Lecture # 11 Vitiating Factors of Contract LOC/LOC 11 Vitiating... · 2016-01-10 · ©VLC...

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Lecture # 11

Vitiating Factors

By: Salik Aziz Vaince

[0313-7575311]

Reasons; invalidating effect

Even where a contract meets the requirements of offer and acceptance, consideration and intent to

create legal relations, it may still not be binding if, at the time the contract was made, certain factors

were present which mean there was no genuine consent.

These are known as vitiating factors (because they vitiate, or invalidate, consent). The vitiating factors

which the law recognizes as undermining a contract are misrepresentation, mistake, duress, undue

influence and illegality.

As we have seen, contracts are enforced by the law because they are expressions of the parties’ own

free will; the parties have consented to their contractual obligations.

The reason why the vitiating factors undermine a contract is that they all in some way render invalid

the parties’ consent to their agreement – for example, if one party agrees to a contract because the

other has threatened him or her, he or she cannot be said to have exercised free will.

The presence of a vitiating factor usually makes a contract either void or voidable, depending on

which vitiating factor is present.

Where a contract is declared void, the effect is that there was never a contract in the first place, so

neither party can enforce the agreement. If a contract is voidable a contract comes into existence and

the innocent party can choose whether or not to end the contract.

Void: never a contract in the first place

Voidable: a contract comes into existence. The innocent party can choose whether or not to end the

contract.

Definition: Clause, provision, or term that impairs a contract in part or in full, or makes it void or

voidable.

Misrepresentation

A misrepresentation is an untrue statement of fact by one party which has induced the other to enter into the contract. For a misrepresentation to be actionable, it has to fulfill three requirements: there

Vitiating factors

Misrepresentation Mistake Duress Undue influence Illegality


must be an untrue statement; it must be a statement of fact; not mere opinion; and it must have induced the innocent party to enter the contract.

A misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract.

The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.

Definition

The positive statement in a manner not supported by the information of the person making it, of that

which is not true, though he believes it to be true.

Any breach of duty without intent to deceive, gain or advantage to the person committing it or any one

claiming under him by misleading another to his prejudice (injustice or unfairness) or to the prejudice

of anyone claiming under him.

Causing, however, innocently a party to an agreement to make a mistake as to the substance of the

thing which is the subject of the agreement.

Contents of definition

• Positive statement not supported by exact information

Misrepresentation takes place when one makes an encouraging statement in a manner not supported

by the information of the person making it, of that which is not true, though he believes it to be true.

• Breach of duty without intent to deceive

Any breach of duty without intent to deceive, gain or advantage to the person committing it or any one

claiming under him by misleading another to his unfairness or to the unfairness of any one claiming

under him.

• Mistake regarding the essence of contract

Innocent mistake regarding the essence of contract results in misrepresentation. For example, an

illiterate person goes to medical store and asks for the medicine of fever. Sales man mistakenly gives

him medicine that cures sugar disease. This is a kind of misrepresentation on the part of sales man.

• Effects of Misrepresentation

The contract is void-able at the option of aggrieved party.

• Burden of proof

The burden of proof lies on the shoulders of the party who wants to set aside the contract.

For a misrepresentation to be actionable, it has to fulfill three requirements:

1. An untrue statement

2. A statement of fact

3. Inducement

1. An untrue statement

An untrue statement of fact must have been made by the other contracting party (or by their agent

acting within the scope of their authority), or the other contracting party must have known of the

untrue statement.


Silence does not usually amount to a misrepresentation. There are however, five types of situations

where the law imposes a duty to disclose information. To remain silent about a material fact in any of

these circumstances can therefore amount to a misrepresentation.

i. Contracts requiring utmost good faith

Where a contract requires utmost good faith, such as a contract for insurance, failure to disclose a

matter regarding which utmost good faith is required allows the innocent party to rescind the contract,

though damages are not available.

ii. Subsequent falsity

A misrepresentation may occur a statement was true when it was made, but owing to a change of

circumstances has become incorrect by the time it is acted upon. Keeping silent about the change can

amount to a misrepresentation.

With v O’Flanagan (1936)

Facts: The claimant purchased a medical practice from the defendant. The claimant was induced to buy

the practice by the defendant's statement that the practice took £2,000 per annum. This statement

was true at the time it was made. However, subsequently the defendant became ill and many patients

went elsewhere. By time the sale was completed the practice was virtually worthless.

Held: Where a statement is rendered false by a change in circumstances there is a duty to disclose the

change. A failure to do so will result in an actionable misrepresentation.

iii. Partial revelation

If one party makes a statement which is itself true, but which misrepresents the whole situation

because of what is left unsaid, the statement may amount to a misrepresentation.

Dimmock v Hallett (1866)

Facts: A 934-acre (3.78 km2) estate was about to be auctioned off to discharge a debt to a mortgagee.

The estate included three parcels of land called "Bull Hassocks Farm", "Creyke's Hundreds" and

"Misson Springs". The advertisement for the auction described the Bull Hassocks Farm as having

"fertile and improvable land", and described in the particulars that each parcel was let out to paying

tenants (the first two to Mr. R Hickson and Misson Springs to a Mr. F Wigglesworth). However, it was

not mentioned that the tenants had, by the time of the auction, already given notice to quit the

property. The eventual buyer, Mr. Dimmock, sought rescission of the contract for misrepresentation

(among a number of other grounds).

