Misrepresentation in English law
Encyclopedia
Misrepresentation in English law is an area of English contract law
, which allows a person to escape a contractual obligation or claim compensation for losses. If one person can show that she entered an agreement because of another person's false assurances, then the other person will be unable to enforce the agreement against her, and may have to pay her damages. A misrepresentation can be an outright lie (fraud), an unintentional but careless falsehood (negligence), or an innocent slip of the tongue. In most cases English law
allows escape from the bargain when a misrepresentation was made, because it holds that people should only assume contractual obligations when they have given their true consent.
When a misrepresentation has been made and an agreement was (or at any rate appeared to be) concluded, the misrepresentee (the one told the lie, falsehood, etc.) does not have to bring a halt to the deal. Misrepresentations generally do not render a contract void, as does the contractual doctrine of common mistake or frustration
. It merely means that a contract will be voidable at the option of the misrepresentee. This is because not all contracts entered into on the strength of misrepresentations will always be bad, and it is thought more just to give the wronged party the choice about how to proceed.
Remedies are partly regulated by the Misrepresentation Act 1967
. English law generally allows a contract to be unwound, so that both parties are put back into the position before the agreement was made. It may be that the misrepresentation was incorporated into the contract as a term, so as an alternative one can claim the contract should subsist and claim for a loss in expectations. In this case the misrepresentee can equally sue for damages as if the misrepresentation had been true. A misrepresentee may also sue for any losses which resulted from her relying on the misrepresentation.
The law does not say 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" do not count. This is because a reasonable person would be unlikely to take such claims seriously.
There are two essential steps in claiming a remedy for misrepresentation. The first is to show that a misrepresentation took place, and the second is to show that you have relied on the misrepresentation when entering the contract.
Bowen LJ held that Mr Smith could not enforce a contract against LHP to buy his property, because he had advertised that the current tenant, Mr Fleck, was "most desirable". In fact, as Mr Smith knew, Mr Fleck had been missing his rent payments and was then declared bankrupt. So even though "most desirable" is an evaluative statement it is still a misrepresentation because it warrants the statement maker has good knowledge of certain facts.
The cases seem to show that the divide between "fact" and "opinion" is partly affected by the balance of knowledge and expertise between the parties. In Bisset v Wilkinson
Mr Bisset said his land in New Zealand could support 2000 sheep. Both he and Mr Wilkinson knew sheep had not been farmed before. Mr Wilkinson tried to pull out after the contract was signed, but the Privy Council
advised that the statement was only one of opinion, not fact given that there was no dishonesty, and considering the "knowledge of the parties respectively, and their relative positions". In the more recent case of Esso Petroleum Co Ltd v Mardon
Lord Denning MR emphasised again that knowledge of facts was crucial in being liable for a misrepresentation. Here Esso told Mr Mardon, a prospective franchisee, that its Southport
petrol station would have 200,000 customers a year. In fact the projections were wrong, and so Mr Mardon was entitled to claim compensation for his losses. The distinction between Esso and Mr Bisset is that Esso was in a far better position to know what was true.
, 'the state of a man's mind is just as much a fact as the state of his digestion.' So where Mr Edgington had bought shares after he heard the company was seeking capital to expand, but in reality it was to pay off debts, he was entitled to rescind his purchase.
or insurance
contracts is there a duty of utmost good faith (or uberrimae fidei) by which both sides are meant to disclose to each other all material information. For example in Lambert v Co-operative Insurance Society Ltd
the Co-op was entitled to rescind their insurance policy with Ms Lambert and not pay up on stolen jewelry because she had failed to disclose that her husband had been convicted for theft. By contrast, in ordinary contractual situations, there is no such duty. As Chitty J opined,
However several qualifications exist. First, if a representation was made during negotiations, which later transpires to be no longer true, there is a duty to make a correction. So in With v O'Flanagan where Dr O'Flanagan told Mr With that his medical practice earned £200, but when the contract was signed the income had dropped to £5, Dr O'Flanagan was under a duty to correct himself. Representations are continuing. Second, one cannot simply tell half truths, as for instance in Dimmock v Hallett
, where a land vendor said two farms were fully let but did not say the tenants had given notice to quit. This was misrepresentation. Third, it can be a misrepresentation when a person says they are "unaware" of something, but have in fact done no checks. This was the situation in Notts Patent Brick and Tile Co v Butler, where a land purchaser asked the vendor's solicitors whether there were any restrictive covenants and the solicitor (without bothering to find out) said he was unaware of any. It was true that the solicitor was aware, but it was also a misrepresentation.
The requirement for reliance has not been pushed so far as to say that a misrepresentor is never liable when a misrepresentee could have found out the truth. In the leading case, Redgrave v Hurd
Mr Hurd was told by the elderly Mr Redgrave that the solicitor practice earned £300 pa. Mr Redgrave told Mr Hurd he could check some documents in the office to prove it. Mr Hurd did not check, and subsequently signed a contract to join Mr Redgrave as a partner. Then Mr Hurd found out the practice only generated £200 pa, and the documents in the office had never said otherwise. Lord Jessel MR held that the contract could be rescinded for misrepresentation, because Mr Redgrave had still made a misrepresentation. Furthmore it would be inferred that Mr Hurd relied on the statement from the fact that it was untrue. Edgington v Fitzmaurice
confirmed further that a misrepresentation need not be the sole cause of entering a contract, for a remedy to be available, so long as it is an influence.
Redgrave v Hurd
raises another question, about contributory negligence
under the Law Reform (Contributory Negligence) Act 1945
. In the case, Mr Redgrave's mistake was referred to as innocent misrepresentation, though it is very arguable that it was at least negligent. Was it negligent of Mr Hurd to not check the papers as well? Had Mr Redgrave been fraudulent, it is clear that any negligence on Mr Hurd's part could not affect his right to compensation. However damages for negligent misrepresentation and damages under the Misrepresentation Act 1967
s 2(1) can.
It is important to note that a misrepresentee does not have to exercise the right to rescind a contract, and have it declared void. A contract is always voidable, and it exists until the option to void is exercised. If one's wish to rescind is clear, this will be effective even if not communicated to the misrepresentor, but to some official authority like the police or a motoring mutual society
When a contract is entered into after the misrepresentation of a third party, this area resembles the law on undue influence
. In TSB Bank plc v Camfield, a wife guaranteed repayment of her husband's partnership's loan through a mortgage over her house. Her husband's innocently misrepresented that the maximum liability was £15,000. Applying Barclays Bank plc v O'Brien
the court held she was allowed to rescind the agreement. She had not given true consent to the charge. Another example beyond the typical husband/wife/mortgage scenario is if a consumer buys goods on the strength of a manufacturer's advertising from a retailer.
When rescission is claimed, it is not possible to also claim expectation damages as if the contract were to be performed. Either one may claim rescission, or one may ask the court for damages as if the contract were still in force. But it would be inconsistent to do both. In Whittington v Seale-Hayne
it was held that one could not claim both damages for losses as if the contract was still in force, and losses to put the claimant in the position as if he had never entered it. So where Mr Whittington's prize poultry died on a polluted farm which Seale-Hayne represented was sanitary, Mr Whittington got an indemnity for council rates and repair costs, but not for the loss of profits. At the time, it was not possible to also recoup costs for the dead poultry, but now Hedley Byrne negligence or MA 1967 s 2(1) would provide this remedy.
it was held that a defrauded investor could not rescind the purchase of his shares because the investment was bound up in the company and the shares were now worth less. Precise counter restitution was impossible. However, the rule was mitigated, becoming more lenient. Now only substantial restitution is necessary. In Erlanger v New Sombrero Phosphate Co
promoters (who are in law fiduciaries, and therefore subject to a duty to disclose material facts) did not tell investors that a mine on Sombrero
island had been bought by the promoters for half the price that they were now valuing it for in the company. By the time investors realised, however, a substantial amount of phosphate had been mined. It clearly could not be put back in the ground. But Lord Blackburn
held that since substantial restitution (i.e. the money equivalent) could be paid, rescission of the share contracts was not barred.
