#17241 - Misrepresentation - GDL Contract Law

Glossary:

• Representation: A pre-contractual statement of fact, whether express or implied, which leads the representee to enter into a contract with the representor.

• Misrepresentation : A statement, as above, which proves false, whether made innocently, negligently or fraudulently.

• Misstatement: A statement, whether of fact, opinion or belief, by which the maker becomes liable for loss resulting to the recipient.

• Rescission: The retroactive undoing of the contract, involving the return of its subject matter and the price paid for it.

• Termination: The withholding of further performance of the contract.

• Indemnity: Monetary compensation for obligations which the contract has (a) created; and (b) imposed on a misrepresentee.

• Reliance: The importance of the representation in the mind of the representee in deciding whether to enter into the contract, and if so, on what terms.

• Materiality: The propensity of the representation to affect the mind of a reasonable person in the sense above.

• Innocent: (a) Prior to 1967: non-fraudulent; (b) Post 1967: without fault.

Poole defines an actionable misrepresentation as: ‘an unambiguously false statement of fact made to the claimant, which induces the claimant to enter into a contract with the statement maker.’

Statements of Fact vs Opinion/Belief/Intention

• A statement of honest opinion/belief is actionable unless it implies a factual basis for its assertion:

  • Bisset v Wilkinson [1927] – sale of land in New Zealand:, seller stated “my idea was that it would carry 2000 sheep”. Found it would not carry 2,000 sheep. PC held that the seller’s statement had been nothing more than an honest expression of opinion

  • Smith v Land Property (1884) – Plaintiff selling a hotel which was let to Mr Fleck. Described Mr Fleck as a ‘very desirable’ tenant. In fact he had fallen behind on his rent and soon became bankrupt. Held that this was a misrepresentation as the expression of opinion involved the implied assertion of a factual basis for its making.

    • Bowen LJ: if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.

• A statement of future intention can be actionable if not genuine

  • Edgington v Fitzmaurice (1885) – Ds sent out a prospectus to shareholders inviting subscriptions in return for bonds. Stated this money would be used for expanding business. In fact used to pay off creditors. Plaintiffs sued for misrepresentation when company went bust.

    • Action succeeded. Bowen LJ: ‘the state of a man’s mind is as much a fact as the state of his digestion.’ So long as the state of mind can be proved/ascertained, it is actionable.

    • This requires a wilful/fraudulent misrepresentation.

• A statement of law is an actionable misrepresentation.

  • House of Lords in Kleinwort Benson v Lincoln CC [1999] abolished presumption that every person should know the law.

  • Pankhania v Hackney BC [2002] – clarified old law, before most assumed a statement of law was not actionable. Purchaser of property induced to by after statement that National Car Parks was a mere contractual licensee so that its occupation could be terminated on three months’ notice.

    • That was false, since the company was in fact a business tenant, protected by the Landlord and Tenant Act 1954. held this was an actionable misrepresentation.

• Silence cannot amount to an actionable misrepresentation

  • Keates v The Earl of Cadogan (1851) – D contracted to let house to plaintiff. Was aware that P wanted it immediately, but the the house was uninhabitable. But D did nothing to induce P to believe it was habitable.

    • Held no duty of disclosure so silence cannot amount to actionable misrepresentation.

• A duty to disclose may arise if asked directly/circumstances change in continuing representations:

  • With v O’Flanagan [1936] – D told P’s that his medical practice was doing at a rate of 2,000pa. Due to ill health the practice became neglected before conclusion of contract. Buyers opened and received only 15 in first three weeks.

    • Introduced idea of a ‘continuing representation’, which, if it later becomes false, may be grounds for an action.

  • Dimmock v Hallett (1866) – Land was advertised for sale as ‘fertile and improvable.’ When asked about the tenants seller said the farms were fully let, but certain tenants had given notice to quit. In fact the farmers had also given notice to quit.

    • Although boasts and ‘mere puff’ are not actionable, and although these statements were true (technically) the implication was false and recission was allowed.

