Misrepresentation PDF - Contract Law

11. Untrue statements Misrepresentation and unilateral mistake Contract Law (3rd edn) TT Arvind p. 305 11. Untrue statements Misrepresentation and unilateral mistake TT Arvind, Professor of Law and Head of Departme...

11. Untrue statements Misrepresentation and unilateral mistake Contract Law (3rd edn) TT Arvind p. 305 11. Untrue statements Misrepresentation and unilateral mistake TT Arvind, Professor of Law and Head of Department, York Law School, University of York https://doi.org/10.1093/he/9780198867777.003.0011 Published in print: 12 July 2022 Published online: September 2022 Abstract This chapter examines how English law deals with the problem of untrue statements through the doctrines of misrepresentation and unilateral mistake. It begins with an overview of contractual transactions involving at least some measure of information asymmetry and proceeds by considering the basic principles of the law of misrepresentation. It then considers the three elements of false statements: the absence of general duties to disclose relevant facts, an objective approach to construing ambiguous statements, and a distinction between statements of fact and statements of opinion. It also discusses the remedies available to the representee in the case of misrepresentation, along with two types of unilateral mistakes recognized in law: unilateral mistakes as to identity and unilateral mistakes as to terms. The chapter concludes with an analysis of misleading selling practices and statutory remedies which are available to victims of misleading selling practices under the law of unfair commercial practices. Keywords: untrue statements, misrepresentation, unilateral mistake, contract, information asymmetry, false statements, remedies, identity, terms, misleading selling practices ‘For truth is precious and divine; * Too rich a pearl for carnal swine.’ 11.1 Introduction: facts and the decision to contract 11.2 Untrue statements: the law of misrepresentation 11.2.1 False statements Page 1 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Duties to disclose The role of reasonableness The fact/opinion distinction 11.2.2 Materiality 11.2.3 Remedies Rescission Damages Remedies against third parties 11.3 Unilateral mistakes 11.3.1 Mistakes as to identity and the problem of identity theft Mistake and misrepresentation Identity and attributes Shogun Finance and the documentary/face-to-face distinction 11.3.2 Unilateral mistakes as to terms p. 306 11.4 Misleading selling practices: the Consumer Protection from Unfair Trading Regulations 2008 11.4.1 Transactions covered by the Regulations 11.4.2 Prohibited practices 11.4.3 The ‘significant factor’ test 11.4.4 Remedies 11.5 In conclusion: contract and the pre-contractual process Problem 11: setting the context Consider the facts set out in the following scenario: Page 2 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Student anger as college’s dodgy practices exposed Students at Sarum College are up in arms after the college’s graduate earnings claims were shown to be riddled with serious inaccuracies. In its most recent prospectus, the college painted a rosy picture of its students’ employment prospects, citing government studies in relation to the premium a typical graduate could expect to earn over the course of their career. A substantial number of students at the college have confirmed that this statement played an important role in their decision to study there. Now, however, documents leaked by a whistle-blower have suggested that these figures bear little resemblance to the actual earnings of the college’s graduates. Last year, the Institute for Economic Research and Analysis (IERA), an independent think tank, carried out a study of the earnings of graduates working in England. It found that graduates of a number of institutions earned (on average) less than non-graduates. The IERA did not publish the names of these institutions, although individual institutions were informed of its findings. Documents which we have seen show that Sarum College is one of the institutions whose graduates earn less than non-graduates. Shockingly, it appears that the college decided that it would not alter its marketing material in any way, despite the IERA’s findings. A spokesperson for the college would neither confirm nor deny the accuracy of the leaked documents, but insisted that the college had acted appropriately. She said that the prospectus was based on government data, and pointed out that it made no specific claims in relation to its graduates’ earnings. Student representatives, however, have declared themselves ‘entirely unsatisfied’ with the college’s statement. They are understood to be demanding a substantial refund of their fees on the basis that the college induced them to enrol under false pretences. This problem presents a classic situation where one party enters into a contract relying on the other party’s statements, which subsequently turn out to be somewhat misleading. But how much of an obligation should a party have to place the truth before the other party? When does a statement become too misleading to be justifiable? And what recourse should this give rise to? p. 307 11.1 Introduction: facts and the decision to contract When we decide to enter into a contract, we invariably base our decision on our knowledge, beliefs, and impressions about the things we are contracting for, and the persons we are contracting with. Consider how we as consumers decide to buy a particular brand of smartphone (eg an iPhone) rather than another Page 3 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake (eg a Samsung). We form an impression about the characteristics of each phone from independent reviews, advertisements, our friends’ feedback, and the sales pitch we encounter in store. On the basis of that impression, we come to a decision as to which phone better suits our needs. Businesses work in a similar way. A company deciding which supplier it wants to use will also form an impression about the desirable and undesirable characteristics of each supplier on its shortlist based on information it gathers, and come to a final decision based on those impressions. A significant portion of this information comes from the person with whom we are contracting. The phraseology used in the law of contract can often make it seem that the law assumes all parties to the contract to have the same set of background factual information. The legal rules on interpretation, for example, speak of ‘the information available to the parties’, in the plural, as if the information available to 1 party A is the same as the information available to party B. But this is not usually true. It is almost always the case that one party knows things the other does not, and that the only source of information you have for some facts is the other party. Problem 11 at the start of this chapter presents one example, but the majority of the transactions we enter into on an everyday basis are similar. Consider the following scenario: In this example, you know nothing at all about the condition of the phones you see. You do not know whether they are in working order, whether the battery holds charge, or for that matter even whether the shop has put a completely different set of innards into the case of a phone. More importantly, you have no practicable way of ascertaining any of these things. Even if you had the necessary technical skill, the shop is unlikely to let you disassemble the phone or subject it to tests to satisfy yourself as to its condition. You are entirely dependent on the information provided to you by the shop. Situations like this are not exceptional. Economists describe them as involving ‘imperfect knowledge’, or 2 ‘information asymmetry’. The vast majority of contractual transactions involve some measure of information asymmetry. Information asymmetry creates the scope for things to go wrong in at least two p. 308 ways. First, a party may fail ↵ to disclose important information which would have swayed the other party’s decision had she known of it. The survey data in Problem 11 is a clear example. So too is Illustration 11.1, where a sales assistant could easily show you a phone without telling you that it had a cracked screen which the shop has replaced with a non-original third party screen. Secondly, a party may provide incorrect information, by telling the other party something that is not in fact true. Illustration 11.1 You go into a used electronics shop intending to buy a second-hand smartphone. A salesman in the shop shows you a number of different phones, and tells you a little bit about the condition of each phone. Page 4 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake One way of dealing with the problem is through the contract. A contract may, for example, impose an 3 obligation on one party to ensure that the information is true. If the parties do this, then the party who 4 has taken on that obligation is liable for breach of contract if the information is false. But where the parties fail to include a term, the task of dealing with the problems posed by information asymmetry falls to the law. In these cases, the phenomenon of information asymmetry poses a threefold problem. The first problem is figuring out when to assign significance to information asymmetry. In everyday transactions, information asymmetry is often irrelevant. Consider the following advertisement: Illustration 11.2 The London and South-Western Railway Company The cleanest railway toilets in England! The toilets on our trains are cleaned three times as often as the toilets on any other train