MISREPRESENTATION

Introduction

English law imposes a duty to not make false statements of fact or law to the other
contracting party and thereby induce him to enter into the contract.

Misrepresentation

A misrepresentation is a false statement of fact, which is addressed to the party,

misled, which, whilst not being a term of the contract, which is material and induces the
other party to enter the contract and it was relied upon.

The effect of an actionable misrepresentation is to make the contract voidable, giving the
innocent party the right to rescind the contract and/or claim damages.

1. FALSE STATEMENT OF FACT

An actionable misrepresentation must be a false statement of fact, not opinion or future

intention or law.

(A) STATEMENTS OF OPINION

A false statement of opinion is not a misrepresentation of fact. See:

• Bisset v Wilkinson [1927] AC 177.

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However, where the person giving the statement was in a position to know the true facts and
it can be proved that he could not reasonably have held such a view as a result, then his
opinion will be treated as a statement of fact. See:

• Smith v Land & House Property Corp. (1884) 28 Ch D 7.

(B) MERE PUFFS

Some expressions of opinion are mere puffs. Thus, in Dimmock v Hallet (1866) 2 Ch App 21,
the description of land as 'fertile and improvable' was held not to constitute a representation.

(C) STATEMENTS AS TO THE FUTURE

A false statement by a person as to what he will do in the future is not a misrepresentation.

And will not be binding on a person unless the statement is incorporated into a contract.

However, if a person knows that his promise, which has induced another to enter into a
contract, will not in fact be carried out then he will be liable. See:

• Edgington v Fitzmaurice (1885) 29 Ch D 459

• Esso Petroleum v Mardon [1976] QB 801.

(D) STATEMENTS OF THE LAW

A false statement as to the law is not actionable misrepresentation because everyone is

presumed to know the law. However, the distinction between fact and law is not simple. See:

• Solle v Butcher [1950] 1 KB 671.

In practice however, misrepresentation of law can now constitute an actionable

misrepresentation claim. Kleinwort Benson Ltd v Lincoln City Council (1999).

(E) SILENCE

Generally, silence is not a misrepresentation. Smith v Hughes (1871) LR 6 QB 597.

However, there are three fundamental exceptions to this rule:

(i) HALF TRUTHS

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The representor must not misleadingly tell only part of the truth. Thus, a statement that does
not present the whole truth may be regarded as a misrepresentation. See:

• Nottingham Brick & Tile Co. v Butler (1889) 16 QBD 778.

(ii) STATEMENTS WHICH BECOME FALSE

Where a statement was true when made out but due to a change of circumstances has
become false by the time it is acted upon, there is a duty to disclose the truth. See: With v
O'Flanagan [1936] Ch 575.

(iii) CONTRACTS UBERRIMAE FIDEI

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of
all material facts because one party is in a strong position to know the truth. Examples would
include contracts of insurance and family settlements.

Where there is a fiduciary relationship between the parties to a contract a duty of disclosure
will arise, eg, solicitor and client, bank manager and client, trustee and beneficiary, and
inter-family agreements.

2. THE STATEMENT WAS ADDRESSED TO THE PARTY MISLED

After establishing the disputed statement it must be shown that the statement was addressed
to the party misled. There are two ways for it. First is by direct communication of the
misrepresentation to the claimant by the representor. Alternatively, it can be addressed by
the representor to a third party with intention that it be passed on to the claimant.
Commercial Banking Co of Sydney v RH Brown and Co (1972)

2. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT

Finally, the false statement must have induced the representee to enter into the contract. The
requirements here are that (a) the misrepresentation must be material and (b) it must have
been relied on.

(A) MATERIALITY

The misrepresentation must be material, in the sense that it would have induced a
reasonable person to enter into the contract.

• Museprime Properties v Adhill Properties [1990] 36 EG 114.

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 • Mathias v Yetts (1882)

The onus is on the representor to show that the claimant did not rely on the statement and
entered the contract on his own judgement.

(B) RELIANCE

The representee must have relied on the misrepresentation.

There will be no reliance if the misrepresentee was unaware of the misrepresentation. See:
Horsfall v Thomas [1862] 1 H&C 90.

There will be no reliance if the representee does not rely on the misrepresentation but on
his own judgment or investigations. See: Attwood v Small (1838) 6 CI & F 232.

