Misrepresentation

 Misrepresentation

A misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract.

The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.

1. FALSE STATEMENT OF FACT

An actionable misrepresentation must be a false statement of fact, not opinion or future intention or law.

(A) STATEMENTS OF OPINION

A false statement of opinion is not a misrepresentation of fact. See:

•  Bisset v Wilkinson [1927] AC 177.

However, where the person giving the statement was in a position to know the true facts and it can be proved that he could not reasonably have held such a view as a result, then his opinion will be treated as a statement of fact. See:

•   Smith v Land & House Property Corp. (1884) 28 Ch D 7.

Some expressions of opinion are mere puffs. Thus, in Dimmock v Hallet (1866) 2 Ch App 21, the description of land as 'fertile and improvable' was held not to constitute a representation.

(B) STATEMENTS AS TO THE FUTURE

A false statement by a person as to what he will do in the future is not a misrepresentation and will not be binding on a person unless the statement is incorporated into a contract.

However, if a person knows that his promise, which has induced another to enter into a contract, will not in fact be carried out then he will be liable. See:

•   Edgington v Fitzmaurice (1885) 29 Ch D 459

•   Esso Petroleum v Mardon [1976] QB 801.

(C) STATEMENTS OF THE LAW

A false statement as to the law is not actionable misrepresentation because everyone is presumed to know the law. However, the distinction between fact and law is not simple. See:

•   Solle v Butcher [1950] 1 KB 671.

(D) SILENCE

Generally, silence is not a misrepresentation. The effect of the maxim caveat emptor is that the other party has no duty to disclose problems voluntarily. Thus if one party is labouring under a misapprehension there is no duty on the other party to correct it. See:

•   Smith v Hughes (1871) LR 6 QB 597.

However, there are three fundamental exceptions to this rule:

(i) HALF TRUTHS

The representor must not misleadingly tell only part of the truth. Thus, a statement that does not present the whole truth may be regarded as a misrepresentation. See:

•   Nottingham Brick & Tile Co. v Butler (1889) 16 QBD 778.

(ii) STATEMENTS WHICH BECOME FALSE

Where a statement was true when made out but due to a change of circumstances has become false by the time it is acted upon, there is a duty to disclose the truth. See:

•   With v O'Flanagan [1936] Ch 575.

(iii) CONTRACTS UBERRIMAE FIDEI

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of all material facts because one party is in a strong position to know the truth. Examples would include contracts of insurance and family settlements.

A material fact is something which would influence a reasonable person in making the contract. If one party fails to do this, the contract may be avoided. See:

•   Lambert v Co-Operative Insurance Society [1975] 2 Lloyd's Rep 485.

Where there is a fiduciary relationship between the parties to a contract a duty of disclosure will arise, eg, solicitor and client, bank manager and client, trustee and beneficiary, and inter-family agreements.

(E) OTHER REPRESENTATIONS

The term 'statement' is not to be interpreted too literally:

•   In Gordon v Selico Ltd (1986) 278 EG 53, it was held that painting over dry rot, immediately prior to sale of the property, was a fraudulent misrepresentation.

•   In St Marylebone Property v Payne (1994) 45 EG 156, the use of a photograph taken from the air, printed with arrows (misleadingly) indicating the extent of land boundaries, was held to convey a statement of fact (which amounted to actionable misrepresentation).

2. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT

The false statement must have induced the representee to enter into the contract. The requirements here are that (a) the misrepresentation must be material and (b) it must have been relied on.

(A) MATERIALITY

The misrepresentation must be material, in the sense that it would have induced a reasonable person to enter into the contract. However, the rule is not strictly objective:

In Museprime Properties v Adhill Properties [1990] 36 EG 114, the judge referred, with approval, to the view of Goff and Jones: Law of Restitution that, any misrepresentation which induces a person to enter into a contract should be a ground for rescission of that contract. If the misrepresentation would have induced a reasonable person to enter into the contract, then the court will presume that the representee was so induced, and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the misrepresentee to show that the misrepresentation induced him to act as he did. See:

•   Museprime Properties v Adhill Properties [1990] 36 EG 114.

