False Preliminary Statements PDF

6 False Preliminary Statements LEARNING OUTCOMES When you have completed this chapter, you should be able to: distinguish between different types of pre-​contractual statements and explain and apply the guidelines used by the courts;...

6 False Preliminary Statements LEARNING OUTCOMES When you have completed this chapter, you should be able to: distinguish between different types of pre-​contractual statements and explain and apply the guidelines used by the courts; explain and discuss in depth the law relating to misrepresentation; appreciate the relationship between the law of contract and the law of tort with reference to misrepresentation and breach of contract actions. 6.1 False preliminary statements made by a contracting party Before we can look in detail at misrepresentation, it is necessary to appreciate when a false preliminary statement will be actionable and to distinguish between when it will amount to breach of an express term of the contract and/​or a misrepresentation. A statement made during contractual negotiations may be: A mere puff. This is usually a claim which is extravagant in an obvious way or an advertising gimmick. There is no right of action in respect of this type of statement. An express term. A term is part of the contract. If untrue, the innocent party will have a remedy for breach of contract. We dealt with terms in Chapter 3 and with remedies for breach in Chapter 4. A representation. A representation is a statement made by one party to the contract which may have induced the other party to enter into the contract but does not form part of it. If untrue, the innocent party may have a remedy if the statement amounts to a misrepresentation. The law relating to false preliminary statements is important in most areas of contract law. Where a lot of money is at stake, both individuals and business buyers will want assurances about what they are proposing to buy. The main difference is that in most commercial contracts there will be a clause purporting to exclude liability for false preliminary statements. This means that if, and when, a false preliminary statement is made, the initial focus is more likely to be on the validity of the exclusion rather than on the classification of the false statement. 147 Contract For an example of how a company might seek to exclude liability in this respect, let us look at the Specimen Standard Conditions of Sale set out in Reading 1 in the Appendix. Clause 2.2 provides, inter alia: The Seller’s sales representatives are not authorised to do any of the following things on behalf of the Seller: 2.2.1 … introduce any other terms, written or oral into the Contract and 2.2.2 … make any representation … Thinking back to Chapter 2 in which you studied agency, you will realise that this clause is to stop a sales representative binding the seller to any preliminary statement which they might make in trying to promote a sale. Where sales representatives are inexperienced and/​or subject to ambitious sales targets, there will always be a risk that they might make exaggerated claims about the products they are selling. A party may also put a clause in the contract limiting liability for misrepresentation. You can see an example in clause 8.4.1 of the Specimen Conditions of Sale. Section 3 of the Misrepresentation Act 1967 provides that any clause in a non-​consumer contract which purports to exclude or restrict liability for misrepresentation will only be upheld if it satisfies the reasonableness test set out in s 11 of the Unfair Contract Terms Act (UCTA) 1977. Similarly, if you remember back to Chapter 3 in which you studied UCTA 1977, when one party deals on the other party’s written standard terms, it is only possible to exclude liability for breach of an express term if it is reasonable to do so (UCTA 1977, s 3). So, in a commercial context where there is a clause purporting to exclude liability for a false preliminary statement, the main issue is often whether or not the clause is reasonable and as such valid. By contrast, where there is no such exclusion, the initial focus will be on the classification of the false preliminary statement(s) as that will determine the remedies available to the innocent party. 6.2 Distinguishing between terms and representations It is because the remedies for breach of contract and misrepresentation differ that it is important to decide whether a false preliminary statement is a term or only a representation. In practice, the claimant might claim both breach of contract and misrepresentation in the alternative, but there will be no double recovery. The primary test for determining whether a statement is a term or a representation is the common intention of the parties when they entered the contract. Did they intend the particular statement to be a contractual term, or did they intend it to be only a representation? If that intention is not clear, there are a number of guidelines the court will consider namely: Whether one party had greater skill or knowledge of the subject matter. Whether a statement made verbally was repeated in a written contract before it was agreed. Whether the recipient of the statement made clear it was of vital importance. Whether the statement maker invited the other party to verify it. Whether there was a lapse of time between the statement being made and the contract being formed. We will now consider each of the above guidelines in more detail. 6.2.1 The relative skill and knowledge of the parties If an expert makes a false preliminary statement to a non-​expert, the statement may well be deemed to be a term of the contract; conversely, if a non-​expert makes a false preliminary statement to an expert, the statement is more likely to be deemed a simple representation. 148  False Preliminary Statements This guideline is well illustrated by Oscar Chess Ltd v Williams 1 WLR 370, CA and Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd 1 WLR 623. In Oscar Chess Ltd v Williams the defendant sold a second-​hand car to the claimant, a motor dealer, for £290. The price had been calculated on the basis of information in the registration book (which was inspected by the claimant) which stated that the car was first registered in 1948, and the defendant had no reason to doubt that fact. The following year, the claimant discovered from the manufacturer that the car was a 1939 model. Had the claimant been aware of that fact, the claimant would only have paid the defendant £175 for the car. Thus, the claimant tried to recover the difference by bringing an action for breach of contract, but the action failed. The majority of the Court of Appeal held that as the claimant knew the defendant had no personal knowledge of when the car was manufactured, and as the claimant was in at least as good a position to know this, the defendant had simply made an innocent misrepresentation. To quote Denning LJ: It is sometimes supposed that the tribunal must look into