The 13th condition of sale also stated the following exclusion clause,

“If any mistake be made in the description of any of the lots, or any other error shall appear in the

particulars of the estate (except as to the quantity of land, which shall be taken as stated, whether

more or less), such mistake or error shall not annul the sale, but the vendor or purchaser shall give or

take a compensation or equivalent as the case may require, and which compensation or equivalent

shall be settled by the said Judge at Chambers.”

Held: The Court of Appeal held that although the statement about the land being "fertile and

improvable" was merely a "flourishing description" and did not entitle the buyer to rescind, telling only

a half truth about the tenants constituted good grounds for unwinding the contracts.


Sir GJ Turner LJ gave judgment first: The purchaser further grounds his case on misrepresentation in

the particulars. Some of the instances alleged appear to me to be unimportant. Thus I think that a

mere general statement that land is fertile and improvable, whereas part of it has been abandoned as

useless, cannot, except in extreme cases – as, for instance, where a considerable part is covered with

water, or otherwise irreclaimable – be considered such a misrepresentation as to entitle a purchaser to

be discharged. In the present case, I think the statement is to be looked at as a mere flourishing

description by an auctioneer.

iv. Fiduciary relationship

Sometimes it is the existing relationship between the parties, rather than the type of contract

concerned, which gives rise to a duty to disclose important facts about a contract.

v. Voluntarily assumption of responsibility

One contracting party can occasionally incur liability for remaining silent when he or she has accepted

responsibility for the other party.

2. A statement of fact

An actionable misrepresentation must be a false statement of fact, not opinion or future intention or law.

(A) Statements of opinion

A false statement of opinion is not a misrepresentation of fact. Bisset v Wilkinson [1927] AC 177 Facts: The claimant purchased a piece of farm land to use as a sheep farm. He asked the seller how

many sheep the land would hold. The seller had not used it as a sheep farm but estimated that it would carry 2,000 sheep. In reliance of this statement the claimant purchased the land. The estimate turned out to be wrong and the claimant brought an action for misrepresentation.

Held: The Privy Council held that the statement was only a statement of opinion and not a statement of fact and therefore not an actionable misrepresentation. The claimant's action was therefore unsuccessful.

However, where the person giving the statement was in a position to know the true facts and it can be proved that he could not reasonably have held such a view as a result, then his opinion will be treated as a statement of fact.

Smith v Land & House Property Corp. (1884) 28 Ch D 7 The claimant purchased a hotel. The seller described one of the tenants as being 'most desirable'. In

fact, as the seller knew, the tenant was in arrears and on the verge of bankruptcy. This was held to be a statement of fact rather than opinion as the seller was in a position to know the facts.

Some expressions of opinion are mere puffs. Thus, in Dimmock v Hallet (1866) 2 Ch App 21, the description of land as 'fertile and improvable' was held not to constitute a representation.

Dimmock v Hallett 1866 H described his land as ‘fertile and improvable’ and D purchased it, but previous tenants had

abandoned it as useless, which H didn’t mention. Courts said it was merely a ‘flourishing description’ of the land, not a misrepresentation – a ‘puff’.

(B) Statements as to the future

A false statement by a person as to what he will do in the future is not a misrepresentation and will not be binding on a person unless the statement is incorporated into a contract.


However, if a person knows that his promise, which has induced another to enter into a contract, will not in fact be carried out then he will be liable. See:

Edgington v Fitzmaurice (1885) 29 Ch D 459 Facts: The claimant purchased some shares in the defendant company. The company prospectus

stated the shares were being offered in order to raise money to expand the company. In fact the company was experiencing financial difficulty and the money raised from the sale of the shares was going to be used to pay the company debts.

Held: Despite the fact that the statement related to a statement of future intent, it was an actionable misrepresentation as the defendant had no intention of using the money to expand the company.

Esso Petroleum v Mardon [1976] QB 801. Facts: Mr Mardon entered a tenancy agreement with Esso Petroleum in respect of a new Petrol

station. Esso's experts had estimated that the petrol station would sell 200,000 gallons of petrol. This estimate was based on figures which were prepared prior to planning application. The planning permission changed the prominence of the petrol station which would have an adverse affect on the sales rate. Esso made no amendments to the estimate. The rent under the tenancy was also based on the erroneous estimate. Consequently it became impossible for Mr Mardon to run the petrol station profitably. In fact, despite his best endeavours the petrol station only sold 78,000 gallons in the first year and made a loss of £5,800.

Held: The Court of Appeal held that there was no action for misrepresentation as the statement was an estimate of future sales rather than a statement of fact. However, the claimant was entitled to damages based on either negligent misstatement at common law or breach of warranty of a collateral contract.

(C) statements of the law

A false statement as to the law is not actionable misrepresentation because everyone is presumed to know the law. However, the distinction between fact and law is not simple.

