Learning Outcomes
This article explains the concept of misrepresentation as a vitiating factor in contract law. After studying this material, you should be able to identify the elements required for an actionable misrepresentation, distinguish between fraudulent, negligent, and innocent misrepresentation, explain the remedies available (including rescission and damages), and recognise potential bars to rescission. This knowledge is essential for analysing scenarios and answering SQE1-style multiple-choice questions concerning contract validity and remedies.
SQE1 Syllabus
For SQE1, you are expected to apply your knowledge of misrepresentation to practical scenarios. This involves identifying when a misrepresentation has occurred, classifying its type, and determining the available remedies. Understanding the impact of the Misrepresentation Act 1967 is particularly important.
As you work through this article, focus on these key areas for your revision:
- The definition of an actionable misrepresentation, including the requirements for a false statement of existing fact or law that induces the contract.
- The distinction between a representation and a term of the contract.
- The different types of misrepresentation: fraudulent, negligent (at common law and under statute), and innocent.
- The remedies available for each type of misrepresentation, specifically rescission and damages.
- The circumstances in which the right to rescind may be lost (bars to rescission).
- The effect of sections 2(1) and 2(2) of the Misrepresentation Act 1967 on damages.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following is LEAST likely to be considered a statement of fact for the purposes of misrepresentation?
- "The central heating system was installed last year."
- "This car achieved 60 miles per gallon on my last trip."
- "In my opinion, this business is likely to be highly profitable next year."
- "The accounts accurately show a turnover of £500,000 for the last financial year."
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A claimant seeking damages under s 2(1) Misrepresentation Act 1967 must prove:
- Fraud on the part of the defendant.
- Negligence at common law under the Hedley Byrne principle.
- That they entered the contract after a misrepresentation was made to them by the other party, resulting in loss.
- That the statement was made innocently but without reasonable grounds for belief in its truth.
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What is the primary remedy for all types of misrepresentation, although it may be barred in certain circumstances?
- Damages under s 2(1) MA 1967.
- Rescission.
- Damages for breach of contract.
- Damages in the tort of deceit.
Introduction
A misrepresentation is a vitiating factor that can make a contract voidable. It occurs when one party makes a false statement of fact or law before the contract is formed, which induces the other party to enter into the agreement. Unlike a term of the contract, a representation is not a promise but a statement that influences the decision to contract. If such a statement proves false, the innocent party may have remedies available, depending on the nature of the misrepresentation. Understanding these rules is fundamental to contract law.
Key Term: Misrepresentation
An untrue statement of fact or law made by one party to another, before or at the time of contracting, which induces the other party to enter into the contract.
ELEMENTS OF ACTIONABLE MISREPRESENTATION
For a misrepresentation to be actionable, giving rise to potential remedies, several key elements must be established.
Untrue Statement
There must be a statement that is untrue. Silence does not generally constitute misrepresentation, as there is no general duty of disclosure in English contract law. However, exceptions exist, such as in contracts requiring utmost good faith (uberrimae fidei, like insurance contracts), where a fiduciary relationship exists, or where a half-truth creates a misleading impression. Also, a change in circumstances making a previously true statement false may create a duty to disclose the change.
Statement of Fact or Law
The statement must be one of existing fact or law, not merely an opinion or a statement of future intention.
Key Term: False Statement of Fact
An assertion about a specific state of affairs that is demonstrably untrue. This excludes mere 'puffs' (sales talk), statements of opinion, or statements of future intention, unless the maker did not genuinely hold that opinion or intention, or implied facts they knew to be untrue.
A statement of opinion may be treated as a statement of fact if the person making it possesses special knowledge or skill relating to the subject matter, implying they have reasonable grounds for their opinion (Esso Petroleum Co Ltd v Mardon [1976] QB 801). Similarly, a statement of intention can be a misrepresentation if the person did not actually hold that intention at the time (Edgington v Fitzmaurice (1885) 29 Ch D 459).
Inducement
The false statement must have induced the claimant to enter into the contract. It does not need to be the sole reason, but it must be one of the reasons the claimant contracted.
Key Term: Inducement
The requirement that the misrepresentation played a real and substantial part in persuading the claimant to enter into the contract. The claimant must have relied on the statement.
If the claimant was unaware of the misrepresentation, did not rely on it (perhaps relying on their own investigation), or knew it was false, then it did not induce the contract, and the claim will fail.
TYPES OF MISREPRESENTATION
Once an actionable misrepresentation is established, it is classified into one of three types, which affects the available remedies.
Fraudulent Misrepresentation
This is the most serious type, involving deliberate deceit. It is defined based on the case of Derry v Peek (1889) 14 App Cas 337.
Key Term: Fraudulent Misrepresentation
A false statement made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false. The burden of proof is on the claimant to prove fraud.
Remedies include rescission of the contract and damages in the tort of deceit. Damages aim to put the claimant back in the position they were in before the misrepresentation occurred and can cover all direct losses flowing from the fraudulent inducement, even if not reasonably foreseeable.
Negligent Misrepresentation
This occurs when a false statement is made carelessly or without reasonable grounds for believing it to be true. There are two potential routes: common law and statute.
1. Common Law (under Hedley Byrne v Heller [1964] AC 465) Requires demonstrating a 'special relationship' between the parties giving rise to a duty of care. The claimant must prove the defendant was negligent in making the statement. Damages are awarded based on the tort of negligence, covering reasonably foreseeable losses.
2. Statute (Misrepresentation Act 1967, s 2(1)) This is often easier for a claimant to use. If a party enters a contract after a misrepresentation by the other party and suffers loss, the party making the misrepresentation is liable for damages as if it were fraudulent, unless they can prove they had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.
