BetterLawNotes-5 (2)

CONTRACT LAW

Introduction

A misrepresentation is an unambiguous statement of fact which is false or misleading and which induces the addressee to enter into a contract. Where the misrepresentation is made by one contracting party to the other, the addressee may be able to rescind, ie undo or escape from, the contract. In addition or alternatively, he may be able to claim damages.

Misrepresentation is a complex topic. This is partly because it draws upon the common law, equity and statute. Furthermore, while an action for misrepresentation is distinct from an action for breach of contract, the same facts may give rise to liability for both. Misrepresentation, then, cannot be considered in isolation from other areas of contract law.

The statement must be one of fact

 A misrepresentation is a false statement of fact, that is the statement relates to something in the past or present. A statement ‘that something will be done in the future cannot either be true or false at the moment it is made’. Similarly, a statement of opinion is not of itself liable to characterisation as true or false. As such, it is commonly said that statements of intention or opinion are not actionable as misrepresentations. Nevertheless, statements of intention and opinion may give rise to liability for misrepresentation because the express statement may justify the implication of an ancillary statement of fact.

As regards statements of opinion, consider the following:

Nottingham Patent Brick and Tile Co v Butler (1866) 16 QBD 778

The solicitor, Mr Gilbert, acting for the seller of a piece of land replied was asked whether the land was subject to any restrictive covenants. He replied that it was not so far as he was aware. While the statement was made honestly, and was strictly true, Gilbert had not troubled to look at the title deeds to the property. The statement was held to be a misrepresentation:

‘[Gilbert] allowed himself, in his zeal for his client, to make statements which were calculated to lead the other side to believe that he was stating facts within his own knowledge, and his statements in fact misled them, so that what he said amounts to a mis-statement of facts.’ (Lord Esher MR at 787-8)

Smith v Land & House Property Corp (1884) 28 Ch D 7

A seller described his property as being let to one Frederick Fleck, ‘a most desirable tenant’. In fact, Fleck was behind on his rent payments. Held: the description of Mr Fleck was false statement that nothing had occurred to render him an undesirable tenant.

‘The vendors state that the property is let to a most desirable tenant, what does that mean? I agree that it is not a guarantee that the tenant will go on paying his rent, but it is to my mind a guarantee of a different sort, and amounts at least to an assertion that nothing has occurred in the relations between the landlords and the tenant which can be considered to make the tenant an unsatisfactory one. That is an assertion of a specific fact . . .

It is often fallaciously assumed that a statement of opinion cannot involve the statement of fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion. The statement of such opinion is in a sense a statement of fact, about the condition of the man’s own mind, but only of an irrelevant fact, for it is of no consequence what the opinion is. 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 a material fact, for he impliedly states that he knows facts which justify his opinion’

Bowen LJ.

But an implication will not always be justified: it will depend upon the facts of the case. So contrast the previous cases with the following:

Bisset v Wilkinson [1927] AC 177

The claimant, Bisset, brought an action to recover an amount due under an agreement for the sale of certain land. The defendant counter-claimed for rescission of the agreement on the grounds of misrepresentation or, alternatively, for damages for deceit.

The agreement, made in 1919, provided for the sale of two plots of land, Homestead and Hogan’s, comprising approximately 2,062 and 348 acres respectively, at Avondale on the south island of New Zealand.

The defendants agreed to pay £13,260, with £2,000 being due on the signing of the agreement and the balance in five years’ time, with interest being paid half-yearly in the meantime.

The defendants intended to use the land for sheep-farming, although one had no relevant experience. The other had previously been in charge of an extensive sheep-farm carried on by his father. The father accompanied and advised the son during the sale negotiations and carefully inspected the land at Avondale. During those negotiations the claimant stated that land “would carry 2,000 sheep” based on one team of horses working the land. While the claimant had carried out sheep-farming on part of the Homestead plot, he had no experience of farming Hogan’s.

