Damages for Misrepresentation PDF

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Misrepresentation Damages for Misrepresentation Part 1 Reminder of basics Structure for misrepresentation 

Actionable misrepresentation - voidable 1. False statement, conduct, silence or omission encouraging false belief 2. Of fact (as opposed to opinion, future intention or law) 3. Induces other party to enter the contract.  Which type of misrepresentation is it?  Remedies available  Rescission - if available  Damages - if appropriate. Availability and measure depend on type of misrepresentation

Structure for misrepresentation 1.Actionable misrepresentation 2.Type of misrepresentation 3. Remedies available

Remedies for misrepresentation The purpose of the remedies is to restore the parties to their original position before the misrepresentation. • •

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Rescission alone- this is setting aside the contract. It is available in all types of misrepresentation unless the right to recession has been lost. Rescission and damages- both remedies are available in cases of fraudulent and negligent misrepresentation. In innocent misrepresentation the remedy will be recession OR damages, not both. Damages alone- available for all types of misrepresentation. Damages alone would be awarded when the right to recession has been lost.

Types of Misrepresentation  Fraudulent Fraudulent misrepresentation is when there is an absence of an honest belief that the statement is true.

A statement is made: • Knowing it is false OR • Not believing it is true OR • Recklessly- not caring whether it is true or false

Types of Misrepresentation  Negligent  

An honest belief that the statement is true but no reasonable grounds for that belief Failed duty to use reasonable care and skill to check accuracy (failed to appreciate it is false)

 Innocent 

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An honest belief that the statement is true and reasonable grounds for that belief However, the statement turns out to be false.

Damages and misrepresentation • When are damages available? 1. Where there is additional loss (i.e. not recovered by rescission alone) OR 2. Parties are not put in their original position because rescission is unavailable • The TYPE of misrepresentation is important when calculating the measure of damages and ability to recover.

Part 2 Fraudulent misrepresentation Outcomes- fraudulent misrepresentation 1.Tort of deceit- basis of loss 2. Calculation of damages-Smith New Court Securities v Scrimgeour (1997) 3. Reduction in damages – OMV v Glencore (2016) 4. Mitigation- Downs v Chappell (1997) 5. Loss of profit- East v Maurer (1991)

1. Fraudulent misrepresentation- tort of deceit • • • • • •

Fraudulent misrepresentation- damages are awarded based upon the tort of deceit. The aim of damages in the tort of deceit is, to restore the misrepresentee to the position they would have been in had the misrepresentation not been made. The test of remoteness is very wide indeed. The misrepresentee may recover for all the direct loss incurred as a result of the fraudulent inducement, regardless of foreseeability. Doyle v Olby (Ironmongers)Ltd (1969) Lord Denning MR: The person who has been defrauded is entitled to say: 'I would not have entered into this bargain at all but for your representation….’

2. Smith New Court Securities v Scrimgeour Vickers (HL) (1997)- calculation of damages  The case concerned the purchase of shares in a company as a result of fraudulent misrepresentation.  HL held that the measure of damages would normally be based on the difference between the price paid (82.25p a share) and market value of the shares at the date of the contract to purchase (78p)

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However it was later discovered that the company had been the victim of a serious fraud by third party so that the real value of the shares at the time of purchase was in fact only 44p a share. HL held: although normal measure was difference between price paid and actual value at date of contract, since the misrep ‘locked’ Ps into the transaction as a result of the fraudulent misrep, this subsequent loss was a direct loss flowing from the misrepresentation. Therefore (82.25 – 44p) 38.5p per share was recoverable.

3. OMV v Glencore (2016) (CA)- reduction fraudulent damages? OMV Petrom SA v Glencore International AG • A defrauded purchaser’s (OMV) damages were not reduced, even when it transpired, OMV were not in as bad a position (as initial thought) at the date of the fraudulent transaction. • Reinforces court’s very robust approach to fraudulent claims. • Facts: OMV imported oil from Glencore. Glencore needed to provide a specified blend of oil. The oil that Glencore actually provided was a different blend of oil other than the specified blend of oil contracted for. Glencore produced paperwork (e.g. certificates of conformity) to support the deception. • OMV sued Glencore for the difference in value between the specified blend of oil that should have been provided and the different blend of oil that was actually provided. Glencore appealed on the basis the substitute oil was better quality (than initial suggested in High Court claim). The risks of using this different blend of oil had not materialised and so damages could be reduced. The appeal failed.

