Misrepresentation in Law
CHAPTER EIGHT MISREPRESENTATION A misrepresentation is an untrue statement, which induces the other party to enter into the contract. A misrepresentation may be fraudulent, negligent misstatement, or wholly innocent. The applicable remedy depends on the nature of the misrepresentation. In order for a representation to amount to an actionable misrepresentation it must be: a)false; b)one of fact as oppose to intention, opinion, or law; c)The statement must be addressed to the party who claims to have been misled; )it must be the chief reason which induced the other party to enter the contract. If the representation that is being challenged satisfies these four requirements, then it is an actionable representation. Statement of Fact or Opinion A statement which is made to the other party that is false and induces him to enter into the contract, this is an actionable misrepresentation. The false statement must be one of fact and not of law because no one can misrepresent the law since everyone is presumed to know the law. A statement of opinion is not actionable per se as a misrepresentation because it is not a statement of fact. In Bisset v. Wilkinson, the respondent purchased from the appellant, two plots of land in New Zealand for the purpose of sheep farming. During the negotiations, the appellant told the respondent that, if the place was worked properly, it would carry two thousand sheep. The respondent, it was admitted, bought the place believing that it would carry two thousand sheep. As both parties were aware, the appellant had not and, so far as appeared, no other person had at anytime carried on sheep farming on the land. In an action for rescission for misrepresentation, Sim J. said: In ordinary circumstances, any statement made by any owner who has been occupying his own farm, as to its carrying capacity would be regarded as a statement of fact…. This, however, is not such a case … in these circumstances. The plaintiff were not justified in regarding anything said by the defendant as to the carrying capacity as being anything more than an expression of opinion on the subject. Their Lordships concurred in their view on the matter, and therefore held that the purchaser had no right to rescind the contract since an erroneous opinion stated by the party affirming the contract, though it has been relied upon and has induced the contract on the part of the party who seeks rescission, gives no title to relief unless fraud is established. The ratio decindendi of this decision is that the respondent had no previous or present knowledge of the capacity of the land, neither was he an expert in sheep farming?? So in the opinion of the Court the most he could have averred was a mere opinion. However, in certain circumstances, an opinion because it presupposes the possession of certain knowledge, may be an actionable misrepresentation. In Smith v Land and House Property Corporation, the vendor of an hotelier described it as let to a Mr. Frederick Fleck, a most desirable tenant. The tenant was in fact in arrears with his rent. It was held that the statement was not a mere expression of opinion because the vendor was impliedly stating that he has facts, which justifies his opinion. The court deemed the vendor to have knowledge of particular facts; therefore the ‘opinion’ was regarded as a misrepresentation of fact, which induced the other party to enter into the contract. The decision in Bisset’s case was followed in Esso Petroleum Co. Ltd. v. Mardon. Esso’s experienced representative told Mardon that Esso estimated the through-put of petrol on a certain site would reach 200,000 gallons in the third year of operation, and so persuaded Mardon to enter into a tenancy agreement in April 1963 for three years. Mardon did all that could be expected of him as tenant but the site was not good enough to achieve a through-put of more than 10,000 gallons. In July 1964 Mardon gave notice to quit, but Esso granted him a new tenancy at a reduced rent. Mardon continued to lose money and by August 1966 was unable to pay for petrol supplied. Esso claimed possession of the site and the money due. Mardon claimed damages in respect of the representation alleging that it amounted to 1) a warranty, 2) a negligent misrepresentation. On the matter Lord Denning M. R. said that Council for Esso retaliated by citing Bisset v. Wilkinson where the Privy Council said that a statement by a New Zealand farmer that an acre of land” would carry 2000 sheep was only an expression of opinion. He submitted that the forecast here of 200,000 gallons was an expression of opinion and not a statement of fact, and that it could not be interpreted as a warranty or promise. Lord