Misrepresentation

A misrepresentation is a false statement of fact or law which induces the

representee to enter a contract. Where a statement made during the course of
negotiations is classed as a representation rather than a term an action for
misrepresentation may be available where the statement turns out to be
untrue.

There are three types of misrepresentation:

1. innocent misrepresentation;
2. negligent misrepresentation; and
3. fraudulent misrepresentation.

The affect of a finding of misrepresentation is the contract is voidable i.e. the

contract exists but may be set aside by the representee. The remedy available
depends on the type of misrepresentation, but generally consists of rescission
and or damages. The right to rescind the contract may be lost in some
circumstances.

In order to amount to an actionable misrepresentation certain criteria must be

satisfied:

False statement
There must be a false statement of fact or law as oppose to opinion or estimate
of future events:

Bisset v Wilkinson [1927] AC 177: The claimant purchased a piece of farm

land to use as a sheep farm. He asked the seller how many sheep the land would
hold. The seller had not used it as a sheep farm but estimated that it would
carry 2,000 sheep. In reliance of this statement the claimant purchased the
land. The estimate turned out to be wrong and the claimant brought an action
for misrepresentation.

HELD: The Privy Council held that the statement was only a statement of
opinion and not a statement of fact and therefore not an actionable
misrepresentation. The claimant's action was therefore unsuccessful.

Esso Petroleum v Mardon [1976] QB 801: Mr Mardon entered a tenancy

agreement with Esso Petroleum in respect of a new Petrol station. Esso's
experts had estimated that the petrol station would sell 200,000 gallons of
petrol. This estimate was based on figures which were prepared prior to
planning application. The planning permission changed the prominence of the
petrol station which would have an adverse affect on the sales rate. Esso made
no amendments to the estimate. The rent under the tenancy was also based on
the erroneous estimate. Consequently it became impossible for Mr Mardon to
run the petrol station profitably. In fact, despite his best endeavours the
petrol station only sold 78,000 gallons in the first year and made a loss of
£5,800.

HELD: The Court of Appeal held that there was no action for misrepresentation
as the statement was an estimate of future sales rather than a statement of
fact. However, the claimant was entitled to damages based on either negligent
misstatement at common law or breach of warranty of a collateral contract.

A statement of opinion may amount to an actionable misrep where the

representor was in a position to know the facts:

Smith v Land & House Property Corp (1884) 28 Ch D 7: The claimant

purchased a hotel. The seller described one of the tenants as being 'most
desirable'. In fact, as the seller knew, the tenant was in arrears and on the
verge of bankruptcy.
HELD: This was held to be a statement of fact rather than opinion as the seller
was in a position to know the facts.

A statement as to future intent cannot amount to a misrepresentation unless

the representor had no intention of carrying out the stated intent:

Edgington v Fitzmaurice (1885) 29 Ch D 459: The claimant purchased some

shares in the defendant company. The company prospectus stated the shares
were being offered in order to raise money to expand the company. In fact the
company was experiencing financial difficulty and the money raised from the
sale of the shares was going to be used to pay the company debts.

Held: Despite the fact that the statement related to a statement of future
intent, it was an actionable misrepresentation as the defendant had no intention
of using the money to expand the company.

False statement of law will now amount to an actionable misrepresentation :

Pankhania v Hackney [2002] EWHC 2441: The claimants purchased 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.

HELD: This was a misrepresentation as to law which had previously been

assumed not to be an actionable misrepresentation through analogy with case
law based on restitutionary claims for mistake of law. The rule barring recovery
for mistake of law was abolished by the House of Lords in Kleinwort Benson v
Lincoln County council. The High court held that actions based on
misrepresentation of law could now be actionable based upon that change of law.
The claimant's action was therefore successful.

Silence will not generally amount to a misrepresentation:

Smith v Hughes (1871) LR 6 QB 597: Held: both actions failed. The action
based on misrepresentation failed as you cannot have silence as a
misrepresentation. The defendant had not mislead the claimant to believe they
were old oats.

