What is Misrepresentation?
Statements which are intended to influence the other party into entering the contract, but which do not become part of the contract as terms of it are referred to as representations. A misrepresentation is basically a representation which is untrue or false. The general effect of a misrepresentation which induces a party to enter into a contract is that it renders the contract voidable at the option of the party misled.
What constitutes an operative misrepresentation?
An operative misrepresentation consists of a false statement of fact, made by one party to another, before or at the time of the making of the contract’ which is intended to and does in fact induce the other party to enter into the contract.
There must be a false representation. There must be a statement made or conduct from which a statement can be implied.
The statement must be one of existing fact that is, relating to a past or present state of affairs. This is distinguished from a statement of intention or of opinion. A statement of intention or of opinion is generally not considered ad a representation because it is not a positive assertion of fact. A statement of opinion is later turns out to be unfounded would not constitute and operative misrepresentation. A statement of opinion may, however, amount to a misrepresentation of fact if it is proved in the circumstances that the person who expressed the opinion did not in fact hold that opinion or could not, as a reasonable man with his knowledge of the facts, honestly hold such an opinion. On these circumstances the statement so made would constitute a misrepresentation of fact.
BISSET V WILKINSON.
SMITH V LAND & PROPERTY CORP
A representation of fact is distinguished from a statement of intention or a promise to do something in the future. The distinction is based on the fact that an assertion of truth of a fact relates to an existing fact or past state of affairs and does not contain any element of futurity. However a statement of intention can be a misrepresentation if it is found that at the time the statement was made, the maker had no will or intention to put that stated intention into effect.
EDGINGTON V FITZMAURICE
Generally, commendatory statements or mere sales talk usually expressed in vague terms, and used in advertisements and promotional sales are considered ad mere puffs and have no effect at law or in equity. Statements like ‘this soap powder washes whiter than snow’ of ‘this product gives lasting satisfaction’ are not considered representations of fact. A distinction is made between indiscriminate praise and specific promises or assertions of fact which can be verified. The more specific or verifiable the statement, the more likely it is that it would be considered a representation of fact.
DIMMOCK V HALLET.
What is Silence as misrepresentation?
Generally at common law, mere silence is not regarded as misrepresentation even if disclosure of facts known to the silent party would have influenced the decision of the other party. However, this is so only if the silent party is not guilty of misleading conduct. Thus it has been held that a person who sits down in a restaurant and orders a meal, represents by his conduct that he can pay for it.
SMITH V HUGHES.
WALTERS V MORGAN
What is Contracts uberrimae fidei?
Some kinds of contract have the peculiar feature of one party alone being in possession of the material facts affecting the rights of the parties under the contract. In such special contracts, the law imposes a burden on particular party to the contract to disclose material facts known to him. Such special contracts are referred to as contracts uberrimae fidei (contracts involving the utmost good faith). Examples include insurance contracts, contracts to take shares in a company and family arrangements.
Where silence distorts a positive representation previously made
In some cases a representor may make a statement which is true at the time, but because of a change in circumstances, the statements may become untrue to the knowledge of the representor before the contract is concluded. In such a case, the representor come under a duty to disclose the change in circumstances to the representee before the conclusion of the contract.
WITH V O’FLANAGAN
The defendant, doctor represented to plaintiff, a potential purchaser of his practice, that the practice was worth 2000 pounds a year. This was true but by time contract of sale was concluded, practice had dwindled which brought 5 pounds a week. Defendant failed to inform plaintiff of change in value before contract was signed. Held- The representation should be treated as continuing until the contract was signed. Since the statement became false to the knowledge of the representor, he should have communicated the changed facts to the purchaser before the contract was signed.
Partial disclosure
Even though a party to a contact may be legally justified in remaining silent about some material fact that affects he is entering into, where he ventures to make a representation on the matter, It must be a full and frank statement, it must not be such a partial account that what is withheld makes that which is said absolutely false. In other words, a half-truth may amount to a misrepresentation because of what is left unsaid.
CURTIS V CHEMICAL CLEANING CO
Assistant informed customer that exclusion on receipt excluded liability to any damage howsoever arising. Held- The statement made was a partial disclosure of the meaning of the clause which conveyed a false impression and therefore it amounted to a misrepresentation.
The representation must be addressed to the party misled
The next requirement is that misrepresentation must have been addressed to the party misled. In other words, the party who has relied on the misrepresentation must be one to whom, or whom it was intended to be passed on or a member of a class of persons at which the representation was directed.