Having gone into possession, the buyers soon experienced difficulties caused partly by their inexperience. After two years the price for sheep and wool fell to levels such that the defendants would have lost money even had the land been capable of carrying 3,000 sheep. The defendants reduced their flock and turned to cropping and dairy-farming, but failed to pay the instalments of interest as provided for in the agreement.

At trial, the defendants failed to prove that that the farm, if properly managed, was not capable of carrying two thousand sheep.

Sim J held that the claimant’s statement had been one of opinion and had been honestly made.

The Court of Appeal reversed the decision.

The Privy Council ruled that the decision of the trial judge should be restored.

In ascertaining what meaning was conveyed to the minds of the now respondents by the appellant’s statement as to the two thousand sheep, the most material fact to be remembered is that, as both parties were aware, the appellant had not and, so far as appears, no other person had at any time carried on sheep- farming upon the unit of land in question. That land as a distinct holding had never constituted a sheep-farm . . . As was said by Sim J: ‘In ordinary circumstances, any statement made by an owner who has been occupying his own farm as to its carrying capacity would be regarded as a statement of fact . . .

This, however, is not such a case. The defendants knew all about Hogan’s block and knew also what sheep the farm was carrying when they inspected it. In these circumstances . . . the defendants were not justified in regarding anything said by the plaintiff as to the carrying capacity as being anything more than an expression of his opinion on the subject.’

In this view of the matter their Lordships concur.

Whether the appellant honestly and in fact held the opinion which he stated remained to be considered. This involved examination of the history and condition of the property. If a reasonable man with the appellant’s knowledge could not have come to the conclusion he stated, the description of that conclusion as an opinion would not necessarily protect him against rescission for misrepresentation. But what was actually the capacity in competent hands of the land the respondents purchased had never been, and never was, practically ascertained . . .

. . . It is of dominant importance that Sim J. negatived the respondents’ charge of fraud.

To similar effect, a statement of intention will give rise to liability for misrepresentation where the maker of the statement does not hold that intention. This is because the court will imply a statement that the maker is telling the truth.

Edgington v Fitzmaurice (1885) 29 Ch D 459

The defendants, directors of a company, the Army and Navy Provision Market (Ltd.), invited subscriptions for debenture bonds totalling £25,000. The prospectus stated that the purpose of the issue was to enable the company to complete the development of its premises, to purchase horses and vans, and to develop arrangements for the direct supply of cheap fish from the coast. The real object of the fund-raising however was to pay off the company’s pressing liabilities. The claimant subscribed for some of the bonds partly in reliance on the statements in the prospectus and partly on the basis of an erroneous belief that the bonds would be secured by a charge over the company’s property. The company became insolvent and the claimant brought an action claiming the return of his advance of £1,500 on the ground that he had been induced into the transaction by the defendants’ fraudulent misrepresentations. Held: affirming the decision of Denman J., the defendants were liable in deceit.

‘A mere suggestion of possible purposes to which a portion of the money might be applied would not have formed a basis for an action of deceit. There must be a misstatement 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 misstatement of fact. Having applied as careful consideration to the evidence as I could, I have reluctantly come to the conclusion that the true objects of the Defendants in raising the money were not those stated in the circular … I am satisfied that the objects for which the loan was wanted were misstated by the Defendants, I will not say knowingly, but so recklessly as to be fraudulent in the eye of the law.’ (Bowen LJ at 483).

Just as a statement may be implied from something which the defendant said, an implication may be drawn from what the defendant did: put another way, a statement may be made by conduct and not simply by words. Thus ‘a nod or a wink, or a shake of the head, or a smile’ may be sufficient to constitute a representation. See for example:

R v Barnard (1837) 7 Car & P 784

The defendant was found guilty of obtaining property through false pretences. He entered Mr Vincent’s shop in Oxford High Street wearing an Undergraduate’s cap and gown. He said he was a member of Magdalen College. Vincent let the defendant take away some boot-straps on credit. Bolland B said that if nothing had passed in words, the wearing of the cap and gown would have been sufficient evidence of a false pretence that he was a member of the University.

