Misrepresentation

Monday, 22 April, 2024 9:29 AM

1. What are vitiating factors?

~ These factors can invalidate or cripple the contract.

~ Exp: Misrepresentation, mistake, duress, undue influence and illegality.
~ When these factors exist in a contract , the affected party can either rescind the contract
and claim for damages.
~ It can make a contract void or voidable.

Void :- Put the parties back in the position that they were in before the contract (no contract)
Voidable:- Innocent party can chose to end the contract or not.

2. What is a misrepresentation?

~ An unambiguous false statement of fact or law by one party (representor) which is

addressed to the party misled (representee), which is material and induces the other party to
enter into a contract.

• Contract can be made void. (pre-contractual position)

• Claim for damages.
• Requirements:-
1. Must be a statement of fact (not mere opinion).
2. The statement made must be untrue/false.
3. Must have induced innocent party to enter into the contract.

3. Types of misrepresentation?

1. Fraudulent misrepresentation
2. Negligent misrepresentation at Common Law
3. Misrepresentation under Statute
4. Innocent Misrepresentation
* [(2), (3) comes under one point (2)]

~ Remedies
- Rescission - Bars to Rescission

- Affirmation
- Lapse of time
- Impossible to return to the pre-contractual position
- Third party rights
- All or nothing
- Indemnity payment
- Damages - Remoteness of damages

Representor:- Person making the statement (representation)

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Representor:- Person making the statement (representation)
Representee:- Person to whom representation was made - (who relied on representation)

• There should be a distinction between a promise and a representation

• There is a very thin line that differentiates the two pre-contractual statements

Promise (Terms)
• Statements that imposes obligation on another are promises (terms/clauses)

Representation
• They are statements of inducement. They induce the other party to enter into the contract.
• There is no obligation imposed and the buyer is not forced. Seller just wants to influence the
buyer to purchase his goods and services.

How to differentiate the two?

- Using the Contractual Cartography Test

- Developed by Lord Moulton in Heilbut Smons v Buckleton

• There should be made a distinction between a 'promise' and a 'representation'
• Both are fundamentally different - Kleinwort Benson v Malaysia Mining Corporation Berhad
(1989)

A statement of fact

Bisset v Wilkinson (1927)

F - A buyer and a seller entered into a contract for the sale of land. Prior to the contract, the seller
(an agricultural worker) told the buyer (a sheep farmer) that he thought that the land could carry
around 2000 sheep. This was an honest guess. The land was not actually capable of carrying that
many sheep all year round. The buyer sought to rescind the contract on the grounds of
misrepresentation.

D - The Privy Council held in favour of the seller. The statement was a statement of opinion, and
the seller honestly held that opinion. As such, there was no misrepresentation.

*However, where someone lies about what their opinion is, that can also be considered a
statement of fact. This rule was laid down, neatly explained, in the following case.

Edgington v Fitzmaurice (1885)

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Edgington v Fitzmaurice (1885)

F - The directors of a company issued a prospectus inviting investors to subscribe for debentures,
claiming they would purchase and renovate property and develop trade. However, the directors
intended to use the money to pay off the company's debts. The claimant advanced money after
reading the prospectus, and sued the directors for deceit. The company went insolvent, and the
directors argued they were not liable for deceit because they only made a statement of their future
intentions.

D - The Court of Appeal held for the claimant. The directors’ statements as to their future
intentions was a statement of fact as to their present state of mind. As it was not true, there was a
false statement of fact.

LP:- A statement about what a person is thinking or believes is a statement of fact, and if it is
false it can amount to a misrepresentation.

*Additionally, in circumstances if a party giving an opinion appears to have facts on which their
opinion can be based, they are effectively stating that they possess such facts, and if not, the
statement is considered a misrepresentation.

Smith v Land and House Property Corporation (1884)

F - The claimant sold their hotel to a desirable tenant for £400 per year over a 7.5-year term. The
tenant missed several payments, but the defendant believed the tenant was paying rent. They won
the bid and the tenant went into liquidation. The defendant refused to complete the sale, leading
the claimant to sue for specific performance. The defendant argued that the transaction should be
avoided due to misrepresentation, and the claimant sued for specific performance. The defendant
responded that the transaction should be avoided for misrepresentation. The case highlights the
importance of accurate and fair representation in business transactions.

D - The Court of Appeal ruled in favor of the defendant, stating that the claimant's description of
the tenant as desirable was a misrepresentation, as the claimant knew of the tenant's non-
payment of rent, which was a fact that the defendant had relied on during the contract signing,
thereby avoiding the transaction for misrepresentation.

