Chapter 13 Outline answers to end-of-chapter questions


1. Ikra told Tyrese that she was thinking of selling her trampoline centre. She told Tyrese that the business was making profits of £200,000 a year and offered the accounts to confirm the figure. Tyrese did not bother to read the accounts because Ikra had an expensive sports car and he knew that the centre was busy, having been a customer himself. Ikra also stated that the business had a licence to sell alcohol so the profits could be increased by installing a bar. Two months later, when Tyrese bought the business, he discovered that the profits were only £100,000 a year. In addition, he has been told by the council that the alcohol licence was being revoked and that notice of this had been sent to Ikra a month before the sale took place.

Advise Tyrese.

Introduce your answer by identifying the legal issue of misrepresentation which is concerned with false pre-contractual statements and whether or not Tyrese can rescind the contract and claim damages for any resulting losses. Explain your approach – that you will need to explore whether the statements about the profits and the licence will be actionable before turning to the remedies.

Start the main body of the essay by explaining what an actionable misrepresentation is.

Explain the statement of fact requirement using the case law. It cannot be puffery, honest opinion, honest statements of future intention or an abstract statement of law.

Apply it to the profits statement – a clear factual issue.

Now turn to the rule on non-disclosure and explain the rule from With v O’Flanagan [1936] and how it works.

Apply it the statement about the licence. It seems that Ikra had an obligation to disclose the change. Romer LJ referred to having knowledge of the change. Question whether Ikra actually knew. The evidence on the balance of probabilities might indicate that she did know. But if she didn’t, is it enough that she ought to have known?

Next, explain the requirement of inducement as a matter of causation and that the claimant representee (Tyrese) has the burden of proving inducement on the facts (BV Netherlands Industrie Van Eiprodukten v Rembrandt Enterprises [2019]). Also, that the statement does not have to be the only reason for entering the contract (Edgington v Fitzmaurice (1885)). The point from Raiffeisen Zentral Bank of Osterreich v Royal Bank of Scotland [2010] on the ‘but for’ test should be observed. Also explain the point from Redgrave v Hurd (1881) and the reasoning.

Apply the points on inducement to the statements in turn. On the profit statement, apply Redgrave and indicate that the statement should remain actionable. Also finish this part by indicating that the statements might be actionable.

Now turn to the basic remedy of rescission. Explain the requirement of communicating an intention to rescind which Tyrese can do here. Mention that the facts do not appear to indicate a bar to rescission is relevant directly (list them), however it depends on when Tyrese complains to Ikra. Delay in doing so might mean he is barred by lapse. Address the rule with reference to what Longmore LJ said in Salt v Stratstone [2015]. Mention that rescission could be refused by the court under the Misrepresentation Act 1967 with damages awarded in lieu, but that here it is unlikely. 

Now turn to damages and the Misrepresentation Act 1967 s.2 on negligent misrepresentation. Explain briefly how it works with the reversed burden and the liability based on fraud. However, if an award is made, in relation to the profits statement, a reduction could be made to reflect the degree of fault indicated by Tyrese not checking the accounts (Gran Gelato Ltd v Richcliff [1992]).

Finally conclude on the likelihood of Tyrese being entitled to a remedy for misrepresentation.

2. There is now no reason for bringing a claim in fraud for misrepresentation, since a claim brought under s. 2 (1) of the Misrepresentation Act 1967 will be just as good if not better. Critically discuss.

The issue is plain from the question so introduce you answer by acknowledging your approach - that it is necessary to explain misrepresentation based on the tort of deceit and then explain the relevant aspects of the Act. This will explain the perception conveyed by the statement. You will then compare any specific differences to conclude on the extent to which the fraud action remains relevant.

Begin the main body by explaining what a fraudulent misrepresentation is (Derry v Peek (1889); Versloot Dredging v HDI Gerling Industrie Versicherung (The DC Merwestone) [2013]; and Jacob J in Thomas Witter v TBP Industries [1996]).

Now, explain the assessment of damages (Doyle v Olby [1969]; Smith New Court v Scrimgeour Vickers [1997] and the approach to lost profit claims from East v Maurer [1991]).

