Contract: Misrepresentation

Misrepresentation

Establishing Misrepresentation

The Importance of Misrepresentation

If a statement is a term of the contract, the innocent party can sue for breach if it is untrue. However, in many cases a statement which induced the contract will not be part of the contract itself. This means that no action for breach of contract will arise. In those circumstances, the innocent party may find a remedy by relying on misrepresentation as a defence or action.

The Requirements

To establish misrepresentation, the innocent party must establish that:

  1. The other party made a false statement of fact or law;
  2. The statement induced the innocent party to enter into the contract.
False Statement

The false statement must be one of law or fact, and not a statement of opinion: Bisset v Wilkinson [1927] AC 177. There is an exception to this where:

  • The statement is one of opinion based on false facts which the representor was in a position to know: Smith v Land & House Property Corp (1884) 28 Ch D 7; or
  • The statement was one of future intent which the representor had no intention to carry out: Edgington v Fitzmaurice (1885) 29 Ch D 459.

Conduct which conveys information can amount to a statement of fact or law: Spice Girls v Aprilia [2000] EWHC Ch 140. Silence cannot normally be an actionable misrepresentation: Smith v Hughes (1871) LR 6 QB 597. This is so unless the contract is one of ‘utmost faith’ (e.g. insurance contracts): HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6.

If a statement of fact or law was true at the time it was made but later becomes false, it will be a misrepresentation not to correct it: With v O’Flanagan [1936] Ch 575. However, there is no duty to disclose relevant information in the absence of a misleading representation: Turner v Green [1895] 2 Ch 205.

Inducement

The innocent party must show that they knew about and relied on the representation when deciding to enter into the contract: Horsfall v Thomas [1862] 1 H&C 90. This means that but for the representation, the innocent party must show he would not have entered into the contract had he known the truth.

The courts will presume, in the absence of contrary evidence, that the innocent party relied on the statement if it was ‘material’. A statement is material if a reasonable person would have relied on it: Museprime Properties Ltd v Adhill Properties Ltd (1991) 61 P & CR 111.

However, in fraudulent misrepresentation cases, the innocent party only needs to prove that the representation was actively in their mind when they made the decision – a lower threshold. The court will also presume that a fraudulent misrepresentation induced the contract if the representor intended it to induce a contract: BV Nederlandse Industrie Van Eiprodukten v Rembrandt Entreprises [2019] EWCA Civ 596.

Reliance will not exist if the innocent party made checks to verify the statement himself: Attwood v Small [1838] UKHL J60. However, the fact that the innocent party could have verified the statement but failed to does not mean he did not rely it: Redgrave v Hurd (1881) 20 Ch D 1.

Remedies for Misrepresentation

Effect of Misrepresentation

If the innocent party establishes misrepresentation, the contract becomes voidable at their election.

A contract which is voidable is not treated as never existing. Rather, it is treated as existing until the innocent party communicates that they are terminating the contract or take reasonable steps to do so. Reasonable steps include reporting the goods stolen if the defendant has vanished.

Types of Misrepresentation

The exact range of remedies which are available for misrepresentation depends on whether it was fraudulent, negligent or innocent.

Fraudulent Misrepresentation
fraudulent phone call

A fraudulent misrepresentation is one which the representor knows is false, does not believe is true or which the representor is reckless as to its truth or falsity: Derry v Peek (1889) 5 TLR 625.

The remedy for fraudulent misrepresentation is to rescind the contract and claim damages under the tort of deceit. These damages do not need to be foreseeable: Doyle v Olby [1969] 2 QB 158.

Negligent Misrepresentation
negligent flood

A negligent misrepresentation is one which the representor cannot prove he had reasonable grounds to believe was true: Howard Marine v Ogden [1978] QB 574.

As a result of section 2(1) of the Misrepresentation Act 1967, the remedy for a negligent misrepresentation is the same as the remedy available for a fraudulent misrepresentation: Royscott Trust v Rogerson [1991] 2 QB 297. Alternatively, the court may refuse an application for rescission and grant damages (assessed according to contractual principles) in lieu, if it thinks this is equitable in light of the potential harm rescinding/not rescinding would cause to each party: Misrepresentation Act 1967, s 2(2).

