Misrepresentation

In contract law, a misrepresentation is a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.

Representation is not a term

To seek a remedy under misrepresentation it must first be determined that the representation is not a term of the contract (i.e. a warranty or condition). This is determined objectively by the trier of fact by looking at the time that the representation was made: the closer to the moment of contract formation, the more likely it is a term. If there is any mention of the representation in writing, then it could be construed as part of the contract.

As well, the Courts will often attempt to find a collateral contract by interpreting the representation as a promise accompanied by some sort of consideration (see Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 (H.L.)). The collateral contract will have the effect of adding the representation as a term to the contract.

If the representation is found to be a term then the normal remedies for breach of contract apply.

Types of misrepresentation

There are three types of misrepresentation. Depending on the type, the remedies available vary:

• Fraudulent misrepresentation (Derry v Peek) is when the representation is made with intent to deceive and with the knowledge that it is false. This is generally a difficult type of misrepresentation to prove but allows for a remedy of both damages and rescission. An action for fraudulent misrepresentation can also be brought as a tort. Fraudulent misrepresentation is capable of being made recklessly.
• Negligent misrepresentation is when the representation is made carelessly while having no reasonable reasons for believing it to be true. This class of misrepresentation is relatively new and was introduced in order to allow for a remedy of damages in situations where neither a collateral contract nor fraud could be found. It was first seen in the case of Hedley Byrne v. Heller [1964] A.C. 465 where the court found that a statement made negligently that was relied upon can be actionable in tort. Lord Denning in Esso Petroleum Co. Ltd. v. Mardon [1976] Q.B. 108 however, transported the tort into contract law, stating the rule as:

if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another…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

• Innocent misrepresentation is when the representor had reasonable grounds for believing that his or her false statement was true. This type of representation only allows for a remedy of rescission.

Remedies

Rescission

Generally, the effect of misrepresentation is that it makes the contract voidable (the representee can chose whether to affirm the contract or have it rescinded). Rescission can be done either by informing the representor or by requesting an order from the court. There are certain circumstances where rescission is not possible though. The idea behind rescission is that the parties are restored to the positions they were before entering into the contract. Therefore, if this is not possible, rescission is not an option.

If the representee discovers the misrepresentation and fails to take steps to avoid the contract, then he may not be able to rescind it. The time limit for taking such steps varies depending on the type of misrepresentation. In cases of fraudulent misrepresentation, the time limit runs until when the misrepresentation ought to have been discovered, whereas in innocent misrepresentation, the right to rescission may lapse even before the representee can reasonable be expected to know about it.

In certain circumstances, third party rights may interfere with rescission and render it impossible. For example, if B contracts with A to sell a house with a misrepresentation and then A sells the house to C, the courts are not likely to permit rescission as that would require C to give up the house.

In England and Wales, under s. 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages instead of rescission.

Damages

In cases of fraudulent misrepresentation, a claim for damages is under the tort of deceit, making the damages tortuous, in other words, only actual losses are recoverable. If the losses are calculated under th Misrepresentation Act 1967, damages for misrepresentation are calculated as if the defendant had been fraudulent, even if he has been only negligent. This is a wider scope than ussualy tortious liability, as it protects the claimant's loss even if it was not reasonably foreseeable. inclusion of the representation into the contract as a condition will leave the remedy for breach in damages as a common law right. The difference is that damages for misrepresentation usually reflect C's reliance interest, whereas damages for breach of contract protect C's expectation interest, although the rules on mitigation will apply in this case. In certain cases though, the courts have awarded damages for loss of profit, basing it on loss of opportunity. In cases of negligent misrepresentation, a claim for damages may be made either in the tort of negligence or under s. 2(1) of the Misrepresentation Act 1967 (England and Wales).

In cases of innocent misrepresentation, the court has a discretion to award damages instead of rescission. Such damages are intended to accomplish the same thing as rescission: restoration of the parties to their original positions, rather than compensate any losses. The result of this is that damages for any losses other than what was agreed to be transferred are not recoverable.

See also

• False pretenses—related criminal law term
• Cost underestimation