(B) RELIANCE

The representee must have relied on the misrepresentation.

There will be no reliance if the misrepresentee was unaware of the misrepresentation. See:

•   Horsfall v Thomas [1862] 1 H&C 90.

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) 6 CI & F 232.

(Note: this rule does not apply where the misrepresentation was fraudulent and the representee was asked to check the accuracy of the statement: Pearson v Dublin Corp [1907] AC 351.)

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. See:

•   Redgrave v Hurd (1881) 20 Ch D 1.

There will be reliance even if the misrepresentation was not the only inducement for the representee to enter into the contract. See:

•   Edgington v Fitzmaurice (above)

3. TYPES 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.

(A) FRAUDULENT MISREPRESENTATION

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as 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." Therefore, if someone makes a statement which they honestly believe is true, then it cannot be fraudulent. See:

•   Derry v Peek (1889) 14 App Cas 337.

The burden of proof is on the plaintiff - he who asserts fraud must prove it. Tactically, it may be difficult to prove fraud, in the light of Lord Herschell's requirements.

The remedy is rescission (subject to exceptions discussed later) and damages in the tort of deceit (see later).

(B) NEGLIGENT MISREPRESENTATION

This is a false statement made by a person who had no reasonable grounds for believing it to be true. There are two possible ways to claim: either under common law or statute.

(i) NEGLIGENT MISSTATEMENT AT COMMON LAW

The House of Lords have held that in certain circumstances damages may be recoverable in tort for negligent misstatement causing financial loss:

•   Hedley Byrne v Heller [1964] AC 465.

Success depends upon proof of a special relationship existing between the parties. Such a duty can arise in a purely commercial relationship where the representor has (or purports to have) some special skill or knowledge and knows (or it is reasonable for him to assume) that the representee will rely on the representation. See:

•   Esso Petroleum v Mardon [1976] (above)

•   Williams v Natural Life Health Foods (1998) TheTimes, May 1.

The remedies are rescission (subject to exceptions discussed later) and damages in the tort of negligence (see later).

(ii) NEGLIGENT MISREPRESENTATION

UNDER s2(1) MISREPRESENTATION ACT 1967

Section 2(1) of the Misrepresentation Act 1967 provides:

"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."

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. This burden may be difficult to discharge as shown in:

•   Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574.

Remedies: recent case-law has shown that the remedies available are as those available in fraud unless the representor discharges the burden of proof. In particular, damages will be based in the tort of deceit rather than the tort of negligence (see later).

(C) WHOLLY INNOCENT MISREPRESENTATION

This is a false statement which the person makes honestly believing it to be true.

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 (see below).

4. REMEDIES FOR MISREPRESENTATION

Once an actionable misrepresentation has been established, it is then necessary to consider the remedies available to the misrepresentee.

(A) RESCISSION

Rescission, ie setting aside the contract, is possible in all cases of misrepresentation. The aim of rescission is 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. However, this is not always necessary as any act indicating repudiation, eg notifying the authorities, may suffice. See:

•   Car & Universal Finance v Caldwell [1965] 1 QB 525.

BARS TO RESCISSION:

Rescission is an equitable remedy and is awarded at the discretion of the court. The injured party may lose the right to rescind in the following four circumstances:

(i) AFFIRMATION OF THE CONTRACT

The injured party will affirm the contract if, with full knowledge of the misrepresentation and of their right to rescind, they expressly state that they intend to continue with the contract, or if they do an act from which the intention may be implied. See:

•   Long v Lloyd [1958] 1 WLR 753.

Note that in Peyman v Lanjani [1985] Ch 457, the Court of Appeal held that the plaintiff had not lost his right to rescind because, knowing of the facts which afforded this right, he proceeded with the contract, unless he also knew of the right to rescind. The plaintiff here did not know he had such right. As he did not know he had such right, he could not be said to have elected to affirm the contract.

(ii) LAPSE OF TIME

If the injured party does not take action to rescind within a reasonable time, the right will be lost.