4. Mitigation      

Difference between purchase price and price recovered when eventually able to sell if locked into the transaction by the fraud. [Not limited to position at date of contract]. However, once a purchaser makes reasonable offer, must accept it if wish to recover full loss. The misrepresentee is under a duty to mitigate (i.e. reduce its losses) Downs v Chappell: Fraudulent misrep re value of bookshop. Purchased for £120,000. Discovered the fraud but then refused 2 offers of £76,000 for the business in March 1990, eventually selling it for less than £60,000. CA held Ps were entitled to recover damages for losses down to the date when the misrepresentation was discovered and the Ps had the opportunity to avoid further loss, i.e. March 1990 when an offer to purchase had been received. Damages were therefore £44,000 (£120,000-£76,000) not £60,000.

5. Loss of profits: East v Maurer     

Ps purchased one of D’s hair salons in Bournemouth for £20,000. D’s fraudulent misrepresented that they had no intention of working in D’s other salon nearby. After the purchase, D continued to work in their other nearby salon. The court held that it had been D’s intention all along to work in their nearby salon. D’s actions had adverse effect on Ps’ business. P eventually sold the business for £7,500. CA held Ps could recover difference price paid and price on selling (£20,000 less £7,500) = £12,500 Ps also claimed damages for their loss of profits. CA held could recover for this on tortious basis – i.e. profit they might have made had the rep not been made at all and had they purchased another hair salon for £20,000. Calculated as £10,000 loss of profits.

Part 3 Negligent misrepresentation Outcomes- negligent misrepresentation •

Negligent misstatement

Hedley Byrne v Heller Damages

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S.2(1) MA 1967

Principles Howard/Spice Girls Damages: remoteness & fiction of fraud Royscot Trust v Rodgerson Causation- test Naughton/ Butler Creagh

Negligent misrepresentation

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In negligent misrepresentation damages can be recovered: • 1. On a tortious basis in negligent misstatement at common law • 2. On a statutory basis under S.2(1) Misrepresentation Act 1967 Negligent misstatement- basis of recovery • • •

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Negligent misstatement is a tortious basis of recovery A contractual relationship is not needed. Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)- damages may be recoverable for negligent misstatement that has caused financial loss, in certain circumstances. Prior to “Hedley Byrne”- damages could only be recovered for fraudulent misrepresentation.

Hedley Byrne v Heller (1964) (HL) - the facts • • •

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Hedley Byrne were a firm of advertising agents. Easipower Ltd were a customer of Hedley Byrne and put in a large order with them. Hedley Byrne wanted to check Easipower’s financial position. Hedley Byrne asked their bank (NatWest) to get a report from Easipower’s bank (Heller &Partners Ltd). Heller said Easipower was considered “ good for its ordinary business engagements”. Hedley Byrne acted upon this advice and bought advertising time for Easipower. Easipower went into liquidation and Hedley lost £17,000 on contracts. There was no contract between Heller and Hedley Byrne. Hedley Byrne sued Heller for negligence on basis the information was misleading. Heller argued no duty of care and liability excluded.

Negligent misstatement- damages 

Damages for Negligent Misstatement - Hedley Byrne v Heller

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Claimant must establish that:

 There is a duty of care between C and D (which includes a special relationship/assumption of responsibility)  That duty is breached  Causation  Loss resulting from that breach of duty (loss but not be too remote. Loss must be reasonably foreseeable). Negligent Misrepresentation - S.2(1) MA 1967- the principles  Where a person has entered into a contract following a misrepresentation, and as a result he has suffered loss,  then, if the person making the misrepresentation would be liable in damages had the misrepresentation been made fraudulently, that person will be liable notwithstanding that the misrepresentation was not made fraudulently,  UNLESS he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.

