Contract B: Misrepresentation

Definition
A statement of fact made by the representor to the representee that is false, material, and induces the representee
to enter into the contract.
Consequences
Contract is voidable (not automatically void) innocent party may either affirm/rescind
o Smith v Hughes: contract void by mistake; never existed
Remedies include rescission (contract), damages (statute/tort), indemnity (contract)
Elements of a misrepresentation
1. A statement
Silence is generally not a misrepresentation (Smith v Hughes)
Exception: contracts of good faith e.g. fiduciary r/ships (solicitor-client)
A statement that is literally true but grossly misleading may be a misrepresentation
Dimmock v Hallet: all farms fully let when in reality all tenants had given notice to quit
A statement that becomes false and is not corrected may be a misrepresentation; there is a duty to disclose the
truth because statements have a continuing effect.
With v OFlanagan: businesss value dropped considerably 6 months prior to its sale, but the seller did not
inform the buyer
2. Of fact
Fact vs. opinion: a statement of opinion almost always implies 1) it is the representors opinion 2) the representor has
reasonable grounds for believing so

No liability for pure opinion statements

Bisset v Wilkinson: sheep farmer/vendor of land misstated its sheep-bearing capacity but not a
misrepresentation because hed never used the land for sheep farming; no implication that his opinion was
based on solid grounds
Anderson v Pacific Fire & Marine Insurance Co: ship master said the pilot considered an anchorage as safe
and this was false, but pure opinion because he had never visited
Exception: wrong opinion may give rise to liability where the representor is in a position to know the facts/has
expert knowledge
Esso Petroleum Co v Mardon: Esso misrepresented profits of a petrol station despite being aware of future
construction and were liable because they professed expertise
Smith v Land & House Property Corp: landowner liable for representing a tenant as most desirable despite
him paying late rent, because he was in a factually good position to know the truth
Lying about your opinion = misrepresentation of fact
Blind guess opinion and can give rise to liability (Economides v Commercial Assurance Co plc)

Fact vs. intention: a statement of intention is a fact of ones intention

Therefore a false statement of intention is a misrepresentation

Edgington v Fitzmaurice: borrowed money on the basis of company expansion, but actually intended to repay
company debts
Not revealing a change of mind as regards future intention is a misrepresentation
Traill v Baring: insurance company changed their mind and reinsured the part represented to be retained +
commercial case (parties understand full significance)
Exception: An undisclosed change of intention under domestic circumstances
Wales v Wadham: during divorce agreement wife told husband she would never remarry yet she did, but was
not liable because it would be unrealistic
3. Made by or on behalf of the representor to the representee, 3 rd parties not liable
Exception Peyman v Lanjani: held liable for his agents (impersonator) actions
Exception: 3rd party liability arises when the party has notice of the misrepresentation but fails to take reasonable
steps, usually in suretyship transactions (OBrien, Etridge: wives who made contracts with banks under husbands
influence could sue the bank if it had notice of the misrepresentation)
4. That is false
5. That is material
Objective criteria, not subjective (unlike inducement)
Materiality/inducement is not a requirement in fraudulent misrepresentations (see below)
Material = if a reasonable person in their position would regard the misstated fact as relevant in deciding whether
to enter in to the contract
6. That induces the representee to enter into the contract

Fraudulent misrepresentation: the fraudulent misrepresentation need not be the sole cause of inducement; it will give
rise to liability even if there were other deciding factors in entering the contract

