9. Vitiating Factors / Misrepresentation
Misrepresentation Act 1967
9.1 Vitiating Factors
Even where it is established that the essential elements of a legally binding contract are present, and the terms can clearly be identified, the agreement may not be legally enforceable because of the presence of some vitiating factor. Thus, where fraud is present or a fundamental mistake as to the contract has been made by one or both parties, the contract may be either totally void or voidable at the option of the innocent party.
The main vitiating factors which we will examine are Misrepresentation, Duress and Undue Influence, Mistake and Illegality (with particular reference to Restraints of Trade).
The law of misrepresentation is an amalgam of common law and statute. Before the Misrepresentation Act 1967 the law was already complex because Equity provided the remedy of rescission for ‘innocent' misrepresentation (in effect, any misrepresentation). Courts of Law (as distinct from Courts of Equity) provided for damages and in some cases rescission for fraudulent misrepresentation. The law was adjusted by the Misrepresentation Act 1967 .
A further complicating factor is that an action for damages for fraudulent misrepresentation, is part of the law of tort, where it is also called ‘deceit', and cases where the fraudulent misrepresentation has induced a contract can be regarded as a specialized subset of the tort of fraudulent misrepresentation. In some cases negligent misrepresentation inducing a contract will also amount to the tort of negligent mis-statement.
There is a clear exposition of the structure of the law in the chapter on Misrepresentation in Chitty on Contract , 29th edition (for which edition the relevant chapter was completely rewritten).
An action for misrepresentation is the remedy for a party who has entered into a contract in reliance on a false statement (representation) of fact by the other party but the statement has not become incorporated in the contract as a term, i.e. the statement is not part of the bargain that the parties have made. Where the statement has become a term the remedy will be an action for breach of contract.
X, wishing to buy a used car privately, enters into negotiations with Y who has advertised his car for sale. The odometer of the vehicle in question is turned back to nought. In the course of negotiations Y makes a number of statements including a (false) statement that the car has a very low mileage. A few days later X returns and agrees to buy the car. The written note of the transactions makes no statement as to the mileage of the car.
The remedy in this instance will be an action for misrepresentation and not an action for breach of contract.
Where there is an actionable misrepresentation it renders the contract voidable, i.e. valid until avoided at the instance of the innocent party.
We shall deal first with the distinction between representations and terms, then the concept of actionable misrepresentation and the remedies available, and conclude by looking at clauses which purport to exclude liability for misrepresentation.
9.2.2 Representations and terms
Statements made by the parties in the course of negotiations leading up to the formation of a contract are classified as either representations or terms.
Whether a statement is a representation or a term is primarily a question of intention. If the parties have indicated that a statement is to be regarded as a term, the court will implement their intention. In other cases, the following guidelines may be applied:
Manner and timing of statement
A statement is not likely to be a term if the person making the statement asks the other party to check or verify it, as where the seller of a boat stated that it was sound but asked the buyer to have it surveyed; Ecay v Godfrey (1947) 80LL LR 286. If the statement is made with the intention of preventing the other party from finding a defect, and succeeds in this, the court may consider it to be a term. Thus in Schawel v Reade (1913) 2 IR 64, the vendor of a horse said to the buyer, “you need not look for anything, the horse is perfectly sound” and the House of Lords held that the statement was a term.
Where there is a distinct interval of time between the making of the statement and the conclusion of the contract, this may indicate that the parties do not intend the statement to be a term; Routledge v McKay  1 WLR 615.
Importance of statement
A statement is likely to be a term if it is such that the injured party would not have entered the contract had it not been made.
Bannerman v White (1861) 10 CB NS 844
A prospective purchaser of hops asked whether they had been treated with sulphur, adding that if they had, he would not even trouble to ask the price. The seller's (erroneous) statement that sulphur had not been used was held to be a term.
Special knowledge and skill
Where one of the parties possesses superior knowledge and skill relating to the subject matter, the court may conclude that any statement made by such a party is a term.
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd  1 WLR 623,
A car dealer gave a false statement as to the mileage of a Bentley. The Court of Appeal held the dealer's statement to be a term, thus distinguishing Oscar Chess Ltd v Williams  1 WLR 370 where, on a part-exchange deal, a private car owner falsely (but honestly) stated the age of the car to the dealer. The statement was held to be a representation; the dealer was in at least as strong a position to verify the truth of the statement.
