Misrepresentation 14

A statement made during contractual negotiations may be a mere puff, a representation, or a

contractual term. The essence of a representation is that the maker asserts the truth of certain
facts and this operates to induce the contract. A term, on the other hand, is essentially a promise,
so that there is an obligation to fulfil it. (See page 200, Chapter 6, section 1, for a discussion of the
distinction between representations and terms.)
Since a representor does not make a promise, the most appropriate remedy in misrepresenta-
tion is for the party induced to be put into the position in which he would have been had he not
been induced to contract. An actionable misrepresentation therefore renders the contract void-
able, i.e. liable to be set aside (rescinded). Damages may also be available with the aim of restoring
the parties to their original positions.
(This area of contract law tends to overlap with tort. Factual situations that give rise to a claim
in misrepresentation may also give rise to a claim in tort for negligent misstatement.)
The law governing misrepresentations in B2C (trader and consumer) contracts has recently under-
gone a radical transformation with the introduction of the Consumer Protection (Amendment)
Regulations 2014, SI 2014/870. These Regulations added new civil remedies for misleading actions
and aggressive commercial practices that induced the making of a consumer contract to the exist-
ing CPR regime (Consumer Protection from Unfair Trading Regulations (CPRs) 2008, SI 2008/1277).
This has the potential to create largely separate misrepresentation regimes for commercial and con-
sumer contracts if consumers choose to adopt the CPRs when seeking relief. They are encouraged
to do so since section 2(4) Misrepresentation Act (MA) 1967 now provides that s. 2 ‘does not entitle
a person to be paid damages in respect of a misrepresentation if the person has a right to redress
under Part 4A of the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277) in
respect of the conduct constituting the misrepresentation’. Thus, whereas a consumer can seem-
ingly choose to seek a remedy using the existing principles of common law and equity (reg. 27L CPRs
2008), it would appear that if they had ‘a right to redress’ under the CPRs any such claim would be
seriously limited in relation to damages by the unavailability of the s. 2 remedy. This may be too
literal an interpretation since the expression ‘right to redress’ may not be intended to preclude s. 2
damages where the consumer has chosen not to seek recovery under the CPRs and there is there-
fore no double recovery. However, that is not what s. 2(4) states. As a final point on this relationship,
there appears to be no ‘right to redress’ for a consumer who complains of ‘misleading omissions’ (as
opposed to ‘misleading actions’) so that such a consumer should retain the ability to recover dam-
ages under s. 2. There are therefore a number of issues that have the potential to cause confusion
unless they are rapidly addressed through interpretation by the courts.

SECTION 1 Actionable misrepresentation

An actionable misrepresentation is an unambiguous false statement of fact that induces the other
party to enter into the contract.
 A) Unambiguous false statement
14 Misrepresentation

i) Conduct
A ‘statement’ can include conduct.

Gordon v Selico Co. Ltd

(1986) 278 EG 53 (CA)

On behalf of the owners, the estate agents of a flat instructed an independent contractor to do
work to the flat ‘to bring it up to a very good standard for the purpose of selling’. The contractor
deliberately covered up patches of dry rot without attempting to eradicate it. The plaintiffs saw
the flat with a view to purchasing it and later went ahead with the purchase.
Held: The Court of Appeal agreed with Goulding J at first instance that this concealment
amounted to a fraudulent misrepresentation to the plaintiffs that the flat did not suffer from
dry rot.

Question

I wish to sell my house. I put up wood panelling in the dining room, partly because the room
needs decorating and partly to hide serious cracks in a wall. You buy my house and subse-
quently discover that the wall is defective. Would you have a remedy in misrepresentation or
under the CPRs 2008 in these circumstances?

NOTES
1. It had been argued that the plaintiffs had inspected the flat and that this meant that they were pre-
612 cluded by Horsfall v Thomas (1862) 1 H & C 90 from complaining of misrepresentation. In Horsfall v Thomas,
a defect in a gun was concealed, but it was held that there was no actionable misrepresentation. However,
this was because the defect in the gun was discoverable on inspection, but no inspection had taken place.
Therefore the plaintiff in Horsfall v Thomas could not argue that he had relied upon (and been induced by) the
misrepresentation. However, in Gordon v Selico, not only was the defect deliberately concealed, but also it
was not discovered on routine inspection. It was intended to deceive and did deceive, so there was no ques-
tion of the plaintiff not having relied upon the misrepresentation.
2. In Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15, [2002] EMLR 27, it was held that
when the pop group Spice Girls took part in a photo shoot and promotions for the defendant, a motor scooter
manufacturer, prior to the signing of a sponsorship agreement for their tour, this amounted to a misrepresen-
tation by conduct. The misrepresentation was that the group did not know, and had no reasonable grounds to
believe, that any member of the group had an intention to leave before the sponsorship agreement ended. This
was false because, as the judge found on the evidence, one member of the group (Geri Halliwell) had already
declared an intention to leave the group.

ii) Implied representations as to a present intention

Crystal Palace Football Club (2000) Ltd v Dowie

[2007] EWHC 1392 (QB), [2007] IRLR 682

The defendant football manager’s contract contained a provision requiring compensation of

£1 million to be paid if he left Crystal Palace Football Club to take up employment at a premier-
ship club before the end of his contract term.
The defendant had agreed a compromise agreement with the Club whereby it had agreed to
release him without compensation, since he had falsely stated that he wanted to leave to move
north for family reasons and had had no contact with the Premiership club Charlton Athletic. Eight
days after this agreement had been entered into, the defendant had been appointed as the manager

14 Misrepresentation
of Charlton Athletic. The claimant Club alleged that it had been deceived. The defendant claimed
that he had no contract with the Premiership club when he made the compromise agreement.
Held: When the defendant represented that he had received no contact from Charlton at the
relevant time, he was impliedly representing that he had no present intention to join Charlton,
whereas he did have such an intention. He therefore knew the representations to be false and
these misrepresentations had induced the making of the compromise agreement to forego the
compensation payment.

iii) Silence
Does silence amount to misrepresentation? Is there a duty of disclosure?

Keates v The Earl of Cadogan

(1851) 10 CB 591, 138 ER 234 (Common Pleas)

The defendant let a house to the plaintiff knowing that the plaintiff wanted it for immediate occu-
pation, but did not tell the plaintiff that the house was in fact uninhabitable.
Held: In the absence of fraud, the defendant was under no implied duty to disclose the state of
the house.

JERVIS CJ: It is not pretended that there was any warranty, express or implied, that the house was fit for
immediate occupation: but it is said, that, because the defendant knew that the plaintiff wanted it for
immediate occupation, and knew that it was in an unfit and dangerous state, and did not disclose that
fact to the plaintiff, an action of deceit will lie. The declaration does not allege that the defendant made
any misrepresentation, or that he had reason to suppose that the plaintiff would not do what any man in
613
his senses would do, viz. make proper investigation, and satisfy himself as to the condition of the house
before he entered upon the occupation of it. There is nothing amounting to deceit: it was a mere ordi-
nary transaction of letting and hiring . . .

NOTE: This case is based on the principle of caveat emptor. Contracting parties should not be expected to
share every piece of information with one another where they deal at ‘arm’s length’ unless the non-disclosure
is fraudulent (see Gordon v Selico, section 1Ai). Caveat emptor does not apply to claims based on deceit.

Exceptions to non-disclosure
(a) Misleading statements: Half-truths

Dimmock v Hallett
(1866) LR 2 Ch App 21 (CA)

Land for sale was described as ‘let to Hickson at £130 p.a.’ and another farm was described as ‘let
to Wigglesworth at £160 p.a.’. In fact, both tenants had given notice to quit, but this was not men-
tioned, although there were statements that some of the other tenants had given notice to quit.
Held: It was a fair inference that these tenants had not given notice to quit, so that the state-
ment that the farms were let was misleading and amounted to a misrepresentation.

(b) Change of circumstances

What is the position regarding statements that are true when made, but which become false
before the contract is entered into?
 14 Misrepresentation

With v O’Flanagan
[1936] Ch 575 (CA)

In January 1934, negotiations were entered into for the sale of a medical practice, which the ven-
dor represented as having an income of £2,000 per annum. However, by the time the contract
was signed in May, the practice had declined as a result of the vendor’s illness, but this was not
disclosed. The purchasers sought rescission.
Held: The representation was made to induce purchasers to enter into the contract and had to
be treated as continuing until the contract was signed. Once it became false, to the knowledge of
the representor, there was a misrepresentation if he failed to correct it.

ROMER LJ: If A with a view to inducing B to enter into a contract makes a representation as to a material fact,
then if at a later date and before the contract is actually entered into, owing to a change of circumstances,
the representation then made would to the knowledge of A be untrue and B subsequently enters into
the contract in ignorance of that change of circumstances and relying upon that representation, A cannot
hold B to the bargain. There is ample authority for that statement and, indeed, I doubt myself whether any
authority is necessary, it being, it seems to me, so obviously consistent with the plainest principles of equity.

NOTES
1. The misrepresentation occurs when the change of circumstances is not disclosed.
2. It is more difficult to establish that such a misrepresentation is fraudulent. Lord Wright MR stated in
this case, at p. 584:

[T]he failure to disclose, though wrong and a breach of duty, may be due to inadvertence or a failure to realise that the duty
rests upon the party who has made the representation not to leave the other party under an error when the representa-

614 tion has become falsified by a change of circumstances . . .

In Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 (see page 630, section 3A), Jacob J held that a
company selling a business had not been fraudulent in failing to disclose a change in accounting method
affecting the profit estimates, since there was no evidence of dishonesty on the part of the officers concerned.
(See the definition of fraudulent misrepresentation at page 629, section 3A.)
Nevertheless, there are examples of fraudulent misrepresentation being established in these circum-
stances. In Banks v Cox (No. 2) (unreported, 21 December 2000) (discussed at page 638, section 3Aii in relation
to the damages award), after the date of the relevant accounts, the vendors of the nursing home business
had been informed that there were to be cuts in the social services budget, which would impact on the busi-
ness. They also knew that there had already been a deterioration in occupancy and turnover, but failed to
disclose these material changes to the accounts dated five months prior to the sale contract. This failure
to disclose was considered to amount to a fraudulent misrepresentation. Similarly, in Erlson Precision
Holdings Ltd (formerly GG132 Ltd) v Hampson Industries Ltd [2011] EWHC 1137 (Comm), in negotiations
over a ten-month period, various income and customer forecasts had been supplied to the potential buyer
of the shares in a company. These forecasts included details of the contracts with the company’s second big-
gest customer, although that customer had terminated its supply arrangement a few months after the initial
forecasts had been made available to the buyer. This information would have made the business unsaleable.
The chief executive officer was aware that these forecasts were being made available to the potential buyer,
but decided not to correct them. The buyer relied on these forecasts in purchasing the business. It was held
that the CEO ought to have corrected the details about the customer and that the failure to do so constituted
a fraudulent misrepresentation.
3. A further example of change of circumstances and failure to disclose is provided by the decision in Spice
Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15, [2002] EMLR 27.
4. It has traditionally been an accepted principle that the duty to disclose does not apply to statements
of intention, so that if the contracting party changed its declared intention before the conclusion of the con-
tract, there was no obligation to communicate that change of intention. The authority for this principle is
Wales v Wadham.
 14 Misrepresentation
Wales v Wadham
[1977] 1 WLR 199

In February 1973, during divorce negotiations, the husband promised to pay the wife £13,000 to
settle finally the wife’s claim for financial provision. The wife remarried shortly after the divorce
decree was made absolute in September 1973, so that, but for the agreement, the ex-husband
would have been under no obligation to make financial provision for her. The ex-husband claimed
that the agreement should be rescinded for fraudulent misrepresentation, in that the ex-wife had
stated on numerous occasions that she would not remarry.
Held: The wife had made an honest representation of her intention, which was not a statement
of fact or an intention that she did not actually hold at the time. As a result, she was under no duty
to inform her husband that she had changed her mind.

TUDOR EVANS J: It is submitted that even if the wife’s statement that she would never remarry was hon-
estly held, she was under a duty to tell the husband of her changed circumstances, but that she failed
to do so. Counsel has referred me to With v O’Flanagan [1936] Ch 575, in the Court of Appeal . . . Lord
Wright MR, at p. 582, quoted, with approval, observations of Fry J in Davies v London & Provincial Marine
Insurance Co. (1878) 8 Ch D 469, 475, where he said:

So, again, if a statement has been made which is true at the time, but which during the course of negotiations
becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to
the other the changed circumstances.

The representations in both of these cases related to existing fact and not to a statement of intention in
relation to future conduct. A statement of intention is not a representation of existing fact, unless the
person making it does not honestly hold the intention he is expressing, in which case there is a misrep-
resentation of fact in relation to the state of that person’s mind. That does not arise on the facts as I have 615
found them. On the facts of this case, the wife made an honest statement of her intention which was
not a representation of fact, and I can find no basis for holding that she was under a duty in the law of
contract to tell the husband of her change of mind.

NOTE: See page 618, section 1Bii, on the distinction between a statement of fact and a statement of
intention.

However, in Inclusive Technology v Williamson [2009] EWCA Civ 718, [2010] 1 P & CR 2, it was
explained that this principle will depend on the context and nature of the statement of intention,
i.e. whether it is a continuing statement of intention into the future.
The landlord had issued a statutory termination notice of a tenancy, which indicated an inten-
tion to refurbish. However, having given the tenant notice to quit, the landlord then changed his
mind about the refurbishment, but did not inform the tenant. The Court of Appeal distinguished
Wales v Wadham and treated this statement as a representation that had meaning only if it was a
continuing representation into the future given the purpose of the notice and the statutory time
frame. As such, it carried with it a duty to speak to correct it if there were a change in the previ-
ously declared intention to refurbish. It followed that there was a misrepresentation in order to
secure possession.
 B) Of fact
14 Misrepresentation

i) Statements of belief or opinion

If the maker of the statement is in no better a position to know the truth of the statement than
the recipient of it, and the recipient is aware of this, then the maker’s statement is likely to be con-
strued as a statement of opinion and, if false, will not amount to an actionable misrepresentation.

Bisset v Wilkinson
[1927] AC 177 (PC)

The owner of a farm told a prospective purchaser that he believed that it would support 2,000 sheep.
Held: On the evidence, the statement was merely a statement of opinion that the owner hon-
estly held. The evidence was that the owner was not in any better position than the purchaser to
know the farm’s true capacity, since the land had not been used as a sheep farm before. Therefore
the purchaser was aware that the vendor could do no more than state his belief.

LORD MERRIVALE: [I]t is . . . essential to ascertain whether that which is relied upon is a representation
of a specific fact, or a statement of opinion, since an erroneous opinion stated by the party affirming the
contract, though it may have been relied upon and have induced the contract on the part of the party
who seeks rescission, gives no title to relief unless fraud is established. The application of this rule, how-
ever, is not always easy, as is illustrated in a good many reported cases, as well as in this. A representation
of fact may be inherent in a statement of opinion and, at any rate, the existence of the opinion in the
person stating it is a question of fact.
In ascertaining what meaning was conveyed to the minds of the now respondents by the appellant’s
statement as to the two thousand sheep, the most material fact to be remembered is that, as both par-
616 ties were aware, the appellant had not and, so far as appears, no other person had at any time carried on
sheep-farming upon the unit of land in question. That land as a distinct holding had never constituted a
sheep-farm . . . In these circumstances . . . the defendants were not justified in regarding anything said
by the plaintiff as to the carrying capacity as being anything more than an expression of his opinion on
the subject . . .

If, however, the statement maker is in a better position to know the facts, then his statement con-
tains an implied assertion that he knows of facts justifying his opinion.

Smith v Land and House Property Corporation

(1884) 28 Ch D 7 (CA)

The plaintiffs advertised a hotel for sale, stating in the particulars that it was let to ‘Mr Frederick
Fleck (a most desirable tenant)’. In fact, Fleck was in arrears with his rent at the time and distress
had been threatened (i.e. the taking of goods by the landlord to cover the non-payment of rent).
The defendant agreed to purchase the hotel, but then refused to complete. The plaintiffs sued for
specific performance.
Held: This description was not a mere expression of opinion, but contained an implied asser-
tion that the vendors knew of no facts leading to the conclusion that Fleck was not a most desir-
able tenant.

