06.02.17 - Misrepresentation - complete PDF

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06.02 Misrepresentation Vitiating Factors:  Situations where the parties have reached agreement but the question arises whether the existence or non-existence of some fact, or the occurrence or non-occurrence of some event, that destroys the basis upon which that agreement was reached so that the ...

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06.02.17  

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Misrepresentation

Vitiating Factors: Situations where the parties have reached agreement but the question arises whether the existence or non-existence of some fact, or the occurrence or non-occurrence of some event, that destroys the basis upon which that agreement was reached so that the agreement is discharged or in some other way vitiated. Vitiating Factors: - Illegality and contracts contrary to public policy - Mistake - Misrepresentation - Duress - Undue Influence Misrepresentation: Key Points The law on misrepresentation is based primarily on common law rules, but with statutory intervention in the form of the Misrepresentation Act 1967 affecting the position in relation to remedies. The law relating to misrep is concerned with the situation where a false statement leads a contracting party to enter into a contract which would otherwise not have been undertaken. The contract may be rescinded under the common law. Core Requirements: 1. The false statement must have been made by one of the contracting persons to the other 2. It must be a statement of existing fact of law, not opinion 3. The statement must have induced the other party to enter into the contract

1. Statement by one party to the other  If a person enters into a contract as the result of a misrep by a 3rd party, this will have no effect on the contract or on his relationship with the other contracting party. A person who buys shares in a company on the basis of a third party’s statement that it has just made a substantial profit cannot undo the contract if it turns out to be untrue.  Dowie v Crystal Palace FC [2007] EWHC 13: Dowie was employed as the manager of Crystal Palace FC on a fixed-term contract which was due to expire on 8 June 2008. This contract contained a compensation clause requiring Mr Dowie to pay the club a fee of one million pounds if he was to leave prior to the expiry of its term  Mr dowie then spoke to the club’s chairman on 20 may 2006, explaining dissatisfaction with not seeing his family and his wish to move to the north of England to be nearer to them.  It was then agreed that the compensation clause would not be enforced against Mr Dowie if he, in return, did not bring any financial claims against the club that he may have.  On 17 May 2006, Mr Dowie spoke to the chairman of Charlton Athletic FC and an interest was expressed by both parties in Mr Dowie becoming Charlton manager.  However, on 20 May 2006, Mr Dowie then denied having a contract of any sort with Charlton Athletic FC  Court held that Mr Dowie had made false representations which had induced Crystal Palace FC to enter the compromise agreement. He had misrepresented that he wanted to move to the north of England, that he had not been in contact with Charlton Athletic FC, and that he had no intention of joining them when in fact they had made a conditional offer to him.

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Conduct can amount to misrep: Gordon v Selico Co (1986) 278 3EG 53: Prior to the first inspection of a house by the Pls, the second defendants had instructed some painters to conceal patches of dry rot from view, by painting them. The Pls obtained a detailed survey of the flat in February 1979, which concluded that no dry rot had been found. The Pls moves into their flat on January 1 st 1980 and subsequently discovered extensive dry rot in a number of rooms. CoA held that ordinarily, a misrep is made by a statement of supposed fact, or otherwise a statement of intent. However, the painting of dry rot to conceal it amounted to a misrep. The court distinguished the set of facts from other cases, where it was held that reliance on an independent surveyor’s findings defeated a claim of misrep. Spice Girls Ltd v Aprilla World Service [2002] EWCA Civ 15: The pop group took part in a photo shoot and promotions for AWS scooters prior to signing a sponsorship agreement for their tour. A few weeks later, one member, Geri Halliwell, left. It was held that this amounted to a misrep by conduct. The misrep was that the band did not know or had no reasonable grounds to believe that any member of the group had an intention to leave before the sponsorship contract ended. This was false as one member of the group admitted to the others that she intended to leave prior to the shoot.

2. Must be a statement of existing fact or law:  In Bisset v Wilkinson (1927) AC 177, a farmer in NZ told the Pl that a certain area of law would support 2000 sheep, though he had never carried on sheep farming on the land, and the purchaser was aware of this. The Pl bought the land but it failed to support 2000 sheep. He sought to rescind the contract on the ground of misrep.  The pricy council held that this was not misrep. The farmer’s view on the matter was merely an expression of an opinion, and not a statement of fact. No rescission.  There are 3 situations where a statement that appears to be one of opinion will be treated as one of fact. (a) Opinion must not be contradicted by other facts known to the person giving it. (b) Where the statement of opinion comes from an ‘expert’, it may amount to a representation (c) Statement of intention to act in a particular way in future may be interpreted as a statement of fact  2(a): Opinion must not be contradicted by other facts known to the person giving it.  Smith v Land and House Property Corp (1884) 28 Ch D 7, D made a statement that a tenant was ‘most desirable’. Whilst this looked like an opinion, he knew that the tenant had been in arrears of rent for a long time.  Bowen LJ held there was a misrep relied on by LHP. He held that statements of opinions can often involve statements of facts, because, ‘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.”  Bowel LJ said with his opinion the landlord “avers that the facts peculiarly within his knowledge are such as to render that opinion reasonable.” And it “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… In my opinion a tenant

