Contract Law

Misrepresentation

A Misrepresentation is a false statement of fact made by one party to another, which, whilst
not being a term of the contract induces the other party to enter into 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.

The elements of Misrepresentation are:

(i) False statement of Fact

(ii) Induce another party to enter into the contract

1. False statement of Fact

An actionable misrepresentation must be a false statement of fact, not opinion or future

intention or law.

(a) Statement of opinion

A false statement of opinion is not a misrepresentation of fact. In Bisset v Wilkinson, a

statement made about the farming capacity of a parcel of land was not a
misrepresentation of fact but merely an opinion. In the said case, the claimant
purchased a piece of farm land to use as a sheep farm. He asked the seller how many
sheep the land would hold. The seller had not used it as a sheep farm but estimated that
it would carry 2,000 sheep. In reliance of this statement the claimant purchased the
land. The estimate turned out to be wrong and the claimant brought an action for
misrepresentation.

The Privy Council held that the statement was only a statement of opinion and not a
statement of fact and therefore not an actionable misrepresentation. The claimant's
action was therefore unsuccessful.

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 However, where the person giving the statement was in a position to know that the
true facts and it can be proven that he could not reasonably have held such a view
as a result, then his opinion will be treated as a statement of fact (Smith v Land &
House Property Corp).

Some expressions of opinion are mere puffs. Thus in Dimmock v Hallet, the
description of the land as fertile and improvable was held not to constitute a
misrepresentation.

(b) Statement as to future

A false statement by a person as to what he will do in the future is not a
misrepresentation and will not be binding on the person unless the statement is
incorporated into the contract.
However, if a person knows that his promise, which has induced another to a
contract, will not in fact be carried out then will be liable (Esso Petroleum V
Mardon). In the said case, the plaintiff, entered into a tenancy agreement with the
defendant, Esso Petroleum, in respect of a petrol station owned by the latter. During
the course of the negotiation of the agreement, ‘expert’ advisers employed by the
defendant had provided an estimate of the sales which the petrol station could
expect which was based on inaccurate information and consequently was
significantly inflated. The value of the rent on the agreement had been calculated
based on this inflated figure. As a result, it was impossible for the plaintiff to operate
the petrol station profitably.
The issues were: firstly, whether the plaintiff could have any action for
misrepresentation given that the figure purported to be an ‘estimate’ rather than a
statement of fact; secondly, whether the defendant owed any duty of care to the
plaintiff so that he could bring his claim in the tort of negligence.
Held, the Court of Appeal held that the contract could not be voided for
misrepresentation as the defendants presented the inflated figure as an estimate

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 rather than as a hard fact. On the other hand, as the defendant had taken it upon
themselves to employ experts for the purpose of providing an estimate of sales, they
owed a duty of care to the plaintiff to ensure that this was done on the basis of
accurate information. The plaintiff was therefore able to recover the losses which he
had suffered as a result of the defendant’s negligent misstatement.
(c) Statement of Law
A false statement of law is not actionable misrepresentation because everyone is
presumed to know the law. However, the distinction between the fact and law is not
simple (Solle v Butcher).
(d) Silence
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. If one party is
labouring under a misapprehension there is no duty on the other party to correct it
(Smith v Hughes).

However, there are three fundamental exceptions to this rule:

(i) Half Truths
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 v Butler).
(ii) Statement which becomes false.
Where a statement was true when it was made out but due to a change of
circumstances has become false by the time it was acted upon, there is a
duty to disclose the truth (O’Flanagan).
(iii) Contracts UberrimaeFidei
Contracts uberrimaefidei (contract of utmost good faith) impose of duty of
disclosure of all material facts because one party is in a strong position to
know the truth. Example, contracts of insurance and family settlements. A
material fact is something which would have induced a reasonable person

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 into making the contract. If one party fails to do this, the contract may be
avoided (Lambert v Co-operative Insurance Society). Where there is a
fiduciary relationship between the parties to a contract a duty of disclosure
will arise, e.g. solicitor and client, bank manager and client, trustee and
beneficiary.

(e) Other Representations

The term statement is not to be interpreted too literally:
(i) In Gordon v Selico, it was held that painting over a dry rot, immediately prior
to the sale of the property was fraudulent misrepresentation.
(ii) In Marylebone Property v Payne , the use of a photo graph taken from the air,
printed with arrows (misleadingly) indicating the extent of the land
boundaries, was to convey a statement of fact (which amounted to
actionable misrepresentation).

