Law of Contract Misrepresentation

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Law of Contract
Misrepresentation
Misrepresentation
When negotiating a contract, the prospective
parties may say many things which are
designed to encourage the other party to enter
into the contract.
1) Sometimes these become terms of the
contract
2) Sometimes they do not become terms but
may be representations (false statements) that
may have induced the party relying on it, to
enter into the contract.
Misrepresentation
Statements made by parties during the course
of negotiations leading to a contract could
either be,
1) Terms or
2) representations
3) or a mere puff
Misrepresentation
The distinction between a term and a mere
representation is important because :
1) a failure to comply with a term results in a breach of
contract, which entitles the party affected to
repudiate/rescind the contract or enforce specific
performance, or claim damages.
2) If a statement is a mere representation which is not
complied with then it results in a claim for
misrepresentation and thus damages or rescission in
some cases.
But see the result of the Misrepresentation Act 1967
Misrepresentation
If the statement is found to be a representation
and
not a term of contract then we would have to
ask if
the statement was in fact a,
Misrepresentation.
Misrepresentation
What is misrepresentation ?
A misrepresentation may be defined as an
“ Is an untrue statement of fact by one party
which
has induced, the other to enter into the
contract”
Misrepresentation
Thus a misrepresentation is a :
1) statement of fact
2) addressed to the party that was misled as a
result
3) statement induced the party into the contract
Misrepresentation
The statement may be in any form :
1) spoken
2) written
3) conduct
May be expressed even by conduct
Spice Girls Ltd v Aprilia World Service
(2000)
Facts : The participation by all five existing members of
the spice girls pop group in an advertising shoot, was
held to have carried the implication that none of them
was planning to leave the group
Held : When this turned out to be untrue, an action for
misrepresentation was possible in relation to a
sponsorship contract signed shortly after the shoot.
Mere silence not misrepresentation
Mere silence will not amount to
misrepresentation.
Fletcher v Krell (1873)
Facts : A woman applied for the post of
governess, without revealing that she had been
previously married. At that time this may well
have been a factor that would have affected the
employer’s decision to employ her.
Held : Silence alone would not amount to
misrepresentation.
But see exceptions below
Silent Nondisclosure/misrepresentation
If a statement which was true when made,
becomes false as a result of changed
circumstances, keeping silent, of the
changed nature may be treated as a
misrepresentation.
With v O’Flanagan (1936)
Facts : A doctor was selling his medical practice. He
told a prospective buyer that it was worth £200 per
annum, which was true at that time. The doctor fell ill
and many of patients left him, and by the time the
contract was signed, there was almost no income.
Held : The failure to update the buyer on the
developments amounted to misrepresentation.
Silent Nondisclosure/misrepresentation
A statement that is literally true, may be
treated as a misrepresentation if
“relevant’ information related to the
statement is not disclosed
Dimmock v Hallett (1866)
Held : The statement that flats were let was true
; but the failure to disclose that the tenants had
given notice to quit, turned it into a
misrepresentation.
Silent Nondisclosure/misrepresentation
“Uberrimae fidei” contracts or contracts
in “utmost good faith”. e.g. insurance
contracts
In contracts of this kind, the maker of
statement is obliged to disclose relevant
information, even if not asked for.
Lambert v Co-operative Insurance
society(1975)
Statement of facts
The following are not statement of facts :
1) statements of opinion or belief
2) statements of future conduct or intention
Statements of Opinion or belief
Bisset v Wilkinson (1927)
Facts : The owner of a farm, which had never
been used as a sheep farm, stated that he
believed it would support a certain number of
sheep (2000 sheep).
Held : The court held that the statement was
one of opinion and not fact, thus it was not a
misrepresentation.
But see Esso Petroleum Ltd V Mardon (1976)
where
Bisset was distinguished
Statements of Opinion or belief
Esso Petroleum Ltd v Mardon (1976)
Esso represented to the defendant, a prospective
tenant of a petrol filling station which was in the
process of construction, that the throughput of
petrol at the station was likely to reach 200,000
gallons per year.
Unfortunately, it reached only 78,000 gallons and
Mardon suffered losses. He could not pay Esso for
their petrol and Esso sued, and Mardon counter
claimed on misrepresentation
Held : CA (Lord Denning) said that the statement
was not an opinion but a statement as they had the
special skill and knowledge and would have made
the statement with “reasonable care and skill”
Statements of intention or future
conduct
A statement of intention or future
conduct, is not a statement of fact.
Wales v Wadham (1977)
e.g. Where one says “ over the next five years,
our investment plans amount to five million
pounds….etc”
“The area around this building will be
developed further and become a busy shopping
area..”
Statements of intention or future
conduct
But a person who misrepresents his
“present” intention does make a false
statement of fact
Edgington v Fitzmaurice(1885)
A company raised money from the public by saying
that the money would be invested in the expansion
of the business. The directors’ real intention was to
use the money to pay off the company’s debts.