BOWEN LJ: It is material to observe that it is often fallaciously assumed that a statement of opinion cannot
involve the statement of a fact. In a case where the facts are equally well known to both parties, what one
 14 Misrepresentation
of them says to the other is frequently nothing but an expression of opinion. The statement of such opinion
is in a sense a statement of a fact, about the condition of the man’s own mind, but only of an irrelevant fact,
for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then
a statement of opinion by the one who knows the facts best involves very often a statement of a material
fact, for he impliedly states that he knows facts which justify his opinion. Now a landlord knows the rela-
tions between himself and his tenant, other persons either do not know them at all or do not know them
equally well, and if the landlord says that he considers that the relations between himself and his tenant are
satisfactory, he really avers that the facts peculiarly within his knowledge are such as to render that opin-
ion reasonable. Now are the statements here statements which involve such a representation of material
facts? They are statements on a subject as to which prima facie the vendors know everything and the pur-
chasers nothing. The vendors state that the property is let to a most desirable tenant, what does that mean?
I agree that it is not a guarantee that the tenant will go on paying his rent, but it is to my mind a guarantee
of a different sort, and amounts at least to an assertion that nothing has occurred in the relations between
the landlords and the tenant which can be considered to make the tenant an unsatisfactory one. That is an
assertion of a specific fact. Was it a true assertion? . . . I think that it was not . . . Now could it . . . be said that
nothing had occurred to make Fleck an undesirable tenant? In my opinion a tenant who had paid his last
quarter’s rent by driblets under pressure must be regarded as an undesirable tenant.

NOTES
1. In Springwell Navigation Corporation v JP Morgan Chase Bank (formerly Chase Manhattan Bank)
[2010] EWCA Civ 1221, [2010] 2 CLC 705 (also discussed at page 672, section 4Ci), the Court of Appeal held that
there had been no misrepresentation when a bank employee had allegedly stated that certain investments
were ‘a conservative and liquid investment and without currency risk’. These statements were not made in
absolute terms and had to be seen in context; in particular, the word ‘conservative’ could not ‘be lifted like a
fish out of water’. The statements were no more than statements of opinion without any implied representa- 617
tion by the employee that the statements were based on objectively reasonable grounds.
2. The Smith v Land & House principle was further extended in Esso Petroleum Co. Ltd v Mardon [1976] QB
801 (for the full discussion, see page 207, Chapter 6, section 1C, and page 649, section 3Bi). The Court of Appeal
stated that where a forecast is made by a person with greater skill and expertise in relation to the subject
matter, that person is impliedly stating that reasonable care and skill has been used in preparing the forecast.
Lord Denning MR said, at p. 818:

[I]t was a forecast made by a party—Esso—who had special knowledge and skill. It was the yardstick . . . by which they meas-
ured the worth of a filling station. They knew the facts. They knew the traffic in the town. They knew the through-put of
comparable stations. They had much experience and expertise at their disposal. They were in a much better position than Mr
Mardon to make a forecast. It seems to me that if such a person makes a forecast, intending that the other should act upon
it—and he does act upon it, it can well be interpreted as a warranty that the forecast is sound and reliable in the sense that they
made it with reasonable care and skill. It is just as if Esso said to Mr Mardon: ‘Our forecast of throughput is 200,000 gallons. You
can rely upon it as being a sound forecast of what the service station should do. The rent is calculated on that footing.’ If the
forecast turned out to be an unsound forecast such as no person of skill or experience should have made, there is a breach of
warranty . . . It is very different from the New Zealand case where the land had never been used as a sheep farm and both par-
ties were equally able to form an opinion as to its carrying capacity: see particularly Bisset v Wilkinson [1927] AC 177, 183–184.

Although this comment relates to establishing a collateral warranty (term), a statement by an expert will be
a statement of fact, since the expert is impliedly stating that there are facts to support his forecast.
3. According to Adams and Brownsword, Understanding Contract Law, 5th edn (Sweet & Maxwell, 2007),
the overall effect of Esso v Mardon is that people with ‘special informational advantages’ are held to their
representations. It is interesting to compare this with the general discussion of the duty of disclosure and
Keates v Cadogan. It appears that a person with special information cannot be compelled, as a general rule, to
disclose that information, but if he does disclose it, then he will be responsible for that disclosure.
4. If the maker of the statement has no special skill or knowledge relating to the statement, his statements
of opinion will not amount to misrepresentations even if his belief is unreasonable: Hummingbird Motors Ltd
v Hobbs [1986] RTR 276.
 ii) Statements as to future conduct and intention
14 Misrepresentation

Edgington v Fitzmaurice
(1885) 29 Ch D 459 (CA)

The directors of a company issued a prospectus inviting subscriptions for debentures (loans to the
company), stating that the money raised would be used to complete alterations in the buildings
of the company, to purchase horses and vans, and to develop the trade of the company. However,
the real object of the loan was to enable the directors to pay off pressing liabilities. The plaintiff
advanced money on some of the debentures under the mistaken belief that the prospectus offered
a charge upon the property of the company, and stated in his evidence that he would not have
advanced his money but for such belief, but that he also relied upon the statements contained in
the prospectus.
Held: The misstatement of the company’s intentions amounted to a misstatement of fact.

BOWEN LJ: There must be a misstatement of an existing fact: but the state of a man’s mind is as much a
fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at
a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation
as to the state of a man’s mind is, therefore, a misstatement of fact . . .

NOTES
1. The difficulty resulting from Edgington v Fitzmaurice is an evidential one—namely, to prove what the
maker’s true intention was at the time of making the statement.
2. In Inntrepreneur Pub Co. (CPC) Ltd v Sweeney [2002] EWHC 1060 (Ch), [2003] ECC 17, [2002] 2 EGLR
132, the tenant of a public house alleged that he had been induced to take a new lease from the defendant
landlord as a result of a statement predicting that the tenant would be released from an associated beer
618 tie by the end of March 1998. This statement was no more than a statement of intention. It was honestly
held, since it was the defendant’s policy at that time to release all pubs from the tie (the defendant having
given undertakings to this effect to the Secretary of State for Trade and Industry). As a result, the statement
could not constitute an actionable misrepresentation. In addition, although the statement might constitute
a statement of fact on the basis that it was an opinion or prediction that impliedly stated that the defendant
had good grounds for making it—Smith v Land & House; Esso v Mardon—it was not a false statement of fact
precisely because there were good grounds to justify the statement at the time it was made.
However, even if a statement of intention is true when made, depending on the circumstances and whether
the statement of intention is a continuing one, the statement maker may come under a duty to correct a
statement of intention where the intention changes before the contract is made: see Inclusive Technology v
Williamson [2009] EWCA Civ 718, [2010] 1 P & CR 2 (see page 615, section 1Aiii).

iii)
Statements of law can give rise to a claim based on actionable
misrepresentation

Pankhania v Hackney London Borough Council

[2002] EWHC 2441 (Ch), [2002] NPC 123

The claimant had bid for commercial property, part of which was occupied by National Car Parks
Ltd (NCP) and used as a car park. The claimant alleged that he had been induced to purchase the
properties as a result of misrepresentations in the auction brochure to the effect that NCP was a
contractual licensee whose occupation could be terminated by giving three months’ notice, when
in fact NCP was a business tenant and protected under the Landlord and Tenant Act 1954. The
claimant sought damages for misrepresentation to cover the payment made to NCP to secure its
departure from the car park. The defendants claimed that any misrepresentations were misrepre-
sentations as to law and there was a long-standing rule that statements of law were not actionable.
 Held: Since the decision of the House of Lords in Kleinwort Benson Ltd v Lincoln City Council

14 Misrepresentation
[1999] 2 AC 349 to the effect that it was not the case that there was no remedy available for a mis-
take of law, a misrepresentation of law could be an actionable misrepresentation.
The judge awarded damages under s. 2(1) of the Misrepresentation Act 1967 (see page 651,
section 3Bii), on the basis that the defendant could not show that it reasonably believed its state-
ments relating to NCP to be true: see Pankhania v Hackney London Borough Council [2004]
EWHC 323 (Ch), [2004] 1 EGLR 135, page 635, section 3Ai, for the damages award.
This was a statement of the application of law to particular facts, which has traditionally been
actionable. Therefore it must remain unclear whether there can be an actionable misrepresenta-
tion in relation to an abstract statement of law.

C) Induces the other party to contract

Redgrave v Hurd
(1881) 20 Ch D 1 (CA)

The plaintiff, a solicitor who was shortly to retire, placed an advertisement offering to take a part-
ner in the practice who would also agree to purchase the plaintiff’s house. The defendant replied to
the advertisement and was told by the plaintiff that the practice brought in about £300 a year. The
plaintiff had shown the defendant summaries for three years, showing a business of just less than
£200 a year, and had stated that the rest of the income was made up of business not included in
the summaries, which was detailed in a bundle of papers shown to the defendant. The defendant
did not examine these papers, which in fact showed that there was next to no additional business,
so that income from the business was only £200 a year. The defendant signed an agreement to
purchase the house for £1,600 and paid a deposit of £100. Subsequently, the defendant discovered 619
the true facts about the business and refused to complete. The plaintiff brought an action for spe-
cific performance, and the defendant counterclaimed for rescission of the contract and damages
alleging misrepresentation.
Held: If a material misrepresentation is made to a party, then he must be taken to have relied
on it in entering into the contract, unless it can be shown that the representee knew of the facts
showing the representation to be untrue, or that he either expressly stated or showed by his con-
duct that he did not rely on the representation. The defendant was therefore entitled to have the
contract rescinded and his deposit returned. (However, he was not entitled to damages because,
at the time of this case, damages were available only where the misrepresentation was fraudulent,
and fraud had not been pleaded by the defendant in his counterclaim.)

JESSEL MR: If a man is induced to enter into a contract by a false representation it is not a sufficient
answer to him to say, ‘If you had used due diligence you would have found out that the statement was
untrue. You had the means afforded you of discovering its falsity, and did not choose to avail yourself
of them.’ I take it to be a settled doctrine of equity, not only as regards specific performance but also as
regards rescission, that this is not an answer.
. . . Nothing can be plainer, I take it, on the authorities in equity than that the effect of false representa-
tion is not got rid of on the ground that the person to whom it was made has been guilty of negligence.
One of the most familiar instances in modern times is where men issue a prospectus in which they
make false statements of the contracts made before the formation of a company, and then say that
the contracts themselves may be inspected at the offices of the solicitors. It has always been held that
 14 Misrepresentation

those who accepted those false statements as true were not deprived of their remedy merely because
they neglected to go and look at the contracts. Another instance with which we are familiar is where a
vendor makes a false statement as to the contents of a lease, as, for instance, that it contains no covenant
preventing the carrying on of the trade which the purchaser is known by the vendor to be desirous of
carrying on upon the property. Although the lease itself might be produced at the sale, or might have
been open to the inspection of the purchaser long previously to the sale, it has been repeatedly held
that the vendor cannot be allowed to say, ‘You were not entitled to give credit to my statement.’ It is not
sufficient, therefore, to say that the purchaser had the opportunity of investigating the real state of the
case, but did not avail himself of that opportunity . . .

NOTES
1. The Redgrave v Hurd principle was applied in the analysis of the Court of Appeal in Peekay Intermark
Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386, [2006] 2 Lloyd’s Rep 511, [2006]
1 CLC 582 (see page 217, Chapter 6, section 2B). The question was whether the claimant had been induced
to sign an investment contract by relying on the informal (and incorrect) description of the product given
over the telephone rather than the formal written terms and conditions in the signed writing. Although the
Court of Appeal held that there had been no inducement, it was stressed that the defendant bank could not
argue that the claimant was bound because he should have read the final terms and conditions before signing.
Constructive notice will not suffice to prevent inducement; the knowledge of the true position must be actual.
2. It might be argued that the buyer is negligent in failing to make inquiries where the opportunity is avail-
able to him, and his damages should consequently be reduced for contributory negligence. The argument in
favour of apportionment is, however, incompatible with the tone of the judgment of Jessel MR in Redgrave v
Hurd that the buyer has no obligation to investigate. (Although see now the discussion of contributory negli-
gence, at pages 646, section 3Av, and 658, section 3Biii.)
3. It is clear from Horsfall v Thomas (1862) 1 H & C 90, that a representation cannot induce a contract
unless the representee knew of it. In that case, the defect might have been discovered by the buyer if he had
620 inspected the gun, but he did not, and the representation could not therefore have induced the contract.

Attwood v Small
(1838) 6 Cl & F 232, [1835–42] All ER Rep 258 (HL)

The vendor made statements about the earning capacity of mines that he was selling. The prospec-
tive buyers arranged for their co-directors and experienced agents to examine the property and
accounts. They reported (incorrectly) that the vendor’s statements were true. The buyers purchased
the mine, but later claimed to rescind, alleging fraudulent misrepresentation by the vendor.
Held: First, there was no fraud, and secondly, the buyers had not relied on the vendor’s state-
ments, because they had tested their accuracy and relied on the results of their own investigations.

NOTES
1. Attwood v Small is often cited as authority for the fact that if the representee carries out his own inves-
tigations, then he does not rely on the representation. However, it was stated obiter in S. Pearson & Son Ltd v
Dublin Corporation [1907] AC 351 that even if a representee carries out his own investigations, the represen-
tor will be liable for misrepresentation if the misrepresentation is made fraudulently.
2. In addition, for Attwood v Small to preclude a claim based on a representation, the claimant must have
relied only on the results of his investigations and not at all on the representation itself, since a representation
need not be the only reason inducing a contract as long as it is one of the reasons: Edgington v Fitzmaurice
(1885) 29 Ch D 459 (see page 618, section 1Bii).
This point is aptly illustrated by Morris v Jones [2002] EWCA Civ 1790. The claimant had been negotiat-
ing to purchase a leasehold interest in a basement flat and the defendant had represented that it had been
‘tanked’. However, the claimant had received three survey reports identifying problems of dampness in the
basement. The defendant therefore alleged that the misrepresentation had not induced the making of the
contract. The Court of Appeal held, relying on Edgington v Fitzmaurice, that the claimant could still rely on
 the misrepresentation as a factor inducing the making of the contract. (The judge had found that the rep-

14 Misrepresentation
resentation was fraudulent and this point was not contested on appeal, which may explain why the fraud
point in S. Pearson & Son Ltd v Dublin Corporation was not argued.) See Clinicare Ltd v Orchard Homes &
Developments Ltd [2004] EWHC 1694 (QB) as a further example: the fraudulent statement had been con-
firmed by the claimant’s own surveyor’s report, but it was held that, since the contract had nevertheless been
entered into, it had been induced by the misrepresentation.
3. In Barton v County NatWest Bank Ltd [2002] 4 All ER 494 (Note), [1999] Lloyd’s Rep Bank 408, the Court
of Appeal held that, in the context of a fraudulent misrepresentation, if the false statement were likely to play
a part in the decision of a reasonable person to contract, inducement would be presumed (unless the repre-
sentor satisfied the Court to the contrary).

SECTION 2 The remedy of rescission

As misrepresentation renders the contract voidable at the option of the misrepresentee, the main
remedy will be rescission, which in principle is available for fraudulent, negligent, and innocent
misrepresentation, and which involves the return from each party of anything that has passed
under the contract.
Note, however, that, as part of the new consumer regime of remedies for misleading actions, the
Consumer Protection (Amendment) Regulations 2014, SI 2014/870, provide for a right to unwind
or a right to a discount in misrepresentation claims falling within the CPRs. The right to unwind
will exist only within the relevant time period (90 days) and only if the product is capable of being
rejected at that time, e.g. is not fully consumed (CPRs 2008, reg. 27E). The consumer will then
become entitled to a refund (CPRs 2008, reg. 27F). Alternatively, the consumer could exercise
his right to receive a discount (CPRs 2008, reg. 27I). The level of the discount turns on matters
such as the seriousness of the trader’s conduct, the impact that it had on the consumer, and the 621
time that has elapsed. There are separate discount provisions if the value of the product exceeds
£5,000. Where the consumer has a right to a discount, either party may also elect to terminate the
contract (in the sense of discharging obligations relating to future performance) but cannot also
unwind the pre-existing contractual obligations.
The consumer will have the burden of establishing causation, i.e. that the prohibited practice
was a significant factor in his decision to contract or make payment.

