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5.1.3 Misrepresentation Lecture – Hand on Example

The following section will be a test of your knowledge and understanding of the principles of misrepresentation. After studying the detailed notes, you should be able to recognise a misrepresentation, identify when one is actionable, identify what type of misrepresentation has been made, and explain the remedies available for that type of misrepresentation. The problem scenario will include a mix of these issues, and the answers can be found at the bottom of the page.

The key characteristic of a problem question relating to misrepresentation is a statement made by a party, not found in the contractual terms, which turns out not to be true. This will indicate that there has been a potential misrepresentation. Be careful, because if the statement is found in the contractual terms, it will be a breach of contract issue, not misrepresentation.

The following method to approaching a problem question on misrepresentation should allow you to answer the question fully:

  • Does the statement form part of the contract or not – Is it a representation of a term?
  • Does the statement amount to an actionable misrepresentation? (Is it an unambiguous, false statement of fact which induced the contract)
  • Is the misrepresentation fraudulent, negligent, or innocent?
  • What remedies are available?

This approach will cover all of the issues and ensure you do not miss any out. This problem scenario will not include any issues from the first bullet-point, as these have been covered in the ‘terms’ chapter. This will allow this problem question to focus on issues of misrepresentation itself.

Scenario

Lewis has recently had a big win on the lottery and has decided to purchase a company. He is extremely disappointed with the result of the contract and would like to know if there is anything that can be done about them.

Contract one was with John, for the purchase of the company. During negotiations for the contract, Lewis enquired about the state of the accounts of the company, specifically, whether the company was profitable. John said this – “I’m unsure, but it is my opinion that the company is profitable. However, I will check the accounts in the next week, if you do not hear from me you can assume all is well”. After a week, Lewis hears nothing. The contract is then signed, but when Lewis receives the accounts he is upset to find the company has not profited in the last 6 months.

Would Lewis’ conduct amount to a misrepresentation? If so, is it actionable, and could you ascertain what type of misrepresentation has been made?

Answer: The first issue is whether Lewis’ conduct could amount to a representation. It is clear from Curtis v Chemical Cleaning & Dyeing co Ltd that a misrepresentation need not be made verbally; it can be implied from the conduct of a party. In this case, the fact John promised he would contact Lewis if the company was not profitable, and did not contact him, would amount to a representation that the company was profitable.

For a representation to be actionable it must be an unambiguous, false statement of fact, which induced the claimant to enter the contract. There is no question as to whether the statement is false, the representation that the company was profitable was not “substantially correct” as per Avon Insurance plc v Swire Fraser Ltd, as the company had not profited in 6 months. As for whether it was a statement of fact, John did state that it was only his opinion that the company was not profitable. However, this was before he had checked the accounts, which he had promised to do. A statement can only be considered an opinion if the statement maker holds themselves out as having no expertise related to the statement, but in this case, John has stated he will check the state of the accounts, therefore suggesting he will have expertise once he checks the accounts. Therefore, the actual misrepresentation in question (not contacting Lewis), could not amount to an opinion.

There may be a question of whether John’s statement would amount to a statement of intention and therefore not be actionable. However, the actual misrepresentation was not a statement of intention, it was a statement of fact regarding the accounts. The fact there was a statement of intention to check those facts is not damning on Lewis’ argument.

Next, it needs to be considered whether the statement induced Lewis into the contract. To do so, the statement must be material, made to the representee, and acted upon. It is clear the representation was objectively material. The accounts of a company will be one of the most important factors in a purchase, and there is no indication from Lewis that he had any other interest in the company. However, if Lewis was purchasing the company for reasons unrelated to the accounts, it representation would not be material (JEB Fasteners Ltd v Marks Bloom & Co. The fact that Lewis took positive action to query the accounts of the company suggests it was material.

Lewis was not expressly aware of the representation, but John not contacting Lewis has made that representation by conduct, therefore it would be known to Lewis. Lewis also clearly acted upon the representation, as because he has not heard from John in the promised week time-frame, he assumes the company’s accounts are fine, and therefore goes on to sign the contract for the purchase. Therefore, it is clear the misrepresentation is actionable as it is a false statement of fact which induced Lewis to enter the contract.

As for the type of misrepresentation, this is dependent on the particular facts and the intentions of John. The misrepresentation was made via the conduct of John, when he did not conduct Lewis. If John had checked the accounts, but decided to purposely withhold this information, this would amount to a fraudulent misrepresentation. As per Derry v Peek, his conduct would amount to a statement that John knows it false.

If John did not bother to check the accounts, or forgot, this would therefore amount to a negligent misrepresentation, which could either be pursued under the tort of deceit or the Misrepresentation Act 1967.

Under the tort of deceit, it is clear there would have been a breach of reasonable care and skill, as John was on a duty to check the accounts, either by forgetting or intentionally not checking he has breached this duty, as he knew the importance of it to the contract. (Hedley Byrne & Co Ltd v Heller & Partners Ltd. John had held himself out as having the expertise to check the accounts, which Lewis relied upon (Henderson v Merrett Syndicates Ltd).

Under Section 2(1) of the Misrepresentation Act, we have already established that if the statement was made fraudulently it would be actionable as fraudulent misrepresentation. Therefore, the only defence John will have, is to prove he had reasonable grounds to believe the statement was true. The fact that John says he ‘unsure’ about the accounts of the company suggests he had no reasonable grounds to believe it was profitable, and needed to check.


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