3 which was
inapplicable to a contractual provision which defined where the terms of the contract were to be
found.

This appeared to be slight departure from Thomas Witter where S.3 MA applied and the distinction
could be the fact that in that case, the clause had a ‘non-reliance’ component whereas the above 2
cases of Deepak and Inntrepreneur was merely where the clause was an ‘entire agreement’
clause.

That such clauses would not be regulated by s.3 MA 1967, received further recognition by the Court
of Appeal in :

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Watford Electronics Ltd v Sanderson CFL Ltd [2001]

S appealed against a decision ([2000] 2 All E.R. (Comm) 984) that two clauses purporting to limit
liability in respect of a contract it had entered into with W were unreasonable in their entirety. The
contract also contained an "entire agreement clause" which stated that no reliance had been made
by the parties on statements or representations made by them.
The relevant Terms & Conditions in that case were the entire agreement clause and the warranty
and limit of liability which provided as follows:

“no statement or representations made by either party have been relied upon by the other
inagreeing to enter into the contract”.“

“neither the company nor the customer shall be liable to the other for any claims for indirector
consequential losses whether arising from negligence or otherwise.”

“In no event shall thecompany’s liability under the contract exceed the price paid by the customer to
the companyfor the equipment connected with any claim”.

The defendant relied on the "entire agreement" and contended that the effect of the negotiated
contract was that the terms were no longer to be treated as standard written terms and that, in
consequence, the Unfair Contract Terms Act 1977 did not apply to them; alternatively, if it did, the
terms satisfied the requirement of reasonableness under that Act.

Held, allowing the appeal, that the judge had erred in failing to properly identify the scope and effect
of the limit of liability clause since the clause did not attempt to exclude liability for pre-contract
misrepresentation. The fact that the entire agreement clause had been drafted as an
acknowledgement of non-reliance and not a blanket exclusion of pre-contract representations was
significant.

Accordingly the two exclusion of liability clauses had to be construed on the basis that the parties
intended their whole agreement to be contained in the documents which they signed and on the
basis that neither party relied on any pre-contract representation when signing the document. On
that basis there was no reason why the parties should have intended, by the words used in the first
part of the exclusion of liability clause to exclude liability for negligent pre-contract
misrepresentation.

Thus, the construction that the court took was that entire agreement clause was not one intended by
the parties to exclude from misrepresentations and as such S.3 MA did not apply; although UCTA
did apply in relation to the 2 exclusion clauses and eventually found them to be reasonable.

Inntrepreneur was recently in:

Ravennavi SpA v New Century Shipbuilding Co Ltd [2006] where the court stated that the effect
of the entire agreement clause in the shipbuilding contracts was to exclude any obligation on N to
accelerate the delivery dates once the final agreements had been entered into.

The entire agreement clause, when read together with the express provisions relating to delivery
and payment dates in the shipbuilding contract, had the effect of replacing the provisions of the
option agreement or depriving them of legal effect.

However note the contrary decision in SAM Business Systems Ltd v Hedley & Co [2002] where
the entire agreement clause was made subject to s.3 MA 1967.

S, a software company, claimed the sum of GBP 310,510 in respect of the outstanding licence fee
for a software system which it had supplied to H, stockbrokers. H counterclaimed substantial
damages for alleged defects in the system. Immediately after the system went live H experienced
serious problems with it and, a year later, ceased using the system without informing S. One month
later, H gave S notice that it intended to reject the system. S subsequently issued proceedings
against H submitting that its liability for misrepresentation and breach of contract had been excluded
under the contract and, in any event, H had failed to give timely unequivocal notice of rejection

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pursuant to the process specified in the contract and at the time when H did give notice of rejection it
had already gained substantial benefit from it.

Held, giving judgment for S, that the exclusion clause fulfilled the requirement of reasonableness
under the Unfair Contract Terms Act 1977. The parties were of equal bargaining power in terms of
size and resources, it was a standard feature of the computer software industry to supply software
only on stringent terms excluding all or virtually all liability and H had not even tried to negotiate
more favourable terms.

