Innocent Misrepresentation:

Misrepresentation Act 1967 There is some overlap between contract and tort in the Misrepresentation
Act 1967 (s 2(1)) if a party to a contract can prove that a misrepresentation was made by the other
contracting party, and the claimant has suffered damage as a result. If the person who made the
misrepresentation would be liable for damages had the misrepresentation been made fraudulently, he
will be liable even if the misrepresentation was not made fraudulently, unless he can prove that he had
reasonable grounds to believe, and did believe, at the time of entering into the contract, that the
statement was true. A claimant relying on the Misrepresentation Act has no need to prove that a duty of
care exists and is, therefore, in a better position than a claimant relying solely on negligence. Damages
under the Act are assessed on the basis of damages in tort rather than contract but are based on the
measure of damages for the tort of deceit and not negligence. This places the claimant under the Act at
an advantage over the claimant relying solely on tort, since there will be liability for unforeseeable
losses. Claims for deceit are less common than those for negligence because of difficulties involved in
proving a state of mind on the part of the defendant. A recent example of a successful claim for deceit is
Black v Davies [2004] EWHC 885 QB. The claimant who cannot establish the existence of a contract will
be forced to rely solely on tort.

( Referred Book: Modern Tort Law, Vivienne Harpwood ,Seventh Edition)

Page Number 86

………………………………………

3. INNOCENT MISREPRESENTATIONS When a person makes a false statement but there is neither an
intention to deceive, nor any negligence in making the statement, there is no liability for such a
statement under Jaw of torts because in such a case an action cannot lie either for 'Fraud', or for
'Negligent Misstatement'. In England, the Misrepresentation Act, 1967, however, permits the award of
compensation for such innocent false statements. The compensation under the Act is awarded when
there is misrepresentation and the parties make a contract on that basis. The Act stipulates the right to
claim compensation in case of non-fraudulent representation in the same way as would have been

there if there had been fraud. According to Section 2(1) : "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 a 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 that the facts
represented were true." The Act does not create any liability for a false statement if there is no contract
on the basis of the false representations. In case of false statement, when there is no contract between
the parties, the liability as stated in Hedley Byrne's case can still arise if the statement is negligently
made. The Act also permits award of damages in lieu of rescission of a contract, in case of nonfraudulent
misrepresentations.1 ______________________ 1. Sec. 2(2), Misrepresentation Act, 1967.

( Referred Book: Law of Torts, Author R.K Bangia, Twenty Second Edition)

(Page Number: 470-471)

3. Innocent Misrepresentations In England, according to the Misrepresentation Act, 1967, if the parties
make a contract on the basis of false statement made without any intention to deceive, the person
making such a statement is liable to pay compensation in the same way as he would have been liable if
the statement had been fraudulent.

( Page Number 740)

In this Chapter, we will discuss the liability of a person, arising in three different ways for false
statements made by him. (1) Liability for Deceit or Fraud. When a person knowingly makes a false
statement of fact making another person to suffer loss by acting on the statement, it may amount to the
tort of Deceit or Fraud. (2) Liability for Negligent Misstatements. If a statement has been made honestly
but negligently, that is, without caring to see whether the same is true or not, liability for such negligent
misstatement may also arise. (3) Liability for Innocent Misrepresentations.

( Page Number 462)

…………………..

Ch. 4-3. Misrepresentation :

Section 18. contract act defines misrepresentation.

It means and includes : i) An unwarranted positive assertion of that, as

not true, even though he believes it to be true.

ii) Committing breach of duty to mislead another person.

iii) Causing a party to the contract to make a mistake as to the subject

matter of the agreement.

Eg : A induces B to believe that C's factory is manufacturing 500

metric tonnes of Indigo annually thereby he induces B to buy the factory. This

is misrepresentation and if B buys, he may avoid the contract as it is

voidable.

Mis-representation may be of two kinds :

mistake on the part of the person making representation.

2. Wilful representation (Fraud). Here there is a willful

falsehood with an intention to deceive. This amounts to fraud

(Section 17).

Misrepresentation Fraud

1. There is no intention to 1. There is an intention to

deceive. deceive

2: Contract may be rescinded 2. Can be rescinded This is also

a tort of deceit. Can be sued for tortious

liability

3. The defendant may plead 3. There is deception. Hence deft,

that the plaintiff could cannot plead his innocence,

have found the truth with

ordinary deligence.

Breach'of duty : There must be some relationship between the parties

e.g. buyer and seller, landlord and tenant, banker and client etc. The

misrepresentation must be material.

