Scheme of Remedies for Misrepresentation

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19th Sep 2017 Law Reference this

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In pre-contractual negotiations, one party (the Representor) may make representations to another party (the Representee), which relate, by way of affirmation, denial, description or otherwise, to a statement of fact or present intention. If the representations made are untrue, they may be termed misrepresentations. The Representor may know that the statements are untrue; or they may be careless or reckless as to their truth. Alternatively, the Representor may hold an honest belief as to truth of the statements made.

Generally there is no positive duty to act honestly in English Law – a misrepresentation cannot be made by silence and even where one party proceeds, fully aware that the other is contracting on the basis of a misunderstanding of some fact, English law does not provide for a remedy. The exceptions are where the facts given are a half-truth, or where a statement is made, circumstances change and the maker of the statement fails to disclose this. Further exceptions are where a contract, such as one for insurance, is treated by the law as being ‘of the utmost good faith’ and requiring the contracting party to disclose all relevant facts; or where the contract involves a fiduciary relationship such as between a company and its promoters.

European Law, by contrast, imposes a positive duty to act in good faith and fair dealing, both during the course of negotiations and where a contract is concluded. It allows avoidance of the contract for fraudulent (deceitful) non-disclosure of information which, in accordance, with the principles of good faith and fair dealing, a party should have disclosed. The duty extends to situations where a contract is not even concluded: for example, where negotiations break down, or where one party is ‘time wasting’. This positive duty to act in good faith is common in other jurisdictions, including some common law systems.

The scope of remedies for misrepresentation in English law depends on the type of misrepresentation that has occurred. Where the misrepresentation is fraudulent, the law sees the Representor as more blameworthy and the level of damages is not limited by, for example, remoteness, the duty to mitigate, and contributory negligence. The reasons for imposing wider liability on the intentional wrongdoer than on the innocent misrepresentor are certainly moral, but as Lord Steyn notes, the law and morality are inextricably interwoven and, to a large extent, the law is simply formulated and declared morality. It seems ironic, therefore, that there is no remedy whatsoever are where one party deliberately fails to disclose a material fact: an action that is intentionally dishonest, immoral and surely equally blameworthy.

To be blameworthy means to be at fault or deserving of blame: from a moral standpoint, it implies conduct for which a party is guilty and deserves reproach or punishment. However, there is a logical consistency to, and a general policy of, not punishing intentional wrongdoers by civil remedies in English law: the primary remedy for civil wrongs is to provide compensatory damages, measured by the claimant’s loss; and the aim of providing a remedy, frequently cited, is to put the claimant into as good a position as if no wrong had occurred. However, the principles by which the remedies for fraudulent misrepresentation have developed do appear to go beyond this, having a punitive nature in their application.

Fraudulent Misrepresentation

Where the Representor makes a statement of fact (or a statement of intention, which involves a representation as to the existence of the intention which is itself a present fact) either knowingly, without belief in its truth, or recklessly, i.e., careless as to whether it is true or false, and this fact, being material, induces the other person to enter into the contract, this is a fraudulent misrepresentation. It does not matter that the Representee could have discovered the truth or spurned the opportunity to do so.

The test as to whether fraudulent misrepresentation has taken place is whether there is an absence of honest belief; and honesty in this context refers to a subjective appreciation of events. The fact that the statement would not convince a reasonable person does not necessarily make it dishonest; however, where the statement is made recklessly or carelessly, the Court may make a finding of dishonesty, in that the person in question could not reasonably have believed in the truth of their statement. In all cases of fraudulent misrepresentation, however, dishonesty is a crucial factor – damages cannot be claimed in deceit on the basis of recklessness alone since the basis of deceit is dishonesty.

Where the misrepresentation is fraudulent, the Representee may rescind the contract – a remedy available for nearly all types of misrepresentation – and he may also recover any benefits that the Representor has enjoyed as a result of the contract being made, prior to the contract being rescinded. The Representee may also claim damages in the tort of deceit, and as noted, the damages are intended to restore the victim to the position he was in before the representation was made.

The test for damages in fraud is one of direct consequence, rather than foreseeability, with damages being divided into two categories – diminuation in value and consequential losses. Similar to damages for negligence, the House of Lords have confirmed that the Representor will be responsible for “a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants”. Unlike for negligence, however, the damages do not need to be foreseeable; as long as they have been caused by the transaction. This demonstrates that the Representor’s blameworthiness is important since the benefit of limiting liability to only foreseeable damages is not permitted to the dishonest person as it would be if the representation was made negligently: per Lord Denning in Doyle v Olby, “it does not lie in the mouth of the fraudulent person to say that they could not have been reasonably foreseen”. This decision was reaffirmed in Smith New Court.

