Contract Law I

Misrepresentation

Prof. Christina Perry

 Regulating pre-contract
negotiations
• Two possible ways in principle-
– Each party under duty to disclose to other party
all relevant information within his knowledge OR
– No general obligation of disclosure, but rule that if
you do provide information to the other party,
then what you provide must be honest and
truthful
• English law, with limited exceptions, does the latter
(and is tough on those who provide
inaccurate/misleading information pre-contract (even
if innocently))
 Misrepresentation 1
• A misrepresentation is a false statement of fact
or law made by one party to another, which,
whilst not being a term of the contract, induces
the other party to enter the contract
• A contract may be void, unenforceable or
voidable
• 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
 Misrepresentation 2
• Distinguish promises from representations
– Promise: maker of statement accepts (or
appears to accept) obligation to do or not to
do something
– Representation: statement asserting a given
state of facts is true
• Kleinwort Benson Ltd. v. Malaysia Mining Corp.
(1989)
– Hierarchy: promises, representations, other
(opinions, puffs etc.)
 Misrepresentations vs
warranties
• Heilbut, Symons & Co v. Buckleton [1913]
AC 30
– "They must be proved strictly. Not only the
terms of such contracts but the existence of
an animus contrahendi on the part of all the
parties to them must be clearly shown."
• Oscar Chess Ltd. v. Williams [1957] 1
WLR 370
• Dick Bentley Productions Ltd. v. Harold
Smith (Motors) Ltd [1965] 1 WLR 623
 Misrepresentation Types

• What is a misrepresentation?
• Different types of misrepresentation?
• Remedies for misrepresentation?
• Excluding liability for misrepresentation?
 What is a misrepresentation?
• Unambiguous false statement of existing
fact or law
• Addressed to the party misled
• Intended to be acted upon
• Material / which induces the making of the
contract
 Actionable misrepresentation
requirements
• Lambert v Co-Operative Insurance Society
Ltd [1975] 2 Lloyd's Rep. 485
• Dimmock v Hallet [1860] L.R. 2 Ch App 21
• Carlill v Carbolic Smoke Ball Co [1893]1
QB 256
• Gordon v Selico (1986) 278 EG 53
• Peekay Intermark v. Australia and New
Zealand Banking Group [2006] EWCA Civ
386
 Representation must be false

• Must be unambiguous false statement

• These are not misrepresentations
– “mere puffs” Dimmock v. Hallett (1866)
• With v O'Flanagan [1936] Ch. 575
• Misrepresentation Act 1967, s. 2(1)
• Conlon v Simms [2006] EWHC 401 – non-
disclosure
 Representation must be fact, not
opinion
• These are not misrepresentations
– X’s statement of opinion or belief: Bisset v. Wilkinson (1927)
• But note the following:
– Esso Petroleum v. Mardon (1976)
– Smith v. Land & House Property Corp. (1884)
– "the facts are equally known to both parties, what one 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 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."
 Fact, not intention
• Wales v Wadham [1977] 1 WLR 199
• Edgington v Fitzmaurice [1885] 29 Ch D
459
– "there must be a mis-statement of an existing fact; but the state
of a man's mind is as much a fact as the state of his digestion. It
is true that it is very difficult to prove what the state of a man's
mind at a particular time is, but if it can be ascertained it is as
much a fact as anything else. A misrepresentation as to the
state of a man's mind is, therefore, a mis-statement of fact."

