Topic 9 - Misrepresentation.docx

Topic 9 – Misrepresentation This topic is concerned with the effect of express statements made prior to entering into a contract. These statements may become terms of the contract or they may be ‘mere’ representations (i.e. representations only). If they are terms of the contract then a remedy lies...

Topic 9 – Misrepresentation This topic is concerned with the effect of express statements made prior to entering into a contract. These statements may become terms of the contract or they may be ‘mere’ representations (i.e. representations only). If they are terms of the contract then a remedy lies for breach of contract should they prove to be false. Technically a remedy for misrepresentation will also be available but may, in many instances, be less valuable to the claimant than the action for breach. If they are ‘mere’ representations then, should they prove to be false, the only remedies available are those for misrepresentation. An actionable misrepresentation is an unambiguous false statement of existing fact or law that induced a party to enter into the contract. In a limited number of circumstances a failure to disclose a matter may also be treated as a misrepresentation. The potential remedies for a misrepresentation are a rescission of the contract and damages. The right to rescind, as an equitable remedy, can be lost. The amount of damages, if any, will depend upon the nature of the misrepresentation, which we explore below. Damages may be available at common law for the torts of deceit or negligent misstatement. The Misrepresentation Act 1967 also provides that damages may be awarded for a misrepresentation. Where a party attempts to exempt liability for a misrepresentation this attempt will generally be subject to the test of reasonableness in the Unfair Contract Terms Act 1977 by virtue of s.3 of the Misrepresentation Act 1967. However, s.3 will not apply to a contract between a trader and a consumer which will be subject to a test of fairness under the Consumer Rights Act 2015 (s.62 and Schedule 4), which was discussed in Topic 6, Introduction and Section 6.2. (Mini Lecture 1) What is a misrepresentation? We have a definition there. A misrepresentation is an untrue statement of fact that induces another to enter a contract. There are two distinct elements here. There has to be an untrue statement of fact, and it has to be one which induces someone to enter a contract. Before leaving this slide, I just want to relate this discussion to a discussion we had in an earlier mini-lecture, when we considered the difference between terms and representations. As it's sometimes put the difference between terms and mere representations. Many things are said by the parties when they're negotiating contracts. Some of those things become terms of their eventual contract. Some do not. The things said in negotiations which do not become terms of the contract are sometimes referred to as mere representations. In that minilecture we looked at the rules used to distinguish between these two categories. A misrepresentation is a different thing and it is as it's described there simply an untrue statement of fact that induces another to enter a contract. Now that untrue statement might or might not become a term of the contract. My statement to you that the car I'm selling you is a 2015 model may or may not become a term of our eventual contract. If it does become a term of the contract, you would be able to sue me if it turned out to be a 2010 model, either for breach of contract, because there is a term breached, an express term that it is a 2015 model. You could also sue me for misrepresentation, because the statement is an untrue statement of fact that induced you to enter the contract. In practical terms if you had a choice of suing me either for misrepresentation or for breach, you would prefer to sue for breach of contract. One of the reasons is that the measure of damages awarded for breach of contract would likely be greater than the amount of damages awarded for misrepresentation. We've yet to look at in the final lecture of this topic, different measures of damages for misrepresentation. In a later mini-lecture we'll look at how we compute damages for breach of contract. At the moment please take it from me that you would generally prefer because of the greater damages available to sue for breach of contract. That has a practical ramification, which is that the times when you would choose to sue for misrepresentation are in practical terms when the untrue statement made does not become a term of the contract, because then your only remedies lie in misrepresentation. Let's look a bit more at what a misrepresentation is. Let's look at the first half of that definition. That is an untrue statement of fact. Although we don't deal with it in these lectures, it has also been established, and this rarely arises, that it could be an untrue statement of law, as well, would be sufficient to give rise to an action for misrepresentation. What is an untrue statement of facts? It's often compared to a statement of opinion. In Bisset v Wilkinson, a farmer said that land would support 2,000 sheep, but he had never had sheep on the land. That was said to be a statement of opinion only. Something that is a statement of opinion is not actionable as a misrepresentation. You should be careful because if the statement is made by someone who has expertise in relation to the thing they are saying, then there would be an implied statement that they are aware of facts or knowledge that justify their opinion. This farmer was not expert in relation to the thing he was asserting because he had never farmed sheep. Statement of opinion is not generally actionable, but a statement of opinion will be actionable as concealing an implied statement of fact if the thing you express an opinion about is something that you are expert in. Another contrast is made between a statement of fact and a statement of intention. A statement of intention is a statement as to the future. We would say that an untrue statement of intention does not amount to a misrepresentation. In Edgington v Fitzmaurice, the promoters of a company said that they wanted to raise money in order to expand the business of the company. They did not. They wanted to raise money to pay off accumulated past debts. Their statement as a statement of intention looks like it does not amount to a statement of present existing fact, except analogously with the statements of opinion we've already mentioned, a statement of intention will be held to conceal an implied statement of fact. At the moment you state your intention, there is an implied representation of present existing fact, that that is what you intend to do. If at the moment you make a statement of intention, you don't intend to do that thing. That will be held to be amount to an untrue statement of fact. Now, there's another contrast we need to make here, which is a difficult concept of a half truth, because by a half truth we mean a statement that is literally true but which is really untrue. A half truth is simply dealt with separately. In a case involving the sale of property, the purchaser's solicitor asked the seller's solicitor, "Is the property subject? Are you aware of any restrictive covenants affecting the property?" The seller's solicitor said, "I'm not aware of any." Now that was literally true, but he hadn't looked, he hadn't done the necessary searches. You cannot hide behind a half truth, because a statement which is literally true will not give rise to a misrepresentation. Half truths are treated differently. If a statement though literally true would convey something different to the reasonable reader, you can rely upon what it would convey to the reasonable listener or reader and thereby say there was an untrue statement of fact. The untrue statement of fact is not and is distinguished from mere sales talk, what is sometimes called puffery or the puff. If you say something which conveys no real factual meaning to a reasonable listener, then that will not be held to amount to an untrue statement of fact. If I say to you, "Oh, my car is so fast, it goes like a rocket," that is not something that conveys a factual meaning to the reasonable onlooker. It's just puffery or inflated sales talk and will not give rise to a misrepresentation. It says on the slide there, NB, note, change of circumstances, because when a statement is made, an untrue statement of fact, it's regarded as being continuously remade. Bear in mind the possibility that if a statement is made which was true when made, through this fiction of what's sometimes called a continuing representation, that statement is regarded as being repeated from moment to moment. If between the making of the statement and the conclusion of the contract it becomes untrue, at that moment there is an untrue statement of fact. In the case called the Spice Girls v Aprillia, the Spice Girls were promoting Aprillia motorcycles. In fact, they were promoting scooters. It was about the time of the Olympic Games. The advertising campaign involved a picture of each of the Spice Girls in one of the Olympic rings, which was put as an advertising on these special edition scooters. It was said that the girls were making an implied representation to Aprillia that they are a group of five. When between the making of that statement and the eventual conclusion of the contract, Geri Halliwell told Spice Girls that she intended to leave. At that moment, because this statement was regarded as continuously being remade, at that moment an untrue statement was being made to the effect that the group were a group of five when they were going to soon become only a group of four. We sometimes explain this principle that there is a continuing representation. You make a statement, you're regarded as continuously remaking it. It's sometimes said to the same effect, that when there is a change of circumstances in respect to a statement you've made, you come under a duty to correct it. We've now finished dealing with the first half of the definition that the misrepresentation is an untrue statement of fact. We're now looking at the second half, the idea that it is also necessary that the representee relies upon the representation made to him in order to enter a contract. This is very easily satisfied because if A makes an untrue statement to B, and B subsequently enters a contract with A, the law assumes there is an inducement. They assume the causal link between the untrue statement and the entering of the contract. There are four circumstances when that presumption or assumption is rebutted. If A makes an untrue statement to B, but B is aware of the untruth and still enters the contract, then there will be said to be no inducement. The untrue statement will be said not to have induced the contract. This has