Solle v Butcher [1950] 1 KB 671 Facts: P rented flat. Neither D nor P knew it was rent controlled. P actually recommended rent Ratio: You can set a mutual mistake aside in equity if it is fundamental – TEST: is the mistake

sufficiently fundamental? Analysis: 2 ways to deal with it – common law (Bell) and equity (Solle) Mistake which renders K void Bell v Lever – once a K has been made then the K is good unless and until it is set aside for failure of

some condition on which the existence of the K depends, or for fraud, or on some equitable ground Neither party can rely on own mistake to nullify it, even if fundamental Mistake which renders K voidable (equitable jurisdiction) This was done in court of equity – could relieve a party from the consequence of his own mistake, so

long as it could do so w/o injustice to 3rd parties A K will be set aside if the mistake of one party has been induced by a material misrepresentation of

the other, even though not fraudulent or fundamental Or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the

person by whom it is made, lets him remain in delusion and concludes the K on mistaken term Holding: Judgment for D on terms that P must elect between rescission and paying the full rent.


(D) Silence

Generally, silence is not a misrepresentation. The effect of the maxim caveat emptor is that the other party has no duty to disclose problems voluntarily. Thus if one party is labouring under a misapprehension there is no duty on the other party to correct it. See:

Smith v Hughes (1871) LR 6 QB 597. Facts: The claimant had purchased a quantity of what he thought was old oats having been shown a

sample. In fact the oats were new oats. The claimant wanted the oats for horse feed and new oats were of no use to him. The seller was aware of the mistake of the claimant but said nothing. The claimant brought an action against the seller based on mistake and misrepresentation.

Held: both actions failed. The action based on misrepresentation failed as you cannot have silence as a misrepresentation. The defendant had not mislead the claimant to believe they were old oats. The action based on mistake failed as the mistake was not as to the fundamental terms of the contract but only a mistake as to quality.

However, there are three fundamental exceptions to this rule:

(i) Half truths

The representor must not misleadingly tell only part of the truth. Thus, a statement that does not present the whole truth may be regarded as a misrepresentation.

Nottingham Brick & Tile Co. v Butler (1889) 16 QBD 778 The representor must not misleadingly tell only part of the truth. Thus, a statement that does not

present the whole truth may be regarded as a misrepresentation. (Half Truths)

(ii) statements which become false

Where a statement was true when made out but due to a change of circumstances has become false by the time it is acted upon, there is a duty to disclose the truth.

With v O'Flanagan [1936] Ch 575 Facts: The claimant purchased a medical practice from the defendant. The claimant was induced to buy

the practice by the defendant's statement that the practice took £2,000 per annum. This statement was true at the time it was made. However, subsequently the defendant became ill and many patients went elsewhere. By time the sale was completed the practice was virtually worthless.

Held: Where a statement is rendered false by a change in circumstances there is a duty to disclose the change. A failure to do so will result in an actionable misrepresentation.

(iii) contracts Uberrimae Fidei

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of all material facts because one party is in a strong position to know the truth. Examples would include contracts of insurance and family settlements.

A material fact is something which would influence a reasonable person in making the contract. If one party fails to do this, the contract may be avoided. See:

Lambert v Co-Operative Insurance Society [1975] 2 Lloyd's Rep 485 Facts: Mrs Lambert signed a proposal form for ‘All Risks’ insurance over her husband’s jewelry, without

mentioning her husband was convicted previously of receiving 1730 stolen cigarettes and was fined £25. The Co-op issued the policy. Mr Lambert was convicted of two more dishonesty offences in 1971 and sentenced to 15 months jail. Mrs Lambert did not reveal this either when the policy was renewed in 1972. In April 1972 some items worth £311 were lost or stolen and the Co-op refused on the basis of a failure to disclose.

Held: Mackenna J held ‘the assured is under a duty of disclosure… [but the] extent of the duty is the matter in controversy.’ You could have a duty to disclose everything you think is material, everything a


reasonable person thinks is, everything the particular insurer thinks is, or everything a reasonable or prudent insurer thinks is, like in s 18 Marine Insurance Act 1906. Because there is no difference between this insurance and marine insurance in principle, it should be the latter. He did however say the law was unsatisfactory and the Co-op was doing ‘a heartless thing… but that is their business, not mine.’

Where there is a fiduciary relationship between the parties to a contract a duty of disclosure will arise, e.g., solicitor and client, bank manager and client, trustee and beneficiary, and inter-family agreements.

(E) Other representations

The term 'statement' is not to be interpreted too literally: In Gordon v Selico Ltd (1986) 278 EG 53, it was held that painting over dry rot, immediately prior to

sale of the property, was a fraudulent misrepresentation. Gordon v Selico Ltd (1986) 278 EG 53, Facts: Mr Gordon and Mrs Teixeira, contracted in November 1978 to purchase a 99 year lease of a flat

owned by the defendant, Selico Ltd. The flat was in poor condition, as was the block that contained it, with some evidence of dry rot. Prior to the first inspection by the plaintiffs in about November 1978, the second defendants had instructed some painters to conceal patches of dry rot from view, by painting them. The plaintiffs obtained a detailed survey of the flat in February 1979, which concluded that no dry rot had been found (although only one floorboard had been lifted, and it could not be guaranteed that it did not exist elsewhere in the flat). The plaintiffs moved into their flat on January 1, 1980, and subsequently discovered extensive dry rot in the front bedroom, bathroom, and lavatory.

