This assignment will first explain the law of misrepresentation in the context of contract law in England and Wales. It will define what constitutes an actionable misrepresentation before outlining and providing case law examples for the three main types: fraudulent, negligent, and innocent misrepresentation. The second part of the assignment will address the court's role concerning Alternative Dispute Resolution (ADR). It will examine the powers courts have to encourage the use of ADR and will conclude by describing the main types of ADR available to parties in civil disputes.
The Law of Misrepresentation
For a contract to be valid, it is expected that the parties enter into it on the basis of true information. When one party makes a false statement that encourages the other party to enter the contract, the law of misrepresentation may provide a remedy. An actionable misrepresentation is an untrue statement of past or existing fact made by one party to another, which induces the other party to enter into the contract. For a statement to be an actionable misrepresentation, it must not be a mere ‘puff’ or sales talk, a statement of opinion, or a statement of future intention.
However, the courts have recognised situations where statements of opinion or intention can be treated as statements of fact. A statement of opinion may be a misrepresentation if the person making it does not genuinely hold that opinion or could not reasonably hold it based on the information they have. In Smith v Land & House Property Corp (1884), a seller described a tenant as ‘a most desirable tenant’, when in fact the tenant was in arrears with rent. The court held that this was a misrepresentation of fact because the seller was in a position to know the true facts. Similarly, a statement of future intention can be a misrepresentation if the person making the statement did not, at that time, have any such intention. In Edgington v Fitzmaurice (1885), a company raised money by telling investors it would be used to expand the business, when the real intention was to pay off debts. This was held to be a misrepresentation of the company’s state of mind, which is a matter of fact.
Once it is established that a false statement of fact has been made, the claimant must also show that the statement induced them to enter the contract. This means the statement must have been a reason for the claimant entering the agreement, although it does not need to be the only reason (Edgington v Fitzmaurice). If the claimant was unaware of the statement or would have entered the contract anyway, then there is no inducement.
Fraudulent Misrepresentation
Fraudulent misrepresentation is the most serious type. It was defined in the House of Lords case of Derry v Peek (1889) as a false statement made ‘(1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false’. To prove fraud, the claimant must show a lack of honest belief on the part of the person making the statement. This is a high standard of proof, as it involves an element of dishonesty. The main remedy for fraudulent misrepresentation is rescission of the contract (setting it aside and returning the parties to their pre-contractual position) and damages under the tort of deceit. Damages are calculated to cover all losses flowing directly from the transaction, even if they were not foreseeable.
Negligent Misrepresentation
Negligent misrepresentation occurs when a party makes a statement carelessly or without reasonable grounds for believing it to be true. There are two ways to claim for this: at common law or under statute. The common law action was established in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964). A claim under this heading requires the claimant to prove that the defendant owed them a duty of care, that this duty was breached, and that the breach caused the claimant to suffer a loss. This often requires there to be a ‘special relationship’ between the parties, where one party relies on the skill and judgment of the other.
A more common route is a claim under section 2(1) of the Misrepresentation Act 1967. This section states that where a person has entered a contract after a misrepresentation has been made to them by another party, and as a result has suffered loss, the person making the misrepresentation will be liable for damages as if the misrepresentation had been made fraudulently. The key advantage for the claimant is that the burden of proof is reversed. Once the claimant shows there was a false statement that induced the contract, it is up to the defendant to prove that they had reasonable grounds to believe, and did believe up to the time the contract was made, that the statement was true. This is often difficult to prove, as seen in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd (1978). In this case, the defendant misrepresented the carrying capacity of two barges. They had based this on their memory of incorrect figures in the official ship's documents, rather than checking the documents properly. The court held that they did not have reasonable grounds for their belief, and they were liable under s.2(1).
Innocent Misrepresentation
An innocent misrepresentation is a false statement made by someone who genuinely and on reasonable grounds believes it to be true. It is made neither fraudulently nor negligently. Before the Misrepresentation Act 1967, the only remedy was rescission. However, section 2(2) of the Act gave the courts discretion to award damages in lieu of rescission for both negligent (under s.2(1)) and innocent misrepresentation. The court will consider the nature of the misrepresentation, the loss that would be caused if the contract were upheld, and the loss that rescission would cause to the other party when deciding whether to award damages instead of allowing the contract to be rescinded.
