VITIATING FACTORS chap 5 Misrepresentation
Introduction to Misrepresentation
Misrepresentation arises when one party makes a false statement or representation to another party, inducing them to enter into a contract. Misleading statements can result from various factors, including commercial pressure, exaggerations, or even innocent mistakes. A misrepresentation is actionable, allowing the misled party (misrepresentee) to seek legal remedies.
The law on misrepresentation is typically considered in four stages:
Categories of Pre-Contract Statements - This helps us understand the type of statement made (whether it’s part of the contract or just an inducement).
Definition of Misrepresentation - We need to define what constitutes a misrepresentation.
Types of Misrepresentation - Identifying the different categories of misrepresentation, which will affect the remedies available.
Remedies - Determining what legal actions can be taken when a misrepresentation occurs.
11.2 Categories of Pre-Contract Statements
Pre-contract statements can generally be classified into three categories:
Sales Puff:
Definition: Exaggerated, extravagant sales talk that is not meant to be taken literally and does not form part of the contract.
Actionability: Not actionable if untrue, as they are not meant to form part of the contractual agreement.
Contract Term:
Definition: A statement that forms part of the agreement, meaning it is a crucial term of the contract.
Actionability: If the term is found to be untrue, the party who made the false statement is liable for breach of contract. Remedies for breach of contract would be pursued (discussed in later chapters).
Representation:
Definition: A statement made by one party that is not part of the contract but influences the other party's decision to enter into the contract.
Actionability: If the representation is false, it is actionable as a misrepresentation.
For a statement to be actionable, it must either be a term of the contract or a misrepresentation. Misrepresentation is actionable if it induces the party to enter into a contract, causing loss.
Guidelines for Categorizing Statements
The court uses certain guidelines to determine whether a statement is a contract term or a representation. The key factors include the common intention of the parties at the time the contract was made, and several additional considerations:
Expertise and Knowledge:
If one party possesses greater knowledge or skill in the subject matter, a false statement made by the expert to a non-expert is more likely to be considered a term of the contract. Conversely, if a non-expert makes a statement to an expert, it is more likely a representation.
Inclusion in the Written Contract:
If a verbal statement is repeated in the written contract, it is more likely to be treated as a term of the contract. If the statement is not included in the written contract, it is likely to be considered a representation.
Importance to the Recipient:
If the recipient of the statement makes it clear that the statement is vital for the contract, it is likely to be deemed a term of the contract.
Opportunity to Verify:
If the statement maker invites the other party to verify the statement (e.g., conducting a survey or inspection), it is more likely a representation. If the statement maker tells the other party not to check, the statement is more likely a term.
Time Lapse:
A longer time lapse between the making of the statement and the contract's formation increases the likelihood that the statement will be regarded as a representation rather than a term.
These guidelines are not scored but serve as factors that the court will weigh in determining whether a statement is a contract term or a representation. Some factors carry more weight than others, depending on the context.
Examples of Pre-Contract Statements
Situation 1: Natasha and the Organic Produce
Statement: The seller assured Natasha that the produce was organic.
Context: Natasha emphasized that it was vital for the produce to be organic.
Outcome: The seller's statement is likely to be a term of the contract, as Natasha made it clear that the organic nature of the produce was crucial. If the statement is false, it would be actionable as a breach of contract.
Situation 2: Anoushka and the Boat
Statement: The seller assured Anoushka that the boat was sound but advised her to have it surveyed.
Context: Anoushka did not have the boat surveyed and proceeded to buy it.
Outcome: The seller’s statement is more likely to be a representation. Anoushka was advised to verify the condition, so the seller did not intend to make a binding promise regarding the boat's condition.
Situation 3: Priti and the Motorbike
Statement: Priti told Robin that the bike was manufactured in 1992, relying on registration papers.
Context: Robin entered into a written contract that did not mention the date of manufacture.
Outcome: This is likely to be a representation because the statement was not included in the written contract and Priti had no special skill or knowledge regarding the bike’s age. Additionally, the time lapse between the statement and the contract formation suggests it was merely a representation.
11.3 Misrepresentation: Definition and Actionability
A misrepresentation occurs when a false statement of fact is made that induces another party to enter into a contract. For the statement to be actionable, it must:
Be false (misleading or inaccurate).
Be made by one party to another.
Induce the misled party to enter into the contract.
Misrepresentation does not require that the false statement be a term of the contract. Even if the statement is merely an inducement (not a binding term), it can still lead to an action for misrepresentation. The key issue is whether the statement led the misrepresentee to enter into the contract.
11.4 Types of Misrepresentation
Misrepresentation is categorized into three main types, each with different consequences and remedies:
Fraudulent Misrepresentation:
Definition: A statement made with the knowledge that it is false or with reckless disregard for the truth.
Remedies: The misrepresentee can rescind the contract and claim damages for any losses suffered.
Negligent Misrepresentation:
Definition: A false statement made without reasonable grounds for believing it to be true.
Remedies: The misrepresentee can rescind the contract and may also claim damages under the Misrepresentation Act 1967.
