LAW OF CONTRACTS: Your Sword, Your Shield 5

In my previous post, I wrote about the terms of contract, which is the last topic on the elements of contracts that I started with. Read it here.

I continue.

 

Ways by which contract can be terminated include:

1. Misrepresentation 
2. Mistake
3. Duress
4. Undue Influence
5. Illegal and Void Contracts
6. Privity of Contract

By termination, it means that the contract has to be put to a stop because some conditions were found to be wrong with that contract.

Today, I want to focus on misrepresentation. I will take the others subsequently.

1.  Misrepresentation

A representation may be made negligently or fraudulently.

Misrepresentation is any representation made during the negotiation of a contract and is later found to be incorrect or unsubstantiated.

A misrepresentation could arise in the following instances:


1.  FALSE STATEMENT OF FACT

See the cases of:

Smith v Land & House Property Corp (1884)

Facts

The plaintiff put up his hotel for sale stating that it would be let out to a 'most desirable tenant'. 

The defendants agreed to buy the hotel. The tenant was bankrupt. As a result, the defendants refused to complete the contract and were sued by the plaintiff for specific performance. 

Holding

The Court of Appeal held that the plaintiff's statement was not a mere opinion, but was one of fact.

The case was adjourned in favour of the plaintiff. The defendant had to pay.

Edgington v Fitzmaurice (1885)

Facts

The plaintiff shareholder received a circular issued by the directors requesting loans to the amount of £25,000 with interest. 

The circular stated that the company had bought a lease of a valuable property. 

Money was needed for alterations of and additions to the property and to transport fish from the coast for sale in London. 

The circular was challenged as being misleading in certain respects. 

Holding

It was alleged, inter alia, that it was framed in such a way as to lead to the belief that the debentures would be a charge on the property of the company, and that the whole object of the issue was to pay off pressing liabilities of the company, not to complete the alterations, etc. 

The plaintiff who had taken debentures, claimed repayment of his money on the ground that it had been obtained from him by fraudulent mis-statements.

The Court of Appeal held that the statement of intention was a statement of fact and amounted to a misrepresentation and that the plaintiff was entitled to rescind the contract. 

Although the statement was a promise of intent, the court held that the defendants had no intention of keeping to such intent at the time they made the statement.

Esso Petroleum v Mardon [1976] 

Facts:

Esso's experienced representative told Mardon that Esso estimated that the throughput of petrol on a certain site would reach 200,000 gallons in the third year of operation and so persuaded Mardon to enter into a tenancy agreement in April 1963 for three years.

Mardon did all that could be expected of him as tenant but the site was not good enough to achieve a throughput of more than 60,000-70,000 gallons. 

Mardon lost money and was unable to pay for petrol supplied. Esso claimed possession of the site and money due. 

Mardon claimed damages in respect of the representation alleging that it amounted to (i) a warranty; and (ii) a negligent misrepresentation.

Holding

The Court of Appeal affirmed the finding of negligence. On the issue of warranty, Lord Denning MR stated:

"... it was a forecast made by a party, Esso, who had special knowledge and skill. It was the yardstick (the "e a c") by which they measured the worth of a filling station.

They knew the facts. They knew the traffic in the town. They knew the throughput of comparable stations. 

They had much experience and expertise at their disposal.They were in a much better position than Mr Mardon to make a forecast. 

It seems to me that if such a person makes a forecast intending that the other should act on it and he does act on it, it can well be interpreted as a warranty that the forecast is sound and reliable in this sense that they made it with reasonable care and skill.... 

If the forecast turned out to be an unsound forecast, such as no person of skill or experience should have made, there is a breach of contract.

2. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT

Museprime Properties v Adhill Properties

Facts

In a sale by auction of three properties the particulars wrongly represented the rents from the properties as being open to negotiation. 

The statements in the auction particulars and made later by the auctioneer misrepresented the position with regard to rent reviews. 

In fact, on two of the three properties rent reviews had been triggered and new rents agreed. 

The plaintiff company successfully bid for the three properties and discovered the true situation. They commenced an action for rescission. 

The defendant company countered with the defence that the misrepresentations were not as such to induce any reasonable person to enter into the contract.