The statement must be false or misleading

Note that a statement may not be false simply because it is not ‘entirely correct’.

Avon Insurance plc v Swire Fraser Ltd [2000] 1 All ER (Comm) 573

‘a representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts’.

Rix J.

The statement must have induced the addressee to enter into a contract

The addressee must have relied upon the statement when agreeing to the terms of the contract. Consider the following:

Horsfall v Thomas (1862) 1 H & C 90

C bought a gun from D. The gun was defective and soon after purchase it exploded. C alleged that D had concealed the defect by inserting a metal plug into the breach of the gun. The court held that C’s claim failed: even if his allegations were true, the concealment had not influenced C at all as he had not examined the gun before buying it.

‘[T]he defendant never examined the gun, and therefore it is impossible that an attempt to conceal the defect could have had any operation on his mind or conduct’.

Bramwell B at 99.

If the addressee can show that the statement would generally have influenced someone in his position, the court will infer that the addressee himself was so influenced. Accordingly, where the addressee shows that the statement was material in this sense, the burden in effect shifts to the representor to show that the addressee was not actually influenced.

Does the misrepresentation have to be the sole inducement?

‘It is not necessary to shew that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the Defendants will be still liable.’ 

Edgington v Fitzmaurice (1885) 29 Ch D 459, 481 (Cotton LJ).

‘if the false statement of fact actually influenced the Plaintiff, the Defendants are liable, even though the Plaintiff may have been also influenced by other motives’. (Edgington v. Fitzmaurice (1885) 29 Ch D 459, 485 (Fry LJ)).

Edgington v Fitzmaurice (1885) 29 Ch D 459, 485 (Fry LJ).

What if the claimant could have discovered the truth?

It is generally no defence for the representor to say that the addressee could and should have discovered the falsity of the statement before entering the contract.

Redgrave v Hurd (1881-82) LR 20 Ch D 1

C advertised to take a partner into his law practice who would also purchase his house. C told D that the practice brought in from £300 to £400 a year and produced business summaries which showed an annual income of almost £200. D also produced various letters and papers which he said related to other income.

D agreed to buy the house and paid a deposit. However, D refused to complete having discovered in the meantime that the business was, as he put it, worthless.

Fry J granted C’s application for specific performance and dismissed D’s counterclaim for rescission. Fry J found that D did not examine the letters and papers, but had he done so he would have seen evidence of a further annual income of around £5. Fry J held that D had either not relied on the statement as to income or if he had relied on it had been guilty of such negligence as to deprive him of any right to relief.

The CA allowed D’s appeal.

‘The mere fact that a party has the opportunity of investigating and ascertaining whether a representation  is true or false is not sufficient to deprive him of his right to rely on a misrepresentation as a defence to an action for specific performance. The person who has made the misrepresentation cannot be heard to say to the party to whom he has made that representation, “You chose to believe me when you might have doubted me, and gone further.” The representation once made relieves the party from an investigation, even if the opportunity is afforded.’

Baggallay LJ at 22-23.

The statement must have been addressed to the representee

While the defendant’s misrepresentation may have induced the claimant to enter into a contract, the claimant will only have a claim if the misrepresentation was addressed to him.

Peek v Gurney (1873) LR 6 HL 377

A statement in a prospectus was intended to invite persons to take allotments of shares in the company. Once the shares to which the statement related had been issued, the statement was exhausted. A subsequent purchaser of those shares in the market had no right of action as regards the falseness of statements in the prospectus.

Misrepresentation by whom?

Where a misrepresentation by a third party induces the claimant to enter a contract with the defendant then, as a general rule, the claimant has no claim against the defendant.

