Making false statements may have serious consequences in English law. False statements and fraud may taint the formation of a contract, giving rise to a rights to rescind the contract, damages and other remedies in England.
Generally speaking, the law of misrepresentation, when substantiated at law, taints the otherwise lawful formation of a contract. A false statement made during contractual negotiations may be a mere statement with no contractual effect, or become a term of the contract. Where a representation is untrue, it will constitute a misrepresentation. An actionable misrepresentation renders the contract voidable, that is, valid until voided by the party relying on the misrepresentation when entering into the contract.
An actionable misrepresentation comprises a false statement of fact made by one party to the other which induces the other party to enter into the contract. The statement made will usually be in words, but it is possible that other forms of communication will be sufficient to amount to a misrepresentation. In the case of Spice Girls v Aprilia World Service BV, CA (2002), a misrepresentation by conduct appeared in promotional material for the company. The person made the representation in the knowledge that Ms Halliwell was leaving the group.
There are two elements of an actionable misrepresentation to be considered:
The false statement of fact must relate to an existing fact or past event. Therefore, the following statements do not amount to a misrepresentation if false:
A statement as to future conduct or intention will not amount to a misrepresentation. However, where such a statement is made and that person never had the requisite intention he claims to have had, this will amount to a misrepresentation as an exception to the rule. In Edgington v Fitzmaurice (1885) a statement was made by company directors that money raised was for the business. In fact to pay the company’s debts, and the directors were liable for fraudulent misrepresentation.
It is not enough that the statement made is a ‘mere puff’, that is to say, vague statements of hyperbole of extravagant praise used in promotion of a business. Such statements must be false as well as ambiguous.
A statement of opinion is not treated as a statement of fact unless the maker of the statement knows that the opinion they are giving is false or if they have special knowledge, that is to say, in a better position to know the true facts regarding the subject matter. In these situations, such an opinion may well be ruled to be a misrepresentation. In the case of Bisset v Wilkinson (1927), the owner of a farm stated that he believed it would hold 2000 sheep, even though it was not a sheep farm. It was held to be a statement of opinion, and therefore there was no misrepresentation of fact.
This case can be contrasted with the case of Smith v Land and House Property Corporation (1884) where a vendor lied about the tenant being ‘most desirable’, even though he knew this was not true. It was held that there was a misrepresentation of fact as the vendor was in a position to know the true facts.
In any event, statements made negligently with the intention that they be relied upon will amount to a misrepresentation of fact.
A statement of law will not constitute a misrepresentation of fact.
The general rule is that mere silence will not amount to a misrepresentation. There is no duty to disclose facts which would affect the other party’s decision to enter into the contract. In the case of Hands v Simpson Fawcett (1928), a commercial traveller was not under a duty to disclose his motor convictions at a job interview. This general rule is, however, subject to certain exceptions:
Where a statement is true, but does not reveal the whole truth which therefore makes the statement misleading, it will be a misrepresentation.
Where a statement is true when made, but due to a change of circumstances or lapse of time it becomes false, there is a duty on the maker of the statement to correct it. Failure to do so will amount to a misrepresentation.
Where a party is in a strong position to know the truth, there is a duty to disclose all material facts. The most common type of contract in this class are contracts of insurance.
Where a fiduciary relationship exists between the parties, there is a particular duty to disclose all material facts upon the fiduciary to their principal to discharge their fiduciary duties..
This involves going beyond remaining silent and involves concealment of a defect. Where this may be provided, it will amount to misrepresentation.
It is not enough that a false statement has been made. The false statement must have induced the other party to enter into the contract. There are four conditions which need to be satisfied in order for there to have been an inducement:
There will only be an inducement if the statement made is material. It must represent a fact upon which a party decides to enter into the contract, although it does not have to be the sole inducement, it is sufficient that it is one of the inducements.
There can not be an inducement unless the misrepresentation made was known to the claimant. In the case of Horsfall v Thomas (1862), the active concealment of a defect in a gun was held to be a misrepresentation, but the buyer did not inspect the gun so he was not to know about the misrepresentation, therefore it did not induce the contract.
The statement made must be intended to be acted upon by its maker.
If the claimant relies upon the misrepresentation when entering into the contract, this will amount to an inducement, even where the claimant did not take advantage of an offer to check the statement made.
However, where the claimant relies upon their own judgement, or having made their own investigations, there will be no inducement as they have not relied upon the misrepresentation.
Misrepresentation can fall into three different categories: Fraudulent; negligent; and innocent. The remedies available for misrepresentation depend upon which category it falls within.
Fraudulent misrepresentation was defined by Lord Herschell in Denny v Peak (1889) as a false statement “made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true or false”, that is to say there is absence of honest belief.
There are two types of negligent misrepresentation:
Traditionally, damages could only be claimed for fraudulent misrepresentation. In the case of Hedley Byrne and Co. v Heller and Partners Ltd (1994), the House of Lords extended common law negligence to negligent statements which cause loss.
The duty of care owed must arise from a ‘special relationship’, that is to say, where one party has special knowledge about the subject matter, that person can reasonably assume that the other party will rely on the statement.
Section 2(1) of the Misrepresentation Act 1967 provides a statutory claim for damages for negligent misrepresentation:
‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as 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 grounds to believe and did believe up to the time the contract was made that the facts represented were true.’
Thus, section 2(1) deems all non-fraudulent representation are negligent. The burden of proving that there was no negligence falls on the maker of the statement.
Where one party makes a statement which he reasonably believes is true, there will be no misrepresentation and the statement will be regarded as ‘wholly innocent’.
Damages can not be claimed where there had been an innocent misrepresentation, however the plaintiff may rescind the contract and be entitled to an indemnity to restore him to the position he was in before the contract was made.
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