A) Limits to the right to rescind

Rescission is an equitable remedy and is subject to a number of bars preventing its exercise. These
bars to rescission (with the exception of s. 2(2) of the Misrepresentation Act 1967) apply to all
instances in which the remedy of rescission is available, e.g. duress or undue influence: Halpern v
Halpern [2007] EWCA Civ 291, [2007] 3 WLR 849.

i) Affirmation

Long v Lloyd
[1958] 1 WLR 753 (CA)

The defendant advertised a lorry for sale in a newspaper and described it as being in ‘exceptional
condition’. The plaintiff saw the vehicle at the defendant’s premises and the defendant stated
that it was capable of a speed of 40 miles per hour. On 22 October, the plaintiff, accompanied by
the defendant, took the lorry for a trial run and the defendant represented that the lorry’s fuel
 consumption was 11 miles to the gallon. The plaintiff then bought the lorry for £750. Two days
14 Misrepresentation

later, on 24 October, the plaintiff attempted a journey in the lorry, but the dynamo ceased to func-
tion and the plaintiff was advised to fit a reconstructed dynamo. He also noticed that an oil seal
was defective, that there was a crack in one of the wheels, and that the vehicle had consumed 8 gal-
lons of fuel when it had travelled only 40 miles. When the defendant was advised of these defects,
he offered to pay half the cost of the reconstructed dynamo and the plaintiff accepted this offer.
The repair having taken place, the plaintiff’s brother took the vehicle on a journey (on 25 October);
on 26 October, the plaintiff learned that the lorry had broken down on this journey. The plaintiff
brought an action for rescission of the contract on the ground of non-fraudulent misrepresenta-
tion. (Note that there was no right to damages for such a misrepresentation at this time.)
Held: Certainly by the time that the plaintiff sent the lorry on a journey on 25 October, he had
affirmed the misrepresentations and accepted the lorry, in full knowledge of the condition and
performance of the vehicle. (Thus the plaintiff was left with no remedy at all.)

PEARCE LJ: [A] strict application to the facts of the present case of Denning LJ’s view to the effect that
the right (if any) to rescind after completion on the ground of innocent misrepresentation is barred by
acceptance of the goods must necessarily prove fatal to the plaintiff’s case. Apart from special circum-
stances, the place of delivery is the proper place for examination and for acceptance. It was open to
the plaintiff to have the lorry examined by an expert before driving it away, but he chose not to do so.
It is true, however, that the truth of certain of the representations, for example, that the lorry would do
11 miles to the gallon—could not be ascertained except by user and, therefore—the plaintiff should have
a reasonable time to test it. Until he had had such an opportunity it might well be said that he had not
accepted the lorry, always assuming, of course that he did nothing inconsistent with the ownership of
the seller. An examination of the facts, however, shows that on any view he must have accepted the lorry
622 before he purported to reject it.
Thus, to recapitulate the facts, after the trial run the plaintiff drove the lorry home from Hampton
Court to Sevenoaks, a not inconsiderable distance. After that experience he took it into use in his busi-
ness by driving it on the following day to Rochester and back to Sevenoaks with a load. By the time he
returned from Rochester he knew that the dynamo was not charging, that there was an oil seal leaking,
that he had used 8 gallons of fuel for a journey of 40 miles, and that a wheel was cracked. He must also,
as we think, have known by this time that the vehicle was not capable of 40 miles per hour. As to oil
consumption, we should have thought that, if it was so excessive that the sump was practically dry after
300 miles, the plaintiff could have reasonably been expected to discover that the rate of consumption
was unduly high by the time he had made the journey from Hampton Court to Sevenoaks and thence
to Rochester and back.
On his return from Rochester the plaintiff telephoned to the defendant and complained about the
dynamo, the excessive fuel consumption, the leaking oil seal and the cracked wheel. The defendant then
offered to pay half the cost of the reconstructed dynamo which the plaintiff had been advised to fit, and
the plaintiff accepted the defendant’s offer. We find this difficult to reconcile with the continuance of any
right of rescission which the plaintiff might have had down to that time.
But the matter does not rest there. On the following day the plaintiff, knowing all that he did about
the condition and performance of the lorry, dispatched it, driven by his brother, on a business trip to
Middlesbrough. That step, at all events, appears to us to have amounted, in all the circumstances of the
case, to a final acceptance of the lorry by the plaintiff for better or for worse, and to have conclusively
extinguished any right of rescission remaining to the plaintiff after completion of the sale.
 NOTES

14 Misrepresentation
1. Pearce LJ also suggested that rescission might well have been lost much earlier. He appears to have
relied upon Denning LJ’s comments in Leaf v International Galleries (see below), seeking to equate this area
of law with the principles in the Sale of Goods Act (SGA) 1979 on the right to reject for breach of condition. At
this time, there was also no available remedy in damages for such a misrepresentation, although damages
were clearly available for breach of contract even where the right to reject had been lost.
2. In Harsten Developments Ltd v Bleaken [2012] EWHC 2704 (Ch), it was alleged that the vendor of a
plot with planning permission had misrepresented the boundary with neighbouring land. The developer
sought rescission of the contract, but had reapplied for the planning permission since the date of the con-
tract. The judge considered that rescission was nevertheless available in principle because the developer had
not been aware of the ability to rescind. The judge then considered the exercise of the discretion in s. 2(2) of the
Misrepresentation Act 1967 to award damages in lieu of that rescission (discussed at page 666, section 3C), a
discretion which would arguably not have been available to the court but for the decision that rescission had
not been lost by the developer’s action in reapplying for the planning permission.

ii) Lapse of time

Leaf v International Galleries

[1950] 2 KB 86 (CA)

In 1944, the defendants sold the plaintiff a picture, which they represented to have been painted
by Constable. In 1949, the plaintiff tried to sell it and discovered that it was not by Constable. He
sought rescission and repayment of the purchase price.
Held: This remedy had been lost because it had not been exercised within a reasonable time.

DENNING LJ: The question is whether the plaintiff is entitled to rescind the contract on the ground that
the picture in question was not painted by Constable. I emphasise that it is a claim to rescind only: there
is no claim in this action for damages for breach of condition or breach of warranty. The claim is simply
one for rescission. At a very late stage before the county court judge counsel did ask for leave to amend 623
by claiming damages for breach of warranty, but it was not allowed. No claim for damages is before us
at all. The only question is whether the plaintiff is entitled to rescind.
The way in which the case is put by [counsel], on behalf of the plaintiff, is this: he says that this was an
innocent misrepresentation and that in equity he is, or should be, entitled to claim rescission even of an
executed contract of sale on that account. He points out that the judge has found that it is quite possible
to restore the parties to their original position. It can be done by simply handing back the picture to the
defendants.
In my opinion, this case is to be decided according to the well known principles applicable to the
sale of goods. This was a contract for the sale of goods. There was a mistake about the quality of the
subject-matter, because both parties believed the picture to be a Constable; and that mistake was in one
sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at
all about the subject-matter of the sale. It was a specific picture, ‘Salisbury Cathedral.’ The parties were
agreed in the same terms on the same subject-matter, and that is sufficient to make a contract: see Solle
v Butcher [1950] 1 KB 671.
There was a term in the contract as to the quality of the subject-matter: namely, as to the person by
whom the picture was painted—that it was by Constable. That term of the contract was, according to our
terminology, either a condition or a warranty. If it was a condition, the buyer could reject the picture for
breach of the condition at any time before he accepted it, or is deemed to have accepted it; whereas, if it
was only a warranty, he could not reject it at all but was confined to a claim for damages.
I think it right to assume in the buyer’s favour that this term was a condition, and that, if he had come
in proper time he could have rejected the picture; but the right to reject for breach of condition has
 14 Misrepresentation

always been limited by the rule that, once the buyer has accepted, or is deemed to have accepted, the
goods in performance of the contract, then he cannot thereafter reject, but is relegated to his claim for
damages: see s. 11, sub-s. 1 (c), of the Sale of Goods Act, 1893, and Wallis, Son & Wells v Pratt & Haynes
[1911] AC 394.
The circumstances in which a buyer is deemed to have accepted goods in performance of the contract
are set out in s. 35 of the Act, which says that the buyer is deemed to have accepted the goods, amongst
other things, ‘when, after the lapse of a reasonable time, he retains the goods without intimating to the
seller that he has rejected them.’ In this case the buyer took the picture into his house and, apparently,
hung it there, and five years passed before he intimated any rejection at all. That, I need hardly say, is
much more than a reasonable time. It is far too late for him at the end of five years to reject this picture
for breach of any condition. His remedy after that length of time is for damages only, a claim which he
has not brought before the court.
Is it to be said that the buyer is in any better position by relying on the representation, not as a condi-
tion, but as an innocent misrepresentation? . . .
Although rescission may in some cases be a proper remedy, it is to be remembered that an innocent
misrepresentation is much less potent than a breach of condition; and a claim to rescission for innocent
misrepresentation must at any rate be barred when a right to reject for breach of condition is barred.
A condition is a term of the contract of a most material character, and if a claim to reject on that account
is barred, it seems to me a fortiori that a claim to rescission on the ground of innocent misrepresentation
is also barred.
So, assuming that a contract for the sale of goods may be rescinded in a proper case for innocent mis-
representation, the claim is barred in this case for the self-same reason as a right to reject is barred. The
buyer has accepted the picture. He had ample opportunity for examination in the first few days after he
624 had bought it. Then was the time to see if the condition or representation was fulfilled. Yet he has kept
it all this time. Five years have elapsed without any notice of rejection. In my judgment he cannot now
claim to rescind. His only claim, if any, as the county court judge said, was one for damages, which he
has not made in this action . . .

NOTES
1. The damages claim to which Denning LJ was referring was that for breach of contract. Nowadays, there
is a right to claim damages in misrepresentation, but only if the misrepresentation was at least negligent.
2. Since Leaf v International Galleries was a case of non-fraudulent misrepresentation, time ran from the
date of the contract. One of the advantages in alleging fraudulent misrepresentation is that time runs from
the date on which the fraud was—or could, with reasonable diligence, have been—discovered.
3. In Salt v Stratstone Specialist Ltd (t/a Stratstone Cadillac Newcastle) [2015] EWCA Civ 745, [2015] CTLC
206, the claimant had purchased a luxury car from the defendant car dealer in 2007 on the basis that it was
a new car. In 2008 he sought to return the car on the basis that it had many defects and then learnt that the
car was in fact two years old and had been involved in a collision. He therefore sought rescission for the mis-
representation that the car was new. The county court judge had refused rescission on the basis that the car
had been registered after the sale so that restitutio in integrum was impossible and that too much time had
elapsed since the sale. (The county court instead awarded damages in lieu of rescission under s. 2(2) MA 1967
but this explanation of s. 2(2) was overturned on appeal by the Court of Appeal, see the discussion at pages
667–8, section 3C). The High Court overturned the county court decision on rescission and this was upheld on
appeal so that rescission was permitted. The claimant had brought his claim a reasonable time after learning
of the misrepresentation and that was sufficient.
Of course, this is at odds with the principle that, in the absence of fraud, time runs from the date of the
contract. However, it was open to the Court of Appeal seeking to preserve the ability to rescind to hold that
the delay was not unreasonable on the facts, particularly given the absence of any fault attributable to the
claimant for the delay in achieving rescission for the misrepresentation.
iii) Restitution is impossible

14 Misrepresentation
Clarke v Dickson
(1858) EB & E 148, 120 ER 463 (Queen’s Bench)

In 1853, the plaintiff purchased shares in a mining company as a result of representations made
by the defendants, who were directors of this company. The company was later wound up. The
plaintiff then discovered that the representations made to him had been fraudulent. He wanted to
give up the shares and recover the purchase price.
Held: He could not because he could not restore the shares in the same state as he took them.

ERLE J: In 1853 the plaintiff accepted the shares; and from that time he was, in point of law, in possession
of the mine, and worked it by his agent . . . After three years working of the mine, and trying to make a
profit, he cannot restore the shares as they were before this was done. But, further, he not only had the
chance of profit, but dividends were declared, and received by him. They were not received in money, it
is true; but the receipt of money’s worth has the same effect in law. Then he has also changed the nature
of the article: the shares he received were shares in a company on the cost book principle; the plaintiff
offers to restore them after he has converted them into shares in a joint stock corporation. Lastly, the
offer to restore these shares is not made till after the Company is in the course of being wound up, when
all chance of profit is over, and the shares can only be a source of loss . . .

It has been confirmed that this principle applies to rescission for duress (see page 680, Chapter 15,
section 1).

Halpern v Halpern
[2007] EWCA Civ 291, [2007] 3 WLR 849 (CA) 625
This case concerned a compromise agreement alleged to have been reached between a number
of the deceased’s sons and daughter (the appellants) and another son and grandson (the respond-
ents) relating to inheritance issues and an arbitration before a Beth Din. One term of the com-
promise was that all documents produced during the arbitration had to be destroyed or handed
over. The appellants raised the issue of duress in relation to this compromise agreement when
sued for damages for its breach and the respondents claimed that, since the relevant documents
had been destroyed, the compromise could not be rescinded, because it would not be possible to
make restitution and thereby put the parties back into the position in which they were before the
compromise. The appellants contended that an inability to give counter-restitution should not be
a bar to a claim based on rescission for duress.
Held: Rescission for duress was no different in principle from rescission for other vitiating fac-
tors, such as misrepresentation.

CARNWATH LJ [with whose judgment on this issue both Waller and Sedley LJJ agreed]: 61 Before
the deputy judge [Nigel Teare QC, [2006] EWHC 1728 (Comm), [2007] QB 88], the argument turned
specifically on the requirements of rescission for duress at common law. This was contrasted, on the
one hand, with common law rescission for fraud, for which counter-restitution was a well-established
requirement: see eg Western Bank of Scotland v Addie (1867) LR 1 Sc & Div 145; and, on the other, with
equitable rescission for undue influence, for which again a form of counter-restitution was required,
albeit subject to a more flexible criterion of ‘practical justice’. The classic statement of the latter
 14 Misrepresentation

approach is in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1278–1279, per Lord
Blackburn: ‘a court of equity could not give damages, and, unless it can rescind the contract, can give
no relief. And, on the other hand, it can take accounts of profits, and make allowance for deteriora-
tion. And I think the practice has always been for a court of equity to give this relief whenever, by the
exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely
to the state they were in before the contract.’ (Emphasis added.) In more modern times, the same
approach was adopted and applied by this court in O’Sullivan v Management Agency and Music Ltd
[1985] QB 428, 458 per Dunn LJ.
62 Before the deputy judge, [counsel] for the defendants had submitted that duress at common law
was to be distinguished, in that there was no necessary requirement for the party seeking rescission to
offer counter-restitution. He relied on the lack of any reported cases in which such a requirement had
been imposed, and on the following passage by Burrows, The Law of Restitution, p 218:

Most importantly, it appears that the bar that restitutio in integrum is impossible generally does not apply to
rescission for duress. The explanation for that is that it would generally contradict the basis for the claimant’s
restitution to recognise a counter-claim by the defendant: if it was illegitimate for the defendant to demand a
sum of money for a particular consideration, for example, carrying out work, it would be inconsistent then to
award the defendant counter-restitution for that work.

63 The judge rejected this argument. He could see no sensible reason for distinguishing between fraud
and duress in this respect. He cited Lord Cross of Chelsea in Barton v Armstrong [1976] AC 104, 118:

There is an obvious analogy between setting aside a disposition for duress or undue influence and setting
it aside for fraud. In each case—and to quote the words of Holmes J in Fairbanks v Snow (1887) 13 NE 596,
598—‘the party has been subjected to an improper motive for action.’

626 He also referred to a passage in Enonchong, Duress, Undue Influence and Unconscionable Dealing (2006),
para 28–012:

The issue of restitutio in integrum has not presented itself in cases of rescission for common law duress.
This is probably because in most cases of duress the complainant has simply paid money or agreed to pay
money without receiving any benefit that he needs to return upon rescission. Since in such cases the ques-
tion is only about the repayment of the money by the defendant, there is no issue in restitutio in integrum.
The lack of discussion on this issue in case of rescission for duress should not be taken to mean that resti-
tutio in integrum is not a requirement for rescission on the grounds of duress. If A is induced by B’s duress
to enter into a contract to buy B’s car, it is unlikely that the court will allow rescission of the contract so that
A can recover the price paid to B without insisting that A should return B’s car. It would not be inconsistent
with the basis of A’s restitution for the court to insist on counter-restitution by A. In any event, restitutio in
integrum is clearly a requirement in the case of rescission for other common law vitiating factors such as
fraudulent misrepresentation.

