3010 LAW – CONTRACTS
MISREPRESENTATION
Introduction
Frequently a party seeks to induce others to enter a contract
by making a statement about the nature of goods or services
offered. Such representations sometimes become part of the
contract itself but sometimes they are not part of the contract.
For example, an offeror may state during negotiation of the
contract that the car he is offering for sale is a 1998 Buick. In
drawing up the contract the parties may simply document the
vehicle as a 1998 Buick car. If having bought the car, the buyer
discovers from his garage mechanic that the car is a 1995
Buick, the seller can be liable for breach of contract, and for
damages to compensate for any loss suffered by the buyer from
the breach.
Alternatively, the buyer may be induced to buy the car at the
agreed price because he believes the seller’s statement that the
vehicle was made in 1998. If the contract document does not
state the year that the car was made, the buyer may not be able
to sue for breach of contract. However, if the seller’s statement
was a factor that induced him to buy the car, the buyer may
have a remedy for misrepresentation by the seller.
Allegation of fact
A misrepresentation must normally be a statement of alleged
fact. So if a seller promises to have the car fully checked
mechanically and any defects fixed before delivery such a
promise is unlikely to be considered a misrepresentation if not
acted upon. If the promise is not included in the contract, it
will likely not be enforceable.
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An expression of opinion is normally not considered a
statement of fact, unless the person making it is an expert.
Accordingly if a professional car salesperson expresses the
opinion that a new car he is offering for sale is the most
reliable car on the market, such opinion will likely be
considered in law as a statement of fact. The same statement
by a non-expert lay person would be merely a statement of
opinion, not fact.
Silence as misrepresentation
Normally silence will not count as misrepresentation. A seller
who fails to reveal that the car he is offering for sale was in an
accident and is likely to require more frequent servicing than
usual is not making a misrepresenting. However, if the seller is
asked by the buyer whether the car has been in an accident
and subject to more frequent servicing, he may make a
misrepresentation if she fails to provide such information if she
knows, or ought to know, that it is true.
See Hoy v. Lovanovski (p. 244 Yates) for an example of silence
not counting as misrepresentation. Hoy sued for fraudulent
misrepresentation when he found the house he had bought was
infested with termites. The Lovanovskis did not mention the
termites. No fraud and no misrepresentation. If you mislead
yourself, caveat emptor applies. Hoy had had the house
inspected so he didn't rely on any statement or lack of
statement from the sellers. Note that Hoy may have a legal case
against the inspector.
Some contractual dealings require “utmost good faith”.
Insurance companies require disclosure of previous illnesses,
past claims, present medical condition, and refusal of coverage
by other insurers before issuing a policy. If it comes to light
later that such information was withheld by the insured, a
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claim on the policy may be denied because of
misrepresentation by the insured.
Taking steps to hide a defect such as a vehicle that burns oil
due to a defective cylinder head would likely be considered
misrepresentation even if the buyer does not ask a question
about such a defect.
Statement must be false
The statement of fact must be false if it is to be a misrepresentation. If only part of the truth is told, this can be a misrepresentation. For example, “the house has been checked for
termites”, will likely be a misrepresentation if the seller fails to
reveal that a termite infestation was found but not treated.
Inducement
Even if a false statement is misleading, it will only be a
misrepresentation if it induced the other party to enter the
contract. If a potential client is told by the surgeon that
prospective plastic surgery on her nose has zero risk of adverse
side effects, the client may agree to surgery even though she
has researched the topic herself and is aware of a 20% chance
of adverse side effects. If the person is willing to take the 20%
risk, it is clear she was not induced by the misrepresentation.
See Hoy above where the house buyer did not rely on the
seller’s silence on the question of termites.
See Papaioannou et al. v. 370684 Ontario Ltd. et al. where the
plaintiff successfully sued for misrepresentation because the
bar business profits had been overstated by the sellers. The
fact that the bar catered to a gay clientele had not been
revealed to him by the sellers, but the plaintiff had visited the
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bar before the contract of sale and must have been aware of
the clientele.
Beer v. Townsgate I Ltd. (p. 246).
Unsophisticated buyers. Purchaser was asked by court why he
bought the property. He replied: "Because as I told you, I
didn't see that there was nothing to lose here, only to gain."