At this point, turn to the Act and explain negligent misrepresentation under s.2; how it operates with the reversed burden of proof; and, mention the point on being liable as if fraudulent. Explain the ‘fiction of fraud’ and significance of Royscott Trust Ltd v Rogerson [1991] along with some criticism of it from commentators.

You are now well placed to explain the perception reflected by the statement i.e. that it appears that for some cases of fraud, it is easier to rely on s.2 and also be awarded the same damages.

But now commence your criticism with reference the rule on contributory negligence in the context of fraud (Standard Chartered Bank v Pakistan National Shipping [2002]). Now contrast this with the position under the Act confirmed in Gran Gelato Ltd v Richcliff [1992]. At this point you can criticise the inconsistency of the Act being based on the tort of deceit (rather than the tort of negligence) for the remoteness rule but is aligned with the tort of negligence on the contributory negligence issue.

The point then is that the statement can be criticised because, following fraud, if a representee is partly at fault for their loss, then if it is a clear-cut case of fraud they would be better advised to rely on the fraud action.

Now turn to another key factor. Just like tort of negligence (illustrated by Hedley Byrne v Heller [1964]), in fraud the representee can bring an action against someone that is not a party to the contract, whereas the Act only applies between parties to the contract (Taberna Europe CDO II v Selskabet af 1 September 2008 A/S [2016]). For that reason, the tort of negligence developed a significant body of case law on negligent misstatement and cases on fraudulent misrepresentation continue.

Conclude with a direct reference to the question – explaining the extent to which a claim in the tort of deceit would be preferred over reliance on the Act and therefore, why such cases under the tort continue.

3. Critically assess the extent to which a contract can be rescinded following an actionable misrepresentation.

Introduce your answer by clarifying the issue and your approach – that rescission is the basic remedy for misrepresentation but is subject to a number of bars.

Commence your main body with a basic explanation of rescission as a remedy, its equitable origin, effect and basis in the context of a remedy following a vitiating factor.

Explain that the effect of a misrepresentation is to render the contract voidable and so it is for the representee to communicate their intention to rescind (Car and Universal Finance v Caldwell [1965]).

Relate the requirement to the question and comment in the light of the flexibility of doing the next best thing when direct communication is not possible.

Now, turn to the key issue of the bars to rescission. Each needs to be explained and evaluated with reference to the cases law. It is useful to refer to views from the further reading too on the relevant aspects of Salt v Stratstone [2015].

Affirmation - explain it with reference to Long v Lloyd [1958] and the point from Edwards v Ashik [2014]. Comment on it as a bar, arguably it would be misleading to affirm and then be permitted to end the contract.

Lapse of time – explain it and refer to the traditional strict approach to non-fraudulent statements from Denning LJ in Leaf v International Galleries [1950]. Criticise this as insufficient protection and contrast this with the clarification by Longmore LJ in Salt v Stratstone Specialist.

Comment on the balance of fairness for non-fraudulent cases. It can be criticised for uncertainty. Also comment on lapse in cases of fraud, being based on affirmation which is then stricter and more protective.

Impossibility – explain this with the unjust enrichment basis (Halpern v Halpern [2006]) and the extent of the flexibility (Erlanger v New Sombrero Phosphate Co (1878) and Salt v Stratstone. Again, criticise the uncertainty on what is ‘practically just.’

Third party rights – explain this with Lewis v Averay [1972]. Address the logic of the approach to timing, but in terms of the remedy with two innocent parties, question the fairness.

Refusal of rescission under the Misrepresentation Act, 2(2) should be addressed and the approach from William Sindell plc v Cambridgeshire County Council [1994] on the balance of interests.

Finally conclude with a direct reference to the question. The existence of bars enable a party to benefit from their false statements. But ultimately, the bars are underpinned by a balance of fairness and a great deal of flexibility which makes sense in terms of the equitable origins of the remedy. However, this is at the expense of legal certainty and makes it very difficult to advise unless the facts are extreme.