Misrepresentation in the Law of Contract - Term Paper Example

Introduction Misrepresentation in the law of contract involves communication of false facts which induces the party receiving the false representation to enter into legal obligations. Misrepresentations can be made either negligently, fraudulently or innocently. Remedies for misrepresentation depend on the type of misrepresentation made.1 In a typical case of misrepresentation the innocent party will be at liberty to rescind the contract and/or seek damages.2 In the case for discussion it is obvious that the statement made by Jennifer to Hassan in respect of the garage’s profit was false however, it would appear that she honestly believed that the statement was true. Jennifer’s statement concerning the forecourt’s capacity to house three car washers appears to be a case of either fraudulent or negligent misstatement. It is also obvious that Jennifer’s statements, particularly the statement in respect of the petrol company’s profits induced Hassan to enter into a contract for the purchase of the garage. Therefore, Hassan’s situation contains all the essential elements necessary to substantiate a claim for misrepresentation and he is entitled to damages and/or rescission in respect of those misrepresentations. Jennifer’s failure to mention the competing bigger garage however does not rise to the level of misrepresentation and this will be explained in greater detail in the discussion that follows. Misrepresentation As noted a misrepresentation can be made in one of three ways. A misrepresentation can be made negligently, fraudulently or innocently. In either case the claimant must prove that he or she relied upon the misrepresentation or was induced to enter into the contract by the misrepresentation.3 If the representee does not rely on the misrepresentation and relies on his own information and judgment then he cannot be said to have relied on the misrepresentation.4 Therefore the fact that Hassan did not inspect the documents and records available will not function to defeat his claim. Moreover, it was held in Redgrave v Hurd (1881) 20 Ch D 1 that even if the representee is offered an opportunity to counter the misrepresented facts he will still be taken to have relied upon the misrepresentation.5 Therefore whether or not Hassan relies on Jennifer’s statements and representations will be crucial to determining how he should proceed and what kind of outcome he can reasonably expect. Jennifer’s Innocent Misrepresentation The facts reveal that Jennifer reasonably believed that the petroleum company had turned over significant profits in recent years. In fact that was her recollection of the accountant’s last report to her. Having no accounting background herself, Jennifer had no independent knowledge outside of her own recollection of the accounting report. Be that as it may, the report was false and the records would speak to quite the opposite. On the facts as stated, Jennifer’s statement to Hassan, although false was innocently made. Section 2(2) of the Misrepresentation Act 1967 makes provision for certain remedies for Hassan in the circumstances where he enters into a contract based on an innocent misrepresentation. Section 2(2) provides as follows: "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."6 In view of the restriction placed on the right to damages in lieu of rescission as contained in Section 2(2) above, Hassan will be advised to state a claim fro damages in the event the right to rescission is lost to him. For instance, the moment he becomes aware of Jennifer’s innocent misrepresentation he should immediately take steps to rescind the contract. If Hassan discovered the mistake prior to accepting the property purchased, if he nonetheless completed the contract the right to rescind will be lost.7 In Long v Lloyd [1958] the defendant advertised for the sale of his lorry which he described as being in “excellent condition”.8 The defendant further claimed that the vehicle gave as much as eleven miles per gallon of petrol. The plaintiff took the vehicle for a short trial run and discovered that it was not in fact in excellent condition but purchased the vehicle anyway. A few days later while driving the vehicle, the plaintiff discovered additional flaws as well as the fact that the lorry rather than give eleven miles per gallon of petrol was only good for five miles. In response to these failings the plaintiff approached the defendant and accepted his offer to pay for the flaws. The following day the vehicle broke down altogether and the plaintiff approached the defendant attempting to rescind the contract.9 It is important to note that although the vehicle had not in fact been in excellent condition the defendant’s misrepresentation of its condition was an innocent statement of false facts. The Court of Appeal in considering these factors held that the plaintiff was not at liberty to rescind the contract since he had already taken possession of the vehicle. Moreover, the last journey taken by the plaintiff functioned as an affirmation of the contract for the purchase of the lorry.10 It is therefore advisable for Hassan to make certain that he does not take steps in furtherance of the contract for the purchase of the property once he discovers the misrepresentation made by Jennifer in respect of the garage’s profit margin. It is also important to note that if too much time has passed before the discovery of the misrepresentation the right to rescind can be lost. In Leaf v International Galleries [1950] 2 KB 86 acting on an innocent misrepresentation that a painting was actually done by J. Constable when in fact it wasn’t, the plaintiff purchased the painting. Five years later he discovered the mistake and tried to rescind the contract. The Court of Appeal held that he right to rescind had been lost after such an extended passage of time and the plaintiff could only recover damages. Since the plaintiff had not made such a claim he was not awarded damages.11 In light of this ruling it is important for Hassan to make his claim for rescission immediately and out of an abundance of