Accordingly, notwithstanding that S had waived an entire agreement clause, S was not liable to H for
breach of contract or misrepresentation and was entitled to the balance of the outstanding licence
fee. If that conclusion was wrong, H had already gained an enormous benefit from using the
defective system by the time it notified S of its decision to reject it. If H had had no computer system
it would have gone out of business. Accordingly, H would not have been entitled to claim all its
money back from S since it had had the benefit of 17 months' service from the system, which it
would not have had if it had gone through the process specified in the contract to recover its money

The Court drew a distinction between the form of entire agreement clause used in this contract -
which sought to exclude pre-contract representations and which was therefore an exclusion to which
s3 UCTA applied - and the form of entire agreement clause considered by the Court of Appeal in
Watford Electronics v Sanderson CFL Ltd - which was effectively an acknowledgement by the
parties that they had not relied on any representations not set out in the contract and so took effect
as an evidential estoppel and not as an exclusion.

To sum up, an entire agreement clause has to be properly construed to see if it is an attempt to
excluse from misrepresentations. If otherwise, the clause would be valid as a term of the contract; in
which case, UCTA would still apply to such a clause. And for the entire agreement clause to be valid
and not be struck down as unreasonable, it should make it clear that the scope of the remedies
available to the representee are being restricted and expressly state that it excludes liability for
innocent or negligent misrepresentation.

Indeed the recent cases of Watford and Inntrepreneur above seem to demonstrate the courts
approach in construing such clauses to be valid as it serves to achieve certainty in contracts.

It is submitted that even if there are any uncertainties and criticisms surrounding the non-
applicability of UCTA to such clauses, there should be no such hurdles in relation to the CRA 2015.
Indeed, entire agreement clauses were identified by the Director General of Fair Trading as 'one
of the most commonly encountered class of unfair term' and that 'virtually all' of the clauses which
had been considered were unfair (OFT Bulletin 1, at 16).

Some recent cases:

First Tower Trustees Ltd v CDS (Superstores International) Limited [2018] EWCA Civ 1396.

The Court of Appeal has found that a “non-reliance” clause in a lease was a term that excluded or
restricted liability for misrepresentation. The clause was therefore within the scope of s.3 of the
Misrepresentation Act 1967 (“MA”) and subject to the reasonableness test under s.11(1) of the
Unfair Contracts Terms Act 1977 (“UCTA”).

Some key points from the Court of Appeal’s analysis include:

 Where a clause simply delimits the parties’ primary obligations, it is not an exclusion clause and
therefore the reasonableness test in UCTA will not apply. Such clauses define the basis on
which the parties are contracting. Lewison LJ, who gave the leading judgment, suggested that
this is how the label “basis clause” in some of the cases should be understood, though Leggatt
LJ, who delivered a concurring judgment, suggested that the term is best avoided in the
interests of clarity.

 A non-reliance clause, in contrast, seeks to prevent liability arising in misrepresentation by

stating that no representations have been made or, if made, have not been relied on, and

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therefore setting up a contractual estoppel. The Court of Appeal held that such a clause
amounts to an attempt to exclude liability for misrepresentation. Accordingly, it is subject to s.3
MA and therefore the reasonableness test under s.11 UCTA.

The relevant clause here was Clause 5.8, which stated:

“The tenant acknowledges that this lease has not been entered into in reliance wholly or partly on
any statement or representation made by or on behalf of the landlord.”

The COA agreed wiith the High Court that clause 5.8 was an attempt to exclude liability for
Misrepresentation and within the scope of s.3 MA. This provides that any contractual term which
would exclude or restrict liability for pre-contractual misrepresentation is subject to the
reasonableness test in s.11(1) UCTA.

The court the went on to hold that clause 5.8 did not satisfy the reasonableness test.

Similarly, in NF Football Investments Limited v NFFC Group Holdings Limited [2018] EWHC
1346 (Ch), the High Court has held that an entire agreement clause in a commercial contract had
the effect of excluding liability for misrepresentation under section 2(1) of the Misrepresentation Act
1967.

This contrasts with the orthodox view that the effect of an entire agreement statement is merely to
avoid pre-contractual representations becoming terms of the contract, and that such a statement will
not, in itself, exclude liability for misrepresentation (as noted above).

The EA clause read:

“This agreement … constitutes the entire agreement between the parties and supersedes and
extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises,
assurances, warranties, representations and understandings between them, whether written or oral,
relating to its subject matter.”

Arguably, the decision rests on the construction of the clause and here the court took the view that
the matters in the entire agreement clause purported to extinguish were not confined to matters of a
contractual nature, but included matters such as “correspondence”, “negotiations” and “assurances”,
as well as “representations”, which could include factual matters asserted in the course of
negotiations; and hence an attempt to exclude from misrepresentations.

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