64 . . . In his original skeleton argument (August 2006), [counsel] had sought to justify a special rule for
common law duress: Whereas fraudulent misrepresentation or indeed any misrepresentation is reliant
upon a wrong that is extrinsic to the contract itself, as it merely induces a contract, duress by contrast is
directly and intimately bound up with the contract formation, that is to say, the improper conduct oper-
ates at the point of entry into the contract itself. Effectively the victim’s autonomy is threatened. Since
mutuality is at the heart of contract an avoided contract cannot be enforced in either direction and no
benefits including counter-restitution can be sought. Effectively, once the contract is avoided for duress
and the victim as an act of self-help takes back that which he parted with and/or is relieved from unper-
formed obligations, the loss lies where it falls in a manner analogous to illegality.
 14 Misrepresentation
65 However, in his supplementary skeleton (February 2007 . . . ) he seems to have moved towards an
argument based, not on the distinction between law and equity, but on their assimilation:

the modern statement of the law is that, impossibility of restitutio in integrum is no longer a bar to relief when
a claimant seeks to avoid/rescind a contract on the grounds of duress or under influence. Instead the court’s
approach is to do practical justice between the parties by making orders for counter-restitution, even if they
cannot restore them to the precise position they were in prior to the contract being rescinded . . . (ii) The cor-
rect approach is that counter-restitution is never in fact impossible: it should always be possible for the party
seeking to rescind to pay a defendant a sum of money to reflect counter-restitution of the value of benefits
received by him. There can be no rational reason in a system of fused administration of law and equity why
the liberal approach taken in equity cannot also be taken at common law . . .

Just as in Erlanger v New Sombrero Phosphate Co the value of depreciation of a phosphate mine could
be measured in order to make counter-restitution in equity, so, it is argued, the court can in the present
case put an appropriate monetary value on the loss of the documents, even if this is represented by a
reduction in the claimant’s prospects of success in the arbitration (cf Kitchen v Royal Air Force Association
[1958] 1 WLR 563) . . .
69 Thus, it seems, the defendants have abandoned the stance that common law duress was to be
distinguished from undue influence at equity. Instead they have embraced the Erlanger practical jus-
tice criterion as applicable to both. But they have taken it a stage further, by arguing that by this test
counter-restitution is never impossible. Counsel for the claimants do not dispute the practical justice
approach, but submit that the extension is wrong in principle, and contrary to authority . . .
76 Returning to the question posed by the preliminary issue in this case, a definitive response is not
possible or appropriate, until the facts have been found. I would be inclined to agree with the deputy
judge that rescission for duress should be no different in principle from rescission for other ‘vitiating
factors’. However, the practical effect of counter-restitution, in the terms explained by Lord Blackburn in 627
the Erlanger case 3 App Cas 1218, will depend on the circumstances of the particular case. In the present
case, if (contrary to Christopher Clarke J’s expectations) the defendants are able to establish that their
consent to the compromise agreement was procured by improper pressure (whether that is character-
ised as duress or undue influence), it would be surprising if the law could not provide a suitable remedy.
The form of the remedy, whether equitable or tortious, is a matter which cannot sensibly be decided
until the facts are known, not only as to the nature and effect of the improper pressure, but also as to the
identity and significance of the documents destroyed.

NOTES
1. On the facts, the inability to make counter-restitution was directly attributable to a condition of the
agreement said to be affected by the duress, which surely calls for some different outcome on the facts, if not
in terms of legal principle.
2. The Court of Appeal noted that, given this situation, ‘it would be surprising if the law could not provide
a suitable remedy’, although did not specify at this stage (before the full facts were known) what this remedy
would be or its basis in law other than securing ‘practical justice’. However, it is conceded by the Court of
Appeal that ‘the primary objective may not always need to be to restore both parties to their previous posi-
tions’ and the envisaged means appears to be the principle in Erlanger v New Sombrero Phosphate Co. (1878)
3 App Cas 1218, i.e. in cases of substantial restitution, the court may exercise an equitable discretion to order
rescission whilst allowing for a financial adjustment in order to take account of the inability to make total
restitution.
3. Regrettably, as a result of the amendment of the pleadings, the Court of Appeal did not discuss the
nature of rescission as a ‘self-help’ remedy (see below).
 In Thomas Witter v TBP Industries Ltd [1996] 2 All ER 573, 588F–H (for the facts, see page 630,
14 Misrepresentation

section 3A), Jacob J held that rescission for misrepresentation was not available because of the
inability to make restitution:

[Counsel for the plaintiff] tied his claim to rescission to the claim in fraud. I never was quite sure why,
since rescission is available also for innocent misrepresentation. Even if I had found fraud, however,
I would not have granted rescission. This remedy is not available where it is not possible to restore
the parties to their position before the contract. Although Melton Medes kept the Witter business
separate, it is unrealistic to regard it as the same as the business conveyed. There have been numer-
ous changes to staff and personnel (including the departure of Mr Francis who had exceptional sales
skills). Those personnel who have stayed have been in different pension schemes, there are mort-
gagees of the business and so on. Time has moved on and third parties would, I think, be affected.
[Counsel’s] actual submission was that it was not shown that third parties would be affected. So he was
suggesting that the onus was on the defendants to avoid rescission by showing innocent third parties
would be affected. I cannot think that is right. The Thomas Witter business has been in the hands of
Melton Medes for four years. It is they who would know who or what might be affected by a transfer
back to Tarmac.

This suggests that rescission of a contract to purchase a business can be lost by the vendor con-
testing the right to rescind, so that the misrepresentee has to seek a remedy of rescission via
court action. It is generally assumed that rescission is a self-help remedy, i.e. the innocent party’s
election to rescind is determinative rather than court action. The problem in practice is that the
guilty party may not accept rescission and a court has to determine the innocent party’s ability to
rescind. In Thomas Witter, Jacob J assessed the availability of rescission at the date of the hearing
628 when, if rescission is achieved by the party’s action, he should have considered the position at the
date of that action to rescind. However, it is unrealistic for a court to evaluate the ability to achieve
restitutio in integrum at that date, since time and events will not have stood still in the interim: see
O’Sullivan [2000] CLJ 509.

iv) Where third party rights have intervened or a bona fide third party
purchaser has acquired the goods before rescission
In Crystal Palace Football Club (2000) Ltd v Dowie [2007] EWHC 1392 (QB), [2007] IRLR 682 (for
the facts, see page 612, section 1Aii), rescission was unavailable because of third party interests,
since it would have the effect of retrospectively reviving the defendant’s employment with the
Club when both had moved on, i.e. the defendant had since been employed elsewhere (Coventry
City) and Crystal Palace had a new manager. The defendant could not work for two clubs at the
same time and the rights of his new club needed to be taken into account. Instead, it was appropri-
ate to order damages or other financial relief as compensation.
See also the discussion of mistake as to identity, at page 90, Chapter 3, section 2C, where an
innocent third party acquires goods from a rogue before the party making the mistake about the
purchaser’s identity has discovered the mistake and taken action.

v) Where the court exercises its discretion under s. 2(2) to award damages
instead of rescission
See page 660, section 3C.
 Types of misrepresentation and damages

14 Misrepresentation
SECTION 3

The nature of the damages available for misrepresentation turns on the type of misrepresen-
tation, but it is no longer the case that damages can be claimed only in relation to fraudulent
misrepresentation.
Rescission alone may have the effect of restoring the parties to their original positions, but may
not do so where, for example, the representee has incurred consequential expenses. In such cases,
damages may be available in addition to rescission for fraudulent and negligent misrepresenta-
tions. Where rescission is not available, the only remedy will be damages for misrepresentation,
although damages cannot be claimed for innocent misrepresentation.
The Consumer Protection (Amendment) Regulations 2014, SI 2014/870, have introduced a right to
damages in consumer contracts falling within the scope of the CPRs, as amended, for certain identi-
fied losses which would not have been incurred had the misrepresentation not taken place (CPRs
2008, reg. 27J). The identified losses must be financial loss or non-pecuniary loss, such as distress,
discomfort, or inconvenience where a significant purpose of the contract was to provide pleasure,
relaxation, or peace of mind to the consumer. However, this is a limited ability to recover damages
since there is no right to be paid financial loss damages covering the difference between the market
price of the product and the amount paid or payable for it under the contract (i.e. it is possible to
recover consequential financial losses and these must also have been reasonably foreseeable at the
time of the misrepresentation). This compares unfavourably with the measure of recovery permit-
ted for fraudulent misrepresentation and damages under s. 2(1) MA 1967. In addition, under the
CPRs 2008 the trader is provided with a due diligence defence (reg. 27J(5)). The 2014 Amendment
Regulations make it clear that the statutory damages claims and discretions contained in s. 2 of
the Misrepresentation Act 1967 are no longer available to consumers who have a ‘right to redress’
629
under the CPRs (MA 1967, s. 2(4)). Outside s. 2 (e.g. claims for damages in the tort of deceit), these new
consumer rights are additional to any common law claims available to the consumer in respect of
the prohibited practice, although there can be no double recovery. The overall effect therefore is to
reduce considerably the potential damages available to a consumer misrepresentee when compared
to the damages available in the B2B (business to business) context for the same misrepresentation.

A) Fraudulent misrepresentation: The tort of deceit

Derry v Peek
(1889) 14 App Cas 337 (HL)

LORD HERSCHELL: I think the authorities establish the following propositions: First, in order to sustain
an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud
is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief
in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and
third as distinct cases, I think the third is but an instance of the second, for one who makes a statement
under such circumstances can have no real belief in the truth of what he states. To prevent a false state-
ment being fraudulent, there must, I think, always be an honest belief in its truth. And this probably cov-
ers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest
belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that
there was no intention to cheat or injure the person to whom the statement was made.
 14 Misrepresentation

Thomas Witter Ltd v TBP Industries Ltd

[1996] 2 All ER 573

The defendants owned a carpet manufacturing business, which the plaintiff wished to purchase.
During the negotiations, the defendants provided the plaintiff with audited accounts and manage-
ment accounts for 1988, and estimated profit figures for 1989. They also allowed the plaintiff to see
the October 1989 management accounts, which included a special one-off expense of £120,000 in
respect of problems with carpets supplied to one customer. However, the defendants did not indi-
cate that these accounts were prepared on a different basis from the audited accounts and contained
deferred pattern book expenditure. The parties concluded the contract for the sale of the business.
Within six months, the plaintiff claimed that it had been induced by representations made in
the accounts—namely, (i) the statement that they included the special one-off expense of £120,000
(thereby implying that general profits would otherwise be higher), when the actual amount of this
expense would be no more than £50,000, and (ii) by not disclosing the change in accounting basis.
The allegation was that these representations had been made recklessly (and so were fraudu-
lent). Alternatively, it was alleged that they were negligent.
Held: These misrepresentations were not made fraudulently. Recklessness for the purposes of
fraudulent misrepresentation required the statements to have been made dishonestly. Although
there was no evidence of dishonesty since there was a belief that these statements were true, the
misrepresentations were made negligently.

JACOB J:

The legal test for fraudulent misrepresentation

630 First then deceit. [Counsel for the plaintiff] relied upon part of the classic speech of Lord Herschell in
Derry v Peek (1889) 14 App Cas 337 at 375–376, [1886–90] All ER Rep 1 at 22–23:

The ground upon which an alleged belief was founded is a most important test of its reality. I can conceive
many cases where the fact that an alleged belief was destitute of all reasonable foundation would suffice of
itself to convince the Court that it was not really entertained, and that the representation was a fraudulent
one. So, too . . . 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, and that he was just as
fraudulent as if he had knowingly stated that which was false.

[Counsel] relied upon the speech of Lord Blackburn in Brownlie v Campbell (1880) 5 App Cas 925 at 950:

I quite agree in this, that whenever a man in order to induce a contract says that which is in his knowledge
untrue with the intention to mislead the other side, and induce them to enter into the contract, that is down-
right fraud; in plain English, and Scotch also, it is a downright lie told to induce the other party to act upon it,
and it should of course be treated as such. I further agree in this: that when a statement or representation has
been made in the bona fide belief that it is true, and the party who has made it afterwards comes to find out
that it is untrue, and discovers what he should have said, he can no longer honestly keep up that silence on the
subject after that has come to his knowledge, thereby allowing the other party to go on, and still more, induc-
ing him to go on, upon a statement which was honestly made at the time when it was made, but which he has
not now retracted when he has become aware that it can be no longer honestly persevered in. That would be
fraud too, I should say, as at present advised . . .

In my judgment [counsel for the plaintiff’s] argument is wrong in law. He takes the reference to ‘reckless-
ness’ out of context—divorcing it from the heart of the tort of deceit, namely dishonesty. One only has to
read earlier in the speech of Lord Herschell [in Derry v Peek] to see that this is so:
 14 Misrepresentation
. . . there has always been present, and regarded as an essential element, that the deception was wilful either
because the untrue statement was known to be untrue, or because belief in it was asserted without such belief
existing . . . I cannot assent to the doctrine that a false statement made through carelessness, and which ought
to have been known to be untrue, of itself renders the person who makes it liable to an action for deceit.’
(See (1889) 14 App Cas 337 at 369, 373, [1886–90] All ER Rep 1 at 19, 21.)

Findings of fact in relation to fraudulent misrepresentation

So what I have to decide is whether Mr Simpson or Mr Lloyd deliberately set out to mislead Mr Puri,
not by a deliberate untruth (for that is not alleged) but by its equivalent, such recklessness as to amount
to a disregard for the truth. I have no difficulty in acquitting these witnesses of any such intent. I must
explain why.
So far as pattern book expenditure deferrals in the October management accounts are concerned,
I accept Mr Simpson’s evidence that he did not know of these right up until the time of the contract. Nor
did Mr Lloyd. By the time of the contract both thought that until November pattern book expenditure
was written off as it was incurred. No one had ever suggested that the management accounts sometimes
had ad hoc deferrals for ‘smoothing’ purposes.
In relation to the Allied problem . . . it is clear that by the time of the contract the representation had
been defined as set out in the disclosure letter, namely £120,000 charged to the September and October
accounts.
What does matter is whether Mr Simpson was so reckless in the estimate that he should be
regarded as fraudulent. He says he was given the figure of £120,000 by Mr Hogarth as a ‘fag packet’
calculation at a Witter board meeting on 21 November. Mr Hogarth has no recollection whatever of
the cost of the Allied problem being discussed. There appears never to have been a detailed estimate
of the figure being worked out. Now I accept Mr Simpson’s evidence that he got a rough estimate
from Mr Hogarth. It was obviously important. So I think he was negligent not to get a proper esti- 631
mate, or to tell Mr Puri that he had not got a proper estimate. But it was not dishonest of him to give
that rough estimate to Mr Puri. He believed it, but knowing there was no proper check, his belief was
not reasonable.

NOTES
1. This case clarified the distinction between recklessness and negligence. In order to be reckless, the
statement maker would need to be in a position in which he does not know whether a statement is true or
false, but takes the risk and asserts that it is true. There is no such dishonesty involved in a statement that
is negligent, since the statement maker honestly believes that his statement is true, even if he ought to have
known that it was false and was careless in not checking first.
2. Since an action based on fraudulent misrepresentation is in the tort of deceit, the measure of damages
is tortious.
3. The standard of proof in relation to an allegation of fraud is demanding, i.e. proof that at the time of the
representation the representor had no belief in its truth. In Smith New Court v Scrimgeour Vickers [1997] AC
254, at p. 274, Lord Steyn explained that:

while as a matter of law fraud only has to be proved to the civil standard, proof to that standard must necessarily take into
account the consideration that the more serious the allegation is, the greater the proof is needed to persuade a court that it
can be satisfied that the allegation is established. In other words, the very gravity of an allegation of fraud is a circumstance
which has to be weighed in the scale in deciding as to the balance of probabilities.

4. It may be necessary to plead fraud in order, for example, to seek to increase a damages award which
would otherwise be affected by a limitation of liability applying to non-fraudulent misrepresentations
(discussed at page 668, section 4B), e.g. Ticket2final OU v Wigan Athletic AFC Ltd [2015] EWHC 61b (Ch).
 i) Measure of damages for fraudulent misrepresentation
14 Misrepresentation

All direct loss flowing from the transaction

The proper measure of damages for deceit was held by the Court of Appeal in Doyle v Olby
(Ironmongers) Ltd [1969] 2 QB 158 to be ‘all the damage directly flowing from the tortious act
of fraudulent inducement which was not rendered too remote by the plaintiff’s own conduct,
whether or not the defendant could have foreseen the loss’.
Doyle v Olby was approved and applied in the following case.

Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd
[1997] AC 254 (HL)

In July 1989, the plaintiff company had purchased a parcel of shares in FIS Inc., at the price of
82.25p per share, as a result of representations by the vendors of the shares that there were two
other bidders involved. In fact, this was not the case. However, before this was discovered, it was
announced in the September that FIS Inc. had been the victim of a major fraud by a third party.
This resulted in a considerable fall in the share price and the plaintiff was eventually able to sell
the shares for only 30–40p per share. The plaintiff sought damages for fraudulent misrepresenta-
tion. The trial judge assessed the damages as being the difference between the price paid and the
real value of the shares at the date of the sale, taking into account the then undiscovered fraud,
i.e. the difference between 82.25p and 44p. This resulted in a damages award of £10.7 million. On
appeal, the Court of Appeal reversed this award, and held that the correct measure was the differ-
ence between the price paid and the market value at the date of the sale, i.e. the difference between
82.25p and 78p. The damages award was therefore reduced to just under £1.2 million.
Held (allowing the appeal): The victim of fraud was entitled to compensation for all actual loss,
632 including consequential loss, which flowed directly from the transaction irrespective of whether
it was foreseeable loss. Although the normal method of calculating such loss would be the differ-
ence between the price paid and the real value of the shares as at the date of the share purchase,
on these facts that would not compensate the plaintiff for loss suffered. The fraudulent misrepre-
sentation had led the plaintiff to pay too high a price for the shares and, given that the shares had
been purchased with a view to retaining them and selling later, the plaintiff was locked into the
transaction. Therefore the damages award was the difference between 82.25p and 44p.

LORD BROWNE-WILKINSON: Doyle v Olby (Ironmongers) Ltd establishes four points. First, that the
measure of damages where a contract has been induced by fraudulent misrepresentation is reparation
for all the actual damage directly flowing from (i.e. caused by) entering into the transaction. Second, that
in assessing such damages it is not an inflexible rule that the plaintiff must bring into account the value
as at the transaction date of the asset acquired: although the point is not adverted to in the judgments,
the basis on which the damages were computed shows that there can be circumstances in which it is
proper to require a defendant only to bring into account the actual proceeds of the asset provided that
he has acted reasonably in retaining it. Third, damages for deceit are not limited to those which were
reasonably foreseeable. Fourth, the damages recoverable can include consequential loss suffered by
reason of having acquired the asset.
In my judgment Doyle v Olby (Ironmongers) Ltd was rightly decided on all these points. It is true,
as to the second point, that there were not apparently cited to the Court of Appeal the 19th century
cases which established the ‘inflexible rule’ that the asset acquired has to be valued as at the transac-
tion date . . . But in my judgment the decision on this second point is correct. The old ‘inflexible rule’ is
 14 Misrepresentation
both wrong in principle and capable of producing manifest injustice. The defendant’s fraud may have
an effect continuing after the transaction is completed, e.g. if a sale of gold shares was induced by a
misrepresentation that a new find had been made which was to be announced later it would plainly be
wrong to assume that the plaintiff should have sold the shares before the announcement should have
been made. Again, the acquisition of the asset may, as in Doyle v Olby (Ironmongers) Ltd itself, lock the
purchaser into continuing to hold the asset until he can effect a resale. To say that in such a case the
plaintiff has obtained the value of the asset as at the transaction date and must therefore bring it into
account flies in the face of common sense: how can he be said to have received such a value if, despite
his efforts, he has been unable to sell.
Doyle v Olby (Ironmongers) Ltd has subsequently been approved and followed by the Court of Appeal
in East v Maurer [1991] 1 WLR 461 and Downs v Chappell [1997] 1 WLR 426. In both cases the plaintiffs had
purchased a business as a going concern in reliance on the defendant’s fraudulent misrepresentation. In
each case after discovery of the fraud they sold the business at a loss and recovered by way of damages
the difference between the original purchase price and the price eventually realised on a resale, i.e. the
old date of transaction rule was not applied. In Banque Bruxelles Lambert SA v Eagle Star Insurance Co.
Ltd [1997] AC 191 your Lordships treated the measure of damages for fraud as being in a special category
regulated by the principles of Doyle v Olby (Ironmongers) Ltd.
. . . In many cases, even in deceit, it will be appropriate to value the asset acquired as at the transac-
tion date if that truly reflects the value of what the plaintiff has obtained. Thus, if the asset acquired is a
readily marketable asset and there is no special feature (such as a continuing misrepresentation or the
purchaser being locked into a business that he has acquired) the transaction date rule may well produce
a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him,
freed from any continuing adverse impact of the defendant’s wrongful act. The transaction date rule has
one manifest advantage, namely that it avoids any question of causation. One of the difficulties of either 633
valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is
that difficult questions of causation are bound to arise. In the period between the transaction date and
the date of valuation or resale other factors will have influenced the value or resale price of the asset.
It was the desire to avoid these difficulties of causation which led to the adoption of the transaction
date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresenta-
tion there are likely to be many cases where the general rule has to be departed from in order to give
adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to
influence the conduct of the plaintiff after the transaction is complete or where the result of the transac-
tion induced by fraud is to lock the plaintiff into continuing to hold the asset acquired.
Finally, it must be emphasised that the principle in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, strict
though it is, still requires the plaintiff to mitigate his loss once he is aware of the fraud. So long as he is not
aware of the fraud, no question of a duty to mitigate can arise. But once the fraud has been discovered, if
the plaintiff is not locked into the asset and the fraud has ceased to operate on his mind, a failure to take
reasonable steps to sell the property may constitute a failure to mitigate his loss requiring him to bring
the value of the property into account as at the date when he discovered the fraud or shortly thereafter.
In sum, in my judgment the following principles apply in assessing the damages payable where the
plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is
bound to make reparation for all the damage directly flowing from the transaction; (2) although such
damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in
assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him,
but he must give credit for any benefits which he has received as a result of the transaction; (4) as a
 14 Misrepresentation

general rule, the benefits received by him include the market value of the property acquired as at the
date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him
obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general
rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the
misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce
the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason
of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential
losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once
he has discovered the fraud . . .
How then do those principles apply in the present case? First, there is no doubt that the total loss
incurred by Smith was caused by the Roberts fraud, unless it can be said that Smith’s own decision to
retain the shares until after the revelation of the Guerin fraud was a causative factor. The Guerin fraud
had been committed before Smith acquired the shares on 21 July 1989. Unknown to everybody, on that
date the shares were already pregnant with disaster. Accordingly when, pursuant to the Roberts fraud,
Smith acquired the Ferranti shares they were induced to purchase a flawed asset. This is not a case of the
difficult kind that can arise where the depreciation in the asset acquired between the date of acquisition
and the date of realisation may be due to factors affecting the market which have occurred after the date
of the defendant’s fraud. In the present case the loss was incurred by reason of the purchasing of the
shares which were pregnant with the loss and that purchase was caused by the Roberts fraud.
Can it then be said that the loss flowed not from Smith’s acquisition but from Smith’s decision to retain
the shares? In my judgment it cannot. The judge found that the shares were acquired as a market-making
risk and at a price which Smith would only have paid for an acquisition as a market-making risk. As such,
Smith could not dispose of them on 21 July 1989 otherwise than at a loss. Smith were in a special sense
634 locked into the shares having bought them for a purpose and at a price which precluded them from
sensibly disposing of them. It was not alleged or found that Smith acted unreasonably in retaining the
shares for as long as they did or in realising them in the manner in which they did.
In the circumstances, it would not in my judgment compensate Smith for the actual loss they have
suffered (i.e. the difference between the contract price and the resale price eventually realised) if Smith
were required to give credit for the shares having a value of 78p on 21 July 1989. Having acquired the
shares at 82¼p for stock Smith could not commercially have sold on that date at 78p. It is not realistic
to treat Smith as having received shares worth 78p each when in fact, in real life, they could not com-
mercially have sold or realised the shares at that price on that date. In my judgment, this is one of those
cases where to give full reparation to Smith, the benefit which Smith ought to bring into account to be
set against its loss for the total purchase price paid should be the actual resale price achieved by Smith
when eventually the shares were sold.

NOTES
1. Lord Mustill suggested, at p. 269F–G, that, ‘in the future when faced with situations such as the present,
courts would do well to be guided by the seven propositions set out by . . . Lord Browne-Wilkinson’.
2. Lord Steyn explained the policy rationale underlying the principles determining remedies for fraudu-
lent misrepresentation (deceit), at pp. 279G–280C:

Such a policy of imposing more stringent remedies on an intentional wrongdoer serves two purposes. First it serves a
deterrent purpose in discouraging fraud . . . And in the battle against fraud civil remedies can play a useful and beneficial
role. Secondly, as between the fraudster and the innocent party, moral considerations militate in favour of requiring the
fraudster to bear the risk of misfortunes directly caused by his fraud. I make no apology for referring to moral consid-
erations. The law and morality are inextricably interwoven. To a large extent the law is simply formulated and declared
 14 Misrepresentation
morality. And, as Oliver Wendell Holmes, The Common Law (1968) p 106 observed, the very notion of deceit with its over-
tones of wickedness is drawn from the moral world.

3. Although the remoteness rules in a claim for deceit and negligent misrepresentation under s. 2(1) of the
Misrepresentation Act 1967 allow recovery of all direct losses—see, e.g., Naughton v O’Callaghan [1990] 3 All
ER 191 (see page XXX, section 3Bii), in which Waller J allowed recovery under s. 2(1) of the difference between
the price paid and the value of the horse at the time that the misrepresentation was discovered, on the basis
that retaining the horse in order to train it was precisely the action to be expected in the circumstances—in
Smith New Court, Lord Steyn made one distinction clear by stating, at p. 283C, that:

[I]n an action for deceit the plaintiff is entitled to recover all his loss directly flowing from the fraudulently induced transac-
tion. In the case of a negligent misrepresentation the rule is narrower: the recoverable loss does not extend beyond the
consequences flowing from the negligent misrepresentation (see Banque Bruxelles Lambert SA v Eagle Star Insurance Co.
Ltd [1995] 2 All ER 769, [1995] QB 375). [Emphasis added]

This may prove significant where there are a number of misrepresentations inducing the making of the
contract.
This distinction was also discussed at first instance in Man Nutfahrzeuge AG v Freightliner [2005] EWHC
2347 (Comm).

MOORE-BICK LJ: 193 . . . Since the agreement expressly recognises that MN relied on the representations in connec-
tion with the purchase of ERF, I think it must be accepted that they played some part in inducing it to enter into the
Share Purchase Agreement. It does not necessarily follow, however, that the indemnity provided by section 12 extends to
losses of every kind flowing from entering into the agreement. In South Australia Asset Management Corporation v York
Montague Ltd [1997] A.C. 191 at page 214 Lord Hoffmann suggested that, if a person who is under a duty to take care in
providing information on which he knows that another will decide upon a course of action is negligent and as a result pro-
vides inaccurate information, he is not generally regarded as responsible for all the consequences of that course of action,
but only for those consequences attributable to the fact that the information he provided was wrong. The reason, he sug-
gested, is because it is necessary to find a sufficient causal connection between the breach of duty and the loss in question
before it is possible to regard the maker of the statement as responsible for it. Although these comments were made in the
context of determining the scope of a duty of care at common law, they do in my view reflect the response of a reasonable
person to the provision of inaccurate information under a contract of this kind and are therefore factors that are properly 635
to be taken into account when construing the indemnity provided by section 12.1. The critical distinction for this purpose
is, as Lord Steyn later described it in Smith New Court Securities Ltd v Citibank N.A. [1997] A.C. 254 at page 283C, between
losses flowing from the misrepresentation and losses flowing from the transaction.
194 This distinction was emphasised by [counsel] when he submitted that it would be very odd if a minor, albeit mate-
rial, misrepresentation made honestly and without any want of due care were to expose Western Star to liability for any
losses suffered by MN as a result of entering into the Share Purchase Agreement. I agree and I find it difficult to accept
that that is what the parties really intended . . .
196 . . . In my view the parties clearly did intend to impose on Western Star an obligation to indemnify MN against all
the costs and expenses arising out of the inaccuracy of any of the representations, including losses incurred as a result of
taking steps in reliance on their accuracy, but not against the entire consequences of entering into the agreement insofar
as they could not be said to flow from the inaccuracy of the particular representation.
197 Accordingly, I am unable to accept [counsel’s] submission that MN is entitled to recover . . . the whole of the losses
it has suffered as a result of having entered into the Share Purchase Agreement. The indemnity available under section
12.1 is limited to the losses that flow from the inaccuracy of that particular representation, namely, the amounts that ERF
is liable to pay by way of arrears of VAT, penalty and expenses incurred in connection with the proceedings that have
since been brought by Customs & Excise.

See also the discussion of the significance of this distinction in Poole and Devenney [2007] JBL 269.
4. In Pankhania v Hackney London Borough Council [2004] EWHC 323 (Ch), [2004] 1 EGLR 135 (for the
facts, see page XXX, section 1Biii), Geoffrey Vos QC appeared to accept that, in principle, Smith New Court
could be applied to a s. 2(1) claim for damages because of the fiction of fraud (see page 653, section 3Bii).
However, on the facts, there was no continuing misrepresentation or lock-in, and the property could have
been sold at any time subject to the NCP tenancy of the car park. Thus, the Smith New Court measure was
inapplicable on the facts. The judge therefore applied ‘the normal measure’ of damages (i.e. the difference
between the sum paid and the actual value of the property—a figure of £500,000). He accepted that mitiga-
tion applied to claims for fraudulent misrepresentation and to damages claims under s. 2(1), but considered
that the claimant had not acted unreasonably in seeking to obtain possession, so that the damages would not
be reduced to take account of what had happened to the property in the meantime.
 ii)Can loss of profits be recovered if fraudulent misrepresentation induced
14 Misrepresentation

the purchase of a business? If so, how will those lost profits be calculated?

East v Maurer
[1991] 1 WLR 461 (CA)

In 1979, the plaintiffs bought one of the two hair salon businesses in Bournemouth, which
belonged to the defendant for £20,000, and were induced to do so in part by a representation by
the defendant that he did not intend to work in the other salon except in emergencies. In fact, he
continued to work full-time at the other salon, and this had such an effect on the plaintiffs’ busi-
ness that it was never profitable. They eventually sold it in 1989 for £7,500 and brought an action
alleging fraudulent misrepresentation. The trial judge assessed damages so as to include an award
of £15,000 for loss of profits, which was based on the profit that the defendant would have made in
the salon if he had not sold it, less a deduction of 25 per cent for the fact that the plaintiffs were not
as experienced. The defendant appealed against this assessment of loss of profits.
Held: Relying on Doyle v Olby, loss of profits, although normally claimed in contract as part of
lost expectation, could be recovered in an action for deceit on the basis that it was actual damage
directly flowing from the misrepresentation. However, this loss of profits had to be calculated using
tortious principles so as to compensate the plaintiffs for the profit that they might have made had
the misrepresentation not been made (i.e. the profit that they might have expected to make in
another hairdressing business bought for a similar sum), rather than on the contractual basis of the
profits that this business might have made had the representation been true and had the defendant
not worked in the other salon. Consequently, the award for loss of profits was reduced to £10,000.

