1 misrepresentation law of contract lw1154 bcl 2005-2006

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MISREPRESENTATION

Law of Contract

LW1154

BCL 2005-2006

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Reading

Textbook: Clark chapter 11

Reference: McDermott chapter 13

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Where one party made a statement which misled the other before agreeing to the contract …

… this may give additional rights to the party who was misled

These rights may include:

(1) damages

(2) a right to escape from the contract

Introduction

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We need to consider the blameworthiness of the person who made the statement

So we need to distinguish between:- Statements made fraudulently Statements made negligently Statements made innocently

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MISREPRESENTATION

,,Can the statement be taken seriously?

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Was the statement a serious one? This is really two questions:

1. Did the person who heard it in fact place any reliance on it?

2. Would “the reasonable person” have placed any reliance on it?

We must answer “yes” to both if the statement is to give rise to any rights

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1. Reliance in fact

In principle, a statement is relevant only if it was relied on

In practice, reliance is presumed if the statement was obviously relevant and important

You can rely on several different statements or things at once

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Example of reliance in factCody v. Connolly [1940] 6 Ir Jur 49

Sale of a mare

Seller said the mare could do work “of all kinds”

Before sale, buyer had a vet inspect the mare

Was buyer still relying on seller?

O’Byrne J held that he was

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Example of reliance in factGahan v. Bolland (Supreme Court, 20/1/84)Sale of a house

Seller said that the new motorway project would not affect it

The buyer was a solicitor, and could very easily have checked this

But the buyer was still held to have relied on the seller’s statement

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Statement not believed

But if the statement is not believed by those who hear it …

… it is impossible to say that they relied on it

e.g. Colthurst v. Colthurst [2000] IEHC 14

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2. Reliance in law

It is not enough to show that a statement was relied on …

… if the statement was one that no reasonable person would rely on

There is a considerable case law on what reasonable people are supposed to rely on

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The cases where “reliance in law” has been doubted fall into 4 rough groups:

Mere sales talk

Statements of opinion

Statements of intention

Statements of law

2. Reliance in law

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“Mere sales talk”

If reasonable people would think they were hearing mere sales talk …

… then they are not entitled to rely on it

So mere sales talk cannot amount to a misrepresentation

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Example 1Dimmock v. Hallett (1866) LR 2 Ch 21

Sale of farming land

The seller described it as “fertile and improvable”

The court said this was “a mere flourishing statement” …

… and refused to treat it as a misrepresentation

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Example 2Smith v. Lynn (1954) 85 ILTR 57

A house was advertised as being “in excellent structural repair”

Both P and D inspect it and bid for it

D bids higher, but 6 weeks after buying tries to resell it

D re-uses the old advert

P buys from D

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Example 2Smith v. Lynn (1954) 85 ILTR 57

Could P reasonably rely on the advert?

Curran J held that he could not

P had inspected the house, so should not have relied on the advert

“It is common knowledge that … one usually finds in such advertisements rather flourishing statements”

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Statements of opinion

If one side makes a mere statement of opinion …

… the other side should not treat it as a factual statement …

… and usually cannot reasonably pay it attention at all

18

Example Bisset v. Wilkinson [1927] AC 177 Sale of farm land

Seller estimated that the land could support 2,000 sheep

However, this was obviously a mere statement of opinion …

… and so the buyer could not sue when the estimate was proved over-optimistic

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An exception

In Bisset the parties were farmers So they were expected to rely on

their own opinions, not those of other farmers

It may be different if the opinion comes from someone very knowledgeable …

… so that it is reasonable for the other to rely heavily on the opinion

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So an apparent expert giving their opinion may be making an implied statement of fact …

… to the effect “I have reasonable grounds for the opinion I am giving”

If the expert has no such reasonable grounds, then there is a misrepresentation

An exception

21

Example 1 Irish Times 12/12/97 Doheny v. Bank of Ireland

A bank described a client as “respectable and trustworthy”