Mr Long bought from Mr Lloyd a lorry advertised as being in ‘exceptional condition,’ said to do 40 mph and 11 miles to the gallon. When it broke down after two days and was doing 5 miles to the gallon, Mr Long complained. Mr Lloyd said he would repair it for half the price of a reconstructed dynamo. Because Mr Long accepted this, when it broke down again, Pearce LJ held the contract had been affirmed. It was too late to escape for misrepresentation. A more lenient approach may now exist. As Slade LJ pointed out in Peyman v Lanjani, actual knowledge of the right to choose to affirm a contract or rescind is essential before one can be said to have "affirmed" a contract.
. However the equity courts decided that a contract could not be declared void if a third party's rights had intervened, provided the third party had acted in good faith and given consideration (the principle of bona fide purchaser). So in Phillips v Brooks Ltd
it was not possible for a jeweller that had been defrauded by a rogue to claim back a ring from the pawn shop where the ring had been sold on.
Phillips v Brooks Ltd, however stands tensely with another area of the law known as the doctrine of "mistake as to identity". The House of Lords by a thin majority recently reaffirmed in Shogun Finance Ltd v Hudson
that when a contract is done at a distance, but where the identity of the contracting party is essential to the transaction, the contract will ex ante be void. In these cases, the courts have deviated from a normal misrepresentation and bar to rescission analysis.
where Mr Leaf was told he had bought the painting 'Salisbury Cathedral
' by John Constable
. It was in fact a copy. Mr Leaf was told this five years later at an auction. However, Denning LJ held that by this time it was far too late to rescind, even though the painter's identity was clearly a condition that went to the root of the contract. By contrast, the Limitation Act 1980
s 5 gives a six year limit from the date of a breach of contract to claim damages. This was an available remedy for Mr Leaf, though in pleading the case the lawyer had forgotten to include that point in the statement of claim!
It has been noted that laches is a ‘somewhat uncertain’ doctrine. There is authority that an innocent party must have known of a right to rescind before time starts to run, which seems to contradict the decision in Leaf.
Mr Caldwell told the AA and the police that he had been given a dud cheque for his Jaguar by a rogue. It was held that this was an act showing the wish to no longer be bound, so a car dealer that ended up with the vehicle, even though they had paid good money, had to give it back. This decision may be justified on the basis that in such "rogue" cases, the third party could protect herself by checking with the authorities that the vehicle they were buying is not stolen.
s 1, which simply says such bars no longer exist. However, it must still be remembered that one cannot ask both for rescission and for recovery of expectation damages for breach of contract.
.
and often a crime. The aim of damages for deceit is to put the claimant in the position as if the tort had not been committed. The leading case, Derry v Peek defines deceit, although it was not actually held in this case that deceit took place. Mr Derry had bought shares in a tram company which advertised new trams it was building had the right to use steam power. Sadly the Board of Trade
would only let the company use horse powered trams and the company was wound up. When Mr Derry sued the company's directors (including Mr Peek), Lord Herschell found that this was not deceit since the directors honestly believed in their statements at the time and thought steam power permission was a mere formality. He noted,
So fraud means a false representation made (a) knowingly, (b) without belief in its truth, or (c) recklessly. Note that an action for negligent misrepresentation was unavailable at the time (see below) and that just because a belief is unreasonable does not mean a statement is fraudulent. It may however be evidence of dishonesty. Conversely good motives (e.g. defrauding a bank to help starving children) do not change the fact of deceit.
A number of cases illustrate how seriously common law takes deceit. In Doyle v Olby (Ironmongers) Ltd
Mr Olby was fraudulently told that the ironmonger's business he was buying was half brought in through a travelling salesman. Lord Denning MR increased the award given at trial (which covered two and a half times the cost of a travelling salesman) to reflect the whole difference between Mr Doyle's position before the fraud and his position now. Any loss flowing directly from the fraud was compensable, because, he said,
Further illustrations are plentiful. In East v Maurer
where Maurer lied that he would not set up a barber competing with the one he was selling to East, Maurer was liable for East's normal market lost profits, costs of improvements and the price paid minus the business' selling price. In Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd
Smith New Court Ltd was deceitfully told there were close rival bids for shares in a company called Ferranti
IS Inc. Smith New Court Ltd bought, but then it transpired that massive fraud had occurred. The Court of Appeal held that only £1.2m was recoverable, the difference between the market price at the time of purchase and the real price, but the House of Lords held that the full losses of £11.8m were recoverable (even though the fraud was unconnected to the misrepresentation) because that loss was one which Smith New Court Ltd had due to entering the transaction after being deceived. In practice, because an action for negligent misrepresentation has now been developed through Hedley Byrne and MA 1967 s 2(1), it is often not beneficial to sue for deceit. The only certain difference is that the defence of contributory negligence
is unavailable in a deceit action. But deceit is harder to prove, since evidence of a person's state of mind is needed. Because the charge can sink people's reputations, alleging deceit is also contrary to professional conduct rules at the bar, unless a good case exists. A large difference which is subject to debate, is that the causation and remoteness rules are more generous for deceit. Certainly this is true when comparing negligence and deceit. However, MA 1967 s 2(1), which was modelled on the law as it stood when the Act was passed has the same causation rules as for deceit (see below).
a claim was allowed where parties were in a fiduciary relationship and in Candler v Crane, Christmas and Co Denning LJ delivered a blistering dissent against the bar to recovery for negligent words. His dissent was approved in the leading case, Hedley Byrne & Co Ltd v Heller & Partners Ltd, where Heller & Partners Ltd (a bank) warranted to Hedley Byrne & Co Ltd (an advertising company) that its prospective client, Easipower Ltd, was creditworthy. When Easipower Ltd could not in fact pay for the advertising services, Hedley Byrne sued the bank for misrepresentation. Readers should note, this is a tort
action, so the question did not actually involve a claim for misrepresentation inducing a contract. But the principle was the same. Could one sue for losses after being told negligent, rather than fraudulent, statements? The House of Lords answered "yes" if there was a special relationship between the parties showing that one had "assumed responsibility" to the other. In the instant case this would have worked, except that Heller & Partners had said in their warrant that they disclaimed any responsibility for their statement's accuracy. They had an exclusion clause (see below, and MA 1967 s 3). So in absence of the exclusion clause, Heller & Partners would have been liable for negligent misstatement.
Even if Hedley Byrne was not a contract case, Esso Petroleum Co Ltd v Mardon
confirmed that its principles were applicable to negligent misrepresentation preceding a contract. Since the same principles apply, it has been held that where a representee is also partly at fault for his loss, her damages can be reduced under the Law Reform (Contributory Negligence) Act 1945
s 1. However, it will almost always be more advantageous to sue under the MA 1967 s 2(1).
An illustration of the burden of proof is given in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd
, where a shipping company told a client that its barge for hire would hold 1600 tonnes. This is what the Lloyd's Register
of ships said. But the ships own documents, accessible to the shipping company, said the barge could only take 1055. The Court of Appeal (Lord Denning MR dissenting) held that in preferring a more convenient source (the Lloyd's Register) over another (the shipping documents), the shipping company had not been reasonable. It was up to the shipping company to positively prove this, and in the circumstances looking to the register was not reasonable. It is likely that a company's own standards and practices will be relevant to what constitutes reasonable grounds for a belief.
The point about remoteness of damages under s 2(1) was treated in the controversial case of Royscot Trust Ltd v Rogerson
. Here Mr Rogerson bought a car on hire purchase, from a Honda dealer, financed by Royscot Trust Ltd. When Mr Rogerson fell behind in his repayments and sold away the car, Royscot Trust Ltd sued the Honda dealer, because they found it had misrepresented the proportion of the deposit Mr Rogerson had put down for the car. On this basis they argued that Honda was liable for them not being able to recover the cost of the loan (Mr Rogerson had no money). Royscot Ltd argued that the loss was too, or that Mr Rogerson's wrongful sale was a break in the causal chain. But the Court of Appeal held that in any event the test under s 2(1) was the same as in the tort of deceit, that one should be liable for all consequences. Balcombe LJ said this followed from the clear wording of the Act.
