#5390 - Misrepresentation - Contract Law

Misrepresentation

1. Requirements

• Redgrave v Hurd (1881) 20 Ch D 1: P published an advert for his job and purchase of house. D answered and P stated business was worth 300. Provided papers which D did not investigate but in fact showed only worth 200. D refused to complete purchase of house when he found out business was worthless. P brought action for specific performance. D claimed misrepresentation.

  • Baggallay LJ:

    • The misrepresentor cannot blame the other for believing him and not inquiring further.

    • There may be circumstances of suspicion which might put a person on inquiry, and make that his duty, but under ordinary circumstances the mere fact that he does not avail himself of the opportunity of testing the accuracy of the representation will not enable the opposing party to succeed on that ground.

  • Jessell MR:

    • Where one person induces another to enter into an agreement with him by a material representation which is untrue, it is no defence to the action to rescind the contract that the person to whom the representation was made had the means of discovering, and might with reasonable diligence, have discovered that it was untrue.

    • If there is a material representation calculated to induce a person into a contract, it is an inference of law that he was induced by the representation to enter into it, and in order to negate this it must be shown wither that he had knowledge of the facts contrary to the representation, or that he stated or by his conduct showed that he did not rely on the representation.

• Smith v Land and House Property Corp (1884) 28 Ch D 7: P offered premises for sale subject to agreement that F, described as a most desirable tenant, should retain lease at a favourable rent. Property was inspected and raised concerns but nothing so as to necessarily indicate insolvency and the representation was later made at auction. F went into liquidation, M refused to complete. P brought action for specific performance.

  • D must prove that there was a material representation (said that F was a desirable tenant when in fact could not meet his rent) and that they entered into contract on the faith of it (evidence suggested that but for the assurance the contract would not have been entered into).

  • It is often fallaciously assumed that a statement of opinion cannot involve a statement of fact. In a case where the facts are equally known, what one of them says is frequently nothing other than an expression of opinion. But if the facts are not equally known to both sides then a statement of opinion by one who knows the facts best involves very often a statement of material fact, for he impliedly states that he knows the facts which justify his opinion.

  • If a landlord says that he considers that all relations between him and a tenant are satisfactory, he really avers that the facts particularly within his knowledge are such as to render that opinion reasonable.

  • Whether or not there was an inducement to enter into the contract is one of fact (contrast above) to be decided on the circumstances of each particular case.

• Edgington v Fitzmaurice (1885) 29 Ch D 459: Directors of a company issued prospectus inviting subscriptions for debentures stating that the objects were to complete alterations of buildings, to purchase horses and vans and to develop trade. Real object was to pay off liabilities. P advanced money on his own mistaken assumption thinking he would get a charge on the property. Company became insolvent. P brought action for deceit.

  • In order to sustain this type of action P must show that D intended people should act on his statements, which were untrue in fact; D knew them to be untrue, or made them under such circumstances that the Court must conclude that they were careless of whether they were true or not.

  • This statement of intention as to object was nevertheless a statement of fact, and if they are not true then they will be liable. A misstatement as to the state of a man's mind is a misstatement of fact. In light of the circumstances of the company as known, this is a statement which should not have been made.

  • A man who lends money reasonably wishes to know for what purpose it is borrowed, and he is more willing to advance it if he knows that it is not wanted to pay of liabilities already incurred. The statement was therefore material.

  • It is true that P would not have paid the money if he knew that he was not to gain a charge on the property; but, if he also relied on the misstatement in the prospectus, his loss none the less resulted from that misstatement. It is not necessary to show that the misstatement was the sole cause of what he did. If he acts on the misstatement, though influenced by an erroneous supposition, the Defendants will still be liable.

• Bisset v Wilkinson [1927] AC 177: Privy Council. Purchaser claimed to rescind contract for sale of land on the basis of a falseness of a statement as to the carrying capacity of the land for sheep.

  • When misrepresentation is the ground of relief it is essential to ascertain whether that which is relied upon is a representation of a specific fact, or a statement of opinion, since an erroneous opinion though it may have been relied upon, gives no title to relief unless fraud is established.

  • The distinction is not always easy as a representation of fact may be inherent in a statement of opinion and the existence of the opinion in the person stating it is a question of fact at any rate.

  • The material facts of the transaction, the knowledge of the parties respectively and their relative positions, the words of representation used and the actual condition of the subject matter, are relevant to the two necessary enquiries to be made: What was the meaning of the representation? Was it true?

  • In this case D's knew all about the land-seems that statement of opinion only. It was never proven that the land could not carry 2000 sheep in any event.

• With v O’Flanagan [1936] Ch 575: Negotiations entered into for sale of medical practice, V representing that takings were at 2000 per annum. By time contract was signed circumstances had changed and profits were down. The change in profitability had not been disclosed.

  • A representation is not like a warranty; it is not necessary it should be strictly construed or strictly complied with; it is enough if it is substantially true; it is enough if it is substantially complied with. If it is not substantially true then the court finds itself within the range of misrepresentation and must give effect to that position if it is satisfied that P acted upon the representation in concluding a bargain, about which there can be no doubt in this case.

  • A representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation. If circumstances change they must be communicated. Putting it this way means that the principle that V is bound is not limited to the contracts of utmost faith or those where there is a peculiar fiduciary duty.

• Banque Keyser v Skandia [1989] 3 WLR 25: Case concerned wide scale fraud. B had secured bank loans on 'valuable property'. Agreement was that sums would be released once insurance for default obtained. Exclusion clause in insurance contract for fraud, but evidence that insurance company knew that something was wrong.

  • There is no general duty of disclosure in ordinary contracts (Smith v Hughes).

  • Since a contract of insurance is one of utmost good faith there are reciprocal absolute duties of pre-contractual disclosure, imposed by general law owing to the nature of that contract. Not until this condition is fulfilled can the parties rely on the contract.

  • Insurers failure to disclose deceit was a breach of duty which entitled the bank to rescind the contract but it does not sound in damages since it is not a tort or a breach of contract or fiduciary duty.

2. Rescission

• Whittington v Seale-Hayne (1900) 82 LT 49: Verbal negotiations for purchase of a lease. P alleged that D had said that the premises were sanitary and in a good state of repair. Agreement contained covenant of repair (unknown to P). P alleged that because of unsanitary water poisoned.

  • Judgement made on assumption that rescission available for innocent misrepresentation.

  • A party who is entitled to rescission for innocent misrepresentation is entitled to be put back into the position as if the contract had never been entered into in the sense that he is discharged from the rights and obligations which the contract to which he was induced to enter imposed. This is not exactly the same as the previous position in all respects- to do so would be to award damages.

• Leaf v International Galleries [1950] 2 KB 86: D sold a picture claimed to be by Constable. P brought action for rescission when he (5 years) later discovered that it was not. CC found innocent misrepresentation. Basically claim for rescission of an executed contract.

  • Evershed MR: To avoid uncertainty, when a man elects to buy a work of art or chattel on the faith of an innocent misrepresentation and delivery is accepted, there should be the end of that particular transaction.

  • Jenkins LJ:

    • So far as dealings in land are concerned there is a considerable body of authority to the effect that rescission on the ground of innocent misrepresentation will not be allowed after conveyance. It is not necessarily the case that this rule should apply to chattels but this case does seem one which is appropriate for its application.

    • Assuming that completion is not fatal to the claim in all events it behoves the purchaser...