Further, the fact that the Representee had every opportunity to avoid the contract or transaction in question, or could have taken proceedings to rescind it, or asserted his rights to have it treated as void in proceedings brought to enforce it, does not bar his claim for damages. Once again, where dishonesty is involved, the law does not allow the misrepresentor any opportunity to reduce his liability, even where there is fault on the part of the Representee.

Similarly, the contributory negligence of the Representee does not apply to reduce damages for the tort of deceit. Again, this feature has been applied because the tort involves dishonesty; regardless of the contributory negligence of the Representee, the Representor will have to pay for all damages because the law views him as blameworthy and cannot justify restricting his liability as a result of this. The Representee may also claim for consequential losses, although he is obliged to take all reasonable steps to mitigate those losses on discovery of the fraud.

The type of damages that may be awarded to the Representee may include both special and general damages, as for A v B, where the claimant Representee was entitled to an award of £7,500 in respect of general damages for distress even though his distressed state had not required medical attention.

Although the potential heavier damages available to claimants may make a claim in fraudulent misrepresentation seem more attractive, it may be difficult to prove the Representor’s dishonesty and failure to succeed may result in an action for defamation; a claim under Section 2(1) of the Misrepresentation Act 1967 (“MA1967”) is more likely to be pursued for these reasons since the remedies available are similar.

Negligent Misrepresentation

The misrepresentation may alternatively give rise to an action for damages in the tort of negligence, if the statement is made (a) knowingly, (b) without belief in its truth or (c) recklessly, careless whether it be true or false; and a special relationship exists between the parties. A finding of dishonesty is not necessary: provided that it can be established that there is reasonable foreseeability of reliance on the statement and of the harm caused by that reliance. As established in Hedley Byrne, the Representor has a duty of care to do all that is reasonable to make sure their statement is accurate, regardless of the existence of a fiduciary or contractual relationship; only a sufficient degree of proximity between the parties is necessary for an action to be sustained. Such proximity would arise in professional relationships, such as those made with barristers and estate agents, and also in purely commercial transactions where the Representor has superior knowledge and experience to that of the Representee and it is reasonable for the Representee to rely on statements made by them. In all cases, it must be just and reasonable for the duty of care to be imposed.

The remedies available to the Representee are rescission of the contract and damages in the tort of negligence; and, unlike a claim for fraudulent misrepresentation, damages will be subject to a test of reasonable foreseeability. The Court may however take account of benefits that the claimant has missed out on as a result of the misrepresentation.

Despite the difficulties in establishing negligence, it should be noted that actions for negligent misrepresentation have the advantage that they are not limited to misrepresentations that induce contracts; nor are they limited to statements of fact. A parallel can be drawn with principles of European law, which recognise liability for losses during the process of negotiation, even if a contract is not made. However, whereas for negligent misrepresentation in English law a duty of care must be established, in European law no such duty is required. Such losses in European law include those incurred as a result of failure to act in good faith and fair dealing; a positive duty imposed on the parties, which may include failure to disclose pertinent information.

Section 2(1) Misrepresentation Act 1967

More commonly, an action for misrepresentation will be made under Section 2(1) of the MA1967 where the misrepresentation results in a contract. Unlike an action in negligence, which requires the Representee to prove that a duty of care existed, the burden of proof is reversed: the Act requires that the Representors prove they had “reasonable grounds to believe, and did believe up the time the contract was made, that the facts represented were true”, and unless they can do this, they will be liable. This can be difficult to prove: a mere honest belief is not enough.

Remedies available to the Representee are similar to those available for fraudulent misrepresentation unless the Representor is able to discharge this burden of proof (and if the Representor can discharge the burden, the Representee may still plead innocent misrepresentation with its consequent remedies). Effectively then, per Royscot Trust Ltd, damages in respect of an honest but careless representation are to be calculated as if the representation had been made fraudulently: this has attracted much criticism as it means in effect that the Courts are required to treat a person who is morally innocent as if he was guilty of fraud.

However, under Section 2(1) the loss recoverable does not go beyond the consequences that arise from the negligent misrepresentation: this is narrower than the recoverable loss permitted for fraudulent misrepresentation per Doyle v Olby. In addition, unlike damages for fraudulent misrepresentation, the Court may reduce the sum if there is evidence of contributory negligence on the part of the Representee.