It will not always be possible to sue under s 2(1), however. If there is no contract, for instance if an agreement was void ab initio on the ground of non est factum, then it will be necessary to sue under Hedley Byrne. Also, the misrepresentation must precede the contract, and is not actionable under s 2(1) even if it is found in the contract subsequently. Lastly, it has been suggested by McKendrick that if s 2(1)'s application leads to draconian consequences, a court may not be willing to enforce it.
Although it has been suggested otherwise, it is important to note that the right of the court to award damages in lieu of rescission only exists if the right to rescission exists. So in Government of Zanzibar v British Aerospace (Lancaster House) Ltd
because it was impossible for the Government to give back its executive jet (counter restitution impossible), it could not ask the court for damages under s 2(2) instead of rescinding its contract.
. It was held in HIH Insurance Ltd v Chase Manhattan Bank that it is never possible to exclude liability for fraudulent misrepresentations. But it is possible to exclude liability for negligent misrepresentation, liability under MA 1967 s 2(1) or innocent misrepresentation. The requirement, however, is that the exclusion is "reasonable" according to UCTA 1977 s 11, in conjunction with Sch 2.
The same issues as are found in the UCTA 1977 cases arise under s 3. First, by analogy to UCTA 1977 s 13, a clause could be held to be not an exemption, but a "duty defining" clause. This was the position in Overbrooke Estates Ltd v Glencombe Properties Ltd
where a condition at an auction stated the auctioneer was never given the authority to represent that the properties were not going to be compulsorily acquired by the council. By contrast, in Cremdean Properties Ltd v Nash
it was held agents of a seller of some Bristol business property always had authority to make general representations, so a clause purporting preclude any guarantee for accuracy of representations was an exclusion and subject to s 3.
The reasonableness test itself can be seen in operation in Howard Marine & Dredging Co v A Ogden & Sons (Excavations) Ltd (where the Court of Appeal disagreed about the weight one would give the Lloyd's Register) and Walker v Boyle
. In Walker, two private parties, albeit both with solicitors acting on their behalf had made an agreement to sell a country house. Some standard terms called the "National Conditions of Sale" were incorporated, and these contained a clause excluding liability for misrepresentations. Even though these terms were widely used, it was held that between the parties their use fell foul of MA 1967 s 3, since they were not negotiated by interested trade parties. A court will weigh up a number of considerations (was the clause transparent? which party is better insured to bear the risk?) but the most important consideration is what the bargaining strength of the parties were.
against unfair trade practices. Typically consumers do not understand legal complexities and have little incentive to litigate over small claims. Statute may also strengthen enforcement of consumer protection by providing criminal or regulatory sanctions. The Trade Descriptions Act 1968
ss 1-4 say that not only false, but also misleading statements about products are prohibited. An early example is found in Robertson v Dicicco where it was held that describing a vehicle as a ‘beautiful car’ was implicitly saying it was fit for purpose. Though the exterior was attractive, it was still a misrepresentation when the car did not work. Similarly the Consumer Protection Act 1987
ss 20-21 create an offence for giving misleading information about the prices of goods and services, such as banking or insurance. On top of this the Unfair Commercial Practices Directive, give a broad principle based jurisdiction to courts and the OFT to clamp down on misleading practices or omissions by businesses.
Were the issue treated as one of fraudulent misrepresentation, the simple equitable principle to be applied would be that the contract is voidable unless third party rights have intervened. The defrauded party (Alice, in the example) has a right to rescind the contract, until the point where Claire's rights had intervened. Claire could be considered a bona fide purchaser
for value without notice of any pre-existing interest, and should take full title to the property. This was essentially the approach advocated in Lewis v Averay. However, it is not the stance English law is currently taking. In Shogun Finance Ltd v Hudson
the House of Lords by three to two decided to uphold an older line of authority which declares a contract void from the start. If there was never any contract between the seller and the fraudster, the fraudster cannot sell any property right to the third party, because they never had a good property right in the first place. This follows the Latin maxim, nemo dat quod non habet
, that one cannot give what one does not have. So the present law is that if a person deals with another by distance (and not face to face, in which case there is deemed to be no "mistake" about identity), that person's presumed identity is recorded in a document, and it turns out that that person is in fact an uncreditworthy "rogue" then the third party cannot acquire good title and the good must be returned to the original person who is defrauded. The minority of the House of Lords (Lord Nicholls and Lord Millett) preferred to follow Lewis v Averay, which is in line with the law across Europe, in the United States and most of the rest of the world.
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
, which allows a person to escape a contractual obligation or claim compensation for losses. If one person can show that she entered an agreement because of another person's false assurances, then the other person will be unable to enforce the agreement against her, and may have to pay her damages. A misrepresentation can be an outright lie (fraud), an unintentional but careless falsehood (negligence), or an innocent slip of the tongue. In most cases English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
allows escape from the bargain when a misrepresentation was made, because it holds that people should only assume contractual obligations when they have given their true consent.
When a misrepresentation has been made and an agreement was (or at any rate appeared to be) concluded, the misrepresentee (the one told the lie, falsehood, etc.) does not have to bring a halt to the deal. Misrepresentations generally do not render a contract void, as does the contractual doctrine of common mistake or frustration
Frustration
This article concerns the field of psychology. The term frustration does, however, also concern physics. In this context, the term is treated in a different article, geometric frustration....
. It merely means that a contract will be voidable at the option of the misrepresentee. This is because not all contracts entered into on the strength of misrepresentations will always be bad, and it is thought more just to give the wronged party the choice about how to proceed.
Remedies are partly regulated by the Misrepresentation Act 1967
Misrepresentation Act 1967
Misrepresentation Act 1967 is an Act of the Parliament of the United Kingdom, which regulates English contract law and unjust enrichment, so far as relevant for misrepresentations.-Section 1:-Section 2:...
. English law generally allows a contract to be unwound, so that both parties are put back into the position before the agreement was made. It may be that the misrepresentation was incorporated into the contract as a term, so as an alternative one can claim the contract should subsist and claim for a loss in expectations. In this case the misrepresentee can equally sue for damages as if the misrepresentation had been true. A misrepresentee may also sue for any losses which resulted from her relying on the misrepresentation.
What is misrepresentation?
A misrepresentation is a false statement of fact or law that is relied on by the other party in entering a contract. For example in Curtis v Chemical Cleaning and Dyeing Co Ms Curtis took a wedding dress with beads and sequins to the cleaners. They gave her a contract to sign and she asked the assistant what it was. The assistant said it was to stop risk to the beads. In fact the contract exempted all liability. The dress was stained. But the exclusion was ineffective because of the assistant's misrepresentation.The law does not say 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" do not count. This is because a reasonable person would be unlikely to take such claims seriously.
There are two essential steps in claiming a remedy for misrepresentation. The first is to show that a misrepresentation took place, and the second is to show that you have relied on the misrepresentation when entering the contract.
Misrepresentation
Not every statement spoken without the utmost truth is a misrepresentation. It is generally said that the statement must be one asserting something as a fact, rather than as an opinion, and that the statements of intention do not count as statements of fact. However, opinions and intentions can overlap with facts. Perhaps controversially English law does not see anything wrong when a person simply stays silent and lets somebody make a mistake.Statements of opinion
Though a statement of opinion is generally not actionable as a misrepresentation, by giving one's opinion one may be held to have represented that they had better knowledge about certain facts. For instance in Smith v Land and House Property CorporationSmith v Land and House Property Corporation
Smith v Land and House Property Corporation LR 28 Ch D 7 is an English contract law case, concerning misrepresentation. It holds that a statement of opinion can represent that one knows certain facts, and therefore one may have still made a misrepresentation.-Facts:Land and House Property Corp ...