Foote v Hayne (1824) 1 C & P 545, 171 ER 1310

Action for breach of promise of marriage. In his defence, D said his promise of marriage had been induced by misrepresentations by C’s father. It was alleged that C had left London to give birth to her second child, of whom one Colonel Berkeley was the father, But that C’s father, Mr Foote, wrote to D saying that C had left London because of a pulmonary complaint.

Abbott CJ said that C was not answerable for her father’s statements. C was awarded damages of £3,000.

But a claim may lie where against the defendant where he had notice of the third party’s misrepresentation or where the third party acted as his agent.

Barclays Bank plc v O’Brien [1994] 1 AC 180

A husband and wife executed a second mortgage in favour of Barclays to secure overdraft facilities extended by the bank to a company in which the husband, but not the wife, had an interest. The husband induced the wife to execute the charge by misrepresenting its nature and extent.

The House of Lords held that the misrepresentation gave rise to an equity in the wife as against the husband to set aside the charge. Further, the wife’s equity/right to set aside was enforceable against the bank as it had constructive notice of the circumstances giving rise to the equity: the bank had failed to take reasonable steps to ensure that the wife’s agreement to stand as surety had been properly obtained.

Liability through non-disclosure

So far, we have considered cases where the defendant has said or done something. But what about the case where he says or does nothing? As a general rule, one party is not obliged to volunteer information which the other party might consider relevant: ‘the failure to disclose a material fact which might affect the mind of a prudent contractor does not give the right to avoid the contract’. In other words, by keeping silent (or still) the defendant escapes liability. A good example is:

Keates v Cadogan (1851) 10 CB 591

C took a tenancy of a house owned by D. C alleged that D knew that C wanted the house for immediate occupation. C alleged that shortly after moving into the house, a great part of it fell down, endangering C and his family and forcing them to move out. C claimed damages in deceit on the ground that as D knew before granting the tenancy that C wanted the house for immediate occupation and that the house was in ruinous state and unfit for occupation, D ought to have warned C of the condition of the house. The claim failed. There was no allegation that D had warranted the condition of the property, nor was there any misrepresentation.

‘The declaration struck me, at first sight, as a perfectly bad one; and it does not improve upon acquaintance.’ Maule J at 601.

But, exceptionally, the defendant will be under a positive duty to make a disclosure, and will be liable if he fails to do so. See, for example, the Marine Insurance Act 1906, s 18(1).

Continuing Effect and Changes of Circumstance

With v O’Flanagan [1936] Ch 575

In Jan 1934, Dr O’Flanagan entered negotiations with the Cs for the sale of his medical practice. Dr O’F’s agent represented that the practice had annual takings of £2,000 and this was confirmed by Dr O’F. The sale took place on 1 May 1934. However, Dr O’F had been ill between January and May 1934 and the practice was looked after in absence by various locums. The business of the practice fell away dramatically during this time: in the 3 weeks before completion of the sale, weekly takings averaged £5.

On 4 May, the Cs issued a writ seeking rescission of the agreement and return of the purchase money [of £4,000]. It was argued on behalf of Dr O’F’s estate (he died in July 1934) that no representations had been made as to takings during 1934. Further, it was argued that Fry J’s dictum was no authority for the proposition that where a statement which was true when made and remained true, the maker was obliged to disclose a subsequent change of circumstances.

Bennett J held that the contract was not one uberrimae fidei, and that since the rep was true when made, the Cs action failed. The CA allowed the C’s appeal.

‘If A with a view to inducing B to enter into a contract makes a representation as to a material fact, then if at a later date and before the contract is actually entered into, owing to a change of circumstances, the representation then made would to the knowledge of A be untrue and B subsequently enters into the contract in ignorance of that change of circumstances and relying upon that representation, A cannot hold B to the bargain.’

Romer LJ at 586.

REMEDIES

The complexities of misrepresentation become evident when remedies are examined. While rescission is relatively straightforward, establishing the defendant’s liability in damages requires identifying whether the misrepresentation is fraudulent, negligent, or innocent, and considering both the common law and the provisions of the Misrepresentation Act 1967. Note that where the representation is incorporated as a term of the contract, consideration must also be given to remedies for breach of contract.