to be proved strictly. In Redgrave v Hurd, the seller of a professional practice said the profits amounted to this. Looking at the books, the purchaser said, "I can't see that the accounts justify that. Where's the extra money made up?" The seller produced a set of papers, threw them down, and said, "Oh, this is the extra business." The case is treated as if the purchaser did not look at the books, and if he did look at the books, he would realize that they did not explain the shortfall between the amount which he was aware the practice could make and the amount it was actually making. The case is authority for saying that you have to prove very strictly that the representee was aware of the untruth. Simply throwing these documents in front of him and saying, "That's where the extra profits are," if he doesn't look at them, you cannot say he was aware of the untruth of the statement. He was given an opportunity to inspect and to verify the statement, but he didn't take it, so you can't say that he should be treated as if he read those documents and became aware that the profits asserted were not being made. That is the first situation where we will not draw the conclusion that the untrue statement induced the contract. The second is if the representee relied on another inducement. Many of the old cases here involve the sale of mines near the Victorian castles, and a vendor represented that a mine had a particular amount of deposit in it, it didn't. However, the purchaser had employed his own surveyor to verify and the surveyor was negligent. The surveyor said, "Oh yes, of all these deposits in the mine," they weren't. It was said that the purchaser could not bring an action for misrepresentation against the seller of the mine, because he had relied on another inducement. He had relied on his erroneous belief that his surveyor had verified what was in the mine. Effectively, he was being told, "You'll have to sue your surveyor, not the seller." If the representee was not aware of the misrepresentation, then it cannot be said to have induced the contract. In an old case called Horsfall v Thomas, there was a representation by conduct. A gun was presented, and it was said that the gun had a split in it which had been crudely fixed, and this meant that the barrel of the gun was inadequate. The proffering of the gun was said to be a representation by conduct that the barrel was in sound condition. The purchaser was never aware of the misrepresentation, because he didn't actually look at the barrel of the gun such that he could be said to have relied upon the filling in of the fault with a plug. He was not actually aware of the misrepresentation by conduct, and so he could not be said to have relied upon it. The final category where it will be assumed that there's no inducement, is, where the representee would have entered the contract even if he was aware of the untruth. We have four circumstances when the court will not draw the conclusion that there was a causal link between the making of the statement and the conclusion of the contract. In each case to avoid liability, the representor is going to have to show quite clearly that the case fell within one of these four exceptions. I have some reading there and particularly a short and interesting case which is less interesting to modern ears than Aprillia v Spice Girls, because it deals with a much older sale, but it deals with that same principle of a change of circumstances and is a much shorter case (Mini Lecture 2) We are going to distinguish between three distinct types of misrepresentation. The are misrepresentations we would call fraudulent, those we would call negligent, and those we might call wholly innocent. Our learning objective is to understand the difference between these three categories of statement. What do we mean by a fraudulent misrepresentation? In a word, in a few words, we mean what we would call a deliberate lie. There's the technical definition from Lord Herschell in the leading case of Derry and Peek. Fraud is proved when it is shown that a false representation has been made knowingly without belief in its truth, or recklessly. I've given an example there, a forger copies a Picasso painting and sells it as by Picasso. He is telling a deliberate lie. That's what we mean by a fraudulent misrepresentation. We sometimes call it fraud, we sometimes call it deceit, all means the same thing. That might be contrasted with what we would call a negligent misrepresentation. Here, the representor is not telling a deliberate lie but is merely careless. It's a statement made by someone which they believe to be true, but which a reasonable person in their position would not believe to be true. Let's suppose I buy a painting at a car boot sale for £20 from a very nice man. This nice man told me it was by Picasso. I believe him and sell it to you as by Picasso. No one would reasonably think that you could buy an original Picasso at a car boot sale for £20, but in this hypothetical, I do believe that, even though no reasonable person in my position would do so, I am negligent. My statement to you is a negligent one. There's a clear dividing line between, on the one hand, fraudulent statements and on the other hand, negligent. Which is that if you have a belief in the truth of the statement, it cannot be fraudulent. A fraudulent statement is one you make which you know to be untrue. The moment you have an honest belief in the truth of the statement, it cannot be fraudulent. If that honest belief is one which no reasonable person would have, it is however, negligent. The third category we can call a wholly innocent statement. It's a statement made by someone which they believe to be true and which a reasonable person in their position would believe to be true. Suppose I have a painting and I take it to the country's leading expert on Picasso. She tells me my painting is definitely by Picasso. I believe her and sell it to you as by Picasso. It turns out to be not by Picasso. I have made a wholly innocent misrepresentation because I have made a statement which I believe to be true, but which a reasonable person in my position would believe to be true. Anyone who has been told by the country's leading expert on Picasso paintings that this one is by Picasso would believe it to be true. Just a little word of caution. I use the word wholly there to distinguish the innocent misrepresentation from the negligent misrepresentation. In older cases, the phrase innocent misrepresentation is sometimes used to refer to a non-fraudulent one. That is one which could be wholly innocent or negligent. The reason for that confusing terminology in the old cases is that before developments in the law of tort, there was no liability for negligence. There was only liability for fraud. The moment a statement was non-fraudulent, it could be called innocent because it gave rise to no liability for misrepresentation. Once liability for negligent misrepresentation was introduced, it's no longer appropriate to call a negligent misrepresentation an innocent misrepresentation because it might give rise to liability. Main liability for negligent misrepresentations was introduced in the 1967 Misrepresentation Act, although some tortious liability predated that. If you don't follow my history as to why these terms should be used cautiously, please don't worry. As long as you understand the difference as I've defined them, between a fraudulent misrepresentation, a negligent one, and a wholly innocent one 9.1 Definition of misrepresentation For the reasons discussed in the Introduction above it is important to know whether a statement made in negotiations becomes a term of any subsequent contract. The principles that determine the answer to this question were discussed in detail in Section 5.1. It is essential that you familiarise yourself with these again. In any examination answer there is a danger that if you wrongly classify a statement made in negotiations as either a term or a ‘mere’ representation this will lead you to discuss the wrong set of remedies available to the victim when the statement later turns out to be untrue. Therefore it is important to begin by distinguishing between statements that are mere representations and statements that become terms of the contract. 9.1.1 Misrepresentation and contractual terms As explained in Topic 5 of this guide, the determination of whether or not a pre- contractual statement was a term of the contract was important before 1967 for a different reason than it is now. Prior to 1967: the remedies for misrepresentation were limited and when a misrepresentation was incorporated as a contractual term the remedy of rescission for misrepresentation was lost. As a consequence, parties went to great lengths to persuade courts that statements were intended to be terms in order to secure a remedy. Both of these factors were changed by the Misrepresentation Act 1967. There are now much more extensive remedies in damages available for misrepresentation (under s.2 of the Act) and s.1(a) provides that a contract may be rescinded for misrepresentation, even if the misrepresentation is also a term of the contract. The question, however, is still of great importance. If, for example, the pre-contractual statement is in the form of a promise rather than a statement of fact then a remedy for misrepresentation is unlikely to be available. The only possible argument for the claimant will therefore be to show that the statement had become a term of the contract. For further full discussion of the way in which statements may become part of a contract, see Section 5.1. 