Bannarman V. White : A agreed to sell to B, hops which had been

grown by A. B's condition was that no sulphur should have been used while

growing hops. A had agreed. But, out of 300 acres, in 5 acres sulphur had

been used. Held this was a misrepresentation and B may avoid the contract.

( Referred Book : Contract Law, Rama Rao, Page No : 17)

…….

Indemnity In its aim to restore the parties to their original position, the court may order an indemnity to
accompany an order of rescission. This is a money payment in respect of obligations necessarily created
by the contract, and should be distinguished from damages. The difference can be seen clearly in the
following case.
Whittington v Seale-Hayne (1900) The buyer of a farm enquired particularly about the water supply,
drains and sewage system, and was told that they were all in order. He subsequently bought the farm
and installed his prize poultry. However, the water system and drains were found not to be satisfactory,
the manager becoming ill and many of the poultry dying as a result. The court allowed rescission, but as
the misrepresentation was not fraudulent, and this was before the Misrepresentation Act 1967,
damages were not payable. This took the buyer back to the original position as far as the farm went, and
an indemnity was ordered which repaid the costs necessarily incurred in buying the farm, such as rates
and other legal requirements. However, it did not replace the cost of the poultry, as it was said that the
buyer did not have to put these on the farm, but chose to do so.

The position may have been different if the case had arisen today, as damages may have been
recoverable instead of an indemnity. An indemnity may still be awarded, even since the
Misrepresentation Act 1967, but will not apply where damages are given. However, it is a useful remedy
where a contract is rescinded for a wholly innocent misrepresentation.

( Referrred Book Contract Law Mary Charman, Willan Publishing 4th edition Page No : 178-179

A misrepresentation is an untrue statement of fact, made by one party to a contract to another, which is
not a term of the contract, has an inducing effect on it.

( Page No: 168)

Non-fraudulent misrepresentation Before 1964 there was only a remedy of rescission for non-fraudulent
misrepresentation, and damages were not available unless fraud was proved (see above). Any non-
fraudulent misrepresentations were regarded as ‘innocent’, and therefore without a monetary remedy.
In 1963, the House of Lords changed this position by stating, obiter, that in certain circumstances, where
a negligent mis-statement resulted in financial loss, damages may be recovered in tort. For this liability
to arise, there had to be a duty of care, arising from a ‘special relationship’ between the parties. In the
case of Hedley Byrne and Co Ltd v Heller and Partners Ltd (1964) (see p. 172), the banker, Heller, was
seen to have been negligent, rather than deliberately fraudulent. Had it not been for a technical matter,
the court would have been willing to make an award of damages, even though fraud was not proved.
Another example is seen in Esso v Mardon (p. 168) which despite going to court in 1976 actually took
place before the Misrepresentation Act was passed in 1967. Although it is not certain exactly what the
term ‘special relationship’ means, some guidelines do exist. Firstly, the principle of liability is based on
the duty of care in tort.

Secondly, from Esso v Mardon (see above, p. 168) it is likely that such a relationship will be considered
to exist where the representor possesses relevant knowledge or skill, and would expect the other party
to rely on this. 176 Contract law Donoghue v Stevenson (1932) When a partly decomposed snail was
found in a bottle of ginger beer, it was held that the manufacturer of the drink owed a duty of care to
the eventual consumer, and was therefore liable for her inconvenience and illness. This is known as the
‘neighbour’ principle (where it is foreseeable that a person will be affected by actions, then a duty of
care is owed to that person).

The Misrepresentation Act 1967 The Misrepresentation Act 1967 provided, for the first time, a remedy
of damages for non-fraudulent misrepresentation. The remedy is available where the person would
have had a remedy, if the misrepresentation had been fraudulent. This provision is found in s.2(1), and is
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 that the facts represented were true.

This section of the Act places a burden on the defendant to prove that it was both reasonable to believe,
and that he did in fact believe, in the truth of his statements. Note that in this way, unlike the common
law requirement to prove liability, the burden of proof shifts to the maker of the statement to disprove
negligence, once misrepresentation has been alleged. This burden is a heavy one to discharge, as seen in
the following case.

Howard Marine v Ogden (1978) The hirer of some barges were told their carrying capacity by the
owners, who looked up the information in Lloyds register (the established authority on this issue). In
fact, on this occasion (and very unusually) the register was wrong, and the hirers were given wrong
information, causing them inconvenience. On investigation the correct information was found on the
owner’s records at their main office. The owners had done what most people would have regarded as a
reasonable practice, but since they owned the information, and made false statements, what they said
was held to be a misrepresentation, albeit not a deliberately deceitful one. This shows that the burden
of disproving misrepresentation is a very heavy one indeed.