See: The Judgment of Lord Justice Denning (as he then was) in Oscar Chess v Williams
The crucial question is: was it a binding promise or only an innocent misrepresentation? The technical distinction between a "condition" and a "warranty" is quite immaterial in the case, because it is far too late for the buyer to reject the car. He can at best only claim damages. The material distinction here is between a statement which is a term of the contract and a statement which is only an innocent misrepresentation. This distinction is beet expressed by the ruling of Lord Holt, "Was it intended as a warranty or not?", using the word warranty there in its ordinary English meaning: because it gives the exact shade of meaning that is required. It is something to which a man must be taken to bind himself.
In applying Lord Holt's test, however, some misunderstanding has arisen by the use of the word "intended". It is sums times supposed that the tribunal must look into the minds of tae parties to see what they themselves intended. That is a mistake.
Lord Moulton made it quite clear that "The intention of the parties can only be deduced from the totality of the evidence". The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice. And this, when the facts are not in dispute, is a question of law. That is shown by Heilbut v. Buckleton itself, where the House of Lords upset the finding by a jury of a warranty.
It is instructive to take some recent instances to show how the Courts have approached this question. When the seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending that the buyer should act on it and he does so, it is easy to infer a warranty. See Couchman v. Hill (1947 King's Bench, page 554) where the farmer stated that the heifer was unserved and Harling v. Eddy (1951, Volume 2, King's Bench, page 739) where he stated that there was nothing wrong with her. So also if he makes a promise about something which is or should be within his own control. See Birch v. Paramount Estates Ltd. decided on 2nd. October 1956 in this Court, where the seller stated that the house would be as good as the show house. But if the seller, when he states a fact, makes it clear that he has no knowledge of his own but has got his information elsewhere, and is merely passing it on, it is not so easy to imply a warranty. Such a case was Routledge v. McKay (1954, Volume 1, Weekly Law Reports at page 636) where the seller "stated that it was a 1942 model and pointed to the corroboration found in the boon", and it was held that there was no warranty.
Turning now to the present case, much depends on the precise words that were used. If the seller says "I believe it is a 1948 Morris. Here is the registration book to prove it," there is clearly no warranty. It is a statement of belief, not a contractual promise. But if the seller says "I guarantee that it is a 1948 Morris. This is borne out by the registration book, but you need not rely solely on that. I give you my own guarantee that it is," there is clearly a warranty. The seller is making himself contractually responsible, even though the registration book is wrong.
In this case much reliance was placed by the Judge on the fact that the buyer looked up Glass's Guide and paid £290 on the footing that it was a 1948 model: but that fact seems to me to be neutral. Both sides believed the car to have been made in 1948 and in that belief the buyer paid £290. That belief can be just as firmly based on the buyer's own inspection of the log book as on a contractual warranty by the seller.
Once that fact is put on one side, I ask myself: What is the proper inference from the known facts? It must have been obvious to both that the seller had himself no personal knowledge of the year when the car was made. He only became owner after a great number of changes. He must have been relying on the registration book. It is unlikely that such a person would warrant the year of manufacture. The most he would do would be to state his belief, and then produce the registration book in verification of it. In these circumstances the intelligent bystander would, I suggest, say that the seller did not intend to bind himself so as to warrant that it was a 1948 model. If the seller was asked to pledge himself to it, he would at once have said "I cannot do that. I have only the log-book to go by, the same as you".
The Judge seems to have thought that there was a difference between written contracts and oral contracts. He thought that the reason why the buyer failed in Heilbut Symons and Routledge v. McKay was because the sales were afterwards recorded in writing, and the written contracts contained no reference to the representation. I agree that was an important factor in those cases. If an oral representation is afterwards recorded in writing, it is good evidence that it was intended as a warranty.