Bowen LJ held that Mr Smith could not enforce a contract against LHP to buy his property, because he had advertised that the current tenant, Mr Fleck, was "most desirable". In fact, as Mr Smith knew, Mr Fleck had been missing his rent payments and was then declared bankrupt. So even though "most desirable" is an evaluative statement it is still a misrepresentation because it warrants the statement maker has good knowledge of certain facts.
The cases seem to show that the divide between "fact" and "opinion" is partly affected by the balance of knowledge and expertise between the parties. In Bisset v Wilkinson
Bisset v Wilkinson
Bisset v Wilkinson [1927] AC 177 is a leading English contract law case on the subject of misrepresentation, establishing that a fairly given opinion cannot amount to a misrepresentation...
Mr Bisset said his land in New Zealand could support 2000 sheep. Both he and Mr Wilkinson knew sheep had not been farmed before. Mr Wilkinson tried to pull out after the contract was signed, but the Privy Council
Privy council
A privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
advised that the statement was only one of opinion, not fact given that there was no dishonesty, and considering the "knowledge of the parties respectively, and their relative positions". In the more recent case of Esso Petroleum Co Ltd v Mardon
Esso Petroleum Co Ltd v Mardon
Esso Petroleum Co Ltd v Mardon [1976] is an English contract law case, concerning misrepresentation. It holds that the divide between a statement of opinion and fact becomes more factual if one holds himself out as having expert knowledge.-Facts:...
Lord Denning MR emphasised again that knowledge of facts was crucial in being liable for a misrepresentation. Here Esso told Mr Mardon, a prospective franchisee, that its Southport
Southport
Southport is a seaside town in the Metropolitan Borough of Sefton in Merseyside, England. During the 2001 census Southport was recorded as having a population of 90,336, making it the eleventh most populous settlement in North West England...
petrol station would have 200,000 customers a year. In fact the projections were wrong, and so Mr Mardon was entitled to claim compensation for his losses. The distinction between Esso and Mr Bisset is that Esso was in a far better position to know what was true.
Statements of intention
Statements of future intention are not generally actionable representations, so that someone who fails to carry out a stated intention is not making a misrepresentation. However, a misrepresentation of one's present intention is actionable. As Bowen LJ said in Edgington v FitzmauriceEdgington v Fitzmaurice
Edgington v Fitzmaurice 29 Ch D 459 is an English contract law case, concerning misrepresentation. It holds that a statement of present intentions can count as an actionable misrepresentation and that a misrepresentation need not be the sole cause of entering a contract so long as it is an...
, 'the state of a man's mind is just as much a fact as the state of his digestion.' So where Mr Edgington had bought shares after he heard the company was seeking capital to expand, but in reality it was to pay off debts, he was entitled to rescind his purchase.
Silence
Only in special categories of contract such as partnershipPartnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
or insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
contracts is there a duty of utmost good faith (or uberrimae fidei) by which both sides are meant to disclose to each other all material information. For example in Lambert v Co-operative Insurance Society Ltd
Lambert v Co-operative Insurance Society Ltd
Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485 is an English contract law case, concerning misrepresentation. It is an example of the operation of a positive duty of good faith in contracts for insurance.-Facts:...
the Co-op was entitled to rescind their insurance policy with Ms Lambert and not pay up on stolen jewelry because she had failed to disclose that her husband had been convicted for theft. By contrast, in ordinary contractual situations, there is no such duty. As Chitty J opined,
‘Mere silence as regards a material fact which the one party is not under an obligation to disclose to the other cannot be a ground for rescission or a defence to specific performance.’
However several qualifications exist. First, if a representation was made during negotiations, which later transpires to be no longer true, there is a duty to make a correction. So in With v O'Flanagan where Dr O'Flanagan told Mr With that his medical practice earned £200, but when the contract was signed the income had dropped to £5, Dr O'Flanagan was under a duty to correct himself. Representations are continuing. Second, one cannot simply tell half truths, as for instance in Dimmock v Hallett
Dimmock v Hallett
Dimmock v Hallett LR 2 Ch App 21 is an English contract law case, concerning misrepresentation.-Facts:An estate was about to be auctioned off to discharge a debt to a mortgagee. The estate included three parcels of land called "Bull Hassocks Farm", "Creyke's Hundreds" and "Misson Springs"...
, where a land vendor said two farms were fully let but did not say the tenants had given notice to quit. This was misrepresentation. Third, it can be a misrepresentation when a person says they are "unaware" of something, but have in fact done no checks. This was the situation in Notts Patent Brick and Tile Co v Butler, where a land purchaser asked the vendor's solicitors whether there were any restrictive covenants and the solicitor (without bothering to find out) said he was unaware of any. It was true that the solicitor was aware, but it was also a misrepresentation.
Reliance
It is essential that there is some connection between a misrepresentation and a claimant's entry into the contract. For instance in Attwood v Small Mr Small made false claims about the capabilities of mines and steelworks, which he was selling to Mr Attwood. Mr Attwood said he would verify the claims before he bought. He employed agents to check. The agents said the claims were true. It turned out they were not. But the House of Lords held that Mr Attwood could not escape the contract, since he did not rely on Mr Small. He relied on his agents.The requirement for reliance has not been pushed so far as to say that a misrepresentor is never liable when a misrepresentee could have found out the truth. In the leading case, Redgrave v Hurd
Redgrave v Hurd
Redgrave v Hurd 20 Ch D 1 is an English contract law case, concerning misrepresentation. It holds that a contract can be rescinded for innocent misrepresentation, even where the representee also had the chance to verify the false statement.-Facts:...
Mr Hurd was told by the elderly Mr Redgrave that the solicitor practice earned £300 pa. Mr Redgrave told Mr Hurd he could check some documents in the office to prove it. Mr Hurd did not check, and subsequently signed a contract to join Mr Redgrave as a partner. Then Mr Hurd found out the practice only generated £200 pa, and the documents in the office had never said otherwise. Lord Jessel MR held that the contract could be rescinded for misrepresentation, because Mr Redgrave had still made a misrepresentation. Furthmore it would be inferred that Mr Hurd relied on the statement from the fact that it was untrue. Edgington v Fitzmaurice
Edgington v Fitzmaurice
Edgington v Fitzmaurice 29 Ch D 459 is an English contract law case, concerning misrepresentation. It holds that a statement of present intentions can count as an actionable misrepresentation and that a misrepresentation need not be the sole cause of entering a contract so long as it is an...
confirmed further that a misrepresentation need not be the sole cause of entering a contract, for a remedy to be available, so long as it is an influence.
Redgrave v Hurd
Redgrave v Hurd
Redgrave v Hurd 20 Ch D 1 is an English contract law case, concerning misrepresentation. It holds that a contract can be rescinded for innocent misrepresentation, even where the representee also had the chance to verify the false statement.-Facts:...
raises another question, about contributory negligence
Contributory negligence
Contributory negligence in common-law jurisdictions is defense to a claim based on negligence, an action in tort. It applies to cases where a plaintiff/claimant has, through his own negligence, contributed to the harm he suffered...
under the Law Reform (Contributory Negligence) Act 1945
Law Reform (Contributory Negligence) Act 1945
The Law Reform Act 1945 is an Act of Parliament of the United Kingdom, which allows a judge to apportion liability for compensatory damages as he feels to be "just and equitable" between a tortfeasor and an injured person who was partly to blame.-Historical background:Until the Act was passed,...
. In the case, Mr Redgrave's mistake was referred to as innocent misrepresentation, though it is very arguable that it was at least negligent. Was it negligent of Mr Hurd to not check the papers as well? Had Mr Redgrave been fraudulent, it is clear that any negligence on Mr Hurd's part could not affect his right to compensation. However damages for negligent misrepresentation and damages under the Misrepresentation Act 1967
Misrepresentation Act 1967
Misrepresentation Act 1967 is an Act of the Parliament of the United Kingdom, which regulates English contract law and unjust enrichment, so far as relevant for misrepresentations.-Section 1:-Section 2:...
s 2(1) can.