:- A statement of opinion can amount to a misrepresentation if it contains an implicit assertation

of fact.

:- A misrepresentation induces the contract if but for the misrepresentation, the innocent party
would not have entered into the contract.

Bowen LJ stated that:

- "In a case where the facts are equally well known to both parties, what one of them says to
the other is frequently nothing but an expression of opinion…But if the facts are not equally
well known to both sides, then a statement of opinion by the one who knows the facts best
involves very often a statement of material fact, for he impliedly states that he knows facts
which justify his opinion. "

A statement must refer to an existing fact, not something in the future, unless it is a statement of

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A statement must refer to an existing fact, not something in the future, unless it is a statement of
intention to be a misrepresentation

*There was a distinction between factual claims and 'mere sales talk', accepting that it is legitimate
for someone selling something to paint it in the best light, as long as that does not amount to lying
about it.

Dimmock v Hallett (1866)

F - The claimant was a mortgagee who possessed of a mortgaged farm. This farm was put up for
auction by the court. The particulars of sale greatly overestimated the amount of rent which could
be obtained from the land. The defendant bid on the land, and their bids were driven up by £4000
by the claimant’s counter-bids. The defendant later argued that the contract should be discharged
for misrepresentation.

D - The court ruled in favor of the defendant, stating that the claimant's bid on the land was not a
reason to avoid the sale, as the auctioneer had informed attendees that interested parties were
entitled to bid. By contrast, the misrepresentation as to the possible rent obtainable from the land
was a substantial misrepresentation which induced the defendant to enter the contract. The
contract could be avoided on these grounds.

• Land for sale was described as 'fertile and improvable': this was held to be simply sales talk,
and not a representation of fact.

:- A contract may be avoided where one party to the contract makes a false statement of fact
which induces the other party to enter into the contract.

*Usually, statements of law were not sufficient to amount to an actionable misrep.This could be
confusing because in practice it is not always clear when statement is one as to law or as to fact. A
similar distinction was made in cases of mistake and after that was abolished in Kleinwort Benson,
where it was seemed that the law on misrep would logically have to go the same way. This was
confirmed by the High Court in the case of,

Pankhania v Hackney LBC (2002)

F - The defendant was selling a car park, and told the buyer it was subject to a license agreement
that could be terminated with three months' notice, when in fact it was subject to a tenancy that
could not be terminated that easily.

D- It was argued that this was a statement of law, not of fact, but it was nevertheless found to be a
misrep, and the court said that there was no 'underlying principle' for distinguishing between a
statement of law and one of fact.

Kleinwort Benson v Lincoln City Council (1999)

F - The claimant agreed to make available to a subsidiary company of the D a £ 10 million credit
facility ( a type of loan). The defendant refused to act as guarantors but gave the claimant a ‘letter
of comfort’ which stated “ it is our policy to ensure that the business of the subsidiary company is
at all times in a position to meet its liabilities to you under the above arrangements”. There was a
collapse in the tin market and the subsidiary company ceased making any trade when it owned the

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collapse in the tin market and the subsidiary company ceased making any trade when it owned the
claimant 10 million the defendant refused to honour their word under the ‘letter of comfort’ and
the claimant tried to sue them for breach of contract .

D - High Court, Hirst J said this letter was a contractual promise and D were liable. CoA stated that
letter did not amount to a contractual promise and it was merely a representation of facts as to the
defendant’s policy at the time the statement was made. The defendant did not promise that they
would not change their policy for the future.

*However, in some circumstances, a statement of law may be considered a statement of opinion,

and in that case, it is not sufficient to amount to misrep.

Bolt Burdon Solicitors v Tariq (2016)

F - The defendants were ordered to pay 498,083.52 with contractual interest at the rate of 8%
totaling 50,706.44. The defendants were also ordered to pay an "additional amount" in the sum of
49,808.35, being 10% of the judgement sum (less the contractual interest awarded) pursuant to
CPR 36.17 (4)(d). The judgement against the defendants was at least as advantageous as the
proposals contained in the Part 36 offers. The claimant was awarded damages in the sum of
360,000, representing the value of the trademarks as a going concern at the relevant date. The
parties contracted for interest at 8% if the sum due was not paid on time. The defendants were
ordered to pay the sum of 70,000 on account of costs. The total figure for costs will be 114,336, of
which 70,000 has already been ordered.

D - The court ruled that the prescribed percentage should be applied to all interest awarded, not
just to the basic monetary award. The court also ruled that the last approved or agreed costs
budget should not be departed from unless there is good reason to do so. As the claimant has
succeeded on the issues which remained contested, the costs of and incidental to the
determination of these consequential matters must also be paid by the defendants.

