Therefore, Fraudulent Misrepresentation is one if the elements that vitiates a contract, and a vitiating factor as explained by Chris Turner in her book Contract Law ‘is one that may operate to invalidate an otherwise validly formed contract, that is one that conforms to all the rules of formation already identified.’
Further explanation into the matter is that to vitiate basically means to impair the quality of, to corrupt or to debase. In contractual terms, this means that factors present at the time of the formation of the contract, possibly unknown to one or either party.
Meaning that the contract lacks the essential characteristic of voluntariness, is based on misinformation or is of a type frowned on by the law. As a result, the role of the law is to provide a remedy to the party who may not have wished to enter the contract given full knowledge of the vitiating factor at the time of formation. There can be two effects if a contract is vitiated: it may be void or it may be voidable.
What do you do if you notice/realize the contract has a vitiating factor?
Whether the contract is void or voidable in a given case depends on the type of vitiating factor that is complained of. In the case of certain vitiating factors, the effect of demonstrating the presence of the vitiating factor to the court’s satisfaction is to render the contract void. It is as though it has never been. Stating that a contract is void is in many ways the same as stating that the contract does not exist. This is because identifying a contract as void is identifying it as having no validity and therefore no enforceability in law.
Where a contract is voidable there are different possibilities. The vitiating factor is identified and acknowledged but this does not necessarily mean that the contract is at an end. A party who has entered a contract that is voidable for a vitiating factor can continue with the contract if that is to his/her benefit. On the other hand, that party can avoid their responsibilities under the contract and in effect set the contract aside.
Chris Turner explains that there are essentially four classes of vitiating factors which themselves are subject to subdivisions which are as follows;
1. Misrepresentation – where a contract has been formed but as the result of false information about its substance the innocent contracting party who is the victim of the misrepresentation can avoid the contract,
2. Mistake – where the contract has been formed on the basis of mistakes about contracting terms made by either party or both parties – if the mistake is operative then the contract is void,
3. Duress and undue influence – duress being a common law area where the contract has resulted from actual or threatened violence and the contract is voidable – this is now supplemented by economic duress which is improper coercion in a commercial context – and,
4. Undue influence which is an equitable doctrine concerning contracts that have been made following improper coercion and the innocent party can avoid the contract,
5. Illegality – of which there are many types where the type of contract will not be accepted at all, sometimes by the courts and sometimes by statute, as being legitimate and enforceable – usually for reasons of public policy.
Fraudulent Misrepresentation and its Elements.
Historical Development.
Fraudulent misrepresentation is a statement made by a party knowing it to be untrue or having no reason to believe it to be true or in a reckless disregard of whether it is true or not.
This was first observed in the case of " Derry v. Peekwhose facts are that, in the prospectus released by the defendant company, it was stated that the company was permitted to use trams that were powered by steam, rather than by horses. In reality, the company did not possess such a right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the Board was considered a formality in such circumstances and the claim was put forward in the prospectus with this information in mind. However, the claim of the company for this right was later refused by the Board.
The court held that it was not proven by the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit.
Looking closely at the holding of Lord Herschell, who pointed out that, although reasonableness of the grounds of belief is not deceitful, it is evidence from which deceit may be inferred. The case also outlined that no duty would be required in relationship to non-fraudulent misrepresentation without the presence of a contract, a fiduciary relationship , fraud or deceit.
Therefore, the decision of Derry v Peek established a 3-part test for fraudulent misrepresentation, whereby the defendant is fraudulent if he:
1- Knows the statement to be false, or
2- Does not believe in the statement, or
3- Is reckless as to its truth.
The House of Lords determined that, when issuing a prospectus, a company has as no general duty to use "care and skill" in to avoid making misstatements.
Even though, this point is no longer good law in cases where economic loss flows from non-fraudulent misstatement
NB: It is important to note that the law regarding false misrepresentation was still developing and this was an important case in doing so. In this case, the court was required to assess the statement made by the defendant company in its prospectus to see whether the statement was fraudulent or simply incorrect.
The Development of the Law on Fraudulent Misrepresentation
The decision of the court in Derry v Peek was developed in the case of Hedley Byrne v Heller . The finding of fact that the directors had an honest belief in the statement runs contrary to the evidence that although they expected to get planning permission as a mere formality, they plainly knew that they did not yet have that permission. The court defined fraudulent misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit. Despite the fact that this case stated above this case tests for fraudulent misrepresentation whereby;
(a) A fiduciary relationship of trust & confidence arises/exists between the parties;
(b) The party preparing the advice/information has voluntarily assumed the risk;
(c) There has been reliance on the advice/info by the other party, and
(d) Such reliance was reasonable in the circumstances.
