Overview of Recourse for Misrepresentation
A misrepresentation (deliberate, negligent or innocent) generally gives the right to the innocent party to cancel the contract. In some circumstances, there may also be a right of compensation, as set out below.
In the case of a sale of goods or supply of services, damages (compensation) may be awarded for the loss caused by a careless or negligent misrepresentation unless the person who made a statement had reasonable grounds to believe and did believe it, at the relevant time. The person who makes the misrepresentation must prove that he took all due care, in order to avoid liability.
There is the possibility of a disretionary award of damages in lieu of recission in cases of innocent misrepresentation in the sale of goods or the supply of services if the court considers it just and equitable.
Rescission for Misrepresentation
A contract may be terminated and avoided where the representation has become a term of the contract, and its breach gives rise to a right to terminate under ordinary principles. Otherwise, there may be a right to damages for loss thereby caused.
Generally, and subject to limitations, a contract may be rescinded or cancelled where there has been a representation which has caused the party to enter the contract. It may be fraudulent negligent or innocent.
A contract may be rescinded for innocent misrepresentation. It may also be rescinded, in addition to other remedies, in the case of negligent and fraudulent misrepresentation. The bars to rescission are less onerous in the case of fraudulent misrepresentation. There is a limited right for a court to grant damages in place of rescission in respect of the supply of goods and services.
Requirements for Rescission
At common law, a person to whom an innocent misrepresentation was made, could rescind and unwind the contract, only if there was a so called “total failure of consideration”. This was where the very thing provided is wholly different from that intended by the contract. A mere breach of contract was not enough. The very thing he contracted for or the legal obligation in respect of it, had to fail.
In equity, it is not necessary to show a total failure of consideration. The equitable relief of rescission is more flexible and wider in scope than the relief at common law.
If the representation is material and induced the contract, the contract can be set aside in equity.
The equitable rule takes precedence, but as with equitable remedies generally, it is subject to equitable considerations. Rescission in equity is not allowed unless the contract can be reversed and its effects undone. Once the contract is executed, rescission is not usually available.
Avoiding the Contract
A person to whom a misrepresentation has been made, may avoid the contract or affirm it. If he avoids it, he must notify the person who has made the representation of his wish to do so
Rescission may take place out of court. In practice, it may require a court order in many cases in order to determine the position.
The Sale of Goods Act provides that where a misrepresentation has become part of the contract, the innocent person may rescind the contract if he would have had an entitlement to do so if it had not been part of the contract.
In the case of fraudulent representation, he need only take reasonable steps to do so (e.g. notify the police or post a notice to the other party.
Reversal Too Late
The general position is that a contract may be set aside and terminated, where there is a misstatement, which has been relied on. However, this right may be lost where the contract is fully put into effect, where there has been a delay or where a third party has acquired rights in reliance on it.
Equitable rescission is lost in certain circumstances. Rescission was traditionally not available, once the contract had been completed or “executed”. The right to damages remains.
This rule did not apply in the case of fraudulent misrepresentation. Equity allowed a contract to be set aside even if executed, where there was “equitable” fraud. This need not involve deliberate wrongdoing. It may involve a breach of a fiduciary duty or unconscionable dealing.
Where the contract has been completed, it will not be set aside, unless there has been a so-called equitable fraud. An uncompleted (“executory” contract) may be terminated if the representation was fraudulent or there has been a total failure of the consideration.
There have been criticisms of this rule as being too restrictive. In the case of the sale and supply of goods and the supply of services, the law has been reformed. The contract may be capable of being rescinded or reversed. This legislation does not up apply to contracts for the sale of land.
If it is impossible to restore the parties to their original positions, then the more blameworthy the misrepresentation the less demanding the requirement for a restoration to the original position.
Modification of Rule
The Sale of Goods Act provides that where a person has entered into a contract after a misrepresentation has been made to him, and the contract has been performed, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled notwithstanding that the contract has been performed.
These above rules have been modified by statute in the case of contracts for the sale of goods, hire purchase, letting of goods or a contract for services. The remaining residue of cases, not covered by this legislation, relate largely to land. The equivalent legislation in the United Kingdom applies to all contracts
Rescission is an equitable remedy, and accordingly, action must be taken promptly. Delay will defeat the remedy, notwithstanding that it is within the strict time limit under the Statute of Limitations. Delay may bar rescission. This is less of an issue with fraudulent misrepresentation.
