Contract Law - Section 2(1) of the Misrepresentation Act 1967, Assignments of Law

Download Contract Law - Section 2(1) of the Misrepresentation Act 1967 and more Assignments Law in PDF only on Docsity! The UK Parliament introduced the Misrepresentation Act 1967 to remedy some of the challenges and barriers under the common law misrepresentation.* However, Section 2 of the Act has proved to be a controversial piece of provision and invites criticism from academics and judges.? The focal point of this write-up will be Section 2(1) of the Misrepresentation Act 1967°, concerning right to damages created by the Act. Before proceeding, it is necessary to understand common law misrepresentation. The following is a road map to outline the scope of this study. In Section |, we will be discussing the position of right to damages under common law misrepresentation prior 1963. Section II will examine the right to damages for negligence misrepresentation post 1963. Finally, Section III will explore the newly adopted statutory right to recover damages in respect of negligent and fraudulent misrepresentation by the 1967 Act. Ewan Mckendrick defined misrepresentation as an unambiguous false statement of fact or law which is addressed to the party misled which induces that party to enter into a contract.’ The statement above consists of multiple elements in need of further description but will be set aside for other contents of relevance to the question to better assist your reading of this study. Section | Pre-1963, misrepresentation is governed by the English common law and was divided into two categories, fraudulent misrepresentation and innocent misrepresentation. It is commonly practiced by the courts that individuals who seek to recover damages for misrepresentation had to prove that the misrepresentation was made fraudulently by bringing an action for damages in the tort of deceit ° Misrepresentation that is found to be made innocently will not be entitled to award of damages but may rescind the contract by restoring the parties of the contract as far as possible to their original position before the contract was made.‘ In most cases, the claimant will attempt to established fraud for the benefit of recovering damages from the defendant otherwise the claimant next only viable 1 Misrepresentation Act 1967 ? Patrick Atiyah and Guenter Treitel, ‘Misrepresentation Act 1967' (1967) 30 The Modern Law Review <https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1468-2230.1967.tb01149.x> accessed 1 July 2020 ° Misrepresentation Act 1967 s 2(1) * Ewan McKendrick, Contract Law (Misrepresentation, 12th edn, Palgrave Law Masters 2019) ° McLauchlan, D. W. ‘Pre-Contract Negligent Misrepresentation’ (1977) 4 Otago Law Review 23 <http://www.nzlii.org/nz/journals/OtaLawRw/1977/3.html> accessed 1 July 2020 ® Ewan McKendrick, Contract Law (13.8 Rescission, 12th edn, Palgrave Law Masters 2019) option is recission without monetary compensation. However, fraud is no easy task to prove especially when the standard of proof is beyond reasonable doubt. The leading case in this matter is Derry v Peek [1889] ’. An overview of the facts would be that of the plaintiff bought shares in the company after the defendants issued a prospectus stating that the tramways company had the right to use steam power. In fact, the consent of the Board of Trade was required and subsequently refused to consent to the use of steam power and the company ended up in liquidation. The plaintiff bought an action in deceit against the defendants. When the case was brought up in the House of Lords, the plaintiff's action failed. The judgement held by Lord Herschell is of importance here; he demonstrates an action for damages requires proof of fraud and makes clear that fraud is not an easy matter to prove.® The case illustrated with the aim to show damages can only be awarded to fraudulent misrepresentation and nothing less. The position of claimants pre-1963; should have significant basis for the allegation of fraud to successfully bring an action for damages. The standpoint above can be further affirmed by a later case of Heilbut, Symons and Co. v Buckleton [1913] ’. The facts of this case are fairly similar to the case illustrated above. The plaintiff bought shares in the defendant’s company after notified by the company’s manager of bringing out a rubber company but in fact the company does not own much rubber trees. It was held that the misrepresentation was not held fraudulently therefore no damages could be payable. Lord Moulton describe two circumstances where the action would be successful. First, and again, the plaintiff must prove the misrepresentation is made fraudulently which the plaintiff failed to do so and two; the misrepresentation is intended to be held as a promise.*° The House of Lords continue to emphasize the principle that a person is not liable in damages for an innocent misrepresentation no matter in what way or under what form the attack is made and should be maintained in its full integrity.* The award of damages for fraudulent misrepresentation aims to put the claimant in the position he would have been in had the tort not been committed, in simple term reliance measure. Thus, putting the claimant back in the same economic position as if it never happened. The measure of reliance damages can be traced back to the case of Robinson v 7 [1889] UKHL 1 ® Ibid (Lord Herschell) 9 [1913] A.C. 30 °° Ibid (Lord Moultan) “Ibid 54 Section 2(1) creates a right of action for damages on a party to a contract who has induced the other party to enter into a contract by means of negligent misrepresentation.” The question of distinction arises between common law negligence portrayed in Hedley Byrne; tort of negligence and Section 2(1) of the Act. These differences were identified in a published journal by Professor Atiyah in two respects.** In Hedley Bryne, there must be a special relationship between the contractual parties whereas this subsection does not entail such requirement as long as a person is a party to a contract.” Secondly, it reverses the burden of proof. The claimant is not required to prove that the defendant’s misrepresentation had been negligent, but it is for the defendant to prove that he had reasonable grounds to believe the representation made was true.” Professor Atiyah highlighted this subsection as ‘fiction of fraud’; in a way which the defendant would be liable in damages for fraudulent misrepresentation, even though the misrepresentation was not fraudulent.” However, there are academics which does not favor the given interpretation of this subsection by the authors above but instead provide a different interpretation of it. R.D. Taylor provided that the words ‘that person shall be so liable’ could meant otherwise.”’ The different interpretation of the statute will be subject to the decision of the courts. Nevertheless, the court in Royscot denied the fiction as the claim brought against the defendant is of fraud.” Richard Hooley has pointed out that the court decision is to treat the foolish but honest man as if he were dishonest.” A similar criticism was pointed out in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996]°, Lord Steyn stated that the court has to treat a person as if he committed fraud when it comes to measure of damages under the statute although in the eyes of the court, he was innocent.** ” Misrepresentation Act 1967 s 2(1) ?3 Patrick Atiyah and Guenter Treitel, 'Misrepresentation Act 1967' (1967) 30 The Modern Law Review <https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1468-2230.1967.tb01149.x> accessed 1 July 2020 ibid * ibid ** ibid 27 R.D. Taylor, ‘Expectation, Reliance and Misrepresentation’ (1982) 45 The Modern Law Review 141 8 11991] EWCA Civ 12 ?? Richard Hooley, ‘Damages and the Misrepresentation Act 1967’ (1991) Law Quarterly Review 547 % [1996] 3 WLR 1054 * ibid There are instances judges does not give weight to the term ‘friction of fraud’. This is illustrated in Gran Gelato Ltd v Richcliff (Group) Ltd [1992]” where Sir Donald Nicholls V-C raise the possibility of using the defense of contributory negligence in case of negligent misrepresentation brought under section 2(1).*° This defense was later ruled by the House of Lords that there is no defense of contributory negligence in fraudulent misrepresentation as shown in Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2002] ™. Firstly, we have to consider whether the measure of damages arises from this subsection is the tortious measure whereby the claimant is put in its original position before entering into the contract or the contractual measure, so as to put the claimant in the position had been the misrepresentation was true; and second, if it was the tortious measure, whether would it be tort in fraudulent misrepresentation or tort of negligence in common law. Balcombe and Ralph Gibson L.JJ. interpreted the phrase ‘so liable’ as to put the measure of recovery to be the same as fraudulent misrepresentation, the tortious measure would include damages for any loss directly flowing from the fraudulent inducement as portrayed in Clark v Urquhart [1930]*; later similar principle implemented in Doyle v Olby [1969]; even it was reasonably unforeseeable unless the representee acted without reasonable common sense. The principle in Doyle is now applied as the basis of recovering damages in Royscot and s 2(1). This measure of damages is largely welcomed by academics.*” ® Such measure protects the reliance interest of both parties to a contract as the representation made to induce another to enter into a contract was not a promise on part of the representor which was not intended to be binding, at least on part of the representor and in view of courts.” “ Although cases where the action for damages under this subsection are likely to be negligent misrepresentations as fraudulent ones. Application of the fraudulent measure in Royscot seems absurd and would assert obscurity in the law as the defendant was stated to be innocent. The court felt constrained, however, by the plain words of the section, holding 11992] Ch 560 * ibid * UKHL 43 55 [1930] AC 28 56 [1969] 2 QB 158 %” Joan Wadsley, ‘Measures in Misrepresentation: Recent Steps in Awarding Damages’ (1992) 55 The Modern Law Review, 702 * Richard Hooley, ‘Damages and the Misrepresentation Act 1967’ (1991) Law Quarterly Review 547 * R.D. Taylor, ‘Expectation, Reliance and Misrepresentation’ (1982) 45 The Modern Law Review 141, 142 “ Howard Marine and Dredging Co. Ltd. v. A. Ogden and Sons (Excavations) Ltd. The court was certain that representations were not contractual warranties and should not be binding. that the only possible interpretation of the words of the section was that the defendant should be liable in damages as if the misrepresentation had been made fraudulently.** Since it was settled that the measure of damages would follow the basis in Doyle, arguments arises when negligent misrepresentation under section 2(1) resorts to the same measure as in fraud could create unjust decisions. Common law negligence misrepresentation was previously governed by Hedley Byrne which observe the effect of reasonable foreseeability.”” This subsection includes damages for loss of profit when it was clearly unavailable under Hedley Byrne. This could result in defendant making non- fraudulent misrepresentation to be held liable for any actual damage directly flowing from such event even if they are morally innocent. Ewan Mckendrick puts emphasis on the remoteness of damages. In negligence, the remoteness test is based on reasonable foreseeability whereas in deceit the defendant is liable for all losses which flows directly from the misrepresentation with no consideration to foreseeability.** However, the following will present the bright side of bringing an action of damages under section 2(1). Finally, to bring an action for damages under the tort of deceit might as well ceased to exist after the decision in Royscot™. Comparing to Derry v Peek’, this subsection provides a much more favorable route for the claimant without having to assume the burden of proving fraud. The claimant could recover the same amount of money by way of damages under section 2(1) by proving a misrepresentation was made and nothing more. The defendant must show that he had reasonable grounds to believe his statement was true, failure to do so will be held liable for damages. The following will discuss the competition between a claim in tort of negligence; Hedley Byrne and a claim under section 2(1). We shall first discuss the case of Howard Marine and Dredging Co Ltd v A Ogden and Sons Ltd [1978]. The facts are as follow: the defendants, Ogden wanted to hire two barges from the plaintiff, Howard. The plaintiff's employee, Mr O'Loughlin told the defendant that their barges could carry 1600 tonnes deadweight “1 Joan Wadsley, ‘Measures in Misrepresentation: Recent Steps in Awarding Damages’ (1992) 55 The Modern Law Review, 702 211964] A.C. 465 “3 Ewan Mckendrick, Contract Law Text, Cases, and Materials (8" edn, Oxford University Press, 2018) #411991] EWCA Civ 12 45 [1889] UKHL 1 “6 11978] QB 574