9.1.2 Unambiguous false statement of existing fact or law that induces a contract For a misrepresentation to be actionable it must be an unambiguous false statement of existing fact or law. Unambiguous As with contractual terms a degree of certainty is required. If a party is to prove they have an actionable claim it must be that the term is sufficiently clear. So in Dimmock v Hallett  LR 2 Ch App 21 where the land was described as ‘improvable’ this statement was held to be ambiguous; therefore not actionable. False One issue is when the statement is, on a strict and literal interpretation of the words, true, but misleading. Is the statement false within the requirements of making a claim for misrepresentation? In Dimmock v Hallett (1866) a statement made pre-contract was that the land was ‘let to paying tenants’, which at the time was literally true. However, what the seller did not go on to say is that before the sale the tenants had given notice. This can perhaps be a half-truth. It is clear that the statement, unless explored further by the purchaser, would lead the reasonable person to believe the set of facts continued. Second, where a statement, which was true when made, becomes false as a result of a change of circumstances, keeping silent may be treated as a misrepresentation: see With v O’Flanagan  Ch 575 and Spice Girls Ltd v Aprilia World Service BV  EWCA Civ In both these cases a representation (respectively as to the profits being made by a medical practice and the continuing membership of a pop group) were true when made but, due to a change of circumstances, became untrue thereafter but before the relevant contract was signed. Both cases treated the statement as a ‘continuing representation’ by virtue of which, when the change of circumstances occurred, the representor was at that moment treated as making an untrue statement of existing fact. Statement In English contract law there is no general duty to disclose facts (Keates v Earl of Cadogan  138 ER 234) based on the principle of caveat emptor (let the buyer beware). However, in certain circumstances silence has been found to amount to a ‘statement’. A different rationalisation of the successful claims in With and the Spice Girls cases above is that the parties’ silence or inaction in the face of the changed circumstances was actionable. There are some contracts which are treated as being ‘of the utmost good faith’ (or uberrimae fidei). This means that parties are obliged to disclose relevant information, even if it is not asked for. The most common example of this type of contract is a contract of insurance. The insurer will normally be entitled to rescind the contract if any information relevant to the risk insured is not disclosed, whether or not this has been asked for: see, for example, Lambert v Co-operative Insurance Society Ltd  2 Lloyd’s Rep 485. There is no general duty when entering into a contract to disclose information so this application is very limited. Recent cases have contained discussions of the desirability of a more general duty upon contractors to act in good faith extending beyond the negotiation of a contract. Leggatt J has been an enthusiastic supporter (Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111 and Novus Aviation Ltd v Alubaf Arab International Bank BSC  EWHC 1575 (Comm)), although this enthusiasm has not been echoed in recent appellate decisions (Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd  EWCA Civ 200 and MSC v Cottonex Anstalt  EWCA Civ 789). See also Monde Petroleum SA v Westernzagros Ltd  EWHC 1472 (Comm) holding that an express right to terminate a contract did not need to be exercised in good faith. Nonetheless, in one of his final judgments as a High Court Judge before joining the Court of Appeal Leggatt J tried to give new life to the concept of a general implied duty of good faith in Sheikh Tahnoon Bin Saeed Shakhboot Al Nehayan v Ioannis Kent  EWHC 333 (Comm). He stated that a duty ‘to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at some time conflict)’ was an essential feature of any relational contract, which he defines as a contract where parties are committed to collaborating with each other, usually on an extended basis, in ways that are hard, or impossible to specify in advance. Conduct A statement may be express but may also be made by conduct. In Spice Girls the group’s conduct in continuing to participate in promotional activity constituted a representation that they were not aware that the membership of the group would soon change (Geri Halliwell had in fact already informed the others of her intention to leave the group). Fact or law A statement of opinion is not generally a misrepresentation – see Bisset v Wilkinson  AC 177. Two exceptions exist. The first is where the person expressing the opinion is aware of facts which indicate that the opinion cannot be sustained. Thus, in Smith v Land House Corporation  28 Ch D 7 a tenant who, the landlord knew, was behind with the rent could not be described as a ‘most desirable tenant’. The landlord’s statement to this effect was therefore a misrepresentation. Where the representor has particular expertise in relation to the thing said the inference that the representor is aware of facts that support his opinion is more easily raised. On this basis an estimate by an oil company of the future sales that could be expected from a particular petrol station site was held to imply a representation that the oil company was aware of facts (e.g. sales from equivalent venues) that would support this estimate (Esso Petroleum Co Ltd v Mardon  QB 801). The second exception, which can lead to a statement of opinion being treated as a false statement of fact, is where there is evidence that the person making the statement does not believe it at the time that it is made. Proof that the maker of the statement was aware of contradictory facts may prove that they did not believe the statement was true. See Edgington v Fitzmaurice  29 Ch D 459, where it was held that the ‘state of a man’s mind is as much a fact as the state of his digestion’. The fact falsely stated in these cases is the speaker’s state of mind. The speaker represents the fact that he or she believes that what is being said is true, whereas in fact no such belief is held. The Edgington v Fitzmaurice approach can also be used to turn statements of intention into misrepresentations, if at the time of making the statement, the person did not have the stated intention. This was, in fact, the situation in Edgington v Fitzmaurice itself in respect of a statement made in a company prospectus that the purpose of soliciting investments in the company was to expand the business when the real motivation was to pay off accrued debts. As the representors, at the very moment they proclaimed their intention, did not in fact have this intention, they were taken to have misrepresented a present existing fact, the state of their mind. For as Bowen LJ remarked ‘the state of a man’s mind is as much a question of fact as the state of his digestion’. Traditionally, statements of law were not regarded as being statements which, if false, will give rise to remedies for misrepresentation. It seems, however, that now that the House of Lords has recognised the possibility of restitutionary remedies for mistake of law (in Kleinwort Benson Ltd v Lincoln City Council  2 AC 349), the same approach may well apply in the area of misrepresentation. This was the view of the High Court in Pankhania v Hackney London Borough Council  EWHC 2441. In any case, if the statement of law is not believed by the person making it, then the principle in Edgington v Fitzmaurice will apply, so that the statement will be treated as a misrepresentation of the person’s state of mind. Study task 1 Consider whether any of the following statements is capable of being a misrepresentation. X, who is selling his car, tells a prospective purchaser that the tyres are ‘good for another 3,000 miles’. In fact, the tyres need replacing after another 1,000 miles. Y, a salesman for XLO Computer Services, tells a prospective customer that all XLO’s service engineers are trained ‘to the highest standards, including six weeks on the job under supervision’. In fact, the supervised period is only five weeks. A new CD is stated on posters displayed in music stores to be ‘The best garage album in the world … ever!’. Reviews of the CD in the music press are universally hostile. Show feedback X’s statement appears to be an expression of opinion as to the likely future life of the tyres. The only possibility of this being a misrepresentation is, then, if X is aware that the wear on the tyres is worse than he is suggesting. His statement will then become a misrepresentation as to his state of mind, on the Edgington v Fitzmaurice (1855) principle. The phrase ‘trained to the highest standards’ is too vague to be treated as a representation. The statement about the length of supervised training is a statement of fact, however. Since this is untrue, it will amount to a misrepresentation. The remedies available will depend on whether the statement induced a contract, and whether the salesman was aware, or should have been aware, that the statement was untrue (see Section 9.2). Statements in advertising are generally treated as ‘mere puffs’, not giving rise to any legal liability. It is unlikely, therefore, that the statement on the poster would be treated as a misrepresentation, even if the statement that the CD was the ‘best’ could be treated as ‘fact’ rather than ‘opinion’. There is also the requirement that the statement is made by one contracting party to the other. Could the statement on the poster be said to be made by the shop selling the CD, rather than the company which produced it? That induces the contract In order for a misrepresentation to be actionable, it must induce the person to whom it is addressed to make a contract. This simply means that the statement must be one of the factors which led the person to enter into the contract – it does not have to be the sole or main reason (Edgington v Fitzmaurice (1885) and now BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises  EWCA Civ 596). It is not sufficient, however, for the claimant to demonstrate that ‘he was supported or encouraged in reaching his decision by the representation in question’ (see Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc  EWHC 1392 (Comm)). The representation must play a real and substantial part of the claimant’s decision to enter into the contract. Where a misrepresentation is made by A to B and subsequently B enters a contract with A it is presumed that A’s misrepresentation induced B to enter the contract. The Supreme Court has recently emphasised that it was ‘very difficult to rebut this presumption’ (Hayward v Zurich Insurance Co plc  UKSC 48 at ). More particularly, to rebut the presumption A must prove one of the following: The representee was aware of the untruth of the statement This must be proved strictly. It does not matter that the claimant had the opportunity to discover the untruth of the statement but did not take the opportunity. In Redgrave v Hurd  20 Ch D 1 the purchaser of a solicitor’s practice had the opportunity to consult documents which would have revealed the falsity of the seller’s statement about the practice’s income. In Hayward v Zurich Insurance Co plc  UKSC 48 the Supreme Court held that an insurance company’s suspicion that the victim of a workplace accident was greatly exaggerating his injury fell short of an actual awareness on their part that his claims were untrue. As a result, when incontrovertible evidence of the victim’s fraud was obtained the insurance company was able to rescind the settlement agreement they had entered with him. The representee relied upon some other inducement Where the representee who was not aware of the untruth of the statement relies completely upon some other inducement for which the representor is not legally responsible, there is no causal link between the misrepresentation and the representee’s loss. So, in Attwood v Small  160 ER 633 statements were made by the