Continuous Representations

~ In this situation, usually a statement alleged to be a misrep will be made some time before the
contract is made, in the course of negotiations or one party asking the other for information.

~ The statement made may be untrue at the time it is made but become untrue by the time the
contract comes into being, is it a misrep if the maker of the statement doesn't reveal that the
statement is now untrue?; Yes it does amounts to a misrep.

~ Generally, in dealing with this situation the courts use the concept of a 'continuing
representation'; if the original statement has a continuing effect on the receiver of it, and has not
been withdrawn, it can still be a misrep.

With v O'Flanagan (1936)

F - The claimant bought a medical practice from the defendant. During negotiations, the defendant
told the claimant that the profits for the business were £2000 per year. This was true at the time.
However, by the time of contracting circumstances had changed. The profits were substantially
lower. The defendant failed to tell the claimant this. When the claimant found out, they sued for
rescission of the contract.

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rescission of the contract.

D - The Court of Appeal held in favour of the claimant and rescinded the contract. The defendant
made their representation with a view to inducing the contract. It should therefore be treated as a
continuing representation. This being the case, the defendant had a duty to inform the claimant of
the truth when circumstances changed.

:- Normally, mere silence is not a misrep. However, if one party makes a statement which later
becomes false, they are generally under a duty to correct that statement. If they do not, this can
be an actionable misrep.

*Where a statement refers to an intention, the courts will look at whether it was true at the time it
was made.

Wales v Wadham (1977)

F - A husband and wife had agreed to divorce. The wife said she did not intend to remarry, and the
husband offered her a financial settlement on that basis. She later changed her mind, but didn’t tell
her husband. Shortly after the divorce, she remarried, and the husband claimed the contract had
been induced by misrepresentation.

D - The court disagreed, the statement was one of intention, and it was true when she made it. The
difference between this and the situation in With v O'Flanagan is that there, the statement was
one of fact.

Cramaso LLP v Ogilvie-Grant, the Earl of Seafield and Others (2014)

F - The Earl of Seafield owned a moorland in Scotland used for shooting grouse. A man called Mr.
Erskine was interested in buying a lease of this moorland as a commercial investment. During the
contractual negotiations an email was sent containing information about the estimated number of
grouse on the moor. his information was misleading as it honestly but negligently overestimated
the grouse population. Relying on this misinformation, Mr. Erskine decided to buy the lease and
created a limited liability partnership, Cramaso LLP, to become the legal owners. Cramaso LLP did
not exist when misleading email had been sent. Upon discovering that the information was
misleading, Cramaso LLP brought proceedings against the Earl of Seafield, claiming that it had been
induced to enter into the lease by a negligent misrepresentation contained in the email.

D - The Supreme Court held that the Earl of Seafield was liable for the misrep made to Mr Erskine,
and the representation contained in the critical email was a 'continuing representation'. Although
the representation was made over a month prior to the contract of sale was signed. As this
representation had not been withdrawn, the Earl of Seafield was implying to Cramaso LLP that it
was true. The Supreme Court commented that:

[The change in the identity of the prospective contract party did not affect the continuing nature
of the representation, or the respondent's continuing responsibility for its accuracy…Neither
party drew a line under the previous discussions, after the appellant was formed , in order to
begin afresh. Neither party disclaimed what had previously been said in the course of their
discussions.]

Can silence be a representation?

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Can silence be a representation?

~ As a general rule , mere silence will not usually amount to a false statement, even if it does
involve concealing some fact which is highly significant.

~ The traditional rule of caveat emptor (Latin for 'let the buyer beware'), shows that a purchaser is
required to ask questions about important matters if necessary. The seller is not usually expected
to volunteer information which may put the buyer off.

~ Even if one contracting party knows that the other has misunderstood some aspect of the
situation, there is no duty to point this out. In the following case it shows that silence did not
amount to a misrepresentation and that there is no duty to point out.

Fletcher v Krell (1873)

F - A woman applied for a post as a governess, without revealing the fact that she had previously
been married. At that time, this may well have been a factor that would have affected the
employer's decision to employ her. However, she was not asked nor did she mentioned she a
divorcee in those times.

D - Despite everything, the court held that her silence did not amount to a misrepresentation.
There was no misrep because she was under no duty to disclose her marital status and she had not
been asked about it.

*However it also should be noted that in the specific context of consumer contracts, under the
Consumer Protection from Unfair Trading Regulations 2008, a criminal offence will be committed
by a retail trader that unfairly misleads a consumer by failing to give information.

