MISREPRESENTATION

Özde Hancıoğlu TERM II

LECTURE 8 – UNIT 8

“What do lawyers learn in law school? They learn to win… What we’ve got to start thinking about is how do we solve problems.”

Benjamin Carson

Learning OutcomesOn completion of this unit students should be able to :

• Define the concept of misrepresentation in contract law

• Explain the elements of actionable misrepresentation

• Explain the different types of misrepresentation under the common law and the Misrepresentation Act 1967

WHAT IS A MISREPRESENTATION?

• DEFINITION : It is an untrue statement of fact made prior to the contract by one party of the contract(misrepresentor) to the other (misrepresentee) which is false or misleading and which induces the misrepresentee to enter into the contract.

IN SHORT…A false statement with the intention of inducing another party to contract.

MISREPRESENTATION• In an action for misrepresentation the plaintiff has

to establish that there is an “ACTIONABLE MISREPRESENTATION”

• ACTIONABLE MISREPRESENTATION: An unambiguous false statement of fact which induces the other party to enter into the contract.

ACTIONABLE MISREPRESENTATION

• The plaintiff has to establish that there was an “Actionable Misrepresentation” and must prove the following four elements:

– A statement of a MATERIAL FACT which is UNTRUE

– The statement was made by ONE contracting party TO the OTHER

– BEFORE the contract– The statement INDUCED the conclusion of the

contract

The First question we must ask is :• WHAT IS A REPRESENTATION ?Answer: It must be a statement of fact, NOT :

- opinion

- mere sales talk, puffs

- intention

If this statement turns out to be UNTRUE, it becomes a MISREPRESENTATION.

“MERE SALES TALK”• If reasonable people would think they were hearing mere sales talk

then they are not entitled to rely on it

• So mere sales talk cannot amount to a misrepresentation

• The law does not consider that “mere puff” or “sales talk” are misrepresentations.

• For example, a second-hand car dealer claiming “this is the fastest car ever”, or a washing detergent company advertising that their product “will clean your clothes whiter than white” are not considered misrepresentations, as a reasonable person would be unlikely to take such claims seriously.

Statements of Opinion • As a general rule, a statement of opinion is not a

statement of fact.

• If one side makes a mere statement of opinion the other side should not treat it as a factual statement and usually cannot reasonably pay it attention at all.

• For example; Bisset v Wilkinson(1927)

Bisset v Wilkinson(1927)• The owner of land in New Zealand, which had not previously

been used as a sheep farm, told a prospective purchaser that in his judgement the land could carry 2,000 sheep.

• However, this was obviously a mere statement of opinion and so the buyer could not sue when the estimate was proved over-optimistic

• HELD- The statement was no more than an honest statement of opinion, made without particular expertise as to the capacity of the farm. It was not a representation as to its actual capacity.

Exception• In Bisset the parties were farmers so they were expected to rely on their own

opinions, not those of other farmers

• However, a statement expressed as an opinion MAY amount to an ACTIONABLE MISREPRESENTATION.

• It may be different if the opinion comes from someone very knowledgeable so that it is reasonable for the other to rely heavily on the opinion

• Therefore; an apparent expert giving their opinion may be making an implied statement of fact to the effect “I have reasonable grounds for the opinion I am giving”

• If the expert has no such reasonable grounds, then there is a misrepresentation (READ; Smith v Land and House Property (1884) and Esso Petroleum Ltd v Mardon (1976)

Misrepresentation by conduct • English law does not require that the representation take the form of

words. The notion of “statement” can extend to mere conduct without words.

• The conduct of a party - Particularly a party’s concealment of some material fact from the other party will support a claim of misrepresentation.

• A misrepresentation can be made by conduct. Information can be conveyed as much by conduct as by words and the courts have generally been willing to imply representations by conduct in ordinary dealings

• Representations can be made by conduct is also demonstrated by the Spice Girls Ltd v Aprilia World Service BV (2000)

Spice Girls Ltd v Aprilia World Service BV (2000)

Spice Girls Ltd v Aprilia World Service BV (2000)

• The claimants, Spice Girls, entered into a contract with the defendants, Aprilia World Service, a manufacturer of motorcycles and scooters.

• Aprilia agreed to sponsor the Spice Girls’ concert tour in return for promotional work carried out by the group.

• Spice Girls had made a misrepresentation by conduct when they participated in a photo shoot to promote a contract with Aprilia.

• Because; at the time of entering the contract Aprilia believed that all the Spice Girls would remain members of the group until the end of the tour.

• However, at the time of entering the contract, the Spice Girls were aware that Geri Halliwell, one of the members of the group, was going to leave the group on 27 May 1998.

Spice Girls Ltd v Aprilia World Service BV (2000)

• Aprilia claimed that the Agreement had been induced by misrepresentation and sought damages for misrepresentation.

