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In contract law, a misrepresentation is a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.
According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.See Bisset v Wilkinson and others [1927] AC 177. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.See Esso Petroleum Co Ltd v Mardon [1976] 2 Lloyd\'s Rep 305.
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As enacted by the Misrepresentations ActMisrepresentation Act 1967 s1(a): "Where a person has entered into a contract after a misrepresentation has been made to him, and the misrepresentation has become a term of the contract, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to butt the provisions of this Act", the statement in question may constitute a representation even if later incorporated into the contract as a term (i.e. a warranty, condition or innominate term).
An alternative approach, applied in parallel but in exclusivity to, is to find a collateral contract by interpreting the representation as a promise accompanied by some sort of consideration (see Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 (H.L.)). The collateral contract will have the effect of adding the representation as a term to the contract.
If the representation is found to be a term then the normal remedies for breach of contract apply.
Misrepresentation is one of several vitiating factors which can affect the validity of a contract. A misrepresentation occurs when one party makes a false statement with the intention of inducing another party to contract. For an action to be successful some criteria must be met in order to prove a misrepresentation. These include:
It is a general rule that for a misrepresentation to occur a positive statement of fact must have been made expressly or implied by conduct. This effectively rules out the possibility that silence can act as a misrepresentation; this is in line with the principle that contracting parties are generally in no relationship which requires them to disclose facts to the other before a contract is formedSee, eg, W. Scott, Fell & Co. Ltd. V Lloyd (1906) 4 CLR 572.. This philosophy can be described in regards to the sale of goods by the maxim ‘caveat emptor’ meaning ‘let the buyer beware’. This however is not practical or equitable in all circumstances and exceptions exist to deal with such situations.
A representor may make a statement which prima facie is technically true; however this may tell only half the story. If a statement of fact is made but the representor fails to include information which would significantly alter the interpretation of this fact, then a misrepresentation may have occurred. In Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, Krakowski agreed to enter into a contract to buy a shop premises from Eurolynx as long as a \'strong tenant\' had been organised. The contract proceeded on the grounds that such a tenant had been arranged. Unbeknown to Krakowski, Eurolynx had entered into an additional agreement with the tenant to provide funds for the first three months rent to ensure the contract went ahead. When the tenant defaulted on the rent and subsequently vacated the premises, Krakowski found out about the additional agreement and rescinded the contract with Eurolynx. It was held that Eurolynx’s failure to disclose all material facts about the \'strong tenant\' was enough to constitute a misrepresentation and the contract could be rescinded on these grounds.
The negotiating stage of a contract can sometimes be a time consuming process. Because of this, new information may arise and circumstances may change. This can result in two particular situations which can result in a misrepresentation if silence is kept. The first is if the representor subsequently discovers that the statement was false, the second being if the statement becomes false at a later time. If a statement is made and it is subsequently made known to the representor that it is in fact false, it would obviously be inequitable to allow the representor to remain silent with the new information. In Lockhart v Osman [1981] VR 57, an agent had advertised some cattle as being “well suited for breeding purposes”. Later on it was discovered that the stock had been exposed to a contagious disease which affected the reproductive system. It was held that the agent had a duty to take remedial action and correct the representation. The failure by the agent to take such measures resulted in the contract being set aside. Should a statement be made which is true at the time, but subsequently becomes untrue due to a change in circumstances, the representor is obligated to amend the original statement. In With v O’Flanagan [1936] Ch. 575, the plaintiff entered into a contract to purchase O’Flanagan’s medical practice. During negotiations it was said that the practice produced an income of £2000 per year. Before the contract was signed, the practice took a downward turn and lost a significant amount of value. After the contract had been entered into the true nature of the practice was discovered and the plaintiff took action in misrepresentation. In his decision, Lord Wright said "...a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation."With v O’Flanagan [1936] Ch. 575, 584.. This means that the representation must be true till the contract is made; creating the obligation mentioned above and accordingly the plaintiff’s petition was successful.
Some relationships also provide that silence can form the basis of an actionable misrepresentation.