RESCISSION

Rescission may be thought of as the primary remedy for misrepresentation. It is available whether the misrepresentation is made fraudulently, negligently, or innocently. Rescission must be distinguished from the remedy of termination for breach of contract. Rescission operates to undo the contract ab initio: following rescission the contract ceases to exist. Rescission, then, involves the setting aside of the contract so as to restore the parties, as far as possible, to their pre-contract positions.

How to effect rescission

Rescission is the act of the representee rather than a curial remedy. To be effective, the representee must, as a general rule, communicate his intention to rescind to the representor. However, this is not a universal requirement.

Car & Universal Finance Co Ltd v Caldwell [1961] 1 QB 525

Caldwell owned a Jaguar. Having advertised it for sale, two men, calling themselves, Norris and Foster, let them take the car away in return for a cheque another car to be held as security. The following morning C presented the cheque at the branch where the account on which it was drawn was held. The cheque was not honoured and the manager advised to C to go to the police. C immediately went to the police station by taxi. Later that afternoon, C telephoned the AA. Both the police and AA endeavoured to find the car. Subsequently, the car changed hands several times before it was bought in good faith by D.

‘If one party, by absconding, deliberately puts it out of the power of the other to communicate his intention to rescind which he knows the other will almost certainly want to do, I do not think he can any longer insist on his right to be made aware of the election to determine the contract. In these circumstances communication is a useless formality. I think that the law must allow the innocent party to exercise his right of rescission otherwise than by communication or repossession. To hold otherwise would be to allow a fraudulent contracting party by his very fraud to prevent the innocent party from exercising his undoubted right. I would hold that in circumstances such as these the innocent party may evince his intention to disaffirm the contract by overt means falling short of communication or repossession.’

Upjohn LJ at 555.

 

Restitutio in integrum

Rescission involves returning the parties to their pre-contract positions: it therefore requires ‘a giving back and a taking back on both sides’. Each party returns to the other what he received under the contract. If one party is unable to restore what he received, then rescission is not an available remedy.

Clarke v Dickson (1858) E B & E 148

C was induced by a fraudulent misrepresentation to acquire shares in a partnership. C subsequently agreed to the partnership being registered as a limited liability company. The company was then wound up. During the winding up, C discovered the fraud and sought to rescind the contract under which he acquired the shares. The Court of QB held that C’s only remedy was for damages for deceit.

Nevertheless, rescission may still be effected where substantial restitution is possible and compensation will put the party in as good a position as he was in before the contract: rather than insisting on precise restitution, the court will strive to achieve ‘practical justice’.

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL)

The defendants formed a syndicate which acquired a lease of an island in the West Indies, which contained valuable mineral deposits, for £55,000. The syndicate then formed a company to which it sold the lease for £110,000. The HL held that the defendants had breached the fiduciary duties they owed the company, and the company could rescind the contract of sale, by giving up possession of the island and accounting for any profits made from mining the minerals.

Note that rescission involves undoing the contract as a whole: partial rescission is not permitted.

TSB Bank plc v Camfield [1995] 1 WLR 430

A wife had agreed to grant a charge over the matrimonial home to secure loans to a business in which her husband held an interest. The wife was induced to grant the charge by the innocent misrepresentation that the maximum liability under the loans was £15,000 whereas in fact it was unlimited. The Court of Appeal held that the wife could rescind the charge in its entirety and the court had no power to set it aside on terms that the wife acknowledged that it was a valid security for £15,000.

Other bars to rescission

Impossibility of restitution is not the sole bar to rescission. The following further restrictions should be noted:

Affirmation

Long v Lloyd [1958] 1 WLR 753

C induced to buy a lorry by D’s misrep. C took lorry on journey during which various defects came to light. C spoke to D who offered to contribute to certain repairs, which C accepted. The following day C sent the lorry on another journey during which it broke down. C then sought to rescind the contract. CA held C had accepted the lorry before rescinding.

