Introduction to Misrepresentation

Note on Introduction to Misrepresentation by Legum

Introduction to Misrepresentation:

Before parties enter into a contract, they make statements intended to influence each other to enter into the contract. Such statements are known as representations. If a representation turns out to be false, it is known as misrepresentation.

Misrepresentation Defined:

Misrepresentation is a false statement (can be words or conduct) given by a party to another to induce the other party to enter into the contract.

Essentially, the misrepresentation must:

1. Have succeeded in inducing the other party to enter into the contract.

2. Must be addressed to the party misled.

The misrepresentation must Succeed in Inducing a Party to Enter into a Contract (Inducement):

Before a remedy can be given for misrepresentation, the misled party must show that they were induced by the misrepresentation to enter into the contract. Thus, they must demonstrate that without the misrepresentation, they would not have entered into the contract. The following rules apply to inducement:

1. A person cannot allege inducement if he was unaware of the misrepresentation before the conclusion of the contract: If party X is not aware of the misrepresentation of party Y, party X cannot claim he was induced by an unknown misrepresentation. In the case of Horsfall v Thomas, the defendant wanted to rescind a contract after he discovered that a gun handed over to him by the claimant had a defect. The defendant had failed to examine the gun upon submission, and the court held that he could not have been induced to enter the contract by the representation of the claimant on the state of the gun.

2. The representation must affect the judgment of the representee: When X misrepresents to induce Y to enter into a contract, yet Y was not induced by the misrepresentation of X, Y cannot use the misrepresentation as grounds for rescission. In the case of Smith v Chadwick , the plaintiff sought to rescind a contract on grounds that the prospectus contained inaccurate information on the composition of a company’s board. He admitted during trial, however, that he was not induced by the representation on the composition of the board. The court held he could not rescind the contract since the misrepresentation did not induce him to enter the contract.

3. If the representee relies on his investigation or independent judgement, instead of the representations of the representor, he cannot claim to have been induced by the representor: Sometimes, a party to a contract may undertake their checks to verify the representations made by the other party. If a party relies on their findings from such a check to enter into a contract, the party cannot claim to have been induced by the misrepresentations of the other party. In the case of Atwood v. Small, the claimant bought a mine from the defendant. Before the purchase, the defendant (vendor) had greatly exaggerated the earning potential of the mines. The claimant had his agents verify the representations of the defendant, and only completed the contract after he was informed by his agents that the accounts were accurate. When it was later discovered that the statements on the earning potential were false, the claimant sought to rescind the contract but failed. The court held that the claimant had relied on his investigations and had not been induced by the defendant.

4. A representor of a false statement cannot argue or defend that if the representee had taken reasonable care, he would have discovered the misrepresentation: Sometimes, a party to a contract may be given a document which would reveal the misrepresentation by the other party. However, the party given the document may fail to peruse the document and still get induced by the misrepresentation. The party misrepresenting cannot use this fact as a defence. In the case of Redgrave v Hurd, Mr Hurd had failed to check documentation which revealed that a law practice brought in £200 per annum instead of the £300 the plaintiff, Mr Redgrave, told him it generated. When the defendant sought to rescind his contract with the plaintiff on grounds of misrepresentation, the plaintiff claimed the defendant would have discovered the misrepresentation if he perused the document handed over to him. The court held that it did not matter that the defendant failed to peruse the document, what was essential was that the defendant was induced by the plaintiff’s misrepresentation.

5. Misrepresentation does not induce a person with actual and complete knowledge of the facts: When party X misrepresents to party Y, but party Y is fully aware of the facts, then party Y cannot claim he was induced by the misrepresentation.

6. The misrepresentation must be material: For misrepresentation to be a ground for rescission, what is being misrepresented must be material based on a reasonable and objective evaluation.

The Misrepresentation Must be Addressed to the Party Misled:

Another essential element required for misrepresentation to give rise to remedies is that it must have been addressed to the party induced. When a party to a contract makes a false statement to party X to induce X to enter into a contract, but party Y had access to the false statement and got induced, party Y cannot claim misrepresentation. In the case of Peek v. Gurney, the applicants acquired shares of a company from some shareholders. The applicant later claimed that some information in the prospectus, which he relied on for the purchase of the shares, was false and constituted a misrepresentation. The court held that the information in the prospectus was addressed to the original allottees of the shares and not to the plaintiff and could not constitute misrepresentation to the plaintiff.

