The rule that silence does not constitute a misrepresentation is subject to four exceptions. ‘Statement is a half truth’, a statement which is partial and does not give the full extent to the truth, can amount to a misrepresentation. ‘Change of circumstances’, a duty of disclosure may arise where the circumstances have changed as statement may be false by the time it is acted upon, in With v O’Flanagan it was decided that failure to disclose this state of affairs was an actionable misrepresentation. ‘Contracts uberrimae fidei’ (of the utmost good faith) are contracts which require a full disclosure of all material facts, for example in insurance contracts. ‘Parties in fiduciary relationship’ where the parties are in a relationship based on good faith, such as doctor and patient, a duty to disclose may arrive.
2. Advise Avril as to whether she can claim that her contract with Bernice is voidable for misrepresentation and, if so, what remedies she might claim.
Pre-contractual negotiations although excluded from a written contract are likely to be regarded as representations. Nevertheless the courts look to the intention of the parties to see whether they intended that the contract as a whole should be partly written and partly oral. Although the final written sale agreement contains a ‘whole agreement clause’ Avril may argue that she was induced in to the contract by Bernice’s pre-contractual statements.
With regards to the liquor license, an essential component of a cocktail bar, Bernice’s failure to reveal the subjective conditions is arguably a misrepresentation. When one fails to present the whole truth it can constitute a misrepresentation known as ‘half truth’. For example, Tap v Lee. Avril can argue that Bernice’s failure to add the provisions of the license in her pre-contractual statements may have been a misrepresentation inducing her in to the contract. However the general rule in contract is that silence is not a representation illustrated in Hands v Simpson Fawcett. Bernice may wish to argue that her non-disclosure of the facts was not a misrepresentation however the courts are likely to disagree.
Future conduct is difficult to argue as a representation. A statement by Bernice of her future conduct is not a misrepresentation if unfulfilled so long as it is true at the time the statement was made. However it depends on the material facts as to whether Avril can argue that Bernice’s statement (of no intention to opening another wine bar in the vicinity) was a true representation of her mind. Bernice may distinguish a ‘cocktail bar’ from a ‘public house’ in her argument against the accusation. In Edgington v Fitzmaurice a person wilfully lying about his intentions may be guilty of fraudulent misrepresentation of fact. Bowan LJ in a famous judicial pronouncement said: “the state of man’s mind is as much a fact as the state of his digestion” illustrating that if ascertained a person’s mind is as much a fact as anything else however difficult to prove.
As misrepresentation renders the contract voidable at the option of the misrepresentee, the remedy for Avril is rescission, available whether misrepresentations were fraudulent, negligent or innocent. Rescission setting aside the contract may be done by Avril applying to the court for an order to rescind the contract, or she may rescind by notifying Bernice or any other act indicating repudiation of liability. The effect of rescission is to terminate the contract ab initio i.e. the parties are put back in to the position they were before the contract was made. In order to achieve this position, an order of rescission may be accompanied by the court ordering an indemnity. A money payment by Bernice designed to restore the parties to their original positions. It is limited to payments in respect of obligations necessarily created by the contract and is to be distinguished from damages illustrated in Whittington v Seale Hayne. The indemnity would not however cover any losses incurred by Avril through surveying, loss of profits, loss of stock etc. Such losses if awarded would amount to damages. An indemnity may still be awarded after the 1967 Misrepresentation Act, however not appropriate if damages are awarded either under the Act or at common law. This means that the remedy is available where the contract is rescinded for a wholly innocent misrepresentation.
There are certain bars to rescission, where Avril may lose her right to rescind; these are ‘affirmation’, ‘impossibility of restitution’ and ‘third party rights’. Affirmation occurs where Avril with full knowledge of the misrepresentation states (expressly or implicitly) that she intends to continue with the contract, as in Long v Lloyd. Lapse of time when seeking a remedy may also be evidence of affirmation. In the case of non-fraudulent misrepresentation, rescission may be barred where, even though there is no delay in seeking a remedy, Avril does not become aware of the misrepresentation until a period of time has lapsed since the contract was made, laid down in Leaf v International Galleries. In Peyman v Lanjani (1985) the Court of Appeal held that the right to rescind will be lost by affirmation only where the claimant not only knows the facts but also is aware of the right to rescind.
