What is a contract and its essential elements?

A contract between the two parties is an agreement which give rise to the obligations of the parties, and this agreement is enforced and recognized by law. Three essential elements for creating the contract are agreement, contractual intention, and consideration. The first and most important element of the contract is that the parties must reach to the agreement, and agreement is created when offer is given by one party, and such offer is accepted by another party. In other words, contract is the combination of offer, acceptance, and consideration.

There are number of situations in which parties reached to the agreement but the question arises whether existence or non-existence of any fact, or the occurrence and non-occurrence of any event has potential to destroy the basis on which such contract is formed. There are number of reasons because of which contract between the parties is discharged without performance, and one reason among these reasons is misrepresentation.

A misrepresentation is considered as statement which is untrue in nature and related to the fact or law which induces the representee for the purpose of enters into contract. When statement is made at the time of negotiations between the contracting parties, then such statement is known as representation, and term misrepresentation is used when such statement is turns out to be untrue. Misrepresentation is classified in three types, and these three types are innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation.

The effect of finding misrepresentation in the contract is the contract is voidable. In other words, contract exists between the parties but it may be set-aside at the option of the representee. Availability of remedy clearly depends on the type of misrepresentation, but generally there are two types of remedies that are rescission and or damages. However, right to rescind the contract may be lost in some situations.

In English contract law and English tort law, misrepresentation is defined as a situation in which one person is induced to enter into a contract on the basis of complete or partly false statement related to fact or law, and this statement is made by other contracting party. It must be noted that claims which are described as sales talk such as advertisements and slogans are not considered as misrepresentation. In case representation is included in the contract as a term then only such statement is considered as misrepresentation, and it form the basis of breach of contract and contractual remedies. If statement is considered as misrepresentation, then party has right to cancel the contract and claim for damages. Law related to misrepresentation is mainly described by the Misrepresentation Act 1967, and some of the important features of this Act are stated below in detail.

What is misrepresentation?

For the purpose of considered the statement as actionable misrepresentation, it is necessary to fulfill the following criteria:

There must be a false statement related to fact or law, and any false opinion related to the estimation of future events. In other words, statement made by person must be untrue and it must be related to the fact or law. This can be understood with the help of case law, Bisset v Wilkinson [1927] AC 177 Privy Council. In this case, piece of farm land was purchased by the claimant for the purpose of using it as sheep farm. He clearly asked from the seller about the number of sheep the land would hold. Eller does not use the land as sheep farm but made estimation that land would hold almost 2000 sheep’s. On the basis of this statement claimant purchased the piece of the land, but the estimation made by the seller was turn out to be wrong and claimant brought an action of misrepresentation against the seller.

In this case, Privy Council decided that avowal made by the seller was only avowal of opinion, and not an avowal of fact. Therefore, statement was not considered as actionable misrepresentation and action taken by claimant was unsuccessful.

One more case law is there which help in understanding this point and that is Esso Petroleum v Mardon [1976] QB 801 Court of Appeal. In this case, Mr. Mardon entered into tenancy agreement with Esso Petroleum in respect of a new Petrol station. Experts of Esso would make estimation that petrol station would sell 200,000 gallons of petrol. This estimation was based on the figures which were prepared before the planning application. Panning permission changed the prominence of the petrol station, and this change had adverse effect on the rates of the sale. Esso fails to make any amendments in the estimate. However, rent under the tenancy agreement was also based on the erroneous estimate. Later, it becomes impossible for Mr. Mardon to run the petrol station profitably. In fact after making the best efforts, petrol station only sold the petrol of 78,000 gallons in the initial year and made loss of £5,800.

The Court of Appeal decided that there was no action for misrepresentation because statement made by Esso was actually an estimation of future sales instead of statement of fact. However, claimant was entitled to get a damage which was either based on negligent misstatement at common law or breach of warranty of a collateral contract.

What are the effects of misrepresentation on a contract?

A statement related to opinion may be considered as an actionable misrepresentation, if representator was in the position to know the facts. In other words, if representator is in the position to know the facts then it is the duty of representator to know the facts before making any such representation. This can be understood through case law Smith v Land and House Property Corp (1884) 28 Ch D 7. In this case, hotel was purchased by the claimant, and seller recommended one tenant to the claimant as the most desirable tenant. In fact, seller knew that the tenant was in arrears and on the verge of bankruptcy. This statement made by seller was related to the fact, and it was not considered as opinion because seller was in a position to know the facts.

After proving the above element that is statement made by the representator is untrue, then it is necessary for representee to prove that that false representation made by representator induced the representee to enter into contract. In other words, representee enters into the contract on the basis of the false statement made by the representee. However, representee is not induced if representee was not aware in relation of false statements. This can be understood through the case law Horsfall v Thomas [1862] 1 H&C 90. In this case, gun was purchased by the claimant and that gun had a concealed defect. Action of misrepresentation made by claimant was failed because claimant does not check the gun before buying it. Court held that misrepresentation did not induce the claimant to enter into the contract as he was not aware of it.

In case representee or the agent of representee verify the rationality of the statement then they will not relied on the statement.

In case Attwood v Small [1838] UKHL J60, claimant purchased Corn greaves estate from the defendant for amount of £600,000. Corn Greave estates includes the mining land, iron works and various properties including a mansion house. Many properties on this land were subject to lease and generate income for owners. The mines were to be worked by and profit to go to the claimant. Parties made the preliminary agreement in which claimant agreed to purchase because he was satisfied that reports and accounts provided by the defendant were accurate in nature.