It can also of course be deceit where an opinion is allegedly expressed which is not genuinely held because this would amount to a false statement of fact.
A recent decision of Cherrilow Ltd v Richard Butler-Creagh whose facts were, the claimants challenged an order granting the defendants leave to appeal against judgment, saying that the application had been made without the required disclosure and with material inaccuracies.
Cherrilow’s claims arose out of its purchase of a large property on the river at Henley-on-Thames called Fawley Court, which is thought to have been designed by Sir Christopher Wren and may have been the inspiration for Toad Hall in “The Wind in the Willows”. Cherrilow was incorporated in Jersey in December 2008 as a special purpose vehicle to buy Fawley Court at the instigation of Aida Hersham, a few weeks after she had first been shown around the property by Mr Butler-Creagh. Mr Butler-Creagh claimed at that time to have the benefit of an exclusivity arrangement with the vendors of Fawley Court, the Marian Fathers, so that only he could buy it.
Contracts were exchanged on 10 December 2008 and completion took place in April 2010.
A month later, Mr Butler-Creagh brought a claim against Ms Hersham for a fee of £5 million which he said she had agreed to pay him for allowing her to “step into his shoes”.
In April 2011 Cherrilow began its action against Mr Butler-Creagh, claiming that it had agreed to buy Fawley Court in reliance on his fraudulent misrepresentations and had suffered significant loss, being the difference between the amount it had agreed to pay and Fawley Court’s true value in December 2008, plus consequential losses. Mr Butler-Creagh brought a counterclaim against Cherrilow for a quantum meruit.
The cases were ordered to be heard together on a highly expedited timetable. Cherrilow’s claims succeeded, and Mr Butler-Creagh’s claim against Ms Hersham and counterclaim against Cherrilow were dismissed.
In his judgment Eady J found that Mr Butler-Creagh had “told lie after lie” in his evidence and that, “He was an unusual witness. He gave the impression of being quite confident and self-assured. Yet it emerged very clearly from his two days and more of cross-examination that he lives in a parallel universe where truth and falsehood imperceptibly merge, the one into the other, he being quite insensitive to the distinction between them.”
Therefore, the court held that a party was induced into entering a contract for the purchase of a property because of a representation made as to its value of £22.5 million when in fact the more realistic market value was £10 million. There were no grounds to suppose that anyone would buy the property at the value represented and as such the representation was a false statement of fact rather than a genuine opinion. In all cases the essence of liability is the dishonesty of the defendant in making a statement which he did not honestly know to be true. The motive for making the statement is largely irrelevant. If the claimant has suffered loss as a result, then there is a claim.
This position was affirmed in Thomas Witter Ltd v TBP Industries Ltd where it was stated that damages cannot be claimed in deceit on the basis of recklessness alone since the basis of deceit is dishonesty. To establish fraudulent misrepresentation in these circumstances it had to be shown that the recklessness of the defendant was such that it amounted to a disregard for the truth so that they could be regarded as having acted fraudulently. Proving that the representor has made a fraudulent misrepresentation by suing in the tort of deceit is not easy and is likely to be hotly disputed. Failure to prove it may result in an action in defamation so the decision to pursue such an action should never be taken lightly.
What were the remedies of Fraudulent Misrepresentation.
It should also be noted that, before 1963, the significant difference was between fraudulent misrepresentations for which the contract could be set aside (ie ‘rescinded’) and for which damages were available in the tort of deceit, and non-fraudulent misrepresentations (known as ‘innocent misrepresentations’) for which only rescission was available. The explanation for this lay in the distinction between common law and equity, and the historical development of the law of tort. Whereas in equity a contract could be rescinded for non-fraudulent misrepresentation, damages, a common law remedy, was not available in the Court of Chancery. But while the common law courts awarded damages for fraud in the tort of deceit, and for the breach of a contractual term, they gave no remedy for a non-fraudulent misrepresentation which merely induced the formation of a contract. The Judicature Act 1873, which enabled equitable remedies to be granted in any division of the High Court, did not affect the substantive rule that damages in addition to rescission cannot be awarded for innocent misrepresentation, and did little to change this situation.
