Fraudulent Misrepresentation

Introduction

Fraudulent misrepresentation is a false statement of fact made knowingly, without belief in its truth, or recklessly as to whether it is true or false, which induces another person to act and causes loss. It appears in both contract law (making a contract voidable) and tort law (the tort of deceit). While opinions and future intentions are generally not statements of fact, they can amount to fraud where the speaker does not genuinely hold the opinion or intention.

This guide explains the elements you must prove, how courts treat reliance and causation, the limits on contractual clauses, leading cases, and practical steps for bringing or defending a claim.

What You’ll Learn

• The elements of fraudulent misrepresentation (statement, falsity, knowledge/recklessness, inducement, loss)
• What counts as a “statement of fact” and when opinions or intentions are actionable
• How reliance works, including the effect of independent checks and “non-reliance” clauses
• Differences between contractual rescission and the tort of deceit, and the measure of damages
• Bars to rescission: affirmation, lapse of time, and impossibility of restitution
• Key cases: Derry v Peek, Edgington v Fitzmaurice, Redgrave v Hurd, Attwood v Small, Doyle v Olby, and more
• Practical steps to prove (or challenge) fraud and manage risk in transactions

Core Concepts

What counts as a representation?

• Statements of past or present fact:
  • Actionable if false and relied upon.
  • Silence is usually not actionable, but “half-truths” can be. If you speak, you must not mislead by omission.
• Opinions:
  • A bare opinion is not usually actionable (Bisset v Wilkinson [1927]).
  • It can be actionable where the maker is in a stronger position to know the facts, so the “opinion” implies facts that are false (Smith v Land & House Property Corp (1884)).
  • Expert or specialist statements presented as predictions can be treated as factual representations about the basis for the prediction (Esso Petroleum v Mardon [1976]).
• Intentions:
  • A statement of future intention can be a statement of fact if the intention was not genuinely held when stated (Edgington v Fitzmaurice (1885)).
• Change of circumstances:
  • A statement that was true when made can become false. There is a duty to correct it if circumstances change before contract (With v O’Flanagan [1936]).
• Concealment of defects:
  • Active concealment is evidence of fraud (Horsfall v Thomas [1862]).
• Special disclosure duties:
  • Some contracts (historically, insurance) impose duties to disclose material facts (Lambert v Co‑Operative Insurance [1975]).

Fault: dishonesty and recklessness

• The classic test (Derry v Peek (1889)):
  • Fraud exists if a false representation is made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.
• Recklessness:
  • Not mere carelessness; the defendant must have been indifferent to truth, consciously taking the risk the statement was false.
• Honest belief:
  • Reasonable grounds may support a claim of honest belief, but the focus is subjective. If the defendant did not actually believe the statement, that is enough for fraud.

Inducement, reliance and causation

• Inducement:
  • The claimant must show the misrepresentation played a real and substantial part in their decision to contract or act (Smith v Chadwick (1884)).
• Opportunity to verify:
  • The claim is not defeated merely because the claimant could have discovered the truth with due diligence (Redgrave v Hurd (1881)).
• Independent checks:
  • If the claimant in fact relied on their own investigation or expert advice rather than the statement, there is no reliance (Attwood v Small (1838)).
  • Statements must be shown to be material to the decision (Museprime Properties v Adhill Properties [1990]).
• Non-reliance clauses:
  • Clauses saying “no reliance” cannot exclude liability for fraud, but they may be relevant to whether reliance actually occurred. Clauses seeking to exclude or restrict misrepresentation liability are also subject to reasonableness where the Misrepresentation Act 1967 applies.
• Burden:
  • The claimant must prove the elements of fraud, including inducement. Courts often infer reliance where a material false statement was made and communicated; the defendant can rebut that inference (see Smith v Chadwick; also Barton v County NatWest Ltd [1999] for the need to prove causation in misrepresentation-type claims).

Effect on contracts and title

• Fraudulent misrepresentation makes a contract voidable, not void. The claimant may rescind (set aside) the contract and/or seek damages.
• Mistake as to identity vs attributes:
  • Where identity is fundamental, a mistake of identity can render the agreement void (no title passes), as distinct from a misrepresentation about attributes, which makes it voidable (King’s Norton Metal Co v Edridge Merrett & Co (1897)).

Remedies and bars

• Rescission:
  • Returns the parties to their pre-contract position (restitutio in integrum), where possible.
  • Bars to rescission include:
    • Affirmation: the claimant continues with the contract after discovering the truth (Long v Lloyd [1958]).
    • Lapse of time: delay may bar rescission, especially for non-fraud; in fraud, courts are more flexible but delay can still matter.
    • Impossibility of precise restitution: if the subject matter cannot be restored (Clarke v Dickson (1858)).
    • Intervention of third-party rights.
• Damages:
  • Tort of deceit damages aim to put the claimant in the position they would have been in had the misrepresentation not been made.
  • Not confined by contractual remoteness rules; all losses directly flowing from the deceit are recoverable, even if not foreseeable (Doyle v Olby (Ironmongers) Ltd [1969]).
• Contractual clauses:
  • A party cannot exclude liability for its own fraud (S Pearson & Son Ltd v Dublin Corporation [1907]).

