Misrepresentation

While parties are in the process of negotiation, a lot of things will be said which will be part of the reasons the other party entered the contract. Where the things said are not part of the terms of the contract even though they induced the other party to enter the contract, they are mere representations.

A misrepresentation is an untrue statement made by one party to the other before or at the time of the contract to induce the other party to enter the contract. A misrepresentation is a false representation. A misrepresentation can also cause an action in tort or in breach of contract. If A induces B to enter a contract to purchase his three-year old car by telling him it is one-year old, it can cause an action in tort for deceit. Where the representation also forms a term of the contract, it may support an action for breach of contract.

In another vein, a misrepresentation can also cause a mistake in contract. One easy example is Couturier v Hastie, where the defendant had a cargo of corn for sale which unknown to him had been sold. Such a misrepresentation constituted an innocent misrepresentation. Also, in Leaf v International Galleries, the defendant sold a painting claiming it was the work of a famous painter, whereas it was a cheap imitation. This is another case of mistake flowing from misrepresentation.

Misrepresentation is covered by both common law and equity. At common law, a person who is induced to enter a contract through a fraudulent or negligent misstatement is entitled to sue for damages, while the remedy for misrepresentation at equity is rescission of the contract without damages.

What constitutes misrepresentation?

The question of what constitutes misrepresentation was fully considered in Udokwu v Oki. Misrepresentation is a false statement of facts by one party, to the other, which does not constitute a term of the contract. It relates to an existing fact or past event, and not to a future event or a mere statement of intention. However, a statement of intention might constitute misrepresentation in some instances. This will occur where the representing party did not honestly hold that belief, or could not have reasonably held that belief. This was stated by Bowen L.J. in Edgington v Fitzmaurice, where he stated that a misrepresentation as to the state of a man’s mind may also be a misrepresentation of facts.

The following do not amount to misrepresentation.

1. Statement of opinion

The general rule is that a mere statement of opinion cannot constitute a misrepresentation. However, there are two exceptions to this rule. The first is where the representing party did not honestly hold the opinion, and so misled the other party. A statement of opinion may also constitute a misrepresentation where the party making the representation is in possession of certain skills regarding the subject matter, or is in a stronger position to make him know the truth.

2. Statement of intention

A statement of intention is a statement of what a person will do in the future. This would usually not constitute a misrepresentation, unless it is fraudulently made to induce the other party to enter the contract. In Edgington v Fitzmaurice, company directors raised money from the public by stating that the money would be used to expand the business, when their real intention was to use the money to pay off the company’s existing debt. The court held it to be a fraudulent misrepresentation of facts.

3. Statement of law

As a general rule, a false statement as regards the law is not actionable. However, a willful misrepresentation of the law will create liability, especially where the person making the statement possesses knowledge of the law or has a profession which puts him in the position to know. However, it might sometimes be difficult to know if a misrepresentation is one of law or one of facts. This is clearly illustrated in Solle v Butcher, where the parties renegotiated the lease of a flat in the belief that the Rent Restriction Act was not applicable, and this would restrict the amount of rent chargeable. The question was whether a statement that the flat was outside the scope of the act was a mistake of law or mistake of facts. Lord Denning held that there had been a misrepresentation as to private rights and this was equivalent to a misrepresentation of facts.

4. Silence or non-disclosure

There is generally no duty on a party to disclose material facts known to him. While a false statement which induces another to enter a contract may constitute misrepresentation, simply keeping quiet while the other party assumes facts shall not be misrepresentation. If party A assumes that the battery of a phone he is buying from party B can last for 24 hours when it can only last for three hours, and party B stays quiet and lets him continue to assume, there has been no misrepresentation by party B.