Where the misrepresentation is fraudulent, time runs from the time when the fraud was, or with reasonable diligence could have been discovered. In the case of non-fraudulent misrepresentation, time runs from the date of the contract, not the date of discovery of the misrepresentation. See:

Leaf v International Galleries [1950] 2 KB 86.

(iii) RESTITUTION IN INTEGRUM IMPOSSIBLE

The injured party will lose the right to rescind if substantial restoration is impossible, ie if the parties cannot be restored to their original position. See:

Vigers v Pike (1842) 8 CI&F 562.

Precise restoration is not required and the remedy is still available if substantial restoration is possible. Thus, deterioration in the value or condition of property is not a bar to rescission:

Armstrong v Jackson [1917] 2 KB 822.

(iv) THIRD PARTY ACQUIRES RIGHTS

If a third party acquires rights in property, in good faith and for value, the misrepresentee will lose their right to rescind. See: Phillips v Brooks [1919] 2 KB 243 under Mistake.

Thus, if A obtains goods from B by misrepresentation and sells them to C, who takes in good faith, B cannot later rescind when he discovers the misrepresentation in order to recover the goods from C.

(v) NOTE:

The right to rescind the contract will also be lost if the court exercises its discretion to award damages in lieu of rescission under s2(2) of the Misrepresentation Act 1967.

For innocent misrepresentation two previous bars to rescission were removed by s1 of the Misrepresentation Act 1967: the misrepresentee can rescind despite the misrepresentation becoming a term of the contract (s1(a)), and the misrepresentee can rescind even if the contract has been executed (s1(b)). Generally, this will be relevant to contracts for the sale of land and to tenancies.

(B) INDEMNITY

An order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages. See:

•   Whittington v Seale-Hayne (1900) 82 LT 49.

(C) DAMAGES

(i) FRAUDULENT MISREPRESENTATION

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 test of remoteness in deceit is that the injured party may recover for all the direct loss incurred as a result of the fraudulent misrepresentation, regardless of foreseeability:

•   Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158

•   Smith New Court Securities v Scrimgeour Vickers [1996] 4 All ER 769.

Moreover, damages may include lost opportunity costs, eg loss of profits. See:

•   East v Maurer [1991] 2 All ER 733.

In Archer v Brown [1984] 2 All ER 267, the court held that the plaintiff was entitled to aggravated damages in deceit for the distress he had suffered.

The claimant will not be entitled to recover damages after the date he discovered the misrepresentation and had an opportunity to avoid further loss:

Downs v Chappell [1996] 3 All ER 344.

(ii) NEGLIGENT MISREPRESENTATION

The injured party may elect to claim damages for negligent misrepresentation at common law. The test of remoteness in the tort of negligence is that the injured party may recover for only reasonably foreseeable loss (Esso Petroleum v Mardon [1976] QB 801).

Alternatively, the injured party may claim damages for negligent misrepresentation under s2(1) of the Misrepresentation Act 1967. This will be the normal course to pursue as s2(1) reverses the burden of proof. Damages will be assessed on the same basis as fraudulent misrepresentation rather than the tort of negligence, ie 'direct consequence' rather than 'reasonable foreseeability'. See:

•   Royscott Trust Ltd v Rogerson [1991] 3 WLR 57

(iii) WHOLLY INNOCENT MISREPRESENTATION

In cases of non-fraudulent misrepresentation, s2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured party would be entitled to rescind, to award damages in lieu of rescission. Damages under s2(2) cannot be claimed as such; they can only be awarded by the court. Section 2(2) states:

"Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party."

It is not clear from the above words if the right to damages will be lost if the representee has lost the right to rescind (See Cheshire & Fifoot, p301-2; Treitel, p333). According to Thomas Witter v TBP Industries (1996) (below), this will not be a bar provided the plaintiff had such a right in the past.

It is not yet clear what the measure of damages is under s2(2):

•   According to Treitel (p337) and to Chitty, damages under s2(2) may be lower than the damages awarded under s2(1). Chitty suggests the possibility of a special measure to compensate the injured party for the loss of the right to rescind.

•   ·According to Cheshire & Fifoot, compensation should be limited to an indemnity (p305). This was in substance the view taken by the High Court in:

•   Thomas Witter v TBP Industries [1996] 2 All ER 573.

