Misrepresentation and Breach of Contract
Misrepresentation and Breach of Contract
The distinctions between the two legal issues of misrepresentation and breach of contract are dependant on whether the pre-contractual statement was made on the basis of a representation, or on a promise or obligation to be fulfilled. These are radically different when it comes to remedying the damage caused by one party against another. A breach of contract would put the claimant back into the position had there not been a breach, and any damages would put the claimant where he/she would had expected to be in. However, if there is an actionable misrepresentation, the claimant would be returned to the position had there not been a misrepresentation, thus being compensated prior to the misrepresentation, i.e. as if there had been no contract at all. The effect of an actionable misrepresentation is to make the contract voidable. The Misrepresentation Act 1967 has expanded the remedies for a breach of contract, and has therefore become an alternative claim for the party who has suffered a loss. When deciding whether the statement is a representation or a promise, intention of the parties cannot be said to furnish a decisive test (Heilbut, Symons & Co. v. Buckleton)1. The distinction is dependant on three main factors relating to the intentions of the statements themselves - the importance attached to the statement, the assurance or verification of the statement, and whether the statement relied upon required any special knowledge or skill. In the present situation of a contract between Mr Drake and Agnew Gallery, there clearly has been no promise or obligation to be fulfilled, but a situation where a contract has been induced by a misrepresentation.
A misrepresentation is a false statement of an existing fact, and it becomes actionable when the statement is made during the course of negotiations, inducing the other party to enter the contract. The statement made by Mr Agnew of the painting "unequivocally " being a genuine Van Dyck will have to be analyzed as an actionable misrepresentation. Firstly, we need to distinguish an actionable misrepresentation from a non-actionable one according to whether it is an existing false statement of fact.
Clearly the statement cannot be said to be a "mere puff" with no contractual intention which would make the representation non actionable. The statement is specific, concerning the subject matter of the contract, and has induced Mr Drake to purchase the painting (Carlill v. Carbolic Smoke Ball Co. Ltd)2, rather than a statement that a salesman would employ (Scott v. Hanson)3. Although it is questionable whether this statement was a false statement of opinion that was honestly held by Mr Agnew, which is considered a non-existing fact that does not fall into the category of misrepresentation.
With reference to the case of Bisset v Wilkinson4, it was held that the appellant's statement was an honest statement of his opinion of the farm's capacity and not a representation of its actual capacity. Here, we have a representation of a type of painting, and not just a painting itself so the statement cannot be said to not be one of an existing fact. Furthermore, Bisset v Wilkinson shows that where the representor is in a better position to know the truth than representee, the statement cannot be regarded as a statement of opinion. When applied to the facts of this case, Mr Agnew was the owner of an art gallery; therefore, he should be in a better position to know the truth than Mr Drake. His statement cannot be regarded as a mere statement of opinion.
We are informed in the report that Mr Agnew had his opinion confirmed by art historians in France, America and Britain. A statement of an honest opinion can also be an actionable misrepresentation if the maker of the statement "impliedly states that he knows facts which justify his opinion"5. The facts of this report seem to show that Mr Agnew did exactly this. As held in Esso Petroleum Ltd v Mardon6, the representor should take reasonable care and skill when making his statement, particularly if he or she possesses some "special knowledge or skill" in the subject matter. It is arguable whether Mr Agnew held "special skill" in the subject matter, although he is expected by the representee to possess enough skill to make a reliable judgment and he does, as required, have greater knowledge than Mr Drake. Therefore, although his opinion of the painting being a Van Dyck was honestly held and he stated facts to justify (i.e. assurance from other art historians), the statement was nevertheless untrue, which can amount to an actionable misrepresentation.
By charging "41 times" the original purchase price, it could even be argued that his opinion was not even "honestly" held. The statement could therefore be categorised as "a statement of an existing fact" which is the first requirement for an actionable misrepresentation. As defined by Bowen L.J. in Edgington v Fitzmaurice7:
"The state of a man's mind is as much a fact as the state of his digestion...A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact."
Mr Agnew stated that the painting was a genuine Van Dyck ...
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By charging "41 times" the original purchase price, it could even be argued that his opinion was not even "honestly" held. The statement could therefore be categorised as "a statement of an existing fact" which is the first requirement for an actionable misrepresentation. As defined by Bowen L.J. in Edgington v Fitzmaurice7:
"The state of a man's mind is as much a fact as the state of his digestion...A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact."