Held: Ordinarily, a misrepresentation is made by a statement of supposed fact, or otherwise a statement of intent. It was held by the Court of Appeal that the painting of dry rot to conceal it amounted to a misrepresentation. The court distinguished the set of facts from other cases, where it was held that reliance on an independent surveyor's findings defeated a claim of misrepresentation.

“ Furthermore, he observed, the plaintiffs and their surveyor had ample opportunity to inspect the flat, an opportunity of which they availed themselves. In these circumstances, decisions such as Horsfall v Thomas and Smith v Hughes, precluded the plaintiffs from complaining of any misrepresentation.

Both these two cases, however, are distinguishable from the present on their facts. In the former, not only was the defect in the gun patent and discoverable on inspection, but the purchaser took no steps to inspect it, so that he did in fact not rely on any misrepresentation as to its condition which might have been made. In the latter case, the vendor did nothing to disguise the character of the oats sold. In the present case, on the learned judge's relevant findings of fact, with which we see no reason to disagree, not only was a fraudulent misrepresentation made, which was intended to mislead prospective purchasers of a lease of the property; the misrepresentation did mislead the purchasers and they acted on it to their detriment. In these circumstances, it is in our judgment no answer in law to the claim in deceit for the defendants to say that the plaintiffs or their surveyor could have discovered the dry rot on a closer inspection of Flat C or were content to purchase without any warranty as to the condition of the property; they and their surveyor were in fact misled by the cover-up operation, as they were intended to be. The general principle caveat emptor has no application where a purchaser has been induced to enter the contract of purchase by fraud. Nor can clause 4(2)(a) of the Law Society's Conditions of Sale avail a vendor in these circumstances. These subsidiary submissions made by way of defence to the claim based on deceit are not in our judgment well founded.


In St Marylebone Property v Payne (1994) 45 EG 156, the use of a photograph taken from the air, printed with arrows (misleadingly) indicating the extent of land boundaries, was held to convey a statement of fact (which amounted to actionable misrepresentation).

3. Inducement

The false statement must have induced the representee to enter into the contract. The requirements here are that (a) the misrepresentation must be material and (b) it must have been relied on.

(A) Materiality

The misrepresentation must be material, in the sense that it would have induced a reasonable person to enter into the contract. However, the rule is not strictly objective:

In Museprime Properties v Adhill Properties [1990] 36 EG 114, the judge referred, with approval, to the view of Goff and Jones: Law of Restitution that, any misrepresentation which induces a person to enter into a contract should be a ground for rescission of that contract. If the misrepresentation would have induced a reasonable person to enter into the contract, then the court will presume that the representee was so induced, and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the misrepresentee to show that the misrepresentation induced him to act as he did.

Museprime Properties v Adhill Properties [1990] 36 EG 114 P: if it not material, then they cannot be inferred as a matter of fact, unless representee could prove he

is actually induced – Subjective test F: Adhill sold property to Museprime; there was inaccurate statement in the particulars. Adhill claims it

is not material as no reasonable man will be induced. Held by Scott J, as long as the Museprime was actually induced, materiality doesn’t matter. But the less reasonable the inducement, the more difficult would be for claimant to prove the inducement.

(B) Reliance

The representee must have relied on the misrepresentation. There will be no reliance if the mis representee was unaware of the misrepresentation. Horsfall v Thomas [1862] 1 H&C 90 The claimant purchased a gun which had a concealed defect. His action for misrepresentation failed as

he hadn't inspected the gun before purchasing it. Therefore the misrepresentation did not induce him to enter the contract as he was unaware of it.

There will be no reliance if the representee does not rely on the misrepresentation but on his own judgment or investigations.

Attwood v Small (1838) 6 CI & F 232 Facts: The claimants purchased Corngreaves estate from the defendant for £600,000. Corngreaves

estate consisted of mining land, iron works and various properties including a mansion house. Many of the properties were subject to leasehold and generated income. The mines were to be worked by and profit to go to the claimant. A preliminary agreement was made between the parties whereby the claimant agreed to purchase subject to being satisfied that the reports and accounts given by the defendant were accurate. The claimant then had his accountants and directors check out the accounts and reports who were satisfied they were accurate. The claimant then proceeded with the purchase. It then transpired that the accounts had greatly exaggerated the income generated by the estate and the claimant sought to rescind the contract based on the misrepresentations contained in the reports and accounts.


Held: The claimant was unsuccessful. By getting his own experts to check out the reports he had not relied on the accounts but his own judgment.

(Note: this rule does not apply where the misrepresentation was fraudulent and the representee was asked to check the accuracy of the statement: Pearson v Dublin Corp [1907] AC 351.)

There will be reliance even if the misrepresentee is given an opportunity to discover the truth but does not take the offer up. The misrepresentation will still be considered as an inducement. See:

Edgington v Fitzmaurice (above) The misrepresentation will only be actionable under contract law if it is at least one of the reasons for

which the claimant entered into the contract.