Alternative Dispute Resolution (ADR)
The second part of this assignment considers the court's role in Alternative Dispute Resolution (ADR). ADR refers to a range of methods used to resolve civil disputes without resorting to litigation in court. These methods are often cheaper, quicker, more flexible, and less confrontational than court proceedings.
The Court’s Powers in Relation to ADR
The courts in England and Wales cannot force parties to engage in ADR against their will. The Court of Appeal in Halsey v Milton Keynes General NHS Trust (2004) held that to compel parties to mediate would be an unacceptable obstruction of their right of access to the court, as protected by Article 6 of the European Convention on Human Rights. Lord Justice Dyson stated that ‘it is one thing to encourage the parties to agree to mediation… it is another to compel them to do so.’
However, the courts strongly encourage the use of ADR. This is part of the 'overriding objective' set out in the Civil Procedure Rules (CPR), Part 1, which requires courts to manage cases justly and at proportionate cost, including 'encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate'.
The main power the court has to enforce this encouragement is through costs sanctions. A party that unreasonably refuses to consider or participate in ADR may be penalised when the court comes to decide who should pay the legal costs of the case at its conclusion. Even a successful party who wins their case in court may be ordered to pay some or all of the loser's legal costs if they are found to have unreasonably refused to mediate. The Halsey case set out non-exhaustive factors to help courts decide if a refusal was unreasonable, including the nature of the dispute, the merits of the case, the extent to which other settlement methods have been attempted, and whether the costs of ADR would be disproportionately high. More recently, the courts have shown an increasing willingness to be robust in promoting ADR. For instance, in Lomax v Lomax (2019), the Court of Appeal held that it could order an Early Neutral Evaluation (ENE) even when one party objected, suggesting a slight shift in judicial attitude, although this does not overturn the general principle in Halsey regarding mediation.
Types of ADR
There are several forms of ADR available to parties in a civil dispute:
- Negotiation: This is the most informal method, where the parties or their lawyers communicate directly with each other to try and reach a mutually acceptable agreement. There is no third-party involvement.
- Mediation: A neutral third-party, the mediator, helps the parties to find their own solution. The mediator does not make a decision but facilitates communication and explores options. The process is confidential and "without prejudice", meaning anything said cannot be used later in court. If an agreement is reached, it can be written down in a contract that becomes legally binding.
- Conciliation: This is similar to mediation, but the conciliator may take a more interventionist role than a mediator. A conciliator may be asked to suggest possible solutions for the parties to consider. This method is often used in employment disputes through the Advisory, Conciliation and Arbitration Service (ACAS).
- Arbitration: This is a more formal process where an independent third-party, the arbitrator, is appointed to hear both sides of the argument and make a decision. The arbitrator's decision, known as an award, is legally binding and can be enforced through the courts in the same way as a court judgment. The process is governed by the Arbitration Act 1996 and is often used in commercial and international disputes.
In conclusion, the law of misrepresentation provides important protections for parties entering into contracts, with remedies varying according to the level of fault of the person making the false statement. In parallel, the civil justice system, through the CPR and judicial encouragement, actively promotes the use of ADR as a primary means of resolving disputes, using its powers over costs as a key tool to persuade reluctant parties to engage with processes like mediation before resorting to a full court trial.
References
Cases
- Bisset v Wilkinson [1927] AC 177
- Derry v Peek (1889) 14 App Cas 337
- Edgington v Fitzmaurice (1885) 29 Ch D 459
- Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576
- 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
- JEB Fasteners Ltd v Marks, Bloom & Co [1983] 1 All ER 583
- Lomax v Lomax [2019] EWCA Civ 1467
- Smith v Land & House Property Corp (1884) 28 Ch D 7
- Whittington v Seale-Hayne (1900) 82 LT 49
Legislation
- Arbitration Act 1996
- Misrepresentation Act 1967
Other
- Civil Procedure Rules 1998, SI 1998/3132