the minds of the parties to see what they themselves intended. That is a mistake … The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice … When the seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending that the buyer should act on it and he does so, it is easy to infer a warranty … So also if he makes a promise about something which is or should be within his own control … But if the seller when he states a fact, makes it clear that he has no knowledge of his own but has got his information elsewhere, and is merely passing it on, it is not so easy to imply a warranty. The case of Dick Bentley v Harold Smith Motors also involved the sale of a car, but in this case it was a car dealer selling to a private individual (the claimant). The defendant had told the claimant (relying on the odometer reading) that the car had only done 20,000 miles and this was one of the reasons that had prompted the claimant to buy the car. The claimant subsequently discovered that the car’s stated mileage was false and sued for breach of contract. In this case, the claimant was successful. 6.2.2 Whether a statement made verbally was repeated in a written contract before it was agreed If so, it is good evidence that the statement was intended to be a term but, if not, it could well be just a representation. As with all the factors though, this one is not conclusive. For example, in Birch v Paramount Estates the seller’s oral promise was not repeated in the written contract but the court still decided it was a term of the contract. This meant that the contract in Birch v Paramount Estates was partly written and partly oral. 6.2.3 Whether the recipient of the statement made clear it was of vital importance If so, it is likely the statement will be deemed a contract term. This guideline is illustrated by the case of Bannerman v White (1861) 10 CB NS 844 where the buyer of hops asked the seller if the plants had been treated with sulphur. The buyer added that, if they had, they would not even ask the price. The seller assured the buyer that sulphur had not been used. This assurance was held to be a term of the contract. 149 Contract 6.2.4 Whether the statement maker invited the other party to verify it If so, the statement may well be just a representation. In Ecay v Godfrey (1947) 80 Ll L Rep 286, the seller of a boat asked the buyer if they were going to have it surveyed. The court decided that this question indicated that the seller did not intend their previous statement about the condition of the boat to be a term. Conversely, if the seller tells the buyer not to bother with a survey, this points to a statement about the quality of goods being a term. The authority for this is Schawel v Reade 2 IR 81, HL. 6.2.5 Whether there was a lapse of time between the statement being made and the contract being formed The longer the time lapse, the more likely the statement will be held to be a representation. Authority for this is Routledge v McKay 1 WLR 615. During pre-​contractual negotiations for the sale and purchase of a motorcycle, the seller, taking information from the registration book, said on 23 October that the cycle was a 1942 model. On 30 October a written contract of sale was made which did not refer to the date of the model. The actual date was later found to be 1930. The buyer’s claim for breach of contract failed. There had been a marked interval between the negotiations and the contract. It is not a scoring system. Some of the above guidelines tend to carry greater weight than the others eg the relative skill and knowledge of the parties. 6.2.6 Summary –​classification of actionable pre-​contractual statements We have seen that the test for determining whether a false preliminary statement is a term or a representation is the common intention of the parties. If that is not clear, the court will consider a number of guidelines and factors. If, after having applied the guidelines, you conclude that a false preliminary statement may have been an express term of the contract, it is then necessary to consider remedies for breach (see Chapter 4). Furthermore, if the false preliminary statement is a misdescription of goods, it may amount to breach of the statutory implied condition that goods sold by description should match that description (Sale of Goods Act 1979, s 13, Supply of Goods and Services Act 1982, s 3 and Consumer Rights Act 2015, s 11), in which case you would need to consider damages, the possibility of rejecting the goods and, if appropriate, the additional remedies available to buyers dealing as consumers (see Chapter 3). If you conclude that a false preliminary statement may have been a representation, the next step is to determine whether it amounts to a misrepresentation. If it does, you should consider the remedies available for misrepresentation. We shall now look at misrepresentation in detail. 6.3 Misrepresentation 6.3.1 What is a misrepresentation? To have a remedy if a representation turns out to be untrue, the innocent party must establish that a misrepresentation has occurred. The definition of a misrepresentation is technical, but basically it is a false statement of fact made by one contracting party to the other before the contract was made and which was one of the factors which induced the other party to enter into the contract. We shall now consider each part of the definition in turn. 150  False Preliminary Statements 6.3.1.1 False statement There must be a false statement The statement may be oral, in writing or by conduct. In Spice Girls v Aprilia World Service BV EMLR 748, the court held that by participating in the filming of a TV commercial, the pop group Spice Girls represented that they did not know or have reasonable grounds to believe that any members intended to leave. This was untrue. Their participation in the filming amounted to a misrepresentation by conduct, and the sponsor who had relied on the misrepresentation when entering into the sponsorship contract was entitled to damages. Conduct should be distinguished from silence The general rule is that silence in itself will not amount to a misrepresentation (Hamilton and Others v Allied Domecq plc UKHL 33). There are four exceptions to this rule namely: (a) where there is a fiduciary relationship between the parties, eg solicitor and client or trustee and beneficiary; (b) where the contract is one of the utmost good faith, eg an insurance contract; (c) where there has been a half-​truth, ie where what was not said positively distorts what was actually said. For example, a car is advertised ‘one lady owner’; this is true but ignores the other previous owners who happened to be men, giving the misleading impression that there has been just one owner and that the one owner was a lady –​the moral is to tell the whole truth, or nothing at all. A case involving a half-​truth is Curtis v Chemical Cleaning and Dyeing 1 KB 805. You considered the facts of this case in Chapter 3 in the context of exemption clauses, and you will consider them again later in this chapter; (d) where a statement of fact is true when made, but a change of circumstances occurs before the contract is formed which makes the statement untrue. Failure to disclose the change in circumstances may amount to a misrepresentation. This is illustrated by With v O’Flanagan Ch 575, where the vendor of a medical practice told the potential buyer in January that the practice was worth £2,000 a year. This was true at the time, but before the sale went through in May profits had dropped considerably due to the vendor having been ill. The change in circumstance was not disclosed to the buyer. This was held to be a misrepresentation and the contract was set aside. 