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Part IV Vitiation, 11 Misrepresentation

From: Contract Law in Practice

Neil Andrews

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Damages and contract — Validity of contract — Damages

(p. 219) 11  Misrepresentation


11.01  Statistically, misrepresentation1 is by far the most important of the vitiating factors (the other factors being duress, undue influence, unconscionability in Equity, and non-disclosure but this last applies only in special and exceptional circumstances).

11.02  Misrepresentation is always a prima facie basis for rescinding the contract. In some situations it can also produce liability for damages. Rescission and, where available, damages can be combined. Or the representee might no longer be able to rescind, or he might elect not to rescind.

11.03  If made culpably, as we shall see, a misrepresentation will give rise to damages. Those damages are ordinarily tortious, that is, based on the need to protect the representee from the injurious consequences of having been misled. That tortious type of compensation is different from the contractual paradigm form of damages, which is to award damages to protect the promisee against the harm resulting from the promise not having been kept (on that `loss of bargain’ paradigm form of damages [28.38]). And so, it is sometimes advantageous to the representee to persuade the court that the pre-formation assurance made by the other party was a collateral contract or a contractual assurance. If this is shown, the representee acquires a contractual right with respect to the statement, that is, a protected expectation that what was said will in fact be the case, otherwise the promisee can recover damages designed to place her in the position which she would have been enjoyed had the statement been accurate and if the warranty had been satisfied. Such a contractual assurance or warranty has acquired a special status and so it is no longer merely an inaccurate statement of fact (and hence a misrepresentation producing liability for the contract to be rescinded and, if culpable, a damages action based on tort principles).

11.04  A misrepresentation is an inaccurate statement of fact or law on which the other party relies, usually by entering into a contract.

11.05  The traditional doctrinal theory has been that the misrepresentation operates as a form of induced error. It is submitted that this long-standing proposition remains the law, and should continue to be so, despite the apparently unsettling statements contained in the Supreme Court’s decision in Zurich Insurance Co Ltd v Hayward (2016).2 In the Evaluation at [11.137], the author submits that this decision (i) should not unsettle the law concerning misrepresentation, and instead it should remain the general rule that a misrepresentation needs to induce the representee to believe the truth of that which was stated; (ii) accordingly, (p. 220) the Zurich case should become a special and exceptional rule confined to fraudulently induced compromises or settlements.

11.06  A misrepresentation is normally made by words, but it can be indicated by conduct, or it can comprise a combination of these. A misrepresentation does not become actionable unless the representee relies on it, that is, he was (i) aware of the statement and (ii) decisively influenced by it (however, element (ii) does not apply if the representation was fraudulent).

11.07  The two remedies which might (depending on the facts) be applicable following a misrepresentation are (i) the mutual dismantling of the parties’ benefits received under the contract (known as ‘rescission ab initio’) and/or (ii) damages. As for (i), rescission (also known as restitutio in integrum, that is, restoration of the parties to their pre-formation position) is available whether or not the representation was culpable. There are various bars to rescission.

11.08  As for actionable ‘non-disclosure’, a prospective contractual party is required to reveal relevant information to the other only in specific situations, notably contracts of insurance.

The Range of Remedies Applicable to Misrepresentation: a Summary.

11.09  Damages are available as of right only if (i) the misrepresentation is fraudulent (the tort of deceit), or (ii) the misrepresentation is negligent at Common Law (the tort of negligent misstatement), or (iii) the representor is liable under section 2(1) of the Misrepresentation Act 1967, a statutory tort.

11.10  Thus the type of misrepresentation determines the remedies available to the representee:

  1. (1)  the first category concerns a misrepresentation which is made fraudulently, that is, involving the tort of deceit; damages are available in accordance with the rules and principles governing deceit;

  2. (2)  the second category is a negligent misrepresentation, whether (a) at Common Law, or (b) under section 2(1) of the Misrepresentation Act 1967; category (b) covers any other (non-fraudulent) misrepresentation which the representor cannot prove was made with reasonable grounds to believe it to be true, in other words, situations where he does not satisfy the court that he acted non-culpably; curiously, as explored at [11.107], the statutory wording supporting liability for culpable misrepresentation creates a measure or type of damages equivalent to deceit;

  3. (3)  this is an innocent misrepresentation, that is one which is wholly non-culpable; here there is no basis for awarding damages; but there is a statutory basis for damages to be granted, at the court’s discretion, where rescission is available but withheld (on this [11.81]); another possibility is that the relevant pre-contractual statement has satisfied the Common Law test for a collateral warranty or a contractual assurance, in which case liability to compensate for breach of contract can arise.

11.11  The greatest flow of compensatory traffic is along route 2(b), that is, section 2(1) of the 1967 Act. This is because the representee is unlikely to pursue a remedy in tort in preference to that under section 2(1) of the Misrepresentation Act 1967. For a remedy in tort he must prove negligence, whereas in an action under section 2(1) the defendant representor’s fault is presumed until disproved by the representor. Furthermore, the measure being that of the tort of deceit, more damages may be recoverable under section 2(1) than in tort at common law (on these forensic advantages, [11.105] burden of proof, and [11.107] fiction of fraud).

(p. 221) 11.12  Misrepresentation normally has the effect of rendering the contract open to rescission rather than a complete nullity.

11.13  Redgrave v Hurd (1881)3 is authority for both of the following fundamental propositions:4 (i) if the misrepresentation is inaccurate, whether it be fraudulent, negligent, or wholly innocent, and the representee has relied on that statement by entering the contract, the representee can rescind;5 (ii) the representor cannot defend by asserting that the representee should have checked for himself the accuracy of that which was said.6

11.14  In this case the claimant vendor, Redgrave, failed to obtain specific performance on these facts, and the defendant purchaser’s counterclaim for rescission succeeded. Redgrave advertised in the Law Times the sale of a house with an (allegedly) extensive solicitor’s practice. The defendant purchaser met with him because he was interested in gaining a flourishing law practice. The house was incidental to that purpose. On this basis the house and practice were bought, but it turned out that the vendor had misled the buyer into believing that the annual value of the practice was £300, whereas it fell well short of that.7

11.15  Rescission (ab initio) of a voidable contract (also known as restitutio in integrum) involves restoring the parties to their pre-contractual position, that is, a reciprocal giving back and restoration, including, where applicable, indemnification as a substitute for, or to supplement, physical restitution (for financial adjustment to achieve complete restoration of benefits obtained [11.89]).

11.16  This reflects the distinction between a (supposed) void contract and a valid contract which exists until rescinded or set aside, that is, a voidable agreement (this distinction between void and voidable contracts continues to bedevil the contractual doctrine of mistake ‘as to person’ in English law [12.41]). In the case of a void contract (for example, the sale of a car which the purchaser already owns, so-called res sua cases [12.21]), there is no agreement to set aside.

11.17  Usually, rescission is a self-help process, not requiring recourse to court proceedings. Self-help rescission involves the ‘rescinding’ party notifying the other party8 that he is setting aside or avoiding the contract. Alternatively, rescission can result from an order made by the court, at the innocent party’s request: rescission then becomes a formal remedy issued by the court.

11.18  Equity can impose an indemnity [11.85] in favour of a party who has incurred expense during the currency of the transaction which is now rescinded. But the indemnity covers only expenditure necessarily incurred under the terms of the relevant transaction.9

(p. 222) 11.19  There are four general judicial bars. There is also a fifth, but statutory, bar restricted to non-fraudulent misrepresentation (see section 2(2) of the 1967 Act [11.81]). Any of these bars is sufficient to preclude rescission.

11.20  The four general bars are: (i) it has become impossible in a practical sense to restore the parties to the pre-formation position; (ii) the subject matter of the contract has been acquired in good faith by a sub-purchaser from the representee; (iii) there has been affirmation of the contract by the representee; (iv) lapse of time has rendered it unjust for the contract to be dismantled by rescission.

11.21  There is a fifth bar, but this applies only if the misrepresentation is non-fraudulent: under section 2(2) of the Misrepresentation Act 1967, the court can deny or reverse rescission if it considers it just so to do, instead giving damages in lieu of rescission.

Overlap Between ‘Misrepresentation’ Law and Contractual Assurances or Warranties.

11.22  A pre-contractual statement which is inaccurate might enjoy a double juristic life: it might be a collateral warranty (or become a term of the main contract), or it might be a misrepresentation, or it might be both. The law governing the characterization of pre-contractual statements as contractual assurances or warranties is examined in detail at [17.31]. But here, in the context of misrepresentation, it is enough to alert the reader to the possibility of this ‘double juristic life’. The twofold upshots of that overlapping of causes of action (`contractual’ and ‘misrepresentation’) are:

  1. (1)  rescission or termination/discharge for breach: the contract might be rescinded for misrepresentation (on the process of rescission [11.70]) or terminated (treated as discharged) by the innocent party for serious breach by the guilty party (on such termination/discharge [24.253]) where the statement became a term of the main contract and the relevant obligation is a condition (if instead it is a collateral warranty, there is no scope for terminating the main contract and the promisee’s only remedy for breach of the collateral warranty is damages);

  2. (2)  damages: the possibility of different damages claims, based on contractual breach or misrepresentation (damages for deceit, or breach of section 2(1) of the misrepresentation Act 1967, or at Common Law in the tort of negligent misstatement).

11.23  As for (1), rescission or termination/discharge, the law clearly permits the innocent party to make this remedial choice. Thus section 1(a) of the Misrepresentation Act 1967 affirms that a representee retains the prima facie right to rescind even if the statement became a term of the contract. It is submitted that it follows a fortiori from that statutory clarification that the prima facie right to rescind for misrepresentation is retained by the representee even if the statement became or constitutes a collateral warranty (rather than becoming a term of the main contract, the analysis which is addressed by section 1 of the 1967 Act).

11.24  Section 1 of the Misrepresentation Act 1967 states:

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 (p. 223) of this Act, notwithstanding the matters mentioned in paragraphs (a) and (b) of this section.

11.25  And so, the representee is at a fork in the road, and must elect between termination of the contract for breach of an important contractual term incorporated into the contract and rescission for misrepresentation.10 The representee’s decision to rescind the contract ab initio for misrepresentation will preclude an action for damages based upon breach of the term. This is because the contract will no longer subsist, the primary rights having been retroactively made to cease to apply.