vendor about the output of a mine. The purchaser sent his agent and the vendor’s statements were supported by the purchaser’s agents. In a claim to rescind for fraud the House of Lords rejected the claim as it was the statements of the agent, rather than the vendor, which had induced the contract. The ‘representee’ was not aware of the misrepresentation In Horsfall v Thomas  158 ER 813 the claimant sold a gun which exploded when fired because a metal plug had been used to conceal a defect in the gun’s barrel. The use of such a plug could have amounted to a representation by conduct that the barrel was sound and free of defects. However, as the defendant did not inspect the gun he was not aware of the misrepresentation and so it could not be said to have induced him to purchase it. The representee would have entered the contract even if aware of the untruth To come within this category the representor must prove, not merely assert, that the representee would have entered the contract even if he had been in possession of the full facts (Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy)  1 Lloyd’s Rep 188). This category was expressed differently by the Court of Appeal in SK Shipping Europe v Capital VLCC  EWCA 231 at as ‘whether the [representee] would have entered into the contract on the same terms even if the misrepresentation had not been made’. A further requirement is sometimes stated, which is that the misrepresentation, to justify rescission, must be a ‘material’ one (i.e. one upon which a reasonable person might have relied). The requirement of materiality is now best thought of as relevant only to the burden of proof in relation to inducement (Museprime v Adhill  36 EG 114). In the usual situation the misrepresentation will be a material one (i.e. one upon which the representee might reasonably rely) and, as described above, inducement is presumed unless the representor is able to prove otherwise. However, where the misrepresentation is not a material one (i.e. it is one upon which a reasonable representee would not rely (e.g. this car can really fly)) the burden of proving inducement will shift to the representee who must positively prove that it was reliance upon the representation that caused him to enter a subsequent contract (see Dadourian Group International Inc v Simms  1 WLR 2967). 9.1.3 Categories of misrepresentation Fraudulent – this is the tort of deceit. The requirements in Derry v Peek  14 App Cas 337 are that the maker of the statement knows or believes that the statement is untrue, or makes it not caring whether it is true or false. The burden of proof remains with the claimant to prove fraud and the burden is a heavy one. Statutory misrepresentation – under the Misrepresentation Act 1967. This Act has created the ‘fiction of fraud’. If a claimant can prove that there was a misrepresentation, bringing a claim under the Act shifts the burden of proof to the representor to prove that they had reasonable grounds to believe and did believe that the statement they made was true. This is a heavy burden of proof, as seen in Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd  QB 574 and more recently in Foster v Action Aviation Ltd  EWHC 2439 (Comm) where the Court held that where a representor had made a statement on the honest but mistaken belief that it was true (on the basis of the meaning of the term ‘accident’), this was a misrepresentation not made fraudulently but negligently under s.2(1) of the Misrepresentation Act 1967. As will be seen below, the ‘fiction’ is that the remedy provided is the same as if the statement was made fraudulently. Negligent at common law – the maker of the statement and the person relying on it are in a ‘special relationship’ giving rise to a duty of care under the principles of Hedley Byrne v Heller  AC 465 and the maker of the statement acts in breach of this duty. The burden of proof here is on the claimant to prove these elements. Innocent – if the elements of a misrepresentation can be proved but the maker of the statement genuinely believes it is true, and does not act negligently (at common law or under statute, as above) in making it then the action only lies for innocent misrepresentation. Please note that before 1964 an innocent misrepresentation referred to any non- fraudulent misrepresentation because there was at that time no liability to pay damages in respect of anything other than a fraudulent misrepresentation. Liability for negligent misrepresentation now exists at common law under Hedley and under the Misrepresentation Act s.2(1). Consequently the phrase ‘wholly innocent’ misrepresentation is now often used to describe a non-fraudulent and non-negligent misrepresentation. The distinction between these categories is vital in determining the remedies that may be available to the person relying on the statement. This is discussed further in the next section. Study task 2 Keith is an international footballer. He enters into a sponsorship agreement with Alpha Sports. A week before signing the sponsorship contract he tells a representative of Alpha that he intends to keep playing for the next five years. Three weeks after the deal is signed Keith calls a press conference and announces his immediate retirement from football. Can Alpha take action against Keith for misrepresentation? Would Alpha’s case be any stronger if evidence appears that Keith had told his manager on the day before he signed the deal with Alpha that he has just decided to retire? Show feedback Keith’s statement to Alpha Sports is a statement of intention. Such statements cannot usually be treated as misrepresentations. The exception is where there is evidence that the person making the statement did not genuinely have the relevant intention (as in Edgington v Fitzmaurice). In the absence of evidence that Keith had already decided to retire when he made the statement to Alpha’s representative, Alpha will not be able to take action against Keith for misrepresentation. In the alternative situation, it seems that Keith has changed his mind about his intentions between speaking to Alpha, and signing the contract. In general, keeping silent does not amount to a misrepresentation. But here Keith’s change of mind means that his statement about his intentions made to Alpha’s representative is no longer true. There is no direct authority in relation to changed intentions (as opposed to changed circumstances), but by analogy with v O’Flanagan (1936) and Spice Girls Ltd v Aprilia World Service BV  EWCA Civ 15, it would seem that Alpha can argue in this situation that Keith’s failure to tell them of his change of mind does constitute a misrepresentation. Self-assessment questions Define a misrepresentation. What is the presumption of ‘inducement’? How can it be rebutted? Is there a requirement that a misrepresentation be material? If so, what does this mean and how is it applied? What is an ‘innocent’ misrepresentation? Summary A misrepresentation is an unambiguous false statement of existing fact or law which induces a contract. A statement can be both a misrepresentation and a term of the contract. A misrepresentation may arise from conduct. Statements of opinion are not misrepresentations, provided that the opinion is genuinely held, and not contradicted by facts known to the maker of the statement. Silence does not generally constitute a representation, but representations may be inferred from conduct. Silence may also be treated as a misrepresentation where a statement only reveals part of the truth; where circumstances change, rendering the statement no longer true; or in relation to contracts of the ‘utmost good faith’. A presumption of inducement will arise unless the representor proves that: the representee was aware of the falsity of the statement or, the representee relied upon a different inducement or, the ‘representee’ was not aware of the misrepresentation or the representee would have entered the contract even if aware that the representation was false. (Mini Lecture 3) Continuing our account of misrepresentation, we're going to look today at what it is you can do if you have been the victim of a misrepresentation. The first remedy available to you is to get the contract set aside and that's a remedy we call rescission. We are going to talk about rescission today. What our learning objective is, is we want to understand the circumstances when a contract may be rescinded, that is set aside for misrepresentation, but we also want to understand the circumstances which might prevent rescission. These are called the bars to rescission. What do we mean by rescission? Rescission is when a contract is set aside for misrepresentation. Rescission is available prima facie in respect of all misrepresentations. By all, I mean misrepresentations which are fraudulent, misrepresentations which are negligent, and misrepresentations which are wholly innocent. You can ask for rescission independent of the mental state of the representor. What does it do? Well, it literally restores the parties to the position they were in before they relied upon the misrepresentation. If I misrepresent to you the vintage of the car I'm selling you, what rescission would do if you exercised rescission is each of us would give back what we received. You will give the car back to me, I will give the purchase price back to you. It is literally restoring the parties to the position they were originally in. Certain circumstances might prevent rescission and one of those circumstances is said to be lapse of time. The mere passage of time or as the judges sometimes say the mere effluxion of time might cause the right to rescind to be lost. Now it's a difficulty because what length of time? You can only judge the length of time in all the circumstances of the case, which isn't very helpful. You can imagine that if the contract is the sale of something perishable, let's say the sale of a shipload of meat or shipload of fruit, then the time after which the right to rescind will be lost is likely to be much shorter than if it was the sale of a non-perishable cargo such as the sale of cars, shipload of cars or a shipload of coal. There's one caveat here, which is that lapse of time is not a bar to rescission. The passage of more than a reasonable length of time is not a bar to rescission if the untrue statement was made fraudulently. Affirmation is the second bar to rescission. If you are said to have affirmed the contract at some point, you will be held to have lost your right to rescind. Affirmation according to the case of Peyman v Lanjani has two aspects. It's necessary for you to indicate that you wish to continue with the contract at a time when you are both aware of the misrepresentation, but also aware of the right to which it gives rise i.e. the right to rescind. If perhaps through a lack of familiarity with English contract law, you were aware