company’s services. The train company clearly knows a lot more than you do about how often their toilets are cleaned. But their superior knowledge will typically have little, if any, relevance to your decision to contract. A commuter’s decision to take a train will be determined more by their schedule than by the frequency at which the toilets are cleaned. In other situations, however, including those described in Illustration 11.1 and Problem 11, the information asymmetry and the party’s statements do, in fact, profoundly affect the decision to contract. The task for the law is to establish a sensible basis on which to distinguish situations where information asymmetries matter from those in which they do not. The second problem is one of figuring out how to deal with information asymmetry. What remedies should the parties have? Should the affected party be able to get out of the contract? Should the court order the payment of compensation? The third problem is one of figuring out how broad a duty the court should impose. Should the law take a ‘do not conceal’ approach, in which it imposes an affirmative obligation on the parties to disclose all relevant facts to each other (thus requiring the seller in Illustration 11.1 and the college in Problem 11 to make a clean breast of the facts)? Or should it take a much lighter-touch ‘do not lie’ approach, where it p. 309 merely ↵ imposes an obligation to ensure that the things you do say to your counterparty are accurate (thus requiring the seller in Illustration 11.1 and the college in Problem 11 to answer all questions honestly, but not to volunteer information unless requested)? There is no easy answer to these questions, and different legal systems take different approaches to solving the underlying problem. Some legal systems, particularly civil law systems such as Germany, deal with the problem of information asymmetry by imposing a pre-contractual duty of good faith, which prevents a party having superior knowledge from using that superior knowledge to the detriment or disadvantage of the other party. English law takes a very different approach. There is no general duty to Page 5 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake disclose relevant information in English law, nor are there any general principles specifically directed to the problem of information asymmetry. Instead, as we will see in greater detail in this chapter, it deals with the problem of untrue or misleading statements through three different doctrines. Two of these, misrepresentation and mistake, apply to all transactions. The third, unfair commercial practices, creates special rules that only apply to consumer transactions. Misrepresentation is by far the broadest and more generally applicable doctrine. We will therefore begin by examining how the law of misrepresentation works, the sort of situations in which it applies, and the remedies it provides (section 11.2). We will then move to briefly examine the law of mistake (section 11.3), followed by an outline of two specific unfair practices related to untrue statements; namely ‘misleading actions’ and ‘misleading omissions’ (section 11.4). We will conclude with a comparative assessment of how well English law deals with the underlying problem of information asymmetries and the duties of the parties in pre-contractual discussions. 11.2 Untrue statements: the law of misrepresentation In conceptual terms, misrepresentation is the simplest and most direct way of dealing with the problem of untrue pre-contractual statements. The basic principles of the law of misrepresentation can be stated pithily. If one party makes a statement of fact to another (a ‘representation’), and that statement turns out to be untrue, that party has made a misrepresentation. If the misrepresentation contributes to the other party’s decision to enter into the contract, it is said to have induced the contract. Parties who were induced to enter into a contract as a result of a misrepresentation have two remedies. First, they have the remedy of rescission, which gives them the option to rescind or cancel the contract by giving notice to the other party. Secondly, they can in some cases claim damages for the loss caused by the misrepresentation. If the misrepresentation did not induce the contract, in contrast, the contract remains fully valid and no consequences flow from the misrepresentation. Despite its conceptual simplicity, the details of the law of misrepresentation are somewhat complex, especially on the question of the parties’ remedies. As with many areas of English contract law, the legal rules pertaining to misrepresentation represent a complex mixture of common law, equity, and statute. More unusually, some aspects of the remedies for misrepresentation are derived from tort law rather than p. 310 contract, and remain subject to overlapping actions in tort. This has left the law with a number ↵ of peculiar features, which the courts and Parliament have only been partially successful at ameliorating. The source of this complexity lies in the fact that dealing with information asymmetries always involves a balancing act. Acquiring and verifying information can be onerous even for the person making the representation. Consider, once again, Illustration 11.1, and the specific position of a seller who makes a representation that a phone is in full working order. A phone can be used in a lot of ways—ranging from emulating vintage gaming consoles to aiding medical surgery—not all of which a seller will be able to test. How much does the seller have to do to verify what she is saying before making a representation? Can she defend herself against a charge of misrepresentation by saying that she carried out all the tests that a reasonable person would have, and honestly believed her statement? Equally, can the college in Problem 11 defend itself by saying that it based its statement on one of two possible data sets? Page 6 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Where we set the boundary of liability depends on which of two views we take of the purpose of misrepresentation. The first sees it as being about setting standards of conduct for representors. It focuses on the state of mind of the representor, and determines the boundaries of liability with reference to whether she made the representation honestly and after having exercised some care to ascertain its veracity. The second sees it as being about protecting representees who have relied on representations. It focuses on the representation’s impact on the party to whom it is made, and consequently tends towards imposing liability whenever the misrepresentation played a role in the decision to enter into a contract. English law has traditionally followed a combination of both. The law divides misrepresentations into three classes: those that are fraudulent, those that are negligent, and those that are innocent. Until the 1960s, these distinctions—which reflect a focus on the representor’s conduct—were of fundamental importance to the law on misrepresentation. Since then, English law has increasingly tilted towards protecting representees. Whilst the distinction between the three types of misrepresentation has not been abolished, it has been significantly eroded, particularly in relation to remedies and the position of innocent misrepresentation. The growing focus on representees permeates all aspects of the law of misrepresentation, as we will see in greater detail in this section. 11.2.1 False statements A party makes a misrepresentation if he makes a statement which is factually false. In English law, this rule has three elements: the absence of general duties to disclose relevant facts, an objective approach to construing ambiguous statements, and a distinction between statements of fact and statements of opinion. In this section, we will look at each of these in turn. Duties to disclose The first point to note is that misrepresentation is triggered by false statements. For an action of misrepresentation to be maintainable, there must have been either a statement or conduct that was equivalent to a statement. The courts may imply a representation from conduct if a reasonable person p. 311 would naturally assume from ↵ the other party’s conduct that ‘the true state of facts did not exist and that, if it did, he would necessarily have been informed of it’. But that does not dilute the requirement that 5 the implication must be based on clear words or clear conduct of the representor. Silence is not misrepresentation, and an action is not maintainable simply because a party failed to disclose a relevant 6 fact. In Fletcher v Krell, Fletcher had been engaged by Krell to act as a governess for a family in Argentina. She signed her name as ‘Margaret Fletcher, spinster’. Before she was due to leave for Argentina, the family discovered that she had been divorced, and Krell informed her that her services would not be required. She sued successfully for breach of contract. The court held that she had not been under a duty to disclose the fact that she had been divorced, and had not misstated her status in describing herself as a spinster. As this suggests, there is no general duty to disclose relevant facts, and parties are free to conceal facts as long as they do not lie. To this general rule, four exceptions have been carved out by case law and legislation, which we will now briefly examine. Page 7 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Contracts uberrimae fidei First, some types of contracts are held to be contracts of utmost good faith (or, to use the legal term, uberrimae fidei). Here, parties