A fiduciary relationship is one of trust and confidence; it involves one party acting for the benefit of another. For this reason, when entering into a contract, it is important for a fiduciary to disclose all facts which could be considered material even if not expressly asked aboutSee, eg, Davies v London & Provincial Marine Insurance Co (1878) 8 Ch. D. 469, 474. Justice Fry commented on the responsibilities of a fiduciary ”…they can only contract after the most ample disclosure of everything…”.. In Lowther v Lord Lowther (1806) 13 Ves Jr 95, the plaintiff handed over a picture to an agent for sale. The agent knew of the pictures true worth yet bought it for a considerably lower price. The plaintiff subsequently discovered the pictures true worth and sued to rescind the contract. It was held that the defendant was in a fiduciary relationship with the plaintiff and accordingly assumed an obligation to disclose all material facts. Accordingly the contract could be rescinded.
A contract uberrimae fidei is a contract of ‘utmost good faith’. Similarly to fiduciary relationships, the parties are required to make known all material facts influencing the contract. Contracts uberrimae fidei usually arise when one party has knowledge which the other does not have access to. Contracts which are commonly considered to be of such a nature include contracts of insurance and family agreements. When applying for insurance, the person or entity must disclose all material facts so that the insurer can properly asses the risk involved with the offering of insurance. Since the insurer cannot have access to all information relating to the insured and their situation which could affect the risk involved, it is necessary for this disclosure so that both parties are entering into the contract on equal grounds. Lord Blackburn addressed the issue in Brownlie v Campbell (1880) 5 App Cas 925 when he noted "...the concealment of a material circumstance known to you...avoids the policy."Brownlie v Campbell (1880) 5 App Cas 925, 954.. Another contract considered uberrimae fidei is that of family agreements. In Gordon v Gordon (1821) 3 Swan 400, two brothers had reached an agreement regarding the family estate. The elder brother was under the impression that he was born out of wedlock and thus not their fathers true heir. The agreement was reached on this basis. The elder brother subsequently discovered that this was not the case and that the younger brother had knowledge of this during the negotiation of the settlement. The elder brother sued to set aside the agreement and was successful on the grounds that such a contract was one of uberrimae fidei and the required disclosure had not been executed.
It is a general requirement that for an action in misrepresentation to proceed, that the statement in question be one of present or past fact. This has its grounding in that only facts can be distinguished as being true or untrue at the time they are made.
Statements of opinion are not often seen as sufficient to produce a misrepresentationSee, eg, Bisset v Wilkinson [1927] AC 177.. Obviously it would be unreasonable to treat opinions in the same manner as truths as opinions can be based purely on personal beliefs with no additional foundation. There are however some exceptions where opinions can give rise to an action in misrepresentation:
Statements which are made in relation to the intention of a party or the occurrence of some event in the future do not constitute misrepresentations should they fail to eventuate. This is because at the time the statements were made they can not be categorised as either true or false. However, similarly to the first point above, an action can be brought if the intention never actually existed. This can be illustrated by the decision in Edgington v Fitzmaurice (1885) 29 Ch. D. 459, which deals with a statement of intention by the directors of a company to use loaned money to alter company buildings and make purchases to expand the company’s operating options. It was found that the directors actually intended to repay current debts and according it was held by the judges that the contract was voidableEdgington v Fitzmaurice (1885) 29 Ch. D. 459, 479..
Statements of law were, in the past, considered to be free from claims of misrepresentation due to the fact that it is equally accessible by both parties and is "...as much the business of the plaintiff as of [the defendants] to know what the law [is]."Beattie v Lord Ebury (1872) LR 7 Ch App 777, 803.. This has since changed and it is now more recognised that statements of law should be treated as akin to statements of fact rather than occupy a special isolationSee, eg, David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. While dealing with a mistake of law, similar reasoning should apply to a misrepresentation of law.. As stated by Lord Denning "...the distinction between law and fact is very illusory."Andre & Cie v Ets Michel Blanc & Fils [1979] 2 Lloyds LR 427, 430..
An action in misrepresentation can only be brought by a representee. This means that only those who were an intended party to the representation can sue. This principle can be seen in Peek v Gurney (1873) LR 6 HL 377, where the plaintiff sued the directors of a company for indemnity. The action failed because it was found that the plaintiff was not a representee (an intended party to the representation) and accordingly misrepresentation could not be a protection. It is not required that in order to be a representee, the representation must be received directly. It is sufficient that the representation was made to another party with the intention that it would be made known to a subsequent party and ultimately acted upon by them as a representeeSee, eg, Commercial Banking Co (Sydney) Ltd v R H Brown & Co (1972) 126 CLR 337..
