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Misrepresentation 2 Notes

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Contract Law: Misrepresentation 2, Categories & Remedies 4 categories of misrep (remedies available depend on the category)
?????Prior to 1967, at common law, only two categories of misrep recognised: fraudulent; or innocent.
?????Now changes in MA 1967, categories extended.
?????Fraudulent o Tort of Deceit at common law
?????Negligent misrep o Statutory claim, s2(1) Misrep Act 1967
?????Innocent misrep o Statutory claim, s2(1) Misrep Act 1967
?????Negligent misstatement (a tort of negligence at common law) (not strictly a category of misrep, but closely related): o Tort of negligence at common law. Misrep makes a contract voidable

Categories (1) Fraudulent Misrep--Definition
? A common law claim, tort of deceit (but part of contractual claims).
? Derry v Peek (1889), HL per Lord Herschell, need to show a false representation was made o (a) Knowing it was untrue; o OR (b) without belief in its truth; o OR (c) reckless as to its truth o [[Herschell quote: in many ways, the third is a manifestation of the second, for 'one who makes a statement under such circumstances can have no real belief in the truth of what he states']].
? Burden of proof is on Claimant, and is a difficult burden. An allegation of fraud = serious. May require a higher burden than the usual civil burden of proof (balance of probabilities).
? Facts of Derry v Peek: o Peek a Director of a tramway company running horse-drawn trams (was empowered by a special Act of parliament to operate certain tramways using animal power). The Act said that, with consent of Board of Trade, mechanical power might be used. o At that time, steam-power had suddenly been discovered. The company applied to the Board of Trade for consent to run their trams with steam-power.

1 ??

o They issued a prospectus and issued further shares, to attract investors, the prospectus saying they would be able to run their trams with steam or mechanical power in the future. o Derry bought shares relying on this misrep. o In fact, the Board of Trade denied them the right to use steampower. o Therefore, Derry was left with a useless investment; sued for misrep. o [[note that this case was before negligent misrepresentation was introduced by 1967 Act, so at this time you had to show fraud or innocent misrep.]]
o In this case, the relevant claim was reckless as to the truth was shown. o HELD, HL: the false statement was not fraudulent. o Derry failed in his claim to prove fraudulent misrep---
fraudulent misrep is incredibly hard to prove (if it had been after 1967 Act, he would have succeeded in claim for negligent misrep). o So he had to claim for innocent misrep. Definition of 'recklesness'--Thomas Witter v TBP Industries (1996), per Jacob J, re what is 'reckless as to its truth': o Level of reckleness required = a 'flagrant disregard for the truth' . . . "...where the defendant has shut his eyes to the facts, or purposely abstained from inquiring into them, ... just as fraudulent as if ... knowingly stated that which was false." Fraudulent Misrep is a difficult claim to sustain o Burden on Claimant to prove actual fraud. o The standard of proof higher standard than the normal civil standard of 'balance of probabilities', because fraud is a serious claim. o Once proven, motive is irrelevant, Derry v Peek (1889). Advantages of fraudulent misrep claim: o Court will ignore any investigation by claimant---S Pearson v Dublin Corp (1907). o And defence of contributory negligent is not available: Standard Chartered Banking v Pakistan Nat Ship (2003).

Always back up a claim for fraudulent misrep with a claim for negligent misrep
??? ?Note that you would also be seeking a claim for breach of contract in the first case; and in the alternative, you'd be claiming fraudulent misrep; and in the alternative, negligent misrep.
??? ?In an exam question, first say that the some of the statements could be terms as well, so you would always bring a claim for breach of contract.