when you indicated a desire to continue with the contract of the misrepresentation, but you weren't aware that that gave you the right to rescind, then this dual test will not be satisfied and will not be said to have affirmed the contract. It's also said that you will lose the right to rescind if you are unable to make substantial restitution. Remember what I said was that rescission involved giving back that which you have received. If you are unable to give back that which you've received, then that is a bar to rescission. The inability to make substantial restitution is understood in a very particular way according to the case of Salt v Stratstone. Even if you are giving back the thing in an altered state, if you give a financial accounting for any diminution in its value because of the altered state, you will be able to rescind and will be said to be making substantial restitution. In a very old case, the name of which I haven't put here but is the wonderfully named Erlanger v New Sombrero Phosphate Company, one of those old cases dealing with the sale of a mine, the purchaser went into possession of the mine, operated the mine for a while and extracted some phosphate from it, and then sought to rescind because the deposits weren't what they were represented to be. Technically, the purchaser could not give the mine back in exactly the state that they received it in because they had worked it briefly and extracted some phosphate. It was said that they could make substantial restitution when they gave the mine back and gave an account of the profits, which they made on the small amount of phosphate that they extracted. The final circumstance that might bar or prevent rescission is said to be the intervention of innocent third-party rights. I asked you when we looked at mistake to do some reading through the cases on mistaken identity. One of the cases I directed you to then was Ingram v Little. Ingram v Little was a case where three old ladies, Elsie, Hilda, and Mrs. Badger were duped out of their car by someone. Someone representing themselves to be a respectable business person gave them a cheque for the car, they parted with the car and of course, he was merely impersonating someone. He was not the person he said he was. These cases give rise to a difficulty because obviously, the ladies were the victims of a misrepresentation. They were the victims of a fraudulent misrepresentation, but their remedies misrepresentation were worthless. This was because what these fraudsters do when they dupe you, they scam you out of your property is that they sell it on for cash as quickly as they can, usually at a bit of an undervalue they sell on quickly. Unfortunately, although the ladies could have rescinded their contract with the rogue to get the car back, once the rogue had sold the car on to someone else, then that was the intervention of innocent third-party rights barring their claim for rescission against the rogue. Their right to recover damages for fraudulent misrepresentation, a topic we'll cover in a minute, was pretty valueless because as you might expect, these rogues are usually penniless. When they are discovered, maybe they're still on the run, they can't be discovered. Maybe they're sitting in prison, but in any event, they're not able to meet a judgment for damages, so the lady's only claim was really to try and get the car back and they lost that claim, the moment it had been sold because of the intervention of innocent third party rights. The point of this case is, and I don't want to talk really about mistake, but their only real remedy lay in mistake because if they could show that the contract with the rogue was a void, the contract is voidable for misrepresentation. It's liable to be set aside for misrepresentation, but they were unable to do that before the intervention of third-party rights. But if they were able to show that the contract was void, then of course, that would mean no contract came into existence, and that would have meant that they gave no good title to the rogue, not even a voidable one, and the rogue couldn't pass on any good title to the innocent third party. The doctrine of mistake, as it was exceptionally applied in that case, did give them a remedy, and they were able to get their car back, whereas the law of misrepresentation could not give them a remedy. (Mini Lecture 4) What we're going to look at now is damages for misrepresentation. When someone says, "Look, I'm not going to get the contract set aside. I merely want damages. I want some financial compensation because I've got a good that was not what it was described as." In relation to damages, as opposed to rescission, it matters what type of misrepresentation it was because the route to getting damages is different if it was made fraudulently, if it was made negligently, or if it was made wholly innocently. The learning objectives today are understanding the circumstances when an award of damages can be made, but also understanding what different measures of damage are available, how they will vary when it's made fraudulently, negligently, or wholly innocently. Damages for fraudulent misrepresentation. I told you that we sometimes use the word fraudulent misrepresentation. We sometimes call it fraud. We sometimes call it deceit, but this is actually a tort. There's an overlap between the law of tort and the law of contract when we talk about misrepresentation. Torts are wrongs, civil wrongs fixed by the law. We're most familiar with the tort of negligence, I act negligently. When I owe you a duty of care, it causes you loss, you can sue me. I drive my car carelessly, you sue me for negligence. Fraud is also a tort. Because it is a tort, what is called the tortious measure of damages applies. The thing about the tortious measure of damages is that the tortious measure of damages is the award of such sum of money as is necessary to put you in the position you were in before the tort occurred. It's sometimes called a backward-looking measure of damages because it is seeking to make good your losses, it is seeking to put you back in the position you were in before the tort occurred. If the tort is misrepresentation as it is here, it is putting you back, giving you such sum of money as is necessary to put the innocent party in the position she was in before the misrepresentation was made. Now, later, when we look at damages for breach of contract, we will contrast this tortious measure of damages with the measure of damages that is available for breach of contract, which we sometimes call the contractual measure of damages, but more often call the expectation measure of damages. Because when a contract is breached and you sue for damages, you recover as damages the sum of money which is needed to put you in the position you would have been in if the contract had been performed. It is forward-looking. If you are a manufacturer of widgets and I use your widgets in order to make a good we call gadgets, if your widgets are defective and I suffer a loss of profit in the sale of my gadgets, then I would sue you for breach of contract, but the contractual measure would try to put me in the position I would have been in if you performed your contract, i.e., I will recover from you the profits that I have lost through the sales I have been unable to make. Whereas the tortious measure of damages simply makes good your losses, the extent to which your financial position has been made worse, the contractual measure of damages seeks to give you the benefit of the contract you made, seeks to put you in the position you would have been in if the contract had been performed. Fraud is a tort, so you get the tortious measure of damages. Now, I did say in passing that the main route, the main way someone would sue for damages for negligent misrepresentation is under a statutory section called the Misrepresentation Act 1967, Section 2(1). You'll also recall that I did say to you in an earlier lecture that if you came to me just before the exam and said, "How can I best spend the next day revising," I would tell you to look at the statutory sections we come across. This is only six or seven, eight lines long, but it's quite a complicated section, and it's something you should read and reread. What it says is it says where a person has entered into a contract after a misrepresentation has been made to him and has suffered loss, the misrepresentor would be liable to damage. Had the misrepresentation been made fraudulently, they are so liable, even though it was not made fraudulently unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented with truth. Now, I've had to change the words to fit, to reduce the exact words of the sections likely to fit on the slide there. What it's saying is that if someone would have been liable, if a statement had been made fraudulently, they shall be liable even though it was not made fraudulently if it was made negligently. It said that the action for negligent misrepresentation is made, is created by reference to a fiction of fraud. The reason for that is a bit long-winded, but all those rules which we said that an untrue statement has to be an untrue statement of fact, not opinion, fact, not intention. Instead of writing all those out in this new action that was created, the parliamentary drafts people did this by shorthand, by saying if you would have been liable if it had been made fraudulently, you shall be liable even though it's not made fraudulently if it was made negligently. Is a shorthand way of saying it must be an untrue statement of fact, not opinion. It must be an untrue statement of fact, not intention because they would have been necessary to bring an action for fraud. Now, it doesn't actually say as I've summarized. It doesn't actually say does it that you shall be liable even though the statement was only made negligently. It says you will be liable unless you prove that you had reasonable grounds to believe in the truth of the statement. Now, this is significant because if A sues B for negligent driving, A has to show that B was negligent. What this section is doing is reversing the burden of proof. It is saying that if A makes an untrue statement to B and B has it as a contract with A in reliance on it, to sue for negligent misrepresentation, A doesn't have to show the statement was made carelessly. B has to show it was not made carelessly. The representor has to show that they had reasonable grounds to believe in the truth of the statement. It's even better than that because not only does the representor have to show they had reasonable grounds to believe in the truth of the statement when it was made, they have to show that those reasonable grounds continued right up to the time of the contract. They will be liable unless the representor proves he had reasonable grounds to believe and did believe up to the time the