But she had a record of dishonesty

So although “respectable and trust-worthy” is a matter of opinion …

… nonetheless a misrepresentation was established

22

Example 2Esso v. Mardon [1976] QB 801

Mardon was negotiating for an Esso franchise at a petrol filling station

Esso’s economist made an estimate of the amount of petrol it would sell

Mardon bought the franchise

But the estimate turned out to be over-optimistic

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Example 2Esso v. Mardon [1976] QB 801

The court of appeal held that:The estimate was mere opinionBut it involved an implied assertion

that it had been made carefully In fact, the economist had made a

basic errorTherefore the estimate amounted to

a misrepresentation

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If I say “I intend to do X” …

… then that is a misrepresentation if I do not intend to do X

However, a statement of intention is not the same thing as a promise …

… so it is not enough simply to show that I failed to do X

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“… the state of a man’s mind is as much a fact as the state of his digestion”

Edgington v. Fitzmaurice (1885) 29 ChD 459 (Bowen LJ)

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So a false statement of intention can form the basis of an action in misrepresentation …

… so long as the speaker never really had that intention

But a simple failure to carry through a stated intention is not actionable

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Statements of law It is often said that mis-statements of law

are not actionable …

… perhaps because “everyone is presumed to know the law”

The rationale of the rule is unclear, and it is often criticised

But the rule is very well established e.g. Doolan v. Murray (Keane J, 21/12/93)

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Statements of law - exception

Despite the traditional rule, some statements of law are actionable: Fraudulent statements of law

Statements of foreign law

Statements about private rights

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MISREPRESENTATION

Silence and misrepresentation

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Silence – general rule Most cases assume that there is

some statement or representation …

… rather than a simple failure to speak

The general rule is that some statement is needed …

… and that silence is not enough …

… even if it is misleading

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ExampleKennedy v. Hennessy (1906) 40 ILTR 84

Sale of heifers at a fair

One of the heifers was in fact in calf, and so of low value

But nothing had been said on that subject, either on or before the sale

Gibson J held that there was no misrepresentation

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Silence – exceptions

In 3 cases, silence will be treated as a misrepresentation

1. Where an accurate but confusing statement has been made

2. Where a statement was true when made, but becomes false

3. Where there is a legal duty to speak

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Confusing statements

Where a true statement is made …

… but that statement is confusing or misleading unless more is said …

… there is a duty to clear up the confusion

A failure to speak amounts to a misrepresentation

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Example Notts Brick v. Butler (1886) 16 QBD 778 Sale of land

The solicitor said that he wasn’t aware of any covenants on the land

But he hadn’t looked at the documents

This amounted to a misrepresentation

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Statement true when made

If a statement is true at the time it is made …

… but becomes untrue before the contract is finally agreed …

… a failure to admit this amounts to a misrepresentation

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ExampleSpice Girls v. Aprilia [2000] EMLR 478

Negotiations for product endorsement by the Spice Girls

The 5 members of the group appeared for a photo shoot …

… but kept back the information that one member (Gerry Halliwell) would soon be leaving

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ExampleSpice Girls v. Aprilia [2000] EMLR 478 Arden J held that:

Gerry Halliwell’s departure removed all commercial value from the picture shoot

Failure to reveal the truth was misleading

Allowing her to take part amounted to a misrepresentation

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Duty to speak

If the law imposes a duty to reveal certain facts or matters …

… then a failure to speak amounts to a misrepresentation

There are no such general duties applicable to all contracts …

… but there are many applicable to particular types of contract

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Example 1Sales of land

The duties of the seller of property are prescribed in cases and statute

They certainly include obligations to reveal defects in title, and covenants binding the land

So silence on these points amounts to a misrepresentation

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Example 2 Insurance contracts Those seeking insurance have a

general duty to disclose all material facts

A material fact is one which would influence a prudent insurer in deciding: whether to accept the insurance,

or in setting the premium to be paid

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Summary and recap

There must be:-

reliance in fact, and

reliance in law

There must also be:-

a positive statement, or

silence which is equivalent to a statement

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Misrepresentation

Remedies for misrepresentation -

Introduction

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3 ways in which a plaintiff can use misrepresentation