5. EXCLUDING LIABILITY FOR MISREPRESENTATION

Any term of a contract which excludes liability for misrepresentation or restricts the remedy available is subject to the test of reasonableness. Section 3 of the Misrepresentation Act 1967, as amended by s8 of UCTA 1977, provides that:

"If a contract contains a term which would exclude or restrict:
a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or
b) any remedy available to another party to the contract by reason of such a misrepresentation,
that term shall be of no effect except insofar as it satisfies the requirement of reasonableness as stated in s11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

(Section 11(1) UCTA 1977 provides that "… the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.")

Cases Of MisrEpresentation

1. FALSE STATEMENT OF FACT

Bisset v Wilkinson [1927] AC 177

The plaintiff purchased from the defendant two blocks of land for the purpose of sheep farming. During negotiations the defendant said that if the place was worked properly, it would carry 2,000 sheep. The plaintiff bought the place believing that it would carry 2,000 sheep. Both parties were aware that the defendant had not carried on sheep-farming on the land. In an action for misrepresentation, the trial judge said:

"In ordinary circumstances, any statement made by an owner who has been occupying his own farm as to its carrying capacity would be regarded as a statement of fact. … This, however, is not such a case. … In these circumstances … the defendants were not justified in regarding anything said by the plaintiff as to the carrying capacity as being anything more than an expression of his opinion on the subject."

The Privy Council concurred in this view of the matter, and therefore held that, in the absence of fraud, the purchaser had no right to rescind the contract.

Smith v Land & House Property Corp (1884) 28 Ch D 7

The plaintiff put up his hotel for sale stating that it was let to a 'most desirable tenant'. The defendants agreed to buy the hotel. The tenant was bankrupt. As a result, the defendants refused to complete the contract and were sued by the plaintiff for specific performance. The Court of Appeal held that the plaintiff's statement was not mere opinion, but was one of fact.

Edgington v Fitzmaurice (1885) 29 Ch D 459

The plaintiff shareholder received a circular issued by the directors requesting loans to the amount of £25,000 with interest. The circular stated that the company had bought a lease of a valuable property. Money was needed for alterations of and additions to the property and to transport fish from the coast for sale in London. The circular was challenged as being misleading in certain respects. It was alleged, inter alia, that it was framed in such a way as to lead to the belief that the debentures would be a charge on the property of the company, and that the whole object of the issue was to pay off pressing liabilities of the company, not to complete the alterations, etc. The plaintiff who had taken debentures, claimed repayment of his money on the ground that it had been obtained from him by fraudulent mis-statements.

The Court of Appeal held that the statement of intention was a statement of fact and amounted to a misrepresentation and that the plaintiff was entitled to rescind the contract. Although the statement was a promise of intent the court held that the defendants had no intention of keeping to such intent at the time they made the statement.

Esso Petroleum v Mardon [1976] QB 801

Esso's experienced representative told Mardon that Esso estimated that the throughput of petrol on a certain site would reach 200,000 gallons in the third year of operation and so persuaded Mardon to enter into a tenancy agreement in April 1963 for three years. Mardon did all that could be expected of him as tenant but the site was not good enough to achieve a throughput of more than 60,000-70,000 gallons. Mardon lost money and was unable to pay for petrol supplied. Esso claimed possession of the site and money due. Mardon claimed damages in respect of the representation alleging that it amounted to (i) a warranty; and (ii) a negligent misrepresentation.

The Court of Appeal affirmed the finding of negligence under the principle of Hedley Byrne v Heller (1964). On the issue of warranty, Lord Denning MR stated:

"… it was a forecast made by a party, Esso, who had special knowledge and skill. It was the yardstick (the "e a c") by which they measured the worth of a filling station. They knew the facts. They knew the traffic in the town. They knew the throughput of comparable stations. They had much experience and expertise at their disposal. They were in a much better position than Mr Mardon to make a forecast. It seems to me that if such a person makes a forecast -intending that the other should act on it and he does act on it- it can well be interpreted as a warranty that the forecast is sound and reliable in this sense that they made it with reasonable care and skill. … If the forecast turned out to be an unsound forecast, such as no person of skill or experience should have made, there is a breach of warranty."