11.26  As for (2), tortious or contractual damages, the issue is this: can a representee elect to seek ‘loss of bargain’ compensation for breach of a contractual term (where the statement became a term of the main contract) or can he instead seek tortious damages based on misrepresentation, where the relevant statement was inaccurate and became a term? Section 1 does not make clear whether a representation which has become a contractual term can also give rise to a damages claim for misrepresentation. There are conflicting authorities: (i) both damages causes of action arise;11 (ii) per contra.12

11.27  It is submitted that, in principle, if the contract is not rescinded, the innocent party should have concurrent claims for compensation for misrepresentation (deceit, section 2(1) of the Misrepresentation Act 1967, or negligent misstatement at Common Law) and for breach of a term (provided, of course, there is no double recovery for the same loss). For example, Waller J in Naughton v O’Callaghan (1990)13 held that where P bought a racehorse ‘Y’ (possessing a specified pedigree), which had been wrongly described as horse ‘X’ (having a different pedigree), P was entitled (both on the basis of misrepresentation and breach of contract) to the difference between the price paid and the value of the horse assessed at the time (two years after the sale) when the error was discovered (at that point the horse’s value had declined markedly because of a series of poor runs).

Fundamental Elements of a Misrepresentation


11.28  A misrepresentation comprises the following four main elements (and those elements sub-divide): there has been (i) a pre-formation false statement or representation by conduct, which was both (ii) apt to mislead and upon which (iii) the representee (iv) relied. Those four elements will provide the structure underpinning the following discussion.

(p. 224) 11.29  Hamblen J supplied a lucid, accurate, and penetrating distillation of the ingredients of a misrepresentation, including deceit and section 2(1) of the Misrepresentation Act 1967, in Cassa di Risparmio della Republica di San Marino SpA v Barclays Bank Ltd (2011),14 but this passage is too long to quote here: reference should be made to it.

Pre-Formation False Statement or Representation by Conduct: Element (1) of a Misrepresentation.

11.30  This first element sub-divides as follows: (i) inaccuracy: the statement must have been (or become, prior to formation) inaccurate; (ii) the misrepresentation can be verbal or by conduct; (iii) timing: the representor (a party to the contract) made a statement before the contract’s formation.


11.31  A true statement cannot be a misrepresentation. For example, in Sykes v Taylor-Rose (2004)15 a prospective purchaser of a house asked the vendors, ‘Is there any other information which you think the buyer may have a right to know?’, and the vendor honestly answered ‘no’. The Court of Appeal held that the vendor’s response contained no misrepresentation. The answer was an accurate response to a question which required a report of the vendor’s belief. They had been told (correctly) by their solicitor that it was enough to answer the question by saying ‘no’. In fact the vendor knew, but did not disclose, that there had been a gruesome murder in the property before the vendor had become owner. However, as explained, the vendor had been told by their lawyer that there is no independent duty to volunteer this information (for the absence of a duty to disclose [11.174]).

11.32  But an inaccurate statement will not be an actionable misrepresentation if it is false only in a trivial sense and, as such, this degree of inaccuracy would not influence a reasonable person, having regard to the totality of the pre-formation information supplied by the representor. In Avon Insurance plc v Swire Fraser Ltd (2000), Rix J said:16 ‘a representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts’.

11.33  In that case Rix J refused to engage in ‘microscopic’ scrutiny of each phrase’s accuracy.17 But his statement18 that ‘where there is room for an exercise of judgement, a misrepresentation should not be too easily found’ was doubted by Hamblen J in Cassa di Risparmio v Barclays Bank (2011).19

11.34  Misrepresentation by Half-truth. A pre-contractual statement which misleadingly discloses only part of the true position can constitute a misrepresentation (giving rise to rescission and/or liability in damages). The law is sensitive to the representor’s creation of a misleading impression. Mustill LJ explained in Atlantic Estates plc v Ezekiel (1991)20 that an objectionable half-truth and hence a misrepresentation occurs where ‘the true import of what was (p. 225) said or written is distorted by what is left unsaid, so that even if the representation is literally true in every particular it is nevertheless misleading’.

11.35  The rationale of the legal protection afforded in such a context is that, deprived of the full story, the representee might deduce something which is simply false, as Lord Cairns LC noted in Peek v Gurney (1873):21

Mere non-disclosure of material facts, however morally censurable … would … form no ground for an action in the nature of an action for misrepresentation. There must … be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false.

11.36  A half-truth concerning the scope of an exclusion clause occurred in Curtis v Chemical Cleaning and Dyeing Co (1951). The defendant dry-cleaning company told the plaintiff that an exclusion clause which she was about to sign covered damage to beads and sequins on a garment. In fact this clause covered all forms of damage to the garment during the process of cleaning, including, on the facts, a stain caused during that cleaning process. Because of this misleading statement, the defendant was precluded from relying on the exclusion clause in these circumstances.22 The Curtis case involved non-incorporation of the exclusion clause (the misrepresentation precluded the proferens from asserting that the claimant’s signature had caused the whole set of written terms to be incorporated into the contract: on the signature rule [17.76], including this exception to that rule). And so, on the facts of that case, even loss of, for example, beads and sequins would not have been excluded.23

Misrepresentation can be Verbal or by Conduct.

11.37  There is a category of ‘implied misrepresentation’,24 based either on (i) something implicit in what has been stated or (ii) on conduct, or a combination of (i) and (ii). In Deutsche Bank AG v Unitech Global Ltd (2013),25 a case which concerned the ‘LIBOR rigging scandal’, Longmore LJ (with whom Underhill LJ and Sir Bernard Rix agreed) concluded that the proposed pleas of implied representation were arguable but that ‘any case of implied representation is fact specific and it is dangerous to dismiss summarily an allegation of implied representation in a factual vacuum’.

Conduct: Nods, Winks, etc.

11.38  Lord Campbell LC said in Walters v Morgan (1861):26

Simple reticence does not amount to legal fraud, however it may be viewed by moralists. But a single word, or (I may add) a nod or a wink, or a shake of the head, or a smile from (p. 226) the purchaser intended to induce the vendor to believe the existence of a non-existing fact, which might influence the price of the subject to be sold, would be sufficient ground for a Court of Equity to refuse a decree for a specific performance of the agreement. So, a fortiori, would a contrivance on the part of the purchaser, better informed than the vendor of the real property to be sold, to hurry the vendor into an agreement without giving him an opportunity of being fully informed of its real value, or time to deliberate and take advice respecting the conditions of the bargain.

11.39  An example of misrepresentation by conduct is Spice Girls Ltd v Aprilia World Service BV (2002).27 The Court of Appeal found that a misrepresentation had arisen from conduct suggesting that a pop group was not about to lose one of its members. The prospective agreement was for sponsorship of the group (a female pop quintet) on a world tour, in return for the group promoting a motor-scooter. But one member of the group (Geri Halliwell, ‘Ginger Spice’) had already told the group that she would be leaving the band quite soon. The famous (but in fact fragile) five preserved an appearance of unity by participating in photo shoots. These representations by conduct suggested that the band was not about to change its membership in this way. A formal sponsorship agreement was reached on 6 May 1998. Ginger Spice left the band three weeks later, on 27 May. Because of Ginger Spice’s defection, the scooter promotion ceased to be commercially feasible. The Court of Appeal found the managing company of the band to be liable for damages under section 2(1) of the 1967 Act.

11.40  Similarly, in Gordon v Selico (1986),28 the seller of a ninety-nine-year leasehold property made a fraudulent misrepresentation by conduct. The seller had deliberately covered up dry rot. The representor could not plead as a defence the fact that the representee’s surveyor failed to detect this concealment during inspection of the relevant property.

Representation Endures Until Formation.

11.41  The representation (if it is inaccurate or if it becomes inaccurate, on which see the ensuing discussion) is treated as continuing to operate until the moment of formation. In Cramaso LLP v Ogilvie-Grant (2014) Lord Reed said:29

Thus a person who subsequently discovers the falsity of facts which he has innocently misrepresented (the statement having always been false, albeit presented in good faith) may be liable in damages if he fails to disclose the inaccuracy of his earlier representation: Brownlie v Campbell (1879–1880) 5 App Cas 925, 950, HL, Lord Blackburn.

11.42  But in the converse situation where an initially false statement ceases to be erroneous there will be no actionable misrepresentation, unless the representee had relied already on the statement before it had ceased to be inaccurate.30

Supervening Falsification Known to the Representor.

11.43  A statement initially accurate might become inaccurate before the contract is formed. This was the position in With v O’Flanagan (p. 227) (1936),31 where a doctor’s practice had ceased to be as valuable as earlier indicated. It had been stated to have a £2000 turnover a year, but the figure at the date of formation was pitifully low. The reason for this decline in revenue was that the vendor, a doctor, had fallen ill and had been unable to arrange adequate locum cover. Patients were no longer using this practice, which had become almost worthless. The vendor knew of this but failed to pass on this crucial change of circumstances as an update to the representee. This non-disclosure was a misrepresentation.

11.44  This case is clear Court of Appeal authority that where there is a pre-formation falsification of an initially accurate statement, the change being known to the representor, but not notified to the other party, failure to make a correction constitutes a misrepresentation. But (to emphasize) this is so only if (i) the representor knows of the supervening inaccuracy and (ii) fails to point it out before the time of formation. Although Lord Wright MR in this case expressed his personal view that he would not insist on awareness, that is, element (i), his was a minority view. The other judges in the Court of Appeal, Romer LJ and Clauson J, clearly required element (i). Romer LJ said:32

Sometimes an initially accurate statement is rendered inaccurate by a change of circumstances. Does the representor become liable in such circumstances? The current view at the moment is that the representor is responsible for having made a misrepresentation if he had pre-formation knowledge of the falsification but made no correction.

11.45  Later cases have adopted that majority analysis. For example, in Spice Girls Ltd v Aprilia World Service BV (2002) Sir Andrew Morritt V-C assumed that this was the criterion.33 Similarly, Lewison J approved this analysis in Foodco UK LLP v Henry Boot Developments Ltd (2010).34 The criterion of awareness is also adopted in the Law Society’s Standard Conditions of Sale, with respect to real property.35 There is a long examination of the topic of pre-formation corrections in Reinhard v Ondra LLP (2015).36

Evaluation: Supervening Falsification.

