Law Sessions With Jennifer Housen’s Podcast

The Silent Deception: Understanding Misrepresentation in Contractual Agreements

Subscriber Episode • • Jennifer Housen • Season 5 • Episode 2

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We explore the complex legal concept of misrepresentation in contract law, from when silence constitutes a legal issue to the different types of misrepresentation and their consequences. Through landmark cases and clear examples, we unpack how false statements impact contractual relationships and what remedies are available when misrepresentation occurs.

• Silence generally doesn't amount to misrepresentation except in contracts of utmost good faith like insurance contracts
• HIH Casualty case shows insurers could rescind contracts for fraudulent misrepresentations despite waiver clauses
• Changed circumstances can create a duty to disclose when statements become false before contract completion
• Misrepresentation claims require inducement—the false statement must have caused the party to enter the contract
• Types of misrepresentation include fraudulent (knowingly false), negligent (without reasonable grounds), and innocent

Join us in our next segment as we continue our discussion on the remedies available for misrepresentation.


💡⚖️ Let’s learn the law together—one session at a time!

Speaker 1:

Welcome back to the second segment of Contract Law Misrepresentation. Now, in the last segment we broke just at the point where we were discussing contracts of the utmost good faith. Discussing contracts of the utmost good faith, and the point was that silence in itself will not, of course, amount to a misrepresentation, unless you're dealing with certain types of contracts. So we established that unless it is a contract of the utmost good faith then, such as an insurance contract or where the representor is in a fiduciary position, silence will not amount to a misrepresentation. In such contracts there is a duty which exists to disclose all material facts, and a failure to do so may give rise to an action for misrepresentation. The case of course to consider is a case called HIH Casualty and General Insurance Limited and Chase Manhattan Bank. Now Chase Manhattan Bank advanced substantial sums to finance the production of a film syndicate. Hih provided insurance for the event that the film did not make enough revenue to repay the loan. Now Chase Manhattan made the insurance a condition of getting the loan and also specified the agent Heath North America, h&a for our purposes that must be used to obtain the insurance. Now H&A obtained the insurance policies, but in doing so, insurance. Now H&A obtained the insurance policies but in doing so made certain fraudulent misrepresentations and failed to disclose a report that suggested the films were unlikely to make a profit. The films did not generate sufficient revenue to cover the loan and Chase sought to claim under the insurance policy. Well, the insurance company quite rightly refused to pay out, claiming to rescind the contract for misrepresentation and a failure to disclose a material factor as required under Section 19 and 20 of the Marine Insurance Act of 1906. And it was applicable to such types of contracts, not just marine. Well, section 18.3, subsection C of the Act provided that the insured need not disclose information which has been waived by the insurer. The contract of insurance contained a truth of statement clause which said, at Clause 6, the insured will not have any duty or obligation to make any representation, warranty or disclosure of any nature, expressed or implied, such duty and obligation being expressly waived by the insurers. There was a clause 7 that continued and said that continued and said and shall have no liability of any nature to the insurers for any information provided by any other parties. Clause 8 said and any such information provided by or non-disclosure by other parties, including, but not limited to he's not American American special risk limited other than one part of the question here shall not be a ground or grounds for avoidance of the insurer's obligation under the policy or the cancellation of the policy. Well, chase sought to reland this clause to argue that the insurance company could not rescind the contract. Well, the court said that the clause was ineffective. The insurers were entitled to rescind the contract of insurance through both the misrepresentation and the non-disclosure.

Speaker 1:

Now it's that if a statement made becomes false because of a later change of circumstances, there is of course an obligation to disclose. You see there that it was that they made certain representations which were of course not true, and as such the court was more or less saying you can't rely on it. But what if your circumstances actually change? I start selling you a business and I know that it is making £100,000 profit, but by the time it changes hands to you I know that it is making no more than £10,000 profit. Well, that is what came to be decided before the courts.

Speaker 1:

Or something very similar in the case of Wythe and of Flanagan in 1936, because there the claimant purchased a medical practice from the defendant. The claimant was induced by the practice by the defendant's statement that the practice took £2,000 per annum. The statement was true at the time it was made, but subsequently the defendant became ill and many of his patients went elsewhere. Physician Heal Thyself, I suppose, did not operate in his circumstances. Well, by the time the sale was completed, the practice was virtually worthless.

Speaker 1:

The court said in that case that where a statement is rendered false by a change in circumstances, there is a duty to disclose the change. A failure to do so, it said, will result in an actionable misrepresentation. All right, the next focus, of course, is this induced into the contract Because the fact that I say to you well, if you buy my practice, you will get £100,000 a year, but you're just thinking yeah, yeah, yeah, whatever, because at the end of the day, I've got my own clients coming and I know I can make £200,000. I have made a representation to you. Indeed, it may be false, but did you rely on that in order to come into the contract? Now, for exam purposes, it is critical that you at least consider whether or not the statement made operated to induce the party to enter into the contract.