1. P can argue that D guaranteed the truth of the statement

2. P can argue that the making of the statement was a tort or wrong, deserving compensation

3. P can seek to escape from (= “rescind”) the contract

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Guaranteeing the statement P argues that when the statement

was made …

… the maker promised that it was true …

… and so is in breach of contract if it is not

If successful, this may lead to an award of damages

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A mis-statement as a wrongP argues that the making of the

statement was a wrong …

… which harmed P’s financial interests …

… and so should be compensated

This argument can only be made if the person who made the statement was at fault in some way

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Rescission of the contract

P argues that the contract was only made because D misled P …

… and so P should be allowed to escape from the contract when the truth becomes known

This is the weakest of the three arguments, as it is hard to unravel a partially-performed contract

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3 different approaches?

Can P combine two or more approaches in one action?

In theory yes, but:-

The courts will not allow double compensation for the same wrong

Either the contract remains in place or it doesn’t

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MISREPRESENTATION

1. Statements which have been guaranteed

to be true

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Guarantee – Basic principle

If a statement is made during contractual negotiations …

… and the maker of the statement seems to be encouraging reliance on the statement …

… then they may be held to have promised or guaranteed its truth …

… and so can be sued if it is false

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Example 1 Phelps v. White (1881) 7 LR (I) 160

Sale of land, on which there were some trees

The seller said that the right to the trees was included in the sale

In fact, it was not

The buyer was held able to sue for the value of the timber

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Implicit representations

Sometimes the representation is only implicit in what is said

But if the implication is obvious …

… and the invitation to rely is clear …

… then an action may lie

52

ExampleMcRae v. CDC (1951) 84 CLR 377

Sale of a tanker wreck

Seller gave very precise details of its location …

… and so was held to be guaranteeing its existence

Seller was liable for buyer’s expenses thrown away in looking for it

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Is there a guarantee?

Relevant factors (though none is conclusive) include:

Whether there was a clear statement or promise

Whether the other party thought the statement important or relevant

Whether the other party could find out the truth for themselves

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Remedy?

The claim is for a broken promise (that the statement was true) …

… and so the usual remedy is an action for damages

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Calculation of damages?

Contract damages are usually given on the “expectation” measure …

i.e. we ask, How would P have gained if the promise had been kept

So the usual measure here is, How much would P have gained if the statement had been true

e.g. Phelps v. White

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Sometimes, this “expectation” measure is hard to calculate …

… and the court allows instead the “reliance” measure

i.e. The amount thrown away in reliance on the statement

e.g. McRae v. CDC

Calculation of damages?

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Summary

Someone complaining of a misrepresentation has to show:-

either 1. that statement was promised to be true

or 2. that the making of the statement was a legal wrong

or 3. that the statement gives grounds for rescission

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MISREPRESENTATION

2. Statements tortiously (wrongly) made

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“Tortiously”Sometimes the making of a

statement is a “tort” …

… i.e. a personal wrong against the person hearing it …

… who can sue for loss resulting from the statement

This involves proof that the maker of the statement was at fault

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3 relevant torts1. The tort of “deceit”

P must prove D knew of the falsity

2. The tort of “negligent misstatement”

P must prove D was negligent

3. The statutory misrepresentation tort

D must prove lack of negligence

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The tort of deceit

A tort of deliberately causing harm

It can only be used where D can be proved not to have believed what s/he was saying

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The tort of deceit: elements

If D makes a false statement

and intends that P should act on it

and knows it is false (or doesn’t care whether it is true or not)

and P, acting on it, suffers loss

Then P can sue D for the loss

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ExampleCarbin v. Somerville [1933] IR 226

Sale of a houseThe seller told the buyer that the

house was dry In fact, the house was thoroughly

and hopelessly dampFitzGibbon J found that the seller

must have known this all along …… so the buyer could sue in deceit

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Knowledge of falsity?