If it is not put into writing, it is evidence against a warranty being intended. But it is by no means decisive. There have been many cases where the Courts have found an oral warranty collateral to a written contract such as Birch v. Paramount Estates. But when the purchase is not recorded in writing at all, it must not be supposed that every representation made in the course of the dealing is to be treated as a warranty. The question then is still: Was it intended as a warranty? In the leading case of Chandelor v. Lopus in 1603 a man by word of mouth sold a precious stone for gold affirming it to be a bezoar stone whereas it was not. The declaration averred that the seller affirmed it to be a bezoar stone, but did not aver that he warranted it to be so. The declaration was held to be ill because "the bare affirmation that it was a bezoar stone, without warranting it to be so, is no cause of action." That has been the law from that day to this and it was emphatically re-affirmed by the House of Lords in Heilbut Symons v. Buckleton (1913 Appeal Cases at pages 36 and 50)
Statement reduced to writing
Where the agreement has been reduced to a written document, statements appearing in the written contract will normally be regarded as terms. Subject to the matters discussed above, statements excluded from the written contract are likely to be regarded as representations. Nevertheless, the court will look to the intention of the parties to see whether they intended a contract partly written and partly oral; J Evans and Son (Portsmouth) Ltd v Andrea Merzario Ltd  WLR 1078.
9.3 Actionable Misrepresentation
An actionable misrepresentation is a false statement of fact made during pre-contractual negotiations by one party which induces the other party to enter into a contract.
False statement of fact
To be actionable, the statement must be one of some specific existing fact or past event. Thus the vendor who states that “the drains are in good working order” or “the car's engine has been re-conditioned” is clearly making a false statement of fact which would be actionable if manifestly false.
However, the position is rarely so straightforward and it is necessary to distinguish between statements of fact, which are actionable if false, and statements of opinion or belief; statements of future conduct or intention; statements of law and cases of silence or non-disclosure which are not in general actionable.
(i) Statements of opinion or belief
Such statements, if false, do not constitute actionable misrepresentation.
Bisset v Wilkinson  AC 177
The owner of a farm, which had never been used as a sheep farm stated that he believed it would support a certain number of sheep. The court held the statement to be one of opinion not fact.
Of course, very often, the makers of such statements are dealers or agents who have special knowledge or skill in relation to the subject-matter, or are in a stronger position to know the truth. Here the court may infer an implied representation of fact; see, for example Smith v Land and House Property Corporation (1884) 28 Ch D 7 where the plaintiff put his hotel up for sale declaring that it was let to a ‘most desirable tenant'. The tenant was not desirable, he was bankrupt! The defendant refused to complete and was sued. The Court of Appeal held that the plaintiff's statement was a statement of fact, not a mere opinion.
See also Esso Petroleum Co Ltd v Mardon (1976) QB 801. A petrol company offering an inaccurate sales forecast were liable in damages to thetenant who contracted in reliance on the forecast.
Brown v Raphael  Ch 636 CA
Clearly, many (but not necessarily all) statements made by advertisers are classed as “mere puff” and are not actionable because they have no factual basis (e.g. “we take the drama out of a crisis”).
(ii) Statements of future conduct or intention
A statement by a person as to what he will do in the future is not a statement of fact, e.g. “over the next five years, our investment plans amount to five million pounds”. But even here a person who wilfully lies about his intentions may be guilty of a (fraudulent) misrepresentation of fact, as illustrated by the following case.
Edgington v Fitzmaurice (1885) 29 Ch D 459
A company raised money from the public by saying that the money would be invested in the expansion of the business. In fact, the directors' real intention was to use the money to pay off the company's debts. The statement was held to be a fraudulent misrepresentation of fact. Bowen L J, in a famous judicial pronouncement said:
“There must be a mis-statement of an existing fact; but the state of a man's mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact.”
The same principle would also apply to a dishonest statement of opinion or belief; see (i) above.
(iii) Statements of law
A false statement as to what the law is, is not an actionable misrepresentation, e.g. “a valid contract of hire purchase does not need to be in writing.” However, in practice, such bold statements are rarely made and statements containing legal propositions may be related to the subject matter in such a way that they are really statements of fact. For example, in Solle v Butcher (1950) 1 KB 671 a statement that a flat was “new” and therefore not subject to the Rent Acts was held to be fact.
Besides, this principle may have to be called into question since the House of Lords declared, in Kleinwort Benson v Liverpool City Council  1 AC 953 that a mistake of law could render a contract void for mistake, contrary to the traditional view that it could not. A mistake, and misunderstanding induced by misrepresentation, are similar, so the doctrines of mistake (discussed in a later chapter) and misrepresentation are related.
(iv) Silence or non-disclosure
The general rule here is that to remain silent does not amount to misrepresentation. Thus a commercial traveller who kept quiet, at a job interview, the fact that he had serious motoring convictions was not guilty of misrepresentation; Hands v Simpson Fawcett (1928) 44 TLR 295. Obviously, if he had been directly asked whether he had such convictions and had denied it, he would have been liable.