• Limit No2 Ltd v Axa Versicherung AG

[2008] EWCA Civ 1231
 Representation of law?
• Holt v Markham [1923] 1 KB 504
• West London Commercial Bank Ltd v
Kitson (1884) 13 QBD 360 at 362-3
• But note the more recent decision of the
High Court in Pankhania v Hackney
London Borough Council [2002] EWHC
2441, applying the House of Lords’
decision in Kleinwort Benson Ltd v Lincoln
City Council (1999) to contract law
Addressed to whom; intended to
be acted upon
• The misrepresentation must be addressed to
the party misled
– Commercial Banking Co. of Sydney v. R.H.
Brown & Co. (1972)
• The misrepresentation must be intended to be
acted upon
– Peek v Gurney [1873] L.R. 6 HL 377
– Andrews v Mockford [1896] 1 QB 372
 Induce contract & material
• The misrepresentation must be an inducement
to entering the contract, i.e. misled party must
have actually relied on it (and in that sense
must also be a material one)
• An inducement suffices: need not be the only
one
– JEB Fasteners v. Marks, Bloom & Co. (CA1983)
– Smith v Eric S Bush [1990] 1 AC 831
– Edgington v Fitzmaurice [1885] 29 Ch D 459
– Museprime Properties v Adhill Properties [1990] 36
EG 114
 Inducement
• When may claimant be unable to show the
misrepresentation induced he contract?
– If he did not know of the misrepresentation
– If he knew it was untrue
– If he did not allow the misrepresentation to
affect his decision
• Horsfall v. Thomas; Smith v. Chadwick; Atwood v.
Small; Redgrave v. Hurd; Peekay Intermark Ltd. v.
New Zealand Banking Group Ltd.; Hayward v
Zurich Insurance Company
 Types of misrepresentation
• Unusually for contract law, we classify by
reference to mental state of the
misrepresenting party
• Why does the classification matter?
• REMEDIES
 Fraudulent misrepresentation
• Fraudulent misrepresentation:
– Derry v. Peek (HL1889)
– Doyle v Olby (Ironmongers) ltd [1969] 2 Q.B.
158
– Archer v Brown [1984] 2 All E.R. 267
– East v Maurer [1991] 2 All E.R. 733
 Innocent & Negligent Misrep
• Innocent misrepresentation:
– Newbigging v Adam (1866) 34 Ch. D. 582
– Whittington v Seal Hayne (1900) 82 LT 49
• Negligent misrepresentation at
common law: duty of care principle
• Hedley Byrne v. Heller (HL1964)
– Representor’s knowledge? Purpose of
statement? Reasonable for representee to
rely on it? Esso Petroleum v. Mardon [1976]
Caparo v. Dickman (HL1990)
 Negligent misrepresentation
• Assumption of responsibility principle
– Henderson v Merrett Syndicates Ltd [1995] 2
A.C. 145; [1994] 3 W.L.R. 761; [1994] 3 All
E.R. 506
– Williams v Natural Life Health Foods Ltd
[1998] 1 W.L.R. 830
– Customs and Excise Commissioners v
Barclays Bank Plc [2006] UKHL 28
• Concurrent duties in tort and contract
– Esso Petroleum, Henderson, Williams
 Statutory misrepresentation 1
• s.2(1) Misrepresentation Act 1967
– If X has entered into contract after misrepresentation made to
him by Y (another party to the contract)
– AND X suffered loss as result
– then, if Y would be liable if his misrepresentation were
fraudulent, Y shall be liable (even though his misrepresentation
was not fraudulent)
– unless Y proves he had reasonable grounds to believe and did
believe (up to time of contract) that facts he represented were
true
• Benefits for X over a negligent misrepresentation claim
• Reversal of burden of proof against Y: Howard Marine v. Ogden
• Measure of damages better for X
• But sometimes X must still use negligent misrepresentation at
common law
 Statutory misrepresentation 2
• Resolute Maritime Inc v Nippon Kaiji Kyokai
[1983] 2 All Er 1
• Howard Marine and Dredging Co v Ogden &
Sons Ltd [1978] 2 WLR 514; [1978] QB 574;
[1978] 2 All ER 355
• Royscot Trust Ltd v Rogerson [1991] 2 Q.B. 297
• Spice Girls Ltd v Aprilia World Service BV [2002]
EWCA Civ 15, [2002] E.M.L.R. 27
• MCI WorldCom International Inc v Primus
Telecommunications Inc [2003] EWHC 2182
(Comm), [2004] 1 All ER (Comm) 138
Remedies for misrepresentation
• Two main remedies are:
– Damages
– Rescission of the contract
