Fact vs Fiction: The Legal Consequences of False Statements in Contracts

Contract law's area of misrepresentation examines what happens when someone makes a false statement that induces another to enter a contract. The contract becomes voidable, meaning it can be set aside by the misled party who may also claim damages depending on whether the misrepresentation was innocent, negligent, or fraudulent.

• A misrepresentation must be a false statement of fact or law, not merely an opinion or estimate
• Opinions can become actionable when the speaker has special knowledge or is in a position to know the facts
• Statements about future intentions can be misrepresentations if the speaker had no intention of fulfilling them
• False statements of law are now actionable following legal developments in Pankhania v London Borough of Hackney (2002)
• Silence generally doesn't constitute misrepresentation except in contracts of "utmost good faith" like insurance

Join us in our next session where we'll continue our discussion of misrepresentation, focusing on contracts of good faith and further exploring this important area of contract law.

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Chapters

• 0:36 Introduction to Misrepresentation
• 1:27 What Makes a Misrepresentation Actionable
• 4:32 Statements of Opinion vs Fact
• 7:26 False Statements of Law
• 11:32 Silence and Good Faith Contracts

Transcript

Speaker 1: 0:36

The Welcome to Law Sessions. I am Jennifer Halson. In this Law Session, we will look at the contract law area of misrepresentation. What happens when someone says something to you that makes you enter into a contract with them? What are the repercussions? Well, what we will do in this law session, of course, for the next four segments, is to look at misrepresentation, and then, of course, there is a law session immediately after that which looks at mistake. Now, quite often on examination papers, what you get is a mixture of both misrep and mistake, and so if this is an error that you intend to review in advance of your exam, then certainly I think you need to take it on board with its twin mistake.

Speaker 1: 1:27

All right, we will look at misrep, and let's start off with what is a misrepresentation for the purposes of contract law. Well, a misrepresentation is a false statement of fact or law. Now, I will be honest with you and say that I always had a problem with that, because if it's a statement of fact, how can it be false? Well, I'll show you in a moment. But certainly it does look at a statement being made of fact or law which is false. That's the way really to do it. So it's a false statement of fact or law which induces the representative to enter into a contract. Now, where a statement is made during the course of negotiations, as I mentioned earlier, in terms it is classed either as a representation rather than a term, and an action for misrepresentation may be available where the statement turns out to be untrue. So the point here is, of course, if you've already listened to the contents of a contract lecture. The point is that a term in a contract can be a term which gives rise to obligations or it is a representation. If it is a representation, it does not give rise to any legal liability, unless it turns out to be a misrepresentation. So if it is that it is a representation, then of course liability will attach, if, of course, the representation has, among other things, induced you and it is false.

Speaker 1: 3:07

Now there are three types of misrepresentation there is innocent misrep, there is negligent misrep and there is fraudulent misrep. Now, the effect of a finding of misrepresentation is that the contract is voidable, meaning that the contract exists, but it may be set aside by the representee. Now the remedy available depends on the type of misrepresentation it is, but generally it consists of rescission, which means that you rescind the contract, meaning you get out of it and or damages, because you can get the both. Now the right to rescind the contract may be lost in certain circumstances. The law as it relates to misrep is mainly found in the common law, but the misrepresentation at 1967 does provide supplemental assistance and there are certainly further details in the Act.

Speaker 1: 4:11

Now, in order to amount to an actionable misrepresentation, there are certain criteria which must be satisfied. The first, of course, is that it is a false statement. So there must be a false statement of fact or law. Now it can't be an opinion or an estimate of future events. It must be that it is a statement of fact or law which is false. Now, if we consider the case of Bisserton Wilkinson in 1927, it is a Privy Council case and the facts there were that the claimant purchased a piece of farmland to use as a sheep farm. He asked the seller how many sheep the land would hold. Now the seller had not used it as a sheep farm before but estimated that it would carry about 2,000 sheep. In reliance on the statement, the claimant purchased the land. Now the estimate turned out to be wrong, of course, and the claimant brought an action for misrep. The Privy Council said that the statement was only a statement of opinion and not a statement of fact and therefore it was not an actionable misrepresentation. Now you can see that the statement itself was false. But in order for it to give rise to liability it must be a false statement or a fact. It simply cannot be. Well, I think that it would hold 2000. And you think? You think so? Yeah, I think so. What did I base my thought process on? If it is, as in that case, nothing, given that there wasn't sheep on it before, then arguably the courts are going to find that it's an opinion and, in the circumstances, no misrep. Now the claimant's action was unsuccessful in that case.

