Contractual Misrepresentation In Common Law

    Meaning Of Misrepresentation

    In contract law, misrepresentation is a statement made by one contracting party to the other which is not true, and which encourages the other contracting party to enter into the contract. Misrepresentation is of two kinds, being either fraudulent or innocent; that is to say, it may either amount to a wilful and conscious falsehood intended to deceive the representee, or it may, on the contrary, be merely an honest mistake on the part of the representor, by which the representee is misled though not wilfully deceived.

    If the misrepresentation is identified, the contract can be declared void and depending on the situation, the unfavourably impacted party may seek damages. In such a contract dispute, the party who made the misrepresentation becomes the defendant and the aggrieved party is the plaintiff.

    Essentials

    The first essential of misrepresentation is that the information communicated to the adverse party must be false. The question whether a particular statement is false depends on the facts and circumstances of each case. In Avon Insurance v. Swire[1], Rix J. held that a statement would be treated as true if it is substantially correct and the difference would not have induced a reasonable person to enter the contract.

    It must be a statement of fact and not law. It is necessary that statements of misrepresentation must be of fact and not law. It is commonly said that statements of law cannot be treated as a misrepresentation. A statement of law may be regarded as a statement of opinion, but just as a statement of opinion may be a representation of fact, so too a statement of law may amount to a representation, or misrepresentation, as the case may be. So, a wilful misstatement of law would always amount to a misrepresentation.[2]

    It is true that every man is presumed to know the law, and that a plea of ignorance or mistake of law will not be listened to in the Courts for any purpose. But to be ignorant of the law is surely a different thing from being wilfully deceived as to it.

    It is often challenging to differentiate whether a statement amounts to statement of fact or statement of law. However, in several cases, courts have held that statements of mixed law and fact, and statements capable of having either meaning, as statements of fact and therefore qualify as representations. Further, the distinction between an abstract proposition of law and application of the law to facts to a particular situation is necessary, and often the latter would be a case of misrepresentation.[3]

    Statements must be made by the other party. In order to ground relief to a person who has entered into a contract as a result of a misrepresentation, it is normally necessary that the misrepresentation should have been made either by the other party to the contract, or by his agent acting within the scope of his authority, or that the other party had notice of the misrepresentation. A person who has been induced to enter into a contract with A as a result of a misrepresentation made to him by B and of which A had no notice has no ground of relief against A unless B was A’s agent.

    In order to be entitled for relief to misrepresentation, the claimant must show it was intended that he should act on the representation, rather it being aimed solely at someone else. Thus, the defendant would not be liable for deceit unless misrepresentation was intended to be acted on by the representee.

    Material Nature Of Misrepresentation

    It is not only necessary for misrepresentation that the particular statement of fact must be false, rather it must also be a material or essential part of the contract between the parties. Thus, in order to constitute a ground for invalidity of the contract, the misrepresentation must be material. This is because there are certain statements which are so trivial in nature which would not substantially affect the decision of a reasonable person. The test is an objective one and depends upon the circumstances of the transaction itself.[4]

    Remedy would be granted to the affected party if the representor knows that the representee is likely to act on the misrepresentation. Even in a case of innocent misrepresentation, if the representor knows that although per se immaterial it is in fact relied on by the representee as an inducing cause of the contract there seems no reason why it should not invalidate the contract. However, from a purely evidential view, the materiality of the representation is doubtless an important element.

    If it is material, this may be a good ground for the inference of fact that it did in truth induce the contract, and for the further inference that it was intended to do so, or that, at all events, the representee was entitled to assume that it was held out to him for that purpose. If, on the contrary, a representation is in itself immaterial, evidence is required that it did in fact induce the contract, and that it was intended to do so, or that the circumstances were such as to justify the representee in accepting it as so intended.

