Misrepresentation

Difference between a representation and a promise:

Promise: A statement by which the maker of the statement accepts or appears to accept an obligation
to do or not do something.

Representation: A pre-contractual true statement of fact.

Kleinwort Benson Ltd. v. Malaysia Mining Corporation (Court of Appeal): The Court held that the letter
of comfort, stating ‘it is our policy to ensure that the business of the subsidiary company is at all times in
a position to meet its liabilities to you under the arrangements decided’, issued by the defendants was
not a contractual promise, but simply a representation of fact as to the defendant’s policy at the time
when statement was made. Had the defendant’s policy at the time of making the statement been not to
ensure that the subsidiary at all times would be in a position to meet its liabilities, then, the statement
would have amounted to an actionable misrepresentation.

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Definition of Misrepresentation: It is an unambiguous, false statement of fact or law that is

addressed to the party misled, and which induces the party to enter into a contract.

1. A statement of existing fact or law:

For many years a misrepresentation of law did not suffice to create a cause of action. This was first
broken by the House of Lords in Kleinwort Benson Ltd. v. Lincoln City Council, where it was seen that
money paid under a mistake of law could be recovered on the same basis as money paid under a
mistake of fact.

o Brennan v. Bolt Burden: Mistake of law can entitle the mistaken party to set aside the contract
entered into as a result of the mistake.
o Pankhania v. London Borough of Hackney: Misrepresentation of law can found a cause of
action. So a misrepresentation of law should now give the representee a cause of action on the
same basis as if the misrepresentation had been of an existing fact.

A misrepresentation is a false statement of fact. So there are three categories which do not constitute
statements of existing fact:

1. Mere puff: In Dimmock v Hallet, the Court of Appeal stated that the representation that the
land was ‘fertile and improve able’ would not be considered as a misrepresentation as to entitle
the innocent party to rescind the contract.
2. A statement of opinion or belief:
Bisset v. Wilkinson: The defendant represented to a prospective buyer that the farm could
support 2000 sheep. The farm had never been used for sheep farming before. There was no
 misrepresentation as the seller had given an opinion and was in no better position than the
buyer to know the true capacity, as he honestly believed in his statement.

Exceptions:

o Esso Petroleum Ltd. Mardon (Court of Appeal): The defendant had relied on Esso’s official’s
expert advice that the change in the location of the petrol pump would not affect the
throughput of petrol sales per annum. However, the sales were up to 78000 gallons rather than
the estimated 200000 gallons. Mardon went into serious arrears and Esso sued him. The Court
held that their opinion constituted a misrepresentrefjfation as an expert had given it with
reasonable care and skill, which was then relied upon by Mardon.
o The person is aware of the facts which indicate that the opinion cannot be sustained: In Smith
v. Land and House Property Corporation, a tenant who the landlord knew was behind the rent
could not be described as a most desirable tenant. The landlord’s statement to this effect was
then a misrepresentation.
3. A statement of intention:
o Wales v. Wadham: The plaintiff had left his wife on the settlement that she would not
intend to re marry. When later she changed her mind, there was no misrepresentation.
The wife had no intention of remarrying at the time of the contract but her intention
had subsequently changed after she met Wadham. A person who fails to carry out his
stated intention doesnot make a misrepresentation. (Principle) objective test.
o In Edgington v. Fitzmaurice, directors of a company invited the public to subscribe the
debentures on the basis that the money so raised would be used to expand the
business. The real purpose however was to pay off company debts. The directors had
misrepresented their actual intention and were thus guilty. A person who
misrepresents his present intention does infact make a misrepresentation. (Principle)
subjective test.

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2. It should be addressed to the party misled:

There are two ways by which a representation may be addressed to the party misled:

o Direct communication of the misrepresentation to the claimant by the representor.

o Misrepresentation can be addressed to the claimant via a third party. In Commercial Banking
Co. of Sydney v. RH Brown and Co., the defendant bank misrepresented to the claimants’ bank
the financial standing of one of the claimants’ customers. The claimants’ bank communicated
the information to the claimants who acted on it to their detriment. It was held that the
defendants were liable to the claimants because they knew that the claimants’ bank did not
want the information for their own purposes.

