Misrepresentation

Recent case law suggest that litigants are generally better advised to pursue a claim in misrepresentation rather than for breach of contract - Justin Santiago

Misrepresentations are pre contractual false statements of existing facts which is one of the factors that have induced the other party to enter into the contract. Where a pre-contractual statement constitutes both a breach of contract and a misrepresentation, recent case law has suggested that the aggrieved party can look to misrepresentation as an alternative to breach of a term due to inherent advantages of rescission and/or claiming for damages under the tort of deceit and the tort of negligence as well as the Misrepresentation Act 1967. Against this however must be contrasted the problem of recovering any damages for purely innocent misrepresentations and the possible bars to the remedy of rescission.

In the case of remedies, prior to the enactment of the Misrepresentation Act 1967 and the development of the tort of negligent misstatement in Hedley Byrne v Heller and Partners, many of the older cases were concerned with establishing a statement as a term, as damages were only available for misrepresentation in a very narrow range of circumstances i.e. fraudulent misrepresentation or negligent misrepresentation which required proof of various elements. Where a misrepresentation is fraudulent, it must be proved beyond reasonable doubt that the statement was made knowing that it was untrue, without any genuine belief in its truth, or with reckless disregard for whether it was true or not : Derry v Peek). Once it is established that the statement was fraudulent, based on the tort of deceit all damages as a result of the fraud are recoverable with the general purpose being to place the victim in the position he occupied before the misrepresentation took place (‘reliance interest’).

Where a misrepresentation is negligent, a claim can be pursued under the tort of negligence under the principles established in Hedley Byrne v Heller and Partners and later confirmed in Esso Petroleum v Mardon. It must be proved by the claimant that there was a special relationship giving rise to a duty of care and the attendant acts in breach of this duty.

The Misrepresentation Act 1967 provides more remedies for litigants than previously under common law putting a claim in misrepresentation almost on par with a claim for breach of contract. Generally recission and damages are now more easily available under misrepresentations. This is because of increasing rights of consumers and the need to protect consumers from unscrupulous traders. However it must be remembered the courts are no longer as generous in the awarding of damages and remedies and have taken a more cautious approach. It is also difficult to prove that there was a misrepresentation in the first place. The claimant has to go on to the next step in deciding the type of misrepresentation because each will give rise to different remedies.

Under S 2(1) of the Misrepresentation Act 1967 the claimant must establish that a misrepresentation has occurred and then secondly, the burden of proof shifts to the defendant to establish that they had reasonable grounds to believe that the statement was true up to the point of contracting : Howard Marine and Dredging Co v Ogden and Sons, MCI Worldcom International v Primus Telecommunications.

Under S(2) where there are any intervening events (goods have been mixed, consumed, etc affecting the rights of 3rd parties) that would make recission impossible, there will be damages in lieu of recission : Floods of Queensferry Ltd v Shand construction Ltd and Government of Zanzibar v British Aerospace (Lancaster house) Ltd.

Measurement of damages under S2(1) allowed for all losses to be recoverable not simply those that were reasonably foreseeable : Royscott Trust Ltd v Rogerson which puts in on equal footing as if the tort of deceit has been committed. This follows from the test in Doyle v Olby (Ironmongers) Ltd where damages are based on a direct consequence in which reasonable foreseeability has no application making it wider than that available under a breach of contract which are limited by the reasonable contemplation of the parties : : Hadley v Baxendale. However damages payable under S2(1) may be reduced on the ground of the representee’s contributory negligence : Gran Gelato Ltd v Richcliff Group Ltd.

Also many types of non-pecuniary loss which are not normally available for breach of contract can be recovered in the tort of deceit and also by using S. 2(1) of the 1967 Act (e.g. anxiety and stress). Furthermore in the case of East v Maurer it appears that a fraudulent misrepresentation can also give rise to lost opportunity cost putting it on the same footing as a breach of contract.

Rescission of the contract is also available regardless of whether the representation was made innocently, negligently or fraudulently. Additionally S1(a) of the Misrepresentation Act furthermore provides that there is a right to rescind even if the representation becomes part of the contract. Rescission in this context would mean that the contract is set aside and the parties put into the position that they would have been in had the contract never been made. Any goods or money which have been exchanged must be returned.

However the right to rescission can be lost if there is an affirmation of the contract even though the party was aware of the misrepresentation : Long v Lloyd, time lapse between misrepresentation and awareness is too long – Leaf v International Galleries, where third parties have acquired rights in the subject matter prior to avoidance of the contract : White v Garden and where the parties cannot be restored substantially to their original position : Clarke v Dickson.

In contrast a victim of a breach of a contract does not possess an automatic right to repudiate the contract. This would depend on whether the term which has been broken is a condition or an inonimate term where a breach of the term results in severe loss and damage: Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha. A breach of warranty will only give the injured party the right to claim damages, the contract cannot be repudiated : Bettini v Gye.