How to answer a misrepresentation problem question
In any misrepresentation problem question you need to:
- Read the question and check how many possible false statements of fact there are
- Check if a statement is a false statement of fact.
- Check if a statement has induced someone into a contract.
- Assess whether the misrepresentation is fraudulent, negligent, or innocent.
- Advise your client on rescission.
- Advise your client on damages.
Step 1: Ascertain if there has been a false statement of fact. There may be more than one in the scenario.
- The legal definition of a misrepresentation is a false statement of fact.
- The courts have adopted a broad interpretation of what is a false statement of fact.
- False statements: things said which are incorrect are false statements of facts. That’s the easiest example. A false statement can be an action also. Example: if I hide some damp in a house I am trying to let and I tell the person viewing the house that there is no damp (Gordon Selico).
- Opinions: opinions given are not false statements of fact if the person giving the opinion is not an expert or does not have a special insight on a topic (Bisset v Wilkinson). However, where the party giving the opinion is an expert and has some special insight into a topic then this opinion is a false statement of fact (Smith v Land and House Property Corp).
- Sales talk: boasts and sales talk during negotiations cannot be false statements of fact (Dimmock v Hallett). For example, if I said a car was a ‘great little mover’ or an ‘amazing drive’ then this is only sales talk. This cannot be a false statement of fact.
- If someone stays silent about something during negotiations then the general rule is that cannot be a false statement of fact (Keats v Cadogan). However, there are circumstances where the law says you need to say something and cannot remain silent.
- First, where you make a statement before the contract is signed but something happens just before the contract is signed which means that you need to tell the other party about the change (With v O’Flanaghan). In this case A told B his medical practice was making £2,000 per year. This was true when A was asked. Four months later, when the contract was being signed, A knew that the income had dropped to £250 per year because of A’s illness but A did not say anything. Held: the silence was a false statement of fact.
- Second, half truths. If someone says something which is technically true, but does not represent the full truth, then this can be a false statement of fact. An example is Notts Patent Brick and Tile Co v Butler where a solicitor was asked if a property was subject to any covenants. He told B that he did not believe so. This was true. But, this was because the solicitor had not investigated to see if the property was subject to covenants. The fact he did not know was technically correct. But he failed to reveal that this was because he didn’t look!
Step 2: check to see if the false statements of fact have induced the misrepresentee into contracting?
- First, it needs to be show that the victim was aware of the false statement of fact (Horsfall v Thomas). You cannot be induced by something that you did not know happened.
- The statement must be made before the contract is formed (Roscorla v Thomas). This makes sense as something said after the contract was formed cannot be said to have persuaded someone to enter into a contract.
- There must be reliance by the victim on the statement made (Atwood v Small).
- In this case A falsely stated that the income of a property was higher than it was. However, the claimants used their own experts to assess this and knew that the income was wrong. They went ahead and contracted anyway.
- The court held that there was no reliance on the false statement of fact – they had relied on their own experts.
- Therefore, there was no misrepresentation.
- It is important to note that if a claimant is given the opportunity to check the truthfulness of a statement but does not take the opportunity then this does not prevent there being reliance on the statement (Redgrave v Hurd).
Step 3: assess whether the misrepresentation is fraudulent, negligent, or innocent.
You need to tell the examiner which type of misrepresentation has been committed.
There are three types of misrepresentation:
- Innocent (very unlikely to be tested)
Tell the examiner that you know the definition of these.
- A fraudulent misrepresentation is a statement made where the statement maker knows it is false or does not believe it is true or is reckless as to truth (Derry v Peek).
- A negligent misrepresentation. There are two types of negligent misrepresentation.
Negligent misstatement through the common law (Hedley Byrne v Heller). This is where a statement maker carelessly makes a false statement, and there has been reliance by the victim on the statement, and there is a special relationship between the person making the statement and the person receiving the statement. This type of misrepresentation only applies where there is no contract between the parties.
Negligent misrepresentation through Statute under the Misrepresentation Act 1967, s. 2(1). This is where a statement has been made which the statement maker believes is true but has not exercised reasonable care in arriving at that conclusion
3. An innocent misrepresentation. This is a statement that is made in the belief that it is true and this belief is reasonable.
Step 4: assess if rescission is available?
- What is rescission? It involves unwinding the contract and putting each party back in the position that they would have been if the contract had not been performed.
- Example; if A sells a car to B for £10,000 as a result of a false statement of fact/misrepresentation, then B returns the Car to A and A gives the £10,000 back to B.
- Rescission is available for fraudulent and negligent misrepresentations as of right unless one of the bars to rescission applies.
- Affirmation: if I am made aware of the misrepresentation but then continue on as if I am happy to continue with the contract – then the contract cannot be rescinded later (Long v Lloyd).
- Lapse of time: if there has been a great lapse of time between the false statement and claiming rescission then there can be no rescission. If a misrepresentation is fraudulent then the time begins from when the victim/claimant discovered the fraudulent statement. If it is only negligent then the time begins from when the contract was formed (Leaf v International Galleries).
- It might be factually impossible to restore each party to their original position (Armstrong v Jackson). For example, if A sells B some cement as a result of a misrepresentation and B uses that cement to make bricks the contract cannot be rescinded as it is impossible to get the cement back from the bricks.
- Third party rights. This rule means that where the subject matter of the contract is passed on to a third party, and the third party becomes the new owner, and is unaware of the misrepresentation then, the contract cannot be rescinded (White v Garden). Example. If A sells a Car to B as a result of a misrepresentation, and B then sells the same car to C, when B realises the mistake and wants to rescind his contract with A, he cannot do so, as the car has been sold on to C.
Step 5: rescission of the contract may not be available. Or it may be available but does not fully compensate the loss. In these cases, we advise on damages.
- Damages are available for all types of misrepresentation.
- For fraudulent misrepresentations the claimant/victim will recover for all direct losses and these losses do not need to be reasonably foreseeable (Smith New Court Securities Ltd v Vickers). However, the downside of trying to get damages this way is that you need to claim under the tort of deceit. The claimant needs to prove the statement was fraudulent and this can be difficult.
- For negligent misrepresentation through the common law the claimant can claim only damages that are foreseeable. They also need to prove there is a duty of care, breach and damage etc which is difficult.
- For negligent misrepresentation through s. 2(1) of the Misrepresentation Act 1967 you get the best of both worlds! You receive all direct losses (direct losses are all losses linked to the false statement so it is very broad), not just those that are reasonably foreseeable (as if you had pursued the claim under the tort of deceit) and the other side has to prove that they thought the statement was true. In simple terms, the claimant has to do little work to prove anything but gets all the benefits. This is known as the ‘fiction of fraud’. You are getting the benefits that you would have by pursuing the defendant under fraud, but the court only has to find that the statement(s) was negligent.
- There might be some occasions where it will be best to advise that a fraudulent misrepresentation is pursued under the tort of deceit. The limitation period is longer, the claimant does not have to show inducement as it is assumed with a fraudulent misrepresentation and further contributory negligence is also not applicable to fraudulent misrepresentations.