P must establish either that D knew the statement was untrue …

… or that D was “reckless” in making the statement

If D had no idea whether the statement was true or not …

… then “recklessness” is proved

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ExampleMoran v. Orchanda Ltd (HC, 25/5/00)

Sale of a pub

The seller gave the buyer figures for the last 2 years’ turnover

But the seller didn’t really know if the figures were accurate

McCracken J held that the figures were given recklessly

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Remedy

P is complaining that s/he has been injured by D’s false statement …

… so the remedy is damages in compensation

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Measure of damages

The basic measure is the “reliance” measure …

… i.e. the amount P threw away in reliance on the statement

The test is to compare P’s financial condition as it is …

… with how it would have been if D had never made the statement

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ExampleFenton v. Schofield (1966) 100 ILTR 69 Sale of a house with a fishery

Seller made fraudulent statements as to the number of fish caught

Buyer paid seller £27,000 in all

In fact, the property was worth only £22,000

So damages were £5,000

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Damages – extent

D is liable for all the loss caused by the fraudulent statement

even if D did not intend loss to P

even if some of it is rather distant or “remote” from the statement

even if the loss would have been hard to predict or foresee beforehand

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ExampleSmith v. Scrimgeour [1997] AC 254

D tricks P into buying a large block of shares in a company

P buys at 82p per share, when the market price is 78p

Then the company suffers a disaster

The share price falls to 44p

What is the measure of damages?

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D argues: we tricked P into paying 82p for shares then worth 78p

So the loss is only 4p a share

The subsequent crash was not D’s fault …

… and so shouldn’t affect the damages

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But the House of Lords held:

D are responsible for all the loss their false statement caused

P paid 82p, but the shares fell to 44p

So D are liable for 38p per share

Different if P had had a real chance to dis-invest before the crash

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Negligent misstatement

This is a tort of carelessly causing harm

It can only be used where D owed P a duty to be careful (a “duty of care”), and

D can be shown to have been careless

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The elements of the tort

If P relies on D’s skill or judgment

and D ought reasonably to know this

and D then makes a false statement

and D was negligent in so doing

and P suffers loss as a result

Then P can sue D for loss suffered

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Not confined to contract

The doctrine is not confined to cases of contracting parties

If both parties are equally skilled, it doesn’t apply at all …

… as it would be hard to show that one relied on the other’s skill

But it applies if one party can be shown to be relying on the other

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ExampleDoran v. Delaney [1999] 1 IR 303 Sale of house

Buyers asked whether sellers knew of any disputes related to the house

Seller’s solicitor said they knew of none

This was incorrect and careless

Geoghegan J found liability

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No duty if disclaimer made

If D states that P should not rely on what D says …

then P should not rely …

and D is not liable if P does so

Ditto if D says the statement is made “without responsibility” …

as in Hedley Byrne v. Heller [1964] AC 465

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Duty is owed to individuals

P must prove that D owed a duty to P

It is not enough that D owed a duty to someone else …

… or that the statement was a breach of a duty owed to someone else

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ExampleStafford v. Mahony [1980] ILRM 53

An auctioneer advised a client that a particular house was a good buy

The client passed this tip on to his brother

The brother bought the house, and suffered financial loss as a result

Doyle J held that the auctioneer did not owe a duty to the brother

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Measure of damages





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Damages – extent

However, D is not liable for all the loss caused by the false statement

D is not liable for loss which is too distant or “remote” from the statement

D is not liable for a loss which could not be foreseen beforehand

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ExampleNaughton v. O’Callaghan [1990] 3 AER 191

Sale of a colt, buyers hoping it would be a good racer

Sellers misrepresented its ancestry

Buyers spent £15,000 to train it …

… but eventually realised they were wasting their money

How were damages to be measured?