Avril may lose her right to rescind if it is impossible for both parties to be returned to their original position, applied in Clarke v Dickson. In Avril’s case she may find it difficult to rescind the contract if Bernice’s purchase of the ‘Rat and Raven’ was purchased with the capital from her transactions with Avril. Complications may occur in restoring both their positions if it is found impossible in restoring them fully. In some cases the court may allow rescission with a cash adjustment however this would be unlikely under these circumstances. Rescission is not available where an innocent party has acquired rights to the subject matter of the contract. This bar to rescission operated in Clarke v Dickson as creditors had acquired rights over the company.
The bars to rescission where the misrepresentation had been incorporated in to a contractual term and after a non-fraudulent misrepresentation were abolished by section 1 of the Misrepresentation Act (1967).
Avril may be able to receive damages if it is found that Bernice’s statements were fraudulent or negligent. Although Bernice’s statements do not appear to have been made fraudulently, if they are found to be then the ‘out of pocket’ rule applies. This was applied in Mc Connel v Wright. It is essentially a claim for compensation in tort of deceit, seeking to restore the claimant to the original position had the there been no misrepresentation i.e. the amount which she is out of pocket by entering the contract. It would be difficult for Avril to reclaim damages, as though the misrepresentations hadn’t taken place. She may seek to claim the extra costs of having to employ a full-time door attendant however her loss of profits due to the competition of the Rat and Raven would be irretrievable as illustrated by East v Maurer. Bernice’s misrepresentations, would be difficult to prove fraudulent; the undisclosed truth about the licence is not particularly considered fraud, and her reluctance to buy another place (at the time the statement was made) is only fraudulent if proven by material evidence such as she had already put an offer in at the ‘Rat and Raven’.
Avril may elect to claim damages under (negligent misrepresentation) ‘Hedley Byrne’ provided that the ingredients for the tort are established. The measure of damages would be on the same basis as deceit, but the remoteness test will be one of reasonable foresight. However a better alternative for Avril to base her claim for damages would be on section 2(1) of Misrepresentations Act (1967) where under the statement Bernice is deemed to have been negligent and bears the burden of disproving negligence. This subsection requires Avril to establish that Bernice would have been liable in damages had the statements been made fraudulently. The consequence being that the measures of damages are the same as deceit and the remoteness test the same as that laid down in Doyle v Olby (Ironmongers) Ltd. This is a more generous basis than either contract (reasonable contemplation) or negligence (reasonable foreseeability) and can, in practice, bring the damages up to the contractual level, or even exceed it, as happened in Doyle.
In order for Avril to succeed she must prove an operative misrepresentation, and then it is up to Bernice to prove ‘that she had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.’
The peculiar wording employed in Section 2(1) of the Misrepresentation Act 1967 makes it difficult to assess the basis upon which damages may be awarded under the subsection.
To what extent do you agree with the above statement? How, if at all, would you reword the subsection in order to clarify any ambiguity?
Many of the difficulties presented by the 1967 Act concern the principles upon which damages are to be assessed under section 2(1) and (2). The measures to consider are the contractual measure, the general tort measure, the measure in the tort of deceit and a sui generis measure unique to the Act
In relation to claims under section 2(1) of the Misrepresentation Act 1967, as the law presently stands damages for all of the consequences mentioned above would be recoverable. However it is arguable that the measure of damages under the 1967 Act should be the same as for other negligent misstatements, and there is a strong chance that the authority to the contrary will in due course be overruled.
The gist of the subsection (1) is conferring a right to damages for negligent misrepresentation in circumstances in which the right would exist, if the misrepresentation were fraudulent. Thus assuming all non-fraudulent statements are negligent. However consequences follow this.
The measure of damages for an innocent misrepresentation giving rise to an action under subsection (1) is the measure of damages in tort for fraudulent misrepresentation, so as to put the misrepresentee in the position he would have been in had he never entered in to the contract; Royscott Trust Ltd v Rogerson. The test for remoteness in the tort of negligence is that the injured party may recover for only reasonably foreseeable loss Esso Petroleum v Mardon. Alternatively, the injured party may claim damages for negligent misrepresentation under s2(1) of the Misrepresentation Act 1967. This will be the normal course to pursue as s2(1) reverses the burden of proof Howard Marine and Dredging Ltd v Ogden & Sons. Despite earlier decisions, Watts v Spence placing damages under section 2(1) on a contractual basis, it would now seem to be established, as a result of the decision in Royscott, that damages will be assessed on the same basis as fraudulent misrepresentation, ‘tort of deceit’.
