Contract Law: Misrepresentation - Week 6

• Concerns statements made before a contract, potentially invalidating it if false.
• This lecture aims to contextualize misrepresentation within the module and introduce key actionable elements.

Module Context

• Weeks 1 & 2 covered contract formation.
• Weeks 4 & 5 addressed contract terms.
• Week 3 explored vitiating factors like duress and undue influence.
• This week focuses on misrepresentation, another potential vitiating factor.

Definition of Misrepresentation

• An unambiguous false statement of fact.
• Addressed to the claimant.
• Induces the claimant to enter the contract.

Example: Car Dealership

• A car dealer falsely states a car had one prior owner.
• The buyer relies on this statement and purchases the car.
• The statement induces the buyer to enter the contract.
• Even if the statement isn't a contract term, misrepresentation law may provide remedies.

Framework for Analyzing Misrepresentation Claims

• Identify the potential representation.
• Apply the test for actionability.
• Categorize the representation.
• Identify available remedies.

Four Elements of Study

• Elements of an actionable misrepresentation.
• Statements of fact – further detail.
• Categories of misrepresentation.
• Remedies.

Test for Actionability

• Unambiguous.
• False.
• Statement of fact.
• Addressed to the claimant.
• Induces the claimant to enter the contract.

Statement of Fact

• Includes conduct and statements of law.
• Generally does not include statements of opinion or intention, or silence, but there are exceptions.

Categories of Misrepresentation

• Fraudulent (tort of deceit).
• Based on what the representor knew or should have known when making the statement.
• Negligent (statutory claim under s 2(1) of the Misrepresentation Act 1967).
• Innocent (statutory claim under s 2(1) of the Misrepresentation Act 1967).

Remedies

• Rescission: returning parties to their pre-contract position.
• Damages: monetary compensation.
• Available remedies depend on the category of misrepresentation.

Elements of an Actionable Misrepresentation

• The law encompasses aspects of tort and statute, alongside contract law.
• A representation is a statement asserting the truth of a given state of facts.
• The effect is to make the contract voidable, requiring action to rescind.

Key Terms

• Representor: The party who allegedly made the representation.
• Representee: The party who allegedly received the representation.

Definition

• "An unambiguous false statement of fact made to the claimant and which induces the claimant to enter into the contract with the statement maker".

Unambiguous Representation

• Must be clear and have the meaning put forward by the representee.
• The representor isn't liable if the representee's construction is unreasonable.

False Statement

• Must be untrue, but can be substantially correct.
• Differences shouldn't induce a reasonable person to enter the contract.

Statement of Fact

• Asserts a given state of affairs, not an undertaking.
• Mere advertising "puff" doesn't qualify.
• Conduct can act as a statement (e.g., concealing dry rot).
• Statements of law can now be actionable.
• Traditionally, only statements of fact were actionable; however, this is not the case now and a statement of law can give rise to misrepresentation

Statements of Law

• Historically, were not considered actionable misrepresentations.
• A false statement about an Act of Parliament's existence can be misrepresentation.

Statements That Are Not Statements of Fact

• Statements of opinion are generally not considered statements of fact
• Statements of future intention also do not qualify
• Instances of silence are similarly excluded, though there are exceptions

Addressed to the Claimant

• Misrepresentation must be directly communicated to the claimant.

Inducement

• Must cause the representee to enter the contract.
• A misrepresentation is an unambiguous false statement of fact, made to the representee which induces them to enter into a contract
• It induces if either:
  • The statement would have influenced a reasonable person, and the representor can't show it didn't influence the representee.
  • The representee personally was induced (subjective test).
• No misrepresentation exists if:
  • The statement wasn't communicated.
  • The statement didn't affect the decision.
  • The statement was known to be untrue.
• Doesn't need to be the only reason for entering the contract.

Investigations by Representee

• A representee isn't induced if they rely on their own investigations.
• There is no general duty to check the misrepresentor's statement.