Mr Agnew stated that the painting was a genuine Van Dyck with the intention of gaining a much higher price than what he had paid for at the Sotheby's auction. Similarly, in Edgington v Fitzmaurice, it was held that the statement made by the company directors that the money being lent to them by the public would be used for the improvement of building was an actionable misrepresentation. The money was in fact used to discharge existing liabilities owed by the company. If the statement in this case was of an existing fact, the disclaimer is still under an obligation to correct the statement after the truth is known to him (With v O'Flanagan)8. Mr Drake believes that Mr Agnew was aware that the painting was not genuine as a "leading expert on Van Dyck" had informed Mr Agnew that the painting was "clearly a copy" after the sale had been concluded. If this evidence were true, Mr Agnew would be liable for misrepresentation for failing to correct his statement after the truth was known to him.
The second requirement of an actionable misrepresentation is that the statement must have induced the contract, in other words, the representee must have relied upon the representor's statement before entering the contract. As held in Redgrave v Hurd9, if a material representation has been made to the representee than he is said to have relied on the statement by the representor, inducing the contract. The reliance on the representation need not be reasonable, as held in Museprime Properties v Adhill Properties10 and it is sufficient for the reliance to be partial (Edgington v Fitzmaurice)11. The representee is not obliged to make his or her own investigations as to the truth of the statement, although this does not infer that the representee should be entirely naïve and complacent by entering the contract without making inquiries where it is available to him. It could be argued that Mr Drake should have made the relevant enquiries about the authenticity of the painting before entering the contract if there was an opportunity for him to do so, especially with regard to such a large sum of money being involved. Objectively this may be the case, but we cannot say that it was the "fault" of Mr Drake that induced the contract, which would subsequently reduce any damages made payable to him12. If Mr Drake had carried out investigation on the truth of the matter before the conclusion of the contract, but nevertheless went ahead with it, then there would have been no actionable misrepresentation, as the representation did not induce the contract (Atwood v Small)13. There are not enough facts in the newspaper report to make this claim, although it may be argued in favour of Mr Agnew. We have now established that the contract between Mr Agnew and Mr Drake may make Mr Agnew liable for actionable misrepresentation. From the given facts, it seems to show that the statement was one of an existing fact and induced the other party to enter the contract.
An actionable misrepresentation would render the contract voidable, and the innocent party can either choose to affirm the contract, or rescind. Rescission is an equitable remedy that would be available if the misrepresentation is fraudulent, negligent or innocent. To rescind a contract the contracting parties will only be returned to their original position and be compensated expenses incurred which were consequential to the contract. The remedy would be to return everything that has been lost under the contract to the innocent party. The right to claim for damages in addition, will only be allowed if the misrepresentation is either fraudulent or negligent. In order to assess the remedies available to Mr Drake, we will need to establish what category of misrepresentation this case will fall into, assuming there has been a valid misrepresentation involved.
The legal test for fraudulent misrepresentation is in the case of Thomas Witter Ltd v TBP Industries Ltd14. Justice Jacob states that "where a person has made a representation of fact and, before the contract is concluded, comes to learn of its falseness, that person comes under a duty to correct the representation and, if he fails to do so, then is taken to be fraudulent". However, it is unclear whether Mr Agnew actually believed the statement to be untrue after selling the painting to Mr Drake as it suggests from the report that he still believes the painting to be a genuine Van Dyck. The courts may be reluctant to believe this submission as the statement was confirmed by expert opinion to be untrue after the contract was concluded. Mr Agnew would have been obliged to inform Mr Drake as to this conflicting opinion even after he had sold the painting. For a valid fraudulent misrepresentation, it must be shown that the representation had been made knowingly, without belief in its truth, or recklessly. Mr Agnew could be considered to have been reckless in the making of his statement as he did not know whether the painting was genuine or not, but took the risk of asserting that his statement was true. The measure of damages is tortious under fraudulent misrepresentation so if Mr Agnew was liable for fraudulent misrepresentation, Mr Drake would be compensated for "all the damage directly flowing from the tortious act of fraudulent inducement which was not rendered too remote..." (Doyle v Olby)15 and his position now would be regarded in contrast to how it would have been, had he not entered the contract to buy.
The question of damages, i.e. compensation for any loss that would have occurred if the contract continued, would be considered under section 2(1) of the Misrepresentation Act 1967, and section 2(2). The way in which damages is assessed depends on the nature of the misrepresentation, of which there are three types.