BELDAM LJ: [Counsel] for the defendants, submits that there is a difference in the manner in which dam-
636 ages are assessed for breach of contract and for the tort of deceit. He says that the authorities show that
no damages at all are recoverable for loss of profits in an action of deceit. Although there is no express
decision which states that to be the case, in no case which has dealt with the proper measure of damage
in an action of deceit has there been an award for loss of profits, although one would have expected to
see one . . . Finally, he submits that even if damages for loss of profit are recoverable the judge assessed
the figure at too high a level, and on an incorrect basis.
That the measure of damages for the tort of deceit and for breach of contract are different no longer
needs support from authority. Damages for deceit are not awarded on the basis that the plaintiff is to
be put in as good a position as if the statement had been true; they are to be assessed on a basis which
would compensate the plaintiff for all the loss he has suffered, so far as money can do it.
This was confirmed in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, to which both the judge and this
court were referred and was a case in which the facts were similar to those of the present case.
. . . [I]t seems to me clear that there is no basis upon which one could say that loss of profits incurred
whilst waiting for an opportunity to realise to its best advantage a business which has been purchased,
are irrecoverable. It is conceded that losses made in the course of running the business of a company,
are recoverable. If in fact the plaintiffs lost the profit which they could reasonably have expected from
running a business in the area of a kind similar to the business in this case, I can see no reason why those
do not fall within the words of Lord Atkin in Clark v Urquhart [1930] AC 28, ‘actual damage directly flow-
ing from the fraudulent inducement.’
So I consider that on the facts found by the judge in the present case, the plaintiffs did establish that
they had suffered a loss due to the defendants’ misrepresentation which arose from their inability to
earn the profits in the business which they hoped to buy in the Bournemouth area . . .
 14 Misrepresentation
However, I am not satisfied that in arriving at the figure of £15,000 the judge approached the quan-
tification of those damages on the correct basis. It seems to me that he was inclined to base his award
on an assessment of the profits which the business actually bought by the plaintiffs might have made if
the statement made by the first defendant had amounted to a warranty that customers would continue
to patronise the salon in Exeter Road; further that he left out of account a number of significant factors.
What he did was to found his award on an evaluation which he made of the profits of the business at
Exeter Road made by the first defendant in the year preceding the purchase of the business by the plain-
tiffs. Basing himself on figures which had been given to him by an accountant, and making an allowance
for inflation he arrived at a figure for the profits which might have been made if the first defendant had
continued to run the business at Exeter Road during the 3¼ years. He then made an allowance only for
the fact that the second plaintiff’s experience in hair styling and hairdressing was not as extensive or
as cosmopolitan as that of the first defendant. Thus he based his award on an assessment of what the
profits would have been, less a deduction of 25 per cent for the second plaintiff’s lack of experience.
It seems to me that he should have begun by considering the kind of profit which the second plaintiff
might have made if the representation which induced her to buy the business at Exeter Road had not
been made, and that involved considering the kind of profits which she might have expected to make in
another hairdressing business bought for a similar sum . . .
The judge . . . had two clear starting points. First, that any person investing £20,000 in a business would
expect a greater return than if the sum was left safely in the bank or in a building society earning interest,
and a reasonable figure for that at the rates then prevailing would have been at least £6,000. Secondly,
that the salary of a hairdresser’s assistant in the usual kind of establishment was at this time £40 per week
and that the assistant could expect tips in addition. That would produce a figure of over £7,000, but the
proprietor of a salon would clearly expect to earn more, having risked his money in the business. It seems
to me that those are valid points from which to start to consider what would be a reasonable sum to award 637
for loss of profits of a business of this kind. As was pointed out by Winn LJ in Doyle v Olby (Ironmongers) Ltd
[1969] 2 QB 158, 169, this is not a question which can be considered on a mathematical basis. It has to be
considered essentially in the round, making what he described as a ‘jury assessment’.
Taking all the factors into account, I think that the judge’s figure was too high; for my part I would have
awarded a figure of £10,000 for that head of damage, and to this extent I would allow the appeal.

NOTES
1. This is an example of a statement of intention amounting to a statement of fact because it was found
as a fact that the defendant did not actually have the expressed intention when he made his statement. See
Edgington v Fitzmaurice (1885) 29 Ch D 459 (see page 618, section 1Bii).
2. See Marks (1992) 108 LQR 386.
3. Although, in East v Maurer, the Court of Appeal was prepared to assess profits based upon a hypotheti-
cal identical salon without evidence that any such salon existed, in Davis v Churchward (unreported, 6 May
1993)—noted by Chandler (1994) 110 LQR 35—the Court of Appeal looked at actual similar public houses that
could have been purchased for the same amount and held that, because the weekly turnover on these public
houses would have been the same as the actual weekly turnover on the public house purchased (£1,500), there
could be no recovery for lost profits. In particular, unlike Beldam LJ in East v Maurer, Nourse LJ refused to take
account of the profit that would have been made had the purchase money instead been invested in a building
society, on the basis that this was hypothetical, since it had been found as a fact that another public house
would have been purchased.
Nevertheless, this is an example of a contract induced by a fraudulent misrepresentation of weekly turno-
ver, and it must be asked whether it is likely that the plaintiff would indeed have purchased a similar public
house knowing that the actual turnover of that public house was only £1,500.
In Dadourian Group International Inc. v Simms (Damages) [2006] EWHC 2973 (Ch), the judge refused
to accept a claim for loss of profits resulting from being deprived from entering into a sale agreement with
 ‘some other purchaser’, considering that there had to be evidence of another purchaser in the market.
14 Misrepresentation

Even if this evidence were to exist, the claim for loss of profits following a fraudulent misrepresentation
would also need to take account of the duty to mitigate that loss. (The decision was affirmed by the Court
of Appeal—[2009] EWCA Civ 169, [2009] 1 Lloyd’s Rep 601—although on other grounds, since this point
was not appealed.)
4. By comparison, in both 4 Eng Ltd v Harper [2008] EWHC 915 (Ch), [2009] Ch 91, and Parabola
Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486, [2011] QB 477, lost profits were held to be recover-
able in a claim in deceit despite an inability to identify a specific alternative (and profitable) contract that
would have been entered into had it not been for the fraudulent misrepresentation.
5. Loss of profits can be recovered on the Smith New Court basis, down to the date of judgment.
In Parabola Investments, the Court of Appeal agreed with the trial judge that a claim could be made in
deceit by an investment company not only for loss of the capital investment induced by the fraudulent mis-
representation and the profits that could have been made in relation to this lost investment, but also for the
lost profits that could have been made had the fraud not occurred and had the investment company made an
alternative investment. There was no principled reason why the discovery of the fraud should be the cut-off
point for such losses, so that the company could recover for the profits lost on investments right down to the
date of the trial. The Court of Appeal accepted that it was conducting an entirely hypothetical exercise and
that it could only make its best attempt to evaluate the chances of particular alternative investments being
made or being profitable given that the losses are entirely speculative.
However, if this is applied by analogy in the context of damages under s. 2(1) of the Misrepresentation Act
1967 (fiction of fraud—see page 653, section 3Bii), it would be a startling conclusion.
6. In Banks v Cox (Costs) [2002] EWHC 2166 (Ch), Mr and Mrs Banks had purchased a nursing home
for £250,000 as a result of a fraudulent misrepresentation—see also Banks v Cox (No. 2) (unreported, 21
December 2000) (see page 614, section 1Aiii, note 2)—taking a 50-year lease at a rental of £50,000 per annum.
The judge considered that they were locked into the business and would have to continue with it; the change
in the policy of social services meant that they were not in a position to cover their indebtedness. He therefore
awarded damages of £250,000 (the return of the price paid on the basis that no benefit had been received to
set off against this figure). In addition, he awarded £500,000 as compensation for the fact that the purchas-
ers were locked into the lease and had commitments to their bank relating to this loss-making business. The
judge also awarded loss of profits from the date of the contract to the date of judgment of £400,000. This figure
638 was calculated on the basis of the profit that Mr and Mrs Banks would have made if they had purchased a
comparable nursing home, discounted to take account of market conditions and what he referred to as ‘the
comparative lack of experience of the claimants’. The amount of the damages award was largely academic,
since the defendants were also in financial difficulty.

In 4 Eng Ltd v Harper [2008] EWHC 915 (Ch), [2009] Ch 91, damages were awarded in a claim in
deceit on a loss of a chance basis for the lost opportunity of entering into another transaction that
would have been profitable. The company purchased was worthless and there was another identi-
fied company that it was found the claimant would have sought to purchase. The acceptance of
the fact that this is a lost chance is welcome, since the requirements of proof for loss of a chance
should apply and hypothetical evaluations are a necessary part of determining recovery. It should
follow that the ‘chance’ is fixed as a percentage. The judge considered that there was a good chance
on these facts, assessed at 80 per cent, that the owners of the actual alternative company would
have agreed to sell to the claimant, and thus awarded damages as 80 per cent of the income and
capital gain arising from this alternative investment.

DAVID RICHARDS J: 43 The defendants accept that in principle damages for the loss of an alternative
purchase, if caused by the defendants’ fraudulent misrepresentation and the claimant’s reliance on it,
are recoverable in an action for deceit. The Court of Appeal so held in East v Maurer [1991] 1 WLR 461 . . .
In the Smith New Court case [1997] AC 254, 282, Lord Steyn observed that East v Maurer:

shows that an award based on the hypothetical profitable business in which the plaintiff would have engaged
but for deceit is permissible: it is classic consequential loss.
 14 Misrepresentation
44 The defendants make a number of submissions. First, they say that 4 Eng’s claim in this case involves
an impermissible attempt to rely on two distinct strands of authority: damages for loss directly caused to
the claimant and damages for a loss of chance. In my judgment, a combination of such claims involves no
error of principle. If the loss of the chance is damage directly caused by the defendants’ deceit, it is as much
within the scope of damages for deceit as payments or liabilities in fact made or incurred by the claimant or
as damages for the loss of profits in a hypothetical alternative business established on the balance of prob-
abilities as in East v Maurer [1991] 1 WLR 461. That decision predated the decision of the Court of Appeal
in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 by over four years. It does not seem to
me to be an objection that the loss is assessed as a loss of chance, not as a loss established on the balance
of probabilities. It is true that it does not previously appear to have been decided that damages for loss of a
chance are recoverable for deceit, but there is in my judgment no objection in principle. If damages for loss
of a chance are recoverable in negligence, why should they not also be recoverable in deceit?
45 Secondly, while accepting that damages for the profits that would have been earned in an alterna-
tive business are recoverable, the defendants submit that damages for a loss of capital profits, i e the
increase in the value of the alternative business between the date of assumed acquisition and the date of
its presumed disposal, which will be the date of trial if not earlier, are too remote and are not recoverable.
46 The forseeability of a head of loss is irrelevant in the award of damages for deceit, as the House of
Lords established in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC
254. A loss is too remote only if it is not in the eyes of the law directly caused by a defendant’s deceit. Once
it is accepted that the claimant would have purchased an alternative business, and is entitled to recover
damages for the loss of profits which would have been earned during the period of ownership, why should
the claimant not also recover for the loss of the capital profit in the rise of the value of the business? If the
claimant had not been induced by the defendants’ deceit to purchase their business, the claimant would
have purchased an alternative business from which it would have benefited in two ways: first, it would have 639
received profits from it while owning it and, secondly, it would have been able to sell the business at a profit
over the price it had paid for it. Both are losses suffered by it as a direct result of the defendants’ deceit.

iii)
Can the misrepresentee recover damages in deceit on the basis that he would
otherwise have entered into a more profitable contract on better terms?

Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd

[2001] QB 488 (CA)

The plaintiff company had agreed to purchase quotas of goods from the defendant and to dis-
tribute them in France. The defendant had fraudulently stated that the price list applicable
represented the lowest prices at which the defendant’s salesmen could sell the goods to trade cus-
tomers. In fact, other price lists were used for trade customers, and the evidence was that certain
trade customers had obtained big discounts on these prices. The plaintiff managed to resell the
goods purchased at a profit, but sought damages in the tort of deceit representing the difference
between the price paid for the goods and the price that probably could have been negotiated but
for the misrepresentation. The judge awarded such damages and the defendant appealed, arguing
that damages for deceit were limited to instances of loss-making transactions.
Held (upholding the judge’s assessment of damages): There was no absolute rule that the
transaction had to be loss making before damages for deceit could be recovered. If the plaintiff
could prove that a more favourable transaction would have been entered into with the defendant
but for the deceit, its loss of opportunity could be recovered on that basis.
 14 Misrepresentation

SIMON BROWN LJ:

Damages for deceit

[Counsel] for the defendants challenges the whole basis of this second head of claim. He argues that it is
an attempt to obtain by another route damages for loss of a bargain which are not recoverable for the
tort of deceit. Damages for deceit are only to compensate the person deceived for loss suffered. Here
the plaintiffs failed to prove any such loss . . . They can prove no more than that they would have made
a still greater profit had they entered into yet more favourable agreements, and that, submits [counsel]
is insufficient to sustain the claim . . .
[T]he judge [at first instance] concluded on the balance of probabilities that, but for Mr Dent’s deceit,
the plaintiffs could and would have entered into the same distribution agreements but on more favour-
able terms as to price, and that their loss was therefore the difference between the lower prices which
in those circumstances they would have paid and the prices actually paid . . . Having been referred
to a number of authorities, most notably Smith New Court Securities Ltd v Scrimgeour Vickers (Asset
Management) Ltd [1997] AC 254; East v Maurer [1991] 1 WLR 461 and Downs v Chappell [1997] 1 WLR 426,
the judge said:

. . . The result may be the same as a loss of bargain claim, but, as [counsel for the plaintiff] argued, that does not
mean that it is a loss of bargain claim. It is the best way of judging the loss, if any, which was caused directly to
the plaintiffs by being induced by the deceit to enter the agreements which they did . . . It establishes the loss,
if any, which the plaintiffs have suffered with a view to putting them in the position they would have been in
if no representations had been made . . .

[Counsel for the defendant] criticises the judge’s reasoning throughout that section of the judgment. It
is, he submits, contrary to principle to seek to reconstruct the deal which would have been reached but
640 for the deceit.
. . . This whole case, the defendants argue, is an attempt to create for the plaintiffs a contractual claim
to which they were never entitled. These to my mind are powerful arguments and I do not pretend to
have found the point an easy one.
In the Smith New Court case [1997] AC 254, 267 Lord Browne-Wilkinson, summarising the principles
applicable in assessing damages payable where the plaintiff has been induced by a fraudulent misrepre-
sentation to buy property, stated the first three as follows:

(1) the defendant is bound to make reparation for all the damage directly flowing from the transaction;
(2) although such damage need not have been foreseeable, it must have been directly caused by the transac-
tion; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by
him, but he must give credit for any benefits which he has received as a result of the transaction . . .

The difficulty in the present case, as it seems to me, is in deciding whether ‘all the damage (actual loss)
directly flowing from the transaction’ (Lord Browne-Wilkinson’s first principle . . . ) can encompass,
in a case like the present where the actual transaction entered into has been profitable rather than
loss-making, the loss occasioned through the party deceived having entered into that particular trans-
action rather than a different transaction which would have been yet more profitable. In submitting that
it cannot, [counsel] not surprisingly places considerable reliance on Lord Steyn’s statement [in Smith New
Court] [1997] AC 254, 283 that:

it is not necessary . . . after . . . ascertain[ing] the loss directly flowing from the victim having entered into the
transaction, to embark on a hypothetical reconstruction of what the parties would have agreed had the deceit
not occurred.
 14 Misrepresentation
Indeed this very statement, he submits, usefully contrasts ‘the loss directly flowing from . . . the transac-
tion’ with any idea of comparing one profitable transaction with another in order to find a loss in this
way. To do that, he submits, is also to offend against Lord Steyn’s first three propositions: it is to protect
the plaintiffs in respect of their positive interest rather than compensate them in respect of their nega-
tive interest, in this bargain; to create for them a contractual measure of damages. It comes to this: unless
and until the plaintiffs can show (which they cannot) that these distributorship agreements caused them
loss, they have no claim in tort. It is not sufficient for their purpose to show only that other distributor-
ship agreements would have given them greater profit.
It is helpful at this point to consider East v Maurer [1991] 1 WLR 461, the authority principally relied
upon by the judge below in carrying out the exercise he did . . .
Mustill LJ, at p. 468:

the best course in a case of this kind is to begin by comparing the position of the plaintiff as it would have
been if the act complained of had not taken place with the position of the plaintiff as it actually became.
This establishes the actual loss which the plaintiff has suffered and often helps to avoid the pitfalls of double
counting, omissions and impermissible awards of both a capital and an income element in respect of the same
loss . . . In the present case the act complained of is the making of the fraudulent representation, coupled with
the reliance placed upon it by the plaintiffs in concluding the bargain. If this had not happened the plaintiffs
would, on the judge’s findings, have . . . bought a new business in Bournemouth, albeit not the one in Exeter
Road . . . It is objected that the loss of profits is not properly recoverable because it is appropriate not to a
claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits
does not stem from the making of the contract but from the fact that the profit made was not what was antici-
pated. I should have thought this argument sound if the judge had included an item for loss of the Exeter Road
profits; but he has not done so. The loss of profits awarded relates to the hypothetical profitable business in
which the plaintiffs would have engaged but for buying the Exeter Road business, and the profits of the latter
are treated by the judge solely as some evidence of what the profits of the other business might have been . . .
641
[Counsel for the defendant] submits that East v Maurer [1991] 1 WLR 461 was a very different case from
the present and that the point established there and approved in the Smith New Court case [1997] AC 254
cannot avail the plaintiffs here. It is one thing to say that, in quantifying the undoubted losses resulting
from the plaintiffs’ tortiously induced purchase of the salon in Exeter Road, they could properly include
as consequential loss the profits they might reasonably have expected to make in another business
which they would, but for the defendant’s fraud, have purchased; quite another to say that, even had
Exeter Road proved profitable, they could have claimed in tort on the basis that, but for the fraud, it
would have been more profitable still.
The novelty of the present case lies in the plaintiffs having suffered no loss from the transaction save
only from having entered into that transaction rather than a still more profitable one. That distinguishes
this case from all the others we were shown. Is it, however, a distinction fatal to the plaintiffs’ success?
[Counsel for the plaintiff] submits not. His starting point is Lord Steyn’s sixth proposition in the Smith
New Court case [1997] AC 254, 282 with regard to ‘the overriding compensatory principle’:

The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was
made to him with his position as it became as a result of his reliance on the fraudulent statement.