6.3.1.2 The false statement must be fact not opinion or intention To amount to a misrepresentation, the statement must be one of fact and not opinion. However, if the opinion is not genuine, or there are no reasonable grounds for the maker to believe it to be true, or if the statement is made by a person who is in the best position to know the true facts, then there may be an implied false statement of fact which may amount to a misrepresentation if the other elements of the definition are satisfied. In Smith v Land and House Property Corporation (1884) 28 Ch D 7 the seller of a tenanted property described the tenant as ‘most desirable’. The seller knew that the tenant was in arrears with the rent and so had no reasonable ground for describing the tenant as ‘desirable’. Bowen LJ said: ‘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 fact for he impliedly states that he knows facts which justify his opinion.’ Contrast this with the case of Bisset v Wilkinson AC 177. In Bisset v Wilkinson, the seller of a farm was asked about the number of sheep the farm could sustain. The farm had never held sheep, but the seller said that in their personal judgement it would support 2,000 sheep. The statement was held to be opinion rather than fact, because both parties knew that the maker of the statement had not carried on sheep farming on the land and that the land had 151 Contract never been used for this purpose. By contrast, in Smith, the maker of the statement was in possession of facts (knowledge of the arrears of rent) which indicated that the tenant was not desirable. A statement of intention will not amount to a misrepresentation unless it can be shown that the intention was never held. In Edgington v Fitzmaurice (1885) 24 Ch D 459, the directors of a company said the purpose of borrowing money was to expand the company’s business. In fact, the loan was needed to pay the company’s debts. The court held that the directors had made a misrepresentation. They never intended to use the money to expand the business; they had made a false statement about the state of their minds. 6.3.1.3 The statement must be made by one party to a contract to the other If the maker of the statement is not the other contracting party, there cannot be a claim for misrepresentation. It may be possible to bring a claim in tort for negligent misstatement or deceit (both of which are dealt with later in this chapter) if the requisite conditions are satisfied. 6.3.1.4 The statement must have been one of the factors which induced the party to enter the contract The statement does not have to be the only reason why a party enters into a contract provided it did encourage that party to do so. The authority for this is the case of Edgington v Fitzmaurice, which you considered earlier. Where, however, a party does not rely on the other party’s statement but instead has it checked out by their own experts, there will not have been a misrepresentation: the false statement did not act as an inducement to enter the contract. This principle was decided in the case of Attwood v Small (1938) 6 Cl&F 232. A claimant may still claim that a false statement induced them to enter the contract if they were given the chance to verify the facts but did not take it up (Redgrave v Hurd). However, this principle may not be applied where the true position was set out in the contract signed by the claimant. This is illustrated by Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd 2 Lloyd’s Rep 511. The bank had described an investment to the claimant (an experienced businessperson) in general terms. The claimant was later sent a contract setting out the full terms and conditions. The claimant looked at the contract only briefly before signing it. The claimant assumed the terms were in line with what they had been told, but that was not the case. The claimant sued for misrepresentation, but the Court of Appeal held that the bank had not misrepresented the written contract itself. The claimant was an experienced businessperson and had looked at it and decided to sign it. It was not open to the claimant to argue they had been induced by an earlier representation. The facts of this case need to be contrasted with those of Curtis v Chemical Cleaning and Dyeing, considered in Chapter 3 in connection with incorporation of terms. In Curtis the claimant was a consumer who had been misled about the extent of an exclusion clause in a document which had been signed when handing over a wedding dress (for dry cleaning). The claimant in that case asked about the contents of the document before signing and was entitled to rely on what the claimant had been told by the dry cleaners about the exemption. In Peekay Intermark Ltd, however, the claimant was an experienced businessperson and should have known better than simply to rely on a rough and ready explanation of the investment. 152  False Preliminary Statements 6.3.1.5 Burden of proof The party who alleges that a misrepresentation has occurred bears the burden of proving that the definition of a misrepresentation has been satisfied. We have looked at what constitutes a misrepresentation. We shall now consider the remedies which may be available. 6.3.2 Remedies for misrepresentation To some extent, the remedies available for misrepresentation depend on whether the misrepresentation is fraudulent or non-​fraudulent. We shall start by considering the remedy of rescission, which is available whether the misrepresentation is fraudulent or non-​fraudulent. 