There will be reliance even if the misrepresentee is given an opportunity to discover the
truth but does not take the offer up. The misrepresentation will still be considered as an
inducement. See: Redgrave v Hurd (1881) 20 Ch D 1.

There will be reliance even if the misrepresentation was not the only inducement for the
representee to enter into the contract. See: Edgington v Fitzmaurice (above)

3. TYPES OF MISREPRESENTATION

Once misrepresentation has been established it is necessary to consider what type of

misrepresentation has been made. There are three types of misrepresentation: fraudulent,
negligent and wholly innocent. The importance of the distinction lies in the remedies
available for each type.

(A) FRAUDULENT MISREPRESENTATION

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a

false statement that is "made (i) knowingly, or (ii) without belief in its truth, or (iii)
recklessly, careless as to whether it be true or false." Therefore, if someone makes a
statement which they honestly believe is true, then it cannot be fraudulent. See: Derry v
Peek (1889) 14 App Cas 337.

The burden of proof is on the plaintiff - he who asserts fraud must prove it. Tactically, it may
be difficult to prove fraud, in the light of Lord Herschell's requirements.

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The remedy is rescission (subject to exceptions discussed later) and damages in the tort of
deceit (see later).

(B) NEGLIGENT MISREPRESENTATION

This is a false statement made by a person who had no reasonable grounds for believing it
to be true. There are two possible ways to claim: either under common law or statute.

(i) NEGLIGENT MISSTATEMENT AT COMMON LAW

The House of Lords have held that in certain circumstances damages may be recoverable in
tort for negligent misstatement causing financial loss: Hedley Byrne v Heller [1964] AC 465.

Success depends upon proof of a special relationship existing between the parties. Such a
duty can arise in a purely commercial relationship where the representor has (or purports to
have) some special skill or knowledge and knows (or it is reasonable for him to assume) that
the representee will rely on the representation.

The factors to be established under Hedley Byrne principle:

1. Knowledge of representor – the greater the knowledge which the representor has of the
representee and of the purposes for which the representee is likely to rely upon his
statement, the more likely it is that the representor will be liable. (Caparo v Dickman)

2. Purpose of the statement: If purpose of statement is made with intention to make

representee rely on it, then liability is imposed.

3. Reasonable for representee to rely on the statement: objective standard.

See:

• Esso Petroleum v Mardon [1976] (above)

• Williams v Natural Life Health Foods (1998) TheTimes, May 1.

The remedies are rescission (subject to exceptions discussed later) and damages in the tort
of negligence (see later).

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(ii) NEGLIGENT MISREPRESENTATION

UNDER s2(1) MISREPRESENTATION ACT 1967

This provision does not require the representee to establish a duty of care and reverses the
burden of proof. Once a party has proved that there has been a misrepresentation which
induced him to enter into the contract, the person making the misrepresentation will be
liable in damages unless he proves he had reasonable grounds to believe and did believe
that the facts represented were true. This burden may be difficult to discharge as shown in:

• Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574.

• Royscot

Remedies: recent case-law has shown that the remedies available are as those available in
fraud unless the representor discharges the burden of proof. In particular, damages will be
based in the tort of deceit rather than the tort of negligence (see later).

(C) WHOLLY INNOCENT MISREPRESENTATION

This is a false statement which the person makes honestly believing it to be true.

The remedy is either

• (i) rescission with an indemnity, or

• (ii) damages in lieu of rescission under the courts discretion in s2(2)
Misrepresentation Act 1967 (see below).

4. REMEDIES FOR MISREPRESENTATION

Once an actionable misrepresentation has been established, it is then necessary to consider

the remedies available to the misrepresentee.

(A) RESCISSION

Rescission, ie setting aside the contract, is possible in all cases of misrepresentation. The
aim of rescission is to put the parties back in their original position, as though the contract
had not been made.

See: Car & Universal Finance v Caldwell [1965] 1 QB 525.

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BARS TO RESCISSION: Rescission is an equitable remedy and is awarded at the discretion

of the court. The injured party may lose the right to rescind in the following four

circumstances:

(i) AFFIRMATION OF THE CONTRACT The injured party will affirm the contract if, with
full knowledge of the misrepresentation and of their right to rescind, they expressly state
that they intend to continue with the contract, or if they do an act from which the intention
may be implied. See: Long v Lloyd [1958] 1 WLR 753.

