A misrepresentation may be defined as an unambiguous, false statement of fact (or possibly of law) which is addressed to the party misled, which is material and induces the contract. A misrepresentation renders the contract voidable and it may give ris...

Before Hedly Byrne v Heller, the phrase 'innocent misrepresentation' was used to describe all misrepresentations that were not fraudulent. The appearance of two classes of negligent misrepresentation, one in Hedly Byrne and the other in the Misrepresentation Act 1967, means that innocent misrepresentation now applies only to misrepresentations that are made entirely without fault. Innocent misrepresentation is a false statement which the person makes honestly believing it to be true. In cases of non-fraudulent misrepresentation, s2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured party would be entitled to rescind, to award damages in lieu of rescission. Damages under s2(2) cannot be claimed as such; they can only be awarded by the court. Section 2(2) states:

"Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party." It is not clear from the above words if the right to damages will be lost if the representee has lost the right to rescind8.

It is not yet clear what the measure of damages is under s2(2). If Flash honestly believed that the car had won the Monte Carlo Rally then there may have been wholly innocent misrepresentation. Damages can be awarded under S2(2) Misrepresentation Act 1967 in lieu of rescission if it is equitable to do so, however damages will be lower than those awarded under S2(1). Damages will only be awarded if Harry has not lost his right to rescission.

Rescission, i.e. setting aside the contract, is possible in all cases of misrepresentation. The aim of rescission is to put the parties back in their original position, as though the contract had not been made. The injured party may rescind the contract by giving notice to the representor. Rescission is an equitable remedy and is awarded at the discretion of the court. The injured party may lose the right to rescind in the following circumstances:

(i) Affirmation of the contract

(ii) Lapse of time

(iii) Restitution In Integrum Impossible

The injured party will affirm the contract if, with full knowledge of the misrepresentation and of their right to rescind, they expressly state that they intend to continue with the contract, or if they do an act from which the intention may be implied, as in Long v Lloyd9. However in Peyman v Lanjani10, the Court of Appeal held that the plaintiff had not lost his right to rescind because, knowing of the facts which afforded this right, he proceeded with the contract, unless he also knew of the right to rescind. The plaintiff here did not know he had such right. As he did not know he had such right, he could not be said to have elected to affirm the contract. Harry may be seen to have affirmed the contract as after he discovered the misrepresentation he continued to enter the car into races. However, if he was unaware of his right to rescind, as in Peyman v Lanjani, he may not have lost this right. If the injured party does not take action to rescind within a reasonable time, the right will be lost. Where the misrepresentation is fraudulent, time runs from the time when the fraud was, or with reasonable diligence could have been discovered. In the case of non-fraudulent misrepresentation, time runs from the date of the contract, not the date of discovery of the misrepresentation. In Leaf v International Galleries11 the Court of Appeal refused to grant rescission, stating that 'it behoves the purchaser either to verify or, as the case may be, to disprove the representation within a reasonable time, or else fall by it'. In Harry's case he may have lost the right to rescind as he continued the contract for a long time, even after discovering the misrepresentation Harry drove in two further races before contacting Flash.

An order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages. The distinction between an indemnity payment and damages can be seen in Whittington v Seale-Hayne12, only expenses which inevitably arise from a contract will be compensated by indemnity.

The Misrepresentation Act 1967 introduced the concept of negligent misrepresentation distinguishing it from innocent misrepresentation. S2(1) provides;

'Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof suffered loss, then, if the person making the misrepresentation would be liable for damages in respect thereof had the misrepresentation been made fraudulently, that person shall be liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had a reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true'. This will be the normal course to pursue as s2(1) reverses the burden of proof. Damages will be assessed on the same basis as fraudulent misrepresentation rather than the tort of negligence, i.e. 'direct consequence' rather than 'reasonable foreseeability', as shown in Royscott Trust Ltd v Rogerson13. This provision does not require the representee to establish a duty of care and reverses the burden of proof. Once a party has proved that there has been a misrepresentation which induced him to enter into the contract, the person making the misrepresentation will be liable in damages unless he proves he had reasonable grounds to believe and did believe that the facts represented were true. This burden may be difficult to discharge as shown in, Howard Marine & Dredging Co v Ogden & Sons14. The injured party may elect to claim damages for negligent misrepresentation at common law. The test of remoteness in the tort of negligence is that the injured party may recover for only reasonably foreseeable loss, as in Esso Petroleum v Mardon15. Recent case-law has shown that the remedies available are as those available in fraud unless the representor discharges the burden of proof. In particular, damages will be based in the tort of deceit rather than the tort of negligence.

In conclusion the misrepresentation is unlikely to be fraudulent, and Harry would be advised to pursue negligent misrepresentation. Under negligent misrepresentation Harry may be entitled to rescission, indemnity and damages.

Museprime Properties Ltd v Adhill Properties Ltd (1991) 61 P & C R 11, 124

2 Bisset v Wilkinson# [1927] AC 177

3 Smith v Land Property Corp (1884) 28 Ch D 7

4 Derry v Peek (1889) 14 App Cas 337

5 Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158.

6 East v Maurer [1991] 2 All ER 733

7 Downs v Chappell [1996] 3 All ER 344.

8 Cheshire & Fifoot, p301-2

9 Long v Lloyd [1958] 1 WLR 753

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1 Leaf v International Galleries (1950) 2 KB 86

2 Whittington v Seale-Hayne (1900) 82 LT 49

3Royscott Trust Ltd v Rogerson [1991] 3 WLR 57

4 Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574

5 Esso Petroleum v Mardon [1976] QB 801