The Aspect of Misrepresentation - Case Study Example

Business Law Student Name Institution Misrepresentation refers to a false statement of fact, made by one party to the contract (also referred to as the representor) to the other (the representee) that, while not forming a term of the said contract, is one of the reasons that induces the representee to enter into the contract. ’False’ in this case refers to that that is untrue and a ‘statement of fact’ does not include either a statement of intention or of opinion.1 Misrepresentation historically arose from common law where a party who had entered in to a contract with certain beliefs as having represented to him by the other party, found out that such representation was indeed not true. Common law gave such a party a chance to avoid the contract so as not to suffer loss or damages which he or she had not anticipated while signing the contract. In today’s setup, the aspect of misrepresentation has been incorporated into the statues and therefore solidifies it as vitiating factor in contracts. It further establishes misrepresentation as an offense punishable by law. Misrepresentation occurs as according to the Misrepresentation Act 1967 if and when a person makes a false statement to another with the (1). Intention of causing or inducing the other contracting person to enter into a contract or (2). Intention of inducing the other contracting person to make payments or transfer property to the representor or any other person. The person making the misrepresentation, also called the representor, is guilty of an offence under this Act and is liable for punishment. The Act however gives room for a person to avoid prosecution if at the time he was making the representation; he actually believed such representation to be true. For a case of misrepresentation to stand, there are conditions and points that must be proven for the representee to institute action against the representor, these points are as follows. 1. The representation was intended to cause and in fact caused the representee to make the contract. 2. The representation must be a statement of existing facts. 3. The misrepresentation must be material.2 Conditions for liability. We shall be putting the above case scenario to the test to determine whether the above named conditions have been met, only then can we conclude that the representee is liable for misrepresentation. In the first condition of reliance, the question to ask is one; had the misrepresentation not been made to Mr. Manfredi, would he have gone ahead and contracted? From the given facts of the case, it is clear that the making up of the figures by Mr. Elvis Eggplant was to serve one purpose and one purpose only, to induce Mr.Manfredi to enter into the contract. It is also put out very clear that Mr. Manfredi purchased the café based on the representations made to him by Mr. Eggplant. In the case of Edington v Fitzmaurice,3 where a lender was induced to lend money to a company through misrepresentations made to him, the court held that he was entitled to damages as the lender could not have lent the money, had he not held a mistaken belief. The second condition refers to the statements made and that they must be of existing facts. The representation made by Mr. Eggplant to Mr. Manfredi was concerning the historical financial accounts of the subject matter of the contract. Their alteration thereafter has the effect of leading the representee hold a mistaken belief in the profitability and financial muscle of the café. This is an existing fact, one that has been violated, manipulated and enhanced to facilitate in Mr. Eggplant’s wrongdoing. The classical case is the above named Edington v Fitzmaurice whereby Bowen L.J stated that for misrepresentation to stand, there must be a mis-statement of an already existing fact. This misrepresentation of fact does include but is not limited to a misrepresentation as to the status of a man’s mind. The third condition is all about materiality. The aspect here is that the misrepresentation must be one that would affect the judgment of a reasonable man or one that would induce him into a contract without making as enough inquiries as he would normally do. In the above case, it is material that the subject matter has been grossly overvalued. This can be eluded by the case of Museprime Properties ltd v Adhill Properties ltd,4 where a purchaser by action of a commercial property was allowed by the court to rescind the contract for a misrepresentation by the seller of the property. The auctioneer selling the property had represented that higher rents to be levied on property could still be negotiated, the truth however was that the rents had already been fixed up until the next review period. This representation had affected the value of the property and was therefore material. RESCISION. For purposes of misrepresentation, the word rescission shall be used as rescission for misrepresentation. It