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Sellers argued:

The buyers spent £31,500 to acquire the colt …

… which was really worth £25,000

So damages were just £6,500


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But Waller J held:

The buyers spent £31,500 + £15,000 in training fees …

… to get a colt worth £1,500

So damages were (31,500 + 15,000 – 1,500) = £45,000

Might get a different result if buyers had appreciated the truth earlier


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The statutory tort

Contractual misrepresentation has been made a tort by statute

viz. Sale of Goods and Supply of Services Act 1980 s.45

Like the common law tort, it relates to statements made carelessly …

… but where it applies, it is a rather wider liability

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Recall that if a statement is made fraudulently …

… then someone who relies on it can sue for loss they suffer

Under the statutory tort, a statement in contract negotiations will be presumed to be fraudulent …

… unless its maker can prove it was made carefully

The statutory tort

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Where a contract is made:-

after a false statement by one party

and there would have been liability if the statement had been fraudulent

Then there is liability for loss suffered, as if there were fraud

unless the statement was made carefully

The statutory tort - elements

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2 reasons why this is awkward

The statute introduces a fiction of fraud … … deeming people to be

“fraudulent” when they were only careless

Only certain types of contracts are caught by the statute … viz. sale of goods, hire of goods,

hire purchase, and supply of services

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A broad liability

So where a false statement is made by one party to the contract …

… and loss resulted to the other …

… the burden of proof shifts to the person who made the statement …

…who must show that the statement was made carefully

90

ExampleO’Donnell v. Truck Sales [1997] 1 IRLM 466

Sale of Volvo mechanical shovels

Sellers made mis-statements as to their standard and performance

There was also fault by the buyer …

... but Moriarty J found liability

(His holding was reversed on grounds irrelevant here, [1998] 4 IR 191)

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Measure of damages





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Damages – extent

Because the statement is deemed to be made fraudulently:-

D is liable for all the loss caused by the false statement

even if some of it is “remote” or unforeseeable

(Royscot Trust v. Rogerson [1991] 3 AER 294)

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Summary

Someone complaining of a misrepresentation has to show:-

either 1. that statement was promised to be true

or 2. that the making of the statement was a legal wrong

or 3. that the statement gives grounds for rescission

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MISREPRESENTATION

3. Statements giving rise to a right to escape

(or “rescind”) the contract

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The right to rescission

If a contract was made as the result of a misrepresentation …

… then the party who is misled may seek to escape the contract (“rescission”)

The court will then attempt to restore both parties to their original positions

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Does fault matter?

In principle, rescission is available whether the mis-statement was fraudulent, negligent or innocent

However, unwinding a contract often involves difficult issues of fairness …

… and a fraudulent party may be treated much more harshly than a negligent or innocent party

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What is “rescission”

“Rescission” means restoring the parties to their positions before the contract was made

Each is made to return to the other what they received under the contract

Other gains and losses are ignored

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ExampleNorthern Bank v. Charlton [1979] IR 149

A bank financed a take-over bid

But the bank had committed fraud

When the investors sought rescission, they had to return money received from the bank …

… but not shares received from elsewhere

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Rescission + damages?

Rescission simply means unwinding the contract

It does not include an award of damages

If the innocent party suffers a loss which rescission does not cure …

… the loss will have to be claimed on tort principles

100

Rescission + indemnity?

If one side undertook some legal responsibility under the contract …

… but can then rescind the contract for misrepresentation …

… the court may make the other party pay the expense involved

This is called “rescission with indemnity”

101

ExampleWhittington v. Hayne (1900) 82 LT 49

Farm tenant undertook to keep the premises clean

The landlord had misrepresented their cleanliness …

… so that keeping the premises clean was very costly

On rescission, the tenant was indemnified against this cost

102

Rescission is available for any misrepresentation at all

But there are 5 bars:

1. Impossibility of rescission

2. Intervention of 3rd party rights

3. Affirmation of the contract

4. Delay in seeking a remedy

5. Contract is already fully executed

103

Bar: Impossibility

If it is no longer possible for both sides to restore what they received under the contract …

