Introduction
Innocent misrepresentation occurs when a false statement of fact is made by one party to another, which induces the other party to enter into a contract, but the party making the statement does not know or believe it to be false and has reasonable grounds to believe it is true. This principle operates within the framework of contract law, where the presence of a misrepresentation can affect the validity of an agreement. The technical requirements for establishing innocent misrepresentation include a false statement of fact, inducement, and the absence of fraudulent or negligent intent. Such a misrepresentation, while not considered a breach of contract in itself, may offer the misled party grounds for rescission of the contract.
Defining Innocent Misrepresentation
The core concept of innocent misrepresentation lies in the distinction between a statement made without any intent to deceive, and a statement made with knowledge of its falsity or a reckless disregard for its truth. Unlike fraudulent or negligent misrepresentation, an innocent misrepresentation does not involve any culpability on the part of the representor. The representor believes the statement to be true, and there is a reasonable basis for that belief. As outlined in Derry v Peek (1889), the critical difference rests on whether the statement is made knowingly, without belief in its truth, or recklessly. An innocent misrepresentation lacks these qualities. This lack of intent is what separates it from other forms of misrepresentation and affects the type of remedies available.
Essential Elements of Innocent Misrepresentation
To establish an innocent misrepresentation, three essential elements must be satisfied. Firstly, there must be a false statement of fact. This must be a factual statement, as opposed to an opinion or statement of future intent. For instance, in Bisset v Wilkinson [1927], a statement regarding the sheep-carrying capacity of land was held to be an opinion, not a statement of fact as both parties were aware the vendor had never used the land for sheep farming. Conversely, a statement about a "most desirable tenant" was considered a statement of fact, not opinion, in Smith v Land & House Property Corp (1884) because of the vendor’s position to know. Secondly, the misrepresentation must have induced the contract. This means the misrepresentation must have played a part in the other party entering into the contract. The case of Redgrave v Hurd (1881) established that reliance on the misrepresentation is sufficient, and the representee is not obligated to verify the statement's truth, absent clear evidence they did not rely on it. Finally, there needs to be a lack of fraudulent or negligent intent. It must be shown that the statement was made honestly with reasonable belief in its accuracy, as highlighted in Derry v Peek. If a statement is found to be fraudulent or negligent then the claim for innocent misrepresentation will not stand.
Remedies for Innocent Misrepresentation
The primary remedy for innocent misrepresentation is rescission, where the contract is set aside and the parties are returned to their pre-contractual positions. This remedy is designed to reverse the transaction, not necessarily to compensate for any loss incurred by the misled party. As confirmed in Redgrave v Hurd, rescission is a remedy available for innocent misrepresentation. The process of rescission, however, is not always straightforward, and certain bars can prevent its application. This can include lapse of time, affirmation of the contract, intervention of third party rights, and impossibility of restitution. As seen in Leaf v International Galleries [1950], a lapse of five years between the contract and the discovery of the misrepresentation was deemed an unreasonable amount of time, barring the rescission claim. Similarly, in Long v Lloyd [1958], the claimant's use of a faulty lorry after having knowledge of the defects was considered an affirmation of the contract, thereby preventing rescission.
Another important remedy which may be available is indemnity. Indemnity seeks to cover the costs that the misled party was obligated to pay as part of the contract. In the case of Whittington v Seale-Hayne (1900) the court awarded indemnity for rent paid and repair costs which were obligatory under a lease but did not cover losses for dead poultry and associated profits. The basis being that indemnity is restorative and not compensatory, therefore no damages are available.
The Impact of the Misrepresentation Act 1967
The Misrepresentation Act 1967 (MA 1967) significantly changed the legal rules concerning misrepresentation, introducing several key provisions that affect innocent misrepresentation claims. Section 1 of the Act removes a common law bar to rescission based on execution of the contract, allowing rescission even after the contract has been completed. Furthermore, Section 2(2) of the Act grants the courts discretion to award damages in lieu of rescission for non-fraudulent misrepresentations which includes innocent misrepresentation. This allows the court to award compensation instead of unwinding the contract where it is not deemed appropriate to order rescission. However, it is important to note that this section was interpreted by Jacob J in Thomas Witter Ltd v TBP Industries Ltd [1996] to only apply where there was previously an existing right to rescission, not necessarily a present right. Section 3 of the Act deals with clauses which exclude or limit liability for misrepresentation, stating that such a clause is void if it does not carve out fraudulent misrepresentation, meaning it must exclude all misrepresentation, including fraud to be invalid. This provision, as demonstrated in Thomas Witter Ltd v TBP Industries Ltd, prevents parties from attempting to exclude liability for any misrepresentation, and is interpreted strictly to avoid unfair outcomes. This has proven vital to the concept of fairness within contract law.
Bars to Rescission and Alternative Remedies
Even if innocent misrepresentation is established, rescission is not always available. Several bars, stemming from common law and equitable principles, may prevent rescission:
- Lapse of Time: The right to rescind is lost if too much time has passed since the discovery of the misrepresentation, as seen in Leaf v International Galleries [1950].
- Affirmation: If the misled party, with knowledge of the misrepresentation, acts in a way that indicates acceptance of the contract, the right to rescind is lost, as illustrated in Long v Lloyd [1958].
- Third Party Rights: Rescission is barred if a third party has acquired a legitimate interest in the contract's subject matter. This was demonstrated in Car & Universal Finance Ltd v Caldwell [1965], where a fraudulent buyer resold a car. Although rescission was still possible in this instance as the police report served as notification, this was not held to be the case in situations where a third party is a bona fide purchaser without notice of the misrepresentation.
- Impossibility of Restitution: If the parties cannot be restored to their original positions because the contract’s subject matter has been substantially altered, rescission may not be possible, as seen in Thomas Witter Ltd v TBP Industries Ltd. [1996].
Where rescission is not possible, damages may be granted in lieu of rescission under section 2(2) of the Misrepresentation Act 1967. It is important to consider also, that damages for breach of contract may be applicable where the representation is held to be a term of the contract. For example, in Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] a statement made from an expert to a non expert was deemed to be a term of the contract and not just a representation. In addition, a claim of negligent misstatement under Hedley Byrne v Heller [1964] may be brought where the representor had a special skill or knowledge and the representee reasonably relied on the statement which led to the loss. This can mean that it is more appropriate to bring a claim in negligence as opposed to misrepresentation, where the damages available may be more appropriate. It is also important to consider that the burden of proof under a claim for negligent misrepresentation is different to an innocent one. A negligent misrepresentation is assessed at a higher standard of due diligence, as seen in Howard Marine v Ogden [1978], where the representor failed to prove they had reasonable grounds to believe a statement was true.
Conclusion
Innocent misrepresentation represents a critical area of contract law where a false statement, made without any intent to deceive, can still have significant consequences for contractual agreements. This specific type of misrepresentation has legal effects, but it must be considered in distinction from other forms. The legal frameworks of common law and the Misrepresentation Act 1967 provide for the main remedy of rescission and discretionary damages in lieu, but they also establish key limitations. Cases such as Leaf v International Galleries, Long v Lloyd, and Car & Universal Finance Ltd v Caldwell underscore the practical application of these principles, whilst Thomas Witter Ltd v TBP Industries Ltd and Royscot Trust Ltd v Rogerson [1991] show the complexity of the Misrepresentation Act 1967. The careful interplay between these principles, as defined by precedent and legislation, ensures that parties are afforded some level of protection from the effects of inaccurate statements, even when those statements are made honestly. Understanding the legal and technical distinctions within innocent misrepresentation, as a concept, remains vital for establishing the rights and obligations of contracting parties.