Redgrave v Hurd (1881) 20 Ch D 1. There will be reliance even if the misrepresentation was not the only inducement for the representee

to enter into the contract. See: Facts: A solicitor who was due to retire advertised for a partner for the practice and the deal was also

to include the solicitor's house at £1,600. D answered the advertisement. P told him that the business

brought in about £300 pa. P subsequently produced summaries showing an income of about £200 and

then alleged that further unexamined papers brought in the remainder. D then signed an agreement to

purchase the house for £1,600 and paid the deposit. P refused to allow any reference to the business

to be inserted in the agreement. D took possession, but finding the business to be worthless, refused

to complete. P sued for specific performance.

At trial: It was held that as D had an opportunity to check the representations, he can be taken not to

have relied on the representations therefore specific performance can be granted. D appealed.

HELD: The mere fact that a person has an opportunity to check the misrepresentation, and fails to do

so, will not prevent that person from relying on it in an action for specific performance. A duty to

inquire may arise, but ordinarily, a failure to check will not be fatal to the defence.

Constructive knowledge

In some situations, a party to a contract may not have actual knowledge of a misrepresentation but for

public policy reasons they will be treated as if they did have that knowledge, known as constructive

knowledge.

Types of misrepresentation

There are four types of misrepresentation:

(A) Fraudulent misrepresentation

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false statement that is "made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true or false." Therefore, if someone makes a statement which they honestly believe is true, and then it cannot be fraudulent. See:

The burden of proof is on the plaintiff - he who asserts fraud must prove it. Tactically, it may be difficult to prove fraud, in the light of Lord Herschell's requirements.

The remedy is rescission (subject to exceptions discussed later) and damages in the tort of deceit (see later).

A party makes a fraudulent misrepresentation if they make a false statement and, at the time of

making it, do not believe it to be true.


Derry v Peek (1889) 14 App Cas 337. Facts: In a company prospectus the defendant stated the company had the right to use steam powered

trams as oppose to horse powered trams. However, at the time the right to use steam powered trams

was subject of approval of the Board of Trade, which was later refused. The claimant purchased shares

in the company in reliance of the statement made and brought a claim based on the alleged fraudulent

representation of the defendant.

Held: The statement was not fraudulent but made in the honest belief that approval was forthcoming.

Lord Herschell defined fraudulent misrepresentation as a statement which is made either:

- knowing it to be false,

- without belief in its truth, or

- Recklessly, careless as to whether it be true or false.

(B) Misrepresentation under statute

Section 2(1) of the Misrepresentation Act 1967 provides that where one party enters into a contract as

a result of a misrepresentation by the other, the innocent party can claim damages, unless the other

party can prove that at the time the contract was made, they believed the statement to be true, and

had reasonable grounds for that belief.

(C) Innocent misrepresentation

This is a false statement which the person makes honestly believing it to be true. The remedy is either (i) rescission with an indemnity, or (ii) Damages in lieu of rescission under the courts discretion in s2(2) Misrepresentation Act 1967 (see

below). Where one party has entered into a contract because of the others false statement, the other party

can avoid liability for damages by proving that at the time the contract was made, they believed the

statement to be true, and had reasonable grounds for that belief – according to s. 2(1) of the

Misrepresentation Act 1967.

Once misrepresentation has been established it is necessary to consider what type of misrepresentation has been made. There are three types of misrepresentation: fraudulent, negligent and wholly innocent. The importance of the distinction lies in the remedies available for each type.

(D) Negligent Misrepresentation

This is a false statement made by a person who had no reasonable grounds for believing it to be true. There are two possible ways to claim: either under common law or statute.

(i) Negligent Misstatement at common law

Negligent misrepresentation at common law was established by the House of Lords in:

Hedley Byrne v Heller & Partners (1964)

Facts: Hedley Byrne was a firm of advertising agents. A customer, Easipower’s Ltd, put in a large order.

Hedley Byrne wanted to check their financial position, and creditworthiness, and subsequently asked

their bank, National Provincial Bank, to get a report from Easipower’s bank, Heller & Partners Ltd., who

replied in a letter that was headed, "Without responsibility on the part of this bank"

It said that Easipower’s was, "Considered good for its ordinary business engagements".


The letter was sent for free. Easipower went into liquidation and Hedley Byrne lost £17,000 on

contracts. Hedley Byrne sued Heller & Partners for negligence, claiming that the information was given

negligently and was misleading. Heller & Partners argued there was no duty of care owed regarding the

statements, and in any case liability was excluded.

Held: The court found that the relationship between the parties was "sufficiently proximate" as to

create a duty of care. It was reasonable for them to have known that the information that they had

given would likely have been relied upon for entering into a contract of some sort. This would give rise,

the court said, to a "special relationship", in which the defendant would have to take sufficient care in

giving advice to avoid negligence liability. However, on the facts, the disclaimer was found to be

sufficient enough to discharge any duty created by Heller's actions. There were no orders for damages.

The House of Lords stated obiter, that there could be liability for negligent misrepresentation on the

normal principles of tort, where there was a ‘special relationship’ between the parties.