Speaker 1: 5:57

But let's consider Esso Petroleum and Marden. It is one that we have considered before in the context of terms. Now, mr Marden entered into a tenancy agreement with Esso Petroleum in respect of a new petrol station. Esso's expert had estimated that the petrol station would sell 200,000 gallons of petrol. The estimate, of course, was based on figures which were prepared before they got planning permission. Now, when the planning permission was considered, it changed the promise, the prominence of the petrol station, and that, of course, affected sales. Now, esso did not amend the estimate and the result was that, under the tenancy, of course, the basis was erroneous and, as such, it did not produce what they had said. So it became impossible for Mr Marden to run the petrol station profitably. In fact, he did try to use best endeavours, but the best he could do was to sell. 78,000, or 78 as opposed to 200,000 is an extraordinary drop, so of course, he made quite a hefty loss.

Speaker 1: 7:09

The Court of Appeal, though, said that there was no action for misrep, as the statement was an estimate of future sales rather than a statement of fact. However, the claimant was entitled to damages based on either a negligent misstatement at common law or breach of a warranty of a collateral contract. Now, as I say, we touched on that when we looked at a contractual term and its contents in the context of collateral contract, because he succeeded there, but certainly he could not succeed on the basis of a misrep, because it was an opinion, and that opinion was, of course, based on the planning permission. That said, though, it was a misstatement which was negligent, and really they ought to have fixed it by the time they had come to put him into possession of the tenancy. So a statement of opinion may, of course, amount to an actionable misrep where the representor was in a position to know the facts, and that is slightly different. It's not taking it into, it's not making it inconsistent. Because if I give you an opinion which is based on a situation where I should know the factual background, so if you look at Bisserton Wilkinson, if he had done sheep before and then he gave an estimate which was clearly wrong, well, possibly.

Speaker 1: 8:35

Well, the case to consider here is Smith and London House Property Corporation, where the claimant purchased a hotel. Now the seller described it. Well, the seller described one of the tenants as being most desirable. In fact, as the seller knew, the tenant was in arrears and on the verge of bankruptcy. Now, this was held to be a statement of fact rather than opinion, as the seller was in a position to know the facts. So even if it is an opinion, it may cross over into the factual arena.

Speaker 1: 9:10

If it is that that opinion ought to have been based on what you ought to or would have known factually, a statement as to the future intent cannot, of course, amount to misrep unless the representor had no intention of carrying out the stated intent. And in Edgington v Fitzmaurice in 1885, we see there that the claimant purchased some shares in the defendant's company. Now, the company prospectus stated the shares were being offered in order to raise money to expand the company. In fact, the company was experiencing financial difficulty and the money raised from the sale of the shares was going to use to pay off the company's debts. Now the court said that, despite the fact that the statement related to a statement of future intent, it was an actionable misrepresentation, as the defendant had no intention of using the money to expand the company.

Speaker 1: 10:07

What about a false statement of law? Well, a false statement of law will now amount to an actionable misrep. What do I mean by now? The fact is, there was a time when it was not simply because everybody is taken to know the law. Now, in the case of Pancania and London Council of Hackney, we see this is a 2002 case. The claimants purchased property induced by a representation that the current occupiers of the property were contractual licensees whose occupation could be terminated simply by giving them three months notice. In fact, the current occupant was a tenant protected under the Landlord and Tenant Act. Now, this was a misrepresentation as to law which had previously been assumed not to be an actionable misrepresentation through analogy with case law based on certain types of claims for mistake. Well, the rule bar on recovery for mistake of law was abolished by the House of Lords, inclined with Benson and Lincoln County Council. The High Court held that the actions based on misrep of law could now be actionable based on the change of the law. The claimant's action in that then was successful.

Speaker 1: 11:28

Silence will not generally amount to a misrep. In fact silence will not generally amount to anything if you go back to acceptance in a previous law session. But for our purposes silence will not generally amount to a misrepresentation, and the case of course is Smith and Hughes. It's an 1871 case where the claimant had purchased a quantity of what he thought was old oats, having been shown a sample. In fact, the oats were new oats and it was very important for him to have gotten old oats. The claimant wanted the oats for horse feed and new oats were of no use to him. Now the seller was aware of the mistake of the claimant but said nothing. The claimant brought an action against the seller based on mistake and misrep. The court said that both actions would have to fail.

Speaker 1: 12:21

The action based on misrep failed as you cannot have silence as a misrepresentation. The defendant had not misled the claimant to believe there were old oaths. The action based on mistake failed as the mistake was not as to the fundamental terms of the contract, but only a mistake as to quality. When we go into the next law session, as I said, if you manage to listen to that one, you will see what the position is in relation to mistake. Now, that is not to say that silence will not give rise to liability, because if it is a contract of what is called a contract of oboreme fide, which is a contract of the utmost good faith, such as an insurance contract or where the representor is in a fiduciary position, well, in such a case a duty exists to disclose all material facts, and a failure to do so may give rise to an action for misrepresentation. How, then, do you consider what is a contract of the utmost good faith? Well, we will take a short break and in the next segment, we'll pick up with our contracts of good faith. You.