Rescission
The first possible remedy for misrepresentation is that the misrepresentee may be entitled to rescind the contract. This means that the contract is "taken back", as if it had never come into existence. The misrepresentee would then be entitled to compensation to put him back in the position as if the contract had not taken place. Rescission is distinct from termination of a contract, whereby a breach of a term cancels future performance, and only extinguishes the contract prospectively. For rescission the claimant may have a restitutionary remedy to recover any enrichment that a defandant has received under the contract (and in return give up any enrichment the claimant has received). The claimant may also have a tort claim for any losses that had arisen. In principle the rescission remedy is available for fraud and negligent misrepresentation as of right. For innocent misrepresentation, however, MA 1967 s 2(2) gives the court discretion to award damages instead of rescission if undue hardship to the defandant would result. Part rescission is not yet available in England.It is important to note that a misrepresentee does not have to exercise the right to rescind a contract, and have it declared void. A contract is always voidable, and it exists until the option to void is exercised. If one's wish to rescind is clear, this will be effective even if not communicated to the misrepresentor, but to some official authority like the police or a motoring mutual society
When a contract is entered into after the misrepresentation of a third party, this area resembles the law on undue influence
Undue influence
Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible.-Undue influence in contract law:...
. In TSB Bank plc v Camfield, a wife guaranteed repayment of her husband's partnership's loan through a mortgage over her house. Her husband's innocently misrepresented that the maximum liability was £15,000. Applying Barclays Bank plc v O'Brien
Barclays Bank plc v O'Brien
Barclays Bank plc v O’Brien [1993] is an English contract law case relating to undue influence. It set out the basic categories of undue influence as,* actual undue influence* presumed undue influence from a special relationship...
the court held she was allowed to rescind the agreement. She had not given true consent to the charge. Another example beyond the typical husband/wife/mortgage scenario is if a consumer buys goods on the strength of a manufacturer's advertising from a retailer.
When rescission is claimed, it is not possible to also claim expectation damages as if the contract were to be performed. Either one may claim rescission, or one may ask the court for damages as if the contract were still in force. But it would be inconsistent to do both. In Whittington v Seale-Hayne
Whittington v Seale-Hayne
Whittington v Seale-Hayne 82 LT 49 is an English contract law case concerning misrepresentation. It holds that-Facts:Mr Whittington bred prize poultry. He bought a long farm lease, induced by Seale-Hayne’s representation that the premises were sanitary and in good repair. But the water supply was...
it was held that one could not claim both damages for losses as if the contract was still in force, and losses to put the claimant in the position as if he had never entered it. So where Mr Whittington's prize poultry died on a polluted farm which Seale-Hayne represented was sanitary, Mr Whittington got an indemnity for council rates and repair costs, but not for the loss of profits. At the time, it was not possible to also recoup costs for the dead poultry, but now Hedley Byrne negligence or MA 1967 s 2(1) would provide this remedy.
Bars to rescission
The right to rescission may in four circumstances expire. Rescission is often a drastic solution, just as the right to terminate for a contractual "condition" can be an oppressive right when exercised. So as an equitable remedy, the courts developed principles which would take away the right if it seemed unfair on the defendant, some third party, or too rich for the claimant.Counter restitution impossible
With a somewhat technical sounding name, this is the most important bar to rescission in practice. "Counter restitution" simply means "putting the parties back" to their positions before the contract was consummated. For example, if our contract was a pen for £1, counter restitution would mean you giving back the pound and me giving up the pen. The aim is to ensure that a claimant is not unjustly enriched as a result of rescission. It used to be that common law courts insisted on precise restitution. So in Clarke v DicksonClarke v Dickson
Clarke v Dickson EB & E 148 is an English contract law case concerning misrepresentation. It stands as an example of the restrictive approach common law courts took to rescission for misrepresentation before the leading case of Erlanger v New Sombrero Phosphate Co held only substantial counter...
it was held that a defrauded investor could not rescind the purchase of his shares because the investment was bound up in the company and the shares were now worth less. Precise counter restitution was impossible. However, the rule was mitigated, becoming more lenient. Now only substantial restitution is necessary. In Erlanger v New Sombrero Phosphate Co
Erlanger v New Sombrero Phosphate Co
Erlanger v New Sombrero Phosphate Co 3 App Cas 1218 is a landmark English contract law, restitution and UK company law case. It concerned rescission for misrepresentation and how the impossibility of counter restitution may be a bar to rescission...
promoters (who are in law fiduciaries, and therefore subject to a duty to disclose material facts) did not tell investors that a mine on Sombrero
Sombrero
Sombrero in English refers to a type of wide-brimmed hat originating in Mexico. In Spanish, however, it is the generic word for "hat", which originates from "sombra", meaning "shade"....
island had been bought by the promoters for half the price that they were now valuing it for in the company. By the time investors realised, however, a substantial amount of phosphate had been mined. It clearly could not be put back in the ground. But Lord Blackburn
Lord Blackburn
Lord Blackburn may refer to*Colin Blackburn, Baron Blackburn *John Morley, 1st Viscount Morley of Blackburn *Adam Patel, Baron Patel of Blackburn...
held that since substantial restitution (i.e. the money equivalent) could be paid, rescission of the share contracts was not barred.
Affirmation
If a claimant through conduct has subsequently affirmed a contract despite some prior misrepresentation, she will be estopped from changing her mind. For instance, in the slightly harsh case of Long v LloydLong v Lloyd
Long v Lloyd [1958] 1 WLR 753 is an English contract law case concerning misrepresentation. It exemplifies that if a contract is affirmed by a misrepresentee, rescission will be barred.-Facts:...
Mr Long bought from Mr Lloyd a lorry advertised as being in ‘exceptional condition,’ said to do 40 mph and 11 miles to the gallon. When it broke down after two days and was doing 5 miles to the gallon, Mr Long complained. Mr Lloyd said he would repair it for half the price of a reconstructed dynamo. Because Mr Long accepted this, when it broke down again, Pearce LJ held the contract had been affirmed. It was too late to escape for misrepresentation. A more lenient approach may now exist. As Slade LJ pointed out in Peyman v Lanjani, actual knowledge of the right to choose to affirm a contract or rescind is essential before one can be said to have "affirmed" a contract.
Third party rights
A clear bar to rescission is where unwinding a contractual exchange may cause injustice to an innocent third party. This will particularly be the case where an item has changed hands and then been sold on to a third person. If the first contract is declared void, then the second contract with the third person would also be void, due to the principle of nemo dat quod non habetNemo dat quod non habet
Nemo dat quod non habet, literally meaning "no one [can] give what he does not have" is a legal rule, sometimes called the nemo dat rule, that states that the purchase of a possession from someone who has no ownership right to it also denies the purchaser any ownership title...
. However the equity courts decided that a contract could not be declared void if a third party's rights had intervened, provided the third party had acted in good faith and given consideration (the principle of bona fide purchaser). So in Phillips v Brooks Ltd
Phillips v Brooks Ltd
Phillips v Daniel Ltd [1919] 2 KB 243 is an English contract law case concerning misrepresentation. It held that a person is deemed to contract with the person in front of them, and that if a third party's rights intervene, rescission for misrepresentation will be precluded.-Facts:On 15 April 1918,...
it was not possible for a jeweller that had been defrauded by a rogue to claim back a ring from the pawn shop where the ring had been sold on.
