Misrepresentation in English law

Misrepresentation in English contract law and English tort law refers to a situation where a person is induced to enter into a contract entirely or partly by a false assertion (of fact, not opinion or intention) made by the other contracting party. Claims that can be described as sales talk, such as advertising slogans, are not misrepresentations. If a misrepresentation is incorporated as a term of the contract, it may form the basis of an action for breach of contract, and contractual remedies. If not, the misrepresentee (the party influenced by the misrepresentation of the other party) may be able to rescind (withdraw from) the contract or obtain damages. A misrepresentation may be made fraudulently, negligently, or non‐negligently (innocently).^[1] A related term is "misstatement": a false assertion that causes harm other than by inducing a person to enter a contract.^[1] Contract law deals with the contractual implications of misrepresentation; in most cases^[2] English law allows escape from a bargain when a contracting party has not given true consent due to misrepresentation. Tort law deals with civil wrongs and remedies.

When a misrepresentation has been made and an agreement was (or at any rate appeared to be) concluded, the misrepresentee 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 makes a contract voidable at the option of the misrepresentee. Not all contracts entered into on the strength of misrepresentations will be bad for the misrepresentee, who may choose not to void the contract.

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.^[3] 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 due to relying on the misrepresentation.

In some cases, a claim for misrepresentation in contract, may also in parallel, be grounds for an action for deceit in tort, which has different rules and a different basis for damages.

What is misrepresentation?

Misrepresentation sources Carter v Boehm (1766) 3 Burr 1905 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 Redgrave v Hurd (1881) 20 Ch D 1 Derry v Peek [1889] UKHL 1 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 Misrepresentation Act 1967 Lambert v Co-op Insurance Ltd [1975] 2 Lloyd's Rep 485 Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4 East v Maurer [1990] EWCA Civ 6 Royscot Trust Ltd v Rogerson [1991] EWCA Civ 12 Saamco v York Montague Ltd [1996] UKHL 10 Shogun Finance Ltd v Hudson [2003] UKHL 62 Unfair Commercial Practices Directive 2005/29/EC Unfair Trading Regulations 2008 (SI 2008/1277) Misrepresentation in English law

A misrepresentation is a false statement of fact or law^[4] that is relied on by the other party in entering a contract. For example in Curtis v Chemical Cleaning and Dyeing Co^[5] 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 consider 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" are not considered misrepresentations, as a reasonable person would be unlikely to take such claims seriously.^[6]

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 it was relied upon 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 statements of intention are not statements of fact. However, opinions and intentions can overlap with facts. It is not considered misrepresentation when a contracting party does not correct an error in his favour made by the other party.

In some cases, a claim for misrepresentation in contract, may also in parallel, be grounds for an action for deceit in tort, which has different rules and may be advantageous in some circumstances.

Statements of opinion

Though a statement of opinion is generally not actionable as a misrepresentation, by giving an opinion a party may be held to have represented that they had better knowledge about certain facts. For instance in Smith v Land and House Property Corporation^[7] 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.^[8]

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^[9] 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".^[10] In the more recent case of Esso Petroleum Co Ltd v Mardon^[11] 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.

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.^[12] However, a misrepresentation of one's present intention is actionable. As Bowen LJ said in Edgington v Fitzmaurice,^[13] '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.^[14]

Silence and omission

Only in special categories of contract such as partnership or insurance contracts^[15] 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.^[16] For example in Lambert v Co-operative Insurance Society Ltd^[17] the Co-op was entitled to rescind their insurance policy with Ms Lambert and not pay up on stolen jewellery because she had failed to disclose that her husband had been convicted for theft.^[18] By contrast, in ordinary contractual situations, there is no such duty.^[19] As Chitty J opined,^[20]

‘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^[21] 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,^[22] where a land vendor said two farms were fully let but did not say the tenants had given notice to quit. This was misrepresentation.^[23] 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,^[24] 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 unaware, 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^[25] 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^[26] 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^[13] 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.^[27] 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.^[28] However damages for negligent misrepresentation and damages under the Misrepresentation Act 1967 s 2(1) can.^[29]

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 defendant 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, Misrepresentation Act 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.^[30]

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.^[31] 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^[32]

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,^[33] 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^[34] 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 from a retailer on the strength of a manufacturer's advertising.^[35]

When rescission is claimed, it is not possible to also claim expectation damages as if the contract were to be performed. Either rescission, or damages as if the contract were still in force, can be claimed, but it would be inconsistent to do both. In Whittington v Seale-Hayne^[36] it was held that damages for losses as if the contract were still in force, and to put the claimant in the position as if he had never entered it, could not both be claimed. 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 later Hedley Byrne negligence or Misrepresentation Act 1967 s 2(1) provided 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.^[37] It used to be that common law courts insisted on precise restitution. So in Clarke v Dickson^[38] 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^[39] 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.