11.46  If the matter reaches the Supreme Court it will be noted that there are three possible levels of responsibility in this context, (i) bad faith, (ii) fault, and (iii) strict responsibility. It is submitted:37

  1. (1)  when considering whether the representee is entitled to rescind, a strict approach should apply; and so, the right to rescind should arise without the need to show knowledge or fault on the representor’s part; but

  2. (2)  when determining liability to pay damages, it should be necessary for the representee to show that the representor was culpable: in the absence of a contractual warranty concerning the continuing accuracy of a statement, liability to pay compensation should require fault; but fault might involve failure to take reasonable steps to monitor the statement’s continuing accuracy.

Apt to Mislead: Element (2) of a Misrepresentation.

(p. 228) 11.47  The statement must concern a matter of past or present fact or an aspect of ‘law’.38

11.48  The statement should not involve the assertion of a mere matter of opinion. But a statement can import an element of misrepresentation when made in circumstances suggesting that the representor has knowledge of facts supporting the relevant comment.

11.49  The statement must not be vague and unambiguous, and not a ‘mere puff’. For example, in Dimmock v Hallett (1866),39 which concerned a sale of land at auction, Turner LJ said: ‘a mere general statement that land is fertile and improvable [was here] a mere flourishing description by an auctioneer’. But there were other things said or represented at the relevant auction which were inaccurate and which enabled the purchaser to rescind.

11.50  The relevant representation must also be a comment which objectively is apt to influence a reasonable person.40 Commenting on this, Christopher Clarke LJ said in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc (2010):41

[There must have been] a statement of fact upon which [the representee] was entitled to rely … The reference [in Mance LJ’s formulation in the MCI Worldcom case (2004)] to the characteristics of the representee is important. The Court may regard a sophisticated commercial party who is told that no representations are being made to him quite differently than it would a consumer.

11.51  And so, the test is whether (i) a reasonable person, having the characteristics of the representee (there being a spectrum ranging from high-level sophistication and experience to the complete ingénu), (ii) in the relevant context, would act reasonably in treating (iii) the particular statement as intended to be relied upon and as the solid basis for decision-making (for comment on this qualified or nuanced application of the objective principle, see the general treatment of that principle at [2.18]).

11.52  Context is crucial in determining whether a representation has been made which the representee, acting reasonably, was justified in treating as a basis for reliance. For example, Barnsley v Noble (2014)42 concerned a contract of demerger of a company which ran ‘amusement arcades’. Part of the deal concerned the possibility that value-added tax (VAT) would be refunded to the company, following developments in EU law. At the time this was a mere possibility. In fact, subsequently, such refunds were made by the relevant public authorities. Against this background, Nugee J had to consider the allegation that one of the parties, Philip, had made a fraudulent statement to Barnsley that the VAT claims were in Philip’s opinion unlikely to succeed, whereas (so it was alleged) he was confident that they would succeed. In other words, Barnsley was complaining that Philip had deceitfully undervalued the VAT aspect for his own benefit in the negotiations. The judge concluded (p. 229) that no fraudulent misrepresentation had been made on these facts because it was not reasonable for the representee to place any reliance on these remarks in this context, and the statement, even though fraudulent, counted as nothing, it being a mere expression of amateur opinion.

11.53  As for the requirement of ‘intention’, in the context of deceit, this relates to the representor’s dishonest awareness of the content or import of what he is saying. As Hamblen J explained in Cassa di Risparmio della Republica di San Marino SpA v Barclays Bank Ltd (2011):43

In a deceit case it is also necessary that the representor should understand that he is making the implied representation and that it had the misleading sense alleged. A person cannot make a fraudulent statement unless he is aware that he is making that statement. To establish liability in deceit it is necessary ‘to show that the representor intended his statement to be understood by the representee in the sense in which it was false’—per Morritt LJ in Goose v Wilson Sandford & Co [2001] Lloyd’s Rep PN 189 at [41]. In other cases of misrepresentation this is not a requirement, but one would generally expect it to be reasonably apparent to both representor and representee that the implied representation alleged was being made.

‘Mere Puffs’: Incredible Statements: ‘It Will Never Rain’; ‘Prices Will Never Fall’.

11.54  In Shaftsbury House (Developments) Ltd v Lee (2011)44 Proudman J added a curious dictum concerning the category of ‘mere puffs’: that is, the requirement that a statement of fact should not be made on an occasion and in circumstances, or be of a type, that there is no intention, objectively, that it be taken seriously. In short a ‘mere puff’ is an incredible or manifestly unreliable assertion. Proudman J, citing Australian authority, suggested that a statement that real property prices will not fall, in any circumstances, could not be dismissed as a ‘mere puff’. The problem with this dictum is that, with respect, it simply runs counter to the widespread understanding that property prices, whether nationally, or regionally, or locally, can decrease. It should not be enough that something has been said to ‘allay’ apprehension. The test is whether the content of what is said, the context, the relationship between the parties, the relative level of understanding and experience of the parties, leads to the sensible inference, applying the objective principle [2.18], that the representee was right to assume it safe to rely on the statement. Only an absolute contractual guarantee, seriously intended as such, would cross the line and cease to be a puff in this particular context. Even a lie, that is where the representor knows that he does not believe what he said (to use the vernacular, where ‘he is lying through his teeth’) would not count as a representation concerning intention because the statement is intrinsically a worthless reassurance. Property prices go up and go down: to deny the possibility of a decrease is a manifestly worthless expression of optimism.

The Representee Receives the Inaccurate Information: Element (3) of a Misrepresentation.

11.55  The statement must be addressed (normally directly, sometimes indirectly) to, and received by, the representee who goes on to become party to the contract. The Supreme Court in Cramaso LLP v Ogilvie-Grant (2014)45 held that a representation by D to C(1) will continue (p. 230) to operate if, prior to the contract’s formation, rather than C(1), C(2), a newly formed partnership or company, becomes party to the contract. C(2) then becomes the representee and so acquires rights of rescission and/or to damages.46 Another permutation is that the representee’s agent is aware of the representation. That can be decisive.47

Reliance on the Misrepresentation; Element (4) of a Misrepresentation.

11.56  The representee must rely on the statement by entering the contract, or by entering the contract on less favourable terms (on the special position concerning fraudulent misrepresentation, where the law tilts in favour of the representee, [11.58] at sub-paragraph (9)).

11.57  In 2002 the cluster of issues concerning reliance (inducement, causation, and materiality) was twice reviewed by the Court of Appeal: first, in Spice Girls Ltd v Aprilia World Service BV (2002);48 secondly, by Clarke LJ in Assicurazioni Generali SpA v Arab Insurance Group (2002).49

11.58  The law concerning reliance can be summarized as follows:

  1. (1)  reliance must be shown by the representee (in the absence of fraud, where the representee is generously protected: see (9) below);

  2. (2)  reliance can occur even though the representee might have checked for himself; Redgrave v Hurd (1881)50 is authority for this proposition; occasionally the representee’s experience is so considerable that it would be inappropriate to apply this rule ([11.66] for discussion of this aspect of the Peekay case (2006));

  3. (3)  the more common form of reliance is:

    1. (a)  that the representee was induced decisively by the statement to enter the contract; but

    2. (b)  reliance might arise where the representee had already decided to enter the contract, but the impact of the misrepresentation was that he was induced to accept terms less advantageous than he might otherwise have achieved: on (b) see Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd (2001),51 where the misrepresentation had the effect of depressing the representee’s overall level of profit); and Huyton SA v Distribuidora Internacional de Productos Agricolas SA (2003);52

  4. (4)  (a) in general, a decisive influence, or ‘but for’, test of reliance and causation, applies, unless (b) the misrepresentation was fraudulent;

  5. (5)  subject to point (4)(a) (that is, the general requirement of ‘but for’ influence), the misrepresentation might not be the sole inducement; it is enough that it was one of the factors which induced the representee to enter the contract, or to assent to the present set of terms;53

  6. (p. 231) (6)  reliance can be inferred from the representation’s ‘materiality’; a ‘material’ statement is one which, objectively, is apt to induce reliance by a reasonable person, that is, information which would normally influence a reasonable person in the relevant situation to enter the contract or which would influence the assessment of the attractiveness of the proposed contractual terms; but the representee must allege and demonstrate that the statement was ‘material’;54

  7. (7)  however, the element of ‘materiality’ is not necessary, because a representee might exceptionally be able to substantiate a plea of reliance without resort to this inference of law; but, without the assistance of ‘materiality’, the representee’s task in showing reliance on a non-fraudulent misrepresentation is an uphill struggle; this is because the representee will need to adduce independent evidence that the statement had the effect of inducing him to enter into the relevant transaction; that will be difficult because, ex hypothesi, he is claiming to have relied on something which (lacking the quality of ‘materiality’) he cannot show was such that it would have influenced others in the ordinary course of things;

  8. (8)  if the statement was ‘material’, therefore, the onus will be on the representor to prove that in fact the representee did not rely for any of the following three reasons:

    1. (a)  the representation did not reach the mind (or attention) of the representee; or

    2. (b)  the representee, although aware of the representation, did not allow it to influence the decision to contract; for example, the representee preferred instead to act on his own assessment, including conducting his own inquiries; thus in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd (2006) the representee, a ‘sophisticated’ and experienced investor, assessed the proposed investment without reliance on the defendant’s casual misrepresentation;55 but a party who has been guilty of deliberate concealment cannot plead as a defence the fact that the representee failed to detect this concealment, despite the latter’s inspection of the relevant property; this was the position in Gordon v Selico (1986)56 where the seller of a ninety-nine-year leasehold property was held to have made a fraudulent misrepresentation by conduct, having deliberately covered up dry rot which was present within the premises; and the Court of Appeal held that it was no defence that the representee’s surveyor had made an inspection of the premises and had failed to uncover this defect; or

    3. (c)  the representee received and absorbed a correction; in all cases (even if the statement is fraudulent), the representee might confirm that he has absorbed a correction (normally sent by the representor); but the representor’s attempted correction must hit home, and so it is not enough if the attempted correction does not in fact (p. 232) come to the representee’s notice;57 the representor can escape liability by requiring the other party to sign a declaration that he has indeed read a correction, as in Peekay (2006), where the representee had signed a declaration that he had read and understood the document’s accurate description of the subject matter, and this was held to preclude him from asserting that he had not read that correction;58

  9. (9)  in the case of fraud, reliance is presumed if the victim of fraud is seeking rescission (provided he was aware of the statement and did not choose deliberately to ignore it),59 even if it is shown that the representee would have entered into the transaction in the absence of the misrepresentation;60 it is sufficient that the representee was aware of the representation and it formed part of, even though not a decisive part, of his motivation;61 furthermore, as explained in detail at [13.21], a fraudulent statement can be actionable even if the representee was not entirely taken in by the lie, as the Supreme Court held in Zurich Insurance Co plc v Hayward (2016);62

  10. (10)  as a general source of analysis, attention is drawn to Lord Hoffmann’s discussion of reliance within the law of misrepresentation, in Standard Chartered Bank v Pakistan Corporation (Nos 2 and 4) (2002).63

Matters of Opinion

Reliance on the Misrepresentation; Element (4) of a Misrepresentation.