Innocent Misrepresentation
innocent teddy bear

An innocent misrepresentation is one which is neither fraudulent or negligent.

The remedy for innocent misrepresentation is rescission. Alternatively, the court may refuse an application for rescission and grant damages (assessed according to contractual principles) in lieu, if it thinks this is equitable in light of the potential harm rescinding/not rescinding would cause to each party: Misrepresentation Act 1967, s 2(2).

Because misrepresentation renders the contract voidable rather than void, the right to rescind may be lost. The court is also likely to refuse rescission and grant damages in lieu under the Misrepresentation Act 1967, s 2 where:

  • The innocent party’s real reason for seeking rescission is to escape a bad bargain unrelated to the misrepresentation: William Sindall plc v Cambridgeshire County Council [1993] EWCA Civ 14;
  • The misrepresentation has not caused the innocent party any loss.
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Contract Defences Quiz

Test yourself on the principles governing when a party to a contract has a defence.

1 / 52

Complete this sentence: The defence of mistake renders the contract...

2 / 52

Celestine is an elderly woman whose eye-sight is failing. Her niece, Laura, persuades her to sign a document claiming that it will authorise Laura to remove £50 for Celestine's bank account to enable her to pay Celestine's bills. In reality, it is a contract transferring Celestine's house to Laura. Celestine did not bother to read it as she trusts Laura (who has helped her out with bills before) and her eyesight makes reading very difficult. Can Celestine rely on the defence of non es factum?

 

3 / 52

What two conditions must be met before a transaction is void for unilateral mistake?

4 / 52

David offers to sell Mary a house, representing that it has a conservatory. Mary relies on this representation when deciding to buy the house. Prior to the sale, there is a fire, and the conservatory burns down. David does not tell Mary. Can Mary rely on the defence of misrepresentation?

 

5 / 52

If a contract is voidable, can either party rely on its terms?

6 / 52

Julie is applying for an overdraft on a joint account controlled by herself and her husband Johan at ABC Bank. Her husband Johan offers to act as surety. The bank is unaware of the fact that Johan has been unduly influenced by Julie, but knows that the two are married. The overdraft is granted. Does the bank have constructive notice of the undue influence?

 

7 / 52

Can the innocent party prove that a misrepresentation caused them to enter the contract if they used their own resources to verify whether the statement was true?

 

8 / 52

For the purposes of unilateral mistake, when is a term 'vital' to the contract?

9 / 52

Can undue influence be demonstrated in cases where the parties had no relationship prior to the transaction?

10 / 52

For the purposes of the defence of unilateral mistake, when can a term as to the quality of the goods be considered 'vital'?

11 / 52

Complete this sentence: The defence of economic duress renders the contract...

12 / 52

Does a defence of duress to property exist?

 

13 / 52

ABC Bank is advancing money to a debtor. An individual tells the bank that they wish to act as a guarantor or surety for that debt. The debtor has unduly influenced this individual. When is the bank taken to have constructive notice of the presence of undue influence in the transaction?

14 / 52

When establishing the defence of undue influence, how does the claimant demonstrate actual influence?

15 / 52

What must a third-party bank do to rid themselves of constructive notice of undue influence?

16 / 52

Can the innocent party prove that a misrepresentation caused them to enter the contract if they had the opportunity to verify the statement, but did not?

 

17 / 52

In which two scenarios can a person rely on the defence of undue influence against a third-party?

18 / 52

What three elements must an innocent party show to establish the defence of economic duress?

19 / 52

Richard offers to sell Michael a book. Richard knows that Michael believes that the book is signed by the author. Richard did nothing to make him believe this, but nor does he correct Michael. Michael relies on his belief that the book is signed when deciding to buy it. Can Michael rely on the defence of misrepresentation?

 

20 / 52

Complete this sentence: The defence of illegality renders the contract...

21 / 52

David induces Mary to enter into a contract to buy a car by promising that he will service the car before he gives it to her. He has no intention of doing so. Is this an actionable misrepresentation?

 

22 / 52

What are the two requirements of the defence of misrepresentation?

23 / 52

Xavier is a busy taxi driver who purchases a new car from Dodgy Dealers Inc. He signs their standard term car-purchase contract without reading it, not realising that it contains an onerous clause requiring him to pay a penalty fee if he gets the car serviced by anyone else within the first year. Can Xavier rely on the defence of non es factum to get out of the contract?

