Misrepresentation and non-disclosure

1. A false statement of fact can be:

  1. a term of the contract giving rise to remedies for breach (primarily expectation damages, termination and specific performance);
  2. a mere representation generating the main remedies of reliance damages and rescission; or
  3. of no legal effect, such as a ‘mere puff’ or an honest statement of intention yielding no legal redress.

2. The term-representation distinction is important because it affects the remedies available (ie whether damages are recoverable, how damages are measured and whether and when the claimant can get out of the contract). Section 1(a) of the Misrepresentation Act 1967 allows a claimant to rescind the contract for a misrepresentation, although it has been incorporated into the contract as a term and its breach would not have entitled the claimant to terminate the contract. Whether the remedies for breach or for misrepresentation are preferable in any case will depend primarily on whether the claimant has made a good bargain or a bad ­bargain.

3. The term-representation distinction is said to depend on the intention of the parties as objectively manifested, but the factors influencing the court’s determination include the importance of the truth of the statement to the representee, the relative knowledge and expertise of the parties and whether the representee was advised to verify the truth of the statement.4. A misrepresentation is:

  1. an unambiguous false statement of existing fact (or, now, of law),
  2. made to the claimant,
  3. which induces her to enter the contract.

5. Statements of intention, opinion and law imply statements of fact to the effect that the statements are honestly made. Further, statements of law may be misrepresentations if it was reasonable for the representee to rely on them and statements of opinion, where the speaker is in a better position to know the truth, will imply a statement of fact to the effect that she has a reasonable basis for her statements. If untrue, there is a misrepresentation.

6. There is no general duty of disclosure; no liability attaches to silence even if the silent party knows or suspects the other party is ignorant or wrong. However, liability can attach where the silent party:

  1. fails to correct a statement falsified by change of circumstances before contract formation;
  2. tells a ‘half-truth’; or
  3. owes the other party a duty of utmost good faith or a fiduciary duty.

7. To satisfy the inducement (or causation) requirement, the representeee must show she would not have entered into the contract ‘but for’ the misrepresentation; however, this standard is lowered in the case of fraud where the misrepresentation need only be ‘a reason for the representee entering the contract. There is no inducement if the representee was unaware of the misrepresentation, was unaffected by it, regarded it as unimportant or knew it was untrue.

8. Rescission is available for all types of misrepresentation, subject to the bars of:

  1. impossibility of mutual restitution;
  2. affirmation
  3. lapse of time;
  4. third party rights; and
  5. inequity under section 2(2) of the Misrepresentation Act 1967.

In practice, (a) is the main bar, although its strictness has been relaxed by allowing monetary substitution for benefits.

9. Rescission aims to restore the claimant, so far as is possible, to her position before the contract was entered and to prevent her unjust enrichment by requiring her to return any benefits received. In contrast, termination for breach acknowledges the validity of the contract and damages aim to put the claimant in the position she would have occupied if the contract had been performed.10. Damages in lieu of rescission may be available under section 2(2) of the 1967 Act where rescission is barred due to inequity. The measure of damages under section 2(2) appears to be on the basis that the misrepresentation is term of the contract which has been breached.

11. Section 2(1) of the 1967 Act imposes liability on a misrepresentor to pay damages unless she can prove that she honestly believed on reasonable grounds, up to the time of contract formation, that her statement was true. Only where the parties are not in a contractual relationship must the representee resort to the tort actions of deceit and negligent misrepresentation to obtain damages. Then, the representee must prove the representor’s fraud or negligence.

12. A section 2(1) claim is preferable to a claim in tort since it:

  1. lowers the qualifying threshold;
  2. reverses the burden of proof; and
  3. yields a generous measure of damages via the ‘fiction of fraud’ (it is not reduced by remoteness or contributory negligence, and may include loss of opportunity and reduction in the value of the property acquired under the contract at, and even after, the time of contracting).

13. Reliance damages under section 2(1) should be distinguished from other money claims related to rescission (eg recovery of money paid, indemnity and damages in lieu of rescission) and for breach (eg expectation damages).

14. A representor cannot exclude liability for her own fraud. Otherwise, section 3 of the 1967 Act requires any exemptions of liability for misrepresentation to be reasonable.   Whether ‘no statement of fact’ and ‘no reliance’ clauses are subject to the test of reasonableness has caused difficulties that have not been resolved by the device of ‘contractual estoppel’.  Ultimately, substance rather than form should be determinative.  In general, courts seem relatively more willing to uphold exemptions for misrepresentation than for breach.  In any case, the Consumer Rights Act 2015 subjects all variations of these clauses (including ‘no agent authority’ and ‘entire agreement’ clauses) to a test of fairness where they are non-negotiated and in consumer contracts.

15. The Consumer Protection from Unfair Trading Regulations 2008, as amended in 2014, allow consumers to seek civil redress where misleading or aggressive practices by businesses have caused them to enter the contract or to make payments for goods or services (including digital content).