Third-party rights

By the time the claimant in Lewis v Averay [1972] 1 QB 198 discovered that he had been the victim of a fraudulent misrepresentation, the fraudster had already sold the car to an inncoent third party. As such, the claimant was barred from rescinding his contract with the fraudster., rogue had sold car to T. Rogue had no right to car at that time – S could not rescind.

Misrepresentation Act 1967, s 2(2)

Under this sub-section of the Act, the court has a discretion to award damages as an alternative to rescission. The discretion only applies in the case of non-fraudulent misrepresentations.

Lapse of time

In Leaf v International Galleries [1950] 2 KB 86, the Court of Appeal held that rescission was barred once a reasonable period of time had elapsed. But in Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745 the Court of Appeal stated that lapse off time by itself was not a bar to rescission: something more was needed to bar the remedy. 

INDEMNITY

An indemnity is a remedy ancillary to rescission. It takes the form of a monetary award for expenditure which the representee was obliged to incur as a result of entering into the contract.

Whittington v Seale-Hayne (1900) 82 LT 49

C was induced to take a lease of premises for use as a poultry farm by D’s misrepresentation that premises were in a sanitary condition. In fact, water supply was contaminated. C’s manager fell ill and C’s poultry died or became worthless. C was also required by local authority to carry repair work to the premises.

The court held that C could recover by way of indemnity amounts representing rent, rates and repair costs, but not medical bills and loss of profit.

DAMAGES

There are four possible sources of an award of damages for misrepresentation. To establish which may be available it is necessary to distinguish between fraudulent, negligent and innocent misrepresentations. A victim of a fraudulent misrepresentation may recover damages at common law for the tort of deceit. A victim of a negligent misrepresentation may recover damages at common law for the tort of negligence. In both these situations the victim may alternatively claim damages under s 2(1) of the Misrepresentation Act 1967.

The victim of an innocent misrepresentation has no right to damages, either at common law or by statute. However, s 2(2) of the Misrepresentation Act 1967 confers on the court a discretion to award damages in place of rescission where the misrepresentation has been made innocently (or negligently).

Damages for the tort of deceit

What is fraud?

‘…fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.’

Derry v Peek (1889) 14 App Cas 337, 374 (Lord Herschell).

Shutting one’s eyes to the truth

‘if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.’

Derry v Peek (1889) 14 App Cas 337, 376 (Lord Herschell).

The measure of damages

Smith New Court Securities Ltd v Scrimgoeur Vickers (Asset Management) Ltd [1997] AC 254

On 21 July 1989, C (Smith) was induced by a fraudulent misrepresentation by an employee (Roberts) of D2 (Citibank), which was acting as broker for D1 (Scrimgoeur Vickers), to acquire shares in a company (Ferranti). In September 1989, it emerged that the company had been the victim of a fraud (by one Guerin), and its share price fell dramatically. C then sold its shares at prices ranging from 49p to 30p, incurring a total loss of over £11.4m.

The judge dismissed the claim against D1 but held that D2 was liable in damages to C, such damages being calculated as the difference between the price paid for the shares (84.5p/share) and the actual value as at July 1989 (ie had the market known of the Guerin fraud) (44p), amounting to £10.8m.

The CA held that the correct measure of damages was the difference between the price paid and the market price of the shares as at July 1989 (78p), amounting to £1.2m.

The HL held that the correct measure was the difference between the price paid and the amount eventually realised on re-sale. (On the facts, Smith was limited to recovery of £10.8m, because it had not appealed against the judge’s award, and so that stood).

According to Lord Browne Wilkinson (at 267), where the C has been induced by a fraudulent misrepresentation to buy property, damages are to be assessed as follows:

‘(1) the defendant is bound to make reparation for all the damage directly flowing from the transaction;

(2) although such damage need not have been foreseeable, it must have been directly caused by the transaction;

(3) is assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction;

(4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered;

(5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property.