Delay will not operate to the same extent, in the case of fraudulent representation. If the misrepresentation is innocent, the person must act reasonably promptly.
Delay much shorter than the statute of limitations period may bar the rescission of the contract. If it is too late to return to the original position then rescission is not usually possible.
Change of Position
If it becomes impossible to reinstate the original position, the right to rescind is lost, at common law. If the person entitled to rescind, does something or participates in an event which makes it impossible to restore the status quo before the contract, then the right is generally lost.
The more fraudulent and culpable the misrepresentation, the less demanding the court will be in terms of requiring full restoration of the position (counter-restitution).
Recession may be refused, if a third party’s rights may be affected. If an innocent third party has purchased goods in good faith and for value before the contract is rescinded or if a third party would be otherwise adversely affected, rescission may no longer be available.
Rescission may continue to be available, where the change of position emanates from the misrepresentation itself. Where, for example, deterioration and change in the goods concerned is due to the false misrepresentation itself and is not due to the fault of the person to whom the representation is made, the remedy of restitution is not thereby lost.
Sale of Goods
The principle that he right to avoid is lost if a third party’s interests are thereby prejudiced, is reflected in the Sale of Goods Act. It provides that where a person has a voidable title (because, for example, he made a misrepresentation on its purchase) then if that contract is not avoided at the time of the onward sale, the buyer obtains good title provided that he buys them in good faith without notice of the defect.
For example, in one case a car was sold in exchange for a stolen car. The sale of the stolen car was void and the innocent party sought to set aside the sale of his car. The property had been purchased by an innocent third party in the meantime.
Because the contract had not been avoided before the sale to the innocent third party, it could no longer be set aside. In this case, the innocent party would have a right to compensation against the fraudulent person, but this may be of little consolation.
Informing the Police would be a sufficient act of rescission in a case such as this. Court action is not required where the misrepresentation was fraudulent.
Right of Indemnity in Equity
Generally, there is no right of compensation for loss occasioned by a completely innocent misrepresentation if it does not form part of the contract. In this case, the only monetary recourse available to a person who has incurred a loss by reason of an innocent misrepresentation is a right of indemnity for expenditure incurred.
The right is indemnity is an equitable remedy which is associated with the right of rescission. It appears that it is not available once rescission is no longer available or is barred.
If the person to whom the representation was made has incurred expenditure, he may be entitled to have it reimbursed by way of indemnity. There expenses must have been incurred under the contract. The expenditure must have been required to be made.
There is a limited possibility at the court’s discretion to an award of damages in place of rescission, in the contracts for the sale of goods and the supply of services. It appears from caselaw in England that this statutory discretion no longer applies once the right to rescind has been lost.
Misrepresentation as Defence
Misrepresentation (deliberate, negligent or innocent) may be available as a defence. If a party seeks specific performance of a contract, the other party may be able to defend the claim on the basis of misrepresentation. Specific performance is discretionary and a court of equity requires that a person seeking it comes with clean hands.
It may be that a relatively minor misrepresentation is such as to deny the remedy of specific performance on the basis that the maker does not come to court with clean hands
The court may choose to grant specific performance with an abatement on such terms as it deems equitable to make allowance for the misrepresentation.
Damages for Deliberate Misstatement
A party to a contract is entitled to compensation for the loss caused by a deliberate misstatement on which he has relied. This is a fraudulent misrepresentation. Fraudulent misrepresentation is a civil wrong. It may have criminal consequences.
A fraudulent misrepresentation arises where a person makes a statement, knowing it to be untrue or is reckless in relation to its truth or falsity. A fraudulent misrepresentation entitles the innocent party to a claim for damages for tort for loss which has arisen in consequence.
The amount of damages for fraudulent representation is potentially higher than for other representations, as all direct consequences may be compensated, not just those which are reasonably foreseeable.
Damages for Careless Misstatement
A careless misstatement does not necessarily or even, generally, create a right to compensation. If the statement has become a term of the contract, there is a right of compensation for breach of contract for loss thereby caused. In
There may be a right to an abatement or modification of the price in some cases. In a consumer case, a representation may be held to be a term of the contract. There are statutory rights on consumer sales that allow for repair or replacement based on breach of contract terms and misstatements.