2. Misrepresentation must have induced the contract.

The false statement must have induced the representee to enter into the contract. The
requirements here are that:

a) The representation must have been material and;

b) It must have been relied on.
(i) Materiality (importance)
The misrepresentation must be material, in the sense that it would have induced a
reasonable person to enter into the contract. However, the rule is not strictly
objective. In Museprime Properties v Adhill Properties, it was noted that, any
misrepresentation which induces a person to enter into a contract should be a
ground for rescission of that contract. If the misrepresentation would have induced
a reasonable person to enter into the contract, then the court will presume that the
representee was so induced, and the onus will be on the representor to show that
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 the representee did not rely on the representation, either wholly or in part. If
however, the representation would not have induced a reasonable person into the
contract, the onus will be on the representee to show that the representation
induced him to act as he did.

(ii) Reliance
The representee must have relied on the representation. There will be no reliance if
the representee was unaware (Horsfall v Thomas).
There will be no reliance if the representee does not rely on the representation but
on his own judgment or investigation (Attwood v Small). (NB. The rule does not
apply where the representation was fraudulent and the representee was asked to
check the accuracy of the statement (Pearson v Dublin Corp)).
There will be reliance even if the representee is given an opportunity to discover the
truth but does not take the offer up. The representation will still be considered an
inducement (Redgrave v Hurd).
There will be reliance even if the misrepresentation was not the only inducement for
the representee to enter into the contract (Edgington v Fitzmaurice).

3. Types of Misrepresentation

Once the misrepresentation has been established it is necessary to consider what type of
misrepresentation has been made. There are three types of misrepresentation: i) Fraudulent ii)
negligent and wholly innocent. The importance of the distinction lies in the remedies available
for each type.

(i) Fraudulent Misrepresentation

In Derry v Peek, as a false statement that is made:
i. Knowingly, or
ii. Without beliefs in its truth, or
iii. Recklessly, careless as to whether it is true or false.
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 Therefore, if someone makes a statement which they honestly believe is true,
then it cannot be fraudulent. The burden of proof is on the plaintiff- he who
asserts fraud must prove it. Tactically it may be difficult to prove fraud, in light of
the requirements in Derry v Peek.

The remedy is rescission (subject to exceptions to be discussed later) and in

damages in tort of deceit.

(ii) Negligent Misrepresentation

This is a false statement made by a person who has reasonable grounds for
believing it to be true. There are two possible ways to claim common law and
statute.
Negligent Misrepresentation at common law.

The House of Lords held in certain circumstances damages may be recovered in

tort of negligent misstatement causing financial loss: (Hedley Byrne v Heller). The
principle of said case was later refined in Caparo v Dickman [NB. The four
elements to be satisfied in the lecture on Negligence].

Remedies: recent case-law has shown that the remedies available in fraud unless
the representor discharges the burden of proof. In particular, damages will be
base on the tort of deceit rather than the tort of negligence.

(iii) Wholly honest misrepresentation. This is a false statement which the person
makes honestly believing it to be true:
The remedy is either:
a. Rescission with an indemnity, or
b. Damages in lieu of rescission

4. Remedies for Misrepresentation

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Once an actionable misrepresentation has been establish it is then necessary to consider
the remedies available to the misrepresentee.
(A) Rescission
Rescission i.e setting aside the contract, is it possible in all cases of
misrepresentation. The main aim of rescission is to put the parties back in their
original position, as though the contract had not been made. The injured party may
rescind the contract by giving notice to the representor. However, this is not always
necessary as any act indicating repudiation e.g. notifying the authorities, may suffice
(Car & Universal Finance v Caldwell).
Bars to rescission:
Rescission is an equitable remedy and is only available at the discretion of the court.
The injured party may lose his right to rescind in the following 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
do intend to continue with the contract, or if they do an act from which the
intention may be implied (Long v Lloyd).
Note that in Peyman v Lanjani, the court of appeal held that the plaintiff
had not lost his right to rescind. As he did not know that he had such a right,
he could not be said to have elected to affirm the contract.
(ii) Lapse of time
If the injured party does not take an action to rescind within a reasonable
time, the right will be lost. Where the representation is fraudulent, time run
from the time 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 misrepresentation (Leaf v
International Galleries)

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 (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
(Vigers v Pike).
Precise restoration is not required and the remedy is still available if
substantial restoration is possible. Thus, deterioration in the value or
condition of a property is not a bar to a rescission (Armstrong v Jackson).
(iv) Third party acquires rights.
If 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 A (purchaser- misrepresentor) obtains goods from B (vendor-
misrepresentee) by misrepresentation and sells them to C, who takes in good
faith, B cannot later rescind when he discovers misrepresentation in order to
recover goods from C.

(B) Indemnity
An order of rescission may be accompanied by the court ordering an indemnity. This
is money payment by the representor in respect of expenses necessarily created in
complying with the terms of the contract and is different from damages
(Whittington v Seale).

(C) Damages
(1) 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 was made. The test of remoteness in deceit
is that the injured party may recover for all direct loss incurred as a result of the
fraudulent misrepresentation regardless of foreseeability (Doyle v Olby).
Moreover, damages may include lost opportunity cost, e.g. loss of profit.