Negligent Misrepresentation - S.2(1) MA 1967- the principles Negligent misrep under Misrep Act 1967 - s.2(1):  Contractual relationship required:  Advantages MA 1967 S.2 (1)  Fiction of fraud: Liability is said to exist where it would exist had the misrepresentation been fraudulent, despite the fact that it is clearly not fraudulent.  Burden of proof: puts the burden on the maker of the statement to disprove negligence - the D has to prove that he had reasonable grounds to believe and did believe up to the time that the contract was made that the facts represented were true.

Negligent Misrepresentation - s.2(1) M.A. 1967  

Howard Marine v Ogden & Sons- hire of barges. Owners misrep regarding carrying capacity. Owner relied in Lloyd’s register but this was incorrect. The correct information was at head office. S.2(1) damages- reasonable grounds to believe what they said about carrying capacity. Was unreasonable not to refer to documentation at head office. 

Spice Girls v Aprilia: Spice Girls were not able to demonstrate reasonable grounds for their representation by conduct that they were to remain as a group. All of the group knew by that stage that Geri was leaving.

Negligent misrep-S.2(1) MA 1967- calculation of damages 

Damages = Tortious (put the claimant into the position he would have been in had the misrepresentation not been made)

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Remoteness - all direct loss regardless of foreseeability (Royscot Trust v Rogerson)

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Fiction of fraud - damages are assessed as if misrep = fraudulent (although it is not)

Royscot Trust v Rogerson (1991) (CA) • • • •

Mr.Rogerson purchased a car on hire purchase from a car dealer. The finance company was Royscot Trust. The car dealer filled in Mr. Rogerson's form to secure finance with Royscot. The car dealer falsely stated the cost of the car in order to secure the finance for Mr.Rogerson. Had accurate figures been used Royscot would not have approved the loan. Mr. Rogerson ran into financial difficulties and sold the car. He knew he was not allowed to do so under the terms of the hire purchase agreement. Royscot sued the car dealer to recover its losses. Royscot argued if correct figures had been used by the garage it would never had entered the agreement.

Royscot Trust v Rogerson (1991) (CA) • • •

The car dealer argued that the real cause of the loss was Royscot dishonest sale of the car. If the car had not been sold Royscot could have repossessed car to recover their losses. The court had to decide whether the car dealer was liable for all the losses or whether Mr. Rogerson's act of selling the car broke the chain of causation. Held: Car dealer liable for all losses even if those losses were not foreseeable. The measure of damages was tortious and the same as for the tort of deceit.

Critique of Royscot Trust v Rogerson and fiction of fraud

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CA has created an artificial distinction between damages for negligent misstatements in tort (Hedley Byrne v Heller) and damages under s.2(1) for negligent misrepresentation

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Very literal statutory interpretation of the wording of s.2(1)

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There is a failure to draw any distinction between fraud and negligence - one is dishonest and the other honest but careless

Negligent misrepresentation- summary Negligent misstatement • • • • • • • • • •

Common law basis No contract needed. Special relationship/assumption of responsibility, needed to recover economic loss in tort. Damages- loss must not be too remote. Losses must be reasonably foreseeable. Hedley Byrne v Heller S.2(1) MA 1967 Statutory basis. Contractual relationship required. Test- if person would have been liable if the representation was fraudulent, will be liable even though representation was not fraudulent. Reverse burden of proof- the misrepresentor bears the burden of trying to establish that they had an honest belief in statement and had grounds for believing it true. Fiction of fraud- damages are assessed on the same basis as if misrepresentation had been fraudulent. Remoteness- test under S.2(1) is very wide ‘all direct losses regardless of foreseeability. Arguably, recoverability of damages in fraud cases should apply to S.2(1) claims. Royscot Trust v Rogerson

Causation and S.2(1) MA 1967 claims  All direct losses flowing from the breach are recoverable under s.2(1),  The emphasis of case law since Royscot has been concerned with whether the misrepresentation actually caused the loss?  If the misrepresentation caused the loss- then the loss is recoverable  Only if there is an unreasonable intervening action will this jeopardise recoverability

Causation continued 

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Naughton v O’Callaghan (1990) Ps purchased colt for 26,000 guineas. Pedigree wrongly described so that actual value was 23,500 guineas. Ps trained and raced the horse which did badly. P then discovered misrepresentation as to pedigree. Horse’s value fell to £1,500. Why formulate claim as misrepresentation and not breach of contract? Judge considered the fall in value to £1500 was caused by the misrepresentation rather then intervening actions of Ps. The P’s were not in breach. S.2(1) damages were awarded.

