Misrepresentation and Economic Duress

 Objectives

• Explain what is meant by misrepresentation
• Understand the types of misrepresentation under common law: fraudulent misrepresentation, innocent misrepresentation, and negligent misrepresentation
• Explain misrepresentation by statute under the Misrepresentation Act 1967
• Understand the meaning of economic duress and its distinction with duress

What is a Misrepresentation?

• A representation is a statement made at the time of the contract being made and can be incorporated into the contract
• If the representation is falsely made, however, it can be a misrepresentation and can cause the contract to be voidable
• Legal Definition:
• A misrepresentation is a statement of material fact, made by one party to the other party, during the negotiations leading up to the formation of the contract, which was intended to operate and did operate as an inducement to the other party to enter the contract, but which was not intended to be a binding obligation under the contract, and which was untrue or incorrectly stated
• Key cases:
• Bisset v Wilkinson (1927)
• A statement by someone trying to sell land in New Zealand for raising sheep, that the land was capable of supporting two thousand sheep was deemed, on the facts, to be no more than an opinion. Both men knew that up to that point the land had not been used for sheep farming, therefore any representation was never going to be founded on fact but was more likely to be an opinion
• Edgington v Fitzmaurice (1885)
• An invitation to invest in a company by granting loans in it (debentures) was stated to be for the growth of the business, specifically for improving property and extending the investment portfolio that the business could offer. When this turned out to be an exercise in raising money simply to pay off debts, this was seen as a misrepresentation
• Peyman v Lanjani (1985)
• A lease between persons A and B stated that person A could not sublet to another without person B's consent. This is exactly what happened however, and person C was told by person A that he was fully authorised to sublet, when he wasn't
• HELD - Straightforward fraudulent misrepresentation - the original landlord's permission for the original lease was based on a fraud
• Roscorla v Thomas (1842)
• Oral statement as to the suitability of a horse was not part of the contract and had in fact been made post-contract. It had not therefore been a misleading statement that would allow a remedy for misrep
• JEB Fasteners Ltd v Marks Bloom & Co Ltd (1983)
• The claimants wanted to buy a business in order to secure the services of two directors of the business. The claimant had got wind of the fact that the business was in a precarious financial state, so they asked Bloom and Co to check the accounts of the business as a result.
• The defendants passed the accounts as healthy when they weren't . The claimants said that they had relied upon Bloom to check the figures and had acted to their detriment by buying a failing business
• HELD - not the case. There was ample evidence that the claimants were going to buy the business anyway because they wanted to employ the two directors. No reliance was therefore proven
• Attwood v Small (1838)
• The claimant's own investigations as to the profitability of a mine that they purchased painted a positive picture. BUT - it meant that they had not relied on the defendant's own representations to that effect, and hence could not sue them for misrep
• Couchman v Hill (1947)
• A sales catalogue for an animal auction stated that a heifer for sale had not been mated with a bull, and this had been confirmed by the auctioneer and the defendant
• It turned out to be wrong - the heifer gave birth to a calf and then died. The CoA said that as a result of the statements that the claimant clearly relied on, he could recover damages - the sales catalogue AND the oral representation were part and parcel of the same contract, because both had been consulted by the claimant pre-contract

Fraudulent Misrepresentation

• Where fraudulent misrepresentation is alleged, fraud must also be proved
• Derry v Peak (1889) - if a person makes a false statement which he or she does not believe to be true at the time, this is a fraudulent misrepresentation. The claimant will then sue for damages under the tort of deceit:
• The claimant was mistaken as to whether he had permission for his business to run horse drawn AND steam trams along the sea front in Plymouth - the permission was supposedly given under an Act of Parliament AND came from the Minister of the Board of Trae. Neither was correct
• This meant that the investors in the business lost money because the company wasn't as valuable as it would have been had the statement been true
• HELD - on the facts, this was not a deliberate and therefore not a fraudulent misrepresentation. There was no tort of deceit
• HOWEVER - the HoL decided to clarify when fraudulent misrepresentation would arise, and they gave a three step test
• To be fraudulent, a statement must be:
• Given knowingly
• Without belief in its truth
• Reckless as to whether it is true or not
• The damages will then be awarded according to the tort of deceit and are also available under s2(1) Misrepresentation Act 1967. The equitable remedy of recission is also available. The defendant is responsible for all losses including any consequential loss providing a causal link between the fraudulent misrepresentation and the claimant's loss
• Under the Misrepresentation Act 1967 the responsibility of proving the statement was true now shifts to the defendant