must deal with each other in good faith and make a full declaration of all material facts. Insurance contracts are the classic example of contracts which are uberrimae fidei, and at 7 common law as well as statute, a party taking out a policy must disclose all material facts and risks to the other party. This principle is narrow. It is confined to types of contracts that have already been recognized as contracts of utmost good faith. Courts are reluctant to widen the category any further. In Fletcher v Krell, one reason the court gave for refusing to hold that there had been a misrepresentation was that doing so would, in effect, turn contracts of employment into contracts of utmost good faith, and that was not a step they were willing to take. True statements that become untrue Secondly, a duty to disclose changed circumstances may arise at common law, if its result is to render 8 untrue a statement that was true when it was made. The leading case is Davies v London & Provincial. An agent of London & Provincial (L&P) had retained some money belonging to L&P. L&P believed this to be criminal embezzlement and instructed the police to arrest him. They then were advised that the actions were not criminal and they withdrew the instructions. The agent’s friends in the meantime approached L&P’s officials, and attempted to negotiate a settlement. The officials referred to the ‘embezzlement’ and said that the agent would not be arrested before Tuesday. They did not, however, disclose that he could not be arrested at all. The agent’s friends arranged for £2,000 to be deposited with trustees for the security of the company. Upon learning that the agent could not have been arrested, they sought to have the agreement set aside. p. 312 ↵ The court held that L&P had a duty of disclosure in this case. Apart from contracts uberrimae fidei and fiduciary relations (where equity imposes similar duties), a duty of disclosure also arose to correct a previously true statement which was no longer true: If a statement has been made which is true at the time, but which during the course of the negotiations becomes untrue, then the person who knows that it has become untrue is under an 9 obligation to disclose to the other the change of circumstances. 10 Similarly, in Spice Girls Ltd v Aprilia World Service BV, the Spice Girls, a popular girl band, had been hired by the defendants to promote their products. After the contract was entered into, one of the members made it clear that she intended to leave the group. The group failed to disclose this to the defendants, even though it would have prevented the contract from being carried out. It was held that their action amounted to a misrepresentation. Duties imposed by law or contract Thirdly, duties of disclosure may be imposed by law. Financial regulation imposes significant duties of disclosure on financial intermediaries dealing with consumers. Consumers also have broad rights of information under legal rules dealing with unfair trading. These are discussed in section 10.4. Page 8 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Finally, parties may also impose duties of disclosure on other parties by including a provision in their contract requiring the other party to disclose all material facts, or warrant that it has disclosed all material facts. Provisions of this type are common in contracts ranging from complex commercial transactions to contracts to buy and sell houses. Thus whilst the general principle remains that there is no general duty to disclose, they can in practice arise in a number of ways. The role of reasonableness The second point to note, following on from the duty to disclose, is that in determining whether a statement is true or false, the court will construe it objectively, and in context. It does not matter that the person making the statement had no intention to deceive, and genuinely believed it to be true. The court is concerned with the objective truth of the statement, not the representor’s subjective belief. Where the meaning of a statement is disputed, the courts have regard to ‘what a reasonable person would 11 have understood from the words used in the context in which they were used’. This is illustrated by the 12 decision of the Court of Appeal in Foster v Action Aviation. Foster was interested in buying an aircraft made by a company called Emivest. Action Aviation offered to sell him an ‘as new’ aircraft that had been used for demonstration. Foster asked the chairman of Action Aviation whether the aircraft had ever been in an accident. The chairman replied: ‘No, I bought the aircraft new; it’s never been in an accident.’ As it happened, the aircraft had suffered a hard landing after which it had had to be repaired. This accident was logged and reported to Emivest and the insurers. It was not, however, reported to the aviation p. 313 ↵ authorities because it was not reportable under the rules. Foster bought the aircraft, but was unhappy with it and resold it at a considerable loss. When he discovered the accident, he sought to claim damages on the ground of misrepresentation. In evidence, it was found that the chairman had no intention to deceive Foster, and had genuinely believed that an unreportable incident did not amount to an accident. Nevertheless, the court held that there had been a negligent misrepresentation by the company: however much the incident did not have to be reported to the FAA [US Federal Aviation Authority] it was still an accident in the sense used by Mr Foster in his question and Mr Harding should have 13 appreciated that was the way in which his negative answer should be understood. In other words, a representor will have made a misrepresentation if he failed to disclose a fact covered by a reasonable reading of what the question asked. The fact that he understood the question differently is irrelevant. 14 Similarly, in Burki v Seventy Thirty, the claimant had subscribed to a matchmaking service on the basis of representations by the service provider as to the number of men who were on its database. The database included men who were active subscribers as well as men who had been subscribers in the past but were no longer so. The High Court held that the statement was a misrepresentation. Any reasonable person would have understood the statement as being about ‘the numbers of wealthy, actively engaged paying members’ 15 as opposed to former members who were still on the books. In deciding what representations were made, the court will look not just at what was expressly said but also at what the representations implicitly 16 represent. Page 9 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Applying this to Problem 11, the key issue will be whether the college’s representation regarding employment prospects would have been understood on a reasonable reading to refer to its graduates specifically (as the students claim) or to the national picture (as it claims). This will turn on the precise wording of the statement and the context in which it appears, but it should be evident that the position is in any event not as straightforward as either the college or the students make it. Where the representation is framed in words that are ambiguous, the reasonable reading is not always easy to ascertain objectively. The fact/opinion distinction Thirdly, following the duty to disclose and the test of reasonableness, the statement must be factually false. This excludes two types of statements. First, it excludes statements which are ‘mere puff’, for example a claim that a café serves ‘the best coffee in town’. These are not intended to be claims of objective fact and 17 hence will not give rise to a misrepresentation. Secondly, it distinguishes statements of fact from statements of opinion. A statement of opinion does not ordinarily give rise to a misrepresentation. Only a statement of fact does. p. 314 ↵ The exclusion of statements of opinion is, in principle, both logical and necessary. In everyday life, we frequently make statements that are intended to articulate a view rather than to assert the existence of a state of facts. In the course of a negotiation, for example, a party may put forward contentions or arguments setting out what she thinks she is entitled to. It would be absurd to treat these as 18 representations even if they relate to facts. But the divide between fact and opinion is not a sharp one, and it can create difficulties in a range of circumstances. Consider the following example: 19 Let us, for the moment, set aside the question of whether this is a breach of contract. Were the agent’s words ‘you’ll have more fun with our Ibiza package’ a misrepresentation, even though they were phrased in the form of an opinion? There is a strong case for saying that they were. In English law, the fact/opinion distinction is qualified in three different ways. First, the distinction is contextual rather than literal. The representor’s words are looked at not in the abstract but in the context in which they were said. Words that would appear to be a statement of fact in one context may be a statement of opinion in another context. Secondly, any statement of opinion must be of an opinion that was honestly held. If you express an opinion you do not actually hold, then your statement is a misrepresentation. Thirdly, statements of opinion can sometimes contain an implicit assertion of fact. If that implicit assertion is false, the statement will be a misrepresentation. Let us look at each of these in turn, starting with the contextual character of the distinction. The decisions 20 21 in Bisset v Wilkinson and Esso Petroleum v Mardon illustrate