Reasonableness of Checks

• Failure to check or negligent investigation may lead to a defense of contributory negligence, except in cases of fraud.
• Contributory negligence may be argued if the representee does not check statements made by the representor
• Commercial parties are more likely to be expected to investigate representations, as they have greated resources to do so

Key Components of Actionable Misrepresentation

• Unambiguous assertion of fact, proven false, that induces a party to enter into a contract

Statements of Fact Further Detail

• A statement of opinion does not qualify as a statement of fact
• Exceptions include:
  • Statements of opinion made without reasonable grounds that lack any reasonable basis
  • Opinions that that are not genuinely held beliefs

Statement of Opinion

• Generally cannot form the basis of a misrepresentation claim.
• An individual must provide information that justifies their opinion, and prove a factual basis for that opinion

Opinions

• Opinions not actually held can qualify as misrepresenations
• Expert and more knowledgable parties held to a higher standard
• These parties can be found liable for opinions that lack reasonable justification

Statement of Future Intention

• Cannot be true or false when made, so not typically a misrepresentation.
• An intent not carried out cannot be the sole basis for an actionable claim

Future intention

• If the representor states that that they intend to do something, then they are making a statement of fact, that they have particular intent
• However, if, at that point in time, they know they cannot do something, or they do not intend to do it, they misrepresent their existing intention This Bowen LJ put it this way: "The state of a man's mind is as much a fact as the state of his digestion…"
• However, statements of intent by people with no intent can be statements of fact

Silence

• Normally doesn't constitute a statement of fact.
• There's no duty to disclose facts that might affect the other party's decision.

Exceptions to Silence Rule

• Half-truths: misleading statements that are technically true.
• Continuing representations: an obligation to correct previous statements which are no longer true.
• Contracts uberrimae fidei: duty to disclose material facts (e.g., insurance contracts).
• A duty to keep the other party appraised of the status of any representation made.

Categories of Misrepresentation

• Remedies depend on categorization, stemming from the Misrepresentation Act 1967.

Types

• Fraudulent: Under tort of deceit standards; hardest to prove, highest damages.
• Negligent: Easier to prove than fraudulent, damages as if fraudulent, but allows consideration of contributory negligence.
• Innocent: Easiest to prove; offers rescission and, only rarely, damages.

Fraudulent Misrepresentation

• Most serious form, defined in Derry v Peek (1889).
• False representation made knowingly, without belief in its truth, or recklessly.
• Motive is immaterial.

Recklessness

• Involves a flagrant disregard for the truth (Thomas Witter Ltd v TBP Industries Ltd).
• Requires court to decide any failure to disclose was deliberate or dishonest

Disclosure Failures

• May be fraudulent if deliberate/dishonest, not just inadvertent.
• Difficult to persuade a court that a party acted fraudulently rather than negligently.
• If a disclosure failure did amount to fraud, the claimant would have to prove this to a very high standard

Negligent Misrepresentation

• Under s 2(1) of the Misrepresentation Act 1967 (MA 1967).
• The defendant is liable unless they prove they had reasonable grounds to believe the statement was true.
• Treated as fraudulent regarding damages (Royscot Trust Ltd v Rogerson).

Proving Negligence

• Representor must prove that facts that they represented were true.
• Requires any objectively reasonable ground to do so.
• Negligent misrepresentation under s 2(1) MA 1967 is easier for the representee than fraudulent misrepresentation.

Innocent Misrepresentation

• Not made fraudulently or negligently.
• Representor:
  • Proves reasonable grounds for belief.
  • Proves belief in truth up to the contract.

Remedies for Misrepresentation

• Available remedies include rescission, damages, and indemnity.

Rescission

• Makes the contract voidable.
• Requires communication of intent or court proceedings.

Process

• Initiated when one party alleges misrepresentation occurred during contract formation
• Subject to court discretion
• Contract must not have been affirmed, an excessive period should not have elapsed, and restitution should be possible
• Restores parties to the original position by returning transferred property.