However, as was stated by Lord Campbell L C in Walkers v Morgan (1861) 3 D F & J 718, although simple reticence does not amount to a legal wrong ... a single word or a nod or a wink or a shake of the head or a smile from one party might amount to misrepresentation. And of course it is also possible to have a misrepresentation by conduct.
Thus to deliberately physically conceal dry rot in a building may amount to misrepresentation.
R v Barnard (1837) 7 C & P 784D, in Oxford, wore a cap and gown in order to persuade shopkeepers to let him have goods on credit. The fact of appearing so dressed was held to amount to a false pretence; this was a criminal case but there is no reason to suppose that the same principles would not apply to civil liability.
In Sykes v Taylor-Rose  EWCA Civ 299 the seller who was asked if there was anything the buyer had a right to know was held not liable in misrepresentation despite the fact that a murder had occurred several years before. To some extaent - caveat emptor or 'let the buyer beware' still operates.
The rule about silence not being misrepresentation is subject to four exceptions:
1. Statement a half truth
Clearly, a statement that is partial, i.e. fails to present the whole truth, can constitute misrepresentation; Tapp v Lee (1803) B & P 367. Thus a vendor of property who states that the property has planning permission for business purposes but fails to add that the permission is a temporary one and is shortly due to expire would be guilty of misrepresentation.
2. Change of circumstances
A duty of disclosure may arise where the circumstances have changed, i.e. a statement which was true when made has become false by the time it is acted upon. An example is the following case:
With v O'Flanagan (1936) Ch D 575
A doctor, negotiating the sale of his practice, correctly stated that it produced an income of £2,000 per annum. However, by the time the contract was signed four months later the practice had declined so that it was worth no more than £5 per week. It was held that the failure of the vendor to disclose this state of affairs was an actionable misrepresentation.
3. Contracts uberrimae fidei (of the utmost good faith)
These are a type of contract which require full disclosure of all material facts. The most important example of such contracts are contracts of insurance.
Norwich Union Insurance Ltd v Meisels  exemplifies the principle.
4. Parties in a fiduciary relationship
Where the parties are in a relationship based on good faith (e.g. principal and agent, solicitor and client, doctor and patient) a duty of disclosure will arise.
See: Conlon and Another v Simms  EWHC 401 CH
To amount to an actionable misrepresentation, a false statement of fact must be material in the sense that it induces the misrepresentee to enter the contract. If the misrepresentee relies on his own judgment or investigations, there will be no liability on the part of the misrepresentor, as in the following case:
Attwood v Small (1838) 6 Ch & Fin 232
The vendors of a mine made exaggerated statements as to its earning potential and the purchaser instructed a firm of expert surveyors to check the veracity of the statements. The surveyors reported that the vendor's statements were correct. It was held that the vendors were not liable – the purchasers had been induced to enter the contract by the expert's report and not by the vendors. (The purchasers in such a situation would, of course, have an action against the surveyors).
A complication to the above principle is introduced by the following case:
Redgrave v Hurd (1881) Ch D 1
P, a solicitor, wished to take a partner and negotiated with Hurd. P told Hurd that the income of the practice was £300-£400 per annum and Hurd was shown papers purporting to prove this. If Hurd had carefully read these documents he would have seen that the practice was virtually worthless. He did not read them but the court nevertheless held the misrepresentation to be actionable, and the plaintiff's action for breach of contract failed. It made no difference that a prudent purchaser would have discovered the true position.
Obviously, if the plaintiff is unaware of the misrepresentation at the time of the contract there can be no liability ( Horsfall v Thomas (1862) 1 H & C 90) and the position is the same if he is aware of it but it is proved that it cannot possibly have affected his judgment; Smith v Chadwick (1884) 9 AC 187.
The misrepresentation does not have to be the sole inducing factor.
See: Peekay Internmark Ltd v Australia and New Zealand Banking Group Ltd  EWCA CIV 386 stated that the principle in Redgrave v Hurd required actual knowledge and not constructive knowledge.
9.4 Types of Misrepresentation
In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent. These are considered below.