• HELD- According to the Court of Appeal, by participating in a photo shoot and other promotional material, it was suggested that there were five members of the Spice Girls. Gerry Halliwell’s departure removed all commercial value from the picture shoot. Failure to reveal the truth was misleading and allowing her to take part amounted to a misrepresentation

Statements of Law

• Formerly it was always considered that a statement of law could not amount to a misrepresentation. The rule was thought to be justifiable on the basis that the law is equally accessible to everyone and if a person is not sure as to the state of the law, they should seek the advice of their own legal adviser. The rule revolved around the principle of ‘ignorance of the law is no excuse’. In other words, everyone is presumed to know the law; therefore, a misrepresentation of law could not amount to a vitiating factor.

• This has changed and false statement of law will now amount to an actionable misrepresention.

Statements of Intention as to the future

• A mere representation as to future conduct is not actionable either as a breach of contract or as a misrepresentation since such statements do not amount to statements of fact. This is because at the time the statements were made they can not be categorised as either true or false. 

• NOTE- A statement of intention that induces a person to enter into a contract is, however, actionable as a misrepresentation of fact where it can be shown that the maker knew that his promise would not be carried out. {See; Eddington v Fitzmorice (1885)}

Silence as a misrepresentation of fact

• As a general rule, silence cannot amount to a misrepresentation since there is no duty to disclose facts which may influence a person not to enter into a contract. (Keates v The Earl of Cadogan)

• The rule reflects the attitude of classical contract law that the parties must look after their own interests in making contracts.

• Lord Atkin : “The Failure to disclose a material fact which might affect the mind of a prudent contractor does not give the right to avoid the contract.”

Exceptions to this rule When can silence become a Misrepresentation?

If the law imposes a duty to reveal certain facts or matters then a failure to speak amounts to a misrepresentation.

1. Half truth : It is a misrepresentation to make statements which are true but misleading because they do not reveal all the relevant facts.

2. Change in circumstances : Where a truthful statement of fact is made but is subsequently rendered misleading by a change of circumstances, there is a DUTY to correct what has become a false impression. Where a representor knows that the subsequent events or circumstances have changed, he is under a duty to disclose the change of circumstances. {With v O’Flanagan (1936)}

Exceptions to this rule3. Contracts of “UTMOST GOOD FAITH”Three types of Contracts:• Contracts of insurance: Those seeking insurance have a general duty to

disclose all material facts. A material fact is one which would influence a prudent insurer in deciding:

» whether to accept the insurance, or » in setting the premium to be paid

• Contracts for the sale of land: The duties of the seller of property certainly include obligations to reveal defects in title, and covenants binding the land

• Therefore; silence on these points amounts to a misrepresentation

• Contracts for the sale of shares

Exceptions to this rule4. Fiduciary or Confidential Relationship:

A fiduciary relationship is a relationship of special confidence between certain classes of people, imposing particular duties of care on those to whom confidence is entrusted. It involves one party acting for the benefit of another.

For this reason, when entering into a contract, it is important for a fiduciary to disclose all facts which could be considered material even if not expressly asked about.

Such relationships exist between: solicitor – client

agent – principal

doctor – his patient

partners in a partnership

TO BE CONTINUED…

INDUCEMENT• Once it has been established that a false statement has been

made it is then necessary for the representee to demonstrate that the false statement induced them to enter the contract.

• The false statement must have induced the representee to enter into the contract.

• The party misled must prove :– He knew of the existence of the representation– He allowed it to affect his judgment– He was unaware of its truth– He acted upon it (relied on it)

INDUCEMENT• Was it known to the representee (plaintiff)?

There can be no inducement or reliance if the representee was unaware of the false statement. The false statement of fact must have been intended to cause and have in fact caused the representee to enter the contract : Horsfall v Thomas (1962) ~ The representation must be known the to claimant

• B purchased a gun with a defect.• After being fired six rounds, the gun was blown to pieces.• It was not clear why this happened. It appears that S, the seller, had

concealed the defect in the gun (misrepresentation by conduct).• B had not examined the gun.• B claimed that the contract induced by S’s fraud and misrepresentation.

Horsfall v Thomas (1862)

• Held : His action for misrepresentation failed as he hadn't inspected the gun before purchasing it. Therefore the misrepresentation did not induce him to enter the contract as he was unaware of it.

• Discussion : In this case, a defect in a gun was concealed, but it was held that there was no ACTIONABLE MISREPRESENTATION. However, this was because the defect in the gun was discoverable on inspection but no inspection had taken place. Therefore, the plaintiff could not argue that he had relied upon (and been induced by) by the Misrepresentation.