(6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction;

(7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.’

Loss of opportunity but not loss of bargain

‘The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, i.e. the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain . . .

There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendant.’

Smith New Court Securities Ltd v Scrimgoeur Vickers (Asset Management) Ltd [1997] AC 254 (Lord Steyn).

East v Maurer [1991] WLR 461

Maurer operated two hairdressing salons in Bournemouth. When negotiating the sale of one of the salons (Exeter Road salon) to Mr and Mrs East, M said that he had no intention of working at his remaining salon (Canford Cliffs) (unless a staff emergency arose such as illness). The Easts bought the salon for £20,000. However business soon began to fall away at an alarming rate. It turned out that East was working full time at the Canford Cliffs salon. For three years Mrs East tried to make the salon profitable, spending significant sums on advertising and installing a solarium. After various attempts, Mrs E managed to sell the business, for £7,500.

The judge awarded damages of a little over £33,000, together with interest. The damages comprised (i) the difference between the acquisition and disposal prices, (ii) the cost of fees and expenses in acquiring and selling the business together with the cost of improvements (iii) trading losses (iv) loss of profit for the period of ownership (£15,000), and (v) disappointment and inconvenience (£1,000).

M appealed against the award of £15,000 for loss of profit, arguing that damages for loss of profit were not recoverable in deceit. The Court of Appeal held that damages for loss of profit should have been based on the profit that Mrs E might have made had the representation not been made: that required an assessment of the profit she might have made had she bought an alternative hairdressing business. The Court of Appeal substituted a figure of £10,000 for that awarded by the judge.

‘It is objected that the loss of profits is not properly recoverable because it is appropriate not to a claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits does not stem from the making of the contract but from the fact that the profit made was not what was anticipated . . .  [but] the loss of profits awarded relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the [defendant’s] business, and the profits of the latter are treated by the judge solely as some evidence of what the profits of the other business might have been. In my judgment there is no error of principle here.’

 

Mustill LJ at 468.

Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd [2001] QB 488

Simplifying the facts somewhat, the claimant company entered into a distributorship agreement with the defendant under which the claimant agreed to market and distribute certain of the defendant’s products in France. The agreement provided for the claimant to purchase its supplies of the defendant’s products at fixed prices. Although the claimant was able to distribute the defendant’s products profitably, it claimed it had been induced to enter into the agreement by a fraudulent misrepresentation made by the defendant as to product-pricing. The trial judge awarded damages amounting to the difference between the prices the claimant actually paid for the defendant’s products and the more favourable prices it may have been able to secure had the misrepresentation not been made. The defendant appealed on the basis that damages awarded by the judge represented damages for loss of bargain whereas damages for deceit are available only to compensate for loss suffered. The Court of Appeal unanimously dismissed the appeal.

Damages for the tort of negligence

To recover damages at common law for a negligent misrepresentation, the claimant must show not just negligence on the part of the representor but also that the representor owed him a duty of care, or had assumed responsibility, as regards the accuracy of the statement.

Damages under the Misrepresentation Act 1967, s 2(1)

‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.’

Royscot Trust Ltd v Rogerson [1991] 2 QB 297

The customer agreed to buy a car on hire purchase for a cash price of £7,600, inclusive of a deposit of £1,200. The dealer sold the car to the finance company for £6,400 and represented that the customer had agreed a cash price of £8,000 inclusive of a deposit of £1,600. The customer defaulted on his payments to the finance company, which then sought to recover its losses from the dealer. The Court of Appeal held that the company could recover as damages the difference between what it had paid the dealer and what it had received in payments from the customer.

Damages under s 2(2) Misrepresentation Act 1967

‘Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.’