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3. Inducement:
 The statement must be one of the factors that led the person to enter into the contract. It does
not have to be the sole reason (Edgington v. Fitzmaurice).
 However, it must play a real and substantial part of the claimant’s decision to enter into the
contract. The claimant must prove that ‘but for such representation’, the claimant would not
have entered into the contract, even though there were other matters but for which he would
not have done so either. In JEB Fasteners v. Marks and Bloom Co., the Court of Appeal held that
the representation had not played a substantial part in inducing the claimants to enter into the
contract. They had taken over the company not in reliance upon the accounts, but because they
had a desire to acquire the services of the two directors of that company.
 Raiffeisen Zentralbank Osterreich AG v. Royal Bank of Scotland plc 2010: It is not sufficient for
the claimant to demonstrate that the representation ‘supported’ or ‘encouraged’ him in
reaching his decision.

 There are three situations where the representation would not induce the claimant to enter
into a contract:

o Where the claimant was unaware of the existence of the representation: In Horsfall
v. Thomas, the claimant purchased a gun which had a concealed defect. His action for
misrepresentation failed as he hadn't inspected the gun before purchasing it.
Therefore the misrepresentation did not induce him to enter the contract as he was
unaware of it.
o Where the claimant knew that the representation was untrue.
o Where the claimant did not allow the representation to affect his judgment:
 Firstly, the claimant regards the representation as unimportant: Smith v.
Chadwick.
 Or, the claimant relies on his own judgment: In Attwood v. Small, the
defendant had exaggerated the mining capacity so the claimant had asked his
agents to verify the truth of the statement. They found the representation to
be true, and when later the claimant sought to rescind the contract, he was
unable to do so as he had relied on his agent’s judgment rather than the
defendant’s representation.
 However, if the claimant had the opportunity to verify the truth of the
statement and did not take it, then he can still claim an action of
misrepresentation. In Redgrave v. Hurd, the claimant had the opportunity to
discover the falsity of the defendant’s statement regarding the income of his
firm. He did not take that opportunity and the court held that this did not
prevent a claim for misrepresentation. But, if it was reasonable for the
representee to have taken the opportunity of the verification of the statement
and he did not avail it, then Redgrave may no longer apply (Smith v. Eric S
Bush).
 Dadourian Group International Inc v. Simms: If the misrepresentation induces a reasonable
person to enter into the contract, then it would have induced the representee to enter into the
contract as well. The representor must then show that the representee did not rely upon the
 statement. Where the misrepresentation did not induce the representee to enter in to a
contract, then the representee must show that the misrepresentation in fact induced him to
enter into a contract.

Misrepresentation by Silence:
Generally silence is not a misrepresentation, but there are 4 exceptions:

1. Representation by conduct: Conduct can be treated as implicitly making a statement and if such
statement turns out to be untrue, then it is a misrepresentation.
o In Gordon v. Selico, the High Court held that as the independent contractor had only
covered the rot up in the flat without eradicating it, this conduct amounted to an
actionable misrepresentation. The contractor had knowingly made a false
representation to the claimants that the flat was not infected with dry rot up.
o Spice Girls Ltd. v. Aprilia World Service BV: The girls knew that one of their members
was leaving and still took part in the photo shoot together. Their conduct amounted to
an actionable misrepresentation as the other arty thought that the girls were all
together as a group.
2. Representation falsified by later events: if the representation is at first true, but then due to a
change of circumstances is falsified, then the representor is under a duty to disclose it to the
representee. In With v. O’ Flanagan, it was seen that the doctor’s silence in not telling the
claimant about the reduction of the value of his practice due to his ill health amounted to an
actionable misrepresentation.
3. Statement literally true but misleading: There can be an actionable misrepresentation where a
statement is literally true but is misleading as the relevant information is not disclosed to the
representee. In Dimmock v. Hallet, the statement that the flats were let was true, but the
failure to disclose that two of the tenants had given the notice to quit amounted to an
actionable misrepresentation.
4. Contracts uberrimae fidei: These are the contracts of utmost good faith where parties are
obliged to disclose relevant information even if it is not asked for. These include where there is a
fiduciary relationship between the parties, e.g., solicitor and client, bank manager and client,
trustee and beneficiary, and inter-family agreements. Also examples would include contracts of
insurance and family settlements. In Lambert v. Co-operative Insurance Society, the Court held
that Ms. Lambert was under a duty to disclose all the facts regarding her husband’s convictions.