There may be civil liability where there is a relationship of reliance between the parties.
Under the Sale of Goods Act, there is a statutory right of damages for loss caused by negligence in the sale or supply of goods This applies unless the party making the statement proves that he has reasonable grounds to believe it and did, in fact, believe it. There is a discretion to award damages in lieu of rescission in the case on an innocent misrepresentation.
Civil Wrong of Negligent Misstatement
There may liability for the tort / civil wrong for negligent misrepresentation where there is a relationship of reliance and a duty of care is expressly or impliedly undertaken by the person who makes the statement to the recipient. Liability for negligent misstatement commonly arises in relation to lawyer’s advisers, brokers. doctors, insurance companies, and others. This is effectively professional negligence.
In the tort /civil wrong context, there must be a relationship of reliance. Typically, this will arise in a relationship which involves the giving of professional advice. The terms of the contract may limit the liability. A contract is not in fact required at all for this basis of liability.
There may be liability under both the contract and the civil wrong. However, liability for the civil wrong does not override the terms of the contract which may, for example, limit liability.
Statutory Right to Damages I
The Sale of Goods Act reformed the traditional rule in 1980, that damages were not available for negligent misrepresentation. It followed the Misrepresentation Act in England. Unlike the equivalent English provision, this provision applies only to contracts for the sale of goods, hire purchase and leasing of goods and contracts for the supply of a service.
In the case of sale of goods and sale of services, there is a right of compensation for loss caused by careless or negligent misrepresentation unless the person who made a statement had reasonable grounds to believe and did believe it, at the relevant time. The person who makes the misrepresentation must prove that he took all due care, in order to avoid liability.
Affirmation of the contract is not a bar to a claim. The right applies notwithstanding that the contract is not and cannot be rescinded.
Statutory Right to Damages II
The Act provides that 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.
This liability applies unless the person who made the statement 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. It appears that the principles of contributory negligence apply.
It appeared that the method of measuring damages appears to be that applicable to the law of civil wrongs. This measure would be anomalous in that it would be the more extensive measure of loss based on a civil wrong, than that applicable to a breach of contract. The courts have awarded damages on a basis close to that for breach of contract.
Discretionary Damages for Innocent Misrepresentation
The Sale or Goods Act also provides for a discretionary remedy of damages where a contract is entered on the foot of a misrepresentation, including an innocent misrepresentation. . The Act allows the court to award damages in place of rescission if the court is of the opinion, that would be equitable to do so. This is discretionary.
The damages which may awarded under the Sale of Goods Act may not, it appears, exceed the amount of damages which would have been awarded if the representation had become a warranty.
Because the measure is linked to restitution, it has been suggested that the principle of indemnity is the appropriate measure. This is the cost of making good the defect concerned, which could require replacement of the item concerned.
Where a lower price might have been paid for the goods or service without the misrepresentation, then damages may be awarded to reflect the difference.
It is not clear whether damages can be granted where rescission has been lost due to the above “barring” circumstance. Logically, there seems no good reason why the possibility of an award of damages should not remain. However, the balance of English cases, suggest that the jurisdiction no longer applies.
Consumer Repair and Replacement Rights I
Goods must show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller the producer or his representative, particularly in advertising or on labelling.
The seller shall not be bound by the above public statement if the seller —
- shows that he or she was not, and could not reasonably be expected to have been, aware of the statement,
- shows that, by the time of conclusion of the contract, the statement had been corrected, or
- shows that the decision to buy the consumer goods could not have been influenced by the statement.
Consumer Repair and Replacement Rights II
In the case of such a lack of conformity, the consumer shall, be entitled to have
- the goods brought into conformity free of charge by repair or replacement, or
- an appropriate reduction made in the price, or
- the contract rescinded with regard to those goods.
In the first place, the consumer may require the seller to repair the goods or to replace them (in either case free of charge) unless this is impossible or disproportionate.
Either of these remedies shall be deemed to be disproportionate if it imposes costs on the seller which, in comparison with those of the other remedy or of any other remedy, are unreasonable, taking into account
- the value the goods would have if there were no lack of conformity,
- the significance of the lack of conformity, and
- whether the alternative remedy could be completed without significant inconvenience to the consumer.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch. 11, 13
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch. `13
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
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Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
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Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
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Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
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Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.