Holding

It was held that the plaintiff's had established, and indeed that the defendants conceded, that misrepresentation had occurred and any misrepresentation is a ground for rescission. 

The judge referred, with approval, to the view of Goff and Jones: Law of Restitution, that the question whether representations would have induced a reasonable person to enter into a contract was relevant only to the onus of proof. 

Here the plaintiffs had established their claim to rescission of the contract on the ground of material misrepresentation because the inaccurate statements had induced them to buy the properties. 

They would therefore be awarded the return of their deposit, damages in respect of loss conveyancing expenses and interest.


Horsfall v Thomas [1862]

Facts

The buyer of a gun did not examine it prior to purchase. 

It was held that the concealment of a defect in the gun did not affect his decision to purchase as, since he was unaware of the misrepresentation, he could not have been induced into the contract by it. 

Holding

The action of the buyer failed.

2.  TYPES OF MISREPRESENTATION

(Different scenarios in which misrepresentation can arise)

Derry v Peek (1889)

Facts

A special Act incorporating a tramway company provided that the carriages might be moved by animal power and with the consent of the Board of Trade, by steam power. 

The directors issued a prospectus containing a statement that by this special Act the company had the right to use steam instead of horses. 

The plaintiff bought shares on the strength of this statement. 

The Board of Trade refused to consent to the use of steam and the company was wound up. 

The plaintiff brought an action for deceit.

Holding

It was held by the House of Lords that in an action for deceit, it is not enough to establish misrepresentation alone; 
something more must be proved to cast liability on the defendant.

There is an essential difference between the case where the defendant honestly believes in the truth of a statement although he is careless, and where he is careless with no such honest belief. 

Fraud is established where it is proved that a false statement is made: (a) knowingly; or (b) without belief in its truth; or (c) recklessly, careless as to whether it be true or false. 

If fraud is proved, the motive of the person making the statement is irrelevant. It matters not that there was no intention to cheat or injure the person to whom the statement was made. 

The defendants were not fraudulent in this case. They made a careless statement but they honestly believed in its truth. 

Hedley Byrne v Heller [1964]

Facts

Hedley Byrne were a firm of advertising agents. 

They intended to advertise on behalf of Easypower Ltd. They wanted to know if Easypower were creditworthy, and asked their bank, the National Provincial, to find out.

The National Provincial got in touch with Easypower's bankers, Heller & Partners. 

Heller told the National Provincial, "in confidence and without responsibility on our part," that Easypower were good for £100,000 per annum on advertising contracts.

Hedley Byrne relied on this statement in placing orders on behalf of Easypower and, as a result, lost more than £17,000 when Easypower went into liquidation. 

They sought to recover this loss as damages.

Holding

In the House of Lords, Lord Pearce stated that a man may come under a special duty to exercise care in giving information or advice. 

Whether such a duty has been assumed must depend on the relationship of the parties. 

Was there such a special relationship in the present case as to impose on Heller a duty of care to Hedley Byrne as the undisclosed principals for whom National Provincial was making the inquiry? 

The answer to that question depends on the circumstances of the transaction. A most important circumstance is the form of the inquiry and of the answer. 

Both were plainly stated to be without liability. The words clearly prevented a special relationship from arising.

Howard Marine v Ogden [1978]

Facts

The defendants wished to hire two barges from the plaintiffs. 

The plaintiffs quoted a price for the hire in a letter. 

At a meeting, the defendants asked about the carrying capacity of the barges. The plaintiffs' representative replied it was about 1,600 tonnes. 


The answer was given honestly but was wrong. It was based on the representative's recollection of the deadweight figure given in Lloyd's Register of 1,800 tonnes. 

The correct figure, 1,195 tonnes, appeared in shipping documents which the representative had seen, but had forgotten. 

Because of their limited carrying capacity, the defendant's work was held up. They refused to pay the hire charges. 

The plaintiffs sued for the hire charges and the defendants counter-claimed damages.

Holding

By a majority, the Court of Appeal found the plaintiffs liable as the evidence adduced by the plaintiffs was not sufficient to show that their representative had an objectively reasonable ground for disregarding the carrying capacity figure given in the shipping document and preferring the figure in Lloyd's Register.

In my next write up, I shall write about the remedies available for misrepresentation by the aggrieved party.


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Have a nice day.