amount to setting the contract aside for all purposes and restoring things to the state they were before the contract. It seeks to declare the contract void ab initio as there was a defect in the formation of the contract. A party that seeks rescinds for misrepresentation has lost the right to claim for damages for its breach. If such a situation were to cause hardships to a party, the court will exercise its discretion under section 2(2) of the Misrepresentation Act to declare the contract subsisting.5 In rescission for misrepresentation the general rule is that misrepresentation makes the contract voidable at the option of the representee. In Redgarve v Hurd,6 the defendant was led to make a purchase of a solicitor’s house and the solicitor’s practice as a result of a representation as to the value of the practice. The representation turned out to be false. It was held by the court that he could rescind the said contract and also recover in full the deposit he had already paid. Bars to rescission. Despite the above conditions of liability all being fulfilled, there are situations whereby the courts will refuse to grant orders for rescission of the contract made from misrepresentation. These situations are as follows as stipulated in the Misrepresentation Act section 2(2). Firstly, the right to rescission may be lost because the representee has affirmed the contract after learning of the misrepresentation. In the case of long v Lyoyd,7 the purchaser of a lorry was barred from rescission as he had continued to use the vehicle a lot more time after it had been made clear to him that the vendor’s representation to him before he bought the lorry that it was in ‘excellent condition’ was false. Therefore the first advice to Mr. Manfredi would be for him to terminate his use and occupancy of that café with immediate effect. Secondly, the right to rescission may be lost by the lapse of time. However it must be noted that time does not normally begin to run until the representee has knowledge of the misrepresentation. Exceptionally, however, mere passage of time will bar rescission. In the case of Leaf v International Galleries,8 the purchaser of a painting that was innocently misrepresented to be a Constable was barred on the basis of time, when, five years on, he discovered the truth and sought rescission. Thirdly, it is said that this right has been lost once it is no longer possible to return the parties involved to their original positions. Parties are upon rescission, entitled to restitution of any benefits conveyed under the contract. It would be against the law of unjust enrichment to allow parties to keep benefits they had received under the contract.9 Removal of certain bars to rescission. The Law Reform(misrepresentation) Act 1977 goes ahead to provide expressly situations whereby in a case of misrepresentation, the person suffering a detriment would be entitled to be allowed rescission by the courts. The following situations will not negate an individual’s right to rescission. (1). the said misrepresentation was or has risen to become a condition and or term of the contract. (2). the contract has already been performed at the time of seeking rescission and (3). The performance of the contract had led to the registration of a document under the law. Damages for misrepresentation. As stipulated in the Misrepresentation Act 1967 section 2(1), where a person enters into a contract as a result of a misrepresentation and thereafter suffers loss, injury and detriment, the person making the representation is liable to pay for damages suffered, whether the misrepresentation had been done fraudulently or otherwise is irrelevant. Unless the representor proves in court that he did actually believe that the representations he made were the truth. At common law, a person who suffers loss as a result of acting in reliance on a fraudulent statement can recover damages in an action of deceit. He can do this whether he rescinds the contract or not, but cannot pursue both remedies if it results in the recovering of twice of the amount. In determining whether the statements used by Mr. Eggplant would amount to fraud, the case of Derry v Peek 10would come in handy. The House of Lords held that a statement is fraudulent only if made: 1. With knowledge of its falsity. Or. 2. Without belief in its truth. Or. 3. Recklessly. The statements by Mr. Eggplant fit the bill and therefore this remedy is available to Mr.Manfredi. Bibliography Acts Law Reform (Misrepresentation) Act 1977 No 13 Misrepresentation Act of 1967 Books A.S. Smith, Atiyah’s introduction to Contract( Oxford University Press,2006, 6th ed) E Mckendrick , contract law (palgrave,8th Ed, 2009) E. Peel, F. Michael, Law of Contract ( chesire, fifoot & furmstone,2007, 15th ed) H Beale, Bishop and furmton, cases and materials on contract (2008) The law of Contract (Sweet & Maxwell, 2011, 13th ed) Articles LexisNexis, capsule Summary, contracts Read More