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Types of Misrepresentation:
There are four categories of misrepresentation and the distinction between these categories helps us
to determine the remedies which may be available to the person relying on the statement.

1. Fraudulent Misrepresentation: The maker of the statement knows or believes that the
statement is untrue, but still makes it without caring. The burden of proof is on the representee
to prove the fraud. In Derry v. Peek, the House of Lords held that fraud needs to be proved to
bring an action for fraudulent misrepresentation. It can be proved when it is shown that the
 false statement has been made knowingly, or without belief in its truth or recklessly without
caring it to be true or false.

2. Negligent Misrepresentation at Common law: The maker of the statement and the person
relying on it are in a ‘special relationship’ which generates a duty of care under the Hedley
Byrne v. Heller principle; and the maker of the statement then acts in breach of this duty. The
representor has made an untrue statement or has acted negligently and the representee relies
on this negligence. The reliance must have been detrimental to the representee.
o Hedley Byrne v. Heller: The claimants were an advertising agency who booked substantial
advertising space on behalf of their clients, Easipower on terms that they were personally liable
if Easipower defaulted. They were concerned with the financial standing of the company and
sought to draw a reference from the defendants- Easipower’s bank, who replied that the
company was considered good for its ordinary business transactions. The claimants relied on the
reference and suffered losses of up to 17000 pounds when Easipower defaulted. The claimants
alleged that the defendants were negligent in the preparation of the reference and were thus
liable for damages. The House of Lords held that had it not been the disclaimer given by the
bank, the claimants would have been successful.
 If the representor has greater knowledge than the representee and he knows that the
representee is likely to rely on his statement, then it would be more likely that he would
be liable. Here, the defendants knew about Easipower’s financial standing and knew
that the claimants would rely on their reference. Thus they owed a duty of care to the
claimants.
 For the purpose for which the statement was made, where the representor makes the
statement with the intention that the representee will rely on it, the liability is likely to
be imposed.
 It must be reasonable for the representee to rely upon the representor’s statement. If
for instance the statement is made on a social occasion, then there can be no reliance.

3. Statutory Misrepresentation:
S2 (1) of the Misrepresentation Act 1967 states that where misrepresentation is being made by
one party to the other, then the representor is liable to the other in damages, unless he can
prove that he had reasonable grounds to believe and did believe up to the time that the
contract was made, that the statement was true. This type of misrepresentation is easier to
prove.
 Howard Marine and Dredging Co. v. Ogden and Sons: The Court of Appeal held that the
claimants had failed to prove that their marine manager had reasonable grounds to
believe and did believe up to the time the contract was made that the facts that he
represented were true, since the correct figure was contained in the ships’ documents
and they had failed to show any objectively reasonable ground for relying instead on the
figure in Lloyd’s Register.
 4. Innocent Misrepresentation: The maker of the statement genuinely believes it is true, and does
not act negligently under common law or statute.

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Remedies:

1. Rescission: It is an equitable remedy which is available for all types of misrepresentation. It

aims at placing the parties in the pre contractual position, and any goods or money, which have
been exchanged must be returned. It has to be sought by the claimant and does not occur
automatically. Until rescission, the contract would continue to take place and thus
misrepresentation makes a contract voidable rather than void.
o The right of rescission will be exercised by giving notice to the other party. However according
to Car v. Universal Finance Co. v. Caldwell, rescission can be exercised by giving notice to
relevant third parties.
o However, there are some situations where the right to rescind will be lost:
 Where a party knows about the other party’s misrepresentation and still continues with
the contract, affirming it. In Long v. Lloyd, the claimant had accepted the offer of
payment for half the repairs. He had thus affirmed the contract and the remedy of
rescission was not available.
 Where there is a significant lapse of time between the making of the contract and the
discovery of the misrepresentation. In Leaf v. International Galleries, the gap was five
years. If the misrepresentation is fraudulent, then time does not start to run until the
misrepresentation has been or could reasonably have been discovered.
 Where restitution is impossible. If the property which has been consumed or
inextricably mixed with other property, rescission cannot be granted.
 Where rescission would affect the rights of a third party. This usually happens where
goods have been sold to the misrepresentor who then sold them to an innocent third
party before the contract has been avoided. The courts here will not require the third
party to return the goods to the original owner. In such circumstances, parties usually
argue that the contract is void for mistake.
 The right to rescind the contract will also be lost if the court exercises its discretion to
award damages in place of rescission under S2 (2) of the misrepresentation Act 1967.

