8 CONTRACT LAW 2: MISREPRESENTATION
Secrets and Lies Where does the law stand?
Misrepresentation is a false statement of fact by one party which is relied on by another party when entering a contract. In order for the misrepresentation to be actionable, in other words, for a court to take action on behalf of the injured party, it must be a statement of fact. It must not be just an expression of opinion or future intention. False statements about the law are not actionable as there is a presumption that everyone knows the law. If a person remains silent about something that might be relevant to the contract, this is also not misrepresentation, provided there is no fraud. The doctrine of caveat emptor or ‘buyer beware’ applies and a party is not under a duty to voluntarily disclose problems.
There are four recognized types of fraudulent misrepresentation
misrepresentation:
negligent misrepresentation wholly innocent misrepresentation negligent misrepresentation under statute.
Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889). He established that it is a false statement that is made firstly knowingly, or secondly without belief in its truth, or thirdly recklessly as to whether it is true or false. On this basis, if someone makes a statement honestly believing it to be true, there is no fraud. The burden of proof is on the plaintiff, the person who brings a civil action. This means that if you say a statement has been fraudulent, then you must prove it.
Negligent misrepresentation at common law involves a person making a statement with no reasonable basis for knowing whether or not it is true or false. It was first seen in Hedley Byrne v Heller [1964] where the court decided that a negligent misstatement could be actionable in tort. In other words, there might be a case even if there was no breach of contract. In Esso Petroleum Company Ltd v Mardon [1976], Lord Denning, in his inimitable way, developed this concept so that it became part of contract law. The remedy is usually an award of damages.
Wholly innocent misrepresentation differs from negligent misrepresentation in one key element. The person making a false statement has reasonable grounds for believing it to be true.
Before Hedley Byrne v Heller, the courts held that all misrepresentations that were not fraudulent were innocent. The remedy for innocent misrepresentation is usually rescission, where the parties are returned to the position they were in before the formation of the contract. Section 2(2) of the Misrepresentation Act 1967 also gives the court the discretion to award damages instead of rescission, if it is considered equitable to do so.
Negligent misrepresentation under statute is where a case is brought under the Misrepresentation Act 1967. Section 2 of the Act states that, where a person has entered into a contract as a result of misrepresentation, and has subsequently suffered a loss, then the person making the misrepresentation is liable for damages (monetary compensation), even though the misrepresentation was not made fraudulently. That person must prove that he/she had reasonable grounds to believe, and did believe, that the misrepresentation was true, up to the time the contract was made. So, under this statute, the burden shifts to the defendant, who has to prove that there were reasonable grounds to believe that the statement was made truthfully.
There seems to be some conflict between the remedies that are available under common law and those that have been brought in by statute. This conflict arises with negligent misrepresentation which is not fraudulent. Under section 2(2) of the Misrepresentation Act 1967, the courts have the discretion to award damages instead of rescission, even if there has been no fraud. However, under the common law, the rule seems to be that the courts will only allow rescission of the contract and will not award damages when the misrepresentation is not fraudulent.
In Royscott Trust Ltd v Royston [1991] a car dealer induced a finance company to enter into a credit agreement with a customer by mistakenly misrepresenting the amount of the deposit that had been paid. The customer did not make the monthly payments and later sold the car to a third party. The Court of Appeal decided that the dealer was liable for all the losses suffered by the finance company under sections 2(1) and 2(2) of the Act. It was foreseeable that a person buying a car on credit might default (that is, fail to honour their contractual obligation) and then sell the car.
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