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 Lloyd^[40] 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,^[41] 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 habet. 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^[42] 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^[43] 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" (pronounced lay-cheese). 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 Galleries^[44] where Mr Leaf was told he had bought the painting 'Salisbury Cathedral' by John Constable. It was in fact a photocopy. 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! ^{[Citation Missing]}

Royal Prerogative Exception

A historical antiquity remains that the reigning Monarch can bar you from rescinding if the contract's continuing effect is in the public interest. Queen Elizabeth II has not exercised this power since the Falklands War.

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.^[45]

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 Caldwell^[46] 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, Misrepresentation Act 1967 s 1

Older cases had held that if a contract had already been performed,^[47] or a misrepresentation had become a term of the contract,^[48] this would preclude rescission. This inflexible position was amended by the Misrepresentation Act 1967 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 1967.

Fraud or deceit

Deceit, fraud, and fraudulent misrepresentation, are all legal terms related to deliberately making an untruthful statement. In law, the criterion used is that the person did not actually have an "honest belief" (or "honestly held belief") that their statement was true. More exactly, it is an untruthful statement that is made (a) knowingly, and either (b) without belief in its truth or (c) reckless as to whether or not it is true.^[49] At times, recklessness, silence, or omission can also be enough to make a misrepresentation fraudulent or deceitful, for example where the person showed either utter indifference or a lack of care whether or not the statement was true, or deliberately stays silent when a previous statement is no longer the case. This can also include not bothering to check whether or not the statement is true. Fraud and deceit differ from negligence, because they are based on dishonesty while negligence means something closer to 'unreasonable carelessness' or 'lack of expected professional skill'.

In law, deceit and fraud both fall within tort and are also often crimes, while fraudulent misrepresentation is usually associated with contract law. In a claim for deceit or fraud, damages are intended to put the claimant in the position as if the tort had not been committed. Therefore a claim for damages from any of these, requires that the statement was reasonably relied on, and that this reliance led to loss or harm. The motive for dishonesty is irrelevant, so a 'good' motive (e.g. defrauding a bank to help starving children) does not change the fact of deceit or fraud.^[50] Just because a belief is unreasonable does not mean a statement is fraudulent, but it could be evidence of dishonesty.^[51]

Pleading (making a claim of) fraud or fraudulent misrepresentation should be undertaken with care, since it is a more serious claim and therefore will be looked at more stringently; if the case is lost or the claim would make no difference to the outcome, then any award in respect of the defending party's costs may be higher as a result of extra work to defend the claim.^[52] On the other hand to not plead it when applicable may reduce the outcome of a case.^[53]

The leading case, Derry v Peek^[54] 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. 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. (An action for negligent misrepresentation was unavailable at the time: see below). 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…’

A number of cases illustrate how seriously common law takes deceit. In Doyle v Olby (Ironmongers) Ltd^[55] 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^[56] 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^[57] 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.^[58] In practice, because an action for negligent misrepresentation has now been developed through Hedley Byrne and the Misrepresentation Act 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.^[59] Certainly this is true when comparing negligence and deceit. However, the Misrepresentation Act 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).^[60]

Negligence

Negligent misrepresentation occurs when one party innocently but carelessly makes a false statement and the other party reasonably relies on it,suffering a loss as a result. After Derry v Peek it was thought that negligent misrepresentation was not actionable in tort.^[61] However in Nocton v Lord Ashburton^[62] a claim was allowed where parties were in a fiduciary relationship and in Candler v Crane, Christmas and Co^[63] 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,^[64] 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. 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 Misrepresentation Act 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^[11] confirmed that its principles were applicable to negligent misrepresentation preceding a contract. Since the same principles apply, it has been held that where a represent is also partly at fault for his loss, her damages can be reduced under the Law Reform (Contributory Negligence) Act 1945 s 1.^[65] However, it will almost always be more advantageous to sue under the Misrepresentation Act 1967 s 2(1).

Misrepresentation Act 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.^[66] 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,^[67] 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).^[68] The text of section 2(1) reads as follows.

“

Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.

”

An illustration of the burden of proof is given in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd,^[69] 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.^[70]

The point about remoteness of damages under s 2(1) was treated in the controversial case of Royscot Trust Ltd v Rogerson.^[71] 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.^[72]

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.^[73] 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.^[74]

Innocence, Misrepresentation Act 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 Misrepresentation Act 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^[75] 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.^[76]

Although it has been suggested otherwise,^[77] 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^[78] 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 1977. It was held in HIH Insurance Ltd v Chase Manhattan Bank^[79] that it is never possible to exclude liability for fraudulent misrepresentations. But it is possible to exclude liability for negligent misrepresentation, liability under Misrepresentation Act 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.

