British Law of Contract

This question concerns the area of misrepresentation.  A misrepresentation is an untrue statement of fact made by one contracting party that is relied on by the aggrieved party, which induces him to enter the contract, and as a result of which he suffers loss.  The statement must be of fact, not law.  A statement of opinion is not actionable unless it can be proved that the opinion was never genuinely held.

A misrepresentation may be fraudulent (i.e. deliberately dishonest) within the definition of fraud laid down in Derry v Peek , negligent (i.e. made carelessly without having checked the facts, but not necessarily negligent within the tortious meaning of the word), or innocent (i.e. a genuine and innocently made mistake).

Having outlined the key principles, it is now possible to consider whether Mr and Mrs Tuner have any claims against Captain and Mrs Sparrow in misrepresentation.  To do this it is necessary to scrutinise each of the statements made by the Sparrows to the Tuners.  Since the problem question only requires a discussion of possible claims in misrepresentation, it will be assumed that the statements made by the Sparrows were representations rather than terms of the contract.

Statement 1: “We think it is a beautiful house and you are getting an absolute bargain”.

This can be broken down into two separate statements.  The first, “we think it is a beautiful house”, is clearly a statement of opinion and cannot therefore be the subject of a misrepresentation claim

The second part of the statement, “you are getting an absolute bargain” is less clear cut.  According to the statement it is the belief of the Sparrows that the Tuners would be getting a bargain.  If this belief were genuinely held then this statement would be classified as a statement of opinion.   If, on the other hand, the statement were made with the knowledge that it was untrue (for example, if the Sparrows had already had the property valued and were aware of its true value), then it would amount to an untrue statement of fact, and could form the subject of a misrepresentation claim, provided that the statement was relied upon by the Tuners.

Statement 2: “We had planning permission to lift the roof”

If a party makes a statement that is in fact true the court may decide there has been a misrepresentation because of what was left unsaid.   Such statements are so-called ‘half-truths’.

Here, the statement made by the Sparrows is true - they did have planning permission to have the roof lifted.  However, the Sparrows failed to tell the Tuners that they did not have planning permission for the subsequent alterations (i.e. the addition of the window and the boarding out of the space).  If the belief of the Turners that all planning permissions for the roof works had been granted actually induced them to enter into the contract for purchase then they would have a claim in misrepresentation against the Sparrows because of what was left unsaid.  In other words, the Tuners would need to prove that their decision to purchase the property was induced by the representation made by the Sparrows that all necessary planning permissions were in place.  So, what level of proof is required?  A representation will induce a contract only if it is ‘material’.  It must represent a fact which would positively influence a reasonable person, considering entering into the contract, to decide positively in favour of doing so.  Given the vast expenses that can result from breached planning permissions it is likely, on the balance of probabilities, that a reasonable person would have been positively influenced by the Sparrows’ statement regarding planning permission when deciding to enter into the contract.  For this reason, the Tuners would be able to bring a claim for misrepresentation against the Sparrows.

Statement 3: Captain Sparrow covered up the woodworm in the roof and on the whole of the top floor

The requirement for a ‘statement’ has in one sense been interpreted fairly broadly, because the courts have shown a willingness to find the existence of a misrepresentation based on conduct, i.e. without the need for words, “if it is such as to mislead the other… If it conveys a false impression, that is enough” (per Denning LJ in Curtis v Chemical Cleaning and Dyeing Co5).

In Gordon v Sellico , concealment of dry rot was held to amount to a representation to the plaintiffs, who purchased the property in question following an inspection, that the property did not suffer from dry rot.  This case can usefully be compared with Horsfall v Thomas , where concealing a serious defect in a gun by inserting a metal ‘plug’ amounted to representation by conduct.  However, since the purchaser did not inspect the gun before purchase, he could not have been induced by it, and therefore there was no actionable misrepresentation.  The facts of this scenario are similar to those of Gordon v Sellico.  By actively concealing the woodworm the Sparrows were representing to the Tuners, who purchased the property following an inspection, that the property did not suffer from woodworm.  In other words, by concealing the woodworm, the Sparrows were making an untrue statement of fact, i.e. a misrepresentation.  Again, the Tuners would need to prove that their decision to purchase the property was induced by the misrepresentation.  As discussed above, a representation will induce a contract only if it is ‘material’.  This requirement would almost certainly be satisfied here based on the concept of the reasonable person purchasing a property.