how the transactional context can influence whether a statement is seen as a matter of fact or opinion. Page 10 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake p. 315 Case in depth: Bisset v Wilkinson AC 177 (PC) This case arose by way of appeal to the Privy Council from New Zealand. Bisset owned land in New Zealand, which he agreed to sell to Wilkinson and Alexander. The land was to be used for sheep farming. While some of it had been used for sheep farming in the past, portions had been abandoned by a previous occupier and had never been used to farm sheep. Before the purchase was agreed, the farm had been inspected by the purchasers and by Wilkinson’s father, an experienced sheep farmer. In the course of discussions, Wilkinson asked Bisset how many sheep it could support through the winter. It was conceded at trial that Bisset said it could support 2,000 sheep, if 22 it were worked as he had worked it with a six-horse team. Wilkinson and Alexander purchased the property in 1919 making a down-payment with the balance to be paid on 1 May 1924. They were unable to support anywhere near 2,000 sheep on the property during the winter in 1920. In 1921, the sheep price collapsed due to market fluctuations, and the defendants shifted from sheep farming to cropping and dairy farming. When the final payment fell due in 1924, the defendants refused to pay and sought to rescind the contract for misrepresentation. Sim J in the Supreme Court at Dunedin held that the contract was not voidable for 23 misrepresentation, on two grounds. First, he held that the statement as to the capacity of the farm was one of opinion rather than fact. This was because of the peculiar circumstances of the case. Although such a statement would ordinarily be a statement of fact, in this case the purchasers knew that a portion of the farm had not previously been used for sheep farming, and they also knew how many sheep the farm was carrying when it was sold because they had inspected it. As such, they were not justified in ‘regarding anything said by the plaintiff as to the carrying capacity as 24 being anything more than an expression of his opinion on the subject’. An opinion could only be a misrepresentation if it was not honestly held, and on the facts this opinion was honestly held. He held further that the true capacity of the farm had not been proved, as the farm had not been used for sheep farming for long enough. This meant that the purchasers had failed to show that the statement was false. On appeal, the Court of Appeal of New Zealand reversed Sim J, and held that the statement was a misrepresentation. They rejected the argument that the statement was merely one of opinion, on the basis that saying that a seller ‘was giving only an opinion’ when asked about the capacity of a farm was ‘improbable and contrary to what takes place in bargaining about a sheep farm’. Given that Bisset had been expressly asked what the capacity of the farm was, the logical reading of his 25 response was that he was answering the question, and not simply stating his opinion. Page 11 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake On further appeal, the Privy Council reversed the Court of Appeal and restored the judgment of Sim J. As with Sim J, they placed emphasis on the fact that a portion of the farm had lain fallow and not been used for sheep farming by anyone. This fact, they held, was ‘most material’, and meant that 26 any statement as to the farm’s capacity could only be one of opinion. They also concurred with Sim J’s finding that the true capacity of the farm had not been proved. p. 316 ↵ Bisset v Wilkinson is important because it illustrates how much cases in misrepresentation are influenced by the views of individual judges as to which facts are more salient. The Court of Appeal’s decision differed from the other two courts because it placed emphasis on the general transactional significance of the statement. In the context of buying and selling a sheep farm, any statement as to the capacity of the farm would be received as a statement of fact. Sim J and the Privy Council, in contrast, stressed the specific transactional context of that particular sale. Because all parties knew that a portion of the farm had never been used for sheep farming, any statement as to its capacity could not be received as anything other than a statement of opinion. As the final outcome shows, it is this latter context that is now the salient one. Bisset v Wilkinson involved a statement that appeared to be one of fact, but which was ultimately held to be 27 one of opinion because of the surrounding facts. Esso Petroleum v Mardon, in contrast, involved a statement that, at face value, seemed to be one of opinion, but was ultimately held to be one of fact. Esso Petroleum wanted a new petrol station in Southport, and located a site on a busy street in the centre of the town. They calculated that it would have a throughput of 200,000 gallons a year. Unfortunately, the council insisted in the course of granting planning approval that the station be built back-to-front, so that only the showroom was seen from the street and not the petrol pumps themselves. It was obvious that this would have a negative impact upon the petrol station’s throughput, as a casual passer-by on the main street would no longer see the pumps. However, Esso failed to revise its estimated throughput even after it had built the station back-to-front. Esso then offered a tenancy of the station to Mardon. In evidence, it was found that: Mr. Mardon was told that Esso estimated that the throughput of the [site] would amount to 200,000 gallons a year … Mr. Mardon then indicated that he thought 100,000 to 150,000 gallons would be a more realistic estimate, but he was convinced by the far greater expertise of, 28 particularly, Mr. Leitch. In actual fact, the throughput was only 78,000 gallons and Mardon made losses. The parties attempted to renegotiate the contract, but the concessions Esso were willing to make were insufficient to make the business profitable. Esso cut off Mardon’s petrol and sued for possession. Mardon gave up the site, and counterclaimed for damages for misrepresentation. Counsel for Esso relied heavily on Bisset v Wilkinson, 29 arguing that the cases were indistinguishable. The Court of Appeal, however, held that this case was very different from Bisset. In Bisset, because the land had never been used for sheep farming, both parties were ‘equally able to form an opinion as to its carrying capacity’. Here, however, Esso had special knowledge Page 12 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake and skill, in that they knew the patterns of traffic in the town, the throughput of comparable stations, and overall had better experience and expertise. As such, they were in a much better position than Mardon to 30 make the forecast, and were liable accordingly. Put differently, what the court was in effect saying was that Bisset v Wilkinson did not involve any information asymmetry, while Esso v Mardon did. All parties in Bisset were equally ignorant of the carrying p. 317 capacity of the farm, and furthermore the parties knew ↵ that they were all equally ignorant. Under the circumstances, the statement could not reasonably have been construed as a representation. In Esso v Mardon, in contrast, Esso did know more than Mardon. Both parties knew this, and they also knew that Mardon was in fact relying on Esso’s superior knowledge. As a result, the reasonable reading of Esso’s statements was that they were representations made with a view to inducing the contract. This brings us to the second limb of the exception, which is that the exception only applies if the opinion is honestly held. Honest belief is not a defence if the statement in question is one of fact, as the case of Foster v Action Aviation, discussed earlier, shows. It is a defence if the statement is one of opinion, but the requirement of honesty is important. A person who claims to hold an opinion or intention which she does not actually hold is making a fraudulent statement. This is a misrepresentation even if it is a statement of 31 opinion. In Edgington v Fitzmaurice, a company issued a prospectus offering debentures to the public. The prospectus stated that the directors intended to use the debentures to expand the company’s business. This was untrue. The directors in fact intended to use them to pay off the company’s debts. The claimant, who had subscribed to shares after having read the prospectus, sued for misrepresentation. The court held that the words were a misrepresentation, on the basis that ‘the state of a man’s mind is as much a fact as the state of his digestion’. It is not always easy to establish that a person was being dishonest in this sense when expressing an opinion. The state of a person’s mind is a hard thing to prove. The evidentiary burden is somewhat ameliorated by the third limb of the exception. This states that an opinion may be held to contain an implicit representation that the representor knows of facts that justify holding the opinion. In Smith v Land 32 and House Property Corp, a property offered for sale was described as ‘let to a most desirable tenant’. In point of fact, the tenant was in arrears with the rent and went bankrupt shortly after the sale. The court held that the statement was a misrepresentation even though it was couched as an opinion. This was because in stating it, the representor implicitly represented that he knew facts justifying the opinion. Let us now return to Illustration 11.3. The discussion above should have given you a good sense as to why the statement by the travel agent is almost certain to have been a misrepresentation. First, the travel agent does have superior expertise, as in Esso Petroleum v Mardon. Unlike Bisset v Wilkinson, both parties are not equally able to formulate an opinion at the time of contracting, because you as a holidaymaker have not actually seen the hotel or its location. Secondly, the opinion is unlikely to be held to have been honestly held. At the least, the travel agent will be held to have implicitly represented that he knew of facts justifying his opinion that you would have ‘more fun’ in the place he had found for you, much as in Smith v Land and House Property Corp. These cumulatively suggest that the statement will be held to have been a misrepresentation. Page 13 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Illustration 11.3 You are planning a summer break in southern Europe with your flatmates. You are unsure whether to book your holiday in Ibiza or Skiathos. You visit a travel agent, who says to you: ‘You’ll have more fun with our Ibiza package.’ At first sight, this might appear to be clearly a statement of opinion rather than of fact. ‘Having fun’ is not an objectively measurable quantity, and it is not generally possible to assess ‘likelihood of having fun’ in objective factual terms. But consider the following sequel: You arrive in Ibiza. On arrival, you are horrified to find that the travel agent has booked you into a run-down hotel which is 12 miles from the nearest bars and nightclubs, without any transport links. What about the college’s statement in Problem 11? A claim in a prospectus about graduate earnings differs from the situations we have been considering so far. Although the college has superior expertise, if the p. 318 statement is clearly linked to a specific body ↵ of evidence (eg a government study), it is unlikely that it will be held to implicitly represent that the college knows additional facts going beyond that body of evidence. If, however, the statement was phrased more broadly—for example, a more general statement of its graduates’ prospects that are not specifically tied to the government study, then it is likely that it will be held to represent that the college knows facts justifying that opinion. As this suggests, applying the fact/opinion distinction often involves drawing lines which are not easy to draw. As the cases discussed in this section show, the courts tend to draw the line based on their view as to the significance of statements and the manner in which they would have been received, which they examine against the background of the factual context of that specific transaction. This process is not dissimilar to that used in relation to interpretation (discussed in Chapter 7), and reflects the same underlying principle of contextual objectivity. 11.2.2 Materiality For a misrepresentation to be actionable, it must be material in the sense that it must induce the contract. The representee must have been intended and entitled to rely on it, and it must play a role in bringing about the contract. It does not have to be the sole factor or even the decisive factor which motivated the representee to enter into the contract. It is sufficient if it is a cause, or one factor among many, even if it is not the exclusive cause. Recent cases have tended to express this by saying that the misrepresentation must play a ‘real and substantial part’ in the representee’s decision to enter into the contract, but not 33 34 necessarily a ‘decisive part’. In Edgington v Fitzmaurice, discussed in the previous section, the claimant had been induced to subscribe to the debenture partially by the misrepresentation and partially by his own misreading of the prospectus. The court held that the contract could be rescinded for misrepresentation, as Page 14 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake the misrepresentation was one of the factors that had induced the contract. Applying this to the facts of Problem 11, the import is that Sarum College will be liable even if a student was induced to choose Sarum College due to a combination of factors—for example, the misrepresentation as well as the fact that she could live at home while studying there. The bar imposed by this requirement is not a very high one. Nevertheless, the requirement is a real one. The mere fact that an untrue representation was made is insufficient. If the representee treated it as 35 irrelevant, the misrepresentation will not be actionable. In JEB Fasteners v Marks Bloom, the claimant had taken over a company after inspecting its accounts. The accounts had been inaccurately prepared, in circumstances that meant that they constituted a misrepresentation. In evidence, however, it was shown that the purpose of the takeover was to secure the services of two directors of the company, and that it would have proceeded even if accurate accounts had been presented. The court held that the claimant had no remedy for misrepresentation, as the misrepresentation did not induce the contract. Returning to p. 319 Problem 11, if a student read the information in the prospectus and immediately dismissed it as ↵ ‘just exaggeration’, it is extremely unlikely that she will be able to claim that the misrepresentation played a material part in her decision to contract. If the representee has taken steps to try and verify the representation, the court may hold that the 36 representee was induced by the information she gathered, rather than by the representation. This also applies if the facts suggest that the representee was intended to carry out her own checks, for example by 37 consulting lawyers. But absent these circumstances, the representor cannot argue that the representee could have discovered the true state of affairs if she had carried out reasonable checks. In Redgrave v 38 Hurd, the claimant told the defendant that his law practice had an income of £300 a year. This was in fact untrue. The claimant also gave the defendant papers which showed an income of under £200 a year, along with papers showing a small amount of additional business. The defendant did not examine these papers. He signed the agreement and paid a deposit on the strength of the representation. When he discovered the true position, he refused to proceed with the transaction and sought to have the contract set aside. It was held that he was entitled to have the contract set aside: If a man is induced to enter into a contract by a false representation it is not a sufficient answer to him to say, ‘If you had used due diligence you would have found out that the statement was untrue. You had the means afforded you of discovering its falsity, and did not choose to avail 39 yourself of them.’ In Problem 11, therefore, Sarum College will not be able to defend itself by saying (for example) that IERA’s report was widely reported in the press or that it was available on the website. The fact that accurate information was available elsewhere does not excuse a misrepresentation. The representee does not have to entirely believe the representation. If the representee has doubts about the truth of the representation, but is unable to find evidence to verify or rebut it, she is entitled to act on the representation. If the representation then turns out to be false, she will be entitled to sue in 40 misrepresentation notwithstanding her initial doubts. Page 15 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake 11.2.3 Remedies If a misrepresentation has induced a contract, the representee has a range of remedies against the representor. The default remedy is rescission, that is, the ability to have the contract annulled on the basis that it was induced by misrepresentation. In addition, the representee may in some cases also have the right to claim damages for loss caused by the misrepresentation. Claiming one does not bar the other: a party is free to claim both rescission and damages. p. 320 Rescission Setting aside the contract The standard remedy for misrepresentation is rescission. The representee has the option of choosing to rescind the contract by giving notice to the other party. The effect of rescission is to set the contract aside for all purposes, prospectively as well as retrospectively. In legal terms, the contract is treated as if it never was, and the court will seek to restore the status quo ante. That is to say, it will seek to put both parties in the position they would have been in had the contract never been entered into. It is important to note that rescission is only an option available to the representee. The representee can also elect to affirm the contract, and have it remain valid notwithstanding the misrepresentation. Rescission is also not an absolute right. The law recognizes three bars to rescission, whose effect is that the representee loses the right to rescind the contract. The court also has a broad discretion to refuse to permit a party to rescind a contract, and to instead award damages in lieu if the judge believes that it would be more appropriate to do so. Bars to rescission The first of the bars to rescission is lapse of time. A representee will lose the ability to rescind a contract for misrepresentation if there has been undue delay in bringing an action. What constitutes ‘undue delay’ appears to depend on whether the misrepresentation was innocent, negligent, or fraudulent. In Leaf v 41 International Galleries, a gallery sold a painting as being a Constable when it was not in fact by Constable. The purchaser did not discover this until five years after the sale. The misrepresentation in this case was innocent, as the gallery honestly believed the painting to be by