Statement of Fact versus Statement of Opinion:

In addition, the statement which turned out to be false must not be a mere opinion. In instances where an opinion turns out to be false, it is not considered misrepresentation. In the case of Bisset v Wilkinson, the court held that the defendant merely gave an opinion on the number of sheep a particular piece of land could carry, and it did not amount to a misrepresentation when the opinion turned out to be inaccurate.

The Exception to the Above Rule:

A statement of opinion would be held as misrepresentation if it turns out false and it is proven that the representor did not hold that opinion or could not hold that opinion due to their knowledge of the facts. In the case of Smith v Land and House Property Corp, the court of appeal held that Smith’s representation on the desirability of a tenant could not be held as a mere opinion since he knew the bad financial situation of a tenant.

Statement of Intention and Misrepresentation:

When a representor reveals an action they would take in the future, and it is discovered that they do not intend to put the future intention into effect, the courts would hold that the statement of intention (the action they would take in the future) constitutes misrepresentation.

In Edgington v Fitzmaurice, a company had misrepresented what they intended to use proceeds from a sale of shares for. The court held that “a misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact”

Commentary Statements, Sales Talk and Misrepresentation:

Salespersons usually engage in a practice known as puffing . This entails the making of exaggerated statements about the features of a product to convince a prospective buyer to make a purchase. When such exaggerations later turn out to be inaccurate, the courts may hold that the exaggerated statements do not constitute misrepresentation.

In the case of Dimmock v Hallet, an auctioneer described a piece of land as “fertile and improvable”. It later turned out that the land was partly abandoned and useless. The court held that the statement on the quality of the land was merely a flourishing description of the land by the auctioneer and did not constitute misrepresentation.

However, when the seller makes a specific and verifiable statement about a product, and it turns out to be false, the courts will hold that it constitutes misrepresentation. This was the case in Carlill v Carbolic Smokeball Co.

Can Silence Constitute Misrepresentation?

As a general rule, mere silence does not constitute misrepresentation. However, conduct can constitute misrepresentation if a person through his conduct misleads another party.

In the case of Walters v Morgan, the claimant, Walters, leased land from the defendant, Morgan, without disclosing to Morgan the value of resources he knew existed on the land. When Morgan later discovered the value of the land, he refused to permit Walters to mine the land. Walters brought an action against Morgan for specific performance.

The court per Lord Campbell stated that a purchaser is not bound to disclose information which may affect the purchasing price and that there was no misrepresentation since the buyer had not said anything to mislead the seller.

When Silence can Constitute Misrepresentation (Exceptions to the rule that silence does not constitute misrepresentation):

1. Contracts uberrimae fidei: Uberrimae fidei means “utmost good faith”. In some contracts, one party has critical information that could affect the rights of the parties under the contract. For instance, in insurance contracts, the insurance company has all the information on the scope of the insurance and liability covered. The law requires that in such cases, full disclosure is necessary and the party with the information must fully disclose it to the party without the information.

2. Changed fact situations: When the circumstances surrounding a contract change, yet the party with the knowledge of the change stays silent and fails to inform the other party about the change in circumstance, then silence can constitute misrepresentation. In the case of With v O’Flanagan, Dr O’Flanagan had failed to disclose to With that his medical practice no longer earns as it used to. The court held that Dr O’Flanagan was under an obligation to make a disclosure.

3. When partial disclosure renders the information being disclosed completely false: In the case of Curtis v Chemical Cleaning Co, the defendants had partially disclosed that an exclusion clause excluded liability for damage to beadings on a customer’s dress when in fact the exclusion clause excluded all liability for damage. The court held that the exclusion clause was not effective in limiting liability due to the misrepresentation arising from the partial disclosure.

Types of Misrepresentation:

There are three types of misrepresentation:

1. Fraudulent misrepresentation.

2. Negligent misrepresentation.

3. Innocent Misrepresentation.