… then rescission is not available

But “impossible” is a flexible term

The courts do not rigorously insist on this bar if there was fraud

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Bar: 3rd party rights

Rescission will not be ordered if it interferes with the rights of a bona fide 3rd party purchaser

So if a buyer tells lies to get a low price from a seller …

… and buyer then re-sells the property to an innocent 3rd party …

… rescission will not be ordered

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Bar: Affirmation

A right to rescind can be lost by a definite decision not to do so

If a victim of misrepresentation realises that s/he has been misled …

… yet nonetheless declares that the contract remains in force …

… then s/he cannot retract this

106

Bar: Delay

The right to rescind can be lost by too much delay in seeking it

But this rule is not applied harshly to victims of fraud(e.g. Carbin v. Somerville, 12 years’ delay)

Innocent misrepresentation is another matter

107

Bar: Contract fully executed

If the contract has been performed on both sides …

… then it is too late to set it aside

This is a rather harsh rule …

… which has been abolished in other common law jurisdictions

3 exceptions are recognised

108

The exceptions:

1. Fraudulent misrepresentations

2. Total failure of consideration

3. The contract is within the Sale of Goods and Supply of Services Act 1980 (the definition section is s 43)

Bar: Contract fully executed

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Remedies short of rescission

Rescission is often too drastic a remedy

In cases of elaborate contracts, complete rescission is too complicated to carry out

Sometimes, the courts resort to lesser remedies

3 distinct doctrines

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1. Enforcement + abatement

Where the misrepresentation is relatively insignificant …

… and does not change the overall character of the contract …

… the court may force the party who was misled to perform the contract …

… but with an abatement of price

111

ExampleConnor v. Potts [1897] 1 IR 534

Sale of land, at £12 10s per acre

The seller (innocently) over-stated the amount of land

Chatterton VC ordered the buyer to perform …

… but said he need only pay for the acreage he was actually getting

112

2. Damages in lieu

If the court would be entitled to allow rescission for misrepresentation …

… but considers that justice would be better served by simply awarding damages …

… then the court can do so

113

This power is from the Sale of Goods and Supply of Services Act 1980 s 45(2)

It does not apply to fraudulent misrepresentations …

… or if the contract is not one to which the 1980 Act applies

It is entirely unclear how the damages are measured

114

3. Partial rescission Sometimes a party to a contract can

only say that s/he was misled in some respects

e.g. s/he is willing to guarantee some of the debts of another person …

… but is tricked into signing a document guaranteeing them all

Can s/he then escape the contract entirely?

115

The Australians allow partial rescission (Vadasz v. Pioneer Concrete (1995) 184 CLR 102)

But the English say that rescission “is an all-or-nothing process” (TSB Bank v. Camfield [1995] 1 AER 951)

The Irish courts say: ????

116

MISREPRESENTATION

Exclusion of liability for misrepresentation

117

Exclusion of liability

Sometimes the contract itself lays down rules governing complaints of misrepresentation

The contract may even purport to exclude any such claim entirely

But is it possible to exclude liability for misrepresentation?

118


Liability for fraud cannot be excluded

So if a contract provides that one party “must verify all representations for himself” …

… this does not stop him from suing for a fraud by the other party (Pearson v. Dublin Corporation [1907] AC 351)

119

But the general rule is that liability for innocent misrepresentation can be excluded …

… so long as clear words to that effect are included in the contract


120

ExampleDublin Port v. Brittania Dredging

[1968] IR 136

D undertook dredging work for P

D “shall be deemed to have inspected the site” and P “shall not be liable for any misrepresentation or lack of information”

This protected P from a later charge of innocent misrepresentation

121

The position by statuteWhere Sale of Goods and Supply of

Services Act 1980 applies …

… then liability for innocent misrepresentation can only be excluded if it is fair and reasonable to do so (s 46)

It is for the party relying on the exclusion to demonstrate that it is a reasonable one

122

That’s all on misrepresentation

1 misrepresentation law of contract lw1154 bcl 2005-2006

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