Once it is decided that damages should be awarded, then the issue arises as to the basis on which they
should be assessed. Traditionally they are Misrepresentation 177 Howard Marine v Ogden (1978) The
hirer of some barges were told their carrying capacity by the owners, who looked up the information in
Lloyds register (the established authority on this issue). In fact, on this occasion (and very unusually) the
register was wrong, and the hirers were given wrong information, causing them inconvenience. On
investigation the correct information was found on the owner’s records at their main office. The owners
had done what most people would have regarded as a reasonable practice, but since they owned the
information, and made false statements, what they said was held to be a misrepresentation, albeit not a
deliberately deceitful one. This shows that the burden of disproving misrepresentation is a very heavy
one indeed. Applying the above case, if a person selling a house is asked if the woodwork is sound, and
replies that it is, and later some woodworm is found in the corner of the roof, he would be liable for
misrepresentation, as he owns the house.What could he do to avoid such a situation? assessed in
contract on an expectation basis, that is what the party would have expected to receive had the contract
been carried out correctly. This would, of course, take into account lost profit. On the other hand, in tort
damages are assessed on a reliance basis, that is where the aim is to put parties back to the position at
the outset, which they would have been in before the wrong happened. So, in the case of a sale, it takes
parties back to the starting-point, but does not replace lost profit. Because in fraud damages are
assessed on a tort basis, it has been decided, in the case of Royscott v Rogerson (1991), that damages
under the Misrepresentation Act 1967 should also be awarded on this basis. However, this has been
taken a step further by the case of East v Maurer (1991) where it was said that in certain circumstances
lost profits may also be recovered.

A further provision is made in s.2(2) that where misrepresentation is found to exist, the court ‘may
declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be
equitable to do so, having regard to the nature of the misrepresentation and the loss that would be
caused by it if the contract were upheld , as well as the loss that rescission would cause to the other
party. Damages are then given in lieu – see Zanzibar v British Aerospace (2000). When used, this is a
statutory bar to rescission (see page 180).

( P 176 -178)

Rescission

To rescind is to set the contract aside. The aim is to put the parties back into the position that they were
in before the contract existed (i.e. to terminate it ab initio, or from the outset). A contract may be
rescinded whether the misrepresentation is fraudulent or non-fraudulent, even if wholly innocent.
When a misrepresentation occurs, the contract is voidable rather than void. This means that it remains
in force unless the person to whom the misrepresentation has been made chooses to set it aside. The
injured party must indicate his intention to rescind either: • by notifying the other party directly, or • by
some other act which clearly shows that he does not intend to be bound by the contract. An example of
the second situation arose in the Court of Appeal case of Car and Universal Finance Co Ltd v Caldwell
(1965), where it was held that notifying the police and other appropriate authorities would be evidence
of the wish to rescind.

Bars to rescission

It is clear that there is a general right to rescind where misrepresentation is proved. However, as
rescission is based in equity it means that the contract is Misrepresentation 179 repaid the costs
necessarily incurred in buying the farm, such as rates and other legal requirements. However, it did not
replace the cost of the poultry, as it was said that the buyer did not have to put these on the farm, but
chose to do so. Is it right that a person who makes a misrepresentation totally innocently may have the
contract rescinded? Think about this from the point of view of both the misrepresentor and the
misrepresentee. voidable, rather than void, and on some occasions ending the contract may be deemed
by the court to be unfair, and therefore barred. The following are circumstances when this arises.

1 Statutory bar Under the Misrepresentation Act 1967 s.2(2) the court has a right to award damages in
lieu of rescission (see above). This arose in the recent case of Zanzibar v British Aerospace (2000).

2 Lapse of time If a person discovers a misrepresentation but waits too long before making a claim, the
right to do so may be barred. This arose in Leaf v International Galleries (1950) where a painting thought
to be a Constable was found to be a copy five years after the sale, but it was too late to rescind. It should
be noted that lapse of time is slightly different according to whether the misrepresentation is fraudulent
or non-fraudulent. For fraudulent misrepresentation the time in which a claim can be made begins at
the point of discovery of the misrepresentation, so lapse of time is rarely an issue. For non-fraudulent
misrepresentation the time is measured from the point of contract, as in Leaf v International Galleries,
so it is very important that the misrepresentation is discovered quickly.

3 Affirmation Affirmation is indication that the misrepresentee is willing to continue with the contract
(and possibly claim damages). This arose in Long v Lloyd (1958) where a lorry-driver bought a lorry about
which the seller had made claims. When these were found to be untrue and the lorry developed
problems, the buyer telephoned the seller and agreed to share the cost of repair. The buyer took the
lorry on another journey and it again broke down. He then tried to claim rescission, but it was held that
his willingness to share costs and use the lorry indicated affirmation and he had barred the right to
rescind.