Edgington v Fitzmaurice: irrelevant that fraud was not the sole cause of inducement into investment (other cause
was a mistaken belief)
Barton v Armstrong
Approved by HL in Standard Chartered Bank v Pakistan National Shipping Corp
Non-fraudulent misrepresentation
Assicurazioni Generali Spa v Arab Insurance Group (BSC): must show that but for the misrep. he would not have
entered into the contract on those terms (Clarke LJ)
o Discussed in Raiffeisen Zentralbank Osterreich AG (RZB) v The Royal Bank of Scotland PLC (RBS)
o Carlill v Carbolic Smoke Ball Co: would not have used smoke ball if not for the guarantee
JEB Fasteners Ltd v Marks, Bloom & Co: no liability if there is no inducement; if the representee would have
entered the contract regardless of the misrep. (Contract was concluded to use key services of employees, not
based on the companys earnings)
o Attwood v Small: if the representee does not believe the misrepresentation/conducts its own investigations/is
unaware of the misrepresentation, there is no reliance and therefore no liability
Redgrave v Hurd: no onus on the representee to check the truth of a statement (contract rescinded for innocent
misrepresentation even where the representee had the chance to verify the false statement)
o Nocton v Ashburton: No-one is entitled to make a statement which on the face of it conveys a false
impression and then excuse himself on the ground that the person to whom he made it had available the
means of correction. (Lord Dunedin)
o Standard Chartered Bank v Pakistan National Shipping Corp: applies to all forms of misrep.
Remedies:
Rescission
The retrospective setting aside of a
voidable contract, so as to restore the
parties to their original positions, as if the
contract had not been made.
The innocent party rescinds the contract by
notifying the representor, but this is not
always necessary in cases of fraudulent
misrepresentation; Caldwell noises will
suffice
Car & Universal Finance v Caldwell:
fraudster purchased car with dishonored
cheque, sold to innocent third-party, and
fled. But because the original owner to
informed the police and AA this was
sufficient to rescind, and the third party
buyer did not become the owner

Indemnity
May be awarded with
rescission for innocent
misrepresentation where
damages are not available
NOT damages this is a
payment in respect of
expenses incurred by
complying with contract terms,
NOT by the misrepresentation
(Whittington v Seale-Hayne)

Damages
Awarded to restore the innocent
party to the position he was in
prior to the misrepresentation.
If awarded under tort of deceit
(fraudulent, negligent s2(1) MA
1967), the victim may recover for
all direct losses flowing from the
misrepresentation, regardless of
foreseeability. (Doyle v Olby
(Ironmongers) Ltd)
Damages may also include lost
opportunity costs e.g. loss of
profits

Bars to rescission:
1. Unjust enrichment (restitiutum in integrum impossible)
The right to rescind is lost if substantial restoration is impossible
Exception Erlanger v New Sombrero Phosphate Co: rescission need not be precise: it is not barred if the parties
can be restored to their original positions in a practically just or substantial manner. (Mine had been worked out
but the courts permitted rescission by repayment of purchase price + profit derived)
Exception Spence v Crawford: the courts are less likely to find rescission barred by the impossibility of restitution
in cases of fraud, in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to
prevent the defendant from enjoying the benefit of his fraud (Lord Wright)
2. Intervening third-party rights
The right to rescind will be lost if it would prejudice the accrued rights of a bona-fide third-party.
3. Affirmation
Where the representee makes an informed choice to continue with the contract despite knowing it is voidable, the
right to elect the remedy of rescission is lost (Long v Lloyd)

Exception: the right to rescind cannot be lost where the representee was not aware of his right to do so (Peyman v
Lenjani)
4. Lapse of time (laches)
Fraudulent: time runs from when fraud was committed/reasonably discovered
Non-fraudulent: time runs from when contract was concluded
Leaf v International Galleries: discovered innocent misrepresentation of paintings artist but could not rescind
because 6 years had lapsed
5. Judicial discretion
The right to rescind is lost where the court uses its discretion to grant damages in lieu of rescission for innocent
misrepresentation under s.2(2) MA 1967
Only in cases of non-fraudulent misrepresentation where there are no bars to rescission
Common law before Hedley Byrne (1964)

Only fraudulent or innocent misrepresentation

Fraudulent: A false statement that is made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly,
careless as to whether it be true or false. (Derry v Peek per Lord Herschell)
Difficult to prove; claims for damages made under tort of deceit
Innocent: covered both negligent and innocent representation
o No claim for damages in tort
o Could only claim in contract if the misrepresentation was incorporated into the contract = damages for breach
o Only entitled to indemnity costs that flow purely from the contract and not from a misrep/costs that would
have been incurred anyway if the representation were true
o Whittington v Seale-Hayne: innocent misrepresentation that a poultry farms water supply was clean, but the
lessees were only entitled to an indemnity covering rates, rent, compulsory renewal of drains. Did not include
value of dead stock, lost profits on re-sales, medical expenses, lost breeding season
Common law after Hedley Byrne (1964)