Solle v Butcher [1950] 1 KB 671

In 1931 a dwelling house had been converted into five flats. In 1938 Flat No. 1 was let for three years at an annual rent of £140. In 1947 the defendant took a long lease of the building, intending to repair bomb damage and do substantial alterations. The plaintiff and defendant discussed the rents to be charged after the work had been completed. The plaintiff told the defendant that he could charge £250 for Flat 1. The plaintiff paid rent at £250 per year for some time and then took proceedings for a declaration that the standard rent was £140. The defendant contended that the flat had become a new and separate dwelling by reason of change of identity, and therefore not subject to the Rent Restriction Acts. This was held to be a statement of fact. (Note: this is a case on Mistake.)

Smith v Hughes (1871) LR 6 QB 597

The plaintiff farmer asked the manager of the defendant, who was a trainer of racehorses, if he would like to buy some oats, and showed him a sample. The manager wrote to say that he would take the whole quantity. The plaintiff delivered a portion of them. The defendant complained that the oats were new oats, whereas he thought he was buying old oats, new oats being useless to him. The plaintiff, who knew that the oats were new, refused to take them back and sued for the price. There was a conflict of evidence as to what took place between the plaintiff and the manager. The court ordered a new trial. Blackburn J stated:

"… on the sale of a specific article, unless there be a warranty making it part of the bargain that it possesses some particular quality, the purchaser must take the article he has bought, though it does not possess that quality. And I agree that, even if the vendor was aware that the purchaser thought that the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound, unless the vendor was guilty of some fraud or deceit upon him. A mere abstinence from disabusing the purchaser of that impression is not fraud or deceit, for, whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake which has not been induced by the act of the vendor."

Nottingham Brick & Tile Co v Butler (1889) 16 QBD 778

The buyer of land asked the seller's solicitor if there were any restrictive covenants on the land and the solicitor said he did not know of any. He did not say that he had not bothered to read the documents. The court held that even though the statement was literally true it was a misrepresentation. There were restrictive covenants and the contract could be rescinded.

With v O'Flanagan [1936] Ch 575

During the course of negotiations for the sale of a medical practice, the vendor made representations to the purchaser that it was worth £2000 a year. By the time when the contract was signed, they were untrue. The value of the practice had declined in the meantime (to £250) because of the vendor's inability to attend to it through illness. Lord Wright MR quoted:

"So again, if a statement has been made which is true at the time, but which during the course of negotiations becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to the other the change of circumstances."

Therefore, the failure of the vendor to disclose the state of affairs to the purchaser amounted to a misrepresentation.

Lambert v Co-Operative Insurance [1975] 2 Lloyd's Rep 485

In 1963 Mrs Lambert signed a proposal form for an insurance policy to cover her own and her husband's jewellery. No questions were asked about previous convictions and Mrs L gave no information about them. She knew that her husband had been convicted some years earlier of stealing cigarettes and fined £25. The company issued a policy providing that it should be void if there was an omission to state any fact material to the risk. The policy was renewed from year to year. In 1971 the husband was convicted of conspiracy to steal and theft and sentenced to 15 months imprisonment. Mrs L knew of the conviction but did not disclose it and the policy was renewed. In 1972, seven items of the insured jewellery, valued at £311, were lost or stolen.

Mrs L's claim was repudiated on the grounds that she had failed to disclose her husband's first and second convictions. The judge dismissed the wife's claim on the ground that the 1971 conviction was a material fact and that a prudent insurer, knowing of it, would not have continued the risk. This decision was upheld by the Court of Appeal.

2. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT

Museprime Properties v Adhill Properties [1990] 36 EG 114

In a sale by auction of three properties the particulars wrongly represented the rents from the properties as being open to negotiation. The statements in the auction particulars and made later by the auctioneer misrepresented the position with regard to rent reviews. In fact, on two of the three properties rent reviews had been triggered and new rents agreed. The plaintiff company successfully bid for the three properties and discovered the true situation. They commenced an action for rescission. The defendant company countered with the defence that the misrepresentations were not such as to induce any reasonable person to enter into the contract.