• Important : Compare this case with Gordon v Selico (1986)

INDUCEMENT• Verifying a statement made If the representee or their agent checks out the validity of the statement, they have not relied on the statement. Therefore, there will be no reliance if the representee does not rely on the misrepresentation but on his own judgment or investigations.

• See: Attwood v Small (1838)

Attwood v Small (1838) • No inducement will be found where C made his own

investigations.

• A buyer appointed an agent to check the statement made by the seller as to the reserves in a mine. The buyer wanted verification of the statement made by the seller and appointed experienced agents who reported that the statements were accurate.

• HELD- NOT ACTIONABLE MISREPRESENTATION. The buyer had relied on his own agent’s statements, not the seller’s.

INDUCEMENT• Is there a duty to verify?

There will be reliance even if the misrepresentee is given an opportunity to discover the truth but does not take the offer up. The misrepresentation will still be considered as an inducement. If the representee is given the opportunity to check out the statement but does not in fact check it out, they are still able to demonstrate reliance.

See; Redgrave v Hurd (1881) : the fact that the representee did not take advantage of an opportunity to check the statement is no bar to an action for misrepresentation.

Types of Misrepresentation • The remedies available for misrepresentation depend upon

the type of misrepresentation

• Once misrepresentation has been established, it is necessary to consider what type of misrepresentation has been made.

• There are three types of misrepresentation: fraudulent, negligent and wholly innocent. The importance of the distinction lies in the remedies available for each type.

Fraudulent Misrepresentation

Fraudulent Misrepresentation at COMMON LAW

Tort of deceit – Burden of proof on plaintiff

Defined in Derry v Peek (1889) as :

“A statement made with the knowledge that it is untrue or without believing it to be true, or reckless, or careless

whether it be true or false.”

Therefore, if someone makes a statement which he honestly believes is true then it cannot be fraudulent. See : Derry v Peek (1889)

Fraudulent Misrepresentation• REMEDIES available :– Rescission – Damages

• Rescission – setting the contract aside; it is an equitable remedy and awarded at the discretion of the court

• Aim of rescission – To put the parties back in their original position, as though the contract had not been made. The injured party may rescind the contract by giving notice to the representor.

Fraudulent Misrepresentation

• Damages- The injured party may claim damages for fraudulent misrepresentation in the tort of deceit. The purpose of damages is to restore the victim to the position he occupied before the representation had been made.

• The injured party may recover for all the direct loss incurred as a result of the fraudulent misrepresentation, regardless of foreseeability

• Moreover, damages may include claim for “opportunity costs” (=loss of profit).

Negligent Misrepresentation

• A statement made in the belief that it is true but without reasonable grounds for that belief. There are two possible ways to claim: either under common law or statute.

• Negligent Misrepresentation AT COMMON LAW

Tort of Negligence : Burden of proof on plaintiff This is really an action in negligence, so does NOT need a contract to exist to be

used. Tort of negligent misstatement available whether or not contractual relationship exists.

It was established in the case of Hedley Byrne v Heller (1964).

At common law, it needs to be established whether a duty of care arises. That duty exists when there is a ‘special relationship’ between the parties.

Negligent Misrepresentation AT COMMON LAW

• The remedies are rescission and damages in the tort of negligence. Damages recoverable only for reasonably foreseeable loss. (SPECIAL RELATIONSHIP REQUIRED)

• Negligent Misrepresentation under the Misrepresentation Act 1967

If there is a contract between the parties, then it is usual to use s.2(1) Misrepresentation under the Misrepresentation Act 1967.

Negligent Misrepresentation under the Misrepresentation Act 1967 - s.2(1) Misrepresentation Act

• Burden of proof on defendant

• This provision does not require the representee to establish a duty of care and reverses the burden of proof. Once a party has proved that there has been a misrepresentation which induced him to enter into the contract, the person making the misrepresentation will be liable in damages unless he proves he had reasonable grounds to believe and did believe that the facts represented were true.

• S.2(1) Misrepresentation Act 1967 states that the same remedies are available where the statement was made negligently as if it were made fraudulently.  (all direct loss resulting from the misrepresention)

Wholly Innocent Misrepresentation • A statement made in the belief that is true and with reasonable grounds

for that belief.

• The remedy is either:

(i) rescission with an indemnity, or

(ii) damages in lieu of rescission under the courts discretion in s2(2) Misrepresentation Act 1967 

The victim of an innocent misrepresentation is entitled to rescission of the contract and to an indemnity intended to help restore the parties to the position before the contract was made.

Damages are not generally available for innocent misrepresentation since rescission is the main remedy. However, the court has a discretion under s.2(2) of the Act to award damages in lieu of (instead of) rescission.

Checklist The definition of misrepresentation and how it is applicable

The differences between fraudulent, negligent and innocent misrepresentation

Remedies available

That’s all on Misrepresentation

- END-