The remoteness test pursues the same confusion; damages are calculated in the tort of deceit rather than the tort of negligence, i.e. 'direct consequence' rather than 'reasonable foreseeability'. Arguably this concept confuses the law of tort, as negligent misrepresentation is pursuable under the Act yet damages assessed on a different basis than negligence. However the Court of Appeal in Gran Gelato Ltd v Richcliff (Group) Ltd was of the opinion that contributory negligence can be relevant when bringing an action under section 2(1), which is consistent with damages being awarded under section 2(1) on a negligence rather than deceit basis.
The Misrepresentation Act 1967, though short, demands careful reading as a cautionary tale of inept statutory conception and draftsmanship. Almost every provision aches for an explanation and justification. Despite the title, it does not cover the entire law of misrepresentation. In particular, it does not define misrepresentation, does not define rescission, and does not, with few exceptions, determine when rescission is or remains available.
Bibliography
Chitty on Contracts Volume 1 General Principles (28th ed) – Sweet & Maxwell
The Law of Contract (10th ed) – G.Treitel
Modern Law of Contract (5th ed) – Richard Stone
Contract Law / Casebook on Contract Law – Jill Poole
Law of Contract (14 ed) – Cheshire, Fifoot & Furmston
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(1885) A company raised money claiming it to be invested when in truth, it was to pay off debts.
(1950) a statement that a flat was new and therefore was not subject to the Rent Acts, was held to be one of fact.
Gordon v Selico Co. Ltd (1986)
A doctor negotiating the sale of his practice, correctly stated the annual income of £2000. By the time the contract was signed however, circumstances had changed and the practice was worth no more than £5 per week.
J.Evans & Son(Portsmouth) Ltd. V Andrea Merzario Ltd(1976)
(1803) where a vendor of a property stated it had business purposes planning permission, but failed to add that it was a temporary permission and was due to expire shortly.
(1928) thus a commercial traveller who kept quiet about his motor convictions in a job interview was not guilty of misrepresentation
A company raised money from the public claiming it to be used in investment and expansion when really the money was for paying off the company’s debts.
(1900) Poultry breeders took a lease of premises as a result of an innocent misrepresentation that the premises were sanitary. They were not so the contract was rescinded.
(1958) where having bought a vehicle as a result of misrepresentation the representee subsequently agreed to share with the representor the costs of repairs and continued to use it.
(1950) the claimant bought a picture as a result of an innocent misrepresentation that it was a Constable, and five years later discovered it was not genuine. The Court of Appeal held that rescission was barred.
(1858) the claimant invested money in a partnership to exploit a lead mine (as a result of a misrepresentation by the defendants). Later the partnership was in financial difficulty and with the claimant’s consent was converted in to a limited company with its capital converted in to shares. On discovering the false representations, the claimant sought rescission of the contract. It was held that rescission could not be granted because the partnership was no longer in existence and it was not possible to restore the parties to their original position.
(1903) where the claimant was induced to buy shares by a fraudulent misrepresentation. He recovered the difference between the purchase price and the actual value of the shares, assessed at the time of contract.
(1991) where the claimant purchased a hairdressing salon on the basis of a fraudulent misrepresentation. Damages were awarded for the profit the claimant might have made if he bought a different salon in the area, but he could not recover the loss of opportunity cost of relying on the misrepresentation.
“Where a person has entered into a contract after a misrepresentation has been made to him by another party and as a result, he has suffered loss, then if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and he did believe, up to the time the contract was made that the facts represented were true”.
(1969) it was held that in a fraudulent misrepresentation action the claimant may recover for all direct loss incurred as a result of the misrepresentation, regardless of foreseeability.
(1991) A customer agreeing to buy a car from a dealer for £7600. The deposit on hire terms was £1200 with the balance of £6400 on hire-purchase terms. In order to satisfy the 20% deposit, the dealer represented to the finance company that the purchase was £8000 and the deposit had been paid, leaving the same balance. The hire-purchase contract was made on this basis, however the customer dishonestly sold the car for £7200. The measure for damages under s2(1) was tortuous. Allowing the finance company to recover all losses incurred from the misrepresentation.
(1976) The plaintiff’s employee calculated the potential throughput of the petrol station wrong and because of this huge losses were made. It was held that the statement was a contractual warranty because it was a factual statement on a crucial matter by a party professing to having special knowledge.
(1978) Negotiations took place for a hire of certain sea-going barges and the owner’s negotiator misrepresented their capacity. He relied on the Lloyds register which was incorrect, the correct information being on file at the owners head office.
(1992) Gran Gelato brought an action claim for damages for negligent misrepresentation under s2(1) of the Misrepresentation Act (1967) however Richcliff argued that Gelato were contributory negligent in not reading the headlease. This was allowed by the courts and the damages awarded were reduced.