The plaintiffs’ argument is quite straightforward. Before Mr Dent’s fraudulent statement, the plaintiffs
were anxious to become Sovereign’s exclusive distributors in France and were negotiating agreements,
and in particular prices and a price increase formula, to that end. In reliance on the fraudulent state-
ment they became locked into these long-term agreements and a commitment to pay prices and price
increases larger than would otherwise have been the case. The judge below did no more and no less
 14 Misrepresentation

than compensate them for having thereby worsened their position. This accorded with the overriding
principle.
In my judgment this argument is correct. The judge did not, be it noted, make the mistake of awarding
damages by reference to the contractual measure . . .
As for Lord Steyn’s statement [1997] AC 254, 283 that it is unnecessary ‘to embark on a hypotheti-
cal reconstruction of what the parties would have agreed had the deceit not occurred,’ this has to be
understood in the context of Hobhouse LJ’s ‘qualification’ in Downs v Chappell [1997] 1 WLR 426, 444,
which Lord Steyn was criticising. What Hobhouse LJ had done, by way of a ‘check’ on the conventional
measure, was ‘to compare the loss consequent upon entering into the transaction with what would
have been the position had the represented, or supposed, state of affairs actually existed.’ To reject that
exercise (a different exercise, be it noted, from that undertaken by the judge in the present case) was not
to reject the possibility that the ascertainment of loss in the first place might itself require a ‘hypothetical
reconstruction of what the parties would have agreed had the deceit not occurred.’ If, as was held in East
v Maurer [1991] 1 WLR 461 (a holding expressly approved by Lord Steyn [1997] AC 254, 282), consequen-
tial loss can be established and awarded by reference to ‘the hypothetical profitable business in which
the plaintiff would have engaged but for [the] deceit,’ why should that loss, to be recoverable, have to be
parasitic on some other, more direct, loss, and why should the alternative ‘hypothetical profitable busi-
ness’ have to be a business (or, as here, contract) notionally acquired from some third party?
True it is that in Downs v Chappell [1997] 1 WLR 426, 433 Hobhouse LJ, in a part of the judgment not
criticised in the Smith New Court case [1997] AC 254, said:

It was wrong both factually and legally for the judge to create the hypothesis that the second defendants could
and would have given the plaintiffs accurate figures so as to give them an accurate basis upon which to decide
whether to make a contract with Mr Chappell.
642 But that was in the context of establishing liability, not quantifying damage. True it is too that later in his
judgment, having referred to East v Maurer [1991] 1 WLR 461, Hobhouse LJ said [1997] 1 WLR 426, 441:

In general, it is irrelevant to inquire what the representee would have done if some different representation
had been made to him or what other transactions he might have entered into if he had not entered onto the
transaction in question. Such matters are irrelevant speculations . . .

That, however, was expressed to be ‘in general’ and, as I conclude, there will be particular cases, of which
this is one, where to give effect to the overriding compensatory rule it will be both possible on the facts,
and appropriate in law, to hypothesise. Not every hypothesis involves irrelevant speculation.
I have, in short, reached the conclusion that there is no absolute rule requiring the person deceived to
prove that the actual transaction into which he was induced to enter was itself loss making . . .
It will sometimes be possible, as it was here, to prove instead that a different and more favourable
transaction (either with the defendant or with some third party) would have been entered into but for
the fraud, and to measure and recover the plaintiffs’ loss on that basis . . .

NOTES
1. This decision is criticized in Poole and Devenney [2007] JBL 269.
2. There is a clear emphasis in the judgments on the need to achieve justice and some redress for the plain-
tiff, which had been ‘overcharged’. However, the effect of this decision is to include this loss (assuming that
it can be proved) as a direct loss flowing from the fraudulent misrepresentation under what Simon Brown
LJ refers to as ‘the overriding compensatory rule’. The tension arises because, at first sight, it appears to be
a loss of bargain (or contractual) claim, just as the loss of profits claim appeared to be contractual in East v
Maurer and similar difficulties arise in trying to assess damages based on hypotheticals. There is a fine line
between putting a person in the position in which he would have been had the misrepresentation not been
made and putting the person into the position in which he would have been had a true statement been made.

14 Misrepresentation
This dilemma is referred to in the judgment of Ward LJ, at pp. 512G–513C:
WARD LJ: I confess to have been worrying whether there is any meaningful difference between, on the one hand, being put
in the position one would have been in had one not been told a lie and, on the other hand, being put in the position one
would have been in had one been told the truth. I think the answer is to follow Lord Steyn’s approach to its logical conclusion
because if one is truly to compare the position of the plaintiff as it was before the fraudulent statement was made to him with
his position as it became as a result of his reliance on the fraudulent statement, then just before the fraudulent statement was
made the plaintiff was battling in what he believed to be honest negotiations to ascertain the defendant’s bottom line and he
was denied finding it because of the lies that were told to him. My other concern, reflecting [counsel’s] argument, was why, if
one cannot get damages for the loss of one’s bargain, should one be allowed to get damages for the loss of the bargain one
might have made. On reflection, I think the answer to this argument is that the loss of the bargain contemplated in breach of
warranty cases is the bargain to be made with third parties when selling on the goods whereas the bargain one might have
made if told the truth is the different bargain which might have been struck with the defendant. I am now satisfied that so
long as the hypothetical questions are asked and answered as the means of establishing value in the absence of a market or of
any other precise means of establishing that value, then the hypothetical approach, which is essentially what [the judge] was
adopting, is well justified by the authorities. On this basis I would uphold [the judge’s] assessment of damages.

3. In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), [2013] 1 CLC 662,
[2013] 1 All ER (Comm) 1321 (see also page 252, Chapter 6, section 4ii), Leggatt J considered that any losses
that might have been made on an alternative transaction ought also to be brought into account in this
process.

LEGGATT J:

Relevance of alternative transactions

209 This argument raises a question of principle: in assessing damages for fraudulent misrepresentation or under s. 2(1),
is it relevant to consider what, if any, other transaction the claimant would have entered into if the misrepresentation had
not been made? One approach would be to say that it is not. It might be said that where the claimant has been induced
to enter into a contract by misrepresentation the object of an award of damages is simply to restore the claimant to the
position before the contract was made: there is no warrant for going further and examining what the claimant would or
would not have done if it had not made the contract and then bringing into account in assessing damages the financial
consequences of such hypothetical alternative transactions. This approach finds support in a dictum of Hobhouse LJ in
Downs v Chappell [1996] CLC 1492 at 1504; [1997] 1 WLR 426 at 441:
643
In general, it is irrelevant to inquire what the representee would have done if some different representation had been
made to him or what other transactions he might have entered into if he had not entered into the transaction in ques-
tion. Such matters are irrelevant speculations.

...
212 . . . [T]here is a line of cases in which courts have inquired and taken account in assessing damages of what other
transaction the claimant would have entered into if no misrepresentation had been made.
[The judge then explained the decisions in East v Maurer, Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd, and 4 Eng
Ltd v Harper, and continued:]
216 In all these cases the hypothetical alternative transaction which the claimant would otherwise have entered into
was one which would have been profitable. Should account also be taken of a transaction which would probably have
resulted in a loss? Chitty on Contracts (31st edn) at para. 6–064 suggests not, citing an observation of Lord Steyn in Smith
New Court [1996] CLC 1958 at 1979; [1997] AC 254 at 283 that:

. . . it is not necessary for the judge to embark on a hypothetical reconstruction of what the parties would have agreed
had the deceit not occurred.

Similarly, Clerk & Lindsell on Torts (20th edn) at para. 18–45 states that:

where a defendant deceives the claimant into entering a business transaction, the claimant is entitled to recover the
loss he suffers as a result, without reference to the fact that he might otherwise have invested his money in some other
unprofitable way and lost it anyway.

The editors add in a footnote, however, that such an attitude is difficult to defend and that:

if the claimant can increase his recovery by showing he would have invested his money profitably, by parity of reason-
ing the defendant ought to be able to reduce his exposure by showing that, but for his deceit, the claimant would have
lost it in any case.

217 In my view such an attitude would be not merely difficult but impossible to defend. In circumstances where it
is established that the claimant can recover a profit that would have been obtained from entering into some other
 14 Misrepresentation

transaction, it must in principle be equally relevant to take account of any loss. Nor in my view does the case law justify
any different conclusion. In particular:

(1) The dictum of Hobhouse LJ in Downs v Chappell quoted above begins with the words ‘in general’. It cannot therefore
have been intended to state a rule of law—all the more so since it immediately follows a reference to East v Maurer
where the plaintiffs were awarded profits which they would have been made if they had entered into a different
transaction.
(2) The observation of Lord Steyn in Smith New Court quoted in Chitty is taken out of context. The hypothetical recon-
struction which Lord Steyn was disapproving was a reconstruction of the kind suggested separately by Hobhouse
LJ in Downs v Chappell of what the claimant would have done if the representation had been true; Lord Steyn’s
observation should not be interpreted as a statement that it is never relevant to consider what alternative transac-
tion would have been entered into if the representation had not been made—not least since Lord Steyn (at 1978;
282) specifically approved East v Maurer as showing that ‘an award based on the hypothetical profitable business
in which the plaintiff would have engaged but for deceit is permissible: it is classic consequential loss.’
(3) The statements of Hobhouse LJ in Downs v Chappell and of Lord Steyn in Smith New Court were both considered by
the Court of Appeal in Clef Aquitaine and explained by Simon Brown LJ in the way I have indicated above.
(4) There is no difference in principle between an alternative transaction which would have been more profitable and
one which would have been less profitable than the actual transaction such that it can be relevant to take account
of the former but not the latter.
(5) The evidential burden will be on the defendant, however, to show that if the misrepresentation had not been made
the claimant would have incurred a loss. In seeking to discharge this burden, the defendant (unlike the claimant)
does not have the benefit of the principle that if the financial outcome of the alternative transaction is uncertain the
court will make reasonable assumptions in its favour (for example by allowing damages to be calculated on a loss
of a chance basis) to assist in the proof of loss.
(6) Unless the defendant can demonstrate with a reasonable degree of certainty, therefore, both the fact that the
claimant would probably have suffered a loss from entering into an alternative transaction and the amount of
that loss, the damages will not be reduced on that account. In this respect there is a disparity, but a principled one,
between hypothetical transactions which would have made the claimant worse off and those which would have
made the claimant better off.
(7) Slough Estates [Slough Estates plc v Welwyn Hatfield District Council [1996] 2 PLR 50] and Naughton v O’Callaghan
[[1990] 3 All ER 191] are both consistent with this analysis. In those cases there was evidence which justified a very
general inference that the claimant would quite likely have suffered some loss if it had not entered into the con-
644 tract in question (by investing in another property development or buying another horse). But there was no way
of estimating with any certainty or precision what loss, if any, the claimant would have incurred from any such
transaction. As it was the defendant rather than the claimant who wished to rely on such a loss, that difficulty was
insuperable and meant that there was no quantifiable loss which could be taken into account.

Conclusions on right to damages for misrepresentation

218 I therefore consider that in this case it would in principle be open to ITC to show that, if the misrepresentations regard-
ing ITC’s legal right to manufacture and sell the Manchester United products had not been made and the agreement had
not been concluded, Yam Seng would nevertheless have entered into a similar contract at a later date and lost money.
However, in order to reduce the damages recoverable by Yam Seng on this basis, it would be necessary for ITC to quantify
a sum of money which the court can conclude with reasonable confidence that Yam Seng would have lost. That is not an
exercise which ITC has attempted to undertake, nor which I would be able to undertake.

Since it will be for the fraudulent misrepresentor to prove that ‘if the misrepresentation had not been made,
the claimant would have incurred a loss’ and the actual measure of that loss, this may make little practical, as
opposed to theoretical, difference. For example, in Naughton v O’Callaghan [1990] 3 All ER 191 (see page 656,
section 3Bii), the plaintiff might well have suffered some loss had he not entered into the contract in question,
but purchased another horse, but this was impossible to establish without the use of hypothetical assump-
tions and that will not suffice in this context. Equally, it is possible to envisage an argument that a claimant
might well have made a loss through the purchase of an alternative investment, but without knowing which
one, or entering into speculation, that would be equally impossible to establish.

iv) Mitigation of loss in a claim based on fraudulent misrepresentation

Downs v Chappell
[1997] 1 WLR 426 (CA)

In 1988, the plaintiffs were interested in purchasing a bookshop business owned by Chappell,
the first defendant. The sale particulars represented that, in 1987, the business had a turnover
of approximately £109,000 and a gross profit of £33,500. The plaintiffs asked the first defendant

14 Misrepresentation
for independent verification and, at the first defendant’s request, the second defendant, account-
ants, wrote to the plaintiffs broadly confirming these figures. The plaintiffs therefore purchased
the business for £120,000 considering that, on the basis of these figures and with a mortgage of
£60,000, they could still generate an adequate income. However, they later discovered that the
figures had been overstated and that the business would not generate sufficient income to cover
their costs. They therefore sought to sell it. Up until March 1990, the business was making a profit,
although it did not accord with the profit level that had been represented. In March 1990, the
plaintiffs refused two offers of £76,000 for the business, in the belief that they could get more if
they held out. However, they eventually sold the business for less than £60,000, and claimed dam-
ages in the tort of deceit against the first defendant and damages in negligence against the second
defendant. They also claimed an annual alleged loss of £5,000 profit by comparing the actual prof-
itability of the business with that represented.
Held: Since the plaintiffs had been induced by fraudulent and negligent misrepresentations
relating to profitability to purchase a business, the damages recoverable were their income and
capital losses to the date on which they discovered the misrepresentations and had the opportu-
nity to avoid further losses. However, they could not recover for income losses because they were
still trading at a profit up to March 1990. In addition, as far as the capital loss was concerned, they
could not recover the difference between the £120,000 price paid and the price at which they even-
tually sold the business. The capital loss was £44,000 (£120,000 less £76,000).

HOBHOUSE LJ [with whose judgment Butler-Sloss and Roch LJJ agreed]: It is not in dispute that it was
possible for the plaintiffs to sell out in the first quarter of 1990. If necessary they would have had to
abandon the business. Indeed, one or more of those expressing an interest in buying the shop and the
flat in the early part of 1990 were not doing so for the purpose of running a bookshop. Since the busi-
645
ness was unlikely to be capable of covering the cost of servicing its capital, it is not suggested that its
goodwill had then a significant market value. It follows that any losses which the plaintiffs suffered after
the spring of 1990 were not caused by the defendants’ torts but by the plaintiffs’ decision not to sell out
at that date for a figure of about £75,000. The only basis upon which the plaintiffs might have been able
to recover any later loss would have been that they had been reasonably but unsuccessfully attempting
to mitigate their loss further and had unhappily increased their loss: see McGregor on Damages 15th
ed. (1988), pp. 197–199, paras. 323–324. On the facts of this case the plaintiffs are unable to make such
a claim and have not sought to do so. They have argued that they did not act unreasonably in rejecting
the offers of £76,000 in March 1990. Even accepting that they acted reasonably, the fact remains that it
was their choice, freely made, and they cannot hold the defendants responsible if the choice has turned
out to have been commercially unwise. They were no longer acting under the influence of the defend-
ants’ representations. The causative effect of the defendants’ faults was exhausted; the plaintiffs’ right to
claim damages from them in respect of those faults had likewise crystallised. It is a matter of causation.
The correct finding of fact is that the plaintiffs suffered a loss of £44,000 as a result of entering into the
contract with Mr Chappell.