Key Examples or Case Studies

• Derry v Peek (1889)

  • Definition of fraud: knowingly false, no belief in truth, or reckless as to truth.
  • Sets the high fault threshold for fraudulent misrepresentation.

• Edgington v Fitzmaurice (1885)

  • Statements of intention can be factual if the intention was not genuinely held.
  • Reliance can be mixed: even if other factors also influenced the decision, reliance on the misrepresentation suffices.

• Smith v Land & House Property Corp (1884) and Bisset v Wilkinson [1927]

  • Opinion vs fact:
    • In Smith, describing a tenant as “most desirable” implied facts only the seller knew; actionable.
    • In Bisset, a buyer could not rely on the seller’s estimate as to sheep-carrying capacity; treated as mere opinion in the circumstances.

• With v O’Flanagan [1936]

  • Duty to correct a statement that becomes false due to changing facts.
  • Failure to update can make the earlier representation misleading.

• Horsfall v Thomas [1862]

  • Concealment of defects may support a finding of fraud.
  • Non-disclosure alone is not enough without duty, but active concealment is different.

• Redgrave v Hurd (1881)

  • A claimant’s failure to check documents does not defeat reliance if the misrepresentation was in fact relied upon.

• Attwood v Small (1838)

  • No reliance where the buyer relied on independent experts’ verification rather than the seller’s statements.

• Museprime Properties v Adhill Properties [1990]

  • Material misstatements that affect the price or decision are actionable.
  • Demonstrates the role of materiality and reliance.

• Doyle v Olby (Ironmongers) Ltd [1969]

  • Damages in deceit are not limited by contractual foreseeability.
  • Claimant can recover all losses directly flowing from the fraud.

• Long v Lloyd [1958]

  • Affirmation bars rescission where the buyer continues to use the goods after discovering the truth.

• Clarke v Dickson (1858)

  • Rescission may be impossible where the subject matter has fundamentally changed and precise restitution cannot be achieved.

• King’s Norton Metal Co v Edridge Merrett & Co (1897)

  • Distinguishes mistakes about identity (void) from attributes (voidable), with significant consequences for title and third-party rights.

• Lambert v Co‑Operative Insurance [1975]

  • Illustrates duties of disclosure in insurance; non-disclosure/misrepresentation can have serious consequences.

• Horse sale example (contract case study)

  • Seller tells buyer a horse descends from a champion line while knowing of a breeding mix‑up or being reckless as to parentage. A “no reliance” clause appears in the contract. Fraudulent misrepresentation will still be actionable; such clauses cannot exclude liability for fraud, and the buyer can seek rescission and damages.

Practical Applications

• For claimants

  • Identify the representation: who said what, when, and how it was communicated.
  • Prove falsity: documents, expert evidence, and contemporaneous records.
  • Establish fault: show knowledge of falsity or reckless indifference (emails, internal notes, prior warnings).
  • Show reliance and causation: witness evidence of decision-making; price paid; alternatives considered; timing of the statement.
  • Act quickly on discovery: avoid affirmation; notify promptly; preserve the right to rescind where possible.
  • Select remedies:
    • Rescission if practicable and not barred.
    • Damages for deceit to cover all losses directly flowing from the fraud (including consequential losses not limited by foreseeability).
  • Consider procedural points: plead deceit distinctly, separate from negligent/innocent misrepresentation; identify the alleged fraudulent statements with particularity.

• For defendants

  • Challenge falsity: show the statement was true or substantially accurate when made.
  • Assert honest belief: demonstrate the state of mind at the time (due diligence, expert inputs, internal approvals).
  • Contest reliance: point to independent investigations (Attwood v Small), full disclosure packs, and negotiations showing the claimant did not rely.
  • Raise bars to rescission: affirmation (Long v Lloyd), delay, impossibility of restitutio in integrum (Clarke v Dickson), or third‑party rights.
  • Contractual terms:
    • You cannot exclude fraud. “Non‑reliance” language may still help on the facts, and other misrepresentation clauses are subject to reasonableness under the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977 where applicable.

• Transactional risk management

  • Keep records of factual bases for statements.
  • Avoid casual superlatives that imply facts (“most desirable tenant”) unless supportable.
  • Signpost opinions as such and state assumptions clearly.
  • Update statements if circumstances change before completion (With v O’Flanagan).
  • Encourage counterparties to obtain independent advice; however, do not assume this will always defeat reliance.
  • Ensure marketing materials and replies to enquiries are accurate and consistent.

Summary Checklist

• Confirm a clear representation of fact was made (including opinions/intentions treated as facts where not genuinely held)
• Prove falsity at the time it operated on the mind of the claimant
• Show knowledge of falsity or reckless indifference (Derry v Peek)
• Evidence reliance and causation; materiality helps create an inference of reliance
• Consider the effect of independent verification and any “non‑reliance” wording
• Choose remedies: rescission (if not barred) and/or damages for deceit (Doyle v Olby)
• Check bars to rescission: affirmation, delay, impossibility of restitution, third‑party rights
• Remember: contractual clauses cannot exclude liability for fraud (Pearson v Dublin)
• Act promptly on discovery and preserve evidence supporting state of mind and loss

Quick Reference