• Also consider:
– Remedies for breach of contract
– Defence to a claim under the contract
• Remember, sometimes more than one
remedy is available
Damages for misrepresentation
• No contractual claim for damages for
misrepresentation: unless it has become a
term of the contract
• Damages may be available in tort (where
misrepresentation was fraudulent or
negligent), and under ss. 2(1), 2(2) MA
1967 (includes for innocent
misrepresentation)
 Damages for fraudulent
misrepresentation
• Fraudulent misrepresentation: damages
for tort of deceit
• Aim: put X into position he would have had
if tort not committed
– Archer v Brown [1984] 2 All ER 267
– East v Maurer [1991] 2 All ER 733
– Doyle v Olby (Ironmongers) Ltd [1969] 2 QB
158 at 167
 Tort of deceit
• To succeed in a claim for the tort of deceit
representee must show:
– Representor made a misrepresentation
– Representation was made fraudulently
– Representor intended that representee (or
someone in his position) should act upon it
– Representee did act upon it and suffered loss
by so doing
 Damages for fraudulent
misrepresentation
• Derry v Peek (1889) 14 App Cas 337
• Smith New Court Securities Ltd v Citibank N.A.
[1997] A.C. 254
• Clef Aquitaine Sarl v Sovereign Chemical
Industries Ltd [2000] 3 All ER 493
• Pankhania v LB of Hackney [2002] N.P.C. 123
• Standard Chartered Bank v. Pakistan National
Shipping Corporation [2002] UKHL 43; [2003] 1
AC 959
• 4 Eng Ltd v Harper and Simpson [2008] EWHC
915 (Ch)
 Damages for negligent
misrepresentation
• Negligent misrepresentation at common law: tort
=> put X into position he would have had if tort
not committed
• Y liable for all losses that are reasonably
foreseeable consequence of the
misrepresentation (The Wagon Mound)
Reduction for X’s contributory negligence?
• Hedley Byrne & Co Ltd v Heller Partners Ltd
(1964), Thomson v Christie Manson & Woods
Ltd [2004] EWHC 1101, IFE Fund SA v GSI
International [2007] EWCA Civ 811
 Hedley Byrne/ Tort of negligence
• Person making statement must be aware party
relying on it will rely on it without further enquiry
• Person making statement is aware of the
purpose for which the statement is required
• Reasonable for party to act on statement without
further enquiry
• Statement acted on to party’s detriment
• Reasonable person in that situation would not
have made statement
• Party making statement must objectively have
been able to foresee the loss
 MA 1967, s.2 (1) Damages
• Damages under s.2(1) MA 1967:
• Aim- put X in position he would have had if
there been no misrep, but as if Y had been
fraudulent
• Royscot Trust Ltd. v. Rogerson;
Sharneyford Supplies Ltd. v. Barrington
Black). NB reduction for contributory
negligence not appropriate in deceit:
Standard Chartered Bank v. Pakistan
National Shipping Corp. (No. 2) (HL2002)
 S2(1) Misrep Act
• Misrep must have been made by other
party to contract
• Must be actual loss as a consequence of
the misrep
• “Fiction of fraud” – innocent party will get
remedy for misrep as though stmt made
fraudulently
• Unless person making stmt can prove he
had reasonable grounds to believe stmt he
made was true
 MA 1967, s.2 (1) Cases 1
• Naughton v O'Callaghan [1990] 3 All ER 191
• East v Maurer [1991] 2 All E.R. 733
• Smith New Court Securities Ltd v Citibank N.A. [1997]
A.C. 254
– [the court is reluctant to find that] “the rather loose wording of the
statute ‘ compels the court to treat a person who was morally
innocent as if he was guilty of fraud when it comes to the
measure of damages.”
• Forest International Gaskets Limited v. Fosters
Marketing Limited [2005] EWCA Civ 700 [at paras 11-17]
• Cemp Properties (UK) Ltd v Dentsply Research and
Development Corp [1991] 2 EGLR 197
 MA 1967, s.2 (1) Cases 2
• William Sindall plc v Cambridgeshire County Council
[1994] 3 All ER 932
• Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch. 560
• Inntrepreneur Pub Co (CPC) Ltd v Sweeney [2002]
EWHC 1060, The Times June 26, 2002