Innocent Misrepresentation:
Definition: A false statement made by a party who believes it to be true, without negligence.
Remedies: The misrepresentee can rescind the contract, but damages may only be available in limited circumstances (such as under the Misrepresentation Act 1967).
11.5 Remedies for Misrepresentation
The remedies for misrepresentation depend on the type of misrepresentation and may include:
Rescission:
Definition: The cancellation of the contract, returning the parties to their original position.
Availability: Rescission is available for all types of misrepresentation, but it can be barred in certain situations, such as when it is impossible to return to the original position or if third-party rights are involved.
Damages:
Fraudulent Misrepresentation: The misrepresentee can claim damages for losses suffered due to the fraudulent statement.
Negligent Misrepresentation: Damages can be claimed under the Misrepresentation Act 1967, provided the misrepresentation caused the loss.
Innocent Misrepresentation: Damages are available only under the Misrepresentation Act 1967, and the court has discretion on whether to award them.
Definition of Misrepresentation
A misrepresentation is an untrue statement of fact made by one party to a contract, through words or conduct, to the other contracting party, which induces the latter to enter into the contract. This definition can be broken down into four key elements:
Untrue Statement:
A misrepresentation requires that the statement made by one party is false. This can be conveyed through oral statements, written words, or even conduct. An example of misrepresentation by conduct is shown in the case Spice Girls v Aprilia World Service BV [2000] EMLR 748, where the pop group made false representations about the intentions of the members, leading the sponsor to enter into a contract based on this misleading information. In this case, the group's participation in the TV commercial was considered a misrepresentation by conduct.
Statement of Fact, Not Opinion or Future Intention:
For a misrepresentation to exist, the statement must be one of fact, not merely an opinion or a future intention.
Fact: A statement that can be verified as true or false. For instance, a seller telling a buyer that a tenant is a "most desirable" tenant when the tenant has arrears is a statement of fact.
Opinion: This refers to a subjective belief or judgment, which would not generally be actionable as misrepresentation unless it is based on facts that are misrepresented. Similarly, statements of future intention (e.g., “I intend to complete the work by next week”) are not typically misrepresentations unless the intention is false.
Made by One Party to the Other Contracting Party:
The false statement must be made by one of the contracting parties to the other contracting party. Misrepresentations made by third parties, or those made outside the contractual relationship, are not actionable under this heading. However, claims of negligent misstatement or deceit in tort may still be available in such cases.
Inducing the Other Party to Enter the Contract:
The false statement must induce the other party (the representee) to enter into the contract. The representee must rely on the statement in making their decision to enter into the contract. Even if the statement is not the only reason for entering into the contract, it must be a reason for doing so. This reliance is typically shown by the representee’s action or decision based on the statement made by the other party. In some cases, such as when an expert has been appointed to verify the statement, reliance may not be established if the representee relied solely on the expert's opinion.
11.4 Types of Misrepresentation and Damages
The law treats different types of misrepresentation according to their culpability (degree of fault). The remedies available, particularly regarding damages, vary depending on whether the misrepresentation was fraudulent, negligent, or innocent.
11.4.1 Fraudulent Misrepresentation
Fraudulent misrepresentation occurs when a false statement is made:
Knowingly (the maker knows it is false),
Without belief in its truth, or
Recklessly, without caring whether the statement is true or false.
Damages for fraudulent misrepresentation are available in the tort of deceit. The measure of damages is to put the misrepresentee in the position they would have been in if the misrepresentation had not been made. The claimant is entitled to damages for all consequential losses, including those that are remotely related to the misrepresentation.
Example: In East v Maurer [1991] 2 All ER 733, the claimant, who purchased a business based on fraudulent misrepresentation regarding competition from the seller, was awarded damages. The damages reflected the difference between the profits the claimant actually earned and what they would have earned if the statement had been true.
11.4.2 Negligent Misrepresentation
Negligent misrepresentation occurs when a statement is made carelessly, without reasonable grounds to believe it is true. It is governed by Section 2(1) of the Misrepresentation Act 1967.
Liability: Under Section 2(1), the burden of proof is reversed: the defendant must prove they had reasonable grounds for believing the statement was true. If they cannot, the misrepresentee is entitled to damages.
Damages: The damages for negligent misrepresentation are calculated the same way as for fraudulent misrepresentation — to put the innocent party in the position they would have been in had the misrepresentation not occurred. The misrepresentee can recover all consequential losses, just like in fraudulent misrepresentation.
Example: In Howard Marine & Dredging v Ogden [1978] 2 All ER 1134 (CA), a barge owner misrepresented the capacity of the barge based on an incorrect figure from the Lloyd’s Register. The court ruled that the defendant had failed to prove they had reasonable grounds to believe in the truth of the statement. The misrepresentee was awarded damages for losses caused by this negligent misrepresentation.
11.4.3 Innocent Misrepresentation
Innocent misrepresentation arises when the maker of the statement believes it is true and has reasonable grounds to hold that belief. No damages are available for innocent misrepresentation as of right. However, the misrepresentee may still be able to rescind the contract if rescission is not barred (e.g., if third-party rights have intervened, or there has been a lapse of time).