contract was made, that the facts represented were true. Even if at the time he made the statement he had reasonable grounds to believe in the truth of the statement if between the making of the statement and the eventual conclusion of the contract he becomes aware of facts that lead him to believe that the statement was not true, he will be liable. If I honestly believe that the painting I sold to you was by Picasso, I represent it's by Picasso. If before you collect it, an art expert comes to my house, sees it on the wall, and says, 'There's absolutely no way that's by Picasso." You would be able to sue me for negligent misrepresentation because although I had reasonable grounds to believe in the truth of the statement when it was made, because this great expert cast doubt on it after the making of the statement to you, but before you contracted to buy the painting from me, I will be liable. What are the damages? One consequence of creating this right of action by reference to negligent misrepresentation by reference to the fiction of fraud is that the damages you get under Section 2(1) are the same as the damages you will be entitled to for fraud, because what it says is it says that, if you would've been liable had the misstatement been made fraudulently, you shall be so liable even though it was not made fraudulently, if it was made negligently. That was interpreted in Royscott v Rogerson to mean liable to the same extent, i.e, that the damages available under Section 2(1) are the same as the damages available for fraud. The consequence of that is that, in most circumstances, you would prefer to sue under Section 2(1) if you have available an action under Section 2(1) as well as an action in fraud because you'll get the same amount of damages, but you get the benefit of this reversed burden of proof. In a case called Howard Marine Dredging v Ogden, a statement was made about the carrying capacity of certain barges and the representor had checked in something that was called the Bible of the shipping trade, Lloyd's Register of Shipping, what the carrying capacity of the barges were when he represented it. It was said he should have checked that carrying capacity in the title documents to these barges, which would've shown that Lloyd's Register of Shipping was wrong. It's a very claimant-favorable action because in that case, the claimant was unable to show that he had reasonable grounds to believe in the truth of the statement even though he looked up the carrying capacity in what was described as the Bible of his trade. Now, the section after Section 2(1) of the Misrepresentation Act is Section 2(2). This is something that you need to relate back to when we talked about the bars to rescission because this is something that could have been discussed there, or could be discussed here. It describes a circumstance when someone is deprived of the right to rescind, so it could have been discussed as a bar, but it describes a circumstance where someone is given damages instead of rescission. It can be described here as an action for damages. What it says is, when someone is entered into a contract after a misrepresentation has been made to him, which was not fraudulent and he would be entitled to rescind the contract, then the court might declare the contract subsisting might say, 'No, we're not setting aside the contract, but award damages instead." Section 2(2) is both something analogous to the bars to rescission, but it's also something which gives rise to our claim to damages. When would it be used? Well, it would be used really if the misrepresentation was wholly innocent. One way you might get damages is by claiming rescission and inviting the court to substitute for your claim for rescission an award of damages. The damages are awarded at the discretion of the court, but an inference you might make is that they will likely be less than the damages awarded under Section 2(1). If the misrepresentor is wholly innocent, you might expect the damages to be less because he is less culpable or less blameworthy than if he was negligent. I specifically directed you to look at a case in the reading where one of the few cases where these damages are considered. That's the case of William Sindall v Cambridgeshire County Council. There's some reading there which consists of Royscott v Rogerson, William Sindall v Cambridge County Council 9.2 Remedies for misrepresentation The remedies available for misrepresentation will depend on whether it was made innocently, negligently or fraudulently. There are potential remedies available under the common law (both in contract and tort) and under statute (the Misrepresentation Act 1967). The main categories of remedy are first, rescission of the contract and secondly, damages for losses resulting from the misrepresentation. These will be considered in turn. 9.2.1 Rescission The principal common law remedy for a misrepresentation which induced a contract was rescission. This was, and is still, available whether the representation was innocent, negligent or fraudulent. ‘Rescission’ in this context means that the contract is set aside, and the parties put into the position they would have been in had the contract never been made. Any goods or money which have been exchanged must be returned. The equitable remedy of rescission must be sought by the claimant: it does not occur automatically. Until rescission has taken place, the contract will continue to exist. In other words, misrepresentation renders a contract ‘voidable’ rather than ‘void’. Generally speaking the right of rescission will be exercised by giving notice to the other party. There is one authority, however, which holds that rescission can be effected by giving notice to relevant third parties. In Car & Universal Finance Co v Caldwell  1 QB 525, where the seller of a car wished to rescind the contract when the purchaser’s cheque bounced, it was held that notifying the police and the Automobile Association was sufficient. The seller had done all that he reasonably could to rescind the contract, given that the purchaser had absconded and was untraceable. Limitations on rescission There are some situations where the right to rescind will be lost, sometimes called the ‘bars’ to rescission. Where a party to the contract, aware of the other party’s misrepresentation, continues with the contract, and thus ‘affirms’ it: see, for example, Long v Lloyd  1 WLR 753. Affirmation occurs when the ‘dual knowledge’ test is satisfied (Peyman v Lanjani  Ch 475). It is necessary that at the time of the conduct said to constitute affirmation the representee must be aware of both the circumstance that gives rise to the right to rescind and also to the fact that that right has arisen. Where there is a significant lapse of time between the making of the contract and the discovery of the misrepresentation. In Leaf v International Galleries  2 KB 86, for example, the gap was five years. It may well be, however, that a much shorter period would be enough for the right to be lost – unless the misrepresentation is fraudulent. It has recently been suggested that the time at which the representee became aware of the existence of the right to rescind for misrepresentation may affect the operation of this bar to rescission (Salt v Stratstone Specialist Ltd  EWCA Civ 745). Where restitution is impossible. Since the idea of rescission is to restore the parties to the position they would have been in had the contract not been made, if property which has been transferred has been consumed or inextricably mixed with other property, rescission will not be permitted. See, for example, Clarke v Dickson  120 ER 463. The fact that property has been used (rather than consumed), however, will not necessarily prevent rescission, if a payment of money to cover the use can be made. In this sense it is sufficient if substantial restitution may be effected combined with a payment to the representor to cover any diminution in value caused by the representee (Erlanger v New Sombrero Phosphate Co  3 App Cas 1218 and Salt v Stratstone Specialist Ltd  EWCA Civ 745). Where rescission would affect the rights of a third party. The most obvious example is where goods have been sold to the ‘misrepresentor’, who has then sold them on to an innocent third party before the contract has been avoided. The courts will not require the third party to return the goods to the original owner. This is why parties in this type of situation try to argue that the contract is void for mistake (see Topic 8). Note that the court also has a discretion under s.2(2) of the Misrepresentation Act 1967 to award damages instead of rescission, where it is equitable to do so. This is discussed further in Section 9.2.2. Study task 3 In what other circumstances do the courts talk about ‘rescission’ of a contract? How does this differ from ‘rescission for misrepresentation’? Show feedback The main other use of the term ‘rescission’ is in relation to the power of the innocent party to terminate a contract for breach. This is discussed further in Chapter 12. The chief difference is said to be that termination for breach does not aim to undo the contract, but simply to bring it to an end for the future. In other words it is only obligations which are not yet due for performance that are ‘rescinded’ in this situation. The distinction is not clear cut, however, in that in some cases termination for breach may lead to property being handed back. If, for example, a sale of goods contract is terminated because the goods are of unsatisfactory quality, the consequence may be that the goods are returned to the seller and the purchase price is returned to the buyer. For the sake of clarity it is probably best to reserve the term ‘rescission’ for misrepresentation and to refer to ‘termination’ or ‘repudiation’ when breach is being discussed. Study task 4 Why do you think that the remedy of rescission for misrepresentation is subject to so many limitations? Are they justifiable? Show feedback You must remember that rescission of a contract is available even if the misrepresentation is entirely innocent. It is also a powerful remedy which, in undoing the contract, can have serious consequences. Taking these two factors together, the courts are probably right to limit the scope for rescission, leaving the situations where the misrepresentation was not innocent to be dealt with by damages under the tort of deceit (as discussed in Section 9.2.2). The gap that was left, however, was the situation where the misrepresentation was negligent. If the right to rescind was lost, the victim of a negligent misrepresentation was left without a remedy. This gap has now been filled as far as damages are concerned by both the common law and the Misrepresentation Act 1967 (again, see Section 9.2.2). It is arguable that now that the law has recognised a range of categories of misrepresentation, more flexibility should be employed in deciding whether to allow rescission. In the most recent examination of this area of law, Salt v Stratstone Specialist Ltd  EWCA Civ 745, which repays reading in full the Court of Appeal, addressed various questions about the availability of remedies for misrepresentation in a holistic way that took account of the availability of remedies for breach of contract arising from the same set of facts (see especially the judgment of Roth LJ). 