Claimant then had his accountants and directors to check the accounts and reports, and these directors and accountants were satisfied that reports and accounts were accurate. After this claimant proceed with the purchase, and later it was discovered that accounts had greatly exaggerated the income generated by the estate and on the basis of this misrepresentation contained in the accounts and reports claimant applied to rescind the contract.

What are the legal remedies available for misrepresentation?

In this case, court held that claimant was no successful, because claimant gets his own experts to check the reports and accounts and he did not rely on the accounts but rely on his own judgments.

In case, representee provides the opportunity to check out the statement but fails to check the statement, then also they are able to demonstrate the reliance. In case law Redgrave v Hurd (1881) 20 Ch D 1, solicitor purchased into the partnership in the solicitors’ firm. He was informed that partnership earned income of £300 per year and was given the opportunity to look at the accounts. He declined the offer to check the accounts and also took them at their word, but in actual partnership only earned the income of £200 per year.

In this case, Court stated that solicitor had right to rescind the contract because in actual he relied on the statement made by other contracting party. The fact that solicitor declined the offer made by other party to check the books reinforced rather than negated that reliance.

There are various types of Misrepresentation, and some of these types are stated below:

Negligent misrepresentation- Section 2(1) of the Misrepresentation Act 1967, a negligent misrepresentation is a statement which is made by contracting party without the reasonable grounds of belief that statement made them is true. In this situation, burden of proof lies on representator to show that they had reasonable grounds to believe that statement made by them is truth. In case law Howard Marine v Ogden [1978] QB 574, Court stated that defendant does not discharge the burden of proof by showing that that he had reasonable grounds to believe that statement was true as they had registered document which actually contained the correct capacity, and there was no reason why they would have chosen the register of Lloyds instead of the registration document.

Fraudulent Misrepresentation- this type of misrepresentation was defined in the case law Derry v Peek, and Judge stated that it as a statement which was made either knowing it to be false, without believing that statement is truth, and carelessly. In this case, burden of proof relies on the claimant.

Remedies available for misrepresentations are actually depend on the type of misrepresentation, but it must be noted that for all types of misrepresentation, remedy of rescission is available. In this both all the parties revert back the benefit they received in the contract. It must be noted that, in all cases it is not possible to rescind the contract.

What is actionable misrepresentation and what criteria must be fulfilled?

In case of fraudulent misrepresentation, innocent party has right to cancel the contract and claim for damages. Damages that are awarded are not only based on contractual principles but these damages are available in the tort of deceit.

Application:

In the present case, Shahida worked as fashion designer contemporary women’s clothing, and recently she purchased new outlet and decided to purchase new paintings for her new outlet for the purpose of impressing her customers.

For purchasing the painting, she visited the local art gallery named as Benjamin’s Looking Glass and this gallery is owned by Benjamin.

Shahida deals with the sales person named as Reegan and informs him that she want to purchase the painting of a local nineteenth century artist Hilda des Ste Croix. Reegan show her the painting which is labeled as being by Hilda des Ste Croix. Reegan stated that in his opinion this was a picture by the artist Hilda des Ste Croix. In actual, Reegan is unaware that Benjamin had placed the wrong label on this painting. Shahida purchased the painting for £20,000.

After five years, Shahida discovered that painting purchased by her was not made by Hilda des Ste Croix, but in actual it was made by one of her apprentices and only costs £2500.

This is the clear case of misrepresentation because in this all the essential elements of the misrepresentation are present:

False statement: There must be a false statement related to fact or law, and any false opinion related to the estimation of future events. In this case, presentation made by the Benjamin by placing wrong chit on the painting is untrue in nature and it fulfills the criteria of false statement.

Inducement: After proving the above element that is statement made by the representator is untrue, then it is necessary for representee to prove that that false representation made by representator induced the representee to enter into contract. In this case, Shahida enter into the contract by rely on the statement made by Rageen who is the agent of the Benjamin. Therefore, this criterion of the misrepresentation also met.

In this case, Benjamin made the fraudulent misrepresentation by placing wrong chit on the painting either carelessly or knowing it to be untrue, and as per the definition stated by Judge in the case law Derry v Peek, statement which was made either knowing it to be false, without believing that statement is truth, and carelessly is the statement of fraudulent misrepresentation.

This can be understood through case law Derry v Peek (1889) 5 T.L.R. 625, in this case defendant stated that prospectus of the company had right to use the steam powdered teams as oppose to horse powered trams. However, at that time use of steam powered trams was subject to the approval of the Board of Trade, which was later refused. Claimant purchased in the shares in the company on the basis of the statement. Later, claimant brought action of fraudulent misrepresentation against the defendant.

In this case, court held that statement made by defendant was not fraudulent in nature but actually statement made in honest belief that approval was forthcoming.

Therefore, Shahida has right to take action of fraudulent misrepresentation against the Benjamin, and he also has right to cancel the contract and claim for damages.

Conclusion:

This is the case of fraudulent misrepresentation in which Shahida has right to cancel the contract and claim for damages against the Benjamin.

References

Allen & Overy, Basic Principles Of English Contract Law, < https://www.a4id.org/wp-content/uploads/2016/10/A4ID-english-contract-law-at-a-glance.pdf>, Accessed on 27^th December 2017.

Legal services commission, Misrepresentation, < https://www.lawhandbook.sa.gov.au/ch10s02s10.php>, Accessed on 27^th December 2017.

E-law resources, Misrepresentation , < https://e-lawresources.co.uk/Misrepresentation.php>, Accessed on 27^th December 2017.

Law teacher, Misrepresentation Lecture, < https://www.lawteacher.net/lecture-notes/misrepresentation-lecture.php>, Accessed on 27^th December 2017.