Causation continued  

Naughton v O’Callaghan (1990) P’s had trained and raced the horse. This was exactly the conduct to be expected having purchased a race horse The P’s were not in breach as a result of their actions.

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Ps recovered difference between purchase price and the value of the horse at date of judgment.

Causation- limitations Causation-limitations Fraudulent misrep v Negligent misrep- summary Fraudulent misrep • • • •

Common law. Based upon the tort of deceit Aim to put person in position would have been without misrep Test of remoteness is very wide indeed. All direct losses incurred, regardless of foreseeability

Negligent misrep -Negligent misstatement • Common law basis. No contract needed. • Special relationship/assumption of responsibility, needed to recover economic loss in tort. • Damages- loss must not be too remote. Losses must be reasonably foreseeable. Negligent misrep- S.2(1) MA 1967 • Statutory basis. Contractual relationship required. • Test- if person would have been liable if the representation was fraudulent, will be liable even though representation was not fraudulent. • Reverse burden of proof. Fiction of fraud. • Remoteness- test under S.2(1) is very wide ‘all direct losses regardless of foreseeability. The recoverability of damages in fraud cases should apply to S.2(1) claims.

Part 4 Innocent misrepresentation Outcomes- Innocent misrepresentation 1. S.2(2) MA 1967- the principles 2. William Sindall v Cambridgeshire CC- the application 3. No damages when right to rescission lost 1. S.2(2) Misrepresentation Act 1967- the principles 

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S.2(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be: equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.

1. S.2(2) Misrep Act 1967- damages in lieu of recission  Discretion to award damages instead of rescission  If court considers “just & equitable to do so”, having regard to:    

the importance of the representation in relation to the contract as a whole The loss that would be caused to the misrepresentee. The loss that would be caused to the misrepresentor Likely to apply to innocent misrepresentations

2. William Sindall v Cambridgeshire CC (1994) (CA)  

Contract to purchase land on which the purchaser intended to build houses. Delays in obtaining planning permission and, in the meantime, the market value of the land fell dramatically. Purchaser then discovered a sewer running across the land which required a sixfoot maintenance strip. P therefore sought to rescind on the basis of misrepresentation and mistake.

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Court of Appeal held:  On the facts there was no misrepresentation by the D. Therefore, the contract could not be rescinded for misrepresentation.  OBITER the CA considered that even if there had been an actionable misrepresentation, it would have exercised its discretion under s.2(2) M.A. and awarded damages in lieu of rescission.  Why?  The importance of the representation in relation to the contract as a whole £5m sale of land but the ‘misrep’ would have related to matter costing only £18,000 to remedy by diverting the sewer, and which was unlikely to have interfered with development or resale (i.e. trivial misrepresentation so rescission too drastic on the facts). …CA held

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The loss that would be caused to the misrepresentee if contract is upheld. This would not be, as argued by the purchasers, the fall in market value of the land. If there had been misrepresentation the loss caused (utilising S.2(2) MA 1967) would have been £18,000 to divert the sewer. The loss that would be caused to the misrepresentor by rescission. The return of the purchase price plus interest in exchange for land now worth much less. Rescission would place the loss due to decline in market value of the land on the misrepresentor and this was too drastic.

3. Availability of s.2(2) discretion  It appears that there is no discretion to award damages in lieu of rescission where rescission has been lost (barred).  Result may be no remedy at all.

 Government of Zanzibar v British Aerospace  Pankhania v Hackney LBC  Salt v Stratstone (CA)

Part 5 Contributory negl...