Explain the law relating to fraudulent misrepresentation.

There are different types of misrepresentation each with their own remedy, fraudulent misrepresentation, negligent misrepresentation at common law and by statute and innocent misrepresentation. This essay looks at fraudulent misrepresentation.

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There are certain factors which must be present for misrepresentation to have taken place. A misrepresentation occurs when a fact is falsely stated (this can be orally, written or by action Spice Girls Ltd v Aprilia World Service (2002)) by one party to a contract to the other party with the intention of inducing them to enter the contract. This can be conveyed either prior to the contract or at the time the contract is formed. Such a fact would have to be proved to have been false and that it had induced the other party to enter the contract and that it had not been intended to be a valid obligation of the contract.

 

In Spice Girls Ltd v Aprilia World Service (2002) the Spice Girls had made a misrepresentation by conduct when they participated in a photo shoot to promote a contract with Aprilia. At the time of entering the contract Aprilia believed that all the Spice Girls would remain members of the group until the end of the tour. However, at the time of entering the contract, the Spice Girls were aware that Geri Halliwell, one of the members of the group, was going to leave the group on 27 May 1998. Aprilia claimed that the Agreement had been induced by misrepresentation. Misrepresentation had also taken place, according to the Court of Appeal, by the group members participating in such things as logos, images and other material which suggested that there were five members of the Spice Girls.

 

The representation must be of a material fact if it is to be actionable and this was illustrated by the case of Bisset v Wilkinson (1927) which involved the purchase of some land for use as a sheep farm. The claimant relied upon a statement by the seller that he estimated that the farm land would be sufficient for 2,000 sheep. However the seller had not used the farm land as a sheep farm himself. The land was duly purchased but it transpired that the estimate was wrong and the claimant brought an action for misrepresentation. The Privy Council held that the statement only amounted to a matter of opinion and not a statement of fact and as a result was not actionable. The claimant's action failed.

 

Expressions of future intention are not the same as statements of fact and are not actionable but the case of Edgington v Fitzmaurice (1885) showed that, on occasions, expressions of opinion could amount to statements of fact. In the case in question the directors of a company issued a prospectus inviting subscriptions for debenture bonds as they wished to raise capital. According to the prospectus the capital was intended for altering their buildings, buying horses and vans and expanding into supplying fish. In reality the company was in financial trouble and the money was needed to pay off debts. The claimant (Mr Edgington) bought some bonds hoping that he would obtain a charge on the company property. He did not obtain such a charge but it was accepted that he would have bought the bonds anyway.

 

The matter reached the Court of Appeal. The court held that the content of the prospectus amounted to a statement of intention but nevertheless was also a statement of fact in that what had been said was the object of the debentures which amounted to a statement of fact which was not true and therefore actionable.

 

The belief that the claimant thought that he would obtain a charge on the company property was not the only reason for his investment and he had relied upon what was stated in the document regarding the purported use of the capital. The case supports the view that the misrepresentation need not be the sole reason for entering into the contract.

 

The famous case of Carlill v Carbolic Smoke Ball Co (1893) reminds us that we accept that not all statements, boasts or 'mere puffs' are intended to form part of the contract and a statement will not be binding if, in the court's consideration, it was not meant to be taken seriously. In this case the fact that Carlill had deposited funds necessary to meet any claim showed that the company were preparing themselves for the eventuality of claims being made. This was sufficient to show that what was advertised was more than a 'mere puff' or boast and was actionable. The case also serves to show us that offers to the whole world are capable of being accepted.

 

The case of Carlill also showed that conduct was sufficient evidence of acceptance of an offer so it was perhaps not surprising that misrepresentation can result from conduct as well as express verbal or written statements.

 

There are different types of misrepresentation each with their own remedy, fraudulent misrepresentation, negligent misrepresentation at common law and by statute and innocent misrepresentation. We are looking at fraudulent misrepresentation. This occurs when the action taken was done so intentionally or recklessly and knowing or not believing, that there was any truth in the action or statement. Lord Herschell defined fraud in Derry v Peek (1889).