6.3.2.1 Rescission The effect of any misrepresentation is to make the contract voidable, ie the contract is valid unless and until the innocent party rescinds it. If a contract is rescinded, it is sometimes said that the contract is ‘set aside’ or ‘avoided’. The innocent party does not have to rescind the contract –​they may affirm the contract, ie treat the contract as continuing. (a) How to rescind a contract In order to rescind the contract, the innocent party must notify the other party so that they are aware that this is what the innocent party has decided to do. But what if the other party has disappeared? What then can the claimant do to rescind? Imagine for a moment that you sell your car through your local newspaper to a stranger. A couple of days later, you discover you have been conned (eg the cheque you were given as payment is dishonoured). What you would want to do is rescind the contract and get back your car, but the rogue buyer has disappeared. What would you do? Report the incident to the police? In Car and Universal Finance Co Ltd v Caldwell 1 All ER 290, the innocent party, in similar circumstances, tried to recover the car by reporting the matter to the police and the Automobile Association. The court held that by doing this, the innocent party had made it clear that they sought to rescind the contract, and as such ownership of the car immediately reverted to them. Consequently, when the rogue buyer later purported to sell the car to an innocent third party, the rogue no longer owned it (as ownership had reverted to the original owner) and so the rogue could not pass ownership of the car on to the buyer. So, as regards the two innocent parties (ie the original seller and the ultimate buyer), it was the original seller who was held entitled to the car. As well as giving notice to the defaulting party, a claimant can always apply to court for a formal order of rescission. In fact, in some cases the claimant may have to apply for an order of rescission if the other party will not cooperate. One of the main things to remember about rescission is that it is potentially available for all forms of misrepresentation, whether fraudulent or non-​fraudulent, provided it is not barred in either practical or legal terms. You will be looking at the bars to rescission shortly. Having looked at how to rescind a contract, we shall now consider the effect of rescission. (b) The effect of rescission The aim of rescission is to restore both parties as far as possible to their pre-​contract positions. So, if a contract is rescinded, each party should return to the other money or property transferred under the contract, and neither party need perform any future obligations. Think of it as hitting the rewind button –​to go back to the start. 153 Contract Example Zena has bought a car from Keith. Keith has delivered the car to her and she has paid him £7,000. She still has a further £500 to pay and she will pay this when he installs a Sat Nav in the car. Assume that Keith has made a misrepresentation to Zena, eg about the age or mileage of the car. If Zena rescinds: Zena will return the car to Keith. Keith will return the £7,000 Zena has already paid. Keith will not have to install a Sat Nav. Zena will not have to pay Keith the further £500. Notice that each party must return to the other money or property transferred. If Zena wishes to recover the money she has paid to Keith, she must be prepared to return the car. She cannot keep the car and get her money back. The principle behind this rule is to make sure that Zena is not unjustly enriched by rescinding the contract. (c) Bars to rescission Rescission is an equitable remedy and the right to rescind will be lost in certain situations. When this happens, there is said to be a bar to rescission. There are four bars to rescission namely: where a bona fide purchaser has acquired rights in the property; affirmation; undue delay; where restitution is impossible. The first three listed above are equitable bars. The last one is a practical bar to rescission. Let us now consider each of these bars in turn. Where an innocent purchaser acquires an interest in the property before the contract is rescinded Think back to the case of Car & Universal Finance v Caldwell where a rogue bought a car as a result of a misrepresentation and then disappeared. Can you remember what the innocent party did as soon as they discovered that they had been conned? The seller notified the police and the Automobile Association (AA), and that had the effect of immediately transferring ownership of the car back to them. This was important on the facts, as following notification to the police and the AA the rogue had sold the car to an innocent third party, and the main question before the court was which of the two innocent parties (ie the original seller or innocent buyer) should get the car, and which should be left having to sue the rogue for their loss. As the original seller was deemed to have rescinded the contract (and thus regained ownership of the car) before the sale to the innocent purchaser, the court found in favour of the original seller. Had the facts been different and the rogue had resold the car to the innocent purchaser before the police and the AA had been notified, rescission would have been barred. An innocent purchaser who acquires an interest in the property before the contract is avoided is a bar to rescission. 154  False Preliminary Statements Affirmation A second bar to rescission is affirmation. On discovery of a misrepresentation, an innocent party has a choice: elect to affirm the contract, or rescind it. If the innocent party elects to affirm, they cannot then change their mind. Affirmation may be express (ie the misled party may tell the other they are continuing with the contract) or implied. Affirmation will be implied if the misled party behaves in such a way as to lead the other to believe that they are continuing with the contract. Going back to the Example above, if Zena knew about Keith’s misrepresentation but did something that indicated she was treating the contract as continuing (eg, she got him to fit the Sat Nav and paid him the £500), she would probably be regarded as affirming the contract and would lose her right to rescind. Undue delay A third equitable bar to rescission is undue delay, which is illustrated by the case of Leaf v International Galleries 2 KB 86. The claimant had bought a painting which had been described as an original John Constable. Five years later, the claimant discovered it had not been painted by Constable. As a result, the claimant sought to rescind the contract for the purchase of the painting, but the action failed due to lapse of time. Lord Denning thought that the claimant’s claim to rescind was barred because the right to reject the goods for breach of a condition of the contract would have been barred (Chapter 3). The claimant had had the chance to examine the picture within a few days of purchase and discover the misrepresentation. A delay of five years meant the contract could not be rescinded. The Leaf case illustrates that, in calculating delay, the court does not necessarily look at when the misrepresentation was actually discovered, but at when it should have been discovered. Lord Denning thought the misrepresentation should have been discovered very soon after purchase. It was not. However, the principle that time runs from when the misrepresentation should have been discovered does not apply to a fraudulent misrepresentation. If there is a fraudulent misrepresentation then time runs from when the misrepresentation was actually discovered. We shall look at what constitutes fraudulent misrepresentation later in this chapter. Where it is impossible for