Misrepresentation of a Material Fact - Case Study Example

Student Name Instructor Name Course Date Essay on Misrepresentation of a Material fact In this case study, the main aspect in legal perspective is misrepresentation of fact under common law. This is evident since the director of HappyHippie Pty Ltd, Mr. Elvis Eggplant knew that the financial figures were inflated by 60%. The sole purpose was to induce and convince Mr. Manfredi to purchase the vegetarian café. It is important to note that when setting up the new café, Mr Manfredi discovered old tax documents, receipts and cash register receipts that gave a true picture on the actual performance of the café. As such, two key elements in this scenario are the intention to induce Mr. Manfredi by inflating financial figures and the time within which Mr. Manfredi discovered the real the false disclosure of financial information by Mr. Eggplant. The aforementioned aspects are crucial in determining whether or not Mr. Manfredi is entitled to any remedy and/or damage according to Misrepresentation Act of 1967 under the common law of England and the Misrepresentation Act of 1972 for South Australia.1 In a sales contract, where it seems to have been secured by an owner through misrepresentation, the innocent party is entitled to damages pursuant to statute law and/or through common law. The damages are evaluated by what is capable of restoring the innocent party back to the same financial position in case the misrepresentation had not occurred. However, it is important to first understand the various type of misrepresentation before embarking on any legal redress. A misrepresentation refers to a false statement of a material fact by the representor to a representee in order to induce the latter into a contract which is characterised by this effect. As a general rule legal rule, if an innocent party decided to enter into a purchase contract based on misrepresentation, as in this case, claim compensation can be made. Three types of misrepresentation exist; fraudulent misrepresentation, negligent misrepresentation, and innocent misrepresentation.2 In the case of fraudulent misrepresentation, the representor make a statement or presents a material fact that they are very much aware is untrue or without believing it is true and/or recklessly. As a result of fraudulent misrepresentation, the aggrieved party who is the representee, is entitled to claiming damages, cancelling the contract and/or both. In the case of both statute law and common law, the claim on compensation is based on the fraud or negligence.3 However, in the case of the purchase contract between Mr. Eggplant and Mr. Manfriend, the element is fraud if evident since the former knew of the false material facts during the purchase. Second kind negligent misrepresentation in which case statements and/or facts are made carelessly without reasonable grounds of believing there is any element of truth. Third is innocent misrepresentation in which case one party to the contract seems to have had reasonable basis to believe that the false statement was true. Simply it means that the innocent misrepresentation was made without a fault and in most cases it allows for the cancellation of the contract. This allows both parties to the contract to be placed back to the same position they were before initially entering into the contract. Under the common law’s Misrepresentation Act of 1967 section 2(2), a court of competent jurisdiction has the preference of awarding damages rather than ending the contract if it deems necessary but it cannot award both at the same time. This is usually decided based on the nature of the innocent misrepresentation and losses incurred by the representee.4 As earlier highlighted, rewarding damages and/or allowing the aggrieved party to rescind the contract are the only two options. The remedies are decided when it has been determined nature of the misrepresentation and its presence has been determined. Damages involves financial compensation in order to restore representee to his/her earlier position before entering into the purchase contract but it is only as far as money can take care of this. In the case of rescission, the contract is terminated and the contract is treated as though it never existed. The two types of remedies are determined by the nature of misrepresentation and the stage at which the contractual agreement had reached before the victim discovered the presence of misrepresentation. There exist some limitations to misrepresentation especially in the case of rescission. First is that in case one is aware of misrepresentation but chooses to go ahead with the contract, it is not allowed to return to the representor and seek termination of the contract and/or going to the court and seeking legal redress. This is because it is assumed in law, that the victim affirms the contractual obligations despite him/her discovering the presence of misrepresentation. In the case of Mr. Manifredi, when he discovered false disclosure of material facts by