4 Restitution impossible When claiming rescission items must be handed back in their original condition.
The courts recognise that absolute restitution is not always possible, since some things must be used for
the misrepresentation to be discovered. However, it should be as near to complete as possible. In Vigers
v Pike (1842) restitution of a mine was not possible because considerable extraction had taken place.

5 Supervening third-party rights If someone else, a third party, now has the goods, rescission cannot
take place. This arose in White v Garden (1851) where iron bars had been delivered but rescission was
barred because the bars had already been sold on to a third party.

Comparison with remedies for breach of contract When a contract is breached the remedy is damages,
or if the term breached is serious, the right to repudiate. With misrepresentation the right to rescind is
wider, but subject to various bars. When damages are awarded for breach it is on an expectation basis,
and when awarded for misrepresentation it is on a tortious, or reliant, basis. This would have meant that
someone claiming misrepresentation would not have been compensated for lost profits, but now that
these may also be given the two remedies are very similar. Summary Definition A misrepresentation is
an untrue statement of fact, made by one party to a contract to another, which, while not forming a
term of a contract, has an inducing effect on it.
( Page No: 179-180)

What will form a misrepresentation?

Must not be:

• A mere commendation – Dimmock v Hallett.

• A statement of opinion – Bisset v Wilkinson.

• A statement of future intentions – Edgington v Fitzmaurice.

• A statement of law.

Silence

Generally not a misrepresentation – Fletcher v Krell.

Exceptions:

• Conduct may amount to a misrepresentation – Schneider v Heath.

• A half-true statement may be a misrepresentation – Dimmock v Hallett.

• A change of circumstances may be a misrepresentation – With v

O’Flanagan.

• Where one party is in a position of skill v responsibility – Esso v Mardon.

• A fiduciary relationship may impose a duty to disclose – Hedley Byrne

v Heller.

• Contracts uberrimae fidei – Seaman v Fonnereau.

Inducement

The untrue statement must persuade, or induce, the other party into the

contract – Attwood v Small.

Types of misrepresentation

May be fraudulent, according to Derry v Peek (deliberately dishonest),

negligent or wholly innocent. For cases pre-1966, courts were only really

interested in whether misrepresentation was fraudulent or not. Now full

remedies exist for non-fraudulent misrepresentation.

Remedies

Rescission
An equitable remedy which restores the parties to original position unless

barred by:

• Affirmation – Long v Lloyd.

• Third-party rights – White v Garden.

• Restitution impossible – Vigers v Pike.

• Lapse of time – Leaf v International Galleries.

• Statute – s.2(2) Misrepresentation Act 1967 – damages may be awarded

in lieu – Zanzibar v British Aerospace.

Damages

• If fraudulent misrepresentation is proved: damages via the tort of deceit

– Derry v Peek.

• If fraud cannot be proved, damages available under if a ‘special’

relationship exists – Hedley Byrne v Heller.

• Damages under the Misrepresentation Act 1967 s.2(1).

Points arising:

• The Misrepresentation Act 1967 is now the normal route to a remedy,

and the most widely used.

• The burden of proof shifts to the misrepresentor to prove innocence.

• This is a heavy burden and it is difficult to avoid liability – Howard

Marine v Ogden.

• Damages are assessed on a tort basis putting the injured party into the

position which they would have been in had the wrong not happened –

Royscott v Rogerson.

• Loss of profits may also be recoverable in some circumstances – East v

Maurer.

The remedies for non-fraudulent misrepresentation are now more or less

equivalent to those for breach of contract or fraudulent misrepresentation.

( Page 181-183
Remedy

Clearly, if a problem arises with a contract a remedy is needed for the

innocent party. We have seen some remedies in operation throughout this

book, when considering aspects of the law of contract, such as remedies for

misrepresentation.

The usual remedy for a party to seek as a result of a breach of contract

is damages, and this may be claimed as a right at common law. There are

instances, however, when this does not provide a reasonable solution, so

repudiation (ending the contract) is allowed in some circumstances, and

alternative remedies are available, many based in equity, to suit the needs

of the situations which arise.

( Page –226

In some circumstances damages are awarded on a reliance basis. This is the basis used normally in tort,
restoring the injured party to the position which would have existed if the contract had not been
formed. This applied when damages are given for misrepresentation, both fraudulent and under the
Misrepresentation Act 1967.

( Page 227)

Rescission has already been examined as a remedy for misrepresentation

(oage 229)

…..