Misrepresentation

A misrepresentation is a false statement of fact made by one party to another, made

before or at the time of the contract that, whilst not being a term of the contract, made
to induce the contract and it induces the other party to enter the contract. The effect of
an actionable misrepresentation is to make the contract voidable, giving the innocent
party the right to rescind the contract and/or claim damages.

This definition may be broken down into three distinct elements. The first is that the
representation must be an unambiguous false statement of fact or law, the second is that
it must be addressed to the party misled and the third is that it must be an inducement to
entry into the contract and possibly it must also be material.

In order to prove misrepresentation five conditions need to be satisfied.

1. It must be a false statement of fact or law

The rule was traditionally stated in the form that a representation must be an
unambiguous false statement of existing fact. However, it is now clear that a
misrepresentation of law can constitute an actionable misrepresentation. An actionable
misrepresentation must be a false statement of fact, not opinion or a puff. A false
statement of opinion is not a misrepresentation of fact (Bisset v Wilkinson).

A statement of intention is not a statement of fact. Nor is a promise a statement of fact.

A person who fails to carry out his stated intention does not thereby make a
misrepresentation (Wales v Wadham). But a person who misrepresents his present
intention does make a false statement of fact because the state of his intention is a
matter of fact. In Edgington v Fitzmaurice, directors of a company invited the public
to subscribe for debentures on the basis that the money so raised would be used to
expand the business. In fact, the real purpose in raising the money was to pay off
company debts. It was held that the directors were guilty of misrepresentation because
they had misrepresented their actual intention.

2. It must be made before or at the time of the contract

Statements made before the formation of the contract- pre contractual statements
automatically become part of the contract.

3. It must be made by one party to the other

Generally, silence is not a misrepresentation. The effect of the maxim caveat emptor is
that the other party has no duty to disclose problems voluntarily. Thus if one party is
labouring under a misapprehension there is no duty on the other party to correct it.
However, there are three fundamental exceptions to this rule:

i. Half truth

The representor must not misleadingly tell only part of the truth. Thus, a statement that
does not present the whole truth may be regarded as a misrepresentation (Nottingham
Brick & Tile Co. v Butler).

ii. Statements which become false

Where a statement was true when made out but due to a change of circumstances has
become false by the time it is acted upon, there is a duty to disclose the truth. See:

With v O'Flanagan [1936] Ch 575.

iii. Contracts uberrimae fidei

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of
disclosure of all material facts because one party is in a strong position to know the
truth (Horsfall v Thomas).

4. The statement must be made to induce the contract &

5. The statement did induce the contract

There are at least three situations in which a claimant will be unable to show that the
representation induced the contract. The first is where the claimant was unaware of the
existence of the representation (Horsfall v Thomas), the second is where the claimant
knew that the representation was untrue and the third is where the claimant did not
allow the representation to affect his judgment. A claimant does not allow a
representation to affect his judgment where he regards the representation as being
unimportant (Smith v Chadwick) or where he relies upon his own judgment (Atwood
v Small).
 TYPES OF MISREPRESENTATION

Once misrepresentation has been established it is necessary to consider what type of

misrepresentation has been made. There are three types of misrepresentation:
fraudulent, negligent and wholly innocent. The importance of the distinction lies in the
remedies available for each type.

a. Fraudulent misrepresentation

Fraudulent misrepresentation was defined by Lord Herschel in Derry v Peek (1889) as

a false statement that is "made (i) knowingly, or (ii) without belief in its truth, or (iii)
recklessly, careless as to whether it be true or false." Therefore, if someone makes a
statement which he or she honestly believe is true, and then it cannot be fraudulent
(Derry v Peek).

The remedy is rescission (subject to exceptions discussed later) and damages in the tort
of deceit (see later).

b. Negligent misrepresentation

i. Negligent misstatement at Common Law

The House of Lords have held that in certain circumstances damages may be
recoverable in tort for negligent misstatement causing financial loss Hedley Byrne v
Heller.

The remedies are rescission (subject to exceptions discussed later) and damages in the
tort of negligence (see later).

ii. Negligent misrepresentation under Misrepresentation Act 1967

This is a false statement which the person makes believing it to be true but not on
reasonable grounds. The remedy is either rescission with an indemnity, or damages in
lieu of rescission under the courts discretion. Section 2(1) of the Misrepresentation
Act 1967 provides:

"Where a person has entered into a contract after a misrepresentation has been made to
him by another party thereto and as a result thereof he has suffered loss, then, if the
person making the misrepresentation would be liable to damages in respect thereof had
the misrepresentation been made fraudulently, that person shall be so liable
notwithstanding that the misrepresentation was not made fraudulently unless he proves
that he had reasonable ground to believe and did believe up to the time the contract was
made that the facts represented were true."
 c. Innocent misrepresentation

This is a false statement which the person makes honestly believing it to be true
(Oscarchess v Williams). The remedy is either rescission with an indemnity, or
damages in lieu of rescission under the courts discretion. The right to rescind the
contract will also be lost if the court exercises its discretion to award damages in lieu of
rescission under section 2(2) of the Misrepresentation Act 1967.