caution he should make a claim for damages in lieu of rescission in the event the court finds that the right to rescind is lost. In order to substantiate his claim for damages and/or rescission Hassan will have to prove that he relied upon the misrepresentation in respect of the petrol company’s profit margin when deciding whether or not to buy it.12 It has been previously ruled that any misrepresentation that operates to influence the representee. In Museprime Properties v Adhill Properties [1990] the applied an objective test and determined that if such a misrepresentation of the facts would have influenced the reasonable man to act as the plaintiff does then the contract can be rescinded.13Based upon the facts of the case for discussion, Hassan had been thinking about buying the petrol company for some time now and it was not until Jennifer innocently misrepresented the company’s financial turn over that Hassan made up his mind to go ahead with the purchase. It is certainly reasonable in the circumstances to expect that such a statement would have influenced Hassan’s decision to purchase the petrol company. Moreover, Hassan is not required to prove that the innocent misrepresentation was the only statement influencing his decision to purchase the petrol company. In Edgington v Fitzmaurice (1885) 29 Ch D 459 it was held that a single misrepresentation which only partly influences the plaintiff is sufficient to sustain a case for rescission and/or damages provided the false statement was a material statement.14 Jennifer’s statement was made during the negations with Hassan for the purchase of the petrol company and given this fact it is only reasonable to assume that the statement was made for the sole purpose of influencing Hassan’s decision to purchase. In that case the statement was a material statement in that it determined whether or not a contract would be completed. Jennifer’s Statement about the forecourt’s capacity to house three car washers Jennifer’s Statement about the forecourt’s capacity to house three car washers when in fact it could not is fraudulent since there are no facts capable of explaining this misrepresentation away as a mere honest mistake. In Derek v Peek [1889] 14 AC 337 the House of Lords defined fraudulent misrepresentation as follows: “..fraud is proved when it  is shewn  that  a false representation has been made (1) knowingly,  or (2) without  belief  in  its truth, or (3) recklessly, careless whether it be true or false….To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth…Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial.”15 Although the House of Lords have defined fraud in very broad terms, it did not hasten to add that in order to substantiate a claim of fraudulent misrepresentation the complainant would have to produce proof of fraud. As Lord Herschell warned: “…nothing short of that will suffice.”16 Based on this warning by the House of Lords Hassan would be advised to claim negligent misrepresentation. There are two significant advantages to a claim founded on negligent misrepresentation rather than fraudulent misrepresentation. In the first place the onus is on the misrepresentor (Jennifer) to illustrate that she had a reasonable premise for believing that the forecourt was capable of housing three washers. As the representative for the petrol company Jennifer was in a position where she ought to have known the forecourt’s housing capacity. Another advantage to claiming negligent misrepresentation is in the award of damages. Damages will be measured in the same manner that they would be measured for a claim in fraudulent misrepresentation.17 Section 2(1) of the Misrepresentation Act 1967 provides as follows: “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  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 ground to believe and did believe up to the time the contract  was made the facts represented were true.”18 Jennifer’s failure to mention the bigger competing garage The doctrine of caveat emptor generally dictates that the representor is under no residual duty to voluntarily to disclose what might amount to harmful facts concerning the subject matter of the contract.19 It was determined early on in English common law in the case of Smith v Hughes (1871) LR 6 QB 597 that if one party is functioning on a misapprehension the other party is not under a duty to offer a clarification.20 While there are certain exceptions to this rule, for instance contracts of insurance which are of the utmost good faith (contracts uberrimae fidei)21 or in instances of a preexisting fiduciary contract as between solicitor and client22none of these exceptions are available to Hassan. Conclusion For the reasons discussed aforesaid Hassan has a good case for damages and rescission on the grounds of negligent and innocent misrepresentation. It is quite obvious from the facts of the case that Jennifer’s misrepresentation to him in respect of the petrol company’s financial profits was a material statement since it induced Hassan to enter into the contract for the purchase of the company. Jennifer’s negligent misrepresentation of the forecourt’s capacity together with the innocent misrepresentation will at the very least result in Hassan obtaining actual damages if not both damages and rescission. If rescission is refused Hassan’s damages would include an adjustment of the purchase price as well as the cost of expanding the forecourt’s housing capacity and any other incidental losses. Works Cited Attwood v Small (1838) 6 CI & F 232. Derek v Peek [1889] 14 AC 337 Edgington v Fitzmaurice (1885) 29 Ch D 459 Furmston, M.P., Fifoot, C.H.S. and Cheshire, G.C. (2001) Cheshire, Fifoot and Furmston’s Law of Contract. (14th Edition) U.K.: Lexixnexus Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574 Lambert v Co-Operative Insurance Society [1975] 2 Lloyds Rep 485 Leaf v International Galleries [1950] 2 KB 86 Long v Lloyd [1958] 1 WLR 753 Misrepresentation Act 1967 Museprime Properties v Adhill Properties [1990] 2 ALL ER 196 Redgrave v Hurd (1881) 20 Ch D 1 Smith v Hughes (1871) LR 6 QB 597 With v OFlanagan [1936] Ch 575 Read More