Contract Law - False Preliminary Statements (Misrepresentation)
[STEP 1] Is there a valid contract?
This scenario concerns false preliminary statements. [INSERT C] could potentially claim
for misrepresentation or breach of contract if there is a valid contract with:
- Agreement (offer and acceptance)
- Intention to create legal relations; and
- Consideration.
[IF ALL ELEMENTS PRESENT - AFTER THIS PARAGRAPH GO TO STEP 2] There
is clearly a binding contract between X and Y. There is agreement and consideration: X
agrees to Y’s offer and provides Z as consideration. There is a presumption of intention
to create legal relations given the commercial context (Edwards v Skyways), and
nothing to rebut this.
[IF NOT ALL ELEMENTS - DO BELOW THEN END ANSWER] Apply all
As there is no valid contract, C cannot claim for misrepresentation or breach of contract,
but may claim in the tort of negligent misstatement.
As a general rule, no duty of care is owed in tort where C suffers pure economic loss
that is unconnected to physical injury or property damage, and loss is not recoverable
(Murphy v Brentwood District Council).
However, the House of Lords recognised an exception where a negligent misstatement
causes economic loss and a special relationship exists between C and D that involves
(as per Hedley Byrne):
- An assumption of responsibility by D towards C; and
- reasonable reliance on D’s statement by C.
Assumption of responsibility
The four criteria required to establish assumption of responsibility are (as per Caparo):
- Did the adviser know the purpose for which the advice was required?
- Did the adviser know that the advice would be communicated to the advisee
(either specifically or as a member of an ascertainable class)?
- Did the adviser know that the advisee was likely to act on the advice without
independent inquiry?
, - Was the advice acted on by the advisee to its detriment?
Reasonable reliance
Apply to facts
The advantages are:
- Unlike misrepresentation, you do not need a contractual relationship to sue.
- A negligent misstatement can be a statement of opinion as well as one of fact.
- A negligent misstatement is not limited to a false statement made by the other
contracting party. The Hedley Byrne principle was also extended to negligent
statements made to third parties rather than C, provided the third party relies on
it to the detriment of C (Spring v Guardian Assurance plc).
The disadvantages are:
- Misrepresentation actions (under s.2(1) Misrepresentation Act 1967) are better
for Cs as they reverse the burden of proof. D has to prove that there was not a
negligent misrepresentation.
- Remoteness rules do not apply for misrepresentation claims (following Royscot
Trust Ltd v Rogerson), whereas under the tort of negligence damages are only
awarded for reasonably foreseeable losses (under Hadley v Baxendale).
[STEP 2] Is the statement a term, representation, or mere sales puff?
C may claim in relation to these statements:
- Statement 1 -
- Statement 2 -
- Statement 3 -
Terms or representations?
A term sets out obligations for parties to a contract. If unfulfilled, it provides a remedy for
breach.
A representation is a statement made by one party to the contract which may have
induced the other party to enter into the contract, but does not form part of it. If untrue,
the statement could amount to a misrepresentation and the innocent party may have a
remedy.
A mere sales puff is an obviously extravagant claim providing no right of action.
[STEP 1] Is there a valid contract?
This scenario concerns false preliminary statements. [INSERT C] could potentially claim
for misrepresentation or breach of contract if there is a valid contract with:
- Agreement (offer and acceptance)
- Intention to create legal relations; and
- Consideration.
[IF ALL ELEMENTS PRESENT - AFTER THIS PARAGRAPH GO TO STEP 2] There
is clearly a binding contract between X and Y. There is agreement and consideration: X
agrees to Y’s offer and provides Z as consideration. There is a presumption of intention
to create legal relations given the commercial context (Edwards v Skyways), and
nothing to rebut this.
[IF NOT ALL ELEMENTS - DO BELOW THEN END ANSWER] Apply all
As there is no valid contract, C cannot claim for misrepresentation or breach of contract,
but may claim in the tort of negligent misstatement.
As a general rule, no duty of care is owed in tort where C suffers pure economic loss
that is unconnected to physical injury or property damage, and loss is not recoverable
(Murphy v Brentwood District Council).
However, the House of Lords recognised an exception where a negligent misstatement
causes economic loss and a special relationship exists between C and D that involves
(as per Hedley Byrne):
- An assumption of responsibility by D towards C; and
- reasonable reliance on D’s statement by C.
Assumption of responsibility
The four criteria required to establish assumption of responsibility are (as per Caparo):
- Did the adviser know the purpose for which the advice was required?
- Did the adviser know that the advice would be communicated to the advisee
(either specifically or as a member of an ascertainable class)?
- Did the adviser know that the advisee was likely to act on the advice without
independent inquiry?
, - Was the advice acted on by the advisee to its detriment?
Reasonable reliance
Apply to facts
The advantages are:
- Unlike misrepresentation, you do not need a contractual relationship to sue.
- A negligent misstatement can be a statement of opinion as well as one of fact.
- A negligent misstatement is not limited to a false statement made by the other
contracting party. The Hedley Byrne principle was also extended to negligent
statements made to third parties rather than C, provided the third party relies on
it to the detriment of C (Spring v Guardian Assurance plc).
The disadvantages are:
- Misrepresentation actions (under s.2(1) Misrepresentation Act 1967) are better
for Cs as they reverse the burden of proof. D has to prove that there was not a
negligent misrepresentation.
- Remoteness rules do not apply for misrepresentation claims (following Royscot
Trust Ltd v Rogerson), whereas under the tort of negligence damages are only
awarded for reasonably foreseeable losses (under Hadley v Baxendale).
[STEP 2] Is the statement a term, representation, or mere sales puff?
C may claim in relation to these statements:
- Statement 1 -
- Statement 2 -
- Statement 3 -
Terms or representations?
A term sets out obligations for parties to a contract. If unfulfilled, it provides a remedy for
breach.
A representation is a statement made by one party to the contract which may have
induced the other party to enter into the contract, but does not form part of it. If untrue,
the statement could amount to a misrepresentation and the innocent party may have a
remedy.
A mere sales puff is an obviously extravagant claim providing no right of action.