The important developments were the decision of the House of Lords in 1963 in Hedley Byrne & Co Ltd v Heller & Partners Ltd, which first extended the tort of negligence to cover claims for economic loss caused by reliance upon a negligent misstatement, and the enactment of the Misrepresentation Act 1967, which created a special remedy for negligent pre-contractual misrepresentations. Since then, therefore, it has become usual to use the label ‘innocent’ (or, sometimes, ‘wholly innocent’) to refer to misrepresentations which are made neither fraudulently nor negligently. But it is important to understand that judges in the cases before 1963 did not make this distinction, and therefore applied the label ‘innocent’ also to misrepresentations which would now be classified as negligent.
Further Explanations on Fraudulent Misrepresentation
In fraudulent misrepresentation, carelessness of itself does not amount to dishonesty , but where a person acts recklessly, it is open for the court to find dishonesty in that the person could not reasonably have believed in thee truth of their statement .The narrow aspect of the veracity of the statement made in Derry v Peek is that since misrepresentation consists of a false statement it settles in with the origin of the case because there were indeed a false statement and the fact that they didn’t know about it , it was indeed true that it feel under fraudulent misrepresentation and if this was the case, it was a void contract because it was in the operative phrase.
In other words, it is one that is made knowing it to be untrue or made recklessly not caring whether it be true or false.
Therefore, it is not enough that the statement is false; the people who made it have to have been aware of its untruth or were negligent in finding out the actual facts. As seen in Akerhielm v De mare. Whose facts are,
The defendants were sued for false statements in their circular that had been sent out inviting the public to subscribe to their shares. The company was to be formed in Kenya but it stated that about one third of its capital had already been taken up in Denmark. This was untrue but because the company believed it to be true, and were not reckless in believing so therefore their circular could not be fraudulent.
Lord Jenkins in the Privy Council stated that “The question is not whether the defendant in any case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit it was erroneously made”
In contrast, in the case of Bartholomew Nyanabo v Petronida Nyamukama. where X sold land to Y describing it as 40x60 paces. It was in fact 40x60 feet. The court held that it was fraudulent misrepresentation as X knew that the area was less that what was stated. There are three possibilities if an action in fraud is supposed to be successful: first, knowing the statement to be false. That is, that the falsehood is deliberate. Second is lack of belief in the statement. If the representor acted without belief in the statement, then this is also a statement that is in effect falsely made. Thirdly when one is reckless or careless as to whether the statement is true or false. The party suffering loss as a result of fraudulent misrepresentation can sue for damages under the tort of deceit. Inevitably, the method of assessing any damages awarded will be according to the tort measure that is, to put the aggrieved party in the position he would have been in if the contract had been performed.
A party suffering a loss as the result of a fraudulent misrepresentation can sue for damages in the tort of deceit. Inevitably, then, the method of assessing any damages awarded will be according to the tort measure, it aims to put the claimant in the position he would have been in if the tort had not occurred, rather than the contract measure which is to put the claimant in the position that he would have been in if the contract had been properly performed. As clearly stated in Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd, for instance, the claimant entered into long-term agreements as a result of fraudulent claims by the defendant. The agreements were not as profitable as they would have been if the truth had been told at the time of contracting. The claimant was able to recover damages for the loss of profit. There are potential benefits to be gained from this since it may result in more being recovered by way of any claim for consequential loss.
Lord Denning explained this in Doyle v Olby (Ironmongers) Ltd: ‘the defendant is bound to make reparation for all the damage flowing from the fraudulent inducement’.
The holding is very similar with Smith New Court Securities v Scrimgeour Vickers where the claimants had been induced to buy shares in Ferranti at 82.25p per share, because of a fraudulent misrepresentation that the company was a good marketing risk. The shares were actually trading at 78p per share at the time of the transaction. Unknown to either party, the shares were worth considerably less since Ferranti itself had been the victim of a major fraud. The claimants, on later discovering the fraud, chose not to rescind but to sell the shares on at prices ranging from 49p down to as low as 30p per share. The House of Lords held that the losses incurred by the claimants were a direct result of the fraud that had induced them to contract.
The court held that as a result any losses awarded should be based on the figure actually paid of 82.25p rather than the 78p which was the actual value of the shares at the time that they were bought. This point has been confirmed so that the defendant is responsible for all losses including any consequential loss, providing a causal link can be shown between the fraudulent inducement and the claimant’s loss. There are two clear consequences of the judgment: first that heavier claims can be pursued if fraud is alleged and proved, and that there is therefore an encouragement to do so if proof is available.