REMEDIES FOR MISREPRESENTATION

a. Rescission

Rescission, i.e. setting aside the contract, is possible in all cases of misrepresentation.
The aim of rescission is to put the parties back in their original position, as though the
contract had not been made.

BARS TO RESCISSION

Rescission is an equitable remedy and is awarded at the discretion of the court. The
injured party may lose the right to rescind in the following four circumstances:

i. Affirmation of the contract

The injured party will affirm the contract if, with full knowledge of the
misrepresentation and of their right to rescind, they expressly state that they intend to
continue with the contract, or if they do an act from which the intention may be implied
(Long v Lloyd)

ii. Lapse of time

If the injured party does not take action to rescind within a reasonable time, the right
will be lost. Where the misrepresentation is fraudulent, time runs from the time when
the fraud was, or with reasonable diligence could have been discovered. In the case of
non-fraudulent misrepresentation, time runs from the date of the contract, not the date
of discovery of the misrepresentation (Leaf v International Galleries)

iii. Restitution in Integrum Impossible

The injured party will lose the right to rescind if substantial restoration is impossible,
i.e. if the parties cannot be restored to their original position.

iv. Rights passed on to third party

If a third party acquires rights in property, in good faith and for value, the
misrepresentee will lose their right to rescind (Phillips v Brooks).
Thus, if B obtains goods from A by misrepresentation and sells them to C, who takes in
good faith, A cannot later rescind when he discovers the misrepresentation in order to
recover the goods from C.

b. Indemnity

The court ordering a rescission may accompany an order of indemnity. This is a money
payment by the misrepresentor in respect of expenses necessarily created in complying
with the terms of the contract and is different from damages (Whittington v Seale-
Hayne).

c. Damages

The injured party may claim damages for fraudulent misrepresentation in the tort of
deceit. The purpose of damages is to restore the victim to the position he occupied
before the representation had been made.

The injured party may elect to claim damages for negligent misrepresentation at
common law. The test of remoteness in the tort of negligence is that the injured party
may recover for only reasonably foreseeable loss (Esso Petroleum v Mardon [1976]
QB 801). Alternatively, the injured party may claim damages for negligent
misrepresentation under section 2(1) of the Misrepresentation Act 1967. The claimant
can even claim damages that are not reasonably foreseeable (Royscott v Rogerson).

In cases of innocent misrepresentation, section 2(2) of the Misrepresentation Act

1967 gives the court discretion, where the injured party would be entitled to rescind, to
award damages in lieu of rescission. Damages under section 2(2) cannot be claimed as
such; the court can only award them. Section 2(2) states:

"Where a person has entered into a contract after a misrepresentation has been made to
him otherwise than fraudulently, and he would be entitled, by reason of the
misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings
arising out of the contract, that the contract ought to be or has been rescinded the court
or arbitrator may declare the contract subsisting and award damages in lieu of
rescission, if of opinion that it would be equitable to do so, having regard to the nature
of the misrepresentation and the loss that would be caused by it if the contract were
upheld, as well as to the loss that rescission would cause to the other party."
 EXCLUDING LIABILITY FOR MISREPRESENTATION

Any term of a contract that excludes liability for misrepresentation or restricts the
remedy available is subject to the test of reasonableness. Section 3 of the
Misrepresentation Act 1967, as amended by s8 of UCTA 1977, provides that if a
contract contains a term which would exclude or restrict any liability to which a party
to a contract may be subject by reason of any misrepresentation made by him before the
contract was made or any remedy available to another party to the contract by reason of
such a misrepresentation, that term shall be of no effect except insofar as it satisfies the
requirement of reasonableness as stated in section 11(1) of the Unfair Contract
Terms Act 1977; and is for those claiming that the term satisfies that requirement to
show that it does.

Section 11(1) UCTA 1977 provides that "… the term shall have been a fair and
reasonable one to be included having regard to the circumstances which were, or ought
reasonably to have been, known to or in the contemplation of the parties when the
contract was made."