Elements of Misrepresentation

Discuss about the Introduction to Business Law for Accurate Representations.

In this case Mr. Spoke had made a statement regarding the historical figures of the business when he was willing to sell it. However later on, Bob found that these were not accurate representations and had been inflated by 55 percent. As a result of these figures, Bob Wheelie was induced to purchase the store. Therefore, now Bob wants advice if any remedies are available to him for the misrepresentation made by Mr. Spoke.

Elements of Misrepresentation:

Under the common law, a misrepresentation can be described as providing false information to the other party or its agent in a contract before the parties have entered into the contract and as a result of such statement, the other party has been induced to enter into the contract. Therefore if a party has entered into a contract by relying on a misrepresentation and has suffered a loss consequently, such party can rescind the contract and at the same time it may also claim damages.

The law requires that such false statement should be related with a fact as against a statement of opinion or a promise.[1] Therefore if for example, while selling a property, a statement is made by the seller that the property is worth $150,000, it can be said that the seller is merely expressing an opinion. On the other hand, if a statement is made by the seller that he has the $150,000 for the property the seller has made a statement of fact. Similarly, a promise also cannot be treated as misrepresentation because such a statement is also related the future and therefore, it cannot be considered as true or false at the time when it has been made.[2] In the same way, the claims that have been made by businesses in advertisements are also not considered by the law as representations of fact and therefore, generally they cannot be treated as misrepresentations.[3] On the other hand, if a factual statement has been made in an advertisement, for example, “the car has ABS braking and passenger air bags” it can be said that these statements are related with fact and therefore if found to be false, they can be treated as misrepresentations.

In case of the persons selling something privately, the law provides some latitude to make statements to commend their article for the purpose of arousing the interest of the potential buyers. However the border line that is present between such promotional expression and misrepresentation can be very thin. Instead of relying on the statement made by the seller, the buyer should carefully inspect the article and necessary, an evaluation can also be made by an expert. In the same way, it will be difficult to maintain a claim based on misrepresentation if the defect could have been obviously noted by the buyer. Therefore if the seller has mentioned that a particular car has done only 20,000 km but in reality, the odometer shows that the car has run nearly 100,000 km, generally the court will not accept that the buyer has relied on the statement made by the seller.

Factual Statements versus Opinions or Promises

In this way, misrepresentation can be described as one of the several vitiating factors that can have an impact on the validity of the contract. It can be said that the misrepresentation has been made by a party when a false statement has been made, due to which, the other party has been induced to enter into the contract.[4] In order to bring a successful action under misrepresentation, the below mentioned criteria has to be fulfilled for establishing misrepresentation.

The six elements of a fraudulent misrepresentation are that (i) a representation should have been made; (ii) it should be false; (iii) when the representation was made, the party should know that it is false or introductory made recklessly without caring to know if it is true; (iv) the representations that are being made with the intention that the other party will rely on it; (v) the plaintiff should have indeed relied on the representation; and (vi) the plaintiff should have suffered damages as a result of relying on the representation.

The misrepresentation will be treated as if the party making the statement believed that the statement is true and as a result, such party did not have any intention of deceiving the other party. On the other hand, the statement becomes fraudulent misrepresentation when the party making the statement was aware of the fact that the statement is false or he did not believe it to be true or it has made the statement without getting to know if the statement is true or false.[5] In such a case, it can be said that a fraudulent misrepresentation has been made by the party.

A defense will be available to the party making the statement if it can be established by the party that while making the statement, the party had reasonable grounds to believe that the statement is true or the statement was made by someone else and such a party had no reason to know that the statement was not true.

In the present case, it has always been a dream of Bob Wheelie to start his own bike store. Therefore he was delighted and considered it a perfect opportunity when it came to know that Mr. Spoke had decided to sell his bicycle store. Bob believed that by purchasing the store, he will be able to work for himself as he has always wanted to do that. However, Bob did not have the required knowledge regarding running a business, he inquired from Mr. Spoke regarding the sale of the business. Under these circumstances, certain representations were made by Mr. Spoke regarding the past and the future profitability of the bicycle store.

Promotion versus Misrepresentation

An example in this regard can be given of the case titled With v O’Flanagan.[6] In this case, the plaintiff had entered into a contract for purchasing the medical practice of O’Flanagan. When the parties were negotiating the contract for the sale of the medical practice, a statement was made that the income of the medical practice of O’Flanagan was around £2000 per year. However, before the parties have signed the contract, the income of the practice to a downward turn and therefore it lost considerable value. When the parties have entered into the contract, the plaintiff discovered the true nature of the practice and therefore it initiated action under misrepresentation. In its decision, it was stated by the court that a representation that has been made with a view to induce the other party to enter into the contract can be considered as a continent representation. Therefore it is required that the representation should be true when the contract has been made. This creates an obligation to correct the representation. Hence, in this case, the action brought by the plaintiff was successful.

The facts of this case are similar to the facts of the present case. In this case also, Bob was induced to enter into a contract for purchasing the bicycle store of Mr. Spoke by relying on the statement made by Mr. Spoke regarding the profitability of the store. Bob did not have much knowledge regarding business affairs and therefore he was relying on the statement made by Mr. Spoke while entering into the contract. Mr. Spoke was aware of this fact and moreover he had no grounds to believe that the statement made by him were reasonably true. Under these circumstances, the remedies available for misrepresentation are available to Bob Wheelie.

These remedies include a signing a contract and/or to sue the other party for damages. However when the party wants to rescind the contract as a result of the misrepresentation made by the other party, such party should act promptly after it had come to know regarding the misrepresentation. In case of a delay, it is likely that the party may lose the right to rescind the contract. On the other hand, the alternative available to a signing the contract is to sue the other party for damages. In such a case, the court will consider if the statement made by the other party can be treated as a misrepresentation and if the party claiming the damages, has relied on the misrepresentation while entering into the contract. The court will also see if any loss has been suffered by the losing party as a result of the misrepresentation.

Therefore in the present case, after Bob Wheelie came to know regarding the misrepresentation made by Mr. Spoke, he should immediately take steps to rescind the contract if he wants to do so. On the other end, Bob is required to establish that he was induced to enter into the contract for purchasing the bicycle store by the statements made by Mr. Spoke regarding the profitability of the store. In this case, the six essential elements of fraudulent misrepresentation are present and therefore, it can be said that damages can be claimed by Bob Wheelie.

Derry v Peek (1889) 14 App Cas 337

Dimmock v Hallet (1866) 2 Ch App 21

Esso Petroleum v Mardon [1976] QB 801

Museprime Properties v Adhill Properties [1990] 36 EG 114

Smith v Land & House Property Corp. (1884) 28 Ch D 7

With v O’Flanagan [1936] Ch. 575