Misrepresentation

Hi and welcome back to my blog! Today, I'm going to share another important topic which is misrepresentation. 

What is misrepresentation?

In a simple word, misrepresentation is a false statement made by a party that will induce another party to enter into a contract. The statement may be false in fact or in law and must be made during the process of negotiations as a representation. When the statement turns out to be untrue, we can file an action for misrepresentation.

There are three types of misrepresentation:-

1. Fraudulent misrepresentation
2. Negligent misrepresentation 
3. Innocent misrepresentation

Fraudulent misrepresentation

The significance of a misrepresentation being classified as a fraudulent one is that the measure of damages may be greater under certain circumstances. There are two remedies available for fraudulent misrepresentation: recession and damages.

Representees should attempt a claim for fraudulent misrepresentation with caution, as the courts impose a much higher standard of proof due to the serious allegations. There may also be penalties in the event the claim is not made out.

A fraudulent misrepresentation was defined in Derry v Peek(1889) 14 App Cas 337 as a false statement which is ‘made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false’.

In order to assess whether a statement has been made fraudulently, you should consider whether:

1. The statement maker knows that the statement he has made is false
2. The statement maker has reasonable grounds to believe his statement is true even if it is false
3. In the case of a, there will clearly be a fraudulent statement.

In the case of 2, if the statement maker has made a false statement, but has reasonable grounds to believe his statement, it will not amount to a fraudulent statement, as it has not been made recklessly or carelessly. A statement made recklessly or carelessly needs to be a statement made which the statement maker has no belief in the truth of (but does not know for sure that it is true or false).

Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 clarified that where a statement is made where the statement maker has no idea whether or not it is true or false, this statement would be fraudulent due to the recklessness asserting it is true when it may not be.

Negligent misrepresentation

An alternative approach to a claim for negligent misrepresentation is to pursue the claim under statute. The Misrepresentation Act 1967 Section 2(1) allows for such a claim and contains the key components.

The significance of a negligent misrepresentation claim under statute is that the burden of proof from the common law claim is reversed. The representor cannot escape liability simply by proving that he was not negligent, it must be proven that he had reasonable grounds to believe the statement -Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574.

Innocent misrepresentation

With the development of the Misrepresentation Act the claim for innocent misrepresentation is extremely limited. A claim for innocent misrepresentation will arise when a claim for negligent misrepresentation under the Misrepresentation act has failed. The remedy for an innocent misrepresentation will usually be rescission of the contract.

The remedies for misrepresentation

1. Rescission

When a contract has been induced by misrepresentation of any kind, the contract does still confer obligations upon the parties, but the contract will be voidable. Voiding the contract as this stage is using the remedy of rescission. There are a number of restrictions to the use of this remedy. These are known as ‘bars’ to rescission.

2. Affirmation

Affirmation refers to an affirmation of the contract, whereby despite the misrepresentation, the representee had held themselves out to be happy with the contract as it is, therefore affirming the misrepresentation (Long v Lloyd [1958] 2 All ER 402.

In the event of a misrepresentation, it is expected that the representee, if they are not happy with the contract, will take action to remedy the contract.

Lapse of time

There is a differing approach by the courts for different types of misrepresentation.

In the case of fraudulent misrepresentation, the lapse of time will begin at the time the fraud was either discovered, or could have been discovered.

As for misrepresentation which is negligent or innocent, the lapse of time will begin from the date of the contract - Leaf v International Galleries [1950] 2 KB 86.

Restitutio in integrum

This bar to rescission refers to where a rescission of the contract is no longer possible. This is the case where the goods under the contract have been used, consumed or have perished - Clarke v Dickson (1858) 120 ER 463.

In the event that the goods have only been partially consumed rescission is a more complicated issue - TSB Bank plc v Camfield [1995] 1 WLR 430. In De Molestine v Ponton [2002] 1 All ER (Comm) 587 this approach was rejected, and it was argued a partial rescission may be possible where you can split the contract into multiple parts.

Damages

The measure of damages differs for each of the types of misrepresentation, therefore each will be considered in turn.

Fraudulent misrepresentation

A fraudulent misrepresentation requires a high standard of proof. Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 is authority to the effect that damages are awarded on a tortious basis, aiming to put the aggrieved party in the position they would have been if the misrepresentation was true.

This standard is usually subject to a test of ‘reasonable forseeability’, where a loss will only be claimable if the statement maker could have reasonably foreseen that the fraudulent statement would have resulted in such a loss.

Negligent misrepresentation under the common law

Negligent misrepresentation claimed under Hedley Byrne v Hellerand the tort of deceit are extremely limited in comparison to those for fraudulent misrepresentation. Unlike damages for fraudulent misrepresentation, under the tort of deceit the damages are limited by the test of remoteness.

The test of remoteness, from Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon Mound))[1961] AC 388, only allows damages to be claimed that are “reasonably foreseeable”.

If the claimant has also been negligent to some extent, damages may be reduced by way of contributory negligence, apportioning some of the blame to the claimant.

Negligent misrepresentation under the Misrepresentation Act

Under Section 2(1) of the Misrepresentation Act, damages are awarded on exactly the same basis as fraudulent misrepresentation. Therefore, the statement maker will be liable in damages for all consequential losses as a result of the statement, irrespective of their foreseeability - Sharneyford Supplies Ltd v Edge [1987] Ch 305.

Section 2(2) of the Misrepresentation Act clarifies the relationship between rescission and damages. The courts have identified that rescission can often result in unfair consequences, and therefore, damages may be awarded as an alternative to rescission. This means that there cannot be a claim for rescission and damages; it must be one or the other.

Can liability from misrepresentation be excluded in the contract?

In order for liability for misrepresentation to be excluded, Section 8 of the Unfair Contract Terms Act 1977 rules that the term must be:

1. Reasonable
2. Clear and precise as to the exclusion of misrepresentation