Phillips v Brooks Ltd, however stands tensely with another area of the law known as the doctrine of "mistake as to identity". The House of Lords by a thin majority recently reaffirmed in Shogun Finance Ltd v Hudson
Shogun Finance Ltd v Hudson
Shogun Finance Ltd v Hudson [2003] is an English contract law decided in the House of Lords, on the subject of mistaken identity as a basis for rescission of a contract. The case has been the subject of much criticism in failing to effectively clarify the area of mistake to identity.-Facts:A rogue...
that when a contract is done at a distance, but where the identity of the contracting party is essential to the transaction, the contract will ex ante be void. In these cases, the courts have deviated from a normal misrepresentation and bar to rescission analysis.
Lapse of time
The fourth potential bar to rescission is that the right will be lost if a claimant takes too long to bring an action in court. The old term for lapse of time is "laches" . The amount of time that needs to pass is not specified, and a judge will decide that on a case by case basis according to what he thinks is fair. The leading example is Leaf v International GalleriesLeaf v International Galleries
Leaf v International Galleries [1950] 2 KB 86 is an English contract law case concerning rescission for mistake and innocent misrepresentation.-Facts:...
where Mr Leaf was told he had bought the painting 'Salisbury Cathedral
Salisbury Cathedral
Salisbury Cathedral, formally known as the Cathedral Church of the Blessed Virgin Mary, is an Anglican cathedral in Salisbury, England, considered one of the leading examples of Early English architecture....
' by John Constable
John Constable
John Constable was an English Romantic painter. Born in Suffolk, he is known principally for his landscape paintings of Dedham Vale, the area surrounding his home—now known as "Constable Country"—which he invested with an intensity of affection...
. It was in fact a copy. Mr Leaf was told this five years later at an auction. However, Denning LJ held that by this time it was far too late to rescind, even though the painter's identity was clearly a condition that went to the root of the contract. By contrast, the Limitation Act 1980
Limitation Act 1980
The Limitation Act 1980 is a British Act of Parliament. It is a statute of limitations which provides timescales within which action may be taken for breaches of the law. For example it provides that breaches of an ordinary contract are actionable for six years after the event whereas breaches of...
s 5 gives a six year limit from the date of a breach of contract to claim damages. This was an available remedy for Mr Leaf, though in pleading the case the lawyer had forgotten to include that point in the statement of claim!
It has been noted that laches is a ‘somewhat uncertain’ doctrine. There is authority that an innocent party must have known of a right to rescind before time starts to run, which seems to contradict the decision in Leaf.
Communication of rescission
In order to rescind a contract, it is normal to communicate the intention to rescind to the misrepresentor. However this is not necessary, so long as a misrepresentee unequivocally communicates their wish to no longer be bound to someone. In Car and Universal Finance Co Ltd v CaldwellCar and Universal Finance Co Ltd v Caldwell
Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 is an English contract law case concerning misrepresentation. It holds that an unequivocal act communicating the wish to rescind a contract can override third party rights. The communication does not need to go to the...
Mr Caldwell told the AA and the police that he had been given a dud cheque for his Jaguar by a rogue. It was held that this was an act showing the wish to no longer be bound, so a car dealer that ended up with the vehicle, even though they had paid good money, had to give it back. This decision may be justified on the basis that in such "rogue" cases, the third party could protect herself by checking with the authorities that the vehicle they were buying is not stolen.
Removal of bars to rescission, MA 1967 s 1
Older cases had held that if a contract had already been performed, or a misrepresentation had become a term of the contract, this would preclude rescission. This inflexible position was amended by the Misrepresentation Act 1967Misrepresentation Act 1967
Misrepresentation Act 1967 is an Act of the Parliament of the United Kingdom, which regulates English contract law and unjust enrichment, so far as relevant for misrepresentations.-Section 1:-Section 2:...
s 1, which simply says such bars no longer exist. However, it must still be remembered that one cannot ask both for rescission and for recovery of expectation damages for breach of contract.
Damages
Whether a claimant can seek damages depends on whether the misrepresentation was innocent, negligent or fraudulent. The damages available will reflect losses, not a person's expectations, unless the misrepresentation was a promise incorporated as a term into the contract. Provided no double recovery results it is entirely possible to rescind and claim damages (again, though, not expectation damages as if the contract were still in existence). There are four categories of damages claim, which are a combination of common law and the Misrepresentation Act 1967Misrepresentation Act 1967
Misrepresentation Act 1967 is an Act of the Parliament of the United Kingdom, which regulates English contract law and unjust enrichment, so far as relevant for misrepresentations.-Section 1:-Section 2:...
.
Fraud or deceit
Deceit is telling lies. It is a tortTort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
and often a crime. The aim of damages for deceit is to put the claimant in the position as if the tort had not been committed. The leading case, Derry v Peek defines deceit, although it was not actually held in this case that deceit took place. Mr Derry had bought shares in a tram company which advertised new trams it was building had the right to use steam power. Sadly the Board of Trade
Board of Trade
The Board of Trade is a committee of the Privy Council of the United Kingdom, originating as a committee of inquiry in the 17th century and evolving gradually into a government department with a diverse range of functions...
would only let the company use horse powered trams and the company was wound up. When Mr Derry sued the company's directors (including Mr Peek), Lord Herschell found that this was not deceit since the directors honestly believed in their statements at the time and thought steam power permission was a mere formality. He noted,
‘The ground upon which an alleged belief was founded is a most important test of its reality… if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent…’
So fraud means a false representation made (a) knowingly, (b) without belief in its truth, or (c) recklessly. Note that an action for negligent misrepresentation was unavailable at the time (see below) and that just because a belief is unreasonable does not mean a statement is fraudulent. It may however be evidence of dishonesty. Conversely good motives (e.g. defrauding a bank to help starving children) do not change the fact of deceit.
A number of cases illustrate how seriously common law takes deceit. In Doyle v Olby (Ironmongers) Ltd
Doyle v Olby (Ironmongers) Ltd
Doyle v Olby Ltd [1969] 2 QB 158 is an English contract law case concerning misrepresentation. It establishes the different measure of damages between breach of contract and deceit.-Facts:...
Mr Olby was fraudulently told that the ironmonger's business he was buying was half brought in through a travelling salesman. Lord Denning MR increased the award given at trial (which covered two and a half times the cost of a travelling salesman) to reflect the whole difference between Mr Doyle's position before the fraud and his position now. Any loss flowing directly from the fraud was compensable, because, he said,
‘it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen.’
Further illustrations are plentiful. In East v Maurer
East v Maurer
East v Maurer [1990] is an English contract law case concerning misrepresentation.-Facts:Maurer fraudulently told East he would not run a competing hair salon, so East bought the salon from Maurer. Maurer started run a competing hair salon. East lost business...
where Maurer lied that he would not set up a barber competing with the one he was selling to East, Maurer was liable for East's normal market lost profits, costs of improvements and the price paid minus the business' selling price. In Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd
Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd
Smith New Court Ltd v Scrimgeour Vickers Ltd [1996] is an English contract law case concerning misrepresentation. It illustrates the damages available for deceit.-Facts:...
Smith New Court Ltd was deceitfully told there were close rival bids for shares in a company called Ferranti
Ferranti
Ferranti or Ferranti International plc was a UK electrical engineering and equipment firm that operated for over a century from 1885 until it went bankrupt in 1993. Known primarily for defence electronics, the Company was once a constituent of the FTSE 100 Index but ceased trading in 1993.The...
IS Inc. Smith New Court Ltd bought, but then it transpired that massive fraud had occurred. The Court of Appeal held that only £1.2m was recoverable, the difference between the market price at the time of purchase and the real price, but the House of Lords held that the full losses of £11.8m were recoverable (even though the fraud was unconnected to the misrepresentation) because that loss was one which Smith New Court Ltd had due to entering the transaction after being deceived. In practice, because an action for negligent misrepresentation has now been developed through Hedley Byrne and MA 1967 s 2(1), it is often not beneficial to sue for deceit. The only certain difference is that the defence of contributory negligence
Contributory negligence
Contributory negligence in common-law jurisdictions is defense to a claim based on negligence, an action in tort. It applies to cases where a plaintiff/claimant has, through his own negligence, contributed to the harm he suffered...
is unavailable in a deceit action. But deceit is harder to prove, since evidence of a person's state of mind is needed. Because the charge can sink people's reputations, alleging deceit is also contrary to professional conduct rules at the bar, unless a good case exists. A large difference which is subject to debate, is that the causation and remoteness rules are more generous for deceit. Certainly this is true when comparing negligence and deceit. However, MA 1967 s 2(1), which was modelled on the law as it stood when the Act was passed has the same causation rules as for deceit (see below).