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who has paid his last quarter’s rent by driblets under pressure must be regarded as an undesirable tenant.” 2(b): Expert opinion Where the statement of opinion comes from an ‘expert’, it may amount to a representation that the expert has based it on a proper consideration of all the relevant circumstances. Esso Petroleum Ltd v Mardon [1976] QB 801: E bought site for service station. Estimates 200 gallons a year. Thus, M became tenant. Never got close to 200. The CoA took the view that in the circumstances it involved a representation that proper care had been taken in giving it and that it was a statement of fact. If a person who has or professes to have, special knowledge or skill makes a representation (be it advice, info or opinion) with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct and the advice, info or opinion is reliable. Esso did profess special knowledge and had it. Their negligent misstatement was a ‘fatal error…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.” 2(c): Statement of intention to act in a particular way in future may be interpreted as a statement of fact. A statement of intention to act in a particular way in future may be interpreted as a statement of fact if it is clear that the person making the statement did not, at that time, have any intention of so acting. Edgington v Fitzmaurice (1885) 29 Ch D 459: Company directors sent shareholders a prospectus inviting subscriptions for debenture bonds. It said money would go to alter their buildings, buy horses, vans and expand into supplying fish. The actual purpose was to pay off debts, because the company was in trouble. Mistakenly believing he would get a first charge on company property, Mr Edgington bought bonds. He would have bought them anyway, had he known he would have no charge. Mr Edgington sought to recover money for deceit. The CoA held that this statement of intention could be treated as a representation as to the director’s state of mind at the time that the prospectus was issued, and so could be treated as a statement of fact. Bowen LJ: “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.” To note: statement of law can be treated as a statement of fact for the purposes of misrep: In Pankhania v Hackney London Borough Council [2004] All ER (D) 205: Claimants purchases property induced by a representation that the current occupiers of the property were contractual licensees, whose occupation could be terminated on giving 3 months notice. In fact the current occupant was in fact a tenant protected under the Landlord and Tenant Act 1954. This was a misrep as to the law which had previously been assumed not to b an actionable misrep. The high court held that actions based on misrep of law could now be actionable based upon the change of law. The claimant’s action was therefore successful.

Misrepresentation by Silence:

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In general, there is no misrep by silence. Even where one party is aware that the other is contracting on the basis of a misunderstanding of some fact relating to the contract, there will generally be no liability. English law imposes a negative obligation not to tell falsehoods, not a positive obligation to tell the truth. However, if a true statement is made and then circumstances change to make it false, a failure to disclose this will be treated as misrep. With v O’Flanagan [1836] Ch 575: Doctor was selling his practice. He told a potential purchaser that the practice had an annual income of £2000 per annum. This was true at the time but the doctor got sick and the business declined in profitability. By the time it was sold, the average weekly taking was only £5. The purchaser sought to rescind the contract. The CoA held that the failure to notify the purchaser of the fact that the earlier statement was no longer true amounted to a misrep. Lord Wright MR held that Mr W could rescind either because there was a duty to point out the change in circumstance or because the representation continued till the point when the contract was signed. Noted that a ‘representation made as a matter of inducement to enter a contract is to be treated as a continuing representation.’ Purchaser could rescind. Lambert v Co-operative Insurance Society [1975] 2 Lloyd’s Rep 485: Silence can also constitute a misrep in contracts which are entered into on the basis of ‘utmost good faith’. Mrs Lambert was renewing the insurance on her jewellery and failed to disclose that her husband had a number of convictions for theft/conspiracy to steal. The fact that she had not mentioned this meant that when some of her jewellery was subsequently stolen, the insurance co would not compensate her under the policy – the obligation is to disclose such facts as a reasonable insurer might have treated as material. Keates v Earl of Cadogan (1851) 20 LJCP 76: D let house to Pl knowing he wanted immediate occupation, did not tell him the house was uninhabitable. Held: in absence of fraud, D under no implied duty to disclose the state of the house Caveat emptor: Contracting parties should not be expected to share every bit of relevant information with each other. “It is not contended by the plaintiff that any misrepresentation was made; nor was it alleged that the plaintiff was acting on the impression produced by the conduct of the defendant as to the state of the house, or that he was not to make investigations before he began to reside in it. I think, therefore, that the defendant is entitled to our judgement, there being no obligation on the defendant to say anything about the state of the house, and no allegation of deceit.”

Misrep Must Induce the Contract:  

It is not enough for the claimant to point to a false statement of fact made by the D prior to the contract being made, you need to show it induced the contract. In JEB Fasteners v Bloom [1981] 3 All ER 289: The pls took over a business having seen inaccurate accounts seen by the pls. Their reason for taking over the business, however, was shown to have been the wish to secure the services of two directors. The accounts had not induced their action in agreeing the contract.