In Fletcher v Krill, an applicant for the post of governor was held not under an obligation to disclose she was a divorcee. Her failure to disclose did not constitute a misrepresentation. Some Nigerian cases on the issue of disclosure are relevant. Thus, in Moriamo Ode v J.F. Sick & Co, the defendants who had previously employed the plaintiffs brother as an unsaved salesman, terminated his appointment when he incurred losses up to 650 pounds. They however agreed to re-engage him when the plaintiff agreed to act as surety to her brother, and this was backed up by mortgaging her property to the defendant as security. The court held that the surety was not entitled to receive full disclosure of the material facts without a request for it, and so there was no duty to disclose prior losses in the absence of enquiry from the plaintiff.

However, there are some exceptions to this rule. These exceptions include situations in which failure to disclose shall be misrepresentation. They are as follows.

• Partial non-disclosure: Where one party only states a partial truth to induce the other party to enter the contract, it shall be misrepresentation. This was the case in With v O’Flanagan, where the defendant who was negotiating with the plaintiff to sell his medical practice told him it was worth 2,000 pounds per annum. The court held that it was misrepresentation when it subsequently fell to 5 pounds per week and the defendant did not inform the plaintiff.
• Misrepresentation by conduct: It was stated in Walters v Morgan that a while simple reticence does not amount to misrepresentation, a single nod, or a wink, or the shake of a head, or even a smile, may amount to misrepresentation. A smile indeed amounted to misrepresentation in Livesley v Rathbone.
• Contracts uberrimae fidei: These are contracts made in the utmost good faith, where one party necessarily possesses full knowledge of material facts. Hiding such material facts in such contracts could constitute misrepresentation. Examples of such contracts are insurance contracts, family arrangements, sale of land, partnership, companies, inter alia.
• Fiduciary relationships: Where a fiduciary relationship exists between two parties, there is a duty to disclose as the law presumes one party to be in a superior position to the other. In Tate v Williamson, an Oxford undergraduate who was in financial difficulty sought advice from his tutor. The tutor advised him to sell his land, and the tutor then went ahead to buy the land without disclosing that the land contained some mineral resources which would have made him able to fetch double the price he sold it for. The court held that there was a misrepresentation.

Representation and inducement

From all that has been said on misrepresentation, it is clear that there must be a representor who makes the statement that becomes the misrepresentation, a representee to whom the statement is made, and that the misrepresentation must have also induced the representee to enter the contract.

In order for an action for misrepresentation to succeed, it is necessary to show that the statement constituting the misrepresentation was made by either the defendant or his authorized agent. It is also important that the misrepresentation was intended by the representor to reach the representee. There are three classes of people who may be referred to as representees, and the include (i) a person to whom the representation was made or his authorized agent, (ii) persons whom the representor intended the representation to be passed on to and (iii) members of a class at which the misrepresentation is directed. Based on this, an eavesdropper cannot bring an action for misrepresentation.

Whether or not an action can be brought for misrepresentation depends largely on the purpose of the misrepresentation and the intention of the representor. In Peek v Gumey, the plaintiff purchased a company’s shares from a shareholder in reliance on a misrepresentation made by promoters. The court held that the plaintiff could not recover the purchase money because the purpose of the misrepresentation was for members of the public to buy new shares from the company, and not for them to buy existing shares from shareholders.

Also, an action for misrepresentation cannot be brought unless the misrepresentation induced the plaintiff to enter the contract. So, where a representee is not aware that a representation has been made, or it did not affect his decision, or he knew that it was false, an action for misrepresentation will not stand. In Smith v Chadwick, the prospectus of a company contained a false statement that an important person was on the board of directors of the company and he admitted under cross examination that he had in no way been influenced by the false statement. The court held that he could not succeed in an action for misrepresentation.

Also, where a person or their agent knows the true facts, there can be no misrepresentation. This was the rationale for the decision in Bawden v The London Assurance Co. It should also be noted that a misrepresentation shall be deemed waived if the representee finds out about it and still continues with the contract.