a party substantially to restore goods or property to the other We saw in the Example above that if a contract is rescinded then each party should return to the other property and money which had been transferred under the contract. So Zena had to return the car to Keith, and Keith had to refund the price. But what if in the meantime the car had been involved in an accident and had been damaged, or even destroyed? Would rescission then have been possible? If the car had simply been damaged then substantial restoration would be possible and a court would probably order Zena to return the car, but she would not get back the full price she had paid; instead, the price would be reduced to reflect the extent of the damage to the car. If the car had been destroyed, arguably restoration would be impossible and rescission would be barred. A case which illustrates the fact that restoration does not have to be exact is Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. There, a contract for the purchase of a mine was rescinded even though the mine had been worked and was therefore not in the same state as when it had been purchased. Lord Blackburn said that the court: can take account of profits and make allowance for deterioration and I think the practice has always been for a court of equity to give this relief whenever it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract. 155 Contract In the Erlanger case, the purchaser returned the mine, and the court ordered that the purchaser should give an allowance to the seller for the profit they had made using it, and for the deterioration in the state of the mine. One case in which this bar did operate and where the contract was not rescinded is Crystal Palace FC (2000) Ltd v Iain Dowie EWHC 1392 (QB). The claimant had entered into a compromise agreement with Iain Dowie (its former manager) releasing him from his employment contract with the club. Under the employment contract, the defendant had been required to pay the club £1 million compensation if he left prematurely to work for a premiership club. The compromise agreement released the defendant from this obligation to pay the compensation. Very shortly after entering the compromise agreement, the defendant was appointed manager of a premiership club. The court held that the defendant had deceived the claimant into entering the compromise agreement. He had lied about his reasons for wanting to leave, but the court refused an order for rescission. If the compromise agreement had been rescinded, it would have revived the defendant’s employment contract with the claimant. The claimant had in the meantime appointed another manager, and the defendant was now employed as a manager of another club. The defendant could not perform two employment contracts at the same time. Practical justice meant the making of appropriate orders for damages, but not an order for rescission. It is for this reason that a contract for the sale of a business is rarely rescinded. A business is likely to have changed its position (eg by entering into contracts with third parties), rendering rescission impossible. Summary To sum up, there are four bars to rescission, ie: where an innocent purchaser has acquired an interest in the subject matter of the contract before purported rescission of the contract; affirmation; undue delay; where it is impossible substantially to restore goods or property. (d) Indemnity If a contract is rescinded then the innocent party can claim an indemnity for expenses necessarily incurred as a result of entering into the contract. This means the indemnity is very restricted and is only available as part of rescission. In Whittington v Seale-​Hayne (1900) 82 LT 49 the claimant took a lease of premises belonging to the defendant. A clause in the lease provided that the tenant had to do certain repairs and pay rent and rates. The claimant planned to use the premises to breed chickens. Before the contract, the defendant told the claimant that the premises were in a good sanitary condition, but this was not the case. The water supply was polluted and the claimant and their manager became ill and many chickens died. The claimant wanted to rescind the contract (ie give up the lease) and also asked for an indemnity to cover the following: cost of the chickens; loss of profit on the sale of the chickens; 156  False Preliminary Statements rent paid to the defendants; vet’s bill; medical expenses; repairs carried out under the provisions of the lease; and rates paid in accordance with the lease. Which items do you think an indemnity would cover? Which losses had necessarily been incurred under the contract, ie the lease? Only the rent, repairs and rates, all of which had been obligations under the lease. The lease did not say the farm had to be used to breed chickens, so the claimant could not get an indemnity for the loss of the chickens, loss of profit and vet’s and medical bills. The claimant in Whittington v Seale-​Hayne wanted the indemnity because, when the case was decided in 1900, damages were only available for fraudulent misrepresentation and here the misrepresentation had not been made fraudulently. Asking for an indemnity was a way of getting financial compensation. Now, damages are usually available for non-​fraudulent misrepresentation, and an indemnity is only likely to be claimed in a situation where the claimant has no right to damages. We will consider when damages are available for non-​ fraudulent misrepresentation later in the chapter. (e) Damages in lieu of rescission In certain cases where the claimant asks the court for an order of rescission, the court may award damages in lieu of rescission under s 2(2) of the Misrepresentation Act 1967: 2(2) 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. Note the following: The court can award damages in lieu of rescission only if the misrepresentation is non-​fraudulent. The claimant does not have a right to damages under s 2(2). The court has a discretion to award damages in lieu of rescission. The court will not award damages in lieu of rescission under s 2(2) if the right to rescind has been lost, ie if one of the bars to rescission applies. A court is likely to exercise its discretion only where the false statement was about a minor matter and it would be unjust to allow the other party to rescind the contract. 6.3.2.2 Damages Where a misrepresentation has occurred, the innocent party may be able to claim damages in addition to either rescinding the contract or affirming it. The nature of the claim depends to a certain extent on whether the misrepresentation was fraudulent or non-​fraudulent. (a) Damages for fraudulent misrepresentation If the innocent party can prove that the misrepresentation was made fraudulently then they can sue for damages in the tort of deceit. 