It was held that the plaintiff's had established, and indeed that the defendants conceded, that misrepresentation had occurred and any misrepresentation is a ground for rescission. The judge referred, with approval, to the view of Goff and Jones: Law of Restitution (see Lecture p2-3), that the question whether representations would have induced a reasonable person to enter into a contract was relevant only to the onus of proof. Here the plaintiffs had established their claim to rescission of the contract on the ground of material misrepresentation because the inaccurate statements had induced them to buy the properties. They would therefore be awarded the return of their deposit, damages in respect of lost conveyancing expenses and interest.

Horsfall v Thomas [1862] 1 H&C 90

The buyer of a gun did not examine it prior to purchase. It was held that the concealment of a defect in the gun did not affect his decision to purchase as, since he was unaware of the misrepresentation, he could not have been induced into the contract by it. His action thus failed.

Attwood v Small (1838) 6 CI&F 232

The purchasers of a mine were told exaggerated statements as to its earning capacity by the vendors. The purchasers had these statements checked by their own expert agents, who in error reported them as correct. Six months after the sale was complete the plaintiffs found the defendant's statement had been inaccurate and they sought to rescind on the ground of misrepresentation. It was held in the House of Lords that there was no misrepresentation, and that the purchaser did not rely on the representations.

Redgrave v Hurd (1881) 20 Ch D 1

The plaintiff solicitor advertised for a partner who would also purchase his residence. The Defendant replied and during two interviews, the plaintiff represented that his business was bringing in either about £300 a year, or from £300-£400 a year. At a third interview the plaintiff produced summaries of business done, which showed gross receipts below £200 a year. The defendant asked how the difference was made up and the plaintiff produced a quantity of letters and papers which, he stated, related to other business which he had done. The defendant did not examine the books and papers thus produced, but only looked cursorily at them, and ultimately agreed to purchase the house and take a share in the business for £1,600. The trial judge came to the conclusion that the letters and papers, if examined, would have shown business of only £5 or £6 a year. Finding that the practice was utterly worthless, the defendant refused to complete the contract, and the plaintiff brought an action for specific performance. The Court of Appeal gave judgment for the defendant. Lord Jessel MR stated:

"If a man is induced to enter into a contract by a false representation it is not a sufficient answer to him to say, "If you had used due diligence you would have found out that the statement was untrue. You had a means afforded to you of discovering its falsity, and did not choose to avail yourself of them." I take it to be a settled doctrine of equity, not only as regards specific performance but also as regards rescission, that this is not an answer unless there is such delay as constitutes a defence under the Statute of Limitations. That, of course, is quite a different thing."

Edgington v Fitzmaurice (1885) 29 Ch D 459

For full facts, see above. The plaintiff was induced to lend money to a company by (a) the statement of intent, and (b) his mistaken belief that he would have a charge on the assets of the company. He was able to claim damages for deceit even though he admitted that he would not have lent the money, had he not held this mistaken belief.

3. TYPES OF MISREPRESENTATION

Derry v Peek (1889) 14 App Cas 337

A special Act incorporating a tramway company provided that the carriages might be moved by animal power and, with the consent of the Board of Trade, by steam power. The directors issued a prospectus containing a statement that by this special Act the company had the right to use steam instead of horses. The plaintiff bought shares on the strength of this statement. The Board of Trade refused to consent to the use of steam and the company was wound up. The plaintiff brought an action for deceit.

It was held by the House of Lords that in an action for deceit, it is not enough to establish misrepresentation alone; something more must be proved to cast liability on the defendant. There is an essential difference between the case where the defendant honestly believes in the truth of a statement although he is careless, and where he is careless with no such honest belief. Fraud is established where it is proved that a false statement is made: (a) knowingly; or (b) without belief in its truth; or (c) recklessly, careless as to whether it be true or false. If fraud is proved, the motive of the person making the statement is irrelevant. It matters not that there was no intention to cheat or injure the person to whom the statement was made. The defendants were not fraudulent in this case. They made a careless statement but they honestly believed in its truth.