Denning said that he would quite agree with Counsel for Esso that it was not a warranty – in this sense that it did not guarantee that the through-put would be 200,000 gallons. But one party, Esso, has special knowledge and skill. It was the yardstick by which they measure 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. His Lordship went on to show that Esso was in a much better position than Mr. Mardon and their statement of opinion presupposes that they have knowledge to support the opinion. This is very different to the circumstances in Bisset v. Wilkinson where the land had never been used as a sheep farm and both parties were equally able to form an opinion as to its carrying capacity. The Court, therefore, found that Esso was liable for damages for breach of warranty. Fact and Intention Where a representation merely expresses the intention of one party, under normal circumstances the intention, if it is not fulfilled, is not an actionable representation. However, in some circumstances an expression of intention may be considered a statement of fact. In Edgington v. Fitzmaurice, Bowen LJ said: “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. ” The facts in that case are: The directors of a company invited a loan from the Public and stated that the money would be used to improve the company’s building and to extend the business. The real intention of the directors was to use the money to pay off the company’s existing debts. Their statement of intention was held to be a statement of fact. Can Silence Amount to Misrepresentation? Generally silence is not misrepresentation. Each man must protect his own interest and exercise reasonable caution when entering a contract: Caveat emptor. However, the court may consider certain kinds of silence as misrepresentation. In With v O’Flanagon the defendant wanted to sell his medical practice. The negotiations began January 1 at which time the practice was worth ? 2000. 00 per year. However, the defendant fell ill and by May 1 when the contract of sale was signed, the practice was virtually worthless. It was held that the defendant’s silence in the situation amounted to a misrepresentation. Opportunity to Verify Representation Where the representee is given the opportunity to verify the representation made to him, he may or may not make use of the opportunity. If he chooses to act on the statements made by the representor and the statements turn out to be false he can sue but if he chooses to verify and confirm a statement, which is in fact false, he cannot sue the representor. In Redgrave v. Herd, a man was induced to buy a solicitor’s practice by a misstatement of its value. He was given the opportunity to inspect the books, but he did not. If he had checked the books, he would have found that the practice was over-valued. However, the Court held that the non-use of this opportunity did not vitiate his claim. The Privy Council in Senanayake v. Chenq followed this decision. However, when the representee carries out independent investigation to ascertain the accuracy of any statement made to him, though he did not find out the truth, he cannot claim to have been misled because then he would be relying on his own findings or that of his experts. In Atwood v. Small, a vendor offered to sell a mine and made exaggerated claims as to its capacity. The buyer appointed agents to investigate the mines. The agents reported wrongly that the claims were true. The contract of sale was then completed. It was held by the House of Lords that, the buyer’s subsequent action must fail because they have not relied on the vendor’s statement, but on their own independent investigations. Curtis v. Chemical Cleaners misrepresentation. Types of Misrepresentation Fraudulent Misrepresentation. Fraud was defined by Lord Herschel in Derry v. Peek as meaning that the representation made is a false representation: 1) Knowingly or 2) Without belief in its truth or 3) Recklessly, careless whether it is true or false. Fraud must be strictly proven and the burden of proof is high: It requires evidence of actual dishonesty. Negligent Misrepresentation/misstatement. Liability in damages for negligent misrepresentation was created by the decision in Hedley Byrne & Co Ltd. v. Heller & Partner, if there is a special relationship and that the defendant was a skilled professional person acting in the course of his business upon whose advice it is reasonable for the plaintiff to rely. Section 2(1) of the Misrepresentation Ac, 1967, codified this principle. The defendant can escape liability on the section if he can show that he had reasonable grounds for the belief and that he held those beliefs up to the time the contract was