157 Contract If a party wishes to allege fraudulent misrepresentation then the onus is on that party to prove fraud, ie they must show the false representation was made knowingly or without belief in its truth, or recklessly, careless whether it be true or false (per Lord Herschell in Derry v Peek (1889) 14 App Cas 337). A statement made honestly will therefore not be fraudulent. Unless it is an obvious case of fraud, it may be difficult to prove. It will often be one person’s word against another’s. Damages are assessed on tort principles, ie the court will aim to put the innocent party in the position they would have been in if the misrepresentation (and the contract) had not been made. So, basically, it calculates how much the claimant is ‘out of pocket’ as a result of the misrepresentation. However, the damages for fraudulent misrepresentation may be more extensive than is usually the case in tort because the usual tortious remoteness rule of reasonable forseeability does not apply, and the claimant can recover for all loss directly resulting from the defendant’s misrepresentation. The case of East v Maurer 2 All ER 733 involved a fraudulent misrepresentation by the seller of a hair dressing salon. East had bought the business in reliance on the seller’s deliberate false assertion that he (Maurer) intended to stop working at his other hair dressing salon in the same town. As a result of the unexpected competition from Maurer, East’s business was unsuccessful and was eventually sold at a loss. One of the questions the Court of Appeal had to consider was what could be claimed in damages to represent the loss of profit suffered by East as a result of the false statement. The court concluded that tortious principles should be used to calculate the loss of profit suffered –​meaning that the innocent party should be put into the position they would have been in, had the misrepresentation not been made. If the misrepresentation had not been made, East would not have bought that particular hair dressing salon; he would have bought a similar one instead. So East was awarded damages representing the difference between the profit he in fact made and the profit he would have made had he bought a similar business. This is a different calculation to that which is used when determining damages under ordinary breach of contract principles that you considered in Chapter 4. There the aim of damages is to put the innocent party, so far as money can do it, into the position they would have been in, had the contract been properly performed, ie loss of bargain damages (Robinson v Harman). So, if damages in East v Maurer had been awarded on this basis, East would have got a sum representing the difference between the profit he actually made and the profit he would have made had the statement been true. Having looked at fraudulent misrepresentation, we shall now go on to consider liability for non-​fraudulent misrepresentation. (b) Damages for non-​fraudulent misrepresentation The claimant may ask for damages under s 2(1) of the Misrepresentation Act 1967. All the claimant has to show is that there was a misrepresentation that caused loss. Damages under s 2(1) are awarded in accordance with tort principles. The aim of the court is to put the innocent party in the position they would have been if the misrepresentation (and the contract) had not been made. Also, in the case of Royscot Trust Ltd v Rogerson 3 All ER 294, the Court of Appeal held that damages under s 2(1) should be awarded in the same way as damages for fraudulent misrepresentation in the tort of deceit. The effect of this decision is that when damages are awarded under s 2(1), the usual forseeability rule does not apply. We shall now look in more detail at s 2(1): 2(1) 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 158  False Preliminary Statements 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. Note the following: Section 2(1) can only be used by a party to a contract against the other contracting party. The section applies ‘where a person has entered into a contract after a misrepresentation has been made to them by another party thereto’. If the false preliminary statement has not been made by the other contracting party then s 2(1) will not help the claimant. The only claims will be in the tort of deceit or for a negligent misstatement. (We shall look briefly at negligent misstatements later in this chapter.) Once the claimant establishes that a misrepresentation has been made then the defendant will be liable to pay damages under s 2(1) unless the defendant proves that they had reasonable grounds to believe and did honestly believe up to the time the contract was made that the facts represented were true. Notice, therefore, that the burden of proof is on the party making the misrepresentation. Part of s 2(1) says ‘… 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 …’. In the case of Royscot Trust Ltd v Rogerson 2 QB 297, Balcombe LJ interpreted the words ‘so liable’ literally, ie to mean liable as if the misrepresentation had been made fraudulently; rather than to mean simply ‘liable in damages’. Literal interpretation of the words ‘so liable’ ignores the policy behind the introduction of s 2(1), which was to allow damages to be recovered where the misrepresentation had been made negligently (rather than fraudulently). The damages available under the tort of negligence are for reasonably foreseeable losses, whereas in the tort of deceit a claimant is entitled to recover all losses, even if not reasonably foreseeable. The policy behind the broader principle of damages for deceit was to punish a deliberate wrongdoing. As the purpose behind s 2(1) was simply to introduce a right to damages for negligent misrepresentation, is it likely to have been Parliament’s intention that more extensive damages should be available under the section than under the tort of negligence? Balcombe LJ’s interpretation has been criticised, and in the case of Smith New Court Ltd v Scrimgeour Vickers Ltd 4 All ER 769, Lord Steyn said: The question is whether the rather loose wording of the statute compels the court to treat a person who was morally innocent as if he was guilty of fraud when it comes to the measure of damages. There has been trenchant criticism of the Royscot case … since this point does not directly arise in the present case, I express no concluded view of the correctness of the Royscot case. The decision in Royscot has the effect of reducing the importance of the tort of deceit. There seems little point in trying to establish that the defendant was fraudulent when damages will be awarded in the same way under s 2(1) and the burden of proof is reversed (ie, the defendant will be liable to pay damages under s 2(1) unless they can show that they honestly and reasonably believed the statement to be true). For the time being, however, the Royscot case represents the legal position. We have seen that once the claimant establishes that a misrepresentation has been made which has caused loss, the defendant will be liable to pay damages under s 2(1) unless the 159 Contract defendant proves that they had reasonable