Esso Petroleum v Mardon [1976] (above) Williams’s v Natural Life Health Foods (1998) A company director was not personally reliable in negligence for bad advice given by him as director

unless it could clearly be shown that he had willingly accepted such personal responsibility. A special relationship involving an assumption of personal liability must be established before a company director can become liable for negligent misstatement under the Hedley Byrne principles. Lord Steyn: ‘The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said and done by the defendant or on his behalf. Obviously the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff.’ As to whether he was liable as a joint tortfeasor: ‘In any event, the argument is unsustainable. A moment’s reflection will show that, if the argument were to be accepted in the present case, it would expose directors, officers and employees of companies carrying on business as providers of services to a plethora of new tort claims. The fallacy in the argument is clear. In the present case liability of the company is dependent on a special relationship with the plaintiffs giving rise to an assumption of responsibility. Mr Mistlin was a stranger to that particular relationship. He cannot therefore be liable as a joint tortfeasor with the company. If he is to be held liable to the plaintiffs, it could only be on the basis of a special relationship between himself and the plaintiffs. There was none. I would therefore reject this alternative argument.’

(ii) Negligent Misrepresentation

Under s2(1) MISREPRESENTATION ACT 1967

Section 2(1) of the Misrepresentation Act 1967 provides: "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 ground to believe and did believe up to the time the contract was made that the facts represented were true."

This provision does not require the representee to establish a duty of care and reverses the burden of proof. Once a party has proved that there has been a misrepresentation which induced him to enter


into the contract, the person making the misrepresentation will be liable in damages unless he proves he had reasonable grounds to believe and did believe that the facts represented were true. This burden may be difficult to discharge as shown in:

Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574 Facts: The claimant, Ogden, hired two dredging barges from the defendant, Howard Marine (HM), for

£1,800 per week to carry out certain excavation works for Northumbrian Water Authority. In order to make an accurate estimate for tender of the work to be completed, Ogden asked HM the capacity of the barge. HM checked Lloyds Register and stated 850 cubic metres. In fact the entry in Lloyds register was wrong. The capacity was in fact much lower. Consequently the work carried out by Ogden took much longer and cost a great deal more to perform. The claimant brought an action for negligent misrepresentation. HM argued that they had reasonable grounds for believing the statement to be true as they had checked Lloyds register.

Held: The defendant had not discharged the burden of proof by demonstrating they had reasonable grounds for believing it to be true as they had the registration document which contained the correct capacity and there was no reason why they would have chosen Lloyds register over the registration document.

Remedies for misrepresentation

The effect of a misrepresentation is generally to make a contract voidable, rather than void, so the

contract continues to exist unless and until the innocent party chooses to have it set aside by means of

recession.

Once an actionable misrepresentation has been established, it is then necessary to consider the remedies available to the misrepresentee.

Rescission

Rescission is an equitable remedy, which sets the contract aside and puts the parties back in the

position they were in before the contract was made. It is available for all four types of

misrepresentation.

Rescission, ie setting aside the contract, is possible in all cases of misrepresentation. The aim of rescission is to put the parties back in their original position, as though the contract had not been made.

The injured party may rescind the contract by giving notice to the representor. However, this is not always necessary as any act indicating repudiation, eg notifying the authorities, may suffice. See:

Car & Universal Finance v Caldwell [1965] 1 QB 525 Facts: Mr Caldwell sold his Jaguar car on 12th Jan to a rogue, Norris, who had paid £10 cash deposit

and left another car as security and gave a cheque for £965. The following day Mr Caldwell went to cash the cheque and discovered it was fraudulent and the car left as deposit turned out to be stolen. Mr Caldwell reported the incident to the police and used his best endeavours to co-operate with the police to find Norris in order to rescind the contract of sale. He also contacted the Automobile Association to try to locate the car. Norris had acquired a voidable title to the car as the contract was induced by fraudulent misrepresentation. Norris sold the car on to a third party on 15th Jan. The question for the court was whether the actions taken by Mr Caldwell were sufficient to avoid the contract.

Held: The defendant was entitled to return of the car, even though the original purchaser had disappeared, and could not be notified. In these circumstances, communication to the police was


sufficient. If it was impossible to communicate with the representor then then the representee rescinds by taking all necessary and reasonable steps to make it known that the contract is cancelled.

Sellers LJ said: ‘In such exceptional circumstances, it does not seem to me appropriate to hold that a party so acting can claim any right to have a decision to rescind communicated to him before the contract is terminated. (The other party) has to establish clearly and unequivocally that he terminates the contract and is no longer to be bound by it. If he cannot communicate his decision he may still satisfy a judge or jury that he had made a final and irrevocable decision and ended the contract.’ and ‘If one party by absconding deliberately puts it out of the power of the other to communicate his intention to rescind which he knows the other will almost certainly want to do, I do not think he can any longer insist on his right to be made aware of the election to determine the contract. In these circumstances communication is a useless formality. I think that the law must allow the innocent party to exercise his right of rescission otherwise than by communication or repossession. To hold otherwise would be to allow a fraudulent contracting party by his very fraud to prevent the innocent party from exercising his undoubted right. I would hold that in circumstances such as these the innocent party may evince his intention to disaffirm the contract by overt means falling short of communication or repossession.’

