Evaluating Section 2(1) of the Misrepresentation Act 1967 as a Remedy for Contractual Misrepresentation

Introduction

In the law of contract, a misrepresentation is an untrue statement of fact or law made by one party to another, which induces the other party to enter into a contract. Before the enactment of the Misrepresentation Act 1967 (the 'Act'), a party misled by a representation that was not made fraudulently had limited remedies. They could seek rescission of the contract in equity, but common law damages were only available for fraudulent misrepresentation, a claim which is notoriously difficult to prove. The Act, and specifically section 2(1), was introduced to remedy this gap in the law. This essay will evaluate the ways in which section 2(1) provides a superior remedial pathway for a party induced into a contract by a misrepresentation. It will argue that the section’s primary advantages lie in its reversal of the burden of proof and its generous measure of damages. Furthermore, its effectiveness is enhanced by section 1 of the Act, which preserves the action for misrepresentation even where the statement becomes a contractual term, and by the judicial recognition that misstatements of law are actionable.

The Superiority of the Remedy under Section 2(1)

Section 2(1) of the Act created a new statutory cause of action for misrepresentation. It states that where a person has entered into a contract after a misrepresentation has been made to them by another party to the contract, and as a result has suffered loss, the misrepresentor is liable for damages as if the representation had been made fraudulently. The misrepresentor has a defence only if they can prove that they "had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true." This provision presents two significant advantages for the claimant compared to the position at common law.

The first major advantage is the reversal of the burden of proof. In a claim for fraudulent misrepresentation at common law, the claimant must prove that the defendant made the statement knowing it was false, without belief in its truth, or recklessly as to its truth (Derry v Peek (1889)). This requires the claimant to prove a state of mind of dishonesty, which is a high threshold to meet. Similarly, for a claim in negligent misstatement under the rule in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964], the claimant must establish that the defendant owed them a duty of care, breached that duty, and that the breach caused a foreseeable loss. In contrast, under section 2(1), the claimant only needs to prove that a misrepresentation was made and that it induced them to enter the contract, resulting in loss. The burden then shifts to the defendant to prove that they had reasonable grounds for their belief in the statement's truth.

The difficulty for a defendant in discharging this burden is illustrated in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978]. In this case, the defendant’s manager honestly misstated the carrying capacity of two barges by relying on his memory of figures in the Lloyd's Register, rather than checking the official shipping documents which were in his possession and contained the correct, lower figure. The Court of Appeal held that the defendant had not established reasonable grounds for their belief, as a reasonable manager would have checked the official documents. This demonstrates that a mere honest belief is insufficient; the belief must be objectively reasonable. This procedural advantage makes a claim under section 2(1) significantly easier for a claimant to succeed in than one for either fraud or common law negligence.

The second, and perhaps most potent, advantage is the measure of damages. Section 2(1) stipulates that liability is to be assessed as if the representation were made fraudulently. The Court of Appeal in Royscot Trust Ltd v Rogerson [1991] interpreted this "fiction of fraud" to mean that the measure of damages should be the same as for the tort of deceit. This means that the claimant can recover all direct losses flowing from the misrepresentation, whether they were foreseeable or not. This is a far more generous measure than that available for common law negligent misstatement or breach of contract, where damages are limited by the remoteness rule of foreseeability (The Wagon Mound (No 1) [1961]). The House of Lords later affirmed in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] that the tort of deceit measure allows for recovery of all damages flowing directly from the transaction, highlighting the extensive nature of this remedy. The availability of damages on this fraud basis, without the difficulty of proving actual fraud, makes section 2(1) an exceptionally powerful tool for claimants.

The Impact of a Representation Becoming a Contract Term

The superiority of section 2(1) is further enhanced by section 1(a) of the Act. This section provides that a party's right to rescind a contract for misrepresentation is not lost simply because the misrepresentation has also become a term of the contract. Before the Act, the rule in Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] suggested that once a representation was incorporated as a term in the contract, the right to claim for misrepresentation was lost, leaving the claimant with only an action for breach of contract.