Conclusion and Remedie

It would appear from the facts of this scenario that the Tuners would have at least two clear-cut claims for misrepresentation against the Sparrows (statements 2 and 3).  

The effect of any misrepresentation is to make the contract voidable.  The representee (i.e. the Tuners) may either affirm the contract or rescind it.  Where the contract is rescinded it is effectively put aside and each party should return to the other property that is transferred under the contract.  However, rescission is not possible in this scenario since the Tuners have sold the property to a third party and cannot therefore return it to the Sparrows

Since rescission is not possible the Tuners may seek damages under s.2(1) Misrepresentation Act 1967.  Since Royscot Trust Ltd v Rogerson  the measure of damages under s.2(1) Misrepresentation Act 1967 is the same as for fraud (this concept is often referred to as the ‘fiction of fraud) and therefore there is no advantage in proving fraud.  The Tuners should therefore be advised to use s.2(1) and put the burden on the Sparrows to prove they believed and had reasonable grounds to believe their statements were true. 

Under s.2(1) damages are assessed on a tort basis.  The aim is to put the Tuners in the position they would have been in had the statements not been made.  Here, had the statements not been made, the Tuners would have been £50,000 better off (the difference between what they paid for the property and the property’s true value at the time of purchase).  However, when the Tuners eventually sold the property they made a loss of £100,000 (the £250,000 purchase price minus the £150,000 sale price).  So, are they entitled to recover only £50,000 or the full £100,000?  Following Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd , the policy appears to be that, where the statement maker has been fraudulent, he or she should be responsible for all the losses resulting from the other party having made the contract (i.e. losses from the ‘transaction’).  Given the so-called ‘fiction of fraud’ that results from Royscot Trust Ltd v Rogerson, damages for negligent misrepresentations are calculated on the same basis.  In other words, whether the misrepresentations by the Sparrows were fraudulent or negligent, the Tuners would be able to recover all direct losses suffered regardless of foreseeability.  Therefore, the Tuners would be entitled to recover the sum of £100,000 (£250,000 minus £150,000).  However, it should be noted that the misrepresentee is under a duty to mitigate its loss.   Therefore, if the Tuners had received an offer of more than £150,000 before they eventually made the sale, the damages they would be entitled to would be the difference between what they paid (£250,000) and the offer price that they rejected

As long as the Tuners can show a misrepresentation which caused them loss, the Sparrows would be liable to pay the damages under s.2(1) Misrepresentation Act 1967 unless the Sparrows can show that they honestly and reasonably believed what they said to be true (the so-called “innocence defence”).  However, this is unlikely on the facts given that the Sparrows took active steps to cover up the woodworm for example.

BIBLIOGRAPHY

Cases Consulted:

•    Solle v Butcher [1950] 1 KB 671
•    Edgington v Fitzmaurice (1885) 29 Ch D 459
•    Derry v Peek (1889) 14 App Cas 337
•    Bisset v Wilkinson [1927] AC 177 P.C.
•    Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 803 C.A.
•    Gordon v Sellico (1986) 278 EG 53
•    Horsfall v Thomas (1862) 1 H & C 90
•    Gordon v Sellico (1986) 278 EG 53
•    Horsfall v Thomas (1862) 1 H & C 90

Legislation Consulted:

•    Misrepresentation Act 1967

Texts Consulted:

•    Poole J., Textbook on Contract Law (6th Edition), Blackstone Press (2001), pp.312-318.

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