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Horsfall v Thomas [1862] 1 H&C 90: The buyer of a gun did not examine it prior to purchase. It was held that the concealment of defect in the gun did not affect his decision to purchase as, since he was unaware of the misrepresentation, he could not have been induced into the contract by it. His action thus failed. Edgington v Fitzmaurice (1885) 29 Ch D 459: Pl was influenced not only by the prospectus, but by the assumption that he would have a charge on the assets of the company. This mixture of motives was not enough to deny him the power to rescind – what was important was the fact that he misrep was ‘actively present in his mind’ when he signed the contract. The test was defined by Bowen LJ: “…what was the state of the pl’s mind[?], and if his mind was disturbed by the misstatement of the Ds, and such disturbance was in part the cause of what he did, the mere fact of him also making a mistake himself could make no difference.” Atwood v Small (1838) 6 Cl & Fin 232: If the innocent party does not believe the misrep, then he cannot rescind In this case: A contracted to sell his mine to S, but exaggerated its earning capacity. S appointed agents to verify A’s representations and they reported that his statements were true. After the contract was concluded, S discovered the exaggerations and sought to rescind. Was unable to do so because he had relied on his agent’s report and not A’s misrep. Redgrave v Hurd (1881) 20 Ch D 1: Rule does not apply to the C who has an opportunity to discover the truth but does not take it. In this case: R was an elderly solicitor, advertised for a partner to join the business and buy the accompanying house. He said in an interview with Mr Hurd that the practice brought in £300 p/a, when it was only £200 p/a. Mr Redgrave showed him summaries that came to a £200 p/a average income and said that the rest of the £300 figure was borne out by other papers in the office that he could check (in fact they showed no business). Mr Hurd did not inspect the papers, until he realised the truth just before completion of the agreement. He had signed the contract but refused to go through. R sued for specific performance and H counterclaimed for rescission based on fraudulent misrep. On appeal, it was held that the contract was rescinded on grounds of innocent misrep. He held that relying on the representation was enough and there was no duty to inspect the papers “If a man is induced to enter 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… If it is a material representation calculated to induce him to enter into the contract, it is an inference of law that he was induced by the representation to enter into it” and so it is for the person alleging otherwise to show it.” Museprime Properties v Adhill Properties [1990] 36 EG 114: Does reliance on misrep have to be reasonable? There was an inaccurate statement in the prospectus for an auction stating that rent reviews for three leases on properties had not been finalised. They had. D argued the misrep could not have been material to the decision to enter the contract as no reasonable bidder would have allowed this minor fact to influence his bid. Held that the materiality of a misrep was not to be judged by whether a reasonable person would have been induced to enter the contract. As long as the claimant was in fact induced to enter the contract, this was enough to entitle him to rescission. Types of Misrepresentation: - Fraudulent Misrep - Negligent Misrep

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- Section 2 (1) Misrep - Innocent Misrep Remedies: Rescission potentially available for all types Damages only available as of right for negligent and fraudulent misrep

1. Fraudulent Misrepresentation:  Derry v Peak (1889) 14 App Cas 337: Prospectus for a tram co indicated that it had the right to use steam power. The directors had assumed that the BoT would give the necessary permission for this, but they did not. The pls had bought shares in reliance on the statement and sued for the tort of deceit.  The HoL held that for an action for deceit, it was necessary to show fraud. This meant, in the words of L Herschell, that a false representation must be proven to have been made: “(1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false.  On the facts, the ds were not liable because they honestly believed the truth of their statement. Statements made with a lack of care or negligence are not fraudulent.  L. Herschell noted difference between negligence and fraud – a false statement honestly believed does not amount to fraud.

2. Negligent Misrepresentation:  In certain situations, damages for the tort of negligence may be recoverable in relation to misstatements.  The law governing this area comes from the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465: here, the pls asked their bank to give their opinion on the financial standing of a firm. The bank gave a positive report, pls entered into an agreement with the business, soon after it went into liquidation owing money to the Pls. They sued arguing the statements were made negligently.  HoL held that the bank owed a duty of care to the pl, and so could be liable for the consequence of negligent statements which caused economic loss. However, on the facts the bank was protected by a ‘without responsibility’ disclaimer which it had attached to its advice. However, in the absence of this, the ban would have been liable.  Nevertheless, the case established the possibility of taking action in the tort of negligence in relation to statements taken without proper care which result in economic loss as long as a duty of care existed between the parties  2 Requirements: (a) The maker of the statement must reasonably foresee that the person to whom the statement would rely on it, and suffer loss if it was untrue (b) There must be ‘proximity’ between the parties – this will usually be satisfied where there is a contract between the parties.  Duty of care: In tort law, a duty of care is a legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeable harm others. It is the first element that must be established to proceed with an action in negligence. The claimant must be able to show a duty of care imposed by law which the defendant has breached. In turn, breaching a duty may subject an individual to liability.

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Esso Petroleum v Mardon [1976] QB 801: English Courts appear willing to fin...