Constable and was not negligent in so 42 believing. The Court of Appeal held that rescission was barred by lapse of time. The five-year delay was an undue delay, even though the buyer had not known of the misrepresentation for much of that time. In 43 contrast, in Salt v Stratstone Specialist Ltd, a car was sold as brand new when in reality it had been in the showroom for two years and had suffered an accident in that time. The past history was not discovered until three years after the purchase. The Court of Appeal held that the suit was not barred for lapse of time. Unlike Leaf v International Galleries, the misrepresentation here was negligent, and where the misrepresentation is negligent or fraudulent, the time should be counted from the date of discovery of the misrepresentation, rather than the date of the misrepresentation. Page 16 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake The second circumstance barring rescission is a sale to a bona fide third party. If the contract for which rescission is sought relates to the sale of goods, and if a third party has bought the goods for good consideration and without notice of the misrepresentation, the court will not grant rescission, because it will not disturb the title of an innocent third party. Although this exception is per se reasonable, it has caused considerable difficulty for the courts. We will consider this in more detail in section 11.3. p. 321 ↵ The third circumstance barring rescission is somewhat opaquely called impossibility of restitutio ad integrum. If a contract is rescinded, the law ordinarily requires both parties to be restored to their original positions—restitutio ad integrum. If the parties cannot be restored to their original positions, restitutio ad integrum is said to be impossible, and rescission will ordinarily be barred. A typical example is where the subject matter of the contract has been used up, altered, or destroyed. The courts are, however, somewhat reluctant to permit this ground to be invoked too liberally. The following illustration should demonstrate why. Illustration 11.4 Lisa buys a microwave, intending to use it to speed-dry tea leaves to make a luxury green tea blend. The shop tells her that the model she has chosen can be run for up to six successive half-hour sessions at full power. When Lisa tries to do this, the microwave overheats and burns a key circuit, rendering it unusable. If we take the bar of impossibility of restitutio ad integrum literally, rescission will be barred in this situation as the shop cannot be restored to its initial position (since that would require it to get back a functioning microwave, which is no longer possible). Yet it appears somewhat unreasonable, to put it mildly, to say that rescission is barred on these facts. In cases like this, courts often get around the bar by ordering the representee to make counter-restitution, by paying the representor for any retained benefit 44 or deterioration attributable to the representee. In Erlanger v New Sombrero Phosphate Co, the purchasers of a mine sought rescission of the contract of sale on the ground of misrepresentation. The mine had been used for some time, and a portion of its mineral content had been extracted. The court held that this did not bar rescission, and granted rescission subject to the buyer accounting to the seller for the profit it had made. 45 In Salt v Stratstone Specialist Ltd, discussed earlier in this section, the Court of Appeal held that the courts should ordinarily favour awarding rescission as long as practical justice could be done by ordering counter-restitution. In that case, by the time the buyer of the car discovered the misrepresentation, the car had been driven 15,000 miles and been subject to depreciation. The Court of Appeal held that this would not by itself bar rescission, as practical justice could be done by ordering the payment of compensation for the use of the car and for depreciation. Page 17 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake This approach applies directly to a case like Problem 11. Because the students have been studying at the college for a while, restitutio ad integrum is not strictly possible. Salt v Stratstone suggests that in such a case the court will seek to do practical justice by granting rescission of the contract, subject to the students being required to pay some fair compensation for the use of the college’s facilities and access to tuition. p. 322 Damages Damages are also available for misrepresentation. Under s 2(1) of the Misrepresentation Act 1967, damages are available for all types of misrepresentation except innocent misrepresentation. Due to the wording of the statute, however, innocent misrepresentors are frequently also liable to pay damages. To understand why this happens, it is necessary to look briefly at the history of the law. Before the Act was passed, a representee who had suffered loss as a result of misrepresentation could only sue in tort, not contract. If the misrepresentation was fraudulent, she could sue for deceit. If it was negligent, she could sue in negligence. Neither was easy. To succeed in deceit, the representee had to prove that the representor made it knowing it to be false, without belief in its truth, or not caring whether it was 46 true or false. In negligence, the representee had to prove either that there was a special relationship between her and the representor giving rise to a duty of care or that the representor had assumed liability 47 for the consequences of the representation being false. The measure of damages was lower in negligence. A claimant could recover all losses caused by the misrepresentation in deceit, but only foreseeable losses in negligence. If the misrepresentation was innocent, no damages could be claimed. Although this position had its defenders, it came in for strong criticism. A particular point of critique was 48 that fraud was difficult to prove, even where it was clear that there had been a gross misrepresentation. The issue attracted the attention of the Law Reform Committee (the precursor to the Law Commission), 49 which recommended reform of the law in their Tenth Report, titled Innocent Misrepresentation. The recommendations were enacted through the Misrepresentation Act 1967. The wording of s 2(1) reflects its roots in complaints about the difficulty of proving fraud. Instead of the hard-to-prove tests that underlay the tort of deceit, it creates a two-step approach to determining whether damages are recoverable. In the first step, the Act creates a general right to recover damages for all misrepresentations, fraudulent and non-fraudulent, in relation to losses for which the representor would have been liable were the misrepresentation fraudulent. In the second step, it creates a limited defence, under which the representor will not be liable if he can prove, first, that he ‘had reasonable ground to believe’ that the representation was true and, secondly, that he did in fact believe this up to the time the contract was made. Compared with the law as it stood before the Act, s 2(1) makes two changes. First, it eliminates the distinction between negligent and fraudulent misrepresentation. Secondly, it reverses the burden of proof for negligent misrepresentation. The person claiming misrepresentation no longer has to show the existence of a duty of care or a breach of that duty. Once she shows that a misrepresentation has been made, it is for the representor to show that he had reasonable grounds to believe the representation was true. Cumulatively, this imposes a level of liability which was previously only triggered by fraud, on any Page 18 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake representor who cannot prove reasonable grounds for believing the representation. If a false p. 323 representation and inducement are shown, the courts will ↵ proceed as if the misrepresentation is fraudulent unless the representor manages to prove that it is innocent. Two cases illustrate the extent to which the Act has altered the rules on liability for misrepresentation. In 50 Howard Marine & Dredging Co Ltd v A Ogden & Sons Ltd, a company selling two barges made a representation about the barges’ tonnage in the course of discussion with a prospective purchaser. The figure that the company had stated was, in fact, incorrect. The person making the representation had taken the capacity from a book called Lloyd’s Register, which is usually very reliable. In this case, however, Lloyd’s Register had reported incorrect figures. The ships’ documents had the correct figures, but the seller did not check them. The court held that the seller was liable in damages. Because it had documents in its possession giving the correct figures, it had failed to show that it had reasonable grounds for its belief in the wrong figures. 