JUMP TO: FRAUDULENT MISREPRESENTATION – Derry v Peek | Doyle v Olby | Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2) – NEGLIGENT MISREPRESENTATION – Howard Marine v Ogden | Hedley Byrne v Heller | Spring v Guardian Assurance | Henderson v Merrett Syndicates | Misrepresentation Act 1967 | William Sindall v Cambridgeshire County Council | Royscot Trust Ltd v Rogerson | First Tower Trustees Ltd v CDS | MCI WorldCom International Inc v Primus Telecommunications – INNOCENT MISREPRESENTATION
There are three different types of misrepresentation which carry with them different remedies; Fraudulent, Negligent and Innocent.
In order to be fraudulent a misrepresentation must have been ‘made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false’ Lord Herschell, Derry v Peek (1889) (HoL). In other words, the misrepresentor never believed the statement to be true.
Not informing the other party about a change in circumstances is not automatically fraudulent; some representors may not have realised that they had a duty to inform (negligent), others withhold information intentionally (fraudulent).
If fraud is proved the remedy available is rescission of the contract and a claim for damages under the tort of deceit. The innocent party can also claim an award of all expenses lost as a direct result of the fraud. Damages do not have to have been foreseeable by the defendant as long as they are not too remote (Doyle v Olby (Ironmongers) Ltd (1969) (CoA)).
The partial defence of contributory negligence is not available in a claim for fraudulent misrepresentation (Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2) (2002) (HoL)).
A misrepresentation is negligent when the representor is unable to show that, when it was made, they had reasonable grounds to believe it to be true. In other words, the statement was made negligently without knowledge of its falsehood (Howard Marine v Ogden (1978) (CoA)).
Ogden, hired two dredging barges from Howard Marine. Howard Marine claimed that the capacity of the barges was 850 cubic metres, basing this on Lloyds Register. However, the Register was wrong and the capacity was actually much lower. Ogden sued for misrepresentation but Howard Marine argued that they had reasonable grounds to believe that the figure was true. However, the court agreed with Ogden; the barges’ registration documents stated the correct figure, Howard Marine were unable to show reasonable grounds for their decision to only use the Lloyds Register as their source of information and their belief in the false information. Therefore the statement was negligent.
A claim for negligent misrepresentation can be made as a claim in tort or under the Misrepresentation Act 1967 s.2(1).
A claim in tort can be brought under the Hedley Byrne v Heller principle which expanded negligence to include negligent misstatements that cause loss. The misrepresentor does not need to be a party to the contract and the remedies available are rescission and damages.
Key elements of this kind of liaiblity are: (1) an assumption of responsibility by the representor (and typically that assumption of responsibility is a voluntary one) and reasonable reliance thereon by the representee (Spring v Guardian Assurance (1995) (CoA) and Henderson v Merrett Syndicates Ltd (1995) (CoA). This places a heavy onus on the representee to establish all elements.
Before the introduction of the Misrepresentation Act 1967 wronged parties could not claim damages for negligent or innocent misrepresentation, their only option was to rescind the contract. Now, under the Act, a claimant who has suffered loss as a consequence of a misrepresentation can claim damages. The successful claimant can now chose the equitable remedy of rescission or affirmation, or, damages and rescission, or damages in lieu of rescission, depending on the circumstances of the individual case
Damages can be claimed under either;
Section 2(1) – damages that compensate the claimant for any loss flowing directly from the misrepresentation, or
Section 2(2) – damages in lieu of rescission. If the court decides that it would be inequitable to rescind the contract they can award damages in lieu. The court will weigh up the potential consequences of rescission on both parties to decide what is most equitable.
The courts will probably order damages in lieu of rescission when the misrepresentation has not caused the innocent party any loss or the innocent party’s real reason for seeking rescission is to escape a bad bargain unrelated to the misrepresentation (William Sindall v Cambridgeshire County Council (1993) (CoA)).
Controversially, it was held in Royscot Trust Ltd v Rogerson (1991) (CoA) that the measure of damages recoverable under section 2(1) is the measure of damages for the tort of deceit. The Court of Appeal held that damages under section 2(1) were to be assessed as if the defendants had been fraudulent, so that the claimants were entitled to recover their actual loss directly flowing from the misrepresentation, whether or not that loss was reasonably foreseeable. Thus the standard of remoteness is the same for the tort of deceit, not the tort of negligence.
Section 2(1) operates independently of the Hedley Byrne line of authority and has been described as ‘a statutory tort’ (First Tower Trustees Ltd v CDS (Superstores International) Ltd (2018) (CoA)).
To obtain remedies under the Act no assumption of responsibility needs to be shown. The representor is liable unless he proves that he had reasonable grounds to believe and did believe up to the time that the contract was made that the facts represented were true. Whereas at common law it is for the representee to prove that the representor was negligent. The burden upon the representor is a heavy one and it is likely to enable a representee to recover where at common law he would have failed.
Unlike for a claim in common law the mispresentor must be a party to the contract. Therefore, it is the belief of the representor that is relevant for this purpose, not the belief of an agent of the representor. It will not suffice for a representor to show that an agent had reasonable grounds to believe and did believe that the representation was true (MCI WorldCom International Inc v Primus Telecommunications Inc (2003) (CoA)). In this case, the misrepresentation alleged was made by the claimant’s in-house solicitor. The court said that even if it could be shown that the solicitor had no knowledge of the misleading nature of her statement, it was the duty of the company (principal) to, “to disclose before the agreements were entered into all matters necessary to give a truthful account…”
An innocent misrepresentation is a statement that is neither fraudulent nor negligent. The representor must prove that they believed the statement to be true and that they had reasonable grounds to do so. If this can be shown then the statement is still a misrepresentation because it was false but an innocent rather than negligent or fraudulent misrepresentation.
The remedies available for a claim for innocent misrepresentation are rescission or damages in lieu of rescission under the Misrepresentation Act 1967 s.2(2), the claimant cannot claim both.
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