9.4.1 Fraudulent misrepresentation
“Fraudulent” in this sense was defined by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 as a false statement that is “made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true of false.” The essence of fraud is the absence of honest belief; in Derry v Peek , a share prospectus falsely stated that the company had the right to use mechanical power to draw trams, without explaining that governmental consent was required for this. In fact, the directors honestly believed that obtaining consent was a pure formality, although it was ultimately refused. The House of Lords held that there had been no fraudulent misrepresentation.
Lord Herschell however did point out that though unreasonableness of the grounds of belief is not deceitful, it is evidence from which deceit may be inferred. There are many cases,
"where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the court that it was not really entertained, and that the representation was a fraudulent one."
On the other hand, there need be no intention to defraud. An intention to deceive (with no intention to cause the claimant loss) is sufficient.
9.4.2 Negligent misrepresentation
Negligent mis-statement at common law
Until 1963, damages could only be claimed for misrepresentation where it was fraudulent. All non-fraudulent misrepresentations were classed as “innocent” and damages were not available for such innocent misrepresentations. In 1963, the House of Lords stated, obiter, in Hedley Byrne Co Ltd v Heller Partners Ltd  AC 465 that in certain circumstances damages may be recoverable in tort for negligent mis-statement causing financial loss. The liability depends on a duty of care arising from a “special relationship” between the parties. It is now clear that a party can claim damages under the principle in Hedley Byrne where a negligent mis-statement has induced him to enter a contract; Esso Petroleum Co Ltd v Mardon (1976) QB 801. Broadly speaking, the special relationship will only arise where the maker of the statement possesses knowledge or skill relevant to the subject matter of the contract and can reasonably foresee that the other party will rely on the statement.
Negligent misrepresentation under the Misrepresentation Act 1967
Section 2(1) of the Act of 1967 introduced, for the first time, a statutory claim for damages for non-fraudulent misrepresentation. Section 2(1) provides that where a person has entered a contract after a misrepresentation has been made to him by another part thereto and 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 that the facts represented were true.
It should be noted that the sub-section assumes all non-fraudulent statements to be negligent and puts the burden on the maker of the statement to disprove negligence.
Wholly innocent misrepresentation
We have seen that before 1963, the word “innocent” was used to describe all misrepresentations that were not fraudulent.
In the light of Hedley Byrne and s.2(1) of the Act of 1967, the word innocent may now be used to refer to a statement made by a person who has reasonable grounds for believing in its truth. To avoid confusion, “wholly innocent” is a better description.
9.5 Remedies for Misrepresentation
Once it has been established that an actionable misrepresentation has occurred, it is necessary to consider the remedies available to the injured party. These are:
9.5.2 Damages for misrepresentation
9.5.3 Damages in lieu of rescission
Rescission means setting aside the contract. This may be done by the injured party applying to the court for an order rescinding the contract, or the injured party may rescind by notifying the other party or by any other act indicating repudiation of liability, e.g. notifying the police or a Justice of the Peace.
Rescission is available whether the misrepresentation is fraudulent, negligent or innocent. The effect of rescission is to terminate the contract “ab initio”, i.e. the parties are put back in the position they would have been in had the contract never been made. In order to achieve this position, an order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor which is designed to restore the parties to their position had the contract not been made. It is limited to payments in respect of obligations necessarily created by the contract and is to be distinguished from damages.
The distinction is illustrated by the following case:
Whittington v Seale Hayne (1900) 82 LT 49
Poultry breeders took a lease of premises as a result of an innocent misrepresentation that the premises were sanitary. They were not and the contract was rescinded. It was held that an indemnity could be recovered in respect of rent, rates and repairs as these were obligations necessarily created by taking the lease. The indemnity would not however cover loss of business profits, loss of stock and medical expenses etc as these were losses related to the plaintiffs' business and the plaintiffs were not obliged to carry on a business under the terms of the contract. Such items, had they been awarded, would have amounted to damages.
An indemnity may still be awarded after the Misrepresentation Act 1967 although it will not be appropriate where damages are in fact awarded either under that Act or at common law. This means that the remedy remains particularly significant where the contract is rescinded for a wholly innocent misrepresentation.
There are certain “bars” to rescission, i.e. situations in which a party may lose the right to rescind. These are:
Long v Lloyd (1958)1 WLR 753
Affirmation will occur where the injured party, with full knowledge of the misrepresentation, states (expressly or impliedly) that he intends to continue with the contract. Thus if X, having bought a vehicle from Y as a result of a misrepresentation as to its condition, subsequently agrees to share with Y the cost of necessary repairs and continues to use it, he may be said to have affirmed the contract;
Lapse of time in seeking a remedy may 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 once the plaintiff is aware of the misrepresentation, a period of time has elapsed since the contract.
