Introduction
In English contract law, the principle of freedom of contract assumes that parties negotiate on an equal footing. However, the reality is often that one party possesses more information than the other. The law of misrepresentation exists to provide a remedy where one party has been induced to enter into a contract by a false statement made by the other party. It aims to protect the innocent party's reliance on pre-contractual statements that turn out to be untrue, ensuring that consent to the contract was genuinely obtained. A misrepresentation makes a contract voidable, not void, meaning the innocent party has the choice to either rescind (cancel) the contract or affirm it and potentially claim damages.
This essay will explain what constitutes an actionable misrepresentation under the law of England and Wales. It will first outline the essential elements of a misrepresentation, distinguishing it from non-actionable statements. Following this, it will categorise the different types of misrepresentation: fraudulent, negligent, statutory, and innocent. Finally, it will examine the remedies available for each type, principally rescission and damages, paying attention to the significant role of the Misrepresentation Act 1967.
Defining an Actionable Misrepresentation
For a statement to be an actionable misrepresentation, it must satisfy three core requirements. It must be an unambiguous false statement of existing fact or law, which was addressed to the party misled, and which induced that party to enter into the contract.
First, the statement must be a false statement of fact or law. This requirement distinguishes misrepresentations from other types of pre-contractual statements. For example, mere advertising 'puffs' are not considered statements of fact because they are not intended to be taken literally. In Dimmock v Hallett (1866) LR 2 Ch App 21, a description of land as 'fertile and improvable' was held to be a mere flourish and not a representation.
Similarly, a statement of opinion is generally not a statement of fact. In Bisset v Wilkinson [1927] AC 177, a vendor's statement that land could support 2,000 sheep was held to be an opinion, as the vendor had no experience in sheep farming and the purchaser knew this. However, an opinion can be treated as a statement of fact in two situations. If the person expressing the opinion has specialist knowledge, the courts may imply that they have reasonable grounds for their opinion, as seen in Esso Petroleum Co Ltd v Mardon [1976] QB 801. Furthermore, if the opinion is not genuinely held by the representor, it can amount to a misrepresentation of the fact that they hold that opinion (Smith v Land and House Property Corporation (1884) 28 Ch D 7).
A statement of future intention is also not a statement of fact. However, if the representor did not genuinely hold that intention at the time of the statement, they are misrepresenting their state of mind, which is a misrepresentation of fact. As Bowen LJ famously stated in Edgington v Fitzmaurice (1885) 29 Ch D 459, ‘the state of a man’s mind is as much a fact as the state of his digestion’.
Generally, silence does not amount to a misrepresentation. However, exceptions exist where there is a duty to speak, such as in contracts of utmost good faith (like insurance contracts), or where a statement becomes false due to a change in circumstances. A 'half-truth' can also be a misrepresentation; while literally true, it may be misleading because of what is left unsaid. It is now also established that a misrepresentation of law can be actionable, following the decision in Pankhania v Hackney London Borough Council [2002] EWHC 2441 (Ch).
The second requirement is that the statement must be addressed to the party misled. This is usually straightforward, as it is typically made by one contracting party to the other. However, a misrepresentation can also be made indirectly if the representor makes a statement to a third party with the intention that it will be passed on to the claimant (Commercial Banking Co of Sydney v RH Brown & Co [1972] 2 Lloyd's Rep 360).
Third, the misrepresentation must have induced the claimant to enter the contract. It does not need to be the sole reason for entering the contract, but it must be one of the reasons (Edgington v Fitzmaurice). If the claimant was unaware of the misrepresentation, or if they relied on their own investigation rather than the statement, there is no inducement (Attwood v Small (1838) 6 Cl & Fin 232). However, there is no general duty for the representee to verify the truth of a statement, so if they rely on the misrepresentation, they can still claim even if they had the opportunity to discover the truth (Redgrave v Hurd (1881) 20 Ch D 1).
The Types of Misrepresentation
Once an actionable misrepresentation is established, it is classified according to the state of mind of the person who made it. This classification is critical because it determines the remedies available. There are four types: fraudulent, negligent, statutory, and innocent.
Fraudulent Misrepresentation: This is the most serious type and was defined in Derry v Peek (1889) 14 App Cas 337 as a false statement made ‘(1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false’. Proving fraud requires a high standard of evidence, as it involves an allegation of dishonesty.
Negligent Misrepresentation at Common Law: This category was established in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. It arises when a party makes a false statement carelessly or without taking reasonable care to ensure it is true. A claim requires the existence of a 'special relationship' between the parties, creating a duty of care. This is often found in business contexts where one party relies on the skill and judgment of the other.