Negligent Misrepresentation

• Hedley Byrne v Heller & Partners (1964) - damages may be recovered for a negligent misrepresentation where a financial loss has been incurred and where there is a special relationship between the parties
• Hedley Byrne needed a credit reference for a business on whose behalf it contracted for work The defendants, a bank, said that the business was in good financial health. Hedley Byrne relied on this and then incurred about £100,000 worth of work for which they were responsible
• They sued Heller Bank saying that they had relied on a professional opinion which was wrong, and had suffered loss as a result
• HELD - sadly in this case, because the claimants had signed a contract with the defendants that contained an exclusion clause denying all responsibility for the inaccuracy of any statement they made, the defendants were not liable
• BUT that need not be the case in the future. In an obiter statement the HoL said that there CAN be liability for negligent misrepresentation on normal tort principles, where a duty of care exists, if there is a special relationship between the parties
• Three requirements:
• The party making the statement must be in possession of the particular type of knowledge for which the advice is required
• There must be sufficient proximity between the two parties that it is reasonable to rely on the statement
• The party to whom the statement is made does rely on the statement and the party making the statement is aware of that reliance
• Damages will be applied according to the standard tort measure of negligence or under s2(1) of the Misrepresentation Act 1967. The equitable remedy of recission is also available
• The court says that if the misrepresentation is proved, then you can claim damages as if it were a Tort situation...meaning that potentially damages could be whatever financial cost flows from the misrepresentation
• Section 2(1) of the Misrepresentation Act 1967 shifts the burden of responsibility for proving that the statement was not wrong/misleading onto the defendant (the statement maker)
• If you prove your claim under the Act, your rights are rescission (ending the contract) and damages - this means that you could sue under the Tort of deceit for damages, which will allow you to claim consequential loss rather than just what a contract promised
• Esso Petroleum Co Ltd v Mardon (1976)
• In the context of the sale of the lease of a petrol station by Esso, one of their reps stated that the garage was capable of selling 200,000 gallons of petrol per year
• This proved to be wildly inaccurate and the defendant lost money
• HELD - under Hedley Byrne, the defendant WAS entitled to rely on Esso's rep's statement about the petrol sales...and he could claim damages on a tort basis

Innocent Misrepresentation

• Any misrepresentation not made fraudulently was historically classed as an innocent misrepresentation regardless of how it was made
• Since the emergence of the Hedley Byrne principle and the passing of the Misrepresentation Act 1967, the only misrepresentations that can be claimed to be made innocently are those where a party makes a statement with an honest belief in its truth - for example, where the party merely repeats innacurate information, the truth of which they are unaware
• The main remedy for innocent representation is the equitable remedy of rescission: that is to void the contract as if it never happened. Damages are also available under s2(1) Misrepresentation Act 1967

Misrepresentation Under Statute

• S2(1) Misrepresentation Act 1967
• "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"
• In other words, a party who has been a victim of misrepresentation has an action available without having to prove either fraud or the existence of a special relationship under the Hedley Byrne criteria. The burden of proof is reversed so that the person making the statement has to prove that they were not negligent
• Key cases:
• Howard Marine and Dredging Co Ltd v A Ogden and Sons (Evacuations) Ltd (1978)
• Spice Girls Ltd v Aprilla World Service (2002)
• Under s2(2) Misrepresentation Act 1967 the judge has the discretion of which remedy to apply. Recission will not therefore be available if the judge has decided that damages is a more appropriate remedy

Economic Duress

• A contract may be set aside because extreme coercion has rendered the contract otherwise commercially unviable
• Five conditions need to be satisfied in order for there to be a finding of duress
• Pressure was exerted on the contracting party - North Ocean Shipping Co v Hyundai Construction Co (1979) [The Atlantic Baron]
• The pressure was illegitimate - Atlas Express Ltd v Kafco (Importers and Distributors) Ltd (1989)
• The pressure induced the claimant to enter the contract - Barton v Armstrong (1975)
• The claimant had no choice but to enter the contract - Universe Tankships v International Transport Workers' Federation (1983)
• The claimant protested at the time or shortly after the contract was made - North Ocean Shipping Co v Hyundai Contruction Co (1979) [The Atlantic Baron]