Leaf v International Galleries  2 KB 86
P bought a picture as a result of an innocent misrepresentation that it was a Constable. Some five years later he discovered it was not genuine and the Court of Appeal held that rescission was barred.
(ii) Impossibility of restitution
The injured party will lose the right to rescind if the parties cannot be restored to their original position:
Clarke v Dickson (1858) E B & E 148
The plaintiff 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 plaintiff's consent it was converted into a limited company and the partnership capital was converted into shares. On discovery the falsity of the representations, the plaintiff sought rescission of the contract. It was held that rescission could not be granted because the partnership was no longer in existence, having been replaced by the company, and it was not possible to restore the parties to their original positions.
In the above case the property had totally changed in nature but where the property has merely deteriorated the court may rescind with a cash adjustment; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218.
(iii) Third party rights
Rescission is not available where an innocent third party has acquired rights to the subject-matter of the contract. This bar to rescission also operated in Clarke v Dickson above as creditors had acquired rights over the company.
It should be noted that two further bars to rescission were abolished by s.1 Misrepresentation Act 1967 , i.e. where the misrepresentation had become incorporated as a contractual term, and where, after a non-fraudulent misrepresentation, the contract had been executed. This should be borne in mind when looking at some of the older cases.
9.5.2 Damages for misrepresentation
Damages for misrepresentation may be claimed or, as the case may be, awarded under the following heads:
(i) Damages for fraudulent misrepresentation
This is essentially a claim for compensation in the tort of deceit. The object is to restore the plaintiff to the position he would have been in had there been no misrepresentation, i.e. the amount by which he is out of pocket by entering the contract. Thus in McC onnel v Wright (1903) 1 Ch 546, the plaintiff 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 the contract.
Damages for breach of contract, on the other hand, are normally on the “loss of bargain” basis i.e. the injured party is put in the position he would have been in if the contract had not been broken. Thus if in McConnel (above), the shares had been warranted as having a certain value, then the plaintiff could recover (in an action for breach of contract) that value. In practice the difference can be striking.
By way of example, suppose the vendor of a business makes certain misrepresentations which, if true, would mean the business was worth £100,000. The purchaser puts down a deposit of £50,000, the balance to be paid at a later date. In fact the business is really worth £25,000. Damages on the tortious basis (i.e. for misrepresentation) would amount to £25,000; on the contractual basis to £75,000.
(ii) Damages for negligent misrepresentation
The plaintiff may elect to claim damages under Hedley Byrne provided the ingredients of the tort are established. The measure of damages here will be on the same basis as deceit (i.e. the “out of pocket” rule discussed above), however the remoteness test will be one of reasonable foreseeability.
As an alternative the plaintiff may base claim for damages on s.2(1) of the Misrepresentation Act 1967 . As explained later, where the plaintiff has entered into a contract, s.2(1) will be the normal remedy, not Hedley Byrne.
Under s.2(1), the maker of the statement is deemed to have been negligent and bears the burden of disproving negligence. The wording of the subsection (which is not a model of clarity) appears to introduce what has been called a “fiction of fraud”. This apparently requires the plaintiff to establish that the defendant would have been liable in damages if the statement had been made fraudulently. The main consequence is that the measure of damages under s.2(1) is on the same basis as damages for deceit, i.e. the out of pocket rule. Similarly, the remoteness test will be the same as that laid down in Doyle v Olby (above). This was affirmed by the Court of Appeal in Royscott Trust Ltd v Rogerson  3 All ER 294. Despite earlier cases (e.g. Watts v Spence (1976) Ch 165) placing damages under s.2(1) on the contractual basis, it would now seem to be established, as a result of Sharneyford Supplies Ltd v Edge (1987) Ch 305 that damages under s.2(1) are indeed on the same basis as the tort of deceit.
The following case, which repays careful study, is the leading decision on s.2(1):
Howard Marine and Dredging Co Ltd v Ogden and Sons  QB 574
There took place negotiations for the hire of certain sea-going barges and the owner's negotiator misrepresented their capacity. He relied on Lloyd's Register which was in fact incorrect – the correct information was on file at the owner's head office. The Court of Appeal held that there was liability under s.2(1); the presumption of negligence had not been rebutted in this case and so the burden on the misrepresentor is a heavy one. It is clear that the reasonable grounds of belief must continue up to the time when the contract was made and so the statute imposes an absolute obligation on the representor not to state facts which he cannot prove he had reasonable grounds to believe. (Such an obligation does not necessarily exist under Hedley Byrne).