What is the Unfair Trading Regulations Act 2008?

- There is an obligation to trade fairly and honestly with consumers. Consumers have rights of
redress if they have been the victim of misleading actions or aggressive selling. Crucially, The
Unfair Trading Regulations apply before, during and after a consumer contract is made.

Contracts requiring utmost good faith

~ The doctrine of utmost good faith is a principle used in insurance contracts , legally obliging all
parties to act honestly and not mislead or withhold critical information from one another.

~ Which is often known as contracts requiring uberrimae fidei, which is in Latin it means 'utmost
good faith'.

~ Exp:-
• Contracts for insurance [This rule is applied to all insurance contracts under the Marine
Insurance Acts 1906]
• The sale of shares in a company
• The sale of land [Where this rule is required on matters affecting title of the land, although
not physical defects]
• Certain family arrangements

~Failure to disclose a matter regarding which this rule is required allows the innocent party to

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~Failure to disclose a matter regarding which this rule is required allows the innocent party to
rescind the contract although damages are not available.

~ However, the law should ensure that one party does not have an unfair bargaining position over
the other, because the relevant facts are likely to be difficult for the other party to find out for
themselves.

~ It was applied by the High Court, in the following case:-

International Management Group (IMG) UK Ltd v Simmonds (2003)

F - The case revolved around the Sahara Cup cricket tournament between India and Pakistan, which
IMG paid for to have television rights. The 1999 tournament was postponed due to the Indian
Government's refusal to allow the Indian team to participate. IMG took out insurance to protect
the 2000 tournament. However, IMG failed to disclose that they were informed that the Indian
Government would refuse to allow India to play in the tournament. The Indian Government
refused permission, leading IMG to claim compensation under their insurance policy.

D - The High Court ruled that the insurance contract required utmost good faith, which was
breached by IMG's failure to disclose these rumors. This ruling is subject to the Rehabilitation of
Offenders Act 1974, which states that under certain circumstances, a person cannot be required to
disclose past convictions and sentences.

Insurance contracts

- The 'utmost good faith' rule is applied to all insurance contracts under the Marine Insurance
Acts 1906. It meant that the party taking out the insurance policy had to tell insurance
company of any fact they knew of that might affect the company's decision on whether or
not to accept the insurance risk, and what premium to charge.

- In case, if they failed to disclose any fact that affected those decisions, regardless of whether
this failure was made innocently, negligently or fraudulently, the contract was voidable, and
the company was not required to pay out against a claim, even if that claim had no
connection with the fact that was not disclosed.

Partial revelation

~ If one party makes a statement which is itself true, but which misrepresents the whole situation
because of what is left unsaid, the statement may amount to a misrepresentation.

Dimmock v Hallett (1866)

F - The auctioneer stated that the sale was without reserve, and all parties were free to bid. The
mortgagee bid against the purchaser until the price covered the mortgage debt. The particulars of
sale described a farm as late in occupation of a tenant at a rent of £290. The tenant occupied the
farm as yearly tenant at £290 but paid only £1 for the first quarter and quitted at Michaelmas,
paying £291 for a year and a quarter. The plaintiff agreed to let the farm at £225, but the
agreement was rescinded before taking possession.

D - The Court of Appeal in Chancery held that the purchaser was not entitled to be discharged, and

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D - The Court of Appeal in Chancery held that the purchaser was not entitled to be discharged, and
there was substantial misrepresentation to entitle the purchaser to be discharged.

Fiduciary relationship

~ It is the existing relationship between the parties, rather than the type of contract concerned,
which gives rise to a duty to disclose important facts about a contract.

~ It applies where in a relationship one party puts a high level of trust in the other, known as a
fiduciary relationship.

~ Some types are usually considered as fiduciary, the main ones being those:-

i) Between parent and child

ii) Solicitor and client
iii) Trustee and beneficiary
iv) Principal and agent

~ However, the courts have emphasized that this list is not exhaustive and it is always open for the
other parties to demonstrate that their relationship with the other contracting party is such that
one party places trust in the other, thereby gaining influence over them.

Voluntary assumption of responsibility

~ In the case of following, the CA has suggested that a party might incur liability for remaining silent
where the courts found:-
• there was a voluntary assumption of responsibility by one party; and
• reliance on that voluntary by the other.

Banque Financiere de la Cite v Westgate Insurance (1989)

F - The insured banks filed an action to recover money from the insurers. They argued that because
the insurers owed them a duty of care based on negligence or because the contracts were
uberrimae fidei, the insurers were under a duty to disclose to them the deceit being practiced on
them by the banks’ brokers when the insurers knew of that deception.