Speaker 1:

Okay, so, once you've established that a false statement has been made, the necessity then is for the representative to demonstrate that the false statement did induce him or her to enter into the contract. Now there can be no inducement or reliance if the representee was unaware of the false statement. Now how does that work? Well, let's consider the case of Horsfall and Thomas, which is an 1862 case. The claimant purchased a gun which had a concealed defect. I think that's going to be the red flag there. His action for misrep failed as he hadn't inspected the gun before purchasing it. Therefore, the misrepresentation did not induce him to enter the contract as he was unaware of it. The point, of course, is that, yes, you've bought a defective product, but you weren't induced because, again, you had to have been aware of it. Now, if the representative or their agents check out the validity of the statement, again you have not relied on the statement. So in Atwood and Small, an action for misrepresentation. So in Atwood and Small, an action for misrepresentation.

Speaker 1:

The court said that the claimants could not succeed because he got his own experts to check out certain reports and he had not relied on the accounts but rather he had relied on his own judgment via his expert. So once misrepresentation is established, you then need to look at the type of misrepresentation. Now, in terms of the types of misrepresentations. What's the type of misrepresentation? Once it is established that it is a false statement that was made and that it had induced the contract, then you need to look at whether it can be classified as a fraudulent misrepresentation, a negligent misrepresentation, either at common law or under Section 2.1 of the Misrepresentation Act 1967, or whether it is a wholly innocent misrepresentation.

Speaker 1:

Well, let's consider for a minute the fraudulent misrep. Well, lord Herschel defined fraudulent misrepresentation in Darien Peak, which is really the starting point of misrep, as a statement which is made either knowing it to be false, without belief in its truth, or recklessly, carelessly as to whether it be true or false. Now the burden of proof lies on the claimant and in Darien Peak the situation was that in a company prospectus, the defendant said the company had the right to use steam-powered trams as opposed to horsepower trams. However, at the time, the right to use steam-powered trams was subject to approval of the Board of Trade, which was later refused. Now the claimant purchased shares in the company in reliance of the statement made and brought a claim based on the alleged fraudulent representation of the defendant. It was held that the statement was not fraudulent but made in the honest belief that approval was forthcoming and of course, we then get Lord Herschel's definition, as mentioned earlier, in respect of fraudulent misrepresentation. Now, what about negligent misrepresentation under the MISREP Act 1967? Well, under section 2.1 of the MISREP Act 1967, a negligent misrepresentation is a statement made without reasonable grounds for belief in its truth, now, this burden of proof being on the representor to demonstrate they had reasonable grounds for believing the statement to be true. Now, this burden of proof is difficult to discharge In the case of Howard Marine and Ogden.

Speaker 1:

The claimant, ogden, had hired two dredging barges from the defendant, howard Marine, and he hired them for £1,800 per week to carry out certain excavation works for Northumbrian Water Authority. Now, in order to make an accurate estimate for tender of the work to be completed, ogden asked the company the capacity of the barge. Now, the company checked the Lloyd's register and stated that it was 850 cubic meters. In fact, the entry in the Lloyd's register was wrong. The capacity was in fact much more. Consequently, the work which was carried out by Ogden took a much longer time and cost a great deal more money to perform. The claimant, of course, brought an action for negligent misrep and the company argued that they had reasonable grounds for believing the statement to be true, as they had checked the Lloyd's register. It was held that the defendant had not discharged the burden of proof by demonstrating they had checked the Lloyd's register. It was held that the defendant had not discharged the burden of proof by demonstrating they had reasonable grounds for believing it to be true, as they had checked the Lloyd's register. The court said they had the registration documents which had contained the correct capacity and there was no reason why they would have chosen, or needed to have chosen, the Lloyd's register over the registration documents themselves which they had.

Speaker 1:

What about the common law? Well, I will just touch on it briefly because the entirety of that is more or less contained in the law of tort. But in the context of negligent misrep we see that the courts have more or less considered that because Darien Peake seems so harsh. In fact, in a case called Candler and Crane, christmas in 1952, we get Lord Denning saying in Candler that he sees no reason why negligent misstatement should not have liability attached, given that he said words have a far wider reach than actions and as such he considered that liability ought to attach. Well, 12 years later, based on his dissent in judgment, he pretty much got his wish.

Speaker 1:

Because we get the case of Hedley-Byrne and Heller, where the court said that, as far as a negligent misstatement is concerned, if there is a special relationship between the parties, then there will of course be sufficient for there to be a negligent misstatement. And we see that Hedley-Byrne principle being encapsulated in Kappar-on-Dickmann, which provides that there are four criteria on which a negligent misstatement will stand. And so in refining Hedley-Byrne, it set out what the requirements are, not least that there must be some kind of reliance there. Now, moving forward to wholly innocent misrep. An innocent misrepresentation exists where the representor can demonstrate reasonable grounds for believing the truth of the statements, and that's in Section 2.1 of the MISREP Act. Now I will pause there, because the idea is, we've seen the various types of misrep. What we then need to look at, of course, are the remedies for misrepresentation. We'll take a short break and when we come back we will carry on.