    Reliance On Misrepresentation

    In order to be influenced by the representation, the plaintiff must of course have relied upon it, and believed it to be true. If it appears that he believed it to be false, or that he was in fact so sceptical as to its truth that he reposed no confidence in it, it cannot be regarded as a substantial cause of his conduct. If, after hearing the defendant’s statement, he makes an investigation of his own, and acts upon the basis of the information so obtained, he may be found not to have relied upon the defendant, since the fact that he was unwilling to accept the statement without verification is evidence that he did not believe it.[5]

    A person who has entered a contract as a result of a fraudulent misrepresentation may be entitled to rescind even though one would not have expected a reasonable person to enter the contract at that stage because, for example, he has not yet secured finance for the transaction or because he was expected to take the opportunity to check the facts for himself.[6]

     If an erroneous representation is actually relied on as the inducement of the contract, it is no answer, either to a claim for damages or to a claim for rescission, that the party so misled had the means of discovering the truth of the matter for himself, and ought to have used those means, and therefore has only himself to blame. He was under no such duty of doubt or of inquiry. Everyone is entitled to believe without scrutiny whatever representations are made to him for the purpose of inducing him to enter into a contract with him by whom they are made. Even if he does make inquiry into the truth, but does not discover it, he can still rescind the contract for misrepresentation.

    The making of such an inquiry may, indeed, be evidence that he did not rely on the representation made to him, but trusted his own judgment exclusively; but it is not conclusive to this effect.

    https://legalreadings.com/ninth-schedule-of-the-constitution-of-india/

    Burden Of Proof

    The burden of proving that the claimant had actual knowledge of the truth, and therefore was not deceived by the misrepresentation, lies on the defendant; if established, knowledge on the part of the representee is of course a complete defence, because he is then unable to show that he was misled by the misrepresentation. It has also been held that a defence is made out if the truth was known to the agent of the claimant, at least where the facts had deliberately been communicated to the agent.[7]

    Defences To Misrepresentation

    One of the defences is exclusion by express provision. At common law a person could not contract out of liability for fraud inducing the making of a contract with him, at least where the fraud was his own.[8] It is, however, possible that he could do so where the fraud was that of his employees or agents and there seems no doubt that it was possible, by a provision of the contract itself, to exclude or modify the normal consequences of innocent or negligent misrepresentation. Such clauses were, however, subject to the normal construction principles common to all exemption clauses.

    Thus, the rule that a contract is voidable if induced by innocent misrepresentation is not a peremptory rule which prevails over the intention of the parties, and it may be effectively excluded by an express term to the contrary contained in the contract. In such a case, even though the representations so made are in fact erroneous, and although they may in fact have been relied on by the representee and induced the contract, the representee has nevertheless no right of rescission.

    Another defence is the “no reliance” clause. A clause that acknowledges that a party has not relied on a non-contractual representation may prevent that party showing that he was induced to enter the contract by a representation, as it may raise an estoppel. The clause may also be effective, even if it is known that the party did rely on a representation, if the parties have in fact agreed to conduct their affairs on the basis that there has been no reliance, so that an estoppel arises by convention or “by contract”. This analysis has now been accepted by the Court of Appeal in Springwell Navigation Corp v. JP Morgan Chase Bank.[9]

    Another defence is acknowledgment of a statement of opinion. The parties may, through the contract, agree that their statements would not be considered anything else than mere statement of opinion. The parties’ agreement may create a contractual estoppel to the effect that statements will be treated as no more than expressions of opinion.

    References

    1. [2000] 1 All E.R. (Comm) 573.
    2. West London Commercial Bank v. Kitson, (1884) 13 Q.B.D. 360, 362-363; Oudaille v. Lawson, [1922] N.Z.L.R. 259.
    3. Reynell v. Sprye, (1852) 1 De G.M. & G. 660; West London Commercial Bank v. Kitson, (1884) 13 Q.B.D. 360; Hughes v. Liverpool Victoria Legal Friendly Society, [1916] 2 K.B. 482.
    4. Hall v. Johnson, 1879, 41 Mich. 286, 2 N.W. 55; Davis v. Davis, 1893, 97 Mich. 419, 56 N.W. 774.
    5. Enfield v. Colburn, 1884, 63 N.H. 218.
    6. Goff v. Gauthier, (1991) 62 P. & C.R. 388.
    7. Strover v. Harrington, [1988] Ch. 390.
    8. S. Pearson and Son Ltd v. Dublin Corp, [1907] A.C. 351; HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank, [2003] UKHL 6. 
    9. [2010] EWCA Civ 1221, [2010] 2 CLC 705.

    BY KARTIK SINGH | NATIONAL LAW UNIVERSITY ODISHA

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    ADVERTISE WITH LEGAL READINGS :)
    WEEKLY NEWSLETTEREnter your email address below to subscribe to LEGALREADINGS newsletter.