Hedley Byrne & Co v Heller & Partners: companys claim against auditors misleading figures failed because of a
disclaimer excluding responsibility, but the courts established claims in the tort of negligence for negligent
misrepresentation, provided the representee is able to prove two things:
1. Duty of care
2. Breach of that duty by negligence
But still no claim for damages for innocent misrepresentation
Common law - quantification of damages

Contract: losses that occurred as a natural consequence of the breach/would have been a serious possibility to
the parties minds had they considered the breach at the time
Tort of deceit: any losses caused by the misstatement regardless of foreseeability
East v Maurer: hairdresser misrepresented that he would not open a competing salon in the area, damages
for deceit included loss of alternative investment opportunity but not the profit lost on the deal induced by the
misrepresentation
Tort of negligence: losses which were reasonably foreseeable
Indemnity: losses incurred from performing the contract, not by the misstatement (Whittington)

Statute: claiming damages (Misrepresentation Act 1967)

S.1: removes additional bars to the right of rescission

S.2(1): provides that damages for negligent misrepresentation are the same as in fraud
"Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and
as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in
respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the
misrepresentation was not made fraudulently unless he proves that he had reasonable ground to believe and did believe
up to the time the contract was made that the facts represented were true."
NatWest Bank v Rabobank Nederland: claim drafted for negligent misstatement was not substantially factual
to be used in a statutory (s.2(1)) misrepresentation claim
Burden of proof is on the representor & difficult to discharge, so it is much easier to claim under statute
o Howard Marine & Dredging Co v Ogden & Sons: following the Lloyds shipping bible without checking
available paper work was held to be unreasonable under 2(1)
Damages are quantified as in fraud = according to the tort of deceit
o Royscot Trust Ltd v Rogerson: so liable was interpreted to mean in the same measure

1945 Law Reform (Contributory Negligence) Act: no contributory negligence for damages in deceit; but CA
held that it applies to MA s.2(1) (Gran Gelato Ltd v Richcliff (Goup) Ltd: even though damages are quantified
as in fraud, a 2(1) claim is essentially founded on negligence)
Statute: damages by judicial discretion (Misrepresentation Act 1967)

S.2(2): allows judicial discretion to award damages in lieu of rescission (cannot be used if rescission is barred)
William Sindall plc v Cambridgeshire County Council: no misrepresentation where the CC was unaware of
easements at the time of representation s.2(2) damages would be awarded in lieu of rescission (paid value
actual value; never more than if the representation had been a warranty) b/c 5m for rescission but only 1.8k
to remedy defect
If the right to rescind is lost (e.g. by delay/third-party rights) can the courts award damages in lieu?
o Yes 1996 Witter v TBP Industries: only necessary that the right to rescind had existed (Jacob J);
rescission barred by significant changes + 3rd party interests, but damages could be awarded
o No 2000 Government of Zanzibar v British Aerospace: misrep. of plane defects; rescission barred
by selling of plane to third party, so discretionary damages could not be awarded under s.2(2)
Measure of damages under s.2(2):
o Cannot be greater than under 2(1) and possibly less, under 2(3)
o Cannot be more than if the statement was a warranty (Hoffman LJ, Sindall)
o Restricted to the difference between value represented at the time and what it was actually worth;
excludes consequential losses (Evans LJ, Sindall)
S.2(3): adjusts damages where both s.2(1) and (2) apply
S.3: exclusion of liability for misrepresentation will be subject to the reasonableness test in UCTA s.11

The position today

Fraudulent

Negligent

Innocent

A false statement that is made (i) knowingly,

or (ii) without belief in its truth, or (iii)
recklessly, careless as to whether it be true
or false. (Derry v Peek per Lord Herschell)
*Plaintiff bears the burden of proof, which
may be difficult to prove according to
requirements.
A false statement made with no reasonable
grounds for believing it to be true.

A false statement made by a person who

honestly believes it to be true.

- Rescission in equity, and

- Damages under tort of deceit

- Rescission in equity, and

- Damages under
1. Tort of negligence (if using Hedley
Byrne); or
2. Tort of deceit (if using s.2(1)
Misrepresentation Act 1967)
- Rescission in equity with indemnity, or
- Damages in lieu of rescission under s.2(2)
Misrepresentation Act 1967 (by courts
discretion)