Bars to recession

There are some circumstances in which it is unreasonable or impossible to put the contracting parties

back into their pre-contractual position, and in these cases the injured party may lose the right to

rescission. The four circumstances in which this may occur are where the innocent party affirms the

contract; there is a lapse of time; the parties cannot return to their pre-contractual position and where

rescission would deprive an innocent third party acquired rights.

Rescission is an equitable remedy and is awarded at the discretion of the court. The injured party may lose the right to rescind in the following four circumstances:

(i) Affirmation of the contract

The injured party will affirm the contract if, with full knowledge of the misrepresentation and of their right to rescind, they expressly state that they intend to continue with the contract, or if they do an act from which the intention may be implied.

Long v Lloyd [1958] 1 WLR 753 Facts: The claimant purchased a lorry from the defendant. The lorry was advertised in a newspaper

which described the lorry as being in exceptional condition. The claimant phoned the defendant to arrange a viewing and was told it was in first class condition. He went to view it the following day and was told it was capable of doing 40 mph and 11 miles to the gallon. The claimant test drove it and found that the speedometer was not working and he had to pull a wire for the accelerator as this was not working also. The claimant still decided to purchase the lorry. On the first journey the claimant noted certain faults with the lorry and contacted the defendant who offered to pay half the repairs. The claimant accepted this. However, on a further journey the lorry broke down completely and the claimant wished to rescind the contract and brought an action against the defendant for innocent misrepresentation.

Held: By accepting the offer of payment for half the repairs when he became aware of the defects, the defendant had lost his right to rescind as he had affirmed the contract.

Note that in Peyman v Lanjani [1985] Ch 457, the Court of Appeal held that the plaintiff had not lost his right to rescind because, knowing of the facts which afforded this right, he proceeded with the contract, unless he also knew of the right to rescind. The plaintiff here did not know he had such right. As he did not know he had such right, he could not be said to have elected to affirm the contract.


(ii) Laps of time

If the injured party does not take action to rescind within a reasonable time, the right will be lost. Where the misrepresentation is fraudulent, time runs from the time when the fraud was, or with

reasonable diligence could have been discovered. In the case of non-fraudulent misrepresentation, time runs from the date of the contract, not the date of discovery of the misrepresentation.

Leaf v International Galleries [1950] 2 KB 86 Facts: The claimant purchased a painting from the defendant. Both parties believed that the painting

was by the artist Constable. In fact 5 years later the claimant discovered the painting was not a Constable. The claimant brought an action based both on misrepresentation and mistake.

The claim based on misrepresentation was successful however, since it was an innocent misrepresentation, the claimant had lost the right to rescind the contract through lapse of time. With innocent misrepresentation the time starts to run from the date of the contract not the date of discovery.

The claim based on mistake was unsuccessful as the mistake related to the quality and did not render the subject matter something essentially different from that which it was believed to be. He believed he was buying a painting and he got a painting.

(iii) Restitution In Integrum Impossible

The injured party will lose the right to rescind if substantial restoration is impossible, ie if the parties cannot be restored to their original position.

Precise restoration is not required and the remedy is still available if substantial restoration is possible. Thus, deterioration in the value or condition of property is not a bar to rescission:

Armstrong v Jackson [1917] 2 KB 822 In Armstrong v Jackson [1917] 2 KB 822, Armstrong instructed Jackson, a stockbroker, to buy shares in

a certain company. Jackson transferred his own shares in that company to Armstrong. The court ruled that Jackson had breached his fiduciary duties to Armstrong

A broker who is employed to buy shares cannot sell his own shares unless he makes a full disclosure of the fact to his principal, and the principal, with a full knowledge, gives his assent to the changed position of the broker ... [A] broker who secretly sells his own shares is in a wholly false position

(iv) Third party acquires right

If a third party acquires rights in property, in good faith and for value, the misrepresentee will lose their right to rescind. See: Phillips v Brooks [1919] 2 KB 243 under Mistake.

Thus, if A obtains goods from B by misrepresentation and sells them to C, who takes in good faith, B cannot later rescind when he discovers the misrepresentation in order to recover the goods from C.

(v) Note

The right to rescind the contract will also be lost if the court exercises its discretion to award damages in lieu of rescission under s2(2) of the Misrepresentation Act 1967.

For innocent misrepresentation two previous bars to rescission were removed by s1 of the Misrepresentation Act 1967: the misrepresentee can rescind despite the misrepresentation becoming a term of the contract (s1(a)), and the misrepresentee can rescind even if the contract has been executed (s1(b)). Generally, this will be relevant to contracts for the sale of land and to tenancies.

Indemnity payment

The courts can order a payment of money known as an indemnity. This payment is designed to put the

parties back into their former positions.


An order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages.

Whittington v Seale-Hayne (1900) 82 LT 49. Facts: Mr Whittington bred prize poultry. He bought a long farm lease, induced by Seale-Hayne’s

representation that the premises were sanitary and in good repair. But the water supply was poisoned,

Mr Whittington’s manager got very ill and the poultry died. Under the lease, Mr Whittington had

covenanted to carry out repairs required by the council, and these were needed after the council

declared the premises unfit for habitation and the drains needed renewing. It was undisputed that

Whittington was entitled to indemnity for rates paid or repairs costs. Whittington sought rescission

and indemnity for loss of poultry, profits and medical expenses.