Hedley Byrne v Heller [1964] AC 465

Hedley Byrne were a firm of advertising agents. They intended to advertise on behalf of Easypower Ltd. They wanted to know if Easypower were creditworthy, and asked their bank, the national Provincial, to find out. The National Provincial got in touch with Easypower's bankers, Heller & Partners. Heller told the National Provincial, "in confidence and without responsibility on our part," that Easypower were good for £100,000 per annum on advertising contracts. Hedley Byrne relied on this statement in placing orders on behalf of Easypower and, as a result, lost more than £17,000 when Easypower went into liquidation. They sought to recover this loss as damages.

In the House of Lords, Lord Pearce stated that a man may come under a special duty to exercise care in giving information or advice. Whether such a duty has been assumed must depend on the relationship of the parties. Was there such a special relationship in the present case as to impose on Heller a duty of care to Hedley Byrne as the undisclosed principals for whom National Provincial was making the inquiry? The answer to that question depends on the circumstances of the transaction. A most important circumstance is the form of the inquiry and of the answer. Both were plainly stated to be without liability. The words clearly prevented a special relationship from arising.

Williams v Natural Life Health Foods Ltd (1998) The Times, May 1.

See Law Report.

Howard Marine v Ogden [1978] QB 574

The defendants wished to hire two barges from the plaintiffs. The plaintiffs quoted a price for the hire in a letter. At a meeting, the defendants asked about the carrying capacity of the barges. The plaintiffs' representative replied it was about 1,600 tonnes. The answer was given honestly but was wrong. It was based on the representative's recollection of the deadweight figure given in Lloyd's Register of 1,800 tonnes. The correct figure, 1,195 tonnes, appeared in shipping documents which the representative had seen, but had forgotten. Because of their limited carrying capacity, the defendant's work was held up. They refused to pay the hire charges. The plaintiffs sued for the hire charges and the defendants counter-claimed damages.

By a majority, the Court of Appeal found the plaintiffs liable under s2(1) as the evidence adduced by the plaintiffs was not sufficient to show that their representative had an objectively reasonable ground for disregarding the carrying capacity figure given in the shipping document and preferring the figure in Lloyd's Register.

4. REMEDIES FOR MISREPRESENTATION

(A) RESCISSION

Car & Universal Finance v Caldwell [1965] 1 QB 525

Caldwell sold his car to Norris. The cheque was dishonoured when it was presented the next day. He immediately informed the police and the Automoblie Association of the fraudulent transaction. Subsequently Norris sold the car to X who sold it to Y who sold it to Z who sold it to the plaintiffs. In interpleader proceedings one of the issues to be tried was whether the defendant's conduct and representations amounted to a rescission of the contract of sale. It was held that the contract was voidable because of the fraudulent misrepresentation and the owner had done everything he could in the circumstances to avoid the contract. As it had been avoided before the sale to the third party, no title was passed to them and the owner could reclaim the car.

Long v Lloyd [1958] 1 WLR 753

The defendant advertised for sale a lorry as being in 'exceptional condition' and he told the plaintiff purchaser that it did 11 miles to the gallon and, after a trial run, all that was wrong with the vehicle. The plaintiff purchase the lorry and, two days later, on a short run, further faults developed and the plaintiff noticed that it did only about 5 miles to the gallon. That evening he reported these things to the defendant and the plaintiff accepted the defendant's offer to pay for some of the repairs. The next day the lorry set out on a longer journey and broke down. The plaintiff wrote to the defendant asking for the return of his money. The lorry had not been in a roadworthy condition, but the defendant's representations concerning it had been honestly made. The Court of Appeal held that the plaintiff was not entitled to rescission of the contract as he had finally accepted the lorry before he had purported to rescind. The second journey amounted to affirmation of the contract.

Leaf v International Galleries [1950] 2 KB 86

The plaintiff bought a painting after an innocent misrepresentation was made to him that it was by 'J. Constable'. He did not discover this until five years later and claimed rescission immediately. The Court of Appeal held that the plaintiff had lost his right to rescind after such a period of time. His only remedy after that length of time was for damages only, a claim which he had not brought before the court.

