Misrepresentation

Limb two: breach of duty without intent to deceive

This limb covers the case where the misleading arises from failing in a duty rather than from making a statement, and it needs three things: a breach of some duty; no intent to deceive; and an advantage gained by the party in breach by misleading the other to his prejudice.

It is the limb that carries constructive fraud, meaning conduct the law treats as unfair without any dishonesty, and it is where a failure to disclose in a relationship of trust, or in a contract of utmost good faith, is dealt with when the silence was innocent.

Limb three: innocently causing a mistake as to the substance

The words "however innocently" make clear that no fault at all is required. What matters is the effect: the other party was caused to make a mistake as to the substance of the thing which is the subject of the agreement.

"Substance" is a strong word and it limits the limb. A mistake about a quality that goes to the identity or essential character of the subject matter is within it; a mistake about value, or about some collateral quality, is not.

The requirement that runs through all three

The misrepresentation must have induced the contract. Section 14's final paragraph supplies the but for test, and the Explanation to section 19 puts it beyond doubt: a fraud or misrepresentation which did not cause the consent of the party on whom it was practised does not render the contract voidable. A statement the other party never heard, never believed, or independently checked and disregarded, does nothing.

The effect, and the Exception that defeats it

Voidable, section 19. The contract is voidable at the option of the party whose consent was so caused. He may rescind, or affirm and insist under the second paragraph of section 19 that the contract be performed and that he be put in the position he would have been in if the representations made had been true.

No damages. Because there is no deceit, there is no action in tort, and the Act gives no damages for innocent misrepresentation. The remedy is rescission with restitution. This is the single most examined difference from fraud.

The Exception to section 19. This is where a misrepresentation claim most often fails.

"If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence."

The Act's own illustration (b) is exactly this case: A leads B to believe by misrepresentation that five hundred maunds of indigo are made annually at A's factory; B examines the accounts, which show that only four hundred maunds have been made; and B then buys the factory. The contract is not voidable on account of the misrepresentation.

Compare illustration (a), where B is simply induced by the false representation and does not check. There the contract is voidable.

Ordinary diligence means the care a reasonable person would take in the circumstances, not exhaustive investigation. And note again what the Exception does not cover: active fraud under section 17. A liar cannot say the victim should have checked.

A worked example

Yusuf sells his printing business to Zoya. Consider four versions.

• He tells her the machine prints eight thousand sheets an hour, because that is what the manufacturer's brochure says. In fact it manages five thousand. He believes it, so this is not fraud. But he has made a positive assertion in a manner not warranted by his information, since a brochure figure is not the same as measured output. Limb one. The contract is voidable at Zoya's option under section 19, and she gets no damages.
• The same facts, but Yusuf hands Zoya the machine's own log book, which records the true output, and she does not open it. The Exception to section 19 applies: she had the means of discovering the truth with ordinary diligence, so the contract is not voidable. This is illustration (b) in modern dress.
• Yusuf says the business is "a wonderful opportunity with a great future". Not a positive assertion of fact but an expression of opinion and commendation, so there is no misrepresentation at all.
• Yusuf knows the machine manages five thousand and says eight thousand anyway. Now it is fraud under section 17(1), Zoya may rescind and sue for damages in deceit, and Yusuf cannot rely on the Exception, because it does not protect active fraud.

Misrepresentation distinguished from fraud

What it does NOT mean

"An honest statement can never be misrepresentation." Honesty is what makes it misrepresentation rather than fraud. Limb one applies precisely where the maker believes it to be true.

"Misrepresentation entitles the injured party to damages." It does not. Rescission and restitution only