Held: Farwell J held no further losses could be claimed because it was beyond the ambit of the

indemnity to which Mr Whittington was entitled. These losses did not result in a benefit to Seale. Since

the representation was non-fraudulent, there could be no damages and therefore no compensation

either. It was not the case that the rescinder should be in a position status quo ante because ‘to make

good by way of compensation for the consequences of the misrepresentations is the same thing as

asking for damages.’

Damages

Where a party is induced to enter a contract by misrepresentation, they have a right to damages for

any loss, unless the misrepresentation is innocent, where an award of damages is at the judge’s

discretion. Damages for misrepresentation are calculated using the tort measure, rather than the

contract measure.

Remoteness of damages

The courts will make a more generous award of damages where there has been fraudulent

misrepresentation and misrepresentation under s. 2(1) of the Misrepresentation Act 1967 than for

common law negligent and innocent misrepresentation.

(i) fraudulent misrepresentation

The injured party may claim damages for fraudulent misrepresentation in the tort of deceit. The purpose of damages is to restore the victim to the position he occupied before the representation had been made.

The test of remoteness in deceit is that the injured party may recover for all the direct loss incurred as a result of the fraudulent misrepresentation, regardless of foreseeability:

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 Facts: The claimant, Doyle, purchased a business from the defendant, Olby, as a result of a several

fraudulent misrepresentations relating to the profitability and operations of the business. The trial judge assessed damages on contractual principles as to what position the claimant would have been in had the statements been true and awarded a sum of £1,500. However, the claimant had suffered loss to the extent of £5,500 as a result of entering the contract. The claimant appealed on the assessment of damages.

Held: Contractual damages are not applicable to misrepresentation since a representation is not a term of a contract. Where there has been a fraudulent misrepresentation damages should be assessed in the tort of deceit.


Lord Denning MR stated: "On principle the distinction seems to be this: in contract, the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement"

5. Excluding liability for misrepresentation

Any term of a contract which excludes liability for misrepresentation or restricts the remedy available is subject to the test of reasonableness. Section 3 of the Misrepresentation Act 1967, as amended by s8 of UCTA 1977, provides that:

"If a contract contains a term which would exclude or restrict: a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except insofar as it satisfies the requirement of reasonableness as stated in s11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

(Section 11(1) UCTA 1977 provides that "... the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.")

Misrepresentation Act 1967

1. Removal of Certain Bars To Rescission For Innocent Misrepresentation.

Where a person has entered into a contract after a misrepresentation has been made to him, and- (a) the misrepresentation has become a term of the contract; or (b) the contract has been performed; or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall

be so entitled, subject to the provisions of this Act, notwithstanding the matters mentioned in paragraphs (a) and (b) of this section.

2. Damages for misrepresentation.

(1) 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 ground to believe and did believe up to the time the contract was made that the facts represented were true.

(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.


(3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1).

3. Avoidance of provision excluding liability for misrepresentation.

[If a contract contains a term which would exclude or restrict- (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made

by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, That term shall be of no effect except in so far as it satisfies the requirement of reasonableness as

stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.]

4. Amendments of Sale of Goods Act 1893

Discussed in previous lectures

5. Saving for past transactions.

Nothing in this Act shall apply in relation to any misrepresentation or contract of sale which is made before the commencement of this Act.

Class activity

Teacher-led introduction to give examples of vitiating factors and context. For example, mutual

mistake or fraud can vitiate a contract.

This topic can be complex; it is easier if introduced to learners in smaller parts. The blog opposite has a

number of examples of misrepresentation.

Learners make a summary of the key types of misrepresentation and the relevant cases given in the

website opposite.

Learners make a summary of the way remedies operate using the e-lawresources website.

Learners make a summary of the key provisions of the Misrepresentation Act 1967 using the website

opposite to help you.

Group activity – using the key questions indicated here learners construct a problem question for

another group to answer:

- Has there been a false statement of fact and did it induce the other party into the contract?

- What kind of misrepresentation has taken place?

- Can damages be claimed and how is the amount worked out?

- Is rescission available and, if so, why will this be the case?

Exam questions – both essay and hypothetical problem/case study questions can help learners to

develop their skills.

Questions from past papers

Q1. ‘Contracts are frequently induced by misrepresentation’. Critically assess the remedies available to a person who has entered into a contract on the basis of a misrepresentation. [October/November 2004]

Q2. A contract may be declared void or voidable if the consent to the agreement is undermined by a recognised vitiating factor. Evaluate the extent to which ownership of the subject matter to a contract for the sale of goods passes from seller to buyer in these circumstances. [May/June 2005]


Q3. ‘Silence, even as to known defects, does not amount to an actionable misrepresentation’. Using case law to support your arguments, discuss the validity of this statement. [October/November 2005]

Q4. Critically evaluate the remedies available to a party who discovers that a contract has been founded on a misrepresentation. [October/November 2006]

Q5. Silence never amounts to an actionable misrepresentation. Using case law to support your arguments, critically assess the truth of this statement. [May/June 2011]

Lecture # 11 Vitiating Factors of Contract LOC/LOC 11 Vitiating... · 2016-01-10 · ©VLC...

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