Meaning of ‘entitled . . . to rescind’

Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573

Jacob J held (at 590) that the power to award damages under s 2(2) did not depend on the representee having an existing right to rescission and that it was sufficient if the representee had had such right in the past.

Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 WLR 2333

In June 1992 the claimant agreed to purchase an executive jet aircraft from BAe. In November 1992 CIBC was substituted as purchaser with the claimant agreeing to lease the aircraft from CIBC for a period of 10 years. Shortly after delivery, various faults appeared and the aircraft was returned to BAe for repair. The faults continued and the claimant ceased its rental payments to CIBC. In February 1994 CIBC terminated the lease, re-possessed the aircraft and sold it to a third party. The claimant then issued a writ against BAe seeking rescission of the original purchase agreement or damages on the ground that BAe had falsely represented that the aircraft would airworthy, reliable, and without design or construction defects.

Judge Raymond Jack QC held that the court had no power to award damages under s 2(2) of the Misrepresentation Act 1967 where rescission was no longer available.

“…section 2(2) gives the court a discretionary power to hold the contract to be subsisting and to award damages where it would otherwise be obliged to grant rescission or to hold that the contract had been rescinded by the representee. The court does not have that power, and does not need to have that power, where rescission is no longer available. In short, the power to award damages is an alternative to an order for rescission or the upholding of a prior rescission by the representee if that has occurred” (Judge Raymond Jack QC at 2343).

Judge Raymond Jack QC differed from Jacob J’s view in Thomas Witter on the basis that the answer given in a parliamentary debate by the Solicitor General, and relied on by Jacob J., was given ex tempore at 3 a.m. and was not “absolutely clear”. Further, the answer was inconsistent with both the earlier report of the Law Reform Committee and the manner in which the clause in the Bill had been introduced in the House of Lords by the Lord Chancellor (see at 2343).

Contributory fault

Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2002] UKHL 43, [2003] 1 AC 959

‘In the case of fraudulent misrepresentation . . . there is no common law defence of contributory negligence . . . It follows that . . . no apportionment under the 1945 Act is possible.’

Lord Hoffmann at [18].

Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560

‘[I]n short, liability under the Misrepresentation Act 1967 is essentially founded on negligence, in the sense that the defendant, the representor, did not have reasonable grounds to believe that the facts represented were true. (Of course, if he did not believe the facts represented were true he will be liable for fraud.) This being so, it would be very odd if the defence of contributory negligence were not available to a claim under that Act. It would be very odd if contributory negligence were available as a defence to a claim for damages based on a breach of a duty to take care in and about the making of a particular representation, but not available to a claim for damages under the Act in respect of the same representation.’

Nicholls V-C at 573.

By parity of reasoning with the Forsikrings case, which held that ‘the Act of 1945 applies to a case where there is a claim for damages for negligence at common law even if, in addition, there is a claim in contract to the same effect’, Nicholls V-C concluded that ‘the Act of 1945 applies in the present case where there are concurrent claims against Richcliff in negligence in tort and under the Act of 1967.’

But Nicholls V-C went on to rule that it would not be just and equitable to make any reduction in GG’s damages.

‘Richcliff intended, or is to be taken to have intended, that Gran Gelato should act in reliance on the accuracy of the answers provided by Gershon Young. Gran Gelato did so act. In those circumstances it would need to be a very special case before carelessness by Gran Gelato, the representee, would make it just and equitable to reduce the damages payable to compensate Gran Gelato for loss suffered by it in consequence of doing the very thing which, in making the representation, Richcliff intended should happen, viz., that Gran Gelato should rely on the representation. In principle, carelessness in not making other inquiries provides no answer to a claim when the plaintiff has done that which the representor intended he should do. This is a well established principle when misrepresentation, whether innocent or fraudulent, is being relied on as a ground for seeking rescission of the ensuing contract.’ 

At 574.

Exclusion and limitation of liability

Misrepresentation Act 1967, s 3

If a contract contains a term which would exclude or restrict—

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.

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