Section 1 of the Act abolished this rule. This means a claimant now has a choice. They can either sue for breach of contract or for misrepresentation. This choice is valuable because, as discussed, the remedy under section 2(1) can be more advantageous. Damages for breach of contract typically aim to put the claimant in the position they would have been in had the contract been performed correctly (expectation loss). In contrast, damages under section 2(1) aim to put the claimant back in the position they were in before the contract was made (reliance loss), but on the more generous tort of deceit basis. In a situation where a claimant has entered into a bad bargain, the reliance-based measure under section 2(1) is likely to be far more favourable than the expectation measure for breach. Therefore, the ability to pursue a claim under section 2(1) even when a breach of contract action is available gives the innocent party significant tactical and remedial flexibility.

The Extension to Misrepresentations of Law

Historically, the common law drew a distinction between a misrepresentation of fact, which was actionable, and a misrepresentation of law, which was not. The rationale was that "every man is presumed to know the law," and therefore a statement of law was merely a statement of opinion on which the other party could not justifiably rely. This position was widely criticised as artificial and unjust, particularly where one party was in a much stronger position to know the law than the other.

This long-standing rule was finally overturned in Pankhania v Hackney London Borough Council [2002]. The High Court held that actions for misrepresentation could be founded on misstatements of law. The case concerned the sale of a property which the seller’s agent had incorrectly represented as being subject to a simple licence agreement with a car park operator, when it was in fact a protected business tenancy. The court, drawing on the reasoning in the House of Lords decision in Kleinwort Benson Ltd v Lincoln City Council [1999] (which abolished the mistake of law rule in restitution), held that the distinction between fact and law was no longer meaningful in the context of misrepresentation.

This development significantly expands the scope of actionable misrepresentations. As a result, it broadens the reach of all remedies for misrepresentation, including the statutory remedy under section 2(1). A claimant who is induced to enter a contract by a false statement about a legal matter—for example, concerning planning permissions, contractual rights, or statutory regulations—can now bring a claim under section 2(1). This allows them to benefit from the reversed burden of proof and the generous damages measure in a whole new category of cases where previously no remedy existed. This judicial reform has therefore made the already powerful section 2(1) an even more comprehensive and superior form of redress for parties misled into a contract.

Conclusion

In conclusion, section 2(1) of the Misrepresentation Act 1967 offers a demonstrably superior remedy for misrepresentation in several key respects. Its principal strength lies in providing damages equivalent to those for fraud without requiring the claimant to prove a dishonest state of mind. Instead, it places the onus on the defendant to prove they had reasonable grounds for their belief, a burden which the courts have shown is not easily discharged. The measure of damages, being based on the tort of deceit, is significantly more generous than for other non-fraudulent claims. The effectiveness of section 2(1) is further amplified by section 1 of the Act, which allows a claimant to choose this remedy over a claim for breach of contract, and by the modern judicial acceptance that misstatements of law are actionable. While the common law action in Hedley Byrne remains important for situations not involving a contract, for a party who has been induced to enter a contract by a false statement, section 2(1) provides a more accessible, powerful, and often more lucrative remedial option than was available at common law, fulfilling the Act's purpose of correcting an imbalance in the law.

References

Cases

• Derry v Peek (1889) 14 App Cas 337
• Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
• Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574
• Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349
• Pankhania v Hackney London Borough Council [2002] EWHC 2441 (Ch)
• Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] 2 All ER 1167
• Royscot Trust Ltd v Rogerson [1991] 2 QB 297
• Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254
• The Wagon Mound (No 1) [1961] AC 388

Legislation

• Misrepresentation Act 1967

Books

• McKendrick, E. (2022) Contract Law: Text, Cases, and Materials. 10th edn. Oxford University Press.
• Poole, J. (2021) Textbook on Contract Law. 15th edn. Oxford University Press.