Walters v Morgan (1861) 3 DF & J 718: The defendant purchased some land.
The claimant wished to mine the land and produced a draft lease and pressured
the defendant into signing the lease before he realised the value of the land.
Once the defendant had discovered the true value, he refused to allow the
defendant to mine the land. The claimant sued for breach of contract and
sought specific performance. The defendant sought to have the contract
rescinded for misrepresentation.

Held: There was no misrepresentation since the claimant had not said anything
to mislead the defendant as to the value of the land. Silence cannot amount to
misrepresentation. However, the court refused an order of specific
performance as the claimant had sought to take advantage of the defendant’s
ignorance by rushing him into signing the lease.

Unless it is a contract of utmost good faith such as an insurance contract or

where the representor is in a fiduciary position.
- In such contracts a duty exists to disclose all material facts and a failure
to do so may give rise to an action for misrepresentation.

HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003]
UKHL 6: Chase Manhattan advanced substantial sums to finance the production
of a film syndicate. HIH provided insurance for the event that the film did not
make enough revenue to repay the loan. Chase Manhattan made the insurance a
condition of getting the loan and also specified the agent, Heath North America
(HNA), that must be used to obtain the insurance. HNA obtained the insurance
policies but in doing so made certain fraudulent misrepresentations and failed to
disclose a report that suggested the films were unlikely to make a profit. The
films did not generate sufficient revenue to cover the loan and Chase sought to
claim under the insurance policy. The insurance company refused to pay out
claiming to rescind the contract for misrepresentation and a failure to disclose
a material factor as required under s.19 & 20 of the Marine Insurance Act 1906
(applicable to all insurance contracts not just marine insurance). S.18 (3) (c) of
the Act provides that the insured need not disclose information which has been
waived by the insurer. The contract of insurance contained a truth of statement
clause which provided:

"[6] the Insured will not have any duty or obligation to make any representation,
warranty or disclosure of any nature, express or implied (such duty and
obligation being expressly waived by the insurers
[7] and shall have no liability of any nature to the insurers for any information
provided by any other parties [8] and any such information provided by or
nondisclosure by other parties including, but not limited to, Heath North
America & Special Risks Ltd (other than section I of the questionnaire) shall not
be a ground or grounds for avoidance of the insurers' obligations under the
policy or the cancellation thereof."

Chase sought to rely on this clause to argue that the insurance company could
not rescind the contract.

Held: The clause was ineffective. The insurers were entitled to rescind the
contract of insurance through both the misrepresentation and the non-
disclosure.

If a statement made becomes false because of a later change of circumstances,

there is an obligation to disclose the change of circumstances:

With v O'Flanagan [1936] Ch 575:

Inducement/reliance
Once it has been established that a false statement has been made it is then
necessary for the representee to demonstrate that the false statement
induced them to enter the contract. There can be no inducement or reliance if
the representee was unaware of the false statement:

Horsfall v Thomas [1862] 1 H&C 90:

If the representee or their agent checks out the validity of the statement they
have not relied on the statement:

Attwood v Small [1838] UKHL J60:

If the representee is given the opportunity to check out the statement but
does not in fact check it out, they are still able to demonstrate reliance:

Redgrave v Hurd (1881) 20 Ch D 1:

Types of misrepresentation

Once it has been established that a false statement was made and that it
induced the contract, it is necessary to determine the type of misrep in order
to determine the available remedy. A misrepresentation can be classed as
either:

 Fraudulent misrepresentation

 Negligent misrepresentation under s.2 (1) Misrepresentation Act 1967

 Negligent misstatement at common law. See here

 Wholly innocent misrepresentation

Fraudulent misrepresentation
Lord Herschell defined fraudulent misrepresentation in Derry v Peek as a
statement which is made either:

i. Knowing it to be false,
ii. Without belief in its truth, or
iii. Recklessly, careless as to whether it be true or false

The burden of proof lies on the claimant:

Derry v Peek (1889) 5 T.L.R. 625:

Negligent Misrepresentation

Negligent Misstatement at Common Law

Wholly innocent Misrepresentation
An innocent Misrepresentation exists where the representor can
demonstrate reasonable grounds for belief in the truth of the statement.