 

24 / 52

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. The contract is in writing and signed, and the man signed his name as 'John'. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Can Maisy rely on the defence of mistake in relation to the man's identity?

25 / 52

Does the claimant need to establish that but for the threat, they would not have entered into the contract if they are trying to prove duress to the person?

 

26 / 52

Can a person rely on any of the three categories of presumed influence when trying to establish undue influence to challenge the will of a deceased person?

 

27 / 52

Katie and Andrew enter into a contract which states that Andrew will deliver Thompson apples to Katie. The parties are not aware that there are actually two kinds of Thompson apples - Virginia Thompson apples and Alabama Thompson apples. The two types of apple taste very different and have very different uses. Andrew intends to ship Virginia Thompson apples, while Katie is expecting to receive Alabama Thompson apples. Is the contract void for mutual mistake?

28 / 52

For the purposes of the defence of economic duress, can a lawful threat be illegitimate?

 

29 / 52

Joanie has established a presumption that her lawyer, Richard, influenced her when she sold her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

30 / 52

For the purposes of the defence of duress, what factors are relevant to whether the innocent party has a practical choice? (Three answers)

31 / 52

Marcus has shown that he reposed a large amount of trust in his partner, Adrian, when it comes to financial affairs. He also shows that his decision to transfer his inheritance to Adrian is a transaction which calls for explanation. To avoid the transfer being affected by the defence of undue influence, what must Adrian do to show that the influence was not undue?

32 / 52

When will the defence of illegality bar a claim?

33 / 52

Maisy enters into a contract over the phone with a man falsely claiming to be her long-lost cousin, John. In reality, Maisy does not have a long-lost cousin named John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not her cousin. Is the man's identity a vital term of the contract?

34 / 52

Maisy enters into a contract over the phone with a man falsely claiming to be her estranged cousin, John. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

35 / 52

If a contract is void ab initio, can either party rely on its terms?

36 / 52

Joanie has established that a neighbour of hers, Richard, pressured her into selling her house to him. To establish undue influence, what does she need to do to show that the influence was undue?

37 / 52

Maisy enters into a contract with a man falsely claiming to be her long-lost cousin, John, while they are catching up at a restaurant. Maisy later seeks to argue that she should not be bound by the contract, because she would not have entered into the contract had she known the man was not John. Is the man's identity a vital term of the contract?

38 / 52

Complete this sentence: The defence of misrepresentation renders the contract...

39 / 52

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2B' presumed influence?

40 / 52

When are damages in deceit available for a misrepresentation?

41 / 52

When establishing the defence of undue influence, how does the claimant demonstrate the category of presumed influence established in Malik (Deceased) v Shiekh?

42 / 52

When determining if the defence of misrepresentation applies, the courts will presume, in the absence of contrary evidence, that the claimant relied on the statement if a reasonable person would have relied on it. True or false?

 

43 / 52

When dealing with the defence of undue influence in a case where a presumption of influence has been raised, can the defendant rebut the presumption?

 

44 / 52

In which of the three following circumstances would the defence of common mistake apply?

45 / 52

When are damages available for innocent misrepresentation?

46 / 52

When establishing the defence of undue influence, how does the claimant demonstrate 'Type 2A' presumed influence?

47 / 52

Can silence be an actionable misrepresentation?

48 / 52

In what two scenarios are the courts likely to refuse to rescind a contract which has been rendered voidable by misrepresentation?

49 / 52

Complete this sentence: The defence of undue influence renders the contract...

50 / 52

Complete this sentence: The defence of duress to the person renders the contract...

51 / 52

Hannah is applying for a loan for the family business. Her girlfriend Celestine tells the bank that she will act as surety for the loan. The money is to be advanced to a company which Hannah and Celestine hold joint shares in. The bank is aware that Celestine is Hannah's girlfriend and that she has shares in the company, but they are not aware that Hannah has unduly influenced Celestine. They grant the loan. Can Celestine rely on the defence of undue influence against the bank?

52 / 52

When establishing that the defendant's influence was undue for the purposes of the defence of undue influence, the claimant must show that the transaction was manifestly to their disadvantage. True or false?

 

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