Another important aspect to know if a misrepresentation is actionable is the materiality. Where the misrepresentation is so insignificant that it would have no significant impact on the contract in the opinion of a reasonable man, then the contract cannot be rescinded for misrepresentation. However, where the misrepresentation is a fraudulent one as opposed to a negligent or innocent misrepresentation, it shall still be valid misrepresentation irrespective of its materiality.

When is misrepresentation spent?

Assuming that there has been a misrepresentation, the question of how long the misrepresentation stays potent to entitle the representee to rescind the contract comes up. Surely it would be illogical if the misrepresentation is to be taken to last forever.

The first class of representees to be considered are those to whom the representation was not directly made to. Where the misrepresentation is passed on with the permission of the representor, then the misrepresentation shall not be deemed spent, and this was the decision in Pilmore v Hood. However, where the misrepresentation was passed on without the permission of the original representor, the misrepresentation would have been spent. In Gross v Lewis Hillman Ltd., the defendant sold a shop building to G. Ltd. giving the impression that the tenant of the shop was in good financial condition. G. Ltd. in turn sold the shop to the plaintiff who paid directly to the defendant. The court held that the misrepresentation was spent as the plaintiff did not buy the building directly from the defendant.

When the misrepresentation is not passed on to a third party, but is instead acted upon by the direct representee, then whether or not the misrepresentation has been spent is dependent upon the interval of time. The statement made by Lord Tucker in Briess v Woolley is important to consider.

Where there is an appreciable interval between the two dates above mentioned (that is, date when made and date when acted upon), and representation relates to an existing state of things the representor is deemed to be repeating his representation at every successive moment during the interval, unless he withdraws or modifies it by timely notice to the representee in the meantime.

What this statement seems to mean is that where the representor does nothing to negate the misrepresentation earlier made, then the misrepresentation continues on.

Types of misrepresentation

The three types of misrepresentation are fraudulent, innocent and negligent misrepresentation.

1. Fraudulent misrepresentation

A statement shall be a fraudulent misrepresentation when the representor has no real belief in the existence of the facts which he has stated. In Derry v Peeks, a shares prospectus falsely stated that the company had the right to use mechanical power to draw terms without explaining that governmental consent was required. The directors honestly believed that obtaining consent was a mere formality. The plaintiff brought an action for deceit based on alleged fraudulent misrepresentation. The court held that the defendants were no liable for fraudulent misrepresentation, because they had an honest belief in their statement.

In an action for fraudulent misrepresentation, it is not a defense to say that the representee could have discovered the truth if they had been more diligent. This principle was adopted in Sule v Aromire, where the purchaser of a piece of land would have discovered the misrepresentation if he had checked the law suit which was referenced by the defendant. The defendant tried to bring up the defense of caveat emptor, which literally means that buyers should beware, and the defendant stated that the plaintiff would have discovered the truth if he had thoroughly gone through the judgment. The court held that it was no defense to a charge of fraudulent misrepresentation to state that the representee could have discovered the truth.

2. innocent misrepresentation

Innocent misrepresentation was formerly used to describe any misrepresentation which was not fraudulent, even when such a misrepresentation was negligent. However, since 1963 after the decision in Hedley Byrne v Heller Partners, innocent misrepresentation refers to a misrepresentation which is neither fraudulent nor negligent.

There is no remedy for innocent misrepresentation at common law. However, there are the remedies of rescission and in some cases indemnity in equity.

3. Negligent misrepresentation

A negligent misrepresentation is a false statement made carelessly, or without reasonable grounds for believing in its truth. Negligent misstatements were not actionable in the absence of a fiduciary relationship between the parties until in Hedley Byrne’s case. It was stated in the case that there exists a duty of care on the part of the maker of a statement to some people acting on that statement.

It was based on this concept of negligent misstatements giving rise to an action that the plaintiff was able to successfully sue for negligent misrepresentation in Imarsel Chemical Co Ltd v National Bank of Nigeria when the manager of the Enugu branch of the defendant bank said a company was credit worthy to the tune of 3,000 naira and the statement turned out to be untrue, causing the plaintiff to lose 300 naira. Lord Denning’s statement in Esso Petroleum Co Ltd v Mardon should be considered, when he said the following.

