Mr Sagar and Mr Grove, sold a yacht called ' The Intrepid Adventurer' to Jetstone Ltd. The contract was drawn on the basis of statements made by Mr Sagar and Mr Grove relating to the condition of the yacht.
They had made statements concerning the refurbishment, repainting, and repair of the engine to be complete before the sale. Jetstone Ltd, however, claims that the repainting of the yacht is unsatisfactory and that the engine maintenance logs had not been transferred to Jetstone at the time of sale. Jetstone are unable to use the yacht as Mr sagar and Mr Grove have also failed to provide a saftey certificate to them.
Jetstone as result have refused payment of the yacht as its condition does not live up to the statements made prior to the formation of the contract.
In order to determine the legal position of Mr Sagar and Mr Grove, I am going to look at the legal stance concerning pre-contractual statements, misrepresentation, and its remedies, and relevant case law.
Any statement made during contract negotiations will be classified by the courts as either a representation or a term; a significance of classification being the consequences on breach. A term is a promise or undertaking which forms part of the contract, whereas a representation is a statement which induces one party to make the contract but does not become part of the contract itself. If a pre-contractual statement is found to be a term of the contract, which is subsequently proved to be untrue, this will give rise to an action for breach of contract. If however, the statement is classified as a representation and that representation proves false, the remedy will lie in an action for misrepresentation.
Whether a pre-contractual statement is a term relies primarily on whether there is an intention on behalf of the parties for it to be considered as such, and the test to determine contractual intention is an objective one. The approach adopted through the common law reveals that the judiciary have acknowledged several factors as being relevant aids to determining the application of the intention test. These include: the importance of the statement; reliance of the other party on that statement; and the relative knowledge and expertise of the parties.
In Esso Petroleum Co Ltd v Mardon (1976), Mardon bought a garage that Esso said would sell 200,000 gallons of petrol a year when it only sold 78,000 in 15 months. Esso was found to be liable because they were experts in the petrol market.
A misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract. The remedies available for misrepresentation depend on whether the representation is found to be fraudulent, negligent, or innocent.
The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.
The misrepresentation must be material, in the sense that it would have induced a reasonable person to enter into the contract. However, the rule is not strictly objective:
In Museprime Properties v Adhill Properties , the judge referred, with approval, to the view of Goff and Jones: Law of Restitution that, any misrepresentation, which induces a person to enter into a contract, should be a ground for rescission of that contract. If the misrepresentation would have induced a reasonable person to enter into the contract, then the court will presume that the representee was so induced, and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the misrepresentee to show that the misrepresentation induced him to act as he did.
An actionable misrepresentation must be a false statement of fact, not opinion or future intention or law.
It is important to differentiate a 'statement of fact' from a 'statement of opinion'. However, statements of opinion may often include an implied statement of fact, particularly where a person in possession of special knowledge or expertise makes the statement.
Statements of law are not treated as statements of fact, but the distinction is often hard to draw. A representation in respect of a legal document may be related to its contents or to its meaning. If it is the former, it is a statement of fact. However, if it is the latter, it may be a statement of law although even here a statement of fact could be implied. Statements as to future intention are not usually statements of facts so long as the intention is honestly held.
In cases of undue influence, it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction, which is impugned.
The CIBC Mortgages v Pitt , case brought a successful claim for Class 1 undue influence back into the law courts. Up till then it had only been applied in very old cases all involving religious advisors. Mrs. Pitt was induced to agree to a second mortgage on the family home as security for a loan to finance the purchase of shares. She reluctantly gave in to sustained pressure. The court accepted that there was evidence the husband had bullied the wife. The question for the court was, could she claim undue influence without having to prove manifest disadvantage?
The House of Lords held that there is no further requirement in cases of this kind that the transaction must be shown to be to the manifest disadvantage of the party seeking to set it aside.
It was held that manifest disadvantage was a necessary ingredient in cases of class 2, or presumed, undue influence but in actual undue influence it was not necessary. The mere fact that domination was exercised was sufficient to prove actual undue influence.
Two types of remedy are available for misrepresentation: rescission and damages.
Once operative misrepresentation is proven, rescission is available for all classes of misrepresentation. This means the contract ceases to exist, the parties must be put back in the position they were in before the contract was entered into. This is the tortious measure of damages where the parties are put, in so far as money can do it, back into the position they were in before the tort was committed. This contrasts with the normal contract measure of damages which aims to put the innocent party into the position they should have been in had the contract been performed properly.
However, the right to rescind the contract can be lost in several ways. These are called bars to rescission and apply to all cases of rescission, not just rescission for misrepresentation.
If the innocent party affirms the contract after discovering the true state of affairs the right to rescind is lost.
In Long v Lloyd , A lorry which was sold had several faults. When they were first discovered, the seller paid half of the repair costs. It broke down on its next journey again. At this stage the claimant could no longer rescind. The first journey was not affirmation. The buyers were entitled to a 'test drive.' However, the second journey made in the knowledge that the vehicle they had bought was not in good condition was affirmation and the contract could no longer be rescinded.
In Leaf v International Galleries , It was discovered 5 years after the original sale, when the buyers tried to sell the painting themselves, that the painting was not a Constable. It was too late to rescind. This was viewed as a kind of constructive affirmation i.e. by keeping the painting so long without protest, they had by implication, affirmed the contract.
It is no longer possible to restore the parties to their position before the contract was made because the nature of the subject matter has changed.
If the court awards damages in lieu of rescission under S2(2) of Misrepresentation Act then rescission itself no longer available.
The availability of damages depends on which type of misrepresentation is proven. This is a mix of common law and statute. The Misrepresentation Act 1967 caused important changes in the law. Misrepresentation is an action in tort, not contract, so the measure of damages is tortious not contractual.
Fraud is the most serious type of misrepresentation. The courts take fraud very seriously and accordingly award all the damages stemming from the fraud including consequential loses. Rescission and considerable damages are available.
With negligent misrepresentation the claimant is entitled to rescind, as in the case of fraud, but until the Misrepresentation Act 1967 it was not clear whether damages would also be awarded. However, the Misrepresentation Act 1967 changed that and extended the prnciple of damages to negligent misrepresentation as well.
As a result of the wording of Misrepresentation Act S2(1) an innocent representee must not only believe the statement but must also be able to prove that he had reasonable grounds for believing it. This is both a subjective test: the person believed the statement, and an objective test: it was reasonable for them to believe it.
Rescission or damages in lieu of rescission are available under equity for innocent misrepresentation i.e. at discretion of court. They are not a legal right. The measure of such damages is narrower than tort damages.