D - The House of Lords held that an insurer did not owe a duty of care to warn the insured that an
agent of the insured had acted in breach of his duty as agent of the insured in an earlier
transaction. The insurer had not been liable for any misconduct on the part of the agent towards
his principal thereafter.

~ This will be difficult to show in normal commercial agreements.

** For example:- A father who engaged an estate agent to advise his son regarding the purchase of
a property, and the estate agent would be regarded as having assumed responsibility to the son.

~ That interpretation of the law given above was accepted by the HoL in the following case:-

Hamilton v Allied Domecq (2007)

F-

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F-

D-

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Inducement

~ If the claimant was not aware that the statement had been made, or knew it was untrue, or it did
not affect the decision to enter into the contract, the misrep will not be actionable.

~ The untrue statement must have been made before or at the time of making the contract, if not
it couldn't have induced the contract to be made, though it may later be repeated in the contract.

~ Knowledge that another party's statement was untrue will only prevent that statement from
being an actionable misrep if it is genuine knowledge; mere suspicion, or possession of information
which could reveal the lie if checked, are not enough.

Hayward v Zurich (2016)

F - Zurich, the insurers suspected that Hayward might be exaggerating his injuries from an accident
at work but, unable to prove this, they agreed to settle the case for € 135,000. Later on, a
neighbour reported to the employer that the injuries had been exaggerated and the insurance
company sought to reopen the settlement.

D - The Supreme Court confirmed that awareness of a possible misrepresentation does not prevent
a person from being induced to enter the contract by the representation. The accepted that the
insurers could sought to rescind the settlement agreement because they had been induced to
enter the contract due to the misrep, even though they had suspicions at the time that Hayward
was lying. The truth that the insurer was aware there may have been some misrep did not prevent
the finding that the respondent's fraud had induce them to enter into the settlement. The Supreme
Court restored the decision of the High Court judge.

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Redgrave v Hurd (1881)

F - A solicitor advertised their £1600 residence for a partner, but the defendant claimed the
business only earned £200 a year. The claimant provided him with additional records, which
showed a trivial amount of business, not accounting for the missing £100. The defendant did not
read these papers and bought the residence. The defendant later discovered the business was
worthless and refused to complete the sale. The claimant sued for specific performance of the
agreement, but the defendant argued that the agreement should be rescinded for
misrepresentation or that misrepresentation was grounds to refuse specific performance. The
claimant argued that misrepresentation had no bearing on the contract because the defendant had
not relied on it.

D - The Court of Appeal held in favour of the defendant. The claimant had made a material
misrepresentation, so it was to be assumed that the defendant relied on it. The mere fact that the
defendant had the means to discover the truth and failed to do so did not rebut this presumption.
The defendant was therefore entitled to have the contract rescinded.

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 - Where a party to a contract makes a misrepresentation which a reasonable person would
rely on when deciding to contract, or which is intended to induce the contract, the courts
will assume that the defendant relied on the misrepresentation. This is known as a
‘material’ representation.

- To rebut this assumption, the party must show that the defendant actually knew of facts
which made the statement untrue, or that his words or conduct made clear that he did not
rely on the statement.

Attwood v Small (1838)

F - The claimant bought an estate from the defendant for £600,000. The estate consisted of a
manor, various mines and associated properties associated with the mines. These properties, as
well as the mines, generated profit for the landowner. The claimant examined the defendant’s
accounts before contracting and took steps to verify that they were accurate. On the strength of
this, they proceeded with the purchase. However, the accounts were actually inaccurate and
greatly over-estimated the land’s profitability. The claimant sought to have the contract rescinded
for misrepresentation.

D - The House of Lords held in favour of the defendant. A contract can only be rescinded for
misrepresentation if the claimant relied on the false statement. This claimant had not relied on the
false statement – they relied on their own attempts to verify the accounts.

- Where a claimant independently verifies whether the defendant’s statement is true, they
have not relied on the statement. As such, any subsequent contract cannot be rescinded for
misrepresentation.

- This case states that equity will only rescind a contract for fraudulent misrepresentations.
This is no longer good law.

- Generally, where the innocent party does not rely on the other's statement, and instead
conducts their own investigations, or simply relies on their own judgement, the party
making the misrep will not be liable.

Edgington v Fitzmaurice (1885)

- In this case, the claimant was induced to lend money to the company, partly by a
misstatement in the prospectus and partly by his own mistaken belief that the contract would
give him some rights over the company's property. The claimant admitted that he would not
have lend the money if he had not believed he would gain rights in the property, but the
court nevertheless held that the statement made in the prospectus was still an actionable
misrep.