Doyle v Olby (Ironmongers) Ltd  2 QB 158,
HELD : in a fraudulent misrepresentation action the plaintiff may recover for all the direct loss incurred as a result of the misrepresentation, regardless of foreseeability. This is therefore 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 the Doyle case.
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd  AC 254
Affirmed that foreseeability is irrelevant in a claim for fraudulent misrepresentation, and cannot ordinarily be used to limit damages. However, in that case, the House of Lords threw doubt on whether this principle applies also to claims under Misrepresentation Act s.2(1). In such cases, foreseeability may be relevant to identifying which damages are recoverable, just as it is relevant in tort cases under Hedley Byrne.
(iv) Hedley Byrne and s. 2(1) compared
Given that there are two possible actions for negligent misrepresentation, it may be useful at this point to consider the relative advantages and disadvantages of each:
1. Section 2(1) only applies “where a person has entered into a contract”, thus if there is an operative mistake (see later) and the contract is void, no action for damages under s.2(1) would be possible since there is no contract.
2. Under Hedley Byrne you don't have to prove that a misrepresentation as such has been made, i.e. it could be a statement of opinion or law.
3. An action may be brought under Hedley Byrne where the misrepresentation was made by a third party to the contract.
4. Hedley Byrne may be applicable where negotiations do not result in a contract between the plaintiff and defendant but the plaintiff nevertheless suffers loss in reliance on the misrepresentation.
5. The great advantage, however of s.2(1) is the fact that it provides the plaintiff with an assumption of negligence on the part of the defendant – under Hedley Byrne there is a far greater burden of proof.
Nevertheless, in all cases where the plaintiff has entered into a contract as a result of negligent misrepresentation, an action under s.2(1) will be the normal remedy.
(v) Contributory negligence no defence to fraudulent misrepresentation
In an action for negligent mis-statement under Hedley Byrne the Law Reform (Contributory Negligence) Act 1945 will apply, so that damages may be reduced to take account of contributory negligence.
Standard Chartered Bank v Pakistan National Shipping Co  1 Lloyd's Rep 218 (HC)
HELD: contributory negligence was not relevant in a claim for fraudulent misrepresentation. The decision was upheld by a majority of the Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Co  EWCA Civ 230.
(vi) In fraud cases agents are personally liable
Standard Chartered Bank v Pakistan National Shipping Co  UKHL 43;  1 All ER 273
When the same case reached the House of Lords, the only live question was whether the agent who made the misrepresentation was personally liable. Mr Mehra apparently had some money. ‘His' company, on whose behalf (and therefore acting as agent) he told the lie, did not. The House of Lords rejected his argument that he was not personally liable. They found that as agent he was personally liable for any fraudulent misrepresentation; and so long as he acted within his authority, the principal would also be liable.
9.5.3 Damages in lieu of rescission
Prior to the 1967 Act damages could not be claimed for a wholly innocent misrepresentation, i.e. one that is neither fraudulent or negligent. The remedy for wholly innocent misrepresentation was rescission, accompanied by an indemnity.
However, s.2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured party would be entitled to rescind, to award damages in lieu of rescission. Note that damages under s.2(2) cannot be claimed as such, they can only be awarded by the court. The power of the court under the subsection can only be used in the case of non-fraudulent misrepresentation (i.e. negligent and wholly innocent misrepresentation) and cannot be used where one of the bars to rescission exist.
Where damages are awarded under s.2(1) the court must (by virtue of s.2(3)) take into account any damages awarded in lieu of rescission under s.2(2).
See: UCB Corporate Services Ltd v Thomason  EWCA CIV 225 discretion to refuse recission was exercised and no substantial damages were awarded in lieu of the rescission denied.
9.6 Exclusion of Liability for Misrepresentation
Attempts to exclude liability for misrepresentation are not uncommon, e.g. by estate agents. The law on this is to be found in s.3 of the Misrepresentation Act 1967 which provides:
“If a contract contains a term which would exclude or restrict –
(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in s.11(1) of the Unfair Contract Terms Act 1977 ; and it is for those claiming that the term satisfies that requirement to show that it does.”