51 In Royscot Trust v Rogerson, a car dealer was in the process of selling a car to a purchaser on hire purchase. He negligently informed the finance company that he had taken a deposit of £1,600, on a purchase price of £8,000. In reality, he had taken a deposit of £1,200 on a purchase price of £7,600. Although the total amount lent by the finance company was the same, from the company’s point of view the difference was significant because it did not usually lend if the purchaser’s deposit was below 20 per cent. The misrepresentation therefore induced the contract. It was evident that the car dealer was liable in damages. The finance company, however, sought recovery of damages on the (much higher) deceit measure. The dealer argued that damages should follow the negligence measure, as he had been negligent rather than fraudulent. The court held that the wording of the statute was clear, and left no room to award different measures for negligent and fraudulent misrepresentation. Damages would therefore be recoverable on the deceit measure. The cumulative result of these cases is that a person in the position of the seller in Howard Marine, who made an innocent misrepresentation, will be liable to pay damages as if the misrepresentation was fraudulent. This was not the intention behind the Act, but it is nevertheless a consequence of the manner in which s 2(1) was drafted. Returning to Problem 11, the effect will be that the college will be liable to pay compensation as if it had behaved fraudulently, even if it had not in fact behaved fraudulently. Given that some of its employees were aware of the IERA findings, it is unlikely to be able to demonstrate that it had reasonable grounds for believing the figures it gave. The measure of damages under the Act is based on the principles applied to fraudulent misrepresentation. This covers all damage directly caused by the transaction, even if it was not foreseeable, but the claimant 52 must give credit for any benefits received as a result of the transaction. Because the court is seeking to restore the status quo ante, the amount of the loss is often uncertain. It is not always easy to prove what would have happened absent the misrepresentation. The courts tend to approach these cases by making 53 reasonable assumptions, erring on the side of generosity to the claimant where necessary. Page 19 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake p. 324 Remedies against third parties The Misrepresentation Act 1967 did not alter the remedies in tort, and it technically remains possible to sue in deceit for fraudulent misrepresentation, or in negligence for negligent misrepresentation, instead of suing under the Act. In practice, it seldom makes sense to do so in a contractual context, as s 2(1) gives the representee the same level of damages as deceit for a much lower burden of proof. The one context in which the remedies in tort are useful is where someone other than the contracting party is being sued. Here, Piotr’s contract is with the company, Kepwell Plumbing Ltd. However, the company has no assets left, so there is little point in suing it. If Piotr wants to recover any damages, he will have to sue Joe, the person who actually made the misrepresentation. Because he has no contract with Joe, he cannot rely on the Act. Instead, he will have to sue in the tort of deceit (for fraudulent misrepresentation) or in the tort of negligence (for negligent misrepresentation). Both pose difficulties, making recovery against third parties 54 considerably more difficult than recovery under the Act. In Foster v Action Aviation, discussed in section 11.2.1, the claimant had bought the aircraft from a company, which at the time of the suit had no assets. He therefore sought to sue the owner of the company, who had actually made the false statements. His action failed, because he was unable to prove dishonesty or recklessness to the standard required by the tort of deceit, and was also unable to establish that the owner assumed responsibility for the statement’s veracity as an individual (as distinct from in his capacity as an officer of the company). The outcome of any action brought on the facts of Illustration 11.5 is likely to be similar. The easier route put in place by s 2(1) will not 55 be available, because the Act does not apply to actions brought against third parties to the contract. Illustration 11.5 Joe runs a plumbing business through his company, Kepwell Plumbing Ltd. He decides to retire and offers his business to Piotr, who is attempting to establish himself as a plumber. He shows Piotr his accounts, which suggest that the company is turning a healthy profit. Based on the accounts, Piotr contracts with Kepwell Plumbing Ltd to buy the plumbing business. He then discovers that the books understated the business’s costs, and that it is a lot less profitable than the accounts suggested. By the time he realizes this, Kepwell Plumbing has paid the purchase price to Joe as a dividend, and has no assets left. 11.3 Unilateral mistakes The law of misrepresentation is not the only body of doctrine dealing with untrue statements or information asymmetries. English law also has a more specialized set of rules, the law of unilateral p. 325 mistake. Unlike misrepresentation, unilateral mistake deals ↵ with situations where one party knew that the other party had got the facts wrong, and it does not require the party with knowledge to have induced the misunderstanding. It is sufficient if she had knowledge of the misunderstanding. Also unlike Page 20 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake misrepresentation, unilateral mistakes render the contract void. The contract is automatically treated as if it never was. The mistaken party does not need to elect to rescind it, and the court has no discretion to award damages in lieu. Only two types of unilateral mistakes are recognized in law: unilateral mistakes as to identity and unilateral mistakes as to terms. In this section, we will consider each in turn. 11.3.1 Mistakes as to identity and the problem of identity theft Mistake and misrepresentation Consider the following fact situation: Although there has been a misrepresentation here, the law of misrepresentation is unlikely to be of much use for two reasons. First, because the fraudster has disappeared, suing him for misrepresentation is not a practical remedy. Secondly, Daniel cannot seek to get his laptop back by rescinding the contract with the fraudster, as rescission will be barred on the ground that Thomas is a good faith purchaser for consideration. In English law, a person affected by a case of this type could potentially have an alternative remedy under 56 the law of unilateral mistake as to identity. The law of mistake as to identity deals with situations where one party believes himself to be dealing with someone else, and the other party was aware of this mistake. Because it is a type of unilateral mistake, all it requires is for the other party to know of the misunderstanding and do nothing to correct it. From the perspective of a claimant in the position of the original seller in Illustration 11.6, the law of mistake as to identity is a lot more useful than the law of misrepresentation. Because the contract with the fraudster is void rather than voidable, the fraudster never acquires title. Under a principle of English personal property law called the nemo dat rule, this means that anyone to whom he passes the property also never acquires title, even if they bought in good faith and p. 326 ↵ without notice of the defective title. In sharp contrast to the law of misrepresentation, the third party is not protected and can be sued by the original seller because the goods in law still belong to the original seller. Illustration 11.6 Daniel is selling his laptop on eBay. He receives a message from an eBay user called sarahdeals74, offering him 15 per cent above the ‘Buy it Now’ price if he will accept payment by cheque rather than PayPal. Sarahdeals74 has excellent feedback on eBay, so he agrees. He receives her cheque and posts the laptop to the address she provides. The cheque is dishonoured, and he discovers that he had been dealing not with sarahdeals74, but with an unknown fraudster who had hacked her account. This fraudster has in the meantime sold the laptop on to Thomas, who has bought it in good faith without any knowledge of the fraud. Page 21 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake Identity and attributes The key difficulty with which this area of law has to deal is that of distinguishing between, on the one hand, cases where the identity of the party genuinely mattered to the transaction and, on the other hand, cases where the identity of the party did not matter. Consider the following illustration: Illustration 11.7 As a joke, Tracy decides to disguise herself as the Duchess of Cambridge. She goes to the campus supermarket in disguise. She is very convincing, and the person at the checkout serves her in the belief that she is the Duchess of Cambridge. It is clear that the people on the checkout in this example are under a mistake as to the identity of the person they are serving. But it should be equally clear that that mistake should have no impact on the validity of the contract under which Tracy buys her groceries at the campus supermarket. This common-sense insight has been surprisingly difficult to translate into the law. Early cases drew a distinction between mistakes as to the identity of the other party and mistakes that merely related to the 57 attributes of the other party. Cundy v Lindsay illustrate the nature of this distinction. A fraudster placed an order for handkerchiefs with Lindsay. He signed his name Blenkarn, but did so in a way that made his signature look like that of Blenkiron & Co, a reputable firm that carried on its business on the same street. Lindsay sent the goods in a parcel addressed to Blenkiron, at the address provided by Blenkarn. Blenkarn then sold the goods on to Cundy and disappeared without paying Lindsay. Lindsay sued Cundy, arguing that Cundy had no title to the handkerchiefs. The difficulty cases like this pose is that both Lindsay and Cundy were innocent victims of Blenkarn’s fraud. Nevertheless one of them had to bear the cost. The distinction between identity and attributes deals with this by looking at contractual intent. If Lindsay had genuinely intended to deal only with Blenkiron & Co, then the mistake was as to identity rendering the contract void. If, however, he was willing to deal with all-comers, then the main impact of Blenkarn’s fraud would have been on his evaluation of the creditworthiness of a potential customer. This would be a mistake as to attributes, leaving the contract valid. In Cundy v Lindsay itself, the court held the contract to be void for mistake, as Lindsay had only intended to deal with Blenkiron. The distinction was not, however, easy to apply, because the ‘contractual intent’ in practice proved hard to ascertain. The cases, in consequence, were not very consistent. In Phillips v 58 Brooks, a man called North went to Phillips’s jewellery shop and selected a ring worth £450. He claimed p. 327 to be Sir George Bullough, a well-known wealthy man, and said he would pay by cheque. ↵ The shopkeeper checked the address provided by North in the phone directory, found that it corresponded to Bullough’s, and accepted a cheque. North then pawned the ring to Brooks Ltd and disappeared. When the Page 22 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake cheque was dishonoured, Phillips sued Brooks Ltd for the ring. The court held that the contract was not void for mistake, as Phillips contracted with the person who came into the shop. He may have believed that 59 person to have been Bullough, but the contract was with the person before him. 60 In Lake v Simmons, in contrast, a woman called Esmé Ellison procured a necklace on approval from a jeweller. She said she was married to a man named Van der Borgh living at Stonelands, described in the judgment as ‘a well-known residence’. In interwar society, shopkeepers would have been unlikely to check the credit of someone at such a residence. Van der Borgh was in fact the occupant of Stonelands, but Ellison was only his mistress. The jeweller entered the necklace in his book as out on approval to ‘P.F. Van der Borgh, Stonelands, Dawlish’. Ellison disappeared with the necklace. The jeweller sought to recover the cost from his insurers. To decide the claim, the court had to consider whether the contract with Ellison was valid. It held that it was not, as the mistake as to identity made it void. 61 Other cases reflected the same underlying problem. In Ingram v Little, a buyer of a used car claimed (falsely) to be PGM Hutchinson of Stanstead House. The owners verified the address in the telephone directory and accepted a cheque. The buyer sold the car on and disappeared, and the cheque was 62 dishonoured. In Lewis v Averay, a buyer of a used car claimed (falsely) to be Richard Greene, a well- known actor. He showed the sellers a studio pass in the name of Richard Greene. The seller accepted a cheque on the basis of the documentation. The buyer sold the car on and disappeared, and the cheque was dishonoured. In Ingram v Little, the contract was held to be void for mistake (following Lake v Simmons), but in Lewis v Averay it was held to be valid (following Phillips v Brooks) as the seller intended to deal with the person in front of him. It is hard to see how the facts of the cases justified the different outcomes. Apart from their inconsistency, it is also hard to see why misrepresentations which can be characterized as causing mistakes as to identity should be treated differently from other misrepresentations. For most misrepresentations, the law protects the rights of third party purchasers in good faith. Why should mistakes as to identity be any different? In 1966, the Law Reform Committee recommended that this distinction be abolished, with third party purchasers being protected in all cases. The report was not implemented. Shogun Finance and the documentary/face-to-face distinction In 2004, the issue of mistake as to identity came before the House of Lords in Shogun Finance Ltd v 63 Hudson. A crook sought to buy a car on hire purchase, using a stolen driving licence to impersonate a man named Patel. The car dealer faxed the information to the finance company, which ran credit checks on Patel and approved the transaction. The crook paid the deposit partly in cash and partly by cheque, and took the car away. The cheque bounced. In the meantime, the crook sold the car to Hudson and disappeared. The finance company sued Hudson, arguing that he had no title as the contract between the finance company and the rogue was void for mistake as to identity. p. 328 ↵ The House of Lords held by a 3:2 majority that the contract was void. It did so by interpreting prior cases as being grounded in a distinction between face-to-face transactions, on the one hand, and documentary transactions on the other. In face-to-face transactions, the presumption is that the seller intends to deal with the person in front of him. As such, the contract is not void for mistake. If the Page 23 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake transaction is documentary, however, the question becomes one of interpreting the document. Because a person is named on the document, it is presumed that the named person was intended to be the other party. Under the parol evidence rule, oral evidence cannot ordinarily be adduced to contradict the written document. As a result, the contract in such a case will usually be void for mistake as to identity. Because the contract in Shogun Finance was entered into between the finance company and the fraudster, it was a documentary contract rather than a face-to-face transaction. As such it was void for mistake. Documentary contracts are only void for mistake as to identity if the person named on the document (ie the person impersonated by the fraudster) is a real, existing person. In Shogun Finance, Patel was a real 64 person whose identity had been stolen. Likewise, in Cundy v Lindsay, Blenkiron & Co was a real business. Shogun Finance makes it clear that this is essential. Where the person being impersonated is fictitious, the defrauded party will be taken to have intended to contract with the fraudster and not the fictitious person 65 named on the document. In King’s Norton Metal Co v Edridge, Merrett & Co Ltd, a man called Wallis procured goods from the claimants by pretending to be a member of a firm called Hallam & Co. He then sold the goods on to the defendants, leaving the claimants unpaid. Hallam & Co did not exist. The Court of Appeal held (in a judgment approved in Shogun Finance) that the fact that Hallam & Co was non-existent made the case different from Cundy v Lindsay. The claimants would be taken to have intended to deal with whoever was using the name ‘Hallam & Co’, and that is precisely what they did. There was therefore no 66 mistake. Applying this to Illustration 11.6, the transaction between Daniel and the fraudster posing as sarahdeals74 is clearly a documentary transaction involving a real person. This means that the courts will presume that Daniel intended to deal with sarahdeals74, and not the person he actually dealt with, thus making the contract void for mistake as to identity. Thomas therefore does not acquire good title, and will be liable to Daniel. As this suggests, the test in Shogun Finance is somewhat clearer than the old identity/attributes distinction. Nevertheless, it has been criticized as being counter-intuitive—most people would have regarded the 67 transaction in question as face-to-face rather than documentary. It has also been pointed out that the decision fails to consider the issue noted by the Law Reform Committee of why the original seller receives a higher degree of protection than an innocent purchaser in relation to this one type of dishonesty when 68 they do not in others. Two of the five judges on the panel hearing the case dissented for precisely these reasons. p. 329 ↵ An even stronger criticism, however, is that grounding mistake in a distinction between documentary and face-to-face transactions systematically favours certain types of businesses at the expense of other commercial and non-commercial actors. The main class of persons who the law now protects are the type of parties likely to enter into documentary transactions at a distance; namely, commercial sellers and financing companies. The vast majority of transactions involving ordinary individuals will be face-to-face transactions, in which the seller will not be protected. The result, as Shogun Finance itself illustrates, is that the law protects commercial sellers and financing companies— who are in a position to carry out identity checks and spot identity checks—at the expense of individual consumers and small businesses who lack the ability to carry out identity checks. Such a position is obviously problematic, and does little to respond to the risks posed to third parties by identity theft. It is Page 24 of 35 Printed from Oxford Law Trove. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice). Subscriber: University of Manchester; date: 25 January 2025  11. Untrue statements Misrepresentation and unilateral mistake also at odds with the general policy of requiring financial companies to protect victims of identity theft. It is a matter of regret that a narrow majority of the House of Lords has made it unlikely that the position will change in the near future. 11.3.2 Unilateral mistakes as to terms The second type of unilateral mistake that renders a contract void is a mistake as to a term of the contract. Consider the following illustration: Set aside, for a moment, the question of whether the display of the goods for sale on a website is an offer or 69 an invitation to treat. Should the fact that Rob knew the price was a mistake affect the contract’s validity? The answer is that it does affect the contract’s validity