Statutory Misrepresentation: Section 2(1) of the Misrepresentation Act 1967 provides the most commonly used claim. It applies where a party has entered into a contract after a misrepresentation has been made to them by another party to the contract and has suffered loss as a result. Under s.2(1), once the claimant proves there was a misrepresentation, the burden of proof shifts to the defendant to show they had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true. This 'reverse burden of proof' makes it a very powerful tool for claimants, as it is often difficult for the defendant to discharge this burden (Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574).
Innocent Misrepresentation: This is the least culpable category. It is a statement made by a person who not only genuinely believed it was true but also had reasonable grounds for that belief. In practice, this category covers misrepresentations that are not fraudulent and where the maker can satisfy the defence under s.2(1) of the 1967 Act.
Remedies for Misrepresentation
The remedies available for misrepresentation are rescission and/or damages. The availability and extent of these remedies depend on the type of misrepresentation.
Rescission: The primary remedy is rescission, which is the right to set the contract aside. The aim is to restore the parties to the position they were in before the contract was made (restitutio in integrum). Rescission is available for all four types of misrepresentation. The contract becomes voidable, and the innocent party can elect to rescind or affirm it. However, the right to rescind can be lost through several 'bars to rescission':
- Affirmation: The innocent party, with full knowledge of the misrepresentation, expressly or by conduct declares their intention to proceed with the contract (Long v Lloyd [1958] 1 WLR 753).
- Lapse of time: An unreasonable amount of time has passed since the misrepresentation was discovered (or should have been discovered). For non-fraudulent misrepresentation, time runs from the date of the contract (Leaf v International Galleries [1950] 2 KB 86).
- Impossibility of restitution: It is impossible to restore the parties to their pre-contractual positions, for instance, if the subject matter of the contract has been consumed or destroyed (Clarke v Dickson (1858) EB & E 148).
- Third-party rights: A bona fide third party has acquired rights in the subject matter for value, making it unjust to allow rescission.
Damages: The right to damages depends on the type of misrepresentation.
- For fraudulent misrepresentation, the claimant can claim damages in the tort of deceit. The measure of damages is generous, seeking to put the claimant in the position they would have been in had the misrepresentation not been made. All direct losses flowing from the fraudulent inducement are recoverable, regardless of foreseeability (Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158).
- For negligent misrepresentation at common law, damages are calculated based on the tort of negligence, meaning only reasonably foreseeable losses are recoverable.
- Under section 2(1) of the Misrepresentation Act 1967, damages are calculated on the same basis as for fraudulent misrepresentation. This is due to the 'fiction of fraud' wording in the statute, as established in Royscot Trust Ltd v Rogerson [1991] 2 QB 297. This makes a claim under s.2(1) particularly attractive, as it provides the generous measure of damages for fraud without the difficult task of proving it.
- For innocent misrepresentation, there is no automatic right to damages. The only remedy is rescission. However, under section 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages in lieu of rescission for any non-fraudulent misrepresentation (i.e., negligent or innocent). The court will consider the nature of the misrepresentation and the relative losses to each party if the contract is upheld or rescinded. If the court exercises this discretion, the right to rescind is lost.
Conclusion
In summary, the law of misrepresentation in England and Wales provides a crucial framework for policing pre-contractual negotiations. An actionable misrepresentation is an induced, false statement of fact or law, which renders a contract voidable. The legal consequences depend heavily on classifying the misrepresentation as fraudulent, negligent, or innocent. The principal remedy of rescission aims to undo the contract, but its availability is limited by several bars. The alternative or additional remedy of damages varies significantly in its measure, with the Misrepresentation Act 1967 playing a central role in strengthening the position of the innocent party. By providing these remedies, the law seeks to ensure that agreements are based on truth and fair dealing, thereby upholding the integrity of the contractual process.
References
Cases
- Attwood v Small (1838) 6 Cl & Fin 232
- Bisset v Wilkinson [1927] AC 177
- Clarke v Dickson (1858) EB & E 148
- Commercial Banking Co of Sydney v RH Brown & Co [1972] 2 Lloyd's Rep 360
- Derry v Peek (1889) 14 App Cas 337
- Dimmock v Hallett (1866) LR 2 Ch App 21
- Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158
- Edgington v Fitzmaurice (1885) 29 Ch D 459
- Esso Petroleum Co Ltd v Mardon [1976] QB 801
- Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
- Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574
- Leaf v International Galleries [1950] 2 KB 86
- Long v Lloyd [1958] 1 WLR 753
- Pankhania v Hackney London Borough Council [2002] EWHC 2441 (Ch)
- Redgrave v Hurd (1881) 20 Ch D 1
- Royscot Trust Ltd v Rogerson [1991] 2 QB 297
- Smith v Land and House Property Corporation (1884) 28 Ch D 7
Legislation
- Misrepresentation Act 1967
Books
- McKendrick, E. (2020) Contract Law. 14th edn. Palgrave Macmillan.
- Peel, E. (2021) Treitel on The Law of Contract. 15th edn. Sweet & Maxwell.