PEEK V GURNEY
Appellants sued promoters of company claiming he had purchased shares of the company on reliance of certain false statement as stated in the company’s prospectus. Appellant was not a person to whom shares had been allotted on the formation of company. He merely purchase shares from allottees. Held- The prospectus was addressed only to the first applicants for shares and that the intention to deceive could not be supposed to extend to people other than the first allottees.
Inducement
The representee must show that the misrepresentation operated on his mind to induce him to enter the contract, that is to say, that he relied on the misrepresentation in deciding to enter into the contract. It follows that there can be no remedy for a misrepresentation if the plaintiff never became aware that the misrepresentation had been made before he entered the contract, the plaintiff was not influenced by the misrepresentation or did not allow it to affect his judgement or if the plaintiff knew that the statement was false.
The following principles are relevant:
1. Where the other party did not become aware of the misrepresentation before the conclusion of the contract, it cannot be alleged that he was induced by it to enter the contract.
HORSEFALL V THOMAS
2. Once it is established that the misrepresentation did in fact materially affect the representee’s decision to enter the contract, he/she can rescind the contract on that ground even if there were other factors which also induced him to enter the contract.
EDGINGTON V FITZMAURICE
3. If it is shown that the representee did not allow the representation to affect his judgment or decision to enter the contract, even though it was designed to do so, he cannot make it a ground for rescission.
SMITH V CHADWICK
4. Where it clear that the representee did not rely on the misrepresentation but relied on the accuracy of his own investigation or independent judgement, the representee cannot be said to have induced to enter the contract by the misrepresentation of the other party.
ATWOOD V SMALL
5. Where, however, the representee has entered the contract in reliance on the misrepresentation, it is no defense for the representor to assert that if the representee had taken reasonable care, he would have discovered the falsity of the representation made.
REDGRAVE V HURD
Defendant proposed to by plaintiff’s house and join plaintiff’s practice as solicitor. Plaintiff represented that practice was bringing 300-400pounds yearly. Plaintiff produced papers to defendant to support his claim. Defendant did not read the papers and weren’t ahead to contract to buy the house and join the practice in reliance on plaintiff’s statements as to the value of practice. Defendant later discovered that plaintiff’s statements were untrue and sought to rescind contract. Plaintiff sued for specific performance claiming that if defendant had read the papers he would have discovered the fraud. Held- The defendant had in fact relied on the representations mad e by the plaintiff by the plaintiff and it was immaterial that a prudent buyer would have discovered the truth. The defendant was therefore entitled to rescind the contract on grounds of misrepresentation.
6. If the representor can prove that the representee had actual and complete knowledge of the true facts, then even though the representation made is false, it would not be a misrepresentation since the representee cannot claim that he has been misled by it.
Finally, it must be established that representee must have been induced by the representation, it must be established that the misrepresentation was material. Whether a representation is material or not depends in general on the significance that a reasonable person would have attached to it.
What are the Kinds of misrepresentation?
Fraudulent misrepresentation
To establish fraudulent misrepresentation, it is essential to prove the element of fraud, that is, the absence of any honest belief in the truth of the statement. Simply showing that the statement was made without the exercise of care is not sufficient to establish fraudulent misrepresentation.
DERRY V PEEK
Company obtained permission to run trams by animal power. They applied for permission to run trams by steam or mechanical power if Board of Trade gave consent. Directors of company believed Board would give consent since submitted plan to Board raised no objection yet. Directors issued prospectus that company had the right to run trams by steam or mechanical power. Respondents purchased shares in the company relying on this representation. Board of Trade refused to give consent and company wound up. Respondent sued for fraudulent misrepresentation or deceit. Held- To succeed, plaintiff had to prove fraud and, the element of fraud had not been established since plaintiff had not shown the absence of an honest belief on the part of Directors in the truth of the statement they made. Facts show that Directors honestly believed that the statement they made was true, since they had sufficient ground to believe that the permission would be granted.
Where fraud is proved the maker of the statement is guilty of fraudulent misrepresentation, which generally entitles the party misled to rescind the contract. It also gives rise to action for damages for deceit.
Remedies available to the party misled:
1. He may set it aside and recover damages in respect of any loss which he may have suffered by reason of the fraud.
2. The contract can be repudiated if it has not yet been performed
3. Fraud may be set up as a defense against any action brought against the party misled for breach of contract or specific performance and also counterclaim for damages for deceit
The court would normally award the plaintiff such damages as would put him in the position he would have been in if the tort of deceit had not been committed.