Negligence
After Derry v Peek it was thought that negligent misrepresentation was not actionable in tort. However in Nocton v Lord AshburtonNocton v Lord Ashburton
Nocton v Lord Ashburton [1914] AC 932 is a leading English tort law case concerning professional negligence and the conditions under which a person will be taken to have assumed responsibility for the welfare of another.-Facts:...
a claim was allowed where parties were in a fiduciary relationship and in Candler v Crane, Christmas and Co Denning LJ delivered a blistering dissent against the bar to recovery for negligent words. His dissent was approved in the leading case, Hedley Byrne & Co Ltd v Heller & Partners Ltd, where Heller & Partners Ltd (a bank) warranted to Hedley Byrne & Co Ltd (an advertising company) that its prospective client, Easipower Ltd, was creditworthy. When Easipower Ltd could not in fact pay for the advertising services, Hedley Byrne sued the bank for misrepresentation. Readers should note, this is a tort
English tort law
English tort law concerns civil wrongs, as distinguished from criminal wrongs, in the law of England and Wales. Some wrongs are the concern of the state, and so the police can enforce the law on the wrongdoers in court – in a criminal case...
action, so the question did not actually involve a claim for misrepresentation inducing a contract. But the principle was the same. Could one sue for losses after being told negligent, rather than fraudulent, statements? The House of Lords answered "yes" if there was a special relationship between the parties showing that one had "assumed responsibility" to the other. In the instant case this would have worked, except that Heller & Partners had said in their warrant that they disclaimed any responsibility for their statement's accuracy. They had an exclusion clause (see below, and MA 1967 s 3). So in absence of the exclusion clause, Heller & Partners would have been liable for negligent misstatement.
Even if Hedley Byrne was not a contract case, Esso Petroleum Co Ltd v Mardon
Esso Petroleum Co Ltd v Mardon
Esso Petroleum Co Ltd v Mardon [1976] is an English contract law case, concerning misrepresentation. It holds that the divide between a statement of opinion and fact becomes more factual if one holds himself out as having expert knowledge.-Facts:...
confirmed that its principles were applicable to negligent misrepresentation preceding a contract. Since the same principles apply, it has been held that where a representee is also partly at fault for his loss, her damages can be reduced under the Law Reform (Contributory Negligence) Act 1945
Law Reform (Contributory Negligence) Act 1945
The Law Reform Act 1945 is an Act of Parliament of the United Kingdom, which allows a judge to apportion liability for compensatory damages as he feels to be "just and equitable" between a tortfeasor and an injured person who was partly to blame.-Historical background:Until the Act was passed,...
s 1. However, it will almost always be more advantageous to sue under the MA 1967 s 2(1).
MA 1967 s 2(1)
The Misrepresentation Act 1967 followed on from the Law Reform Committee Report of 1962, produced a year before the decision in Hedley Byrne was concluded in the House of Lords. The report also preceded a notorious tort law decision, The Wagon Mound (No 1), which imposed on English law a rule that damage which is too "remote" (not reasonably foreseeable) as a consequence from a faulty act will not be compensated. This threw out the established directness test. The recommendations, and the subsequent Act, plainly reflect the prior legal position, and are accordingly more claimant friendly on three grounds. First, there is no need to prove the problematic Hedley Byrne special relationship. Second, there is no remoteness cap on the damages which may be claimed under s 2(1). And third, possibly reflective of a growing academic favour for claimant rights and strict liability, the burden of proof is on the defendant to show he has not been negligent (i.e. had reasonable grounds to believe her representation was true). The text of section 2(1) reads as follows.An illustration of the burden of proof is given in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd
Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd
Howard Marine and Dredging Co Ltd v A Ogden & Sons Ltd [1978] QB 574 is an English contract law case, concerning misrepresentation...
, where a shipping company told a client that its barge for hire would hold 1600 tonnes. This is what the Lloyd's Register
Lloyd's Register
The Lloyd's Register Group is a maritime classification society and independent risk management organisation providing risk assessment and mitigation services and management systems certification. Historically, as Lloyd's Register of Shipping, it was a specifically maritime organisation...
of ships said. But the ships own documents, accessible to the shipping company, said the barge could only take 1055. The Court of Appeal (Lord Denning MR dissenting) held that in preferring a more convenient source (the Lloyd's Register) over another (the shipping documents), the shipping company had not been reasonable. It was up to the shipping company to positively prove this, and in the circumstances looking to the register was not reasonable. It is likely that a company's own standards and practices will be relevant to what constitutes reasonable grounds for a belief.
The point about remoteness of damages under s 2(1) was treated in the controversial case of Royscot Trust Ltd v Rogerson
Royscot Trust Ltd v Rogerson
Royscot Trust Ltd v Rogerson [1991] is an English contract law case, concerning the Misrepresentation Act 1967 and the extent of damages available under s 2 for negligent misrepresentation...
. Here Mr Rogerson bought a car on hire purchase, from a Honda dealer, financed by Royscot Trust Ltd. When Mr Rogerson fell behind in his repayments and sold away the car, Royscot Trust Ltd sued the Honda dealer, because they found it had misrepresented the proportion of the deposit Mr Rogerson had put down for the car. On this basis they argued that Honda was liable for them not being able to recover the cost of the loan (Mr Rogerson had no money). Royscot Ltd argued that the loss was too, or that Mr Rogerson's wrongful sale was a break in the causal chain. But the Court of Appeal held that in any event the test under s 2(1) was the same as in the tort of deceit, that one should be liable for all consequences. Balcombe LJ said this followed from the clear wording of the Act.
It will not always be possible to sue under s 2(1), however. If there is no contract, for instance if an agreement was void ab initio on the ground of non est factum, then it will be necessary to sue under Hedley Byrne. Also, the misrepresentation must precede the contract, and is not actionable under s 2(1) even if it is found in the contract subsequently. Lastly, it has been suggested by McKendrick that if s 2(1)'s application leads to draconian consequences, a court may not be willing to enforce it.
Innocence, MA 1967 s 2(2)
At common law, as for all forms of misrepresentation, innocent misrepresentation gave rise to the right to rescind a contract. It was not possible to get damages, but so long as one was not confronted by a bar to rescission, the misrepresentee had a right to escape the contract. When the MA 1967 was passed, it was decided that this right to rescission could be used in a way that was unfair on a misrepresentor. So section 2(2) gives the court a discretion about whether it will allow rescission of a contract, or substitute an appropriate award of damages in lieu (instead). In William Sindall plc v Cambridgeshire CC William Sindall plc claimed rescission of a land purchase from Cambridgeshire County Council on the ground that the council falsely (but innocently) stated there were no sewage pipes on the property. This would have cost £18,000 to remove, and the land had been bought for £5m. The real reason that William Sindall wanted to escape from the contract was that land prices had just crashed. The court held that in fact the contract had made the buyer assume any risk of such representations and there was no right to rescind. But if there had been, it would have exercised its discretion under s 2(2) to award a small sum of damages.Although it has been suggested otherwise, it is important to note that the right of the court to award damages in lieu of rescission only exists if the right to rescission exists. So in Government of Zanzibar v British Aerospace (Lancaster House) Ltd
Government of Zanzibar v British Aerospace (Lancaster House) Ltd
Government of Zanzibar v British Aerospace Ltd [2000] is an English contract law case, concerning misrepresentation.-Facts:...
because it was impossible for the Government to give back its executive jet (counter restitution impossible), it could not ask the court for damages under s 2(2) instead of rescinding its contract.