A couple of points in connection with s.3 should be noted. It is clear that it cannot be evaded by the contract term in question deeming that statements of fact are not representations; Cremdean Properties Ltd v Nash (1977) 244 EG 547. But a term which stated that an auctioneer had no authority to make any representation was held to fall outside s.3 as it was not an exclusion clause at all but a limitation on the apparent authority of the auctioneer; Overbrooke Estate Ltd v Glencombe Properties Ltd (1974) 3 All ER 511.
The Unfair Terms in Consumer Contracts Regulations 1999 are unlikely to add anything to s.3 as amended by UCTA s.11(1). However UTCCR may be useful against a term where there is some doubt about whether the kind of liability excluded is or is not a misrepresentation within the meaning of s.3.
9.7 How to Approach Problems on Misrepresentation
Misrepresentation is one of the most difficult topics in the law of contract involving as it does a mixture of common law, equity and statutory rules. If you are faced with a problem involving pre-contractual negotiations it is suggested you follow the following “action guide”:
1. Are the statements terms or representations: It there's any chance that they are the latter, proceed to:-
2. Is there any actionable misrepresentation? If so then:-
3. What type of misrepresentation is it? Is it fraudulent, negligent or innocent? On the facts this may be a difficult question to decide.
4. What are the remedies available?
5. Deal with any clause purporting to exclude liability for misrepresentation.
Legal Research Exercise – Misrepresentation
1. It has been said that after 1967, the distinction between representations and terms is no longer of such great significance. Do you agree?
2. What are the ingredients of actionable misrepresentation?
3. What are the exceptions to the rule that silence is not misrepresentation?
4. In the context of misrepresentation distinguish between fraudulent, negligent and innocent.
5. Distinguish between damages and indemnity. When is an indemnity payable?
6. What are the bars to rescission?
7. On what basis are damages awarded for:
(i) fraudulent misrepresentation, and
(ii) negligent misrepresentation under s2(1) Misrepresentation Act 1967 ?
How does the award of damages for breach of contract differ from the above?
8. What were Lord Denning's reasons for dissenting from the majority of the Court of Appeal in Howard Marine v Ogden? Do you agree with them?
9. In what situations is Hedley Byrne likely to be used instead of s.2(1)?
Tutorial – Misrepresentation
1. Dick, a wealthy car enthusiast, decided to look for a pre-owned Bentley. He went to Harold's showroom.
Dick was examining a smart looking Bentley which had the mileometer turned back to nought when he was approached by Harold, who said, “No need to examine that one, she's a great little bus. Don't take my word for it, look at the engineer's report in my office. I think I'm right in saying she's done about 20,000 miles or so.”
Dick declined the invitation to look at the engineer's report. If he had done so he would have seen that the bodywork, although appearing sound on a superficial examination, was very badly rusted in certain places.
Also, the report stated that the car had done 20,000 since the engine had been overhauled. Prior to that, the vehicle's mileage was 100,000 miles.
Three days later Dick called at Harold's showroom to buy the car. The written contract made no reference to the statements made during negotiations, but contained a term that the dealers were not to be held liable for any false statements made in the course of negotiations.
Some months after delivery, Dick discovers the true position as to the engine. The bodywork is now so badly rusted that the car has fallen completely apart.
Advise Dick as to his civil remedies.
2. Neil owned a comer shop where he ran a newsagent's and tobacconist's business. Neil advertised the business and premises for sale in the local paper, stating that planning permission had been obtained for the development of an off-licence extension to the business.
Having seen the advertisement, Jane visited the premises and was told by Neil that the profits were £40,000 per annum, and that he would anticipate an increase of at least 15% in the next year. Neil said, “If you don't believe me, look at these accounts.” Jane declined to do so, but had she done so she would have discovered that the profits had never exceeded £25,000 and were on a downward trend.
Shortly after this conversation Neil was notified by the local authority that the street on which the premises were situated would become a traffic-free zone in the near future. Neil didn't communicate this information to Jane.
Having entered into a written contract to purchase the premises which made no mention of the above statements, Jane discovers that Neil's statement as to planning permission was incorrect and that the profits position is not what she thought it to be. Furthermore, the local authority has now closed the street, causing a drastic fall-off in passing trade.
Advise Jane .