Fraudulent misrepresentation under statute falls under section 2(1) of the Misrepresentation Act 1967. Here, the burden of proof would be on Mr Agnew rather than Mr Drake, as under this section, it is the representor who must disprove negligence. In Howard Marine and Dredging Co. Ltd v A. Ogden & Sons (Excavations) Ltd16, it is essential that the representor should not state facts where there was an absence of reasonable grounds to believe that fact. In the case of Howard Marine v Ogden, the representor did not satisfy the Court of Appeal with any evidence for having a reasonable ground to believe that the carrying capacity of the barges was as large as they had stated. By basing their opinion on the Lloyd's Register and disregarding their own documents, which were easily accessible to them at the time the contract was concluded for verification, the plaintiffs had acted negligently. Mr Drake could argue that Mr Agnews did not have reasonable grounds for his belief that the painting was a "genuine Van Dyck" after the painting was sold at such a low price at the Sotheby's auction where it was described as "under his eye". This fact should have at least been brought to the attention of Mr Drake before the contract of sale was concluded. On the other hand, Agnews could have said to have had reasonable grounds for their belief after having its attribution confirmed by other expert art historians. Once fraudulent misrepresentation has been proven in any case, the remedies of both rescission and damages can be awarded "even if the loss could not have been foreseen" (Royscott Trust Ltd v Rogerson)17; all losses that have flowed from the fraud would be recoverable. It is unclear how damages would be rewarded if there were proof of fraudulent misrepresentation in this case, as it is not yet determined whether the painting is genuine or not. It is also questionable whether any loss has actually flowed from the fraud, as this would only apply to contracts that can continue, i.e. a contract of service/business.
The representation may fit more accurately with another category of misrepresentation. As set out in Section 2(2) of the Misrepresentation Act 1967 for negligent and innocent misrepresentations, there is a choice between rescission and damages to adequately compensate the representee. It is from this point that we would assess the counterclaim of Mr Agnew.
Firstly, the contract may well be declared void by arguing on the doctrine of a unilateral mistake. Mr Agnews thought he was dealing with a genuine Van Dyck, whereas he was actually dealing with a painting "under his eye". To satisfy the courts, Mr Agnew will need to prove that Mr Drake had only assumed the painting was a genuine Van Dyck. As in the case of Bell v Lever Bros.18, the validity of the employment contracts was assumed without there being any representation. If there was a genuine mistake, a remedy may be available in equity to Mr Agnew. A remedy in equity would either offer specific performance, rescission, or rectification. However, it is clear from the facts of this case that a representation was involved so an argument of mistake would be unlikely to succeed.
On another point, it could otherwise be said that there was no misrepresentation as the buyer, i.e. Mr Drake, had accepted the goods after a reasonable lapse of time. In Leaf v International Galleries19, a Constable painting was sold to the defendant in 1944. It was not until 1949 when the plaintiff tried to sell the painting to a third party, that he discovered the painting was not in fact a genuine Constable. The Court of Appeal held that the remedy of rescission and repayment of the purchase price had been lost due to a lapse of time. Therefore, where Mr Drake has tried to rescind the contract and reclaim damages after four years of purchasing the Van Dyck painting, the court could infer that the remedy has been lost after expiration of reasonable time. Denning quotes:
" The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimidating to the seller that he has rejected them."
The misrepresentation must at least be negligent in order to claim damages as the time runs from the date when the fraud could have been discovered.
In assessing whether Mr Agnew was negligent in his representation, we would need to ask whether he had a duty to exercise his judgment with reasonable care and skill, whether there was a "special relationship" between Mr Drake and Mr Agnew. The test for the liability of negligent misstatement can be found in the House of Lords judgment of Caparo Industries plc v Dickman20, a special relationship exists where the advice is required for a known purpose, the advisor knows that his advice will be communicated to the advisee, the advisor knows this advice will be acted upon, and that the advisee has acted upon it. This is the same as questionning the exisitence of a "fiduciary relationship", as required in Hedley Byrne & Co. Ltd v Heller & Partners Ltd21. It was said in this case, that when approaching the question of whether a party has acted negligently, there needs to be evidence of a "special" or "fiduciary relationship". This was defined as where there was an assumption of responsibility by the defendant and foreseeable detrimental reliance by the claimant. The requirement of a "responsibility" of the defendant is determinable by a number of factors set out in Hedley Byrne. The first is the knowedge of the representor adnn the extent of which he or she knows that his statement will be relied upon by the representee. In the present case, Mr Agnew would surely be aware that such a statement would be relied upon by customers who entered his art gallery. It is also required that where there is a special skill in the subject matter, reasonable care and skill need to be taken when making pre-contractual statements (Smith v Eric Bush22), so extra care must be taken in such circumstances. It must also be reasonable for the representee to rely upon the statement (Esso Petroleum Ltd v Mardon23), and finally, the question of a fiduciary relationship also depends on whether the statement was made to be relied upon. In relation to our present facts, it seems as though an actionable misrepresentation for negligence is more likely to succeed than one of fruad. Mr Agnews' should have taken more care over the making of his statement as objectively, it would most likely be relied upon by any ordinary consumer.