Bars to Rescission

• Affirmation: Intent to proceed with the contract.
• Lapse of time: Delay in bringing action.

Restitution

• Becomes impossible in cases that involve:
  • The nature of the subject matter has changed
  • The subject matter has declined in value
• The contract can can no longer be rescinded if circumstances like this arise. The sale goods prior to recission by a misinformed party may make restitution impossible.

Indemnity

• Covers expenses from obligations assumed due to the contract.
• In the case of Whittington v Seale‑Hayne, the distinction from common law right clarifies indemnity covers only obligations created by contract
• Less likely if damages are awarded for fraudulent or negligent misrepresentation.

Damages

• Greatest for fraudulent misrepresentation.
• Actions for negligent misrepresentation under s 2(1) MA 1967 often lead to similar compensation.

Fraudulent Misrepresentation

• Calculated to place the injured party as if the misrepresentation hadn't occurred.
• Includes all damage directly flowing from the fraudulent act, not too remote due to plaintiff's conduct (Doyle v Olby).
• Damages can be limited where the claimant fails to mitigate as soon as the fraud is discovered, and will be reduced by value of any benefit from the contract
• Also includes benefits attained as result of entering into the contract.
• Contributory negligence isn't a defense.

Negligent Misrepresentation Under S 2(1) Ma 1967

• Awarded as if the statement was fraudulent, because the law says so.

Contributory Negligence with MA 1967

• Damages may be reduced for contributory negligence.

Innocent Misrepresentation

• Only entitles the representee to rescission an indemnity.

Damages in Lieu of Rescission

• Under Section 2(2) of the MA, a Judge can award damages in lieu of recission
• Available at the court's discretion for non-fraudulent misrepresentation.
• Considers the nature of misrepresentation, loss from upholding the contract, and loss rescission would cause.
• The remedy of monetary damages may be awarded instead of recission
• Damages in lieu of rescission are a separate award. Damages in lieu under s 2(1): Compensates for loss that arises from the misrepresentation
  Damages under s 2(2): Compensates the representee where the court has decided, at its discretion, to not award recission

Misrepresentation: Fraudulent Summary

Legal basis: Tort of deceit. Test in terms of knowledge of representor: Representee to prove that representor made statement knowing untrue / without belief in truth / reckless as to truth. Rescission? Yes.Unlikely to need indemnity. Damages: Yes, generous remoteness rules, no reduction for contributory negligence.

Misrepresentation: Negligent Summary

Legal basis: s 2(1) MA 1967. Test in terms of knowledge of representor: Representor fails to show reasonable grounds to believe true and/or not believing true up until the contract was made. Rescission? Yes. Indemnity? Unlikely to be needed. Damages: As for fraud, but potential reduction for contributory negligence. Can also be given in lieu of rescission.

Misrepresentation: Innocent Summary

Legal basis: s 2(1) MA 1967. Test in terms of knowledge of representor: Representor has shown reasonable grounds to believe and actual belief up until the contract was made. Rescission? Yes. Indemnity? Yes, as part of rescission. Damages: Can be given in lieu of rescission.

Misrepresentation and Exemption Clauses

• Section 3 of the Misrepresentation Act 1967 renders ineffective most exemption clauses from liability for misrepresentation

• In accordance with the 1977 Unfair Contract Terms Act, non-reliance clauses may be required to pass the reasonableness test or be struck down

Representations Distinguished from Terms of a Contract

• Arise in cases a statement is later found to be false
• A claim may be made in cases of both contract breaches as well asa misrepresentation in such circumstances
• If the representation is not deemed a contract term and is proven false the injured party may only seek a claim for misrepresentation

Negligent Misstatement at Common Law (Tort of Negligence)

• May be considered an alternative claim to misrepresentation if the misrepresentation cannot be proven
• In cases where a party exhibits a duty of care to another, it may be found liable for damages to representations made that cause harm
• A duty of care must be established between the parties, creating proximity between the parties