• BG Plc v. Nelson Group Services (Maintenance) Ltd
[2002] EWCA Civ 547 CA
• Thomson v Christie Manson & Woods Ltd [2004] EWHC
1101
• IFE Fund SA v GSI International [2007] EWCA Civ 811
 MA 1967, s.2 (2) Cases 1
• Innocent misrepresentation: traditionally, no damages;
rescission only: De Lassalle v. Guildford; collateral
contracts.
• S.2(2) MA 1967: if innocent misrepresentation, discretion
of court to order damages in lieu of rescission
• Principles for exercise of court’s discretion under s.2(2):
very wide. William Sindall PLC v. Cambridgeshire CC
• If X had right to rescind, but has lost it (e.g. because of
lapse of time, he loses right to s.2(2) damages too. Salt v
Stratstone [2015] EWCA Civ 745
 MA 1967, s.2 (2) Cases 2
• Zanzibar v British Aerospace (Lancaster House) Ltd
[2000] 1 WLR 233
• Pankhania v LB of Hackney [2002] EWHC 2441
• UCB Corporate Services Ltd v Thomason [2005] EWCA
Civ 225
 Rescission 1
►Setting aside the contract (“rescission”)
• X can get out of the contract
• X can get back from Y the value of the enrichment Y had
obtained from the contract up to that point BUT X must also
give credit to Y for any benefit X has obtained at Y’s expense
– Aim: try to put X into position he was in before the
contract, and trying to ensure X is not unjustly enriched at
Y’s expense, i.e. contract set aside both retrospectively
and prospectively
• Damages: X may in addition want compensation for financial
losses he has suffered
• If contract is rescinded, he cannot have damages for breach
of contract too: but damages maybe in tort or under s.2 MA
1967
 Rescission 2
• Rescission of the contract in principle available
to X for all types of misrepresentation (but n.b.
court’s discretion to award damages in lieu:
s.2(2) MA 1967)
• BUT n.b. misrepresentation makes contract
voidable, not void
• X has choice: (i) rescind contract, or (ii) affirm
contract + seek damages
– Car & Universal Finance v Caldwell [1965] 1 QB 525
– Inntrepreneur Pub Co (CPC) Ltd v Sweeney [2002]
EWHC 10
 Rescission for
misrepresentation
• How to do it: Islington BC v. UCKAC (CA 2006)
• Either way, X (the misrepresentor) must be made aware
that Y is rescinding the contract
• Loss of right to rescind:
– Affirmation of the contract, once X knew the truth
– Third party rights intervening
– Lapse of time (=> need for Y to act fairly quickly if he is going to
rescind)
– Impossibility of restitution
– Misrepresentation Act 1967 s2(2)
 Rescission cont’d
• Rescission and an indemnity
– Whittington v Seal Hayne (1900) 82 LT 49
• Restrictions on the right to rescind
– Restitution impossible
– Erlanger v New Sombrero Phosphate Co
(1873) 2 App. Cas. 1218 at 1278
– T.S.B. Bank plc v Camfield [1995] 1 W.L.R.
430
 Restrictions on rescission
• Affirmation/Lapse of Time, Estoppel
– Leaf v International Galleries [1950] 2 KB 86
– Long v Lloyd [1958] 1 WLR 753
– Peyman v Lanjani [1985] 2 WLR 154; [1984] 3
All ER 703
• Third party rights
– Phillips v Brooks [1919] 2 KB 243
– Car & Universal Finance v Caldwell [1965] 1
QB 525
 Excluding liability for
misrepresentation
• At common law, X
– Could not exclude liability for his own fraudulent
misrep. Pearson v. Dublin Corporation (1907) Still
very much the case (BSkyB v. EDS);
– But could exclude liability for his own negligent and
innocent misreps, subject to usual
incorporation/interpretation rules
• S.3 MA 1967 (as amended by UCTA 1977):
– Exclusion/limitation has to satisfy reasonableness test
– What of clause in the contract where Y acknowledges
he has not relied on statement by X in deciding
whether/on what terms to contract?
 Excluding liability cont’d
• Walker v Boyle [1982] 1 All ER 634
• Witter Ltd v TBP Industries [1996]2 All ER 573.
• HIH Casualty & General Insurance Ltd v Chase
Manhattan Bank, Chase Manhattan Bank v HIH
Casualty & General Insurance Ltd [2003] UKHL
6, [2003] 1 All E.R. (Comm) 349
• BSkyB Ltd v. HP Enterprise Services UK Ltd
(formerly Electronic Data Systems Ltd) [2010]
EWHC 86