Exclusion clauses
Attempts by contracting parties to exclude liability for misrepresentations are subject to the same restrictions as are found for exclusion clauses generally under the Unfair Contract Terms Act 1977Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
. It was held in HIH Insurance Ltd v Chase Manhattan Bank that it is never possible to exclude liability for fraudulent misrepresentations. But it is possible to exclude liability for negligent misrepresentation, liability under MA 1967 s 2(1) or innocent misrepresentation. The requirement, however, is that the exclusion is "reasonable" according to UCTA 1977 s 11, in conjunction with Sch 2.
The same issues as are found in the UCTA 1977 cases arise under s 3. First, by analogy to UCTA 1977 s 13, a clause could be held to be not an exemption, but a "duty defining" clause. This was the position in Overbrooke Estates Ltd v Glencombe Properties Ltd
Overbrooke Estates Ltd v Glencombe Properties Ltd
Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 3 All ER 511 is an English contract law case, concerning misrepresentation.-Facts:...
where a condition at an auction stated the auctioneer was never given the authority to represent that the properties were not going to be compulsorily acquired by the council. By contrast, in Cremdean Properties Ltd v Nash
Cremdean Properties Ltd v Nash
Cremdean Properties Ltd v Nash 244 EG 547 is an English contract law case, concerning misrepresentation and exclusion of liability under the Misrepresentation Act 1967 s 3.-Facts:...
it was held agents of a seller of some Bristol business property always had authority to make general representations, so a clause purporting preclude any guarantee for accuracy of representations was an exclusion and subject to s 3.
The reasonableness test itself can be seen in operation in Howard Marine & Dredging Co v A Ogden & Sons (Excavations) Ltd (where the Court of Appeal disagreed about the weight one would give the Lloyd's Register) and Walker v Boyle
Walker v Boyle
Walker v Boyle [1982] 1 WLR 495 is an English contract law case, concerning misrepresentation, and the possibility to exclude liability for it under the Misrepresentation Act 1967 s 3.-Facts:...
. In Walker, two private parties, albeit both with solicitors acting on their behalf had made an agreement to sell a country house. Some standard terms called the "National Conditions of Sale" were incorporated, and these contained a clause excluding liability for misrepresentations. Even though these terms were widely used, it was held that between the parties their use fell foul of MA 1967 s 3, since they were not negotiated by interested trade parties. A court will weigh up a number of considerations (was the clause transparent? which party is better insured to bear the risk?) but the most important consideration is what the bargaining strength of the parties were.
- Cleaver v Schyde Investments Ltd [2011] EWCA Civ 929, Laws LJ, Longmore LJ, Etherton LJ, held that the Standard Conditions of Sale (4th edn) para 7.1.3 was not fair and reasonable, as the judge had concluded, and not effective under MA 1967 s 3 and UCTA 1977 s 11. So a purchaser of land was entitled to rescind the contract of sale.
Consumer protection
An important contemporary dimension to misrepresentations is the statutory regulation of business, and enforcement measures by the Office of Fair TradingOffice of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
against unfair trade practices. Typically consumers do not understand legal complexities and have little incentive to litigate over small claims. Statute may also strengthen enforcement of consumer protection by providing criminal or regulatory sanctions. The Trade Descriptions Act 1968
Trade Descriptions Act 1968
The Trade Descriptions 1968 is an Act of the Parliament of the United Kingdom which prevents manufacturers, retailers or service industry providers from misleading consumers as to what they are spending their money on....
ss 1-4 say that not only false, but also misleading statements about products are prohibited. An early example is found in Robertson v Dicicco where it was held that describing a vehicle as a ‘beautiful car’ was implicitly saying it was fit for purpose. Though the exterior was attractive, it was still a misrepresentation when the car did not work. Similarly the Consumer Protection Act 1987
Consumer Protection Act 1987
The Consumer Protection Act 1987 is an Act of the Parliament of the United Kingdom that made important changes to the consumer law of the United Kingdom. Part 1 implemented European Community Directive 85/374/EEC, the product liability directive, by introducing a regime of strict liability for...
ss 20-21 create an offence for giving misleading information about the prices of goods and services, such as banking or insurance. On top of this the Unfair Commercial Practices Directive, give a broad principle based jurisdiction to courts and the OFT to clamp down on misleading practices or omissions by businesses.
"Mistakes" about identity
One area which English law takes outside the ordinary law of misrepresentation is what is typically called "mistakes" about identity. In this group of cases, the common fact pattern is that Alice gives a valuable good to Bob thinking that Bob will pay. Bob is a fraudster and has misrepresented his identity or creditworthiness or both, and has left Alice with a dud cheque, or simply does not fulfil a promise to pay later. The valuable good is then sold by Bob to Claire. Bob disappears and cannot be charged for fraud. Alice finds that Claire has the valuable good and sues Claire to get back the good. The dilemma courts face is whether to prefer one innocent party over another innocent party. Alice has been a victim of fraudulent misrepresentation. Claire is also defrauded in the sense that Bob represented to her that he had good title to the good he sold on. Claire has paid good money for the good. But because Bob cannot be found, Alice has no remedy.Were the issue treated as one of fraudulent misrepresentation, the simple equitable principle to be applied would be that the contract is voidable unless third party rights have intervened. The defrauded party (Alice, in the example) has a right to rescind the contract, until the point where Claire's rights had intervened. Claire could be considered a bona fide purchaser
Bona fide purchaser
A bona fide purchaser referred to more completely as a bona fide purchaser for value without notice is a term used in the law of real property and personal property to refer to an innocent party who purchases property without notice of any other party's claim to the title of that property...
for value without notice of any pre-existing interest, and should take full title to the property. This was essentially the approach advocated in Lewis v Averay. However, it is not the stance English law is currently taking. In Shogun Finance Ltd v Hudson
Shogun Finance Ltd v Hudson
Shogun Finance Ltd v Hudson [2003] is an English contract law decided in the House of Lords, on the subject of mistaken identity as a basis for rescission of a contract. The case has been the subject of much criticism in failing to effectively clarify the area of mistake to identity.-Facts:A rogue...
the House of Lords by three to two decided to uphold an older line of authority which declares a contract void from the start. If there was never any contract between the seller and the fraudster, the fraudster cannot sell any property right to the third party, because they never had a good property right in the first place. This follows the Latin maxim, nemo dat quod non habet
Nemo dat quod non habet
Nemo dat quod non habet, literally meaning "no one [can] give what he does not have" is a legal rule, sometimes called the nemo dat rule, that states that the purchase of a possession from someone who has no ownership right to it also denies the purchaser any ownership title...
, that one cannot give what one does not have. So the present law is that if a person deals with another by distance (and not face to face, in which case there is deemed to be no "mistake" about identity), that person's presumed identity is recorded in a document, and it turns out that that person is in fact an uncreditworthy "rogue" then the third party cannot acquire good title and the good must be returned to the original person who is defrauded. The minority of the House of Lords (Lord Nicholls and Lord Millett) preferred to follow Lewis v Averay, which is in line with the law across Europe, in the United States and most of the rest of the world.
See also
- Good faithGood faithIn philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
- English contract lawEnglish contract lawEnglish contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
- US contract law
- German contract lawGerman contract lawGerman contract law is found in the Bürgerliches Gesetzbuch, in both the "Allgemeine Teil" and the chapter on "Schuldrecht". It forms part of the general law of obligations....
- French contract lawFrench contract lawFrench contract law is part of the law of obligations found in the Code Civil dealing with contracts.-See also:*English contract law*US contract law*German contract law...
- Principles of European Contract LawPrinciples of European Contract Law-Definition:The Principles of European Contract Law is a set of model rules drawn up by leading contract law academics in Europe. It attempts to elucidate basic rules of contract law and more generally the law of obligations which most legal systems of the member states of the European Union hold...
Arts 4:107, 4:116 and 4:117