11.59  The representee must rely on the statement by entering the contract, or by entering the contract on less favourable terms (on the special position concerning fraudulent misrepresentation, where the law tilts in favour of the representee [11.58]) at sub-paragraph (9).

11.60  In 2002 the cluster of issues concerning reliance (inducement, causation, and materiality) was twice reviewed by the Court of Appeal: first, in Spice Girls Ltd v Aprilia World Service BV (2002);64 secondly, by Clarke LJ in Assicurazioni Generali SpA v Arab Insurance Group (2002).65

Mere Opinion: Representor Lacking Experience.

11.61  Objectively, a statement might not be something on which a person would reasonably rely. This was the position in Bisset v (p. 233) Wilkinson (1927),66 where the Privy Council held that a landowner had not made a misrepresentation when he guessed that a portion of a farm, which was for sale, would be capable of sustaining a sheep population of 2000. This was a random, uneducated, figure plucked from thin air by the vendor, and the purchaser must have known this. The Privy Council held: (i) there had been no fraudulent misrepresentation by the vendor; (ii) the sheep-rearing capacity of the land was never established, so that it was not even clear that there had been any numerical ovine misstatement; (iii) in any event, the circumstances indicated that the representee should have realized that the vendor’s statement was a mere matter of opinion, which was not underpinned by practical experience or expertise.

11.62  Lord Merrivale, giving the Advice of the Privy Council, said:67

the most material fact to be remembered is that, as both parties were aware, the appellant had not and, so far as appears, no other person had at any time carried on sheep-farming upon the unit of land in question. That land as a distinct holding had never constituted a sheep-farm. The two blocks comprised in it differed substantially in character… [Sim J at first instance had said that] ‘In these circumstances … the defendants were not justified in regarding anything said by the plaintiff as to the carrying capacity as being anything more than an expression of his opinion on the subject.’ In this view of the matter their Lordships concur.

11.63  Lord Merrivale continued:68

The respondents, after two years’ trial of sheep-farming, under difficulties caused in part by their inexperience, found themselves confronted by a fall in the values of sheep and wool which would have left them losers if they could have carried three thousand sheep. As is said in the judgment of Ostler J [in the New Zealand Court of Appeal]: ‘Owing to sheep becoming practically valueless, they reduced their flock and went in for cropping and dairy-farming in order to make a living.’ … It is of dominant importance that Sim J [the trial judge] negatived the respondents’ charge of fraud … The defendants failed to prove that the farm if properly managed was not capable of carrying two thousand sheep.

11.64  Statement Falsely Painting a Positive Picture Contrary to Known Facts. A statement can be misleading if it suggests that the representor has no knowledge of facts which would contradict his statement. As Bowen LJ observed in Smith v Land and House Property Co (1884):69 ‘ if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion’.

11.65  In Smith v Land and House Property Co (1884)70 a landlord’s statement (contained in the auctioneer’s particulars) that its commercial tenant (‘Mr Fleck’) was ‘most desirable’ or ‘very desirable’ was a statement which papered over the fact that rent had been recently very hard to squeeze from this tenant. This was because, as it seems, the relevant hotel (the Marine Hotel, Walton-on-the-Naze), which was the subject of the proposed sale, was not (p. 234) prospering. The Court of Appeal concluded that rescission should be granted. A false aura of prosperity and economic stability had been created by the vendor’s auctioneer’s remark. The buyer had relied on this sanguine and upbeat comment. Bowen LJ explained:71 ‘[A] tenant who had paid his last quarter’s rent by driblets under pressure must be regarded as an undesirable tenant.’

Informal Oral Comment of No Consequence: ‘The Devil in the Detail’.

11.66  Occasionally, as in the Peekay case (see text below), the representee’s experience is so considerable that it would be inappropriate to apply the second aspect of Redgrave v Hurd (1881), that is, the general rule that the representee can rely without checking the statement’s accuracy.

11.67  In Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd (2006)72 the alleged representee was a man of business with considerable experience as an investor. He knew that it was incumbent on him to check the terms and conditions in the contract he was about to enter, for that document alone would define the investment. He was thus unable to escape from the transaction by asserting that he had relied solely on a casual and oral pre-formation statement. That remark could not reasonably have been relied upon as a decisive and categorical definition of the relevant transaction. He was the cause of his own downfall: his decision simply to glance at the documentation was his own undoing. But this is an unusual situation: the representee was an experienced investor who knew the ropes; this was not an ordinary consumer, certainly not an ingénu.

11.68  In greater detail, the facts of the Peekay case (2006) were as follows. When Peekay’s representative’s (Mr Pawani) visited Dubai, ANZ’s representative, Mrs Balasubramaniam, made a non-fraudulent misrepresentation, concerning the nature of a proposed investment. That representation was made in a ‘rough-and-ready’ fashion. The representee was a ‘sophisticated’ and experienced investor. He knew the crucial importance of the Final Terms and Conditions. Despite that, he recklessly signed without reading. The Court of Appeal concluded that the result was that he had elected to invest without reliance on this rather casual misrepresentation.73 Similarly, Chadwick LJ made clear that the alleged representee had badly cut corners by only glancing at the documentation.74

11.69  A second ground of defence in the Peekay case was that the representee had signed a declaration that he had read and understood the document’s accurate description of the subject-matter (perhaps technically the point is dictum, but more likely it is a second ratio).75 The Court of Appeal held that this constituted a ‘contractual estoppel’ and precluded him from asserting that he had not read and understood the document.76 On the doctrine of contractual estoppel, however, see now the First Tower Trustees case (2018) [11.150].

(p. 235) Routes to Rescission

Modes of Rescission.

11.70  Rescission need not be ordered by the court, for (at least in some circumstances) it can be a self-help possibility. Unfortunately, the law concerning rescission is not without intricacy, as the following propositions reveal:77

  1. (1)  It should be noted that the law of rescission comprises (a) Common Law rescission for fraudulent misrepresentation or duress, or mental incapacity or for non-disclosure (to the small extent that this is recognized at Common Law); and (b) rescission in Equity for non-fraudulent misrepresentation, undue influence, equitable coercion, or unconscionability. Rescission of type (a) can be effected by self-help; whereas (b) is the result of a successful application to the court, the matter is discretionary, and subject to the court’s overall control.

  2. (2)  It is not clear in the third decade of the present century whether these historical and jurisdictional differences are defensible, nor that they will be maintained. Discussion in this field is often disturbingly dogmatic, because rooted in outmoded jurisdictional concepts and differences, rather than being related to the substance of the legal issue.78 It is submitted that the Supreme Court should declare79 that all voidable contracts are capable of being avoided by the relevant party’s ‘election’ to rescind, that is, by the simple act of notification to the other party (no actual notification being required in the context of fraud, as the Car & Universal Finance case makes clear, see text below).

  3. (3)  Under section 2(2) of the Misrepresentation Act 1967 (on which [11.81]) the court is empowered to undo an act of rescission and grant damages in lieu, exception where the misrepresentation was fraudulent. For completeness, the law should be developed so that the court has the same power to undo rescission and grant damages in lieu, where appropriate, even if the ground of rescission was not misrepresentation.

  4. (4)  The attraction of self-help rescission is that it promotes a swift and (by definition) out-of-court response by the party at whose ‘election’ rescission is sought. It would be highly regrettable, and it is submitted wholly retrogressive, to exclude the self-help option. Instead the development of the law should involve extension of the self-help mode, subject to the possibility of judicial compensation in lieu (see (3) above). By contrast, Janet O’Sullivan contends that the law should be changed so that self-help rescission is abandoned and instead judicial rescission should be the sole mode of effecting rescission:80 ‘it is suggested [by Janet O’Sullivan] that the equitable notion of rescission should now prevail entirely and that the notion that rescission is (p. 236) effected by the election of the innocent party should be excised from the law. But this idea, with respect, even if attractive (which is debatable) can only be introduced by legislation or by a self-confident Supreme Court.

  5. (5)  The exigencies of the case might require application to the court for a judicial order for rescission. The judicial route will be necessary where the parties are in dispute concerning the alleged ground of rescission and/or the process of it being worked out, including a possible dispute concerning the ‘bars’ (on these [11.74]) upon rescission in the relevant context.

  6. (6)  It appears that rescission ‘on terms’ is not available in such a case.81 Furthermore, it appears that partial rescission is not available in England.82

  7. (7)  Where rescission was not available, but the contract would otherwise (but for the bar) have been voidable, an order for equitable compensation was made in Mahoney v Purnell (1996).83

Fraudulent Representor Disappears Without Trace.

11.71  Of course, self-help is the predominant mode of rescission, the representee simply rescinding by notifying the representor directly. But if the representor is a rogue. and hence quickly vanishes, there is an obvious difficulty. The Court of Appeal in Car & Universal Finance Co v Caldwell (1965)84 held that, where the representee has been the victim of a fraudulent misrepresentation, the representee’s notification to the Police effects a constructive notification to the rogue (even though, in reality, he remains ignorant) and rescission occurs at that point. But this appears to be a benevolent approach currently (but see the next paragraph of the text) confined to a fraudulent misrepresentation. Davies LJ said in Car & Universal Finance Co v Caldwell (1965):85

The fact that Norris knew that he was a rogue and that, therefore, [the vendor] was likely to be after him distinguishes this case from that of an innocent misrepresentor. It would not occur to the latter that the other party to the contract would have any right or desire to rescind, so that there would be no such implication as that which I have suggested arose in the present case.