Peyman v Lanjani [1985]

(ii) LAPSE OF TIME If the injured party does not take action to rescind within a reasonable
time, the right will be lost.

Leaf v International Galleries [1950] 2 KB 86.

(iii) RESTITUTION IN INTEGRUM IMPOSSIBLE The injured party will lose the right to
rescind if substantial restoration is impossible, ie if the parties cannot be restored to their
original position. See:

Vigers v Pike (1842) 8 CI&F 562.

Armstrong v Jackson [1917] 2 KB 822.

(iv) THIRD PARTY ACQUIRES RIGHTS If a third party acquires rights in property, in good
faith and for value, the misrepresentee will lose their right to rescind. See: Phillips v Brooks

(B) DAMAGES: Awarded as per discretion of the courts.

The common law was late in recognising a right to damages for non-fraudulent
misrepresentations. Originally an innocent misrepresentation provided only an indemnity
for necessary expenditures incurred as a part of the contract rescinded byway of monetary
compensation: see Whittington v Seale-Hayne [1900] 82 LT 49. Where a misrepresentation
was fraudulent, damages were recoverable under the tortious action for deceit. This
requires the claimant to prove that the statement was made knowing that it was untrue,
without any genuine belief in its truth, or with a reckless disregard for whether it was true or
not: see Derry v Peek (1889). Damages for deceit are, of course still available, but where a

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claimant has a choice of which action to pursue, they will elect to recover damages under
Misrepresentation Act s.2(1) because its requirements are easier to prove.

The measure of damages for deceit, being tortious, is based on putting the claimant into the
position he or she would have been in had the misrepresentation not been made. This is in
distinction to putting the claimant in the position he or she would have been in had the
statement been true. In general, this precludes the claimant from recovering lost profits on
the contract. In some circumstances, however, some damages of this kind may be
recovered. In East v Maurer [1991] 1 WLR 461, the fraudulent statement led the plaintiff to
buy a business which turned out to be much less profitable than it would have been had the
statement been true. The damages recoverable took account of the fact that if the statement
had not been made the plaintiff would probably have bought another business, from which
profits would have been made. These potential profits were recoverable, even though the
reduced profits on the business actually bought were not.

Once it is established that the statement was fraudulent, all losses (calculated on the basis
outlined in the previous paragraph) which are directly attributable to the deceit are
recoverable. The normal rules of ‘remoteness’ which apply to contract or tort damages do
not operate in this situation: Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158.

The most important innovation in the Misrepresentation Act 1967 was the introduction of the
action for what is generally referred to as ‘negligent misrepresentation’, in s.2(1). In fact, the
Act does not use this terminology, but provides that a statement which would form the basis
of an action in deceit, if made fraudulently, will also give rise to liability unless the person
making it is able 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’.

There are two important points to note about this section: the first relates to the burden of
proof, noted above; the second to the measure of damages.

The burden of proof

On the burden of proof, all that the claimant has to do is to prove that a misrepresentation
was made and that it induced the contract. The defendant will then be liable for damages
under s.2(1) unless he or she can prove that there were reasonable grounds for his or her
belief that the statement was true. This may not be easy to satisfy. In Howard Marine and
Dredging Co v Ogden and Sons (1978) it was held that reliance on a usually authoritative
Register of the details of ships did not amount to ‘reasonable grounds’ for a false statement
of a barge’s capacity, when the maker of the statement had access to the correct figure in
the shipping documents. In contrast, in Al-Hasawi v Nottingham Forrest FC Ltd [2019] EWCA
Civ 2242 it was held that a representor involved in the sale of a football club could show he
had reasonable grounds to believe the statements he made about the club’s outstanding
liabilities when he had obtained this information from the relevant club’s officers.