2. Damages:

Fraudulent Misrepresentation: Damages may be recoverable under the tortious action for deceit. This
would put the claimant in a position he had been had the misrepresentation not been made. This would
prevent him from recovering lost profits on the contract.
  The test of remoteness in deceit is that the injured party may recover for all the
direct loss arising out of misrepresentation regardless of the forseeability. In
Doyle v Olby, the claimant, Doyle, purchased a business from the defendant,
Olby, as a result of a several fraudulent misrepresentations relating to the
profitability and operations of the business. The trial judge assessed damages on
contractual principles as to what position the claimant would have been in had
the statements been true and awarded a sum of £1,500. However, the claimant
had suffered loss to the extent of £5,500 as a result of entering the contract.
The claimant appealed on the assessment of damages. It was held that
contractual damages are not applicable to misrepresentation since a
representation is not a term of a contract. Where there has been a fraudulent
misrepresentation damages should be assessed in the tort of deceit.
 The principle was also approved in Smith New Court Securities Ltd. v.
Scrimgeour Vickers Ltd.

Negligent Misrepresentation at Common law: The injured party may elect to claim damage under
common law. The test of remoteness in the tort of negligence is that the injured party may recover for
only reasonably foreseeable loss.

Statutory Misrepresentation: The injured party may claim damages for negligent misrepresentation
under S2 (1) of the Misrepresentation Act 1967. Damages will be assessed on the same basis as that of
fraudulent misrepresentation, i.e. direct consequence rather than reasonable forseeability (Royscott
Trust Ltd. v. Rogerson).

Innocent Misrepresentation: In cases of non fraudulent misrepresentation, S2 (2) of the

Misrepresentation Act gives the court a discretion, where the injured party would be entitled to rescind
to award damages in lieu of rescission. They cannot be claimed as such; they can only be awarded by the
court.

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Exclusion of Liability:
o Under common law, a person could not exclude liability for his own fraudulent
misrepresentation, but could exclude liability for negligent or innocent misrepresentation,
although such exclusion clauses were subject to strict rules regarding incorporation and
construction.
o S3 of the misrepresentation Act 1967 has limited the freedom of the parties to exclude liability
for the consequences of a misrepresentation. Any term of a contract which excludes liability for
misrepresentation or restricts the remedy available is subject to the test of reasonableness, as
set out in S11 of Unfair Contract Terms Act 1977.

Cleaver v Schyde Investments Limited [2011]:

Mr. Cleaver had agreed to sell a property to Schyde for residential development. His solicitors replied to
standard enquiries raised by Schyde confirming that no planning applications had been made in respect
of the property. Subsequently, Mr. Cleaver received notice that a third party had applied for permission
to build a health centre on the property, but his solicitors failed to inform Schyde of this. Contracts were
exchanged incorporating the Standard Conditions of Sale (4th edition). Prior to completion, Schyde
discovered the planning application. It considered that, if successful, the application would considerably
hamper its prospects of obtaining planning consent for pure residential development. Schyde therefore
sought to rescind the sale contract on the basis of misrepresentation by Mr. Cleaver. Mr. Cleaver relied
on Standard Condition 7.1.3 which excluded the ability to rescind for misrepresentation except in cases
of fraud or recklessness or where the property differed substantially in quality, quantity or tenure from
that which the purchaser expects to receive. Schyde argued that Condition 7.1.3 was not fair and
reasonable and was accordingly of no effect by reason of section 3 of the Misrepresentation Act 1967.

The judge agreed with Schyde holding that the clause was ineffective and Schyde was entitled to
rescind. Cleaver appealed, arguing that the judge had failed to give proper weight to the facts of the
case, including the fact that both parties were of equal bargaining power and legally represented.
Moreover, the Standard Conditions (which the parties had negotiated in other respects) had a long
history and were approved by the Law Society.

The Court of Appeal refused to overturn the judge’s decision. There was nothing self-evidently offensive
about Standard Condition 7.1.3 and the factors in this case created a strong argument for upholding it.
However, the Court of Appeal should not disturb the judge’s findings unless they were obviously wrong.
In this case, it was clear that the planning position was of particular importance to Schyde and the judge
was entitled to regard this case as being a special one which justified the finding that Standard Condition
7.1.3 was of no effect.

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