Evaluation: Rescission and the Non-Fraudulent Representor.

11.72  The court in the Car & Universal Finance case (1965), see above, left open the question whether such indirect rescission (rescission, as it were, addressed to the world at large) should be effective where the misrepresentation was non-fraudulent or perhaps in other contexts of vitiated agreements (such as duress or undue influence). But Davies LJ suggested that the innocent representor might need to be contacted directly. It appears that innocent representors do not prove elusive, so that the problem is not one of great, if any, practicality.

11.73  It is submitted that constructive notification of rescission should be possible even if the ground of rescission is not fraudulent misrepresentation. In an age of increasing (p. 237) international mobility, it might be necessary to resolve this issue. In support, there are two analogous points: (i) section 2(4) of the Contracts (Rights of Third Parties) Act 1999 enables the court to make a declaration that a contract will be varied, to the detriment of a third party, if the latter’s whereabouts are unknown, or if he lacks mental capacity; (ii) in the context of revocation of an offer of an unilateral contract offer, there is American authority that an offer made to the public at large can be revoked by a public notification.86

Bars to Rescission for Misrepresentation

11.74  The four87 bars to rescission, recognized with respect to all the heads of rescission, will now be considered. (See also [11.81] for examination of the discretionary bar available under section 2(2) of the Misrepresentation Act 1967 with respect to non-fraudulent misrepresentation).

(1)  Affirmation by the Representee.88

11.75  In Peyman v Lanjani (1985), the Court of Appeal confirmed that the representee must know of his right to rescind before he can be said to have elected not to rescind (including, as the court mentioned, the right to terminate for breach) Stephenson LJ said:89 ‘knowledge of the facts which give rise to the right to rescind is not enough to prevent the plaintiff from exercising that light, but he must also know that the law gives him that right yet choose with that knowledge not to exercise it’.

11.76  In North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (`The Atlantic Baron’) (1979)90 Mocatta J held that a coerced party had lost his opportunity to avoid the contract for duress at Common Law because his objective conduct indicated affirmation of the contract after the coercion had ceased to operate on him.

(2)  Acquiescence, Laches, and Prejudicial Lapse of Time.91

11.77  This bar concerns unacceptable and harmful or prejudicial delay which elapses after the party entitled to rescind has acquired knowledge of that possibility or at least of the circumstances which create that possibility. The Court of Appeal in Salt v Stratstone Specialist Ltd (2015) held that lapse of (p. 238) time is not a bar unless it is accompanied by resultant prejudice to the representor, but this was not shown on the facts.92 Longmore LJ said in the Salt case:93

… it does not seem to me that lapse of time on its own can be a bar to rescission in this case… [The] ground on which rescission became available only became known to Mr Salt on disclosure of documents [and this led to amendment of the claim to include a rescission plea]. Most of the subsequent delay has been due to the litigation process and Stratstone’s wrongful refusal to take the car back and return the price.

11.78  In the same appeal, Roth J added that the problematic decision in Leaf v International Galleries (1950) can now be ignored because that case has been overtaken by developments in the sale of goods context and because of the impact of section 1 of the Misrepresentation Act 1967.94

(3)  Inability to Restore the Parties to the Original Position.95

11.79  The Court of Appeal in Salt v Stratstone Specialist Ltd held that a sale of a car described as new, but in fact already used and defective, could be rescinded even though there had been some reduction of the car’s value during the purchaser’s period of ownership.96 Rejecting the vendor’s attempt to raise the present bar, Longmore LJ said97 that Equity strives to adjust the parties’ position to achieve practical justice, taking account of profits and making allowance for deterioration. However, the representor should not be over-indulged:98 ‘ [t]he absence of evidence about depreciation or the value of the use of the car should not operate to the disadvantage of the representee who should never have been put in the position of having a troublesome old car rather than a brand new one’.

(4)  Intervening Third Party Rights: Notably, Purchase of the Subject-matter by a Bona Fide Purchaser for Value without Notice.99

11.80  Here the central point is that an innocent third party who receives a chattel without notice of the representee’s right to rescind will be protected against that possibility of rescission, provided rescission has not already been effected at the time of the third party’s acquisition of the property. On this topic see discussion of Car & Universal Finance v Caldwell at [11.71].

Non-fraudulent Misrepresentation: Statutory Discretionary Bar under Section 2(2) of the 1967 Act.100

11.81  There is a fifth possible bar to rescission, but this only applies where the representation is other than fraudulent. Under section 2(2) of the Misrepresentation Act (p. 239) 1967, the representee might be granted damages in lieu of rescission. The court has a discretion to do so (whether the representee is seeking rescission or seeking damages under section 2(2)). That sub-section states:

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.

11.82  There are three main points concerning this provision. First, the better view is that damages under this sub-section will yield the difference between the price paid and the actual value of the property, that value to be assessed at the time of the property’s transfer, rather than including further loss resulting from a subsequent fall in the property’s value.101

11.83  Secondly, liability under section 2(2) of the Misrepresentation Act 1967 does not require proof that the representor was in any way culpable.102 By contrast, a representor is liable to pay damages under section 2(1) of the Misrepresentation Act 1967 only if he did not have reasonable grounds for believing the accuracy of his statement.

11.84  Thirdly, section 2(2) of the Misrepresentation Act 1967 presupposes that rescission remains extant on the facts, and that the possibility of avoiding the contract has not fallen away at the time when the court is asked to exercise the discretion under that sub-section. This point was made clear by the Court of Appeal in Salt v Stratstone Specialist Ltd (2015), where Longmore LJ said:103

[17] … [The] words ‘in lieu of rescission’ must, in my view, carry with them the implication that rescission is available (or was available at the time the contract was rescinded). If it is not (or was not available in law) because, for example, the contract has been affirmed, third party rights have intervened, an excessive time has elapsed or restitution has become impossible, rescission is not available and damages cannot be said to be awarded ‘in lieu of rescission’.

Monetary Adjustment During Rescission

Indemnity in Favour of the Representee.

11.85  When rescission takes place, the representee and representor are returned to the pre-formation position, and this sometimes requires monetary adjustment.

(p. 240) 11.86  In Whittington v Seale–Hayne (1900)104 Farwell J noted that an ‘indemnity’ granted in favour of the representee during this process of rescission cannot cover anything other than necessary expenditure incurred during the contract’s operation. Such an ‘indemnity’ is not express but is instead an implied obligation to make a pecuniary allowance in favour of the representee in order to avoid the representor’s unjust enrichment.

11.87  This case concerned a lease of a poultry farm. The lessor’s misrepresentation was that it was in a sanitary condition. The indemnity here enabled the tenant to recover for (i) rent paid to the representor (ii) rates and (iii) statutory repair costs, but not (a) loss of poultry, (b) loss of profit, or (c) medical expenses. Items (i) to (iii) avoid unjust enrichment: items (a) to (c) would cross the line and involve compensation for consequential losses.

11.88  In the Whittington case Farwell J said105 that he preferred the analysis adopted by Bowen LJ106 in Newbigging v Adam (1886), who referred to an indemnity in respect of items of expenditure incurred in satisfying ‘rights and obligations created by the contract’, as distinct from loss more generally occasioned as a result of entering the contract. Farwell J construed Cotton LJ’s107 judgment in that case as not necessarily wider. But the third judgment, by Fry LJ,108 was rejected by Farwell J in the Whittington case109 as contrary to principle because it would have tilted the indemnity towards compensation for the consequences of entering the relevant contract.

Flexible Adjustment.

11.89  In the Court of Appeal in Cheese v Thomas (1994)110 Nicholls V-C emphasized the need for a flexible approach to the process of rescission. In this case Cheese, the claimant, an octogenarian, had paid all his money to the defendant, a relative (Thomas), in return for a right to cohabit in a property to which they had contributed in a 43:40 ratio, the payee to receive the property outright on the claimant’s death. The litigation costs wiped out the property’s value. But the property’s market value had already fallen. Although the defendant was guilty of presumed undue influence, the correct form of rescission was that the claimant should recover his share of the property’s value rather than his original money contribution. Here Nicholls V-C said (i) that the market diminution in the property’s value should not fall solely on the defendant’s shoulders because he had not acted in a morally disreputable manner and (ii) the claimant’s notional occupation rent should be cancelled out by the defendant’s notional liability to pay interest on the sum now ordered to be repaid. Nicholls V-C said:111

… the judge acquitted Mr Thomas of acting in a morally reprehensible way towards Mr Cheese. He described Mr Thomas as an innocent fiduciary … In all the circumstances, to require Mr Thomas to shoulder the whole of the loss flowing from the problems which (p. 241) have beset the residential property market for the last year or two would be harsh. That is not an outcome a court of conscience should countenance. The judge declined to order Mr Cheese to account for an occupation rent or to order Mr Thomas to pay interest on the sum being repaid to Mr Cheese. There is obvious good sense in letting these matters offset each other.

Rescission and Allowance for Representor’s Skill.

11.90  In O’Sullivan v Management Agency and Music Ltd (1985)112 a music publishing and promotion contract was rescinded for undue influence. The claimant was the singer and songwriter ‘Gilbert O’Sullivan’. There had been much complicated commercial water under this bridge, and so the Court of Appeal ordered rescission subject to adjustments to achieve practical justice. Fox LJ said:113

… [we will] authorize the payment (over and above out of pocket expenses) of an allowance for the skill and labour of the first five defendants in promoting the compositions and performances and managing the business affairs of Mr O’ Sullivan … Such an allowance could include a [modest: see full text of judgment] profit element in the way that solicitors’ costs do … [Subject to this last point], the agreements and the assignments of copyright [will be] set aside, the master recordings transferred to Mr O’Sullivan and an account of profits ordered.

Tort Damages for Loss of Income

Compensation for Lost Revenue from Investment or Business Venture.