Frenzied atmosphere. False sense of scarcity. Told purchase
risk free and a guaranteed investment. Exemption clause was
buried in the contract and was not brought to the attention of
the purchasers.
Terms of the contract
If a car is represented as a 1998 model, the buyer can protect
himself by having the year written into the contract. If it turns
out to be a 1994 model, there is a breach of contract and the
ability to sue if damages have been incurred. If one enters into
a franchise agreement for a gasoline service station upon the
inducement from the franchiser that there are local authority
plans to re-route a busy road to run past the service station,
this is unlikely to be written into the contract so the ability to
sue for misrepresentation is useful.
Esso v. Mardon
Consumer protection legislation sometimes includes sales
representations in the contract.
Types of misrepresentation
Innocent
Negligent
Fraudulent
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Innocent misrepresentation
False statement made without fraud or carelessness. Seller of
used car may have been told by company he bought it from
that the car is a 1998 model. If he said in good faith to a buyer
that it was a 1998 model when it was really a 1994 model, the
buyer would have only one remedy – rescission.
That is the party in possession of the property will return the
item to the seller along with profits made from it. Damages not
available but expenses are. The seller of the item will return
the money received from the buyer.
Rescission is a limited remedy and is NOT AVAILABLE
WHEN:
(a)
(b)
(c)
(d)
The person in possession of the item affirms the
contract by using the benefit of the contract. Use of the
car after learning it was older than expected.
Item is impossible to restore due to destruction,
integration with other matter – e.g. steel rods forming
the infrastructure of a building – or damage.
Adverse to a third party. Seller relied on buyer's
innocent statement that the car showed signs of having
been in an accident. Seller finds later that it was not
and that he had sold the car for less than it was worth.
No rescission if it has been sold to a third party.
Victim does not have clean hands. Buyer told by seller
that car was 2001 model but only 1997. No rescission if
buyer paid by cheque but had insufficient funds in the
account for three months after the sale.
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Fraudulent misrepresentation
If a misrepresentation of fact is intentional and the other party
is induced into a contract by the misrepresentation, that party
may seek both the contractual remedy of rescission of the
contract and the remedy of damages for the tort of deceit. The
old (1889) English case of Derry v. Peek established the
elements necessary for fraud as a false statement made
(a) knowingly; (b) without belief in its truth; or recklessly
and carelessly as to whether the statement is true or
false. There is still debate as to what this means exactly
but it appears that, if the maker of the statement of
fact does not believe it to be true, it is considered to be
fraudulent. It is no defence to say “I did not know for
sure it was false, but didn’t bother to check if it was
true”.
For there to be a misrepresentation in law, the innocent party
must be induced into the contract by the false statement. The
fact that she relied on the false statement without checking
whether it was true will not hinder an action for deceit and/or
fraudulent misrepresentation. However, fraud can be difficult
to prove even on a balance of probabilities.
Negligent misrepresentation
Negligent misrepresentation involves a false statement of
alleged fact that the person making it honestly believed to be
true but ought to have known was false. A car dealership may
honestly believe the 1997 model offered for sale is a 2001 model
and make a statement to a prospective buyer that it is a 2001
model. If the prospective buyer is induced into a contract to
buy the car by that false statement, she will likely be able to sue
for negligent misrepresentation. *(It is assumed that the court
does not consider the false statement to be a term of the
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contract). If it were considered a term of the contract, the
buyer would be entitled to sue for breach of contract).* As an
expert in the motor vehicle sales field, the seller would
normally be expected to have sufficient knowledge to
distinguish a 1997 car from a 2001 model.
The case Esso Petroleum Co. Ltd. v. Mardon [1976] 2 All E.R. 5
(Court of Appeal) provides an example of negligent
misrepresentation inducing entry into a contract. Esso
provided a substantially overstated estimate of profits for
Mardon who entered an agreement to operate a gas station.
The Company negligently based its estimate on an assumption
that a road would be built running past the location of the gas
station. The court held that the Company was negligent in its
failure to check with the city planning authority that the road
would pass the entrance to the gas station. Mardon relied on
the misrepresentation to his substantial detriment. The appeal
courts held that the statement about projected sales was
actually a term of the contract, which gave Mardon a higher
award of damages than he would have gotten from the false
statement as a negligent misrepresentation.
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