INNOCENT AND FRAUDULENT MISREPRESENTATION

Updated: Aug 5



It has been said: ‘The old law of misrepresentation, distinguishing only between innocent and fraudulent misrepresentations, was preferable to the law of today, which needlessly over complicates things.’ This paper will critically discuss this statement with reference to negligent misrepresentation both at common law and under the Misrepresentation Act, 1967. This paper will discuss if these developments change the law, and why were they deemed necessary?


Derry v Peak (1889)[1], originally established a three pronged test for “fraudulent misrepresentation”, namely, if the defendant “knows the statement to be false”, or “does not believe in the statement” or “is reckless as to its truth”. It should be noted that not only is the burden on the claimant, but as fraud is taken very seriously the standard is may be more than the usual civil standard (balance of probabilities). “Innocent misrepresentation” was the term (pre 1963) for any misrepresentations given that were not “fraudulent”.


Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964][2], created the tort concept of “negligent misstatement”, and this recognised liability for pure economic loss whether or not it arose from a contract. It applied a tortious duty of care and “assumption of responsibility” principle to commercial negligence, and thusly allowed tort remedies, which puts a claimant into the position they were in prior to the tortious act (or the contract).


The Misrepresentation Act 1967 was introduced to codify the law and ensure parties have an action in both contract and tort (with tort damages calculation) if the misrepresentation causes loss. It divided innocent misrepresentation into two categories, “negligent” & “wholly” innocent misrepresentation. Tort damages would apply whether the misrepresentation was negligent, fraudulent, innocent. It was created to provide more security to parties to contracts, ensuring they would not be bound by an agreement making them suffer loss due to a misrepresentation.


Negligent misrepresentation under the 1967 act takes place when one contracting party “carelessly” (or “without reasonable grounds for believing its truth”) makes a statement to the other. The test is objective. Once the representee proves the statement false, the burden of proof switches to the opposition to establish that it reasonably believed in the truth of the statement[3].

A substantial positive change was the removal of the bars to rescission established in common law by cases like Wilde v Gibson (1848)[4]. Historically, where there had been misrepresentation but contractual performance had taken place, the suffering party’s ability to rescind the contract was heavily restricted. Section 1 of the act repeals this rule and gives parties a wider range of circumstances from which to claim. Furthermore, the act sets out the actions and remedies available to parties if they have suffered loss from misrepresentation. The Act, therefore, has “allowed greater clarity regarding the actions… available in such circumstances”[5].


However, despite this, it has further complicated the area. There are three main reasons why this is. First, is the general policy decision to “proceed by a limited number of statutory amendments to the common law”[6]. Furmston argues that the act can only be understood if the preceding common law basis is fully “mastered”, and since it was already overcomplicated & unclear, the act was “erected on an uncertain base”.


Secondly, the Act was modelled on the Law Reform Committee’s 1962[7] report on misrepresentation law, however this was before Hedley. As stated, this already created misrepresentation in tort, and accounted for misrepresentation liability outside of fraud. Thus, two different kinds of negligent misrepresentation’s were created, with different rules and “an uncertain relationship”[8]. Thirdly, these flaws are exacerbated by “frequently obscure and sometimes defective” drafting[9]. An example of this is the phrases “after a misrepresentation has been made” and “any misrepresentation made”. “Misrepresentation” is not defined, which leads to uncertainty regarding whether these phrases can extend to situations where a duty of disclosure is imposed.


In conclusion, the old law was certainly more straightforward, and clearly the Act was not created in the most precise way. Furthermore its goal of providing more protection to representee’s by creating a claim for non-fraudulent misrepresentations is redundant, as Hedley already created negligent misstatement. Hence it is “needlessly” overcomplicated.

[1] Derry v Peak (1889) UKHL 1 [2] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 [3] Springwell Navigation Corp v JPMorgan Chase Bank (formerly Chase Manhattan Bank) and others [2010] EWCA Civ 1221 [4] Wilde v. Gibson (1848) 1 H. L. C. 605 [5] Misrepresentation, Practical Law UK Practice Note 4-107-4724 [6] Furmston MP, Cheshire GC and Fifoot CHS, Cheshire, Fifoot and Furmston’s Law of Contract (Seventeenth edition, Oxford University Press 2017) [7] Law Reform Committee (Report) (10 July 1962) [8] Furmston MP, Cheshire GC and Fifoot CHS, Cheshire, Fifoot and Furmston’s Law of Contract (Seventeenth edition, Oxford University Press 2017) [9] Atiyah and Treitel, ‘Misrepresentation Act 1967’, and the critical remarks of the New Zealand Contracts and Commercial Law Reform Committee in their Report on Misrepresentation and Breach of Contract (1967). See now Contractual Remedies Act 1979 (New Zealand)

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