The final element necessary for an action in misrepresentation to succeed is that the misrepresentation played a part in inducing the representee to contract. Should a representation fail to, in any way induce the representee to contract then the relief provided by misrepresentation will be lost. Situations in which this will occur include where the representee has no knowledge of the representationSee, eg, Horsfall v Thomas (1862) 1 H & C 90., the representee rejects the representation based on held knowledgeSee, eg, Redgrave v Hurd (1881) 20 Ch. D. 1. and where the representation is not employed by the representee (the representee seeks independent informationSee, eg, Attwood v Small (1838) 6 Cl & Fin 232. or the misrepresentation is corrected prior to contractingSee, eg, Holmes v Jones (1907) 4 CLR 1962.). As mentioned above the representation need only play a part in the inducement and may not necessarily be the inducing factor. This is demonstrated in the case of Edgington v Fitzmaurice (1885) 29 Ch. D. 459. While other beliefs held by the plaintiff also contributed to his decision to contract, it was sufficient for an action in misrepresentation that the director’s representation played a part.
Four types of misrepresentations are identified with different remedies available:
This creates an inconsistency of law due to the low burden and damages being calculated as extensive as those under fraudulent misrepresentation whereby a "wicked mind"per Lord Esher, Le Lievre v Gould [1893] 1 QB 491 at 498 is the basis of action. It is, to use the words of Rix J, "a mighty weapon"Avon Insurance Plc v Swire Fraser [2000] 1 All ER (Comm) 573 at 579. Due to academic and judicial criticism in this area, the law is ripe for reform - probably adjusting the measure of damages to that of negligent misrepresentation at common law.see, inter alia, Stuart-Smith, J & de Chassiron, A, ‘Recovery of Damages After Misrepresentation’ (2000) 150 NLJ 865; Rix J, op cit supra
Generally, the effect of misrepresentation is that it makes the contract voidable not void ab initio. This is important for two reasons. Firstly because the representee can continue to be bound by the contract at her will. Secondly because the transactions and effects of the (voided) contract are recognised as to have taken place, therefore if a party transfers title of property to a third party of which the former only holds title to pursuant to the voided contract, the third party can retain legal title.For legal reasoning application of the difference see Shogun Finance Ltd v Hudson [2004] 1 AC 919; Brooks, O & Dodd, A ‘Shogun: A Principled Decision’ (2003) 153 NLJ 1898 Rescission can be done either by informing the representor or by requesting an order from the court. There are certain circumstances where rescission is not possible though. The idea behind rescission is that the parties are restored to the positions they were before entering into the contract. Therefore, if this is not possible, rescission is not an option.See Erlanger v New Sombrero Phosphate Co (1878) 3 App. Cas. 308.
If the representee discovers the misrepresentation and fails to take steps to avoid the contract, then he may not be able to rescind it.See Long v Lloyd [1958] 1 WLR 753 The time limit for taking such steps varies depending on the type of misrepresentation. In cases of fraudulent misrepresentation, the time limit runs until when the misrepresentation ought to have been discovered, whereas in innocent misrepresentation, the right to rescission may lapse even before the representee can reasonably be expected to know about it.See Leaf v International Galleries [1950] 2 KB 86.
In certain circumstances, third party rights may interfere with rescission and render it impossible. For example, if B contracts with A to sell a house with a misrepresentation and then A sells the house to C, the courts are not likely to permit rescission as that would require C to give up the house.
In England and Wales, under Misrepresentations Act 1967 s. 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages instead of rescission.
In cases of fraudulent misrepresentation, a claim for damages is under the tort of deceit, making the damages tortious, in other words, only actual losses are recoverable. If the losses are calculated under the Misrepresentation Act 1967, damages for misrepresentation are calculated as if the defendant had been fraudulent, even if he has been only negligent. This is a wider scope than usual tortious liability, as it protects the claimant\'s loss even if not reasonably foreseeable. Inclusion of the representation into the contract as a term will leave the remedy for breach in damages as a common law right. The difference is that damages for misrepresentation usually reflect C\'s reliance interest, whereas damages for breach of contract protect C\'s expectation interest, although the rules on mitigation will apply in the latter case. In certain cases though, the courts have awarded damages for loss of profit, basing it on loss of opportunity.See East v Maurer [1991] 2 All ER 733.
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