Information about Misrepresentation

Contract Law
Part of the common law series
Contract
Contract formation
Offer and acceptance  · Mailbox rule
Mirror image rule  · Invitation to treat
Firm offer  · Consideration
Defenses against formation
Lack of capacity to contract
Duress  · Undue influence
Illusory promise  · Statute of frauds
Non est factum
Contract interpretation
Parol evidence rule
Contract of adhesion
Integration clause
Contra proferentem
Excuses for non-performance
Mistake  · Misrepresentation
Frustration of purpose  · Impossibility
Impracticability  · Illegality
Unclean hands  · Unconscionability
Accord and satisfaction
Rights of third parties
Privity of contract
Assignment  · Delegation
Novation  · Third party beneficiary
Breach of contract
Anticipatory repudiation  · Cover
Exclusion clause  · Efficient breach
Fundamental breach
Remedies
Specific performance
Liquidated damages
Penal damages  · Rescission
Quasi-contractual obligations
Promissory estoppel
Quantum meruit
Subsets: Conflict of law Commercial law
Other areas of the common law
Tort law  · Property law
Wills and trusts
Criminal law  · Evidence

In contract law, a misrepresentation is a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.^[1] If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.^[2]

Representation is not a term

As enacted by the Misrepresentations Act^[3], the statement in question may constitute a representation even if later incorporated into the contract as a term (i.e. a warranty, condition or innominate term).

An alternative approach, applied in parallel but in exclusivity to, is to find a collateral contract by interpreting the representation as a promise accompanied by some sort of consideration (see Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 (H.L.)). The collateral contract will have the effect of adding the representation as a term to the contract.

If the representation is found to be a term then the normal remedies for breach of contract apply.

Types of misrepresentation

Four types of misrepresentations are identified with different remedies available:

• Fraudulent misrepresentation (Derry v Peek) occurs when one makes representation with intent to deceive and with the knowledge that it is false. An action for fraudulent misrepresentation allows for a remedy of damages and rescission. One can also sue for fraudulent misrepresentation in a tort action. Fraudulent misrepresentation is capable of being made recklessly.^[4]
• Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true. This type of misrepresentation is relatively new and was introduced to allow damages in situations where neither a collateral contract nor fraud is found. It was first seen in the case of Hedley Byrne v. Heller [1964] A.C. 465 where the court found that a statement made negligently that was relied upon can be actionable in tort. Lord Denning in Esso Petroleum Co. Ltd. v. Mardon [1976] Q.B. 108 however, transported the tort into contract law, stating the rule as:

if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another…with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable

• Negligent misrepresentation under Statute, enacted by the Misrepresentation Act 1967. When dealing with a negligent misrepresentation it is most lucrative^[5] (joint with fraudulent misrepresentation, Contributory Negligence notwithstanding^[6]) for an action to be brought under statute law as the burden of proof that is required passes to the person who made the statement. So it is for the person who made the negligent statement to prove that the statement was either not one of fact but opinion and that "had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true"^[7] - the so-called innocent defence.

This creates an inconsistency of law due to the low burden and damages being calculated as extensive as those under fraudulent misrepresentation whereby a "wicked mind"<ref name"esher">per Lord Esher, Le Lievre v Gould [1893] 1 QB 491 at 498 is the basis of action. It is, to use the words of Rix J, "a mighty weapon"^[8]. Due to academic and judicial criticism in this area, the law is ripe for reform - probably adjusting the measure of damages to that of negligent misrepresentation at common law.^[9]

• Innocent misrepresentation occurs when the representor had reasonable grounds for believing that his or her false statement was true.^[10] Prior to Hedley Byrne, all misrepresentations that were not fraudulent were considered to be innocent. This type of representation primarily allows for a remedy of rescission, the purpose of which is put the parties back into a position as if the contract had never taken place. Section 2(2) Misrepresentation Act 1967, however, allows for damages to be awarded in lieu of rescission if the court deems it equitable to do so. This is judged on both the nature of the innocent misrepresentation and the losses suffered by the claimant from it.

Remedies

Rescission

:

Main article: Rescission

Generally, the effect of misrepresentation is that it makes the contract voidable not void ab initio. This is important for two reasons. Firstly because the representee can continue to be bound by the contract at her will. Secondly because the transactions and effects of the (voided) contract are recognised as to have taken place, therefore if a party transfers title of property to a third party of which the former only holds title to pursuant to the voided contract, the third party can retain legal title.^[11] Rescission can be done either by informing the representor or by requesting an order from the court. There are certain circumstances where rescission is not possible though. The idea behind rescission is that the parties are restored to the positions they were before entering into the contract. Therefore, if this is not possible, rescission is not an option.^[12]

If the representee discovers the misrepresentation and fails to take steps to avoid the contract, then he may not be able to rescind it.^[13] The time limit for taking such steps varies depending on the type of misrepresentation. In cases of fraudulent misrepresentation, the time limit runs until when the misrepresentation ought to have been discovered, whereas in innocent misrepresentation, the right to rescission may lapse even before the representee can reasonably be expected to know about it.^[14]

In certain circumstances, third party rights may interfere with rescission and render it impossible. For example, if B contracts with A to sell a house with a misrepresentation and then A sells the house to C, the courts are not likely to permit rescission as that would require C to give up the house.

In England and Wales, under Misrepresentations Act 1967 s. 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages instead of rescission.

Damages

In cases of fraudulent misrepresentation, a claim for damages is under the tort of deceit, making the damages tortious, in other words, only actual losses are recoverable. If the losses are calculated under the Misrepresentation Act 1967, damages for misrepresentation are calculated as if the defendant had been fraudulent, even if he has been only negligent. This is a wider scope than usual tortious liability, as it protects the claimant's loss even if not reasonably foreseeable. Inclusion of the representation into the contract as a term will leave the remedy for breach in damages as a common law right. The difference is that damages for misrepresentation usually reflect C's reliance interest, whereas damages for breach of contract protect C's expectation interest, although the rules on mitigation will apply in the latter case. In certain cases though, the courts have awarded damages for loss of profit, basing it on loss of opportunity.^[15]

In cases of innocent misrepresentation, the court has discretion to award damages instead of rescission where rescission is available.^[16] These damages differ from rescission in that they only take into account the representee. Recently, this has been used as a remedy to compensate for innocent misrepresenation whereby rescission is barred through no fault of the representee. For these purposes, Jacob J in Thomas Witter v TBP^[17] extended the availability of these damages to cases in which rescission had been available at some point after the misrepresentation.

See also

• False pretenses—related criminal law term

Authorities