*The HoL suggested in Standard Chartered bank v Pakistan National Shipping Corp (No 2) (2002)
that the rule in Edgington v Fitzmaurice 'probably' applies only to fraudulent misrepresentations.
Therefore, the existence of other negligent or irrational beliefs for entering the contract alongside
the misrep might prevent the courts finding an actionable innocent or negligent misrep.

Standard Chartered Bank v Pakistan National Shipping Corp (No 2) (2002)

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Standard Chartered Bank v Pakistan National Shipping Corp (No 2) (2002)

F-

D-

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Constructive knowledge

~ In some circumstances, a party to a contract may not have actual knowledge of a misrep but for
public policy reasons they will be treated as if they did have that knowledge, known as constructive
knowledge.

~ The issue of people being placed on inquiry and avoiding constructive knowledge is discussed in
detail in the context of undue influence. (Chapter 12)

Types of Misrepresentation

- There are four types of misrepresentation:-

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 - There are four types of misrepresentation:-

• Fraudulent Misrepresentation
• Negligent Misrepresentation at Common Law
• Negligent Misrepresentation under Statute
• Innocent Misrepresentation

- In which category a misrep falls into depends on the state of mind of the person making the
statement.

Fraudulent Misrepresentation

~ Also known as the tort of deceit.

~ Defined by Lord Herschell in the case Derry v Peek

Derry v Peek (1989)

F - The directors of a tramway company issued a prospectus which stated that the company had
statutory authority to use steam power instead of horses. The claimant bought shares in the
company on the strength of this statement. In fact, the company’s application for statutory
authority was still in progress. It was ultimately refused. The company was wound up as a result.
The claimant sued the directors for deceit. The directors responded that they had honestly
believed that the statement in the prospectus was true.

D - The HoL held in favour of the directors. Since they had believed the statement, they had not
been fraudulent.

LP:- If a person makes a false statement which he or she does not at the time believe to be true,
this is a fraudulent misrepresentation.

:- An action for deceit requires the claimant to prove fraud. This means showing that the
defendant either knew his statement was false, believed it was false, or made the statement
recklessly without caring whether it was true or false.

~ It is difficult to prove that the defendant had one of the required states of mind and claim for
fraudulent misrep because, especially where the defendant is a large and well-established
business.

Negligent Misrepresentation at Common Law

~ It was established by the HoL in the following case, that in limited conditions if a duty of care
arose in the making of statements pure economic loss in tort could now be recoverable in English
law.

Hedley Byrne v Heller & Partners (1964)

F - The claimant company had entered into some advertising contracts, on behalf of another
company, called Easipower. Under the agreement, the claimants were liable if Easipower failed to
pay, so the claimants wanted to check Easipower's creditworthiness. They contacted Easipower's

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pay, so the claimants wanted to check Easipower's creditworthiness. They contacted Easipower's
bankers, who provided a credit reference. Unfortunately, Easipower did in fact default in their
payment, so the claimants sued the bankers. The claimants lost, because the reference was given
with a disclaimer that it was 'without responsibility' (such disclaimer would probably be inoperable
today because of the Unfair Contract Terms 1977).

D - However, the HoL stated obiter that there could be liability for negligent misrepresentation on
the normal principles of tort, where there was a 'special relationship' between the parties.

LP :- There can be liability for negligent misrepresentation on the normal principles of tort, where
there was a special relationship between the parties.

~ A 'special relationship' is a situation where a false statement maker has knowledge or skill
relevant to the contract subject matter and can reasonably anticipate the other party's reliance on
the statement, although the exact definition is not yet clear.

Esso Petroleum Co Ltd v Mardon (1976)

F - Esso's 40-year-old sales representative promised a new petrol station could sell around 200,000
gallons of petrol a year. However, changes to the site's plans led to less sales than the
representative had predicted. Esso's lack of care led to the defendant signing a three-year tenancy
agreement based on the representative's estimate, which resulted in less than half the estimated
petrol sales. The defendant lost a significant amount of money. Esso sued Mardon for rent arrears,
and Mardon counter-claimed for damages for negligent misrepresentation.

D - The court applied the Hedley Byrne principle and Mardon recovered on his counter-claim.

Misrepresentation under statute

~ Section 2(1) of the Misrepresentation Act 1967 states:

Where a person has entered into a contract after a misrepresentation has been made to him by
another party thereto and as a result thereof he has suffered loss, then, if the person making the
misrepresentation would be liable to pay damages in respect thereof had the misrepresentation
been made fraudulently, that person shall be so 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 that the facts represented were
true.