On the other hand, according the authority of Hedley Byrne & Co. Ltd v Heller & Partners Ltd24, we must also refer to the question of whether liability for misrepresentation has already been excluded under the contract. The newspaper report tells us that the catalogue specifically mentioned that there was "a conflict of expert opinion" over the painting's attribution. Is this sufficient to exclude liability for a false statement made by Mr Agnew? The exclusion of liability for misrepresentation is subject to section 3 of the Misrepresentation Act 1967 and satisfaction of the reasonableness test under section 11(1) of the Unfair Contract Terms Act 1977. In section 11(1) of UCTA, it is stated that the "term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made." In deciding whether Mr Agnew has effectively excluded liability we must draw attention to the two areas - firstly, whether the exclusion was "fair and reasonable", and whether it was "known to or in the contemplation of the parties when the contract was made". By fair and reasonable, the representor should only exclude liability where he or she is not in the position to find the real accuracy of the subject matter of the contract. It was not fair and reasonable, in Howard Marine v Ogden25, to try and exclude liability for negligent misrepresentation where the representor had access to information required and the representee did not. Secondly, Mr Drake could argue that the exclusion was know to him, or in contemplation. By writing the term inside a catalogue which Mr Drake may not have looked at before the conclusion of the contract, we cannot assume that it has been incorporated into a contractual document (Chapleton v Barry Council26). It is also arguable whether he had been given sufficient notice of the "term" (Thornton v Shoe Lane Parking27). If the representation has not become a term of the contract, the remedy available to Mr Drake would be to set the contract aside and put the position of both parties as far back as possible to before the contract was made.
From the information we have been given in the newspaper report, it seems as though there is a valid argument for both sides of the case, depending on whether there has been an actionable misrepresentation and whether the courts would still award a remedy after a 4 year lapse of time.
For a company such as Art Sales PLC to protect themselves from being charged for actionable misrepresentation, regard must be taken to the impact of the UCTA 1977 as well as the Unfair Terms in Consumer Contracts Regulation 1999. Any term to exclude liability should be within the requirement of "good faith" under section 5 of the UTCCR. The term should be individually negotiated with the customer, i.e. notify them of the term before the contract is concluded. The exclusion clause should not reflect a "significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer" (s. 5(1) UTCCR). If the term has been drafted without individual negotiation with the customer, then Art Sales plc must prove that the exclusion clause is standard in such a contract (s. 5(3) UTCCR). It is also required that the term is written in "plain and intelligible language", that does not define the subject matter of the contract or the adequacy of the price (s. 6(2) UTCCR). In selling paintings, Ms Grabbit must be careful that any representation is not an implied term under section 13 of the Sale of Goods Act 1979 on the description of the paintings sold. Section 13(1) provides that "where there is a contract for the sale of goods by description, there is an implied term that the goods will correspond with the description." As in the case of Harlington & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd28, the description must influence the sale in order to be a "sale by description" under the SGA 1979.
[1913] AC 30
2 [1893] 1 QB 256
3 (1829) 1 Russ. & M 128
4 [1927] AC 177
5 Bowen L.J. - Smith v. Land and House Property Corporation (1885) 28 Ch D 7
6 [1976] QB 801
7 (1885) 29 Ch D 459
8 [1936] Ch 575
9 (1881) 20 ChD 1
0 (1990) 36 EG 114
1 (1885) 29 ChD 459
2 S.1 (1) Misrepresentation Act 1967
3 [1835-42] All ER 258
4 [1996] 2 All ER 573
5 [1969] 2 QB 158
6 [1978] QB 574
7 [1991] 2 QB 297
8 [1932] AC 161
9 [1950] 2 KB 86
20 [1990] 2 AC 605
21 [1964] AC 465
22 [1990] 1 AC 831
23 [1976] QB 801
24 [1964] AC 465
25 [1978] QB 574
26 [1940] KB 532
27 [1971] 2 QB 163
28 [1990] 1 All ER 737