The damages under Section 2(1) will be based on direct consequence (as for the tort of fraud/deceit) rather than what was reasonably foreseeable (as for the tort of negligence). In Royscot Trust, the Court of Appeal held that the correct measure of damages was based on the tort of deceit and that the Plaintiff was entitled to recover all losses even if those losses were unforeseeable, provided they were not otherwise too remote. Therefore, the measure for damages for innocent misrepresentation under Section 2(1) is the same measure as for fraudulent misrepresentation. This has since been questioned, however, and in Smith New Court Securities, Lord Steyn asked whether it was correct to “treat a person who was morally innocent as if he were guilty of fraud when it comes to the measure of damages”. This measure seems incorrect: especially as, per Avon v Swire (where representations as to the future were presented as statements as to existing intention), the section may be used to produce damages on a scale commensurate with fraud where otherwise the contract would allow no damages in the event of breach and there would be no damages for negligent misrepresentation in tort.

Innocent Misrepresentation

Where the statement made is innocent, in that there is no provable fault, the remedy is rescission of the contract unless the Court awards damages at its discretion under Section 2(2) MA1967; alternatively it may award rescission with an indemnity; the aim of the Court in all cases being not to unjustly enrich the Claimant. The equitable remedies that the Court may award discretionarily may include the setting aside of a deed or other instrument and the restitution of property, with any pecuniary adjustment that might be necessary on either side by way of accounting for profits or allowance for depreciation. Although there is no indication as to the level of damages, it is considered that this should be lower than the damages awarded under Section 2(1), as implied by Section 2(3).

The Court exercises its discretion in accordance with the principles of equity and so there may be no remedy offered if the facts as a whole make it inequitable to grant the relief, or if there is improper conduct or suggestion of a harsh bargain on the part of the Representee.

Mispresentation and blameworthiness: considerations

It has been noted that misrepresentations can be made intentionally, carelessly or recklessly, or innocently. In each case, there is a remedy for the Representee; but the value of that remedy varies based on several factors. We have seen that where fraudulent misrepresentation is proved (for which dishonesty is required), the level of damages awarded may be far greater than for other types of misrepresentation: the Representor must pay all financial losses flowing directly from the misrepresentation. There are few limits to this: the damages do not need to be foreseeable and matters of the Representee’s conduct, such as the fact that he had the ability to avoid the contract or to discover the dishonesty, does not bar his claim. Similarly, his contributory negligence is irrelevant to the calculation of damages. The only restriction is that Representee needs to take reasonable steps to mitigate his consequential losses. Following the recent case of A v B, we have also seen that general damages may be available for distress suffered, even though this is not medical.

Under the MA1967, we have seen that a Representee can claim damages on a scale commensurate with fraud even where the representation was ‘innocent’, although these will be limited by any contributory negligence. It seems unjust that the Representee’s contributory negligence is ignored in fraudulent misrepresentation: this is ‘fault’ per se on the part of the Representee and if the reason for allowing wider damages is blameworthiness, surely the blameworthiness of the Representee must also be a consideration. The European approach of considering all circumstances, including, but not limited to, whether the Representee could reasonably acquire the information, seems fairer. The flexibility of this approach, in contrast to the unlimited scope of damages in English Law permitted for fraudulent misrepresentation, may demonstrate a better approach to the calculation of damages.

The European approach may be contrasted to awards made for innocent misrepresentations in English law, which follow equitable principles; in such cases the conduct of all parties is taken into consideration before reaching a decision. The fault of both parties is balanced in order to reach a decision that is fair to both, and such a system would make a more just compromise between the heavy benefits of a successful claim for fraudulent misrepresentation.

It has also been noted that it is entirely illogical that the law should take such an iron-handed approach where the Representor makes a positive statement which he knows to be incorrect; but provide no remedy whatsoever when the same person dishonestly fails to disclose a material fact that he knows would have a material bearing on the contract. James notes that the EU is taking tentative steps towards the abolition of national contract laws of member states, and the replacement with a single European code. If this happens, we will see the introduction of a positive obligation to act in good faith, both in pre-contractual negotiations and in the formation of contracts. This obligation on contracting parties to be open with each other in negotiations is foreign to English law; it has previously been avoided because of principles of contractual freedom and economic efficiency. However, a model which requires honesty and diligence on the part of both parties, and provides for remedies to either party where there is a loss to be made good, with each party’s conduct assessed for fairness, seems a far more balanced approach than the present system of remedies in English law for misrepresentation, and accords more with the principle of restitutio in integrum that is inherent throughout our contract law system.

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