made that the facts represented were true. The burden of proof is on the representor. See the judgment of Lord Denning in Esso Petroleum v. Mardon. Seeing that the S. 2 (1) supersedes the Hedley Byrne’s case, it is doubtful whether this additional head of damages would add anything to the existing rights under S. (1). Where a representation becomes a term of the contract, the plaintiff will sue for breach of a contractual term or breach of warranty, not for misrepresentation. Innocent Misrepresentation. Whittington v. Seale-Hayne Types of Remedies An actionable misrepresentation attracts the remedies of rescission and damages. Rescission, providing that none of the bars to rescission are applicable, cancels the contract and restores the parties to the status quo ante. When rescission fails the innocent party will be awarded damages which is a monetary compensation that will put him in the position he would have been in but for the misrepresentation of the representor with whom the innocent party had contracted. Rescission or Cancellation. The right to rescind is the right of a party to have the contract set aside and to be restored to his former position. The contract remains valid unless and until rescinded. Third parties may acquire interest under the contract if the innocent party does not act with promptitude, providing that the innocent party is a bona fide(honest) purchaser for valuable consideration. In Car & Universal Finance v Caldwell, the defendant sold his car on January 12, 1960, to Norris who took it away leaving a deposit of ? 10 and a cheque for ? 965. The cheque was dishonoured when the defendant presented it the following day. He immediately informed the police and the Automobile Association of the fraudulent transaction. Norris subsequently sold the car to a third party who sold it to the plaintiff. The question the Court had to decide was whether the defendant’s conduct and representations on or about January 13 amounted to a rescission of the contract of sale. Lord Denning M. R. held that where a seller of goods had a right to avoid a contract for fraud, he sufficiently exercised his election if, on discovering the fraud, he immediately took all possible steps to regain the goods, even though he could not find the purchaser or communicate with him, and the contract was rescinded on January 13. If the innocent party delayed cancelling the contract, any third party who purchased the item bona fide would have acquired a good title to the property and the original owner had no claim to it. See the speech of Lord Wilberforce in Johnson v. Agnew. There are several bars to the right to rescind which may work against the innocent party to the contract. The bars are restitution impossible, third-party rights, affirmation, lapse of time. These are discussed in the paragraphs that follow. Restitution Impossible. When a party rescinds a contract, it must be possible for the Court to restore the two parties to the Status quo ante, to put the parties back in their original position before the contract was made. However, this limitation should not be strictly construed, and the mere fact that the subject matter of the contract may have deteriorated before the truth is discovered, is not sufficient to prevent restoration and so destroy the right to rescind a contract. * In Newbigging v. Adam, rescission was granted even though the partnership business was worse than “worthless”. The facts of that case were “The plaintiff entered into an agreement with the defendants by which he was admitted as a partner with a manufacturing business and provided ? 10,000 of new capital. He was induced to enter into the agreement by a material innocent misrepresentation as to the capacity of certain machinery. The business failed, and the plaintiff sued for rescission of the agreement for recovery of his capital, and for an indemnity against all claims which might be made against him by virtue of his being a partner. The Court unanimously agreed that he was entitled to the remedy for which he asked. Before the passing of the 1967 Misrepresentation Act, there was a further bar of rescission: if the misrepresentation was innocent, there could be no rescission of a contract after it has been executed. * Seddon v North East Salt Co. Ltd. The extent of this rule was somewhat uncertain and it was the subject of much discussion, for in many cases the falsity of the misrepresentation cannot be discovered until the contract is executed. However, the Privy Council in Senanayake v. Cheng did not follow the decision. By S. (2), except in the case of fraud, of the 1967 Misrepresentation Act, the Court has a discretion to allow rescission and to award damages in lieu of