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^[80] 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^[81] 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^[69] (where the Court of Appeal disagreed about the weight one would give the Lloyd's Register) and Walker v Boyle.^[82] 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 the Misrepresentation Act 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.^[83]

• 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 the Misrepresentation Act 1967 s 3 and Unfair Contract Terms Act 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 Trading against unfair trade practices.^[84] 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^[85] 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.^[86] 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,^[87] give a broad principle based jurisdiction to courts and the OFT to clamp down on misleading practices or omissions by businesses.^[88]

"Mistakes" about identity

Mistaken identity cases Boulton v Jones (1857) 27 LJ Ex 117 Cundy v Lindsay (1878) 3 App Cas 459 King's Norton Metal Co Ltd v Roberts (1897) 14 TLR 98 Phillips v Brooks [1919] 2 KB 243 Lake v Simonds [1927] AC 487 Long v Lloyds [1958] EWCA Civ 3 Ingram v Little [1960] EWCA Civ 1 Lewis v Averay [1972] EWCA Civ 4 Citibank NA v Brown Shipley & Co Ltd [1991] 2 All ER 690 Shogun Finance Ltd v Hudson [2003] UKHL 62 Mistakes in English law

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 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.^[89] However, it is not the stance English law is currently taking. In Shogun Finance Ltd v Hudson^[43] 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.

See also

• Good faith
• English contract law
• US contract law
• German contract law
• French contract law
• Principles of European Contract Law Arts 4:107, 4:116 and 4:117
• Misleading or deceptive conduct
• Tort of deceit

Notes

References

Books and chapters

• PS Atiyah, Introduction to the Law of Contract (4th edn Clarendon, Oxford 1994)
• H Beale, Bishop and Furmston, Cases and Materials on Contract Law (OUP 2008)
• A Burrows, Cases and Materials on Contract Law (2nd edn Hart, Oxford 2009) ch 11
• H Collins, Contract law in context (4th edn CUP, Cambridge 2004)
• E McKendrick, Contract Law (8th edn Palgrave, London 2009) ch 13
• E Peel, Treitel: The Law of Contract (7th edn Thompson, London 2008) ch 9

Articles

• PS Atiyah and G Treitel, 'Misrepresentation Act 1967' (1967) 30 MLR 369
• PS Atiyah, 'Res Ipsa Loquitur in England and Australia' (1972) 35 Modern Law Review 337
• R Taylor, 'Expectation, Reliance and Misrepresentation' (1982) 45 MLR 139
• R Hooley, 'Damages and the Misrepresentation Act 1967' (1991) 107 LQR 547, arguing that fraud and negligence are qualitatively different and should be treated differently in order to reflect fraud's greater moral culpability. He says the Misrepresentation Act 1967 s 2(1) establishes only liability in damages but not their quantum, so Royscott was a poor decision.
• I Brown and A Chandler, 'Deceit, Damages and the Misrepresentation Act 1967, s 2(1)' [1992] LMCLQ 40
• H Beale, ‘Damages in Lieu of Rescission for Misrepresentation’ (1995) 111 LQR 60
• J O'Sullivan, 'Rescission as a Self-Help Remedy: a Critical Analysis' [2000] CLJ 509
• W Swadling, ‘Rescission, Property and the Common law’ (2005) 121 LQR 123, suggests the reasoning on recovery of property should not merge the issues of validity of contract and transfer of title. He controversially says the two are separate (i.e. he is in favour of the ‘abstraction principle’). So Caldwell should not have got his car back. Rights in property are passed on delivery and with intent to pass title. This is not dependent on the validity of the contract. In short, he argues for the abstraction principle.
• B Häcker, ‘Rescission of Contract and Revesting of Title: A Reply to Mr Swadling’ [2006] RLR 106, responds to Swadling's argument. She point out flaws in Swadling's (1) historical analysis; and (2) conceptual analysis.
• J Cartwright, 'Excluding Liability for Misrepresentation' in A Burrows and E Peel, Contract Terms (2007) 213

English contract law Formation Agreement Consideration Promissory Estoppel Creation of legal relations Certainty Privity Contractual terms Incorporation of terms Interpreting contracts Implied terms Unfair contract terms Breach of contract Measure of damages Specific performance Setting aside a contract Capacity Iniquitous pressure Misrepresentation Mistake Frustration