What should a Claimant do when they suffer from Fraudulent Misrepresentation?
The claimant who is a victim suffering loss as the result of a fraudulent misrepresentation, has two clear choices on discovering the fraud:
1- He may affirm the contract and go on to sue for damages as indicated above
2- But the claimant might also disaffirm the contract and refuse further performance.
3- If the claimant chooses the latter of the two courses of action then there are two further possible alternatives open to him:
a) Firstly, if there is nothing at this point to be gained by bringing action against the other party, then the claimant can discontinue performance of his obligations and do nothing.
Then if he is sued by the maker of the fraud, he can then use the misrepresentation as a defense to that claim. (In this respect the claimant may refuse to return what he has already received under the contract.
A good example of this would be where a party gained insurance cover as a result of a fraudulent misrepresentation. The insurance company might suspend cover on discovering this but also would be under no obligation to return the premiums already paid under the policy.)
b) Alternatively, the claimant might seek rescission of the contract in equity on discovering the fraud. This would then put him back in the pre-contractual position, provided that this was possible, and none of the many bars to rescission applied in the circumstances of the case.
In Smith New Court Securities v Scrimgeour Vickers (Asset Management) Ltd The claimants had been induced to buy shares in Ferranti at 82.25p per share, as a result of a fraudulent misrepresentation that they were a good marketing risk. The shares were actually trading at 78p per share at the time of the transaction. Unknown to either party, the shares were worth considerably less since Ferranti itself had been the victim of a major fraud. When the claimants, on later discovering the fraud, chose not to rescind but to sell the shares on at prices ranging from 49p to30p per share. The House of Lords held that the losses incurred were a direct result of the fraud that induced the claimants to contract.As a result, any losses awarded should be based on the figure paid of 82.25p rather than the 78p. The clear consequence of the judgment is that heavier claims can be pursued if fraud is alleged, and there is therefore an encouragement to do so if proof is available. The claimant who is a victim suffering loss as the result of a fraudulent misrepresentation then has two choices on discovering the fraud.
c) (S)he may affirm the contract and go on to sue for damages as indicated above.
But the claimant might also disaffirm the contract and refuse further performance. If this is the claimant’s choice then there are two further possible courses of action. Firstly, if there is nothing at this point to be gained by bringing action against the other party, the claimant can discontinue performance of his or her obligations and do nothing. Then if (s)he is sued by the maker of the fraud (s)he can then use the misrepresentation as a defense to that claim. Alternatively, the claimant might seek rescission of the contract in equity on discovering the fraud
However other forms that indicate a misrepresentation and thus punishable by law is where a statement, which was true when made, becomes false as a result of a change of circumstances , keeping silent may be treated as a misrepresentation as seen in Spice Girls Ltd v April a World Service BV The profits made were true when made but due to a change of circumstances , became untrue thereafter but before the relevant contract was signed. Both cases treated the statement as a continuing representation by virtue of which, when the change of circumstances occurred, they represent or was at that moment treated as making an untrue statement of existing fact.
Other various forms of proving a misrepresentation
For instance, the statement alleged to be a misrepresentation must be a statement of material fact and cannot therefore have been offered as a mere opinion. Even though an opinion was held mistakenly, if it was a genuinely held opinion then it cannot amount to a statement of fact or a misrepresentation. However, it may well of course be a misrepresentation if the opinion was not actually held at the time of the making of the statement as clearly explained in the case of Bisset v Wilkinson where a representation as to the number of sheep that land could hold was not based on any expert knowledge as this was not in the possession of the person making it. It was a mere opinion, honestly but mistakenly held, and so it could neither be relied upon nor be actionable as a misrepresentation and according to the Court of Appeal in Springwell Navigation Corporation v J P Morgan Chase Bank a statement is an opinion rather than an actionable misrepresentation when there is no implied representation that there are objectively reasonable grounds for the statement. Neither can the statement be one that is merely expressing a future intention.
This would be speculation rather than fact and a misrepresentation is a false assertion of the existence of a material fact. Again, expressing a future intention could amount to a misrepresentation if the statement actually falsely represented a state of mind which did not in fact exist at the time it was made as seen in Edgington v Fitzmaurice The directors of a company borrowed money, representing that they would use the loan for the improvement of the company’s buildings. In fact, they had intended from the start to use the loan to pay off serious debts that were owed by the company. They had misrepresented what their actual intentions were. The court regarded this as a false statement of material fact and an actionable misrepresentation.
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