rescission, and in this way could allow the contract to continue to subsists whether it was executed or not. The act has over rule Seddon’s case, Wilde v. Gibson. * Third-party Rights. As stated above a third party may acquire a good title if the owner of the property did not act speedily to rescind the contract, providing that the third-party has no knowledge of the origin of the property and could not reasonably be expected to: Car & Universal Finance v. Caldwell. A similar decision was made in Lewis v. Averay: The plaintiff advertised his car for sale. A rogue, posing as the well-known television actor, Richard Greene, called on the plaintiff and offered to buy the car. The plaintiff accepted the order, and the rogue wrote out a cheque, signed it, “R. A. Greene’. The rogue wished to take away the car at once, but the plaintiff was not willing for him to have it until the cheque had been cleared. At the plaintiff’s request the rogue produced identification that he was R. A Greene in the form of a special pass of admission to Pinewood Studios, bearing the name R. A. Greene’ and an address, a photograph of the rogue, and an official stamp. The plaintiff was satisfied on seeing this pass and allowed the rogue to have the car. The cheque was worthless and the rogue sold the car to the defendant, a music student, who bought is in good faith. The Court of Appeal held the plaintiff intended to contract with the person before him. The contract was merely voidable for fraud and the defendant, a third party, acquired a good title in the car against the plaintiff. Affirmation of the Contract. If after becoming aware of the misrepresentation the party affirms the contract either by express words or by taking any benefit under the contract, e. g. accepting dividends on shares, or failure to remove his name from the register of shareholders. In Long v. Lloyd the plaintiff was induced to purchase a lorry by the defendant’s representation that it was “in excellent condition”. On the first journey after the sale, the dynamo broke and the plaintiff noticed several other serious defects. The defendant was informed of these and offered to pay half the cost for the repairs. On the next long journey, the lorry broke down completely and the plaintiff realised that it was in a deplorable condition. He claimed to rescind the contract. The Court held that the second journey amounted to an affirmation and therefore the right to rescind was lost. Lapse of Time Under certain circumstances, lapse of time may be deemed to be affirmation, especially if the other party takes a considerably long time to rescind the agreement. However, normally, time does not beginning to run until the plaintiff becomes aware of the misrepresentation. In Leaf v. International Galleries, the plaintiff bought from the defendant a painting of Salisbury Cathedral which the defendant innocently represented to him at the time of the purchase to have been painted by Constable. Five years later, when he tried to sell it, he discovered that was not the case. He brought an action for the rescission of the sale. The Court of appeal held that it was too late to rescind the contract. Damages The remedy of damages, availability or otherwise depends on the nature of the misrepresentation committed fraudulent, innocent, or negligent. In Newbigging v. Adam damages were award for misrepresentation. In Whittington v. Seale-Hayne, the Court granted the plaintiff an indemnity against some of the lost which he suffered due to innocent misrepresentation. In Hussey v. Eels damages was assessed for negligent misstatement as to the non- existence of subsidence on the property which was the subject of the contract. ------------------------------------------- [ 1 ]. [1927] AC 177 [ 2 ]. ibid at 180 [ 3 ]. (1884) 28 Ch D 7 at 15 [ 4 ]. supra at 191 [ 5 ]. [1976] QB 801 [ 6 ]. supra at 191 [ 7 ]. ibid [ 8 ]. (1885) 2 Ch. D 459 [ 9 ]. [1936] Ch. 575, [1936] 1 All ER 727; Davies v. London and Provincial Marine Insurance Co (1878) 8 Ch. D 469, judgment of Fry J. at 475 [ 10 ]. (1881) 20 Ch. D [ 11 ]. [1965] 3 All ER 296 [ 12 ]. (1838) 6 C L & Fin 232 [ 13 ]. (1889) 14 App. Cas 337 [ 14 ]. [1964] AC 465, [1963] 2 All ER 575, See Mutual Life Citizens Assurance Co v. Evatt [1971] Ac 793, [1971] 1 All ER 156 [ 15 ]. [1976] QB 807, [1986] 2 All ER 8 [ 16 ]. Supra 218 [ 17 ]. [1965] 1 QB 525, [1964] 1 All ER 290 [ 18 ]. [1986] AC 367, [1979] 1 All ER 883 [ 19 ]. (1886) 34 Ch D 582 [ 20 ]. [1905] 1 Ch 326 [ 22 ]. Supra 197 [ 23 ]. (1848) 1 H L Cas 326 [ 24 ]. Supra 195 [ 25 ]. [1975] 1QB 198, [1971] 3 All ER 907 [ 26 ]. [1958] 2 All ER 402, [1958] 1 WLK 753 [ 27 ]. [1950] 2 KB 86, [1957] 1All ER 693 [ 28 ]. Supra 196 [ 29 ]. [1905] 82 CT 49