  • Spice Girls v Aprilia [2002] – In March 1998 Geri Halliwell informed the group she was leaving. In May the group entered into a promotional contract with Aprilia (motorcycle/scooter maker). Geri left at the end of May.

    • Held there was a misrepresentation as negotiations between the parties had proceeded on the implicit basis that the band would continue to consist of all five members.

Materiality and Reliance

• Commonly said that a misrepresentation, in order to be actionable, must induce the representee to enter into the contract. Whule not wrong this can be misunderstood.

• Trietel uses concepts of materiality and reliance to explain inducement.

  • Materiality, when correctly understood, refers to the capacity of the statement made to affect the mind of a reasonable representee.

    • It is an objective measure of the statement’s significance.

  • Reliance is an assessment of whether the statement did in fact play a real and substantial part in the representee’s decision whether (or at least on what terms) to enter the contract.

    • Raifeissen v RBS (2011) goes so far as to suggest a ‘but for’ test for reliance. But this sits uneasily with case law.

Materiality

• Since any non-disclosure entitles the insurer to avoid the contract, there has to be some limit on what is required to be disclosed, and it is provided by materiality.

  • Class of facts to be disclosed is defined as any capable of affecting the mind of a reasonable insurer in deciding whether to take on the risk, and if so, on what terms.

• Pan Atlantic v Pine Top Insurance [1994], Lord Mustill and the majority of the House of Lords held that misrepresentation included a similar test.

Reliance

• Where a representation is material the representor has the burden of showing that the other did not rely on it:

  • Museprime Properties v Adhill Properties (1991) – whether rent on three properties was open to review was misrepresented in the prospectus. Although the average person would not be induced by this fact the claimant showed that thy were.

• Where claimant relies on his own investigation he is unable to claim to have been induced by the seller

  • Attwood v Small (1838) - sale of mines and iron works. Seller made representations about the earning capacities of these assets. Buyer verified these and sent agents to examine accounts. Six months after contract was concluded turned out they were false. Held no misrepresentation.

• But there is no duty to check statements even if you have the opportunity to do so

  • Redgrave v Hurd (1881) – solicitor misrepresented the value of the practice in negotiations claiming it brought in 300pa. Produced receipts but in fact these only amounted to 200pa. D did not examine documents fully. Claim for recission.

    • Held he had been under no duty to inspect the documents properly, but was free to rely instead on the plaintiff’s representation.

• NB post-Law Reform (Contributory Negligence) Act 1945, it could now be made the basis for reducing an award of damages to reflect contributory negligence (though this would not apply if the representation were fraudulent).

The Misrepresentation Act 1967:

• Prior to the passing of the Misrepresentation Act 1967 there were no damages for misrepresentation unless it was fraudulent. The standard remedy for misrepresentation was rescission.

  • It followed that a claimant who wanted compensation for having been deprived of a good bargain would not get it, save by showing that the false pre-contractual statement had become a term of the contract.

  • Sometimes recession was advantageous (especially if contract turned out to be a bad bargain)

• Until the passing of the Misrepresentation Act 1967, the weight of authority was against the permissibility of treating a term as a representation. Section 1 of the Act removes any common law impediment to doing that.

  • Necessary, nevertheless, that the term should have featured in pre-contractual exchanges as a representation independently of its later incorporation into the contract.

• The act creates a new type of misrepresentation, so that there are now three:

  • 1) Fraudulent misrepresentation

  • 2) Negligent misrepresentation (new)

  • 3) Innocent misrepresentation

1) Fraudulent Misrepresentation

• Sub-category of the broader tort of deceit (any fraud which causes loss to the person deceived).

  • The remedies here are rescission and/or damages (discussed furhter below)

• Defined in:

  • Derry v Peek (1889) – D’s, directors of a tram company issued a prospectus which falsely claimed that the company had the right to use steam powered trams rather than only horse-powered ones. In fact they needed consent of Board of Trade.

    • Held that action in deceit must fail as the directors had assumed, honestly but mistakenly, that the giving of consent by the Board of Trade was a formality. While reprehensible this was not dishonest.

    • Lord Herchell...