grounds to believe, and did believe, up to the time the contract was made, that the facts represented were true. The difficulty faced by the misrepresentor in discharging the burden of proof under s 2(1) is illustrated by Howard Marine & Dredging v Ogden 2 All ER 1134, CA. In this case the owner of a barge (the defendant) told a potential charterer that its capacity was about 1,600 tonnes. The defendant based this figure on their recollection of the relevant entry in the Lloyd’s Register, which stated that the capacity was 1,800 tonnes. The capacity was in fact much less, and the defendant would have discovered this if they had consulted the ship’s documents. The charterers later sought to claim damages from the defendant under s 2(1) of the Misrepresentation Act 1967 and succeeded. The defendant had failed to prove that it had had reasonable grounds to believe in the truth of the statement. The defendant had only consulted Lloyd’s Register. This was not enough to give reasonable grounds for believing it to be true. The correct information could be found in the shipping documents, which had been seen, but then forgotten. This case shows how difficult it is to establish reasonable grounds for belief. The maker of the statement had checked an authoritative source which most people would assume would be accurate, but the defendant was still liable under s 2(1). If the defendant does establish reasonable grounds to believe the statement was true then the claimant will have no right to damages under s 2(1). However, as we have seen, the claimant may be able to rescind the contract (if rescission is not barred and the court does not exercise its discretion to order damages in lieu of rescission under s 2(2) of the Misrepresentation Act 1967). So, if the defendant establishes the defence to the claimant’s s 2(1) damages claim and rescission is barred, the claimant will have no remedy. Misrepresentation Act 1967, s 2(1) –​summary of key points Section 2(1) provides that once the claimant has established that a misrepresentation has been made and that they have suffered loss as a result, then the defendant will be liable to pay damages unless the defendant can prove that they had reasonable grounds to believe, and did believe up to the time the contract was made, that the statement was true. The burden of proving reasonable grounds for belief is on the party making the statement and this may be difficult to do –​Howard Marine & Dredging v Ogden. Damages under s 2(1) are awarded in accordance with tort principles. The aim of the court is to put the claimant in the position they would have been if the misrepresentation (and the contract) had not been made. Damages under s 2(1) are awarded in exactly the same way as damages for fraudulent misrepresentation in the tort of deceit, which means that the usual forseeability rule does not apply –​Royscot Trust Ltd v Rogerson. 6.4 Negligent misstatements It may be possible for a person to sue for damages in the tort of negligence if there has been a negligent misstatement. Generally, pure economic loss is not recoverable in tort. However, in the case of Hedley Byrne & Co v Heller AC 465, the House of Lords recognised an exception to this rule in the case of a negligent misstatement which caused economic loss. A negligent misstatement is not limited to a statement of fact, eg it can be a statement of opinion. Also, it is not limited to a false statement made by the other contracting party. 160  False Preliminary Statements In Hedley Byrne, the House of Lords said, obiter, that a duty of care can extend to careless statements where a ‘special relationship’ exists between the parties. Briefly, it means the statement was relied on, the maker knew it was being relied on, and it was reasonable to rely on it. One advantage of suing for negligent misstatement is that the statement need not amount to a misrepresentation as such, eg there need not be a contractual relationship between the parties and the statement need not be one of fact. If, however, misrepresentation can be proved, it is usually better to bring an action under s 2(1) of the Misrepresentation Act 1967, as the burden of proof is reversed and the damages are better (eg as a result of Royscot there is no longer a problem with remoteness of damage under s 2(1)). The claimant in a negligent misstatement claim must prove that the maker of the statement owed them a duty of care and had breached this duty causing loss, and the normal negligence remoteness rules will apply –​ie the loss must be forseeable. 6.5 Conclusion You have now completed the topic of false preliminary statements. Set out below is a suggested structure for tackling problem questions on this topic. Suggested structure 1. Is there a contract? Usually there is no difficulty establishing that all the essential elements are present. 2. Is the statement a term and/​or a representation? The test is the intention of the parties. Consider the guidelines. 3. If the statement is a term of the contract, the maker of the statement will be in breach of contract. Briefly consider remedies available. 4. If the statement is a representation, can the injured party prove misrepresentation? Define misrepresentation. Is each part of the definition satisfied? 5. If there has been a misrepresentation, consider the remedies available: (a) Rescission. Do any of the bars to rescission apply? Damages under s 2(2) in lieu of rescission? (b) Damages. What kind of misrepresentation is it? Even if fraudulent, it may be easier to sue for damages under s 2(1) of the Misrepresentation Act 1967. Deal with the burden of proof and how damages are assessed. 6. If a false statement has been made by a person who is not a party to a contract, consider negligent misstatement. ACTIVITY 1 False preliminary statements Using the suggested structure above attempt to answer the problem question set out below. Then compare your answer with the Feedback to see how well you have remembered and understood the rules relating to the classification of pre-​contractual statements and the remedies available if they are actionable. The question also creates links with some of the statutory implied terms you looked at in Chapter 3. 