Held : the statement was held to be a fradulent
misrepresentation.
Statement addressed to the party
misled
It must be shown that the representation
was addressed to the party misled, either
1) by way of direct communication
or
2) through a third party with the intention
that it be passed on
Statement addressed to the party
misled
Commercial Banking Co of Sydney v RH
Brown and Co (1972)
Facts : The defendant bank misrepresented to the
claimant’s bank the financial standing of one of the
claimant’s customers. The claimant’s bank
communicated the information to the claimant’s
customers.
The claimant’s bank communicated the information
to the claimants who acted on it to their detriment.
Held : The Defendant’s were liable.
Statement Induced the party
The test of inducement is subjective and not
objective.
i.e Was the claimant in fact induced and did he
rely on the statement.
The onus will then be on the maker of the
statement to proof that the receiver did not in
fact rely on statement.
Museprime Properties Ltd v Adhill
Properties (1991)
Statement Induced the party
Not induced if relies on own judgement or
investigation
Attwood v Small (1838)
Facts : The vendors of a mine made exaggerated
statements as to its earning potential and the purchaser
instructed a firm of expert surveyors to check the truth
of the statements.
The surveyors reported that the vendors statements
were correct
Held : The vendors were not liable - the purchasers had
been “induced” to enter into the contract by the
expert’s report and not by the vendors.
Statement Induced the party
It does not matter that party induced
could have found out that it was not true
because there was opportunity to do so.
Redgrave v Hurd (1881)
Facts : The purchaser of a solicitor’s practice
had the opportunity to consult documents
which would have revealed the falsity of the
seller’s statement about the practice’s income.
Held : The failure by the claimant in not doing
his own ‘research’ will not stop him from
making a claim in misrepresentation, if he was
so induced.
Types of misrepresentations
Misrepresentation can be classed as :
1. Fraudulent
2. Negligent at common law
Hedley Byrne v Heller (1964)
3. Negligent under statute
S2(1) Misrepresentation Act 1967
4. Innocent
Fraudulent Misrepresentation
Derry v Peek (1889)
as per Lord Herschell
“A fraudulent misrepresentation is a false statement
that is “made knowingly or without belief in its truth
or recklessly, careless as to whether it be true or false”
Note : the essence of fraud is the absence of honest
belief.
Fraudulent misrepresentation
Derry v Peek (1889)
Facts : A share prospectus falsely stated that
the company had the right to use mechanical
power to draw trams, without explaining that
the government’s consent was required for this.
In fact the directors honestly believed that
obtaining consent was a pure formality,
although it was ultimately refused.
Held : The house of lords held that there had
been no fraudulent misrepresentation
Negligent Misrepresentation
Negligent Misrepresentation under
common law.
Until 1963, damages could be claimed for
misrepresentation only where it was fraudulent.
All Non-fraudulent misrepresentations were
classed as “innocent” and damages were not
available for them.
Negligent Misrepresentation
In 1963, the HL stated, “obiter”, in
Hedley Byrne & Co Ltd v Heller &
Partners (1964)
Held : A party can claim damages for negligent
mis-statement under both tort and contract,
where there was a “special relationship”
between the parties.
i.e the maker of the statement has some skill or
knowledge and he could reasonably foresee
that the other party would rely on the
statement.
Negligent Misrepresentation
Negligent Misrepresentation under the :
Misrepresentation Act 1967
S 2 (1) of the MA 1967, provides that
“Where a party has entered into a contract after a
misrepresentation has been made to him, by another
party, and as a result has suffered loss, then, if the
other party would be liable to damages in respect
thereof had the misrepresentation had been fraudulent,
the party who misrepresented, shall be so liable, not
withstanding that the statement was not
fraudulent..Unless he(maker of statement) proves that
he had reasonable grounds to believe that the
statement was true..”
Negligent Misrepresentation
Result of Misrepresentation Act 1967 :
1) The burden of proof is reversed to
show “innocent” misrepresentation
2) Claimant can choose to rely either on
common law or statute
3) There is no need to show “special
relationship’ under the statute unlike
common law, Hedly Byrne v Heller
requirement.
Negligent Misrepresentation
The courts relied on S2(1) of the
Misrepresentation Act 1967, to hold Spice Girls
Ltd liable to Aprilia
Spice Girls Ltd v Aprilia World Service
(2002)
Facts : Ms Halliwell, one of the Spice Girls, had
declared her intention to leave the group before, the
agreement was signed. Aprilia was not informed of this.
The commercial shoot with all the girls was done.
If Aprilia knew that Ms Halliwell would leave the group
the contract would not have been signed.
Held : The CA held there was misrepresentation under
S2(1)
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