Mr. Eggplant during the setup of the café, it is critical in seeking rescission of the contract. Important to note is that misrepresentation must be reported within a reasonable time in order to seek damages and/or rescission. A huge lapse of time after discovering misrepresentation limits ending a contract. It is generally taken as evidence of accepting the position thereby providing basis of being denied remedy of rescission.5 Another point to consider in this case is if the purchase agreement between Mr. Manifredi and Mr. Eggplant had terms that removed the barriers to rescission especially in the case of innocent misrepresentation. In section 1 of the Misrepresentation Act 1967 stated that in case a misrepresentation because a contractual term and the contract have been executed after a representee enters into it, and then the aggrieved party can opt to rescind it without alleging fraud. It is important to note that a misrepresentation does not usually prevent a contract from either being executed or become void. However, the contract becomes voidable and the main response of the general law to such misinformation is that, since the decision by the representee to contract was based on false information, the representee is permitted to rescind the contract. In that case, rescission is the remedy in most cases of misrepresentation. Traditionally in common law rescission was only available to cases fraudulent misrepresentation was evident. This is in contrast to equitable law rescission where misrepresentation was innocent which holds that it would be unacceptable for the representor to hold the representee to the bargain.6 Consequently, another applicable statute in addition to common law is the Fair Trading Act 1987 of South Australia specifically Division 2 –Trade Practices. Section 56 covers on misleading or deceptive conduct; whereby an individual involved in commerce or trade is not required to engage in deceptive or misleading conduct or one that can deceive or mislead. In this case study, by considering the elements of a misrepresentation, there is untrue statement of a fact by the director of HappyHippie Pty Ltd, Mr. Eggplant, since there was a statement of intention and at the time of stating it, it was known that it is untrue. Besides, the statement was made by a party to the purchase contract and as such, in law there is a remedy for misrepresentation made by a party to the contract. Third element which is more outstanding in the case of Mr. Manifredi is that there was inducement. The inflation of price by 60% was with the sole purpose of influencing Mr. Manifredi to accept buying the café. As required in law, misrepresentation must be capable of influencing a party to decide whether or not he/she can enter into a contract. It needs not be a single inducement but just a particular inducement as was the case in Edfington V. Fitzmaurice (1885); whereby a fraudulent misrepresentation is present and it successfully induced a contract. The aforementioned are the basis upon which a misrepresentation is actionable by common law. However, misrepresentation cannot be actionable if the representee; never knew of its presence as was the case in Horsfall v. Thomas (1862), did not allow it in order to influence their decision as was the case in Smith v. Chadwick (1884) and Atwood v. Small (1838).7 Therefore, in this scenario, it is clearly evident that Mr. Eggplant made a fraudulent misrepresentation with the objective being to influence Mr. Manifredi into buying the business. However, as earlier mentioned it is the responsibility of Mr. Manifredi to act with reasonable as soon as he discovered the misstatement of a material fact by Mr. Eggplant during their negotiations. The reason being, if the real figures of the business performance were actually tabled during the negotiations, probably Mr. Manifredi would not have been influenced to buy the café and/or at a different price. Nevertheless, if Mr. Manifredi continues to set-up the business and starts activities within the premises, he will not later be able to seek legal redress either for terminating the business or being compensated. Under section 2, sub-section 1 of Misrepresentation Act 1967 (MA), Mr. Manifredi qualifies for damages since if a person who has entered into a contract after misrepresentation has been made by another party suffers a loss. Besides there is reason to believe that Mr. Eggplant made the statement fraudulent because documents recovered from the office, old receipts and tax records, has varied figures from what he had presented to Mr. Manifredi during purchase. 8 Works Cited Christian von Bar and Ulrich Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe: A Comparative Study ( Sellier. European law publ., 2004). Michael H. Whincup, Contract Law and Practice: The English System with Scottish, Commonwealth, and Continental Comparisons (Kluwer Law International, 2006). Peter Gillies, Concise Contract Law (Federation Press, 1988). Suff, Essential Contract Law (Cavendish Publishing, 1997). Read More