Vigers v Pike (1842) 8 CI&F 562

A lease of a mine which had been entered into as a result of a misrepresentation could not be rescinded as there had been considerable extraction of minerals since the date of the contract.

Armstrong v Jackson [1917] 2 KB 822

A broker purported to buy shares for a client, but in fact sold his own shares to the client. Five years later, when the shares had fallen in value from nearly £3 to 5s, it was held that the client could rescind on account of the broker's breach of duty. He still had the identical shares and was able to return them, together with the dividends he had received. McCardie J. said:

"It is only … where the plaintiff has sustained loss by the inferiority of the subject-matter or a substantial fall in its value that he will desire to exert his power of rescission … If mere deterioration of the subject-matter negatived the right to rescind, the doctrine of rescission would become a vain thing."

(B) INDEMNITY

Whittington v Seale-Hayne (1900) 82 LT 49

The plaintiffs bred poultry and were induced to enter into a lease of property belonging to the defendants by an oral representation that the premises were in a sanitary condition. In fact the water supply was poisoned and the manager fell ill and the stock died. The terms of the lease required the plaintiffs to pay rent to the defendants and rates to the local authority and they were also obliged to make certain repairs ordered by the local council.

Farwell J rescinded the lease, and, following the judgment of Bowen LJ in Newbigging v Adam (1886) 34 Ch D 582, held that the plaintiffs could recover the rents, rates and repairs under the covenants in the lease but nothing more. They could not recover removal expenses and consequential loss (ie, loss of profits, value of lost stock and medical expenses) as these did not arise from obligations imposed by the lease (the contract did not require the farm to be used as a poultry farm). Had they been awarded, they would have amounted to an award of damages (ie, expenses resulting from the running of the poultry farm).

(C) DAMAGES

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158

After buying an ironmonger's business, things turned out to be very different from what the vendors had led the plaintiff to believe. He was awarded damages for fraudulent misrepresentations and the appeal concerned, among other things, the measure of damages. Lord Denning MR said that: "The defendant is bound to make reparation for all the actual damage directly flowing from the fraudulent inducement … It does not lie in the mouth of the fraudulent person to say that they could not have been reasonably foreseen."

East v Maurer [1991] 2 All ER 733

The defendant who owned two hair salons agreed to sell one to the plaintiffs. They were induced to buy, in part by a representation from the defendant that he hoped in future to work abroad and that he did not intend to work in the second salon. In fact, the defendant continued to work at the second salon and many of his clients followed him. The result of this was that the plaintiffs saw a steady fall-off in business and never made a profit. They were finally forced to sell for considerably less than they paid. The court at first instance found that the defendant's representations were false. The defendant appealed on the assessment of the award of damages.

The Court of Appeal held that the proper approach was to assess the profit the plaintiff might have made had the defendant not made the representation(s). 'Reparation for all actual damage' as indicated by Lord Denning in Doyle v Olby would include loss of profits. The assessment of profits was however, to be on a tortious basis, that is, placing the plaintiff in the same position he would have been in, had the wrong not been committed.

The plaintiff could recover damages in respect of another such business in which he would have invested his money if the representation had been made, but not the profits which he would have made out of the defendant's business, if the representation relating to it had been true. (Note: the damages were reduced by one-third, from £15,000 to £10,000).

Royscott Trust Ltd v Rogerson [1991] 3 WLR 57

A car dealer induced a finance company to enter into a hire-purchase agreement by mistakenly misrepresenting the amount of the deposit paid by the customer, who later defaulted and sold the car to a third party. The finance company sued the car dealer for innocent misrepresentation and claimed damages under s2(1).

The Court of Appeal held that the dealer was liable to the finance company under s2(1) for the balance due under the agreement plus interest on the ground that the plain words of the subsection required the court to apply the deceit rule. Under this rule the dealer was liable for all the losses suffered by the finance company even if those losses were unforeseeable, provided that they were not otherwise too remote. It was in any event a foreseeable event that a customer buying a car on HP might dishonestly sell the car.