Example: If a seller innocently misrepresents the age of a vehicle but genuinely believes it to be true based on inaccurate records, the buyer may still rescind the contract but may not be entitled to damages unless damages are awarded under the Misrepresentation Act 1967.
11.5 Remedies for Misrepresentation
The primary remedies for misrepresentation include:
Rescission:
Rescission is the cancellation of the contract, aimed at restoring the parties to their pre-contract position. However, rescission may be barred in cases where:
It is impossible to return the parties to their original position.
Third-party rights have intervened.
There has been a long lapse of time before the misrepresentee acts.
Damages:
Fraudulent and Negligent Misrepresentation: The misrepresentee can claim all consequential losses, with the aim of restoring them to the position they would have been in if the misrepresentation had not occurred.
Innocent Misrepresentation: Although damages are not available as of right, the misrepresentee can still rescind the contract and potentially seek damages under the Misrepresentation Act 1967 in certain circumstances.
In conclusion, misrepresentation involves an untrue statement made by one party to another that induces the other party to enter into a contract. The remedy and legal consequences depend on whether the misrepresentation was fraudulent, negligent, or innocent, with fraudulent misrepresentation resulting in the most severe remedies, including damages for all consequential losses.
Rescission: Overview and Key Principles
Rescission is the legal remedy for misrepresentation that allows the misled party (the misrepresentee) to void the contract and return to their pre-contractual position. It does not automatically void the contract but gives the misrepresentee a choice to either affirm the contract (continue with it) or rescind the contract (set it aside). It is an equitable remedy, meaning it is granted at the discretion of the court, subject to certain conditions.
Rescission involves the mutual restoration of benefits, effectively putting both parties back in the position they were in before entering into the contract. This process is often compared to "hitting the rewind button" — reversing the contract to its starting point.
Example:
Zena and the Car Purchase:
Zena buys a car from Keith for £7,000 and agrees to pay an additional £500 when a Sat Nav is installed.
If Keith misrepresented the car’s age or mileage:
Zena can rescind the contract, returning the car to Keith and receiving the £7,000 back.
Keith would not need to install the Sat Nav, and Zena would not owe the additional £500.
Bars to Rescission
Despite being available in principle for all types of misrepresentation, rescission can be barred in certain situations. These equitable bars prevent rescission when the court believes it is unfair or impractical. There are four key bars to rescission:
1. Affirmation
Definition: The misrepresentee affirming the contract after discovering the misrepresentation.
Effect: Once the misrepresentee affirms the contract, they cannot rescind it later.
Example: If Zena had known about the misrepresentation regarding the car’s mileage but continued to make payments without objection, she would be considered to have affirmed the contract.
2. Undue Delay
Definition: Excessive delay in seeking rescission after discovering the misrepresentation.
Effect: Delay may bar rescission if it occurs beyond a reasonable time, as illustrated in Leaf v International Galleries [1950].
Case Example: In Leaf v International Galleries, the claimant bought a painting described as an original John Constable. He discovered after five years that the painting was not by Constable. The court ruled that his claim for rescission was barred due to the undue delay in bringing the action.
The key issue is not when the misrepresentation was discovered, but when it should have been discovered.
Fraudulent Misrepresentation Exception: In cases of fraudulent misrepresentation, time runs from when the misrepresentee actually discovered the fraud, not when they should have discovered it.
3. Innocent Third-Party Purchasers
Definition: If an innocent third party acquires an interest in the subject matter of the contract before rescission, rescission may be barred.
Effect: If the property has changed hands and the third party has a legal interest, rescission may not be granted, as the court will consider the rights of the innocent third party.
Case Example: In Car & Universal Finance v Caldwell [1964], a rogue purchased a car based on a misrepresentation and sold it to an innocent third party before the original seller could rescind the contract. The court ruled that rescission was barred since the third party had acquired an interest in the car before the rescission.
4. Impossibility of Substantial Restoration
Definition: When it is impossible for the misrepresentee to substantially restore the goods or property to the other party, rescission is barred.
Effect: If the goods or property cannot be returned in the same condition, rescission is not feasible.
Case Example: In Crystal Palace FC v Iain Dowie [2007], the court refused to order rescission of a compromise agreement because it would have required the defendant to perform two conflicting employment contracts. The court held that practical justice required damages instead of rescission.
Practical Barriers to Rescission
In practice, rescission is rarely granted in certain types of contracts due to the practical consequences of undoing a deal. For example:
Sale of a business: After a business is sold, contracts with third parties, employees, and other legal obligations may alter the business's position, making rescission impractical.
In such cases, the court will likely lean towards awarding damages instead of rescission to remedy the misrepresentation.
Rescission in the Context of Misrepresentation
Rescission is a critical remedy in misrepresentation cases because it allows the misrepresentee to set aside a contract that was induced by false statements. However, it is not automatic and is subject to certain equitable restrictions (affirmation, delay, innocent third parties, and impossibility of restoration).
While rescission aims to restore the parties to their original positions, damages can be awarded in addition to or instead of rescission depending on the type of misrepresentation and the circumstances of the case.