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The measure of damages

As regards the measure of damages, the most important authority is Royscot Trust Ltd v
Rogerson [1991] 2 QB 297. Here it was held by the Court of Appeal that damages under
s.2(1) should be calculated in the same way as if the statement had been made fraudulently.
This means, therefore, that all losses are recoverable, not simply those that were reasonably
foreseeable (as would be the case with an action for negligent mis-statement under the
Hedley Byrne principle). This conclusion was based on the court’s view of the proper
interpretation of s.2(1) and the fact that it appears to require the negligent misrepresentor to
be treated in the same way as the fraudulent one. This conclusion is somewhat controversial,
and some members of the House of Lords in Smith New Court Securities Ltd v Scrimgeour
Vickers (Asset Management) Ltd [1997] indicated doubts about its correctness. It has not as
yet been overruled. In Gran Gelato v Richcliff (Group) Ltd [1992] 2 WLR 867 it was suggested
that damages under s.2(1) might be reduced to reflect any want of care (contributory
negligence) by the representee. This does produce a conundrum as damages in deceit are
not reduced to take account of the representee’s contributory negligence (Standard
Chartered Bank v Pakistan National Shipping (No 2) (2003)) and yet, according to Royscott the
damages available under s.2(1) are the same as those available in the tort of deceit.

The law of tort, in Hedley Byrne v Heller (1964), eventually recognised that a negligent
misstatement which caused economic loss could be actionable. The action that has
developed from this provides another potential remedy for a person who has entered into a
contract as a result of a negligent misstatement from the other party.

That the action can be used in this way was confirmed by the Court of Appeal in Esso v
Mardon (1976). Generally, however, the claimant in such a situation will be better advised to
use the action provided by s.2 of the Misrepresentation Act 1967, since this has advantages
in terms of the burden of proof and damages recoverable, as will be indicated below. The
one situation where the Hedley Byrne action may be needed is if the statement cannot be
categorised as a statement of fact.

A negligently given opinion can, for example, be the basis for an action for negligent
misstatement under Hedley Byrne, without the need to show that it meets the strict
requirements of being a misrepresentation. A further situation where a claimant might
choose to pursue an action for damages under Hedley Byrne (or in the tort of deceit) would
be where A has suffered loss as a result of reliance upon B’s misrepresentation not through
entering a contract with B but rather as a result of entering a contract with C. For example, a
financial adviser recommends the purchase of shares.

If the advice contains a misrepresentation, damages under s.2(1) are not available as they
depend upon the loss being incurred as a consequence of entering a contract with the
misrepresentor. In this example the loss results from entering a contract with a third party,
the company/person selling the shares. That damages in these ‘three party’ situations are
not available under the Misrepresentation Act, s.2(1) was confirmed by the Court of Appeal
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in Taberna Europe CDO II plc v Selskabet (formerly Roskilde Bank A/S) (In Bankrupcy) [2016]
EWCA Civ 1262.

Section 2(2) of the Misrepresentation Act provides a discretion for a court to award damages
in lieu of rescission, where it is adjudged equitable to do so, taking account of the effect of
rescission on both parties. The most natural interpretation of the language of s.2(2),
however, suggests that damages may only be awarded under s.2(2) ‘in lieu of rescission’
when at the time of award there is a subsisting right to rescission. In other words, such
damages are unavailable where there was once a past right to rescind but which right had
subsequently been lost because one of the so called ‘bars’ to rescission i.e. affirmation,
lapse of time, the impossibility of restitution or the intervention of third-party rights (see
Section 9.2.1 above). This interpretation was supported by the Court of Appeal in Salt v
Stratstone Specialist Ltd [2015] EWCA Civ 745 thus resolving a longstanding conflict between
several first instance decisions on this point.

As to the measure of damages under this section, there is similarly no definitive ruling.
Section 2(3) states that if damages are awarded under s.2(1) and s.2(2), the latter must be
taken into account in assessing the former. This implies that s.2(2) damages will be less than
those under s.2(1).

In William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016 it was suggested
that the basic measure under s.2(2) should be the difference in value between what the
claimant was misled into believing he or she was receiving under the contract and the value
of what was in fact received. This seems sensible as an estimate of the loss of the right to
rescind. In this case it was said obiter that the proper measure of damages in lieu of
rescission if there had been a misrepresentation as to the existence of a small sewer beneath
development land bought for £5 million was the modest cost (£18,000) of re-routing the
sewer. Where the misrepresentation is more serious in relation to the contract as a whole
damages in lieu of rescission will be refused (Harsten Developments Ltd v Bleaken [2012]
EWHC 2704).

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