DOYLE V OLBY (IRONMONGERS) LTD
What is Negligent misrepresentation?
A representation is negligent if it is made carelessly and in breach of a duty owed by the representor to the representee to take reasonable care that that the representation is accurate.
Generally, a misrepresentation cannot be regarded as negligent unless the representor owed a duty of care to the representee. At first at common law, there was no liability at all for negligent words or misstatements, especially where the only damage resulting was financial damages. With time the courts recognized that an action for negligent misrepresentation could rise in certain circumstances where the representor owed a duty of care to the representee to ensure the statement was accurate. Initially, such a duty of care was only deemed to exist where there was an existing contract between the representor and the representee or where there was fiduciary relationship between them.
NOCTON V ASHBURN,
CANDLER V CRANE,
CHRISTMAS & CO,
HEDLEY BYRNE V HELLER & PARTNERS
Plaintiffs, advertising agents had Easipower Ltd as their clients. They placed substantial advertisement orders for Easipower Ltd at their request. Plaintiff inquired financial standing from the bank of Easipower a reference or statement on the financial standing of Easipower Ltd. plaintiff’s bank, not having relevant information, requested same from Easipower’s bankers who gave a favorable response. Relying on this plaintiff placed large orders on behalf of Easipower who defaulted causing plaintiffs huge loss. Plaintiff brought action against Easipower’s bankers, alleging that they were negligent in giving the reference on Easipower’s financial standing and therefore should be liable in damages for negligent misrepresentation. Held- Even though there was no contractual or fiduciary relationship between plaintiffs and Easipower’s bankers, there existed a duty of care owed by defendants to plaintiffs by reason of the special relationship that existed between them and defendants would have been liable for the negligent misrepresentation if they had not attached a disclaimer to the reference they gave. Plaintiffs attached a disclaimer stating that the reference was being given “without responsibility”.
It has been noted that such a special relationship does not necessarily require a direct contract between parties, but exists where the statement was made in connection with a business or professional transaction whose nature makes clear the gravity of the inquiry and the importance attached to the answer. The elements of this special relationship are therefore: voluntary assumption of responsibility by the representor and foreseeable detrimental reliance.
It has been recognized however that no liability arises in purely social relationship, even if the advice is given by a professional person. However, even where the parties are friends, the duty of care may be deemed to exist if the representor voluntarily assumes responsibility in a business connection and the advice is not given on a purely social occasion.
CHAUDRY V PRABHAKAR
The plaintiff, an accountant had recently passed her driving test and knew nothing about cars. She asked the first defendant, a friend, to find a suitable second hand car for her to buy, although he was not a mechanic. She stipulated to the defendant that the car shouldn’t have been involved in an accident and he was doing this for free. The first defendant found a one year old car which was being offered for sale by the second defendant. The car had been engaged in an accident before but had been fixed and repaired, although it was not road worthy. The first defendant recommended the car to the plaintiff buy for which she did. She found out later that the car had serious problems and she sued the defendants for the price of the car and damages. Held- the court held that a gratuitous agent owes a duty of care to the principal to exercise the degree of care and skill which could be reasonably be expected of him in all the circumstances, that degree of care and skill being measured objectively and not subjectively. The first defendant knew that the plaintiff was relying on him and as such, he was in breach of his duty.
It has also been held that a duty of care may arise between the parties to a contract during pre-contractual negotiation if one party rely on the superior skill and knowledge of that representor. ESSO PETROLEUM V MARDON
Innocent misrepresentation
An innocent misrepresentation is an untrue statement made in good faith, with honest belief in its truth, intended to induce a party to enter into a contract. It is neither fraudulent nor negligent. It generally gives the party misled to rescind the contract but not to claim damages. It can be set up as a defense to an action brought against the party misled for breach of contract or specific performance on the contract. Instead of waiting to be sued, the party misled by an innocent misrepresentation may bring an action for rescission of the contract and in some cases claim in indemnity against all losses or liabilities imposed on him by the contract himself but he will not be awarded damages.
NEWBIGGING V ADAM
Damages are all those losses which naturally and reasonably flow from the breach of the contract. In the cases of indemnity, the plaintiff is not compensated for all losses flowing from the breach, but is compensated only for those losses incurred by him in the discharge of the obligation created or imposed by the contract he has made.