If a man who has or professes to have special knowledge or skill makes a representation to another, be it advice, information or opinion, with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or erroneous opinion, inducing the other side into the contract, he is liable in damages.

Remedies for misrepresentation

In the event that a misrepresentation has been made to induce one party to enter into the contract, there are a number of remedies available to the aggrieved party. They are as follows.

1. Damages

Damages, in the simplest of terms, is monetary compensation for a legal injury. Damages are only available as a remedy for fraudulent and negligent misrepresentations, and the aim of the damages is to put the party in the position they would have been in if they had never entered the contract. As stated by the court in Doyle v Olby (Ironmongers) Ltd., the defendant is not in the position to say the loss was not foreseeable.

2. Indemnity

It has been stated that the representee in a case of innocent misrepresentation cannot sue for damages to be put in the position they would have been in if they had never entered the contract. All they can sue for is the illusory and often inadequate remedy of indemnity. It is called illusory, because it is very often not available, and not adequate when available. The remedy of indemnity only covers losses that directly flow from the contract. If A rents a house from B with an innocent misrepresentation that the house is inhabitable, and the house turns out to have a leaking roof which destroys A’s property, A can only sue to recover the amount he paid for rent and not the amount for his property destroyed. For more illustration on how damages and indemnity differ, the case of Whittington v Seale-Hayne should be observed.

3. Recission

Rescission is the setting aside of a contract. The remedy of rescission may be used no matter the kind of misrepresentation, whether innocent, negligent or fraudulent. A person who has been induced to enter a contract through misrepresentation has the right of election, to either affirm or disaffirm the contract.

Where a contract is rescinded, it is terminated ab initio and the object is to restore the parties back to their original position as if the contract had never been made. This remedy of rescission can be seen in Sule v Aromire, where A owed B bank some money and was unable to pay. The court ordered A’s property to be used as security for the loan to be sold by auction and that B should be paid from the proceeds of the sale. C bought the house at an auction, and when he tried to take possession, D family resisted on the ground that the property did not belong to A. The court stated that C could recover her money by bringing an action for rescission if she had been a victim of misrepresentation.

In order to rescind without going to court, the representee must convey such an intention to the representor except where it is not possible. When the representee intends to rescind the contract through a judicial process, then informing the representor is not necessary.

While a contract is being rescinded, it is necessary to restore the status quo. This restoration is known as restitutio in integrum. In the event that this restoration is not possible, there can be no rescission. If a baker buys flour based on misrepresentation, he cannot sue for rescission after using the flour to bake, and may only be entitled to damages or indemnity. The scope of restitution in common law is narrow, as it requires precise restoration. However, equity is much broader as it only requires substantial restoration. The perfect case to look at for the operation of the flexibility of equity is Oluwo v Adewale. Clement Oluwo had been fraudulently induced to enter a contract to sell his land when the document was presented to him as a mortgage. Before an action was brought for rescission, the defendant had spent money to develop the land and had received rent on the land. In rescinding the contract and carrying out rescission, the court set aside the contract for sale and kept a contract of mortgage in favour of the plaintiff as a substitution. This meant that ownership of the land would revert back to the plaintiff once the initial purchase price of 3,200 pounds was returned to the defendant, with interest per annum. Also, an account was to be made of profits made on the land through rents and expenses, and after subtracting the expenses from the profit, the remainder was to be used to reduce the total sum payable.

There are some bars to the remedy of rescission. They are as follows.

• If the contract has been affirmed by the representee after discovering the misrepresentation.
• If there has been a substantial lapse of time between when the contract ended and when the action is being brought.
• If a third party as acquired rights on the property for value and without notice of the misrepresentation.
• In the case of innocent misrepresentation only, where the contract has been executed.