11.91  The Court of Appeal in East v Maurer (1991)114 made clear that tort damages for misrepresentation can include the loss of hypothetical income or profit on a capital item (including the running of a business). In that case the representation was fraudulent, but the same analysis applies even if the statement was actionable only under section 2(1) of the Misrepresentation Act 1967 or at Common Law under the principle of Hedley Byrne & Co Ltd v Heller and Partners Ltd (1964).115 Damages for deceit are not subject to a reasonable foreseeability test. Instead, as Lord Browne-Wilkinson explained116 in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997), the fraudulent representor ‘is bound to make reparation for all the damage directly flowing from the transaction; although such damage need not have been foreseeable, it must have been directly caused by the transaction … In addition, the claimant is entitled to recover consequential losses caused by the transaction.’

(p. 242) 11.92  In East v Maurer the defendant vendor’s deceit was a hook to catch a prospective buyer into acquiring a hairdressing business. The lie had the effect of luring the representee into making a bad investment in a hair salon. The vendor had said that he would be emigrating. This was a lie because he knew that he had no intention of doing so. Instead he remained in the area (Bournemouth/Boscombe) after the sale to the claimant. The vendor continued to run a business nearby. The claimant’s salon’s pre-existing clientele was enticed to the vendor’s remaining business because of the goodwill he had established with them. The claimant was entitled to damages which included the amount of gain which the claimant would have made if the business had not had its goodwill depleted in this way. The claim was not based, therefore, on a promised level of income, but simply on loss of income traceable to the tort, here a fraudulent statement. Mustill LJ said:117 ‘The loss of profits awarded relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the Exeter Road business … In my judgment there is no error of principle here.’

11.93  East v Maurer (1991) has produced a line of cases: Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd (2001); 4 Eng Ltd v Harper (2008); Parabola Investments Ltd v Browallia Cal Ltd (2010), and Yam Seng Pte Ltd v International Trade Corp Ltd (2013), and these are noted below.

Tort Damages to Compensate for Less Profitable Contractual Terms.

11.94  Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd (2001)118 is a variation on this theme because the claim concerned not a hypothetical different deal with someone other than the defendant but the lost chance to strike a better deal with the defendant. The parties had been negotiating terms for the claimant to receive a distributorship to supply the defendant’s products in France. The defendant fraudulently gave false figures concerning prices charged by the defendant for those products in the United Kingdom. If the claimant had received accurate figures, it would have secured a better bargain with the defendant. The Court of Appeal awarded damages for that amount of loss which was attributable to a bad set of terms, that is, the extra profit which would have been gained if the defendant had not fraudulently distorted the negotiations concerning the alleged lowest UK supply prices.119

Tort Damages for Having Failed to Acquire a Better Alternative Business and Investment.

11.95  David Richards J’s decision in 4 Eng Ltd v Harper (2008)120 establishes that East v Maurer claims for tortious misrepresentation loss extend to (i) loss of a chance to acquire an alternative particular business (as distinct from the certainty that an alternative, of a generic type, would have been acquired, as in the East v Maurer case, on which see text above); and (ii) such a tortious damages claim can cover not just the income that would have been derived from running the alternative business but the capital increase that would have accrued if, in due course, the alternative business had been sold by the claimant. In 4 Eng Ltd v Harper (2008) the claimant was unsure whether to buy business E or T, but it chose E as a result of the defendant’s fraudulent misrepresentations concerning E’s trading performance. The claimant successfully claimed for the loss of the chance, reckoned by the judge at 80 per cent, to purchase T.

Damages for the Full Extent of Investment Losses.

(p. 243) 11.96  In Parabola Investments Ltd v Browallia Cal Ltd (2010)121 the Court of Appeal held that damages in tort can extend to opportunities for investment which continue to be lost even after the relevant fraud has been discovered. In this case the defendant was vicariously liable for the fraud of one of its traders who had daily misrepresented to the claimant that the relevant trading account was in good health. In fact the overall level of the fund during this period fell by £3.75 million, referred to here as ‘capital loss’. The defendant accepted vicarious liability for the trader’s fraud. The claimant successfully sought compensation not only (i) for this capital loss but (ii) for the loss of profits which the claimant would have made on alternative trading during the period (‘stage 1’) of the fraud and (iii) loss of profits occurring during the period (‘stage 2’) from discovery of the fraud until trial.122

Tort Damages: Inevitable Loss? Burden of Proof.

11.97  Leggatt J in Yam Seng Pte Ltd v International Trade Corp Ltd (2013)123 examined the defendant’s suggestion that tort damages should be reduced, or even reach zero, on the basis that the claimant would have lost some or all of the money even if there had been no tortious misconduct by the defendant. Leggatt J held124 that sustaining such a defence will be an uphill struggle because the defendant will need to show (i) ‘with a reasonable degree of certainty’ (ii) ‘that the claimant would probably have suffered a loss from entering into an alternative transaction’ and (iii) ‘the amount of that loss’.125 No such reduction was made on the facts of this case.

Damages under Section 2(1) of the Misrepresentation Act 1967


11.98  The requirements for a claim under section 2(1) of the Misrepresentation Act 1967 were neatly summarized by Leggatt J in Yam Seng Pte Ltd v International Trade Corp Ltd (2013):127

[200] … it is … necessary for a claimant to show: (1) that it has entered into a contract with the defendant; (2) that it did so after a representation of fact had been made to it by the defendant (and in reliance on that representation); (3) that the representation was false; and (4) that as a result of entering into the contract with the defendant, the claimant has suffered loss. [201] … [If the matters just mentioned are satisfied] the burden is on the defendant in order to avoid liability under section 2(1) to prove that it had reasonable ground to believe, and did believe, up to the time the contract was made that the facts represented were true.

(p. 244) 11.99  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.

11.100  This provision presupposes that the representee and the representor have entered into a contractual relationship after the relevant (alleged) misrepresentation. This elementary point was noted by Moore-Bick LJ in Taberna Europe CDO II plc v Selkskabet (2016):128 ‘[section 2(1) of] the 1967 Act is dealing only with the relationship between the two contracting parties arising out of or in relation to a contract which has been induced by misrepresentation on the part of one of them’.

11.101  As we shall see, a claimant’s preferred potential source of compensation for a pre-contractual misrepresentation (in the absence of a collateral warranty) is section 2(1) of the Misrepresentation Act 1967. This is so for two main reasons: (i) damages are recoverable for all the consequences of the representation, even if not reasonably foreseeable, subject only to a defence of mitigation; (ii) once the representation is shown to have been inaccurate, the defendant bears the burden of showing reasonable grounds for continuing to believe, until formation, the accuracy of the statement.

11.102  As Sir Donald Nicholls V-C noted in Gran Gelato Ltd v Richliff Ltd (1992),129 damages under section 2(1) of the 1967 Act are classified as tortious. Furthermore, they are ‘essentially founded on negligence, in the sense that the defendant, the representor, did not have reasonable grounds to believe that the facts represented were true’. This means that the representee cannot sue for his expectation interest [28.38], that is, on the basis that the statement was a guarantee of accuracy.

Section 2(1) of the Misrepresentation Act 1967 (1): Claimant’s First Advantage: The Burden of Proof.

11.103  The favourite source of tort-based damages for a pre-formation misrepresentation is section 2(1) of the Misrepresentation Act 1967. This is because this provision confers two forensic advantages on the representee: (i) a burden of proof advantage; (ii) the deceit ‘remoteness’ rule, providing the advantage of a very generous scope of liability. These will be treated in turn.

11.104  As Leggatt J noted in Yam Seng Pte Ltd v International Trade Corp Ltd (2013),130 in the passage cited above, the representor bears the burden of proof once the representee has shown inaccuracy and reliance. This is the first forensic advantage of section 2(1) of the Misrepresentation Act 1967. This burden of proof advantage point was noted in Howard Marine & Dredging Co v A Ogden & Sons (Excavations) Ltd (1978).131 Here a barge (p. 245) company’s manager (O’Loughlin) stated inaccurately the capacity of two barges. This was slack. He had not checked properly, as he might have done quite easily. At trial, the defendant admitted that he had hazily recalled a different figure in the vessel’s official specifications, contained in a document kept by his company. But, whether out of over-confidence, laziness, or urgency, the defendant did not make the effort to check. The majority (Shaw and Bridge LJJ) held that damages were payable for misrepresentation under section 2(1). Given the echo in his head of a different (and true) figure, his reliance on a semi-official catalogue of maritime dimensions (Lloyd’s Register, having provided inaccurate details) had not been reasonable (Bridge and Shaw LJJ, overturning Bristow J; in the Court of Appeal, Lord Denning MR dissented).

11.105  The Howard Marine case (1978) indicates that, once the representee has shown that he received a pre-contractual false statement, on which he relied, section 2(1) of the Misrepresentation Act 1967 places the burden of proof on the representor to show that he had reasonable grounds for believing the accuracy of his statement case (see Bridge LJ on this point, quoted below). Bridge LJ thought that, if it had been necessary to prove that the representor had been negligent at Common Law, the claim would have failed (although he offered no reasoning on this point). In his view, the claim succeeded only because section 2(1) of the Misrepresentation Act 1967 places the burden on the representor to show ‘reasonable grounds’ for his belief. Bridge LJ alone focused on the burden of proof issue (although Shaw LJ agreed with Bridge LJ generally). Bridge LJ said132 that the representor bore the onus of proving that it had had reasonable grounds, for the purpose of section 2(1), for believing the accuracy of what it had said, but this onus had not been discharged in this case. Shaw LJ,133 although also willing to apply section 2(1) here, primarily found the representor guilty of negligent misstatement, a Common Law tort.

‘Reasonable Ground’: an Objective Inquiry.

11.106  The Singapore Court of Appeal in RBC Properties Pte Ltd v Defu Furniture Pte Ltd (2014)134 suggested that the representor’s subjective state of awareness will be relevant when the court makes its assessment whether the representor’s belief was objectively reasonable in all the circumstances. With respect, a safer approach (on the principle of objectivity, [2.18]) would be to maintain a simple objective approach: (i) the court must determine whether the representor can show that he had ‘reasonable ground’ at the time of formation for believing the accuracy of what he was then continuing to represent and (ii) that in making that assessment the court must take into account the appropriate level of awareness which can objectively be expected from a representor in that context (otherwise an unreasonably non-inquisitive, forgetful, or non-alert representor might be treated more leniently).