~ Basically, when a party enters into a contracts a result of a misrep by the other party, the
innocent party can claim damages, unless the other party can prove that at the time the contract
was mad, they believed the statement was true, and had reasonable grounds for that belief.
However, the burden of proof is reversed so that the person making the statement has to prove
they were not negligent.

~ The case that the party making the misrepresentation bears a heavy BoP under s.2(1) is
demonstrated by :-

Howard Marine and Dredging Co Ltd v A Ogden and Sons (Excavations) Ltd (1978)

Misrepresentation Page 17
F - The claimants were involved in excavation work and needed to dispose of their clay. They hired
two seagoing barges to dump the clay in the sea. The carrying capacity of these barges was crucial
for the work's speed. However, the barge owners' representative misrepresented their carrying
capacity, claiming it was higher than it actually was. The correct information was found in the file at
the barge owners' head office.

D - The CoA held that there was liability under s.2(1); the defendants had failed to prove they had
not been negligent. According to Bridge LJ, 'the statute imposes an absolute obligation not to state
facts which the representor cannot prove he had reasonable ground to believe.

The Spice Girls: five become four

Misrepresentation Page 18
Misrepresentation Page 19
Innocent Misrepresentation

- Even before Hedley Byrne v Heller, the phrase 'innocent misrepresentation' was used to
describe all misreps which were not fraudulent.
- The materialization of two classes of negligent misrep, one in Hedley and the other in the
Misrepresentation Act 1967, means that innocent misrep now applies only to misreps that
are made entirely without fault.
- Which is where one party has entered into a contract because of the other's false statement,
the other can avoid liability for damages by providing that at the time the contract was made
they believed the statement to be true, and had reasonable grounds for that belief.
- This is the statutory defence laid down in s.2(1) of Misrepresentation Act 1967.
- The remedies for an innocent misrep will usually be rescission of the contract.

Remedies for Misrepresentation

- In some cases, damages may be available, either instead of or as well as rescission.

1. Rescission

- An equitable remedy, which sets the contract aside and puts the parties back in the position
they were in before the contract was made.
- Suitable for all types of misrepresentation, because of an equitable remedy.
- The courts have a discretion (freedom of judgement/choice) to refuse rescission where it is
equitable to do so.

Car and Universal Finance Co Ltd v Caldwell (1965)

F - The defendant sold a car to a rogue and paid with a cheque, which bounced, causing both the
car and the rogue to disappear. The defendant notified the police and the Automobile Association,

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car and the rogue to disappear. The defendant notified the police and the Automobile Association,
who searched for the car. The rogue sold the car to a dealer, who knew the car was not legally
theirs to sell. The dealer then sold the car to the claimants, who bought it in good faith.

D - The CoA held that by contacting the police and the Automobile Association, the defendant had
made his intention to rescind the contract sufficiently clear. As soon as he did this, the ownership
of the car reverted to him. This meant that at the time the car was 'sold' to the claimants, the car
dealer had no legal right to sell it, and so it did not belong to the claimants.

*An injured party can also apply to the courts for a formal order of rescission, which provides that
any property exchanged under the contract reverts to its former owner.

Bars to rescission

- The wronged party may lose the right to rescission when it is unreasonable or impossible to
put the contracting parties back into their pre-contractual position, and in that case the
contract continues to exist.
- In order to do that, there must be four circumstances in which will be the case are where:

• the innocent party affirms the contract (affirmation);

• there is a lapse of time;
• the parties cannot go back to their original, pre-contractual position;
• rescission would deprive an innocent third party of rights acquired over the property which
is the subject of the contract.

• Affirmation

~ Once the innocent party becomes aware of a misrep, they can choose to rescind or affirm the
contract

~ For a contract to be affirmed, the innocent party must have full knowledge of the misrep and
either declare their intention to proceed with the contract (express affirmation) or do some act
from which such an intention may reasonably be inferred (implied affirmation).

~If the representee's continued use of the subject matter of the contract may amount to an
implied affirmation.

Long v Loyd (1958)

F - The claimant bought a lorry which the defendant seller represented was in ‘exceptional
condition’, of a certain speed and fuel consumption. However, the lorry had multiple defects. After
the lorry broke down, the defendant offered to repair the lorry for half price which the claimant
accepted. On a final long trip, the lorry broke down. Later on, the claimant sued the defendant for
rescission of the contract on the grounds of innocent misrepresentation.