 

In Derry v Peek (1889), the claim was brought in the tort of deceit and involved a company prospectus issued by a tram company. The part of the prospectus in issue was the company's statement that the company had permission to use steam trams, rather than horse powered ones. The reality was that this was up to the Board of Trade because at that time the right to use steam power required the Board's approval. The consent from the Board of Trade was not forthcoming and the value of the company was adversely affected and it went into liquidation. The shareholders sued, claiming that they had relied upon the contents of the prospectus. The House of Lords held that a claim in the tort of deceit was not made out as it was not shown that the statement had been made fraudulently. Lord Herschell said that proof was required to show that false representation had been made 'knowingly,or without belief in its truth or recklessly careless whether it be true or false.'

 

At one time fraudulent misrepresentation was the only misrepresentation actionable in common law. It is possible to sue for fraudulent misrepresentation in a tort action and as such this means that there is a remedy of damages and the contract can be rescinded. The tort of deceit can only be used if fraud can be proved.

 

As a defence against fraudulent misrepresentation, honest belief is the best defence. As long as there is an honest belief there does not have to be any reasonableness and it makes fraud very difficult to prove. It makes no difference why fraud has taken place - the motive is irrelevant.

 

Recklessness is not proof of fraud unless it means that the truth has been totally disregarded making it dishonest Thomas Witter Ltd v TBP Industries Ltd (1996). This involved figures disclosed during the sale of a carpet business to Thomas Witter. It had to be decided whether someone had been 'so reckless in the estimate that he should be regarded as fraudulent.'

 

The measure of damages is in tort as you are suing in the tort of deceit. In Lord Denning's words 'the defendant is bound to make reparation for all the damage flowing from the fraudulent inducement' Doyle v Olby (Ironmongers)Ltd (1969). This case laid down the difference in the amount of damages that could be awarded for breach of contract and what could be awarded for deceit. Mr Doyle had purchased an ironmongers business in the belief that all of the business was 'over the counter', it transpired that in fact half of the business was through a travelling salesman.

 

Mr Doyle lost a lot of money. The Judge awarded Doyle £1500 in deceit but on appeal the damages were increased to £5500. Lord Denning said that Doyle had been fraudulently induced to purchase the business, Lord Denning went on to say 'The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited.'

 

In Smith New Court Securities v. Scrimgeour Vickers (1996) the test of damages was established. The case concluded that the defendant is 'bound to make reparation for all the damage directly flowing from the fraudulent inducement...............the damage need not be foreseeable.... it must have been directly caused by the transaction.......... the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction............. In addition, the plaintiff is entitled to recover consequential losses caused by the transaction.........'

 

The effect would be hopefully to encourage more fraud claims because of the higher awards available.

 

The claimant can chose if he wants to affirm the contract and continue with it or disaffirm the contract and avoid it. If he chooses to avoid the contract there is nothing further to be done if there is no advantage in going further, all that needs to be done is for the party to give notice orally or by conduct to show that he will not be bound by the contract. If there is a counter-claim the party may have to use fraud as a defence.

 

If the other party refuses to return the payment made by the misled party an application to the court for a formal order of rescission will have to be made. Once the misrepresentation is discovered there is an obligation on the claimant to mitigate its loss and keep losses to a minimum.

 

Spice Girls Ltd v. Aprilia World Service BV [2002]

Derry v Peek [1889] UKHL - British and Irish Legal Information

Doyle v Olby (Ironmongers) Ltd [1969] - British and Irish Legal

Smith New Court Securities v Scrimgeour Vickers - British

Carlill -v- The Carbolic Smoke Ball Company YouTube





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In this essay misrepresentation is looked at in general as well as fraudulent misrepresentation in particular. The remedies available are also examined.

Significant cases used to illustrate this area of misrepresentation include:

Spice Girls Ltd v Aprilia World Service (2002);


Bisset v Wilkinson (1927);


Edgington v Fitzmaurice (1885);


Carlill v Carbolic Smoke Ball Co (1893);


Derry v Peek (1889);


Thomas Witter Ltd v TBP Industries Ltd (1996);


Smith New Court Securities v Scrimgeour Vickers (1996) and


Doyle v Olby (Ironmongers)Ltd (1969).


As always we have provided links to many of the cases to allow you to investigate these in detail and we have also added some other links you may like to look at to widen your understanding of this area of the law.

 

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