Section 2(1) of the Misrepresentation Act 1967 (2): Claimant’s Second Advantage: The Fiction of Fraud.

11.107  The second forensic advantage conferred by section 2(1) of the Misrepresentation Act 1967 upon the representee is that it gives this party the right to damages which are (unfortunately, as far as the rationality of the law is concerned) regarded as (p. 246) equivalent to the damages which would have been available if the representation had been fraudulent, that is, if it had involved the tort of deceit. This second advantage arises from the convoluted wording of the provision which, in effect, invites the court to treat the damages award as though deceit had been committed.

11.108  As for the measure of damages for deceit, Lord Browne-Wilkinson explained in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) that a fraudulent representor:135 ‘ is bound to make reparation for all the damage directly flowing from the transaction; although such damage need not have been foreseeable, it must have been directly caused by the transaction … In addition, the claimant is entitled to recover consequential losses caused by the transaction.’

11.109  David Richards J in 4 Eng Ltd v Harper (2008) encapsulated the rule governing damages for deceit damages as follows:136 ‘ foreseeability of a head of loss is irrelevant in the award of damages for deceit, as the House of Lords established in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 (HL). A loss is too remote only if it is not in the eyes of the law directly caused by a defendant’s deceit.’

11.110  The ‘fiction of fraud’ problem arises because of the following parenthesis within section 2(1) of the 1967 Act: ‘… had the misrepresentation been made fraudulently, that person shall be so liable’. In Royscot Trust Ltd v Rogerson (1991)137 the Court of Appeal gave literal effect to this statutory supposition that deceit had been committed. In that case Balcombe LJ138 and Ralph Gibson LJ139 considered it necessary to give effect to the ‘plain’ words of section 2(1). The practical advantage of this reading of section 2(1) is that the representee can recover all losses caused by the misrepresentation, even if they are not reasonably foreseeable, that is, the representee receives the benefit of the generous way in which damages in the tort of deceit are assessed (absence of a reasonable foreseeability remoteness test).140

11.111  The objection to the Royscot case’s construction of this provision is that section 2(1) patently creates a statutory tort based on the absence of due diligence on the representor’s part. Its essence is fault, but not dishonesty. And so, the decision in Royscot Trust Ltd v Rogerson (1991) is unattractive in this respect. Unfortunately, this case seems to have cemented itself into the case law as binding Court of Appeal authority. And so, only the Supreme Court seems likely to be able to reverse it and thus remove this (small but avoidable) lapse in reason.

11.112  In Royscot Trust Ltd v Rogerson (1991) the Court of Appeal in fact held that the purchaser’s default on the present facts was not reasonably unforeseeable, nor did it constitute a breaking of the chain of causation.141 It follows that the ‘fiction of fraud’ issue was not necessary to the final outcome. However, later courts have been unwilling to sever the Court of Appeal’s decision to award full damages from the court’s obiter endorsement of section 2(1)’s ‘deceit’ measure of compensation.

Evaluation: ‘Fiction of Fraud’ and the 1967 Act.

(p. 247) 11.113  The better view is that the discussion in Royscot Trust Ltd v Rogerson (1991)142 of the nature of section 2(1) damages was obiter. Both Balcombe and Ralph Gibson LJJ made clear that the loss arising from unlawful sale of the car had not been unforeseeable. It follows that it was unnecessary to apply the deceit damages test.

11.114  It should also be noted that remarks made by Hoffmann and Evans LJJ in William Sindall plc v Cambridgeshire County Council (1994)143 concerning the nature of damages under section 2(1) of the 1967 Act, were also obiter. This is because (i) the Court of Appeal found that there had been no misrepresentation made by the vendor in that case (reversing the trial judge); and (ii) the court’s discussion of the 1967 Act was directed at section 2(2). Hoffmann LJ uncritically said144 that section 2(1) damages were based on fraud: ‘the measure of damages is the same as for fraudulent misrepresentation, ie, all loss caused by the plaintiff having been induced to enter into the contract: Cemp Properties (UK) Ltd v Dentsply Research & Development Corporation [1991] 2 EGLR 197 (CA)’ (see text below on this 1991 case). And Evans LJ in the Sindall case said145 (cryptically, but it seems so as to echo Hoffmann LJ’s statement):

The latter [that is, damages under section 2(2)] is established by the common law [it appears that Evans LJ is here alluding to the tort of deceit] and it is the amount required to compensate the party to whom the misrepresentation was made for all the losses which he has sustained by reason of his acting upon it at the time when he did.

11.115  It should be noted that the fraudulent damages analysis adopted by a strong Court of Appeal in the Cemp case (1991) (Browne-Wilkinson V-C, Bingham and Nolan LJJ) was not the subject of argument and instead rested on this concession by counsel, as recorded in the Court of Appeal: ‘It was common ground before the judge that section 2(1) of the Misrepresentation Act 1967 operated so as to make applicable to innocent misrepresentation claims the same measure of damages as applies to fraudulent misrepresentation.’

11.116  It is submitted that section 2(1) refers to fraud only because the tort of deceit in 1962 was the only head of Common Law damages for misrepresentation. There was no intention to replicate the scope of deceit damages. Instead section 2(1) clumsily refers to the tort of deceit only for the (implicit) purpose of requiring (i) a statement (ii) which is relied on and (iii) causes the representee loss. The tort of negligent misstatement was established by the House of Lords in Hedley Byrne & Co Ltd v Heller and Partners Ltd (1964).146 A claim for negligent misstatement requires proof of a duty of care (sometimes expressed as a ‘special relationship’, and in some of the case law authorities the requirement is known as an ‘assumption of responsibility’) between the defendant and the claimant, and breach of that duty. The measure of damages is subject to a reasonable foreseeability test of remoteness (‘The Wagon (p. 248) Mound’ (1961)).147 The tort of negligent misstatement applies in the pre-contractual context. This was made clear in Esso Petroleum Co Ltd v Mardon (1976).148

11.117  The 1967 Act was a response to an official report.149 That report was composed ten months before the tort of negligent misstatement was ‘discovered’ by the House of Lords in the Hedley Byrne case, on 28 May 1963. The Committee had suggested150 that statutory compensation should be ‘no less extensive’ than deceit damages because in 1962 deceit was the only species of tort damages available. But, when the drafting of the Misrepresentation Bill 1967 was taking place, it should have been apparent that the tort of negligent misstatement also supplied a (less generous) measure of damages because it was subject to a reasonable foreseeability test of remoteness. The Court of Appeal in Esso Petroleum Co Ltd v Mardon (1976) declared that this tort is available in the pre-contractual context. But that was not a surprise. The writing had been on the wall since 1963 when Hedley Byrne was decided.151

11.118  In short, the Misrepresentation Bill 1967 had been drafted without proper awareness of a Common Law development which had already rendered section 2(1) virtually otiose. In so far as section 2(1) might now, with hindsight, be revisited as an attempt to replicate the Common Law, the Royscot interpretation makes no sense.

11.119  The Royscot case’s interpretation of section 2(1) might be reversed if that provision were to come before the Supreme Court. It introduces a curious mismatch between forensic reality and the remedial response, the defendant representor’s non-fraudulent, albeit unreasonable, misrepresentation yielding ‘bonanza’ deceit-based damages for the representee. The door seems ajar to reverse this aspect of the Royscot case. This is because in the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997),152 Lord Browne-Wilkinson expressed agnosticism (`I express no view on the correctness of [the Royscot] decision’) and Lord Steyn, although also refraining from a final assessment, approved153 Richard Hooley’s ‘trenchant academic criticism’ of the Royscot interpretation of section 2(1). Hooley had convincingly condemned awards of the fraud measure under section 2(1) as ‘repugnant’ and ‘bizarre’.154 And the same ‘fiction of fraud’ led Rix J in Avon Insurance plc v Swire Fraser Ltd to describe section 2(1) as a ‘mighty weapon’.155

11.120  Michael Bridge notes that section 2(1)’s wording is tortuous and maddening:156

The reader is called upon first to imagine that fraud has been committed in the uttering of the misrepresentation before unimagining it. It is not unlike entering a building through (p. 249) a revolving door and going round the full 360 degrees. Anyone with a knowledge of the law as it stood in the early 1960s, before the Misrepresentation Act and the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd, will know the strength of the gnomic statement, ‘No damages for misrepresentation in the absence of fraud’. In the light of that, section 2(1) could in its confused way be read as a powerful rhetorical statement that fraud has no part to play in the grant of damages thereunder.

11.121  Furthermore, two leading contract experts at first instance (now members of the Supreme Court), Hamblen J and Leggatt J said that they considered the Royscot case’s interpretation of section 2(1) to be incorrect, or at least not compelling. But both judges assumed that it is binding Court of Appeal authority on the need to quantify such damages as though fraud had been established.157 Leggatt J in the Yam Seng case said:158

[206] The decision in Royscot Trust has been much criticised. As has been pointed out by academic writers, the policy considerations which justify a broad measure of damages where fraud has been demonstrated do not apply, or in nothing like the same degree, in cases of mere negligence. Nor does the language of section 2(1) seem to me to compel such a conclusion. It is possible to construe the words ‘and as a result thereof has suffered loss’ as requiring the claimant to show that he has suffered loss as a reasonably foreseeable result of a misrepresentation having been made to him, and to treat the following words as imposing an additional requirement (that the defendant would be liable to damages had the misrepresentation been made fraudulently) which must also be satisfied. Unless and until Royscot Trust is over-ruled, however, it represents the law; and I must therefore apply it.

Section 2(1) Damages Claims and the Defence of Contributory Negligence.

11.122  The Law Reform (Contributory Negligence) Act 1945 [28.268] is (in some limited circumstances) applicable to a claim for damages under section 2(1) of the Misrepresentation Act 1967, provided the claimant enjoys a parallel Common Law action for negligence against the representor.159

Other Points Concerning Contributory Negligence and the Misrepresentation Act 1967.

11.123  In Taberna Europe CDO II plc v Selkskabet (2016) Moore-Bick LJ observed160 that it will be harsh to reduce damages if the representor has merely failed to uncover the falsity, because this would contradict the spirit of the rule in Redgrave v Hurd (1881),161 viz, the general rule that reliance can be established even though the representee had the opportunity to check but failed to do so); thus it seems unlikely that the 1945 Act defence will apply if the representor had intended the representee to rely and the representee acted on this and failed to check.