D - The appeal was dismissed. The claimant was barred from rescission due to affirmation of the
contract.

*It does also involve contracts for the sale of shares.

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*Individuals who obtain shares based on a misrepresentation in a prospectus can rescind the
contract and recover the paid price. However, if they sell the shares after learning of the
misrepresentation, the right to rescind is lost, as this implies the contract's continued existence.

Re Hop and Malt Exchange and Warehouse Co, exp Briggs (1866)

F - An attempt to sell the property (whether successful or not) is treated as affirming the contract
as selling is an act of ownership which is inconsistent with an intention to repudiate the contract.

Habib Bank Ltd v Nasira Tufail (2006)

F - Habib Bank sought to enforce a mortgage given by the defendant as security for her son's debts
but induced by the son's misrepresentation. She affirmed the mortgage but was later allowed to
rescind because the position of the bank had not changed as a result of the potential affirmation.
To prevent rescission the bank would have had to show that in reliance on Nasira's conduct it acted
to its detriment.

*Firmly speaking, simply doing nothing about a contract does not amount to affirmation but if,
once the innocent party knows about the misrep, he or she takes no action for a long time to
rescind the contract, this may be treated as evidence that the contract has been affirmed.

*Lapse of time without any step towards repudiation being taken does not itself constitute
affirmation, but it may be treated as conclusive evidence that the contract has been affirmed.

• Lapse of time

Leaf v International Galleries (1950)

F - The defendant sold the claimant a painting. They mistakenly represented the painting as having
been painted by a famous artist. When the claimant tried to sell it five years later, they discovered
that it was not painted by that artist. The claimant sought to return the painting and get a refund.

D - The Court held in favour of the defendant. The defendant had made an innocent
misrepresentation which induced the claimant to enter the contract. However, the claimant had
taken too long to attempt to rescind the contract, so the remedy of rescission was not available.
Assuming that the painter’s identity was a condition of the contract, the claimant had lost their
right to reject the goods for waiting too long. If the painter’s identity was merely a warranty, then
the claimant never had any right to reject the goods. Their only remedy would be a claim for
damages.

:- A buyer is taken to have accepted goods after the lapse of a reasonable time. The lapse of a
reasonable time is also a bar to claiming the equitable remedy of rescission.

Misrepresentation Page 22
Salt v Stratstone Specialist Ltd (2015)

F - The defendant was a car dealer who sold the claimant a car. He wrongly told the claimant that
the car was ‘brand new’ when it was not. After a year, the car exhibited defects and the claimant
tried to get a refund. The defendant refused. The claimant sued to have the contract rescinded for
misrepresentation. The defendant responded that any claim for rescission was barred due to the
claimant’s delay. They also argued that it was not possible to put the parties back in their original
position (restitutio in integrum). This was because the car had been sold unregistered, and the
claimant had since registered it. As such, the claimant could not return an unregistered car to the
defendant.

Misrepresentation Page 23
Zanzibar v British Aerospace (Lancaster House) Ltd (2000)

F - The Zanzibar Gov had purchasd a jet from BA in 1992. It later failed to pay the full price of the
plane, which was then repossessed and sold. Several years after the original purchase of theplane,
the Zanzibar Gov initiated proceedings against BA, claiming it had been induced to purchase jet by
virtue of representations made by BA as to the type of jet and its airworthiness, which were
untrue. It sought to rescind the contract.

D - The court barred rescission. The action was unsuccessful because the Zanzibar Gov had delayed
bringing the proceedings for several years after receiving the plane, so their right to recission had
been lost.

• Impossible to return to pre-contractual position

- Rescission will not ordered where it is impossible to return the parties to their original, pre-
contractual position (known as a counter-restitution).
- Because the subject matter of the contract has been used up or destroyed.

Vigers v Pike (1842)

F - The contract concerned a mine, and by the time rescission became an issue, it had been 'worked
our' because there was nothing left in it to mine. Therefore, rescission was impossible.

Clarke v Dickson (1858)

Erlanger v New Sombrero Phostate Co (1878)

Misrepresentation Page 24
Halpern v Halpern (2007)

• Third party rights

White v Garden (1851)

1. All or nothing

De Molestina v Ponton (1851)

1. Indemnity payment

Whittington v Seale-Hayne (1900)

4. Damages

East v Maurer (1990)

Remoteness of damages

Doyle v Olby (Ironmongers) Ltd (1969)

Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1996)

Royscot Trust Ltd v Rogerson (1991)

Smith New Court Securities Ltd v Citibank

(The Wagon Mound [No 1])

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