9.2.2 Damages The common law was late in recognising a right to damages for non-fraudulent misrepresentations. Originally an innocent misrepresentation provided only an indemnity for necessary expenditures incurred as a part of the contract rescinded by way of monetary compensation: see Whittington v Seale-Hayne  82 LT 49. Where a misrepresentation was fraudulent, damages were recoverable under the tortious action for deceit. This requires the claimant to prove that the statement was made knowing that it was untrue, without any genuine belief in its truth, or with a reckless disregard for whether it was true or not: see Derry v Peek (1889). Damages for deceit are, of course still available, but where a claimant has a choice of which action to pursue, they will elect to recover damages under s.2(1) of the Misrepresentation Act because its requirements are easier to prove. The measure of damages for deceit, being tortious, is based on putting the claimant into the position he or she would have been in had the misrepresentation not been made. This is in distinction to putting the claimant in the position he or she would have been in had the statement been true. In general, this precludes the claimant from recovering lost profits on the contract. In some circumstances, however, some damages of this kind may be recovered. In East v Maurer  1 WLR 461, the fraudulent statement led the plaintiff to buy a business which turned out to be much less profitable than it would have been had the statement been true. The damages recoverable took account of the fact that if the statement had not been made the plaintiff would probably have bought another business, from which profits would have been made. These potential profits were recoverable, even though the reduced profits on the business actually bought were not. Once it is established that the statement was fraudulent, all losses (calculated on the basis outlined in the previous paragraph) which are directly attributable to the deceit are recoverable. The normal rules of ‘remoteness’ which apply to contract or tort damages do not operate in this situation: Doyle v Olby (Ironmongers) Ltd  2 QB 158. Study task 5 Read the case of Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd  AC 254. What was the difference between the view of the Court of Appeal and the House of Lords in this case? Explain how the measure of damages used by the House of Lords fits in with the principles outlined above. Show feedback The Court of Appeal thought that if the misrepresentation had not been made then the plaintiffs would still have bought the shares, but at a lower price. They would therefore still have suffered a loss on the resale of the shares, but a smaller one, based on the difference between the actual purchase price and the price they would have paid without the misrepresentation. The House of Lords thought that if the misrepresentation had not been made then the plaintiffs would not have bought the shares at all. They were therefore entitled to the full loss suffered on the transaction. It was irrelevant that the dramatic reduction in the value of the shares was unforeseeable at the time of the initial contract. Since the misrepresentation was fraudulent, the principle in Doye v Olby meant that all direct losses were recoverable, without any consideration of ‘remoteness’. The most important innovation in the Misrepresentation Act 1967 was the introduction of the action for what is generally referred to as ‘negligent misrepresentation’, in s.2(1). In fact, the Act does not use this terminology, but provides that a statement which would form the basis of an action in deceit, if made fraudulently, will also give rise to liability unless the person making it is able to prove that ‘he had reasonable grounds to believe and did believe up to the time that the contract was made that the facts represented were true’. There are two important points to note about this section: the first relates to the burden of proof, noted above; the second to the measure of damages. The burden of proof On the burden of proof, all that the claimant has to do is to prove that a misrepresentation was made and that it induced the contract. The defendant will then be liable for damages under s.2(1) unless he or she can prove that there were reasonable grounds for his or her belief that the statement was true. This may not be easy to satisfy. In Howard Marine and Dredging Co v Ogden and Sons (1978) it was held that reliance on a usually authoritative Register of the details of ships did not amount to ‘reasonable grounds’ for a false statement of a barge’s capacity, when the maker of the statement had access to the correct figure in the shipping documents. In contrast, in Al-Hasawi v Nottingham Forrest FC Ltd  EWCA Civ 2242 it was held that a representor involved in the sale of a football club could show he had reasonable grounds to believe the statements he made about the club’s outstanding liabilities when he had obtained this information from the relevant club’s officers. The measure of damages  As regards the measure of damages, the most important authority is Royscot Trust Ltd v Rogerson  2 QB 297. Here it was held by the Court of Appeal that damages under s.2(1) should be calculated in the same way as if the statement had been made fraudulently. This means, therefore, that all losses are recoverable, not simply those that were reasonably foreseeable (as would be the case with an action for negligent misstatement under the Hedley Byrne principle). This conclusion was based on the court’s view of the proper interpretation of s.2(1) and the fact that it appears to require the negligent misrepresentor to be treated in the same way as the fraudulent one. This conclusion is somewhat controversial, and some members of the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd  indicated doubts about its correctness. It has not as yet been overruled. In Gran Gelato v Richcliff (Group) Ltd  2 WLR 867 it was suggested that damages under s.2(1) might be reduced to reflect any want of care (contributory negligence) by the representee. This does produce a conundrum as damages in deceit are not reduced to take account of the representee’s contributory negligence (Standard Chartered Bank v Pakistan National Shipping (No 2) (2003)) and yet, according to Royscott the damages available under s.2(1) are the same as those available in the tort of deceit. The law of tort, in Hedley Byrne v Heller (1964), eventually recognised that a negligent misstatement which caused economic loss could be actionable. The action that has developed from this provides another potential remedy for a person who has entered into a contract as a result of a negligent misstatement from the other party. That the action can be used in this way was confirmed by the Court of Appeal in Esso v Mardon (1976). Generally, however, the claimant in such a situation will be better advised to use the action provided by s.2 of the Misrepresentation Act 1967, since this has advantages in terms of the burden of proof and damages recoverable, as will be indicated below. The one situation where the Hedley Byrne action may be needed is if the statement cannot be categorised as a statement of fact. A negligently given opinion can, for example, be the basis for an action for negligent misstatement under Hedley Byrne, without the need to show that it meets the strict requirements of being a misrepresentation. A further situation where a claimant might choose to pursue an action for damages under Hedley Byrne (or in the tort of deceit) would be where A has suffered loss as a result of reliance upon B’s misrepresentation not through entering a contract with B but rather as a result of entering a contract with C. For example, a financial adviser recommends the purchase of shares. If the advice contains a misrepresentation, damages under s.2(1) are not available as they depend upon the loss being incurred as a consequence of entering a contract with the misrepresentor. In this example the loss results from entering a contract with a third party, the company/person selling the shares. That damages in these ‘three party’ situations are not available under the Misrepresentation Act, s.2(1) was confirmed by the Court of Appeal in Taberna Europe CDO II plc v Selskabet (formerly Roskilde Bank A/S) (In Bankruptcy)  EWCA Civ 1262. Study task 6 In what situations may it be preferable to base an action on ‘fraud’ (that is, using the tort of deceit) rather than on s.2(1) of the Misrepresentation Act 1967? Show feedback Where the fraud involves a misrepresentation by a party to a contract which has induced the other party to enter into an agreement, there seems little point in using the tort of deceit. The Misrepresentation Act 1967 has a much lighter burden of proof for the claimant, and the remedies available are just as extensive as for deceit (on the basis of Royscot v Rogerson). Do not forget, however, that the tort of deceit does not only apply to misrepresentations inducing a contract; for fraud outside the contractual area the tort of deceit may well still be a useful basis for a claim. Study task 7 Why does McKendrick argue that if the House of Lords does not overrule Royscot v Rogerson then legislation should be used to do so? Show feedback McKendrick’s argument supports the view taken by other academic commentators, and in particular Hooley (1991), that the Court of Appeal’s decision in Royscot v Rogerson involved a misinterpretation of s.2(1) of the 1967 Act. Although the section uses the analogy of fraud, there is nothing in it which compels the court to apply the same approach to damages as is used in the tort of deceit. The current approach means that the law fails to make any distinction between the defendant who cannot prove that he or she took reasonable care and the defendant who is proved to have acted fraudulently. McKendrick suggests that the different level of culpability between the defendants would justify (or even require) a difference in the level of damages which they are required to pay. (Note that considerations of ‘culpability’ have a much stronger role in the law of tort than they normally do in contract, where the loss to the claimant, rather than the fault of the defendant, is generally the dominant consideration.) Section 2(2) of the Misrepresentation Act provides a discretion for a court to award damages in