(p. 250) 11.124  Finally, there are dissonant views on the (suggested) inapplicability of the 1945 Act defence if the section 2(1) 1967 Act claim stands alone.162 It is submitted, however, that section 2(1) is a species of tortious fault, not requiring dishonesty, and that the 1945 Act should apply even if (which will be rare) there is no accompanying Common Law duty of care, or at any rate (which will be less rare, perhaps) that duty of care is not shown to have been breached.

The Torts of Deceit and Negligent Misstatement

The Need for Dishonesty.

11.125  The tort of deceit comprises the following four elements: in addition to a (i) dishonest statement (or implied statement,), (ii) made by the representor, (iii) the representator must intend it to be relied upon, and (iv) it must be relied upon (on this last requirement see [11.132]). But there is no need to show an intention to deceive.163 Damages for ‘loss of opportunity’ in the tort of deceit were awarded in East v Maurer (1991) (CA), Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd (2001) (CA), 4 Eng Ltd v Harper (2008) (David Richards J), Parabola Investments Ltd v Browallia Cal Ltd (2010) CA), and Yam Seng Pte Ltd v International Trade Corp Ltd (2013) (Leggatt J): on these cases [11.91] to [11.97].

11.126  The tort of deceit requires proof that the representor knew that what he was saying was untrue (ie a fully conscious lie) or at least that he knew that he should not pretend to say something categorically, creating the impression that he truly believed it and had no doubts, if in fact he has significant doubts which he is withholding. In both these situations the false statement is accompanied by dishonesty and, if relied on, produces extensive liability in the tort of deceit for all the consequences (see on this last point the Smith New Court case (1997), cited at [11.108]).

11.127  The House of Lords in Derry v Peek (1889) held164 that negligence, even gross negligence, falls short of the dishonesty required in order to substantiate deceit, that is, to demonstrate that there has been a fraudulent misrepresentation (liability of directors and others for untrue statements relating to company prospectuses and listing particulars is now covered by statute).165 In this case a tram company was being promoted on the basis that official permission for steam-power traction would be available, but in fact the anticipated permission did not eventuate. The defendant directors issued a prospectus for a company and they stated:

One great feature of this undertaking, to which considerable importance should be attached, is, that by the special Act of Parliament obtained, the company has the right to use steam or mechanical motive power, instead of horses, and it is fully expected that by means (p. 251) of this a considerable saving will result in the working expenses of the line as compared with other tramways worked by horses.

11.128  In fact the company had only a conditional right to use steam power traction, and such permission would need to be obtained from the Board of Trade. But such permission was not obtained. And so, only horses could be used (which were more expensive). The company was wound up. The House of Lords held that the defendants had not been guilty of deceit because they had not made a dishonest statement. This was held to fall short of deceit because the promoters honestly believed that official permission would be granted.

11.129  The most celebrated speech is by Lord Herschell. The essence is the distinction between (1) mere careless and (2) the intention to deceive (a plain lie) or at least the making of a statement knowing that it is probably not right. He said:166 ‘ to support an action of deceit fraud must be proved, and that nothing less than fraud will do. I can find no trace of the idea that it would suffice if it were shewn that the defendants had not reasonable grounds for believing the statements they made.’

11.130  Lord Herschell noted:167 ‘ making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds’.

11.131  In a famous passage, Lord Herschell explained further:168

… the authorities establish the following propositions: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.

Reliance in the Context of Deceit.

11.132  The Supreme Court in Zurich Insurance Co Ltd v Hayward (2016) held169 that a lie, that is, a fraudulent misstatement, can be relied upon and thus produce liability in the tort of deceit, even though the representee was not wholly taken in. It is enough that the representee cannot be expected to proceed to difficult and (p. 252) hazardous litigation in order to vindicate its doubts concerning the fraudulent statement. And thus the courts apply a pragmatic approach to the relevant context.

11.133  But in the evaluation below [11.137], the author submits that Zurich Insurance Co Ltd v Hayward (2016) (i) should not unsettle the law concerning misrepresentations (whether fraudulent, negligent or innocent), and instead the long-standing general rule should remain, that a misrepresentation must induce the representee to believe the truth of that which was stated; (ii) accordingly, the Zurich case should become a special and exceptional rule confined to fraudulently induced compromises or settlements. The point is also made with respect to the topic of ‘Generality’ in the law of contract at [1.20].

11.134  In Zurich Insurance Co Ltd v Hayward (2016)170 the defendant employee made a fraudulently exaggerated claim in respect of workplace injury. The employer’s insurer later settled the claim, despite real doubts that the injury remained or ever was as serious as alleged. The fraud was later revealed (see below). The Supreme Court held that damages in deceit or, in the alternative, rescission for fraudulent misrepresentation should be awarded on these facts. It is made clear171 that the appeal turned on rescission of the settlement. Following rescission, the payee would be required to repay the overpayment attributable to his fraud. The Supreme Court’s decision in favour of the representee reversed the Court of Appeal.172

11.135  In greater detail, Hayward had lied about the extent of his back injury. The tortfeasor’s insurance company, Zurich, had reluctantly agreed a settlement to pay him an amount based on his allegations (£134,973). Zurich had all along suspected that he might be lying about the extent of his injury, but the insurer had been unable to establish this. Its forensic predicament was that it could not be confident that the trial process would enable it to nail the suspected lie. For this reason, the settlement was agreed. Later, when neighbours of Hayward reported on him, his fraud unravelled (he had fully recovered from his back injury a year before the settlement was reached). Zurich sought recovery of the overpayment. It succeeded (the small amount of damages eventually held to be owed by Hayward’s employer was £14,720, so that the settlement figure had been roughly 90 per cent greater than the merits of the case justified). Whether the recovery of this over-payment is regarded as damages recovered in accordance with the tort of deceit, or as restoration of gains following rescission for fraudulent misrepresentation, the Supreme Court convincingly held that it makes no sense in this context of disputed claims for personal injury to require that the representee must have been totally gulled, that is, absolutely and successfully tricked. The Supreme Court held that it is enough that the representee was practically compelled, as a result of the forensic predicament explained above, to agree the settlement. The underlying vitiating feature was the now proven dishonest falsehood told by the representor.

11.136  In BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises (2019)173 the Court of Appeal carefully analysed the case law authorities on reliance in the context of a fraudulent misrepresentation. The essence of that inquiry is that the representee bears the onus of demonstrating that he relied on the representation. For this purpose, the representee is (p. 253) assisted by a factual presumption that he was induced to enter the contract as a result of the fraudulent statement.

Evaluation: the Zurich Case, Bogus Claims, and the Categories of Vitiation.

11.137  The decision in Zurich Insurance Co plc v Hayward (2016) is salutary. A party who is practically incapable of nailing a suspected lie will sensibly settle a claim, even if there is a suspicion that it is bogus or fraudulently exaggerated. The law generally promotes settlement (see [11.142] below).

Obtaining Damages for Deceit.

11.138  On discovery of hard evidence which nails the lie, it should be possible for the representee to obtain damages for deceit and/or to rescind. The deceit has worked its harm. The representee has relied in a way which is harmful to that party even though he or she was not entirely fooled by the statement. It is submitted that in some situations, even where a representee has consciously concluded that a statement is a lie, the tort of deceit can apply. In litigation a statement can often be untrue but there might be no economical way to get to the bottom of it and refute it. What counts should be the dishonest statement and the fact that the representee had no effective choice174 but to settle or capitulate and thus suffer loss. Eventual discovery of the truth should enable the representee to substantiate the tort of deceit.

The Path to Rescission of the Settlement.

11.139  It was necessary for the settlement in the Zurich case to be rescinded rather than the insurer’s claim resting solely on compensation for deceit. This is because the tort claim presupposed that the settlement no longer stands, otherwise it could be objected that the settlement continues to give the payee entitlement to the settlement payment (a similar conundrum occurred in Bell v Lever Bros where the settlements could not be declared void nor set aside and so the monies paid to Bell and Snelling could be retained by them: see [12.07]). In short, the tort claim in deceit presupposed the setting aside of the settlement agreement.175

11.140  It is unclear whether a lie which is known by the representee to be a lie should be capable of establishing a ground for rescission. There are dicta that it might.176 But it is submitted that the essence of rescission for misrepresentation is that the representation has induced a mistaken belief. The traditional requirement has been that rescission of a transaction on the basis of a representation requires the representee to have been fooled, that is, to have suffered an error. That traditional analysis was encapsulated in the Court of Appeal by Briggs LJ in the second, substantive, Court of Appeal judgment in this litigation:177

[28] In my judgment the authorities … speak with one voice. For a misstatement to be the basis for a claim to rescind a contract, the claimant must have given some credit to its truth, (p. 254) and been induced into making the contract by a perception that it was true rather than false … [No right to rescind arises] by the mere making of a representation which he did not believe was true.

11.141  That leaves the issue whether the reasoning in Zurich was correct. The representation had not caused the insurer to be mistaken, because its managers felt seriously unsure that the claim was fully justified: how then could the settlement be rescinded for misrepresentation, in the absence of an induced error?

11.142  It is submitted:

  1. (1)  Policy: that the decision of the Supreme Court in the Zurich case is attractive; it would not be consistent with the policy of reducing litigation and promoting settlement (see the literature cited below) for it be necessary for insurance cases to defend tooth and nail all claims where it is suspected that the alleged wrong or, as here, the extent of the injuries, have been fraudulently misrepresented;

  2. (2)  Deceit: liability in the tort of deceit does not require the representee in fact to have been deceived; it is enough that the fraud caused the representee to suffer loss;

  3. (3)  Rescission of the Settlement: commentators are right to fear that the wide reasoning concerning reliance or inducement might undermine the whole edifice of misrepresentation law; and so the decision in Zurich should be confined to rescission founded on a fraudulent statement which has induced a settlement or compromise of a pending or contemplated or threatened civil action (any such potential civil action, and not just personal injury litigation). The law already recognizes discrete rules concerning that type of agreement: hence the law relating to consideration in that context.178

Common Law Rule Barring Exclusion of Liability for Fraud.

11.143  The topic of exclusion clauses is trea