Key Term: Negligent Misrepresentation
A false statement made carelessly or without reasonable grounds for believing its truth. Liability can arise under common law (requiring a special relationship and duty of care) or statute (s 2(1) MA 1967, which shifts the burden of proof to the misrepresentor).
Under s 2(1) MA 1967, the burden of proof shifts to the defendant (the misrepresentor) to show they had reasonable grounds for their belief. The measure of damages is the same as for fraudulent misrepresentation (tort of deceit measure), which is advantageous for the claimant. Rescission is also available.
Worked Example 1.1
Anya is selling her cafe. She tells Ben, a potential buyer, that the weekly turnover is £5,000, based on a quick look at recent takings but without checking the verified accounts, which show an average of £3,500. Ben relies on Anya's statement and buys the cafe. He quickly discovers the true turnover. Advise Ben.
Answer: Anya made a false statement of fact (£5,000 turnover) which induced Ben to contract. As Anya made the statement without checking the accounts, she likely lacked reasonable grounds to believe it was true. Ben can likely claim under s 2(1) MA 1967 for negligent misrepresentation. The burden will be on Anya to prove she had reasonable grounds for her belief. Ben can seek rescission (subject to bars) and/or damages assessed on the fraud basis.
Innocent Misrepresentation
This is a misrepresentation made entirely without fault.
Key Term: Innocent Misrepresentation
A false statement made by a person who genuinely believes it is true and has reasonable grounds for that belief.
This covers false statements where the maker can satisfy the court that they believed the statement was true and had reasonable grounds for that belief up until the time of the contract (satisfying the defence under s 2(1) MA 1967). The primary remedy is rescission. However, under s 2(2) MA 1967, the court has discretion to award damages in lieu of rescission if it considers it equitable to do so, considering the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as the loss rescission would cause to the other party.
Exam Warning
Be careful to distinguish the requirements and remedies for each type of misrepresentation. Pay particular attention to the burden of proof under s 2(1) MA 1967 (negligent misrepresentation) and the availability of damages in lieu of rescission under s 2(2) MA 1967 (negligent and innocent misrepresentation).
REMEDIES FOR MISREPRESENTATION
The primary remedies are rescission and damages. The availability and extent depend on the type of misrepresentation.
Rescission
Rescission is an equitable remedy available for all types of misrepresentation. It aims to restore the parties to their pre-contractual position by unwinding the contract.
Key Term: Rescission
The setting aside of a contract, making it voidable. The aim is to return the parties to the position they were in before the contract was made (restitutio in integrum).
However, the right to rescind can be lost through certain 'bars':
- Affirmation: The innocent party, with knowledge of the misrepresentation, declares their intention to continue with the contract or acts in a way consistent with affirmation.
- Lapse of Time: An unreasonable delay in seeking rescission after discovering the misrepresentation (for negligent/innocent) or from the date of the contract (sometimes for innocent). For fraud, time runs from discovery.
- Restitution Impossible: It is impossible to restore the parties substantially to their pre-contractual positions (e.g., goods consumed or destroyed).
- Third-Party Rights: A bona fide purchaser for value acquires rights in the subject matter of the contract before rescission occurs.
Worked Example 1.2
Chloe buys a painting from David, who innocently misrepresents it as being by a famous artist. Chloe discovers the truth six months later but, hoping its value might increase anyway, waits another year before deciding she wants to return it. Can Chloe rescind?
Answer: Possibly not. Although the misrepresentation was innocent, Chloe's delay of one year after discovering the truth could be seen as an unreasonable lapse of time, barring rescission. Furthermore, her conduct in waiting might be interpreted as affirmation of the contract.
Damages
Damages aim to compensate the claimant for losses suffered due to the misrepresentation. The measure depends on the type:
- Fraudulent: Damages in the tort of deceit. Covers all direct losses, regardless of foreseeability.
- Negligent (s 2(1) MA 1967): Damages calculated on the same basis as fraud (tort of deceit measure).
- Negligent (Common Law): Damages in the tort of negligence. Covers reasonably foreseeable losses.
- Innocent: No automatic right to damages, but the court may award damages in lieu of rescission under s 2(2) MA 1967. If rescission is barred, damages under s 2(2) cannot be awarded.
Revision Tip
Remember that damages under s 2(1) MA 1967 provide the same advantageous measure as for fraud, but without the claimant needing to prove fraudulent intent. The burden shifts to the misrepresentor to show they had reasonable grounds for belief. This makes s 2(1) a powerful tool for claimants.
Key Point Checklist
This article has covered the following key knowledge points:
- A misrepresentation is an untrue statement of fact or law that induces a contract.
- Statements of opinion or intention are generally not actionable unless they implicitly misstate facts or the maker's state of mind.
- Silence generally does not amount to misrepresentation, subject to exceptions.
- The statement must have induced the claimant to enter the contract.
- Misrepresentations can be fraudulent, negligent (common law or statutory), or innocent.
- Fraud requires proof of dishonesty (knowledge of falsity or recklessness).
- Statutory negligent misrepresentation (s 2(1) MA 1967) shifts the burden of proof to the defendant to show reasonable grounds for belief.
- The primary remedy is rescission, which aims to restore parties to their pre-contract position but can be lost due to bars like affirmation or lapse of time.
- Damages are available for fraudulent and negligent misrepresentation, calculated on the tortious basis (deceit measure for fraud and s 2(1)).
- For innocent misrepresentation, damages may be awarded in lieu of rescission under s 2(2) MA 1967 at the court's discretion.
Key Terms and Concepts
- Misrepresentation
- False Statement of Fact
- Inducement
- Fraudulent Misrepresentation
- Negligent Misrepresentation
- Innocent Misrepresentation
- Rescission