2 ??? ?If you then run fraudulent misrep, you'd also run negligent misrep as a back-up alternative. Negligent Misrep (Misrep Act 1967)---Definition
? A statutory claim---only possible since MA 1967 (instead, previously, had to pursue a common law claim in tort of negligence for negligent misstatement).
? Misrep Act 1967, S2(1), D liable for negligent misrep if:: o False statement o No reasonable grounds for belief in its truth o So D is liable for negligent misrep unless he can show: he did believe, and had reasonable grounds to believe, the truth of the statement, up to point of contracting. o [[remember With v O'Flanagan---you need to have reasonable grounds to believe what you say is true right up to the point of contracting]].
? Royscot Trust v Rogerson (1991): where a representor is found liable for a negligent misrep, he will be treated as if he had made a fraudulent misrep (important ramifications re damages).
[[But see below in damages section]].
? Howard Marine v Ogden (1978) o 'Fiction of fraud' - treated as having made a fraudulent misrepresentation o Burden of proof on Defendant to show reasonable grounds. o Ogden had a business hiring out commercial shipping; Howard Marine wanted to hire a couple of commercial barges; they told Ogden what they would be used for (transporting heavy loads on canals); Ogden recommended a barge, on basis it could carry that weight. o Ogden got that info by looking at Lloyd's Register (the bible of shipping law). But it was wrong. The barge sank. o Howard Marine sued Ogden for negligent misrep. o Ogden said he had 'reasonable grounds' to believe in the truth of what he told Howard Marine, by looking at Lloyd's Register. o Court HELD: it wasn't good enough to go to Lloyd's Register, should have gone to look at the ship's papers themselves. So he didn't have 'reasonable grounds' to believe his statement, so liable for negligent misrep.
? This is a much easier claim than fraudulent misrep.
? BURDEN OF PROOF REVERSES---ON DEFENDANT--The Defendant has burden of proof, to avoid negligent misrep, D has to show he believed in, and had 'reasonable grounds' to believe in, truth of statement. Hard burden to show
? NB: There must be a contract between C and D for a claim under the Act. S2(1) MA only applies where the misrepresentation

3 has induced the misrepresentee to enter into a contract with the misrepresentor (narrower application than common law).

Innocent Misrep, MA 1967---Definition
?????Until 1967, at common law any misrep which was not made fraudulently was automatically deemed to be innocent (Redgrave v Hurd).
?????So an innocent misrep is one not made fraudulently or negligently.
?????Misrep Act 1967, S2(1) o Burden on misrepresentor to prove he: o "...had reasonable grounds to believe, and did believe, up to the time the contract was made that the facts represented were true." o Innocent misrep if misrepresentor can show this.
? So innocent misrep is not a fraudulent or negligent misrep, so under s2(1) an innocent misrep = a statement where representor 'believed what he was saying was true AND he has reasonable grounds for belief in the truth' of his statement. Negligent Misstatement at common law (tort of negligence)

* Hedley Byrne v Heller (1964), HL: HL extended the common law tort of negligence to the field of negligent misstatements which cause loss.

* HL: D owed a duty of care to the plaintiffs and they were in breach by failing to take reasonable care that the representation was accurate.

* The duty exists where there is a 'special relationship' between the parties.

* Burden on Claimant to prove 3 elements of the relationship between the parties:

* (1) Reasonable reliance: Reasonable foreseeably by the representor that the representee will rely on the statement

* (2) must be sufficient 'proximity' between the parties.

* (3) Must be justice and reasonable for the law to impose a duty (Caparo v Dickman; Smith v Eric Bush).

* Esso v Mardon (1976):

* HELD: the company owed a duty of care to D as he had reasonably relied on the salesman's superior knowledge and experience in relation to statements made during precontractual negotiations.

* Hard to show existence of a special relationship; and burden on the misrepresentee -so unlikely to use a common law claim for negligent misstatement if you can claim under

4 *


s2(1) MA 1967 (i.e. where the misrep induced a contract between the misrepresentor and misrepresentee). But where the misrepresentor is not a party to the contract, a s2(1) action is not available, and C can only sue under common law Hedley Byrne Remedies---damages only, subject to 'reasonable foreseeability' test

* No rescission

* Damages - The Wagon Mound: all damages which are 'reasonable foreseeable'.

? ?? ? Positive remedies afforded: rescission; damages; indemnity.
? ?? ? Plus, the misrepresentee may refuse further performance of the contract, pleading the other party's misrep as a defence in the event of his being sued for breach of contract by the other party. Rescission (available for any type of misrep)
? Effect of misrep---contract is voidable, but not void: so the contract is still valid and subsisting until the representee decides to set it aside (rescind) the contract.
? General rule--Representee must communicate the intention to rescind to the representor (Car & Universal Finance v Caldwell, who is entitled, in the absence of further knowledge, to treat the contract as subsisting.
? Alternatively, court order: the representee may initiate proceedings for rescission of the contract, the object being to obtain from the court an order than the contract is rescinded. o The remedy is equitable, entitled at discretion of court. It is not awarded as of right (as damages are at common law). o Generally, rescission will be awarded only where the parties can be restored to their original position by returning all the property transferred between the parties under the contract.
? A court action would clearly alert the representor of the representee's decision to rescind.
? However, where the representor has disappeared without trace, it would be impossible to communicate to them an intention to rescind, or to bring a court action: o So is possible for the representee to record an intention to rescind by some overt act which is deemed reasonable in the circumstances - Car & Universal Finance v Caldwell (1965).
? ?? ? Dilemma for court where both parties to the litigation are innocent: 5

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