161 Contract Facts On 1 December, Michael, a private collector of antiques, saw a carved ivory elephant in an antiques shop on the local high street. Andrea, the owner of the shop, told him that in her opinion it was from the Mogul period in the sixteenth century. She added that she was sure that the elephant’s eyes were made out of precious stones. Michael did not buy the elephant but said he would think about it. The next day he went to see his friend Carol in her office. She specialises in sixteenth-​century history. Michael asked her to look at the elephant for him. Carol did so and assured Michael that it was genuinely from the Mogul period in the sixteenth century. Carol did not know, however, if Andrea’s statement about the eyes was true. On 8 December, Michael bought the elephant for £300. Six months later he took the elephant to be valued by an auctioneer. The auctioneer told him, correctly, that it was a nineteenth-​century reproduction, the eyes were not made from precious stones, and that it was worth only £100. Explain Michael’s legal position as regards Andrea. FEEDBACK Is there a contract? Michael clearly has a contract with Andrea. Are the statements made by Andrea terms or only representations? A term is part of the contract, whereas a mere representation does not form part of the contract. Whether a statement is a term or a representation depends on the intention of the parties. If the intention is not clear, then the court will apply an objective test. The court decides whether a reasonable person would consider the statement to be a term or a representation. There are various guidelines to help the court. The statements were not made immediately before the sale as Michael only bought the elephant a week later. This timing suggests the statements are just representations (Routledge v McKay). Consider which party has special skill and knowledge. If the maker of the statement has special skill and knowledge, this suggests the statement is a term of the contract (Dick Bentley v Harold Smith Motors), whereas if the other party has special skill and knowledge, it is more likely to be a representation (Oscar Chess v Williams). Here Andrea only has a local high street antique shop, and Michael is a collector and may have greater skill and knowledge. Also, Andrea said that in her opinion the elephant was sixteenth century and, although she said she was sure the eyes were made out of precious stones, ‘precious’ is rather vague. She did not seemingly encourage Michael to check, which would have suggested that the statements were representations (Ecay v Godfrey), nor did Michael indicate that these matters were of vital importance to him, as in Bannerman v White, which would have suggested that the statements were terms. However, looking at the guidelines overall, it seems likely that the statements are just representations. (If this is a sale by description, then a term will be implied by s 11 of the Consumer Rights Act 2015 that the goods shall match the description (Chapter 3).) Consider remedies for breach of contract. If either statement is a term, then Andrea will have committed a breach of contract. If a condition of the contract is broken, the buyer can prima facie reject the goods; if the term implied by s 11 of the Consumer Rights Act 2015 has been breached, Michael will have lost 162  False Preliminary Statements the short-​term right to reject (as he has had the goods for six months), but he could still ask for a price reduction or exercise the final right to reject. However, as we have already seen, it is more likely that the statements are representations. Consider misrepresentation. Michael may be able to establish that there have been misrepresentations made by Andrea. Define misrepresentation. A misrepresentation is a false statement of fact made by one party to the other which induces the other party to enter into the contract. The burden of establishing misrepresentation will be on Michael. Go through the definition to see whether it is satisfied. To be a misrepresentation, the statements must be statements of fact and not opinion (Bisset v Wilkinson, Smith v Land and House Property Corporation). Andrea’s statement about the elephant being sixteenth-​century appears to be an opinion (provided it was an honestly and reasonably held one) and so will not be a misrepresentation. She said she was sure the eyes were made from precious stones. This may be a statement of fact. If either statement is a statement of fact, for it to be a misrepresentation it must also have induced Michael to enter into the contract. If he relied on the advice of his friend Carol, and has not relied on what Andrea said at all, then he will have no action in misrepresentation (Attwood v Small). Carol assured Michael the elephant was from the Mogul period, but did not know whether Andrea’s statement about the eyes was true. He may well have relied on what Carol said about the age of the elephant and on what Andrea said about the eyes. In any case, it is not necessary for Andrea’s statement to be the sole inducement for him to have a claim in misrepresentation (Edgington v Fitzmaurice). Consider remedies for misrepresentation Misrepresentation makes the contract voidable so Michael can rescind the contract by notifying Andrea. The aim of rescission is to restore the parties to their pre-​contractual position so Michael will return the elephant and Andrea will return the money. However, the fact that Michael has delayed for six months may constitute a bar to rescission (Leaf v International Galleries). If so, he will not be able to return the elephant and get his money back. However, he can still claim damages, which can be awarded regardless of whether the contract is rescinded. There is no suggestion on the facts that Andrea made a fraudulent misrepresentation. Michael would have the burden of proving fraud and this is often difficult to do. It is easier for Michael to claim under s 2(1) of the Misrepresentation Act 1967. Andrea will be liable under s 2(1) unless she can show she had reasonable grounds to believe that the statements were true. This is very difficult to do (Howard Marine & Dredging v Ogden). Damages will be awarded in the same way as for fraudulent misrepresentation (Royscot Trust Ltd v Rogerson). The aim of the court will be to put Michael in the position he would have been in if the misrepresentation had not been made (the usual aim in tort), and he can recover for all direct loss. The usual remoteness rules will not apply. He will recover the amount he paid less the value of the elephant. If Andrea can show reasonable grounds for believing what she said was true, then Michael will not obtain damages under s 2(1). The court would not be in a position to award damages in lieu of rescission under s 2(2) of the Misrepresentation Act 1967 if rescission is indeed barred by undue delay (as mentioned above). 163 Contract SUMMARY When advising a client about a false preliminary statement (whether as a potential claimant or defendant), you must be able to classify the false statement to see if it is actionable and, if so, what will be the likely outcome of a case in terms of success and remedies. Only with that information to hand will the client be able to make a risk/​cost assessment of the claim and decide whether it is worth pursuing/​defending. So, in this chapter, you have analysed what constitutes a misrepresentation (in the technical sense) and compared it with breach of an express term. You have studied the remedies available for misrepresentation, considered rules of statutory interpretation in the context of s 2(1) of the Misrepresentation Act 1967 and compared and contrasted the different methods of assessing damages in contract and tort. 164