WHITTINGTON V SEALE-HAYNE
Rescission
Rescission consists in the setting aside of the contract. The aim of the court in granting the remedy of rescission is to cancel the contract and restore the parties as far as possible. The court upon rescission attempt to achieve ‘restitutio in integrum’.
If a party misled elects to rescind the contract he must bring his decision to the notice of the representor. This can be done in a number of way. In theory, rescission can be effect informally- by the representee giving notice to the giving notice to the representor of his intention to rescind the contract. This may be done by the representor recovering the property delivered to the representor under the contract; or by the representee returning what he has obtained under the contract. More importantly, rescission is achieved by legal proceedings in which the plaintiff seeks a declaration in court that the contract is invalid.
However, when the representor absconds or makes it impossible for the representee to give him notice of his decision to rescind the contract, t is sufficient if the party misled shows his intention to rescind the contract by some overt or outward means which is reasonable in the circumstances.
CAR & UNIVERSAL FINANCE CO V CALDWELL
Rogue induced owner of car to sell to him by some fraudulent misrepresentation. Rogue paid cheque which was dishonored next day. Rogue could not be traced. Owner promptly notified Automobile Association and Police to help find car. Rogue sold car to third party after plaintiff had given notification. Issue was whether owner’s act of notifying policy and the Automobile Association amounted to a rescission of the contract between him and the rogue. Held- The act of notifying the Automobile Association was sufficient notice of the owner’s intention to rescind the contract, since the rogue had deliberately absconded, and thus made it impossible for the owner to notify him personally of his intention to rescind the contract.
Discretion of the court
Rescission is an equitable remedy and therefore is a discretionary one. This means the courts would only do so if it is satisfied that having regard to the circumstance it would be equitable to do so.
Restitution
An essential condition for rescission if contract is the possibility of restitution. Normally, a party who wishes to rescind the contract for misrepresentation must be in a position to restore to the other party any benefits he may have obtained under the contract. The principle ground on which the right of rescission may be lost is where it is impossible to restore the parties to their original positions.
Therefore if restitution is impossible, there can be no rescission of the contract. The equitable principle is that restitution need not be exact or precise but it must be substantial. It means the subject matter can be returned even in the altered state. In such a case, the plaintiff must account for any profits derived from its use and also make allowance for deterioration caused by his dealing with the subject matter. Rescission is, however, impossible where the subject matter has been so altered as to change the character of it. For example, an animal purchased under a contract slaughtered cannot be returned as a corpse.
ERLANGER V NEW SOMBERO PHOSPHATE CO.
CLARKE V DICKSON
Affirmation of contract
if the representee, after having disclosing the misrepresentation, expressly declares his intention to proceed with the contract, or doe an act from which such an intention can be implied, he will be deemed to have affirmed the contract and he cannot thereafter rescind the contract.
LONG V LLOYD
Plaintiff purchased lorry from defendant. Lorry advertised in newspaper was described as being in exceptional condition. Plaintiff after phoning defendant to arrange was told that it was first class condition. Plaintiff went to view following day and was told was capable of doing 40 miles per hour and 11 miles to the gallon. On test drive plaintiff found that speedometer was not working and had to put a wire before accelerator would work. He still decided to purchase lorry. On first journey, plaintiff noticed certain faults with lorry and contacted defendant, who offered to pay half of costs of repairs. On further journey, lorry broke down completely and plaintiff sought to rescind contract and brought an action against defendant for innocent misrepresentation. Held- By accepting the offer of payment of half of the cost of repairs when he had knowledge for the defects in the lorry, the plaintiff had lost his right to rescind since he had by his actions affirmed the contract.
Lapse of time
Lapse of time may act as a bar to the right to rescission. In the case of fraudulent misrepresentation, lapse of time does not act as a bar to the rescission but may be evidence of affirmation. This is because the courts take the view that time only begins to run from the discovery of the truth. In the case of innocent misrepresentation, however, the right to rescind may be barred by the lapse of time even without any evidence of affirmation.
LEAF V INTERNATIONAL GALLERIES
Third party rights
The right to rescind may be barred by the intervention of third party rights. If the contract is voidable, then once a third party acquires an interest in the subject matter for value, in good faith and without notice, the party with the right of rescission losses his right to rescind.
PHILLIPS V BROOK,
LEWIS V AVERY