lieu of rescission, where it is adjudged equitable to do so, taking account of the effect of rescission on both parties. The most natural interpretation of the language of s.2(2), however, suggests that damages may only be awarded under s.2(2) ‘in lieu of rescission’ when at the time of award there is a subsisting right to rescission. In other words, such damages are unavailable where there was once a past right to rescind but which right had subsequently been lost because one of the so called ‘bars’ to rescission i.e. affirmation, lapse of time, the impossibility of restitution or the intervention of third- party rights (see Section 9.2.1 above). This interpretation was supported by the Court of Appeal in Salt v Stratstone Specialist Ltd  EWCA Civ 745 thus resolving a longstanding conflict between several first instance decisions on this point. As to the measure of damages under this section, there is similarly no definitive ruling. Section 2(3) states that if damages are awarded under s.2(1) and s.2(2), the latter must be taken into account in assessing the former. This implies that s.2(2) damages will be less than those under s.2(1). In William Sindall plc v Cambridgeshire County Council  1 WLR 1016 it was suggested that the basic measure under s.2(2) should be the difference in value between what the claimant was misled into believing he or she was receiving under the contract and the value of what was in fact received. This seems sensible as an estimate of the loss of the right to rescind. In this case it was said obiter that the proper measure of damages in lieu of rescission if there had been a misrepresentation as to the existence of a small sewer beneath development land bought for £5 million was the modest cost (£18,000) of re-routing the sewer. Where the misrepresentation is more serious in relation to the contract as a whole damages in lieu of rescission will be refused (Harsten Developments Ltd v Bleaken  EWHC 2704). Self-assessment questions Can a contract be rescinded where a party continues with a contract despite knowing the other party has made a misrepresentation? If so what must be proved? When might a representation be regarded as reckless or negligent? What is the basis of the awarding of damages (in tort) for fraudulent misrepresentation? Summary The remedies for misrepresentation are rescission of the contract and damages. Rescission is available for all types of misrepresentation, but can be lost by affirmation, lapse of time, impossibility of restitution, or the intervention of third party rights. Damages are available for fraudulent or negligent misrepresentations, under the tort of deceit and s.2(1) of the Misrepresentation Act 1967. The measure of damages is the same in both cases. There is also the possibility of an action for the tort of negligent mis-statement based on Hedley Byrne v Heller. Section 2(2) of the Misrepresentation Act 1967 gives the court a power to award damages in lieu of rescission. 9.3 Exclusion of liability The exclusion or limitation of liability for misrepresentation in contracts between a trader and a consumer will be subject to a test of fairness under the CRA 2015 (s.62 and Schedule 4). For a discussion of the application of this standard see Topic 6, Introduction and Section 6.2. All other cases are dealt with by s.3 of the Misrepresentation Act 1967, as amended by s.8 of the Unfair Contract Terms Act 1977. This requires that any clause which attempts to limit liability for misrepresentation must satisfy the requirement of reasonableness set out in s.11 of the UCTA (Topic 6). In Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd EWHC 2198 the court considered the criteria set out in Schedule 2 of the UCTA to determine that the clause was reasonable under s.3 of the Misrepresentation Act 1967. Broad attempts to exclude liability have been found to be unreasonable, even if the clauses are drawn from widely used standard conditions: see Walker v Boyle  WLR 495 and Thomas Witter v TBP Industries  2 All ER 573. In HIH Casualty & General Insurance Ltd v Chase Manhattan Bank  1 CLC 358, the House of Lords held that the right of a party to exclude damages caused by an innocent or negligent misrepresentation did not extend to a fraudulent misrepresentation. Where there was a fraudulent misrepresentation the party deceived retained the right to rescind the contract and sue for damages. Sometimes the attempt to exclude liability is put into the form of an assertion, for example, that ‘no statements are made other than those contained in the contract itself’. Such ‘entire agreement’ clauses have been considered in a number of cases. Despite some older, contrary authority, more recent cases have generally taken the line that an entire agreement clause, or clauses, which attempt to deny that there is any reliance on pre-contractual statements, do fall within the scope of s.3 as far as liability for misrepresentation is concerned. See, for example, Cremdean Properties v Nash  1 EGLR 58; Inntrepreneur Estates (CPC) Ltd v Worth  1 ELGR 84; Thomas Witter Ltd v TBP Industries Ltd  All ER 573; Inntrepreneur Pub Co (GL) v East Crown Ltd  2 Lloyd’s Rep 611. In other cases, however, courts have concluded that clauses which seek to define the applicable duty are outside s.3. See, for example, Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317 and Overbrooke Estates Ltd v Glencombe Properties  1 WLR 1335. The conflict between these two positions awaits resolution. See Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland (2010) and Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd (2012). Summary By virtue of s.3 of the Misrepresentation Act 1967, the exclusion or limitation of liability for misrepresentation is subject to the requirement of reasonableness set out in s.11 of the UCTA. ‘Entire agreement’ clauses are generally regarded as falling within the scope of s.3. Sample examination question 1 Question Ian, an investment broker, was approached by Vera who asked him whether she should invest in Wander Electronics Ltd. Ian said, ‘You certainly should, Lord Wellybob is a director. It is a very sound company. It is my view that it will go from strength to strength. In fact I own 5,000 shares myself which I can let you have.’ Vera then bought the shares from Ian for £10,000. The company went into liquidation a month later. The shares are now worthless. It now turns out: that Lord Wellybob resigned from his directorship a week after Ian’s statement was made that Ian’s statement regarding the soundness of the company was based on a report in a financial journal which was intended to refer to Wonder Electronics Ltd but gave the name of Wander Electronics as a result of a printing error. Advise Vera. Feedback In order for Vera to have a remedy against Ian for misrepresentation, she will need to show that he has made a false statement of fact which has induced her to contract with him. The statements which Ian makes are: (a) about Lord Wellybob’s directorship; (b) that the company is ‘very sound’; and (c) that it will go from ‘strength to strength’. Lord Wellybob’s directorship. This statement is true when Ian makes it. Is it still true when Vera enters into the contract? This is not clear from the facts, but if she makes the contract after Lord Wellybob has resigned it may be that Ian should have told her about this (see With v O’Flanagan). If she makes the contract before Lord Wellybob resigns, then Ian can only be liable for misrepresentation if at the time he made the statement he knew that Lord Wellybob was planning to resign (see Dimmock v Hallett and Spice Girls v Aprilia). The final issue will be whether the fact that Lord Wellybob was a director was one of the reasons why Vera entered into the contract. This is for her to prove. Company is very sound. Is this an expression of opinion (Bisset v Wilkinson), or a statement of fact? If the former, then Ian’s statement will not be a misrepresentation, unless he is aware of facts that make this opinion untenable (Smith v Land House Corporation). If it is a statement of fact, and is untrue, then did Ian have reasonable grounds to believe that it is true (as required by s.2(1) of the Misrepresentation Act 1967)? He relied on the magazine article – will this be enough to constitute ‘reasonable grounds’? Should an investment broker have more solid bases for making recommendations of this kind? (See Howard Marine v Ogden). Company will go from strength to strength. This is clearly stated as an ‘opinion’. On that basis it will only give a remedy in misrepresentation if Ian did not genuinely hold the opinion (Edgington v Fitzmaurice). Another possibility might be to sue for negligent misstatement under Hedley Byrne v Heller, if Vera can prove that the opinion was negligently given. In any of the above cases, if Vera can establish the misrepresentation, she may wish to rescind the contract. Do any of the bars to rescission apply? The possible bars here are lapse of time, and the impossibility of restitution. You should discuss both of these in considering whether Vera can return the shares and recover her £10,000. In relation to damages, Vera’s argument will presumably be that in the absence of the misrepresentation(s) she would not have bought the shares and that she can therefore recover the full loss she has suffered from the fall in the shares’ value (i.e. £10,000 minus the current value of the shares). Are there any other losses for which she could recover? Exam question activity 1 Try to answer the following question: Lord Sepulchrave has fallen on hard times. He decides to sell the cherished vintage Bentley which he was given by his brother Barquentine last year. Lord Sepulchrave thinks that it is an example of the very rare 1928 MK I Bentley. In fact it is a very similar 1938 MK II Bentley. Lord Sepulchrave takes the car to Vintage Car Garages. While a garage employee, Flay, is inspecting the car, Lord Sepulchrave says: ‘Don’t worry, I can assure you that it is a perfect MK I Bentley, never had a knock. But I suppose you need to be sure. I’ll leave it with you overnight and you can check it over. You may as well have the documentation as well; that’ll prove it’s a MK I.’ Flay agrees to keep the car overnight as the garage’s Bentley expert will be in the next day. That evening Lord Sepulchrave tells Barquentine of the impending sale. Barquentine is unbothered because he informs his brother ‘it’s had so many knocks it’s hardly in perfect condition.’ The next day the garage’s Bentley expert is off work and so doesn’t inspect the car. Nor does anyone examine the documentation which would have revealed the car’s true model, its age and that the bodywork had been repaired. When Lord Sepulchrave returns to the garage he is offered and accepts £40,000 for the car. The car is in fact worth £10,000. If it were an unblemished MK I it would be worth £60,000. Discuss.