NOTES
1. This demonstrates the dangers of such voluntary action in trying to avoid the consequences of a pur-
chase induced by misrepresentation. The causal link with the defendants’ misrepresentations had ended. It
would therefore appear sensible to accept the first reasonable offer to purchase after discovering the misrep-
resentation or, in preference, seek to rescind (assuming this to be possible). In both Downs v Chappell and
 Smith New Court, there appears to have been no attempt to rescind. (In Smith New Court, an argument to
14 Misrepresentation

rescind after the sale of the shares was not pursued at the trial and, it is submitted, would not have succeeded
because it would not have been possible to return the shares.)
2. The trial judge had held that, although there were false statements made by the defendants, the plaintiffs
had not established on the balance of probabilities that they would not have purchased the business had the
true figures been quoted. However, not surprisingly, the Court of Appeal rejected this and held that an action-
able misrepresentation required only that the plaintiffs establish that the figures induced the transaction.
3. Hobhouse LJ stated that damages for fraudulent misrepresentation should not be greater than the loss that
would have been suffered ‘had the represented, or supposed, state of affair actually existed’. In other words, the
defendant should not be liable for loss that would have been suffered by the purchaser of the business even if the
representation had been true, e.g. a general fall in market price. It was therefore necessary to compare the loss
suffered with the hypothetical position had the representation, in fact, been true. However, Downs v Chappell was
overruled on this point by the House of Lords in Smith New Court [1997] AC 254. No such check is necessary.
4. In Standard Chartered Bank v Pakistan National Shipping Corporation [1999] 1 Lloyd’s Rep 747,
Toulson J held that the test of whether the plaintiff had acted reasonably in mitigation of loss in a claim based
on fraud was the same as in any tort or breach of contract action. The judge considered that if the loss could
reasonably have been avoided, it could not be regarded as having been caused by the misrepresentation. See
also the comment of Potter LJ, on appeal to the Court of Appeal—[2001] EWCA Civ 55, [2001] 1 All ER (Comm)
822, [41]—that, in the tort of deceit, the concepts of causation and mitigation are ‘two sides of the same coin’.

v)There is no defence of contributory negligence where the defendant’s

misrepresentation is fraudulent

Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2)

[2002] UKHL 43, [2003] 1 AC 959 (HL)

The seller, an English company, had contracted to ship a cargo to a Vietnamese buyer, with payment
to be made by a letter of credit issued by a Vietnamese bank (the issuing bank) and confirmed by
Standard Chartered Bank (SCB). This letter of credit required shipment to be made before 25 October
646 and required the documents to be presented before 10 November 1993. The cargo was not shipped
on time and, on 8 November, the shipowners and the managing director of the sellers had agreed
that documents with a false shipping date would be issued. SCB accepted these documents on 15
November and authorized payment, although it knew that the documents were presented after the
expiry of the credit. SCB then sought reimbursement from the issuing bank, falsely stating that the
documents had been presented before the expiry date of the credit. The issuing bank refused pay-
ment because of other discrepancies in the documents. SCB claimed damages for deceit against the
shipowners and managing director of the sellers based on the falsely dated documents. However,
they claimed that SCB had suffered loss partly as a result of its own deceit on the issuing bank. They
alleged that this constituted ‘fault’ within s. 4 of the Law Reform (Contributory Negligence) Act 1945,
so that damages were to be apportioned to take account of SCB’s ‘contributory negligence’.
Held: The defendants could not rely on the claimant’s contributory negligence as a defence to a
claim based on fraudulent misrepresentation. There had been no such defence available at com-
mon law and, since the 1945 Act had not been intended to alter the position on absolute defences
at common law, there was no such defence under that Act.

LORD HOFFMANN [with whose speech the other members of the House agreed]: 10. My Lords, I shall
consider first the defence of contributory negligence. The relevant provisions of the 1945 Act are sec-
tions 1(1) and the definition of ‘fault’ in section 4:

1(1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other
person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person
suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the
court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage . . .
 14 Misrepresentation
4 . . . ’fault’ means negligence, breach of statutory duty or other act or omission which gives rise to a liability
in tort or would, apart from this Act, give rise to a defence of contributory negligence.

11. In my opinion, the definition of ‘fault’ is divided into two limbs, one of which is applicable to defend-
ants and the other to plaintiffs. In the case of a defendant, fault means ‘negligence, breach of statutory
duty or other act or omission’ which gives rise to a liability in tort. In the case of a plaintiff, it means ‘neg-
ligence, breach of statutory duty or other act or omission’ which gives rise (at common law) to a defence
of contributory negligence . . .
12. It follows that conduct by a plaintiff cannot be ‘fault’ within the meaning of the Act unless it gives rise
to a defence of contributory negligence at common law. This appears to me in accordance with the purpose
of the Act, which was to relieve plaintiffs whose actions would previously have failed and not to reduce
the damages which previously would have been awarded against defendants. Section 1(1) makes this clear
when it says that ‘a claim in respect of that damage shall not be defeated by reason of the fault of the person
suffering the damage, but [instead] the damages recoverable in respect thereof shall be reduced . . .’
...
14. [T]he real question is whether the conduct of SCB would at common law be a defence to a claim in
deceit. Sir Anthony Evans said that the only rule supported by the authorities was that if someone makes a
false representation which was intended to be relied upon and the other party relies upon it, it is no answer
to a claim for rescission or damages that the claimant could with reasonable diligence have discovered that
the representation was untrue. Redgrave v Hurd (1881) 20 Ch D 1 is a well known illustration. That was not
the case here. SCB should not have paid even if they could not have discovered that the representation
about the bill of lading was untrue. But in my opinion there are other cases which can be explained only
on the basis of a wider rule. In Edgington v Fitzmaurice (1885) 29 Ch D 459 the plaintiff invested £1,500 in
debentures issued by a company formed to run a provision market in Regent Street. Five months later the
company was wound up and he lost nearly all his money. He sued the directors who had issued the pro- 647
spectus, alleging that they had fraudulently or recklessly represented that the debenture issue was to raise
money for the expansion of the company’s business (‘develop the arrangements . . . for the direct supply
of cheap fish from the coast’) when in fact it was to pay off pressing liabilities. The judge found the allega-
tion proved and that the representation played a part in inducing the plaintiff to take the debentures. But
another reason for his taking the debentures was that he thought, without any reasonable grounds, that
the debentures were secured upon the company’s land. Cotton LJ said, at p 481, that this did not matter:

It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if
he also relied on the misstatement in the prospectus, his loss none the less resulted from that misstatement.
It is not necessary to show that the misstatement was the sole cause of his acting as he did. If he acted on that
misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable.

Bowen and Fry LJJ gave judgments to the same effect.

15. This case seems to me to show that if a fraudulent representation is relied upon, in the sense that
the claimant would not have parted with his money if he had known it was false, it does not matter
that he also held some other negligent or irrational belief about another matter and, but for that belief,
would not have parted with his money either. The law simply ignores the other reasons why he paid. As
Lord Cross of Chelsea said in Barton v Armstrong [1976] AC 104,118–119:

If . . . Barton relied on the [fraudulent] misrepresentation Armstrong could not have defeated his claim to relief
by showing that there were other more weighty causes which contributed to his decision to execute the deed,
for in this field the court does not allow an examination into the relative importance of contributory causes.
‘Once make out that there has been anything like deception, and no contract resting in any degree on that
foundation can stand’: per Lord Cranworth LJ in Reynell v Sprye (1852) 1 De G M & G 660, 708.
 14 Misrepresentation

16. In Edgington v Fitzmaurice 29 Ch D 459 the defence was not that the plaintiff could have discovered
that the representation was false. It was that he was also induced by mistaken beliefs of his own, but for
which he would not have subscribed for the debentures. That is very like the present case. It is said here
that although SCB would not have paid if they had known the bill of lading to be falsely dated, they would
also not have paid if they had not mistakenly and negligently thought that they could obtain reimburse-
ment. In my opinion, the law takes no account of these other reasons for payment. This rule seems to
me based upon sound policy. It would not seem just that a fraudulent defendant’s liability should be
reduced on the grounds that, for whatever reason, the victim should not have made the payment which
the defendant successfully induced him to make.
17. As Sir Anthony Evans correctly pointed out, the rule in Redgrave v Hurd 20 Ch D 1 applies to both
innocent and fraudulent misrepresentations. The wider rule in Edgington v Fitzmaurice probably applies
only to fraudulent misrepresentations. In Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 Sir Donald
Nicholls V-C said that, in principle, a defence of contributory negligence should be available in a claim
for damages under section 2(1) of the Misrepresentation Act 1967. But, since the alleged contributory
negligence was that the plaintiff could with reasonable care have discovered that the representation was
untrue, the rule in Redgrave v Hurd prevented the conduct of the plaintiff from being treated as partly
responsible for the loss. This left open the possibility that, in a case of innocent representation, some
other kind of negligent causative conduct might be taken into account.
18. In the case of fraudulent misrepresentation, however, I agree with Mummery J in Alliance and
Leicester Building Society v Edgestop Ltd [1993] 1 WLR 1462 that there is no common law defence of con-
tributory negligence. (See also Carnwath J in Corporación Nacional del Cobre de Chile v Sogemin Metals
Ltd [1997] 1 WLR 1396 and Blackburn J in Nationwide Building Society v Thimbleby & Co [1999] Lloyd’s Rep
PN 359.) It follows that, in agreement with the majority in the Court of Appeal, I think that no apportion-
648 ment under the 1945 Act is possible.

B) Negligent misrepresentation
Negligent misrepresentation involves a statement made honestly, but without reasonable grounds
for the belief.

i) At common law

Hedley Byrne & Co. Ltd v Heller & Partners Ltd

[1964] AC 465 (HL)

Hedley Byrne, who were advertising agents, asked their bank to inquire as to the financial standing
of Easipower Ltd. Heller & Partners, who were Easipower’s bankers, replied ‘without responsibility’
that Easipower was ‘considered good for its ordinary business engagements’. Relying on this refer-
ence, Hedley Byrne booked advertising time for Easipower on terms under which they were person-
ally responsible for payment. Easipower went into liquidation and Hedley Byrne lost £17,000 on these
contracts. They brought an action against Heller & Partners for damages for negligence.
Held: Such a statement could give rise to an action for damages for financial loss in tort (there
being no contractual relationship between the parties concerned). This was because a duty of
care would be owed where there was a special relationship between the parties. However, on these
facts, that duty had been expressly excluded by the disclaimer of responsibility.

LORD MORRIS OF BORTH-Y-GEST: [I]rrespective of any contractual or fiduciary relationship and irre-
spective of any direct dealing, a duty may be owed by one person to another. It is said, however,
 14 Misrepresentation
that where careless (but not fraudulent) misstatements are in question there can be no liability in
the maker of them unless there is either some contractual or fiduciary relationship with a person
adversely affected by the making of them or unless, through the making of them, something is created
or circulated or some situation is created which is dangerous to life, limb or property. In logic I can
see no essential reason for distinguishing injury which is caused by a reliance upon words from injury
which is caused by a reliance upon the safety of the staging to a ship or by a reliance upon the safety
for use of the contents of a bottle of hair wash or a bottle of some consumable liquid. It seems to me,
therefore, that if A claims that he has suffered injury or loss as a result of acting upon some misstate-
ment made by B who is not in any contractual or fiduciary relationship with him, the inquiry that is
first raised is whether B owed any duty to A: if he did the further inquiry is raised as to the nature of
the duty. There may be circumstances under which the only duty owed by B to A is the duty of being
honest: there may be circumstances under which B owes to A the duty not only of being honest but
also a duty of taking reasonable care. The issue in the present case is whether the bank owed any duty
to Hedleys and if so what the duty was . . .
My Lords, I consider that it follows and that it should now be regarded as settled that if someone pos-
sessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of
another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given
by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in
which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his
ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows
his information or advice to be passed on to, another person who, as he knows or should know, will
place reliance upon it, then a duty of care will arise.

NOTE: Liability under Hedley Byrne v Heller turns on whether there was a special relationship between 649
the claimant and the defendant, and an ‘assumption of responsibility’ for a statement: Henderson v Merrett
Syndicates Ltd [1995] 2 AC 145. To establish the special relationship, first, the defendant must arguably either
have or profess to have some special skill in relation to the subject matter or, at the very least, must have taken
it upon himself to make representations, and secondly, it must have been reasonable for the claimant to rely
upon the defendant’s statement. As a third requirement, the defendant must either know that the claimant
will rely on the statement or it must be reasonably foreseeable that he will rely on it. Finally, the defend-
ant must have some knowledge of the type of transaction for which the information is required: Caparo
Industries plc v Dickman [1990] 2 AC 605.

Hedley Byrne v Heller can apply to pre-contractual statements where a contract finally resulted
between the parties.

Esso Petroleum Co. Ltd v Mardon

[1976] QB 801 (CA)

The facts of this case appear at page 207, Chapter 6, section 1C.

LORD DENNING MR:

Negligent misrepresentation

. . . [T] he question arises whether Esso are liable for negligent misstatement under the doctrine
of Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] AC 465. It has been suggested that Hedley
Byrne cannot be used so as to impose liability for negligent pre-contractual statements: and that,
in a pre-contract situation the remedy (at any rate before the Act of 1967) was only in warranty or
nothing . . .
 14 Misrepresentation

In arguing this point, [counsel for Esso] . . . submitted that when the negotiations between two parties
resulted in a contract between them, their rights and duties were governed by the law of contract and
not by the law of tort. There was, therefore, no place in their relationship for Hedley Byrne [1964] AC 465,
which was solely on liability in tort . . . [D]ecisions show that, in the case of a professional man, the duty
to use reasonable care arises not only in contract, but is also imposed by the law apart from contract,
and is therefore actionable in tort . . . A professional man may give advice under a contract for reward;
or without a contract, in pursuance of a voluntary assumption of responsibility, gratuitously without
reward. In either case he is under one and the same duty to use reasonable care: see Cassidy v Ministry of
Health [1951] 2 KB 343, 359–360. In the one case it is by reason of a term implied by law. In the other, it is
by reason of a duty imposed by law. For a breach of that duty he is liable in damages: and those damages
should be, and are, the same, whether he is sued in contract or in tort.
It follows that I cannot accept [counsel for Esso’s] proposition. It seems to me that Hedley Byrne & Co.
Ltd v Heller & Partners Ltd [1964] AC 465, properly understood, covers this particular proposition: if a
man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof
to another—be it advice, information or opinion—with the intention of inducing him to enter into a con-
tract with him, he is under a duty to use reasonable care to see that the representation is correct, and
that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading
information or expresses an erroneous opinion, and thereby induces the other side to enter into a con-
tract with him, he is liable in damages . . .
Applying this principle, it is plain that Esso professed to have—and did in fact have—special knowl-
edge or skill in estimating the throughput of a filling station. They made the representation—they
forecast a throughput of 200,000 gallons—intending to induce Mr Mardon to enter into a tenancy
on the faith of it. They made it negligently. It was a ‘fatal error.’ And thereby induced Mr Mardon to
650 enter into a contract of tenancy that was disastrous to him. For this misrepresentation they are liable
in damages.

NOTES
1. In a claim based on negligent misstatement, the claimant has the burden of proving the existence of the
duty of care.
2. It will be the only available claim where, as in Hedley Byrne v Heller itself, the misrepresentor is not
a party to the contract, or where no contract results following the negotiations in which the statement
was made.
3. Damages for negligent misstatement are tortious, in that the aim is to put the claimant into the position
in which he would have been had the misrepresentation not been made. In Esso v Mardon at pp. 820–1, Lord
Denning explained it as follows.

The measure of damages

Mr Mardon is not to be compensated here for ‘loss of a bargain.’ He was given no bargain that the throughput would
amount to 200,000 gallons a year. He is only to be compensated for having been induced to enter into a contract which
turned out to be disastrous for him. Whether it be called breach of warranty or negligent misrepresentation, its effect
was not to warrant the throughput, but only to induce him to enter the contract. So the damages in either case are to be
measured by the loss he suffered. Just as in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, 167 he can say: ‘ . . . I would not
have entered into this contract at all but for your representation. Owing to it, I have lost all the capital I put into it. I also
incurred a large overdraft. I have spent four years of my life in wasted endeavour without reward: and it will take me some
time to re-establish myself.’
For all such loss he is entitled to recover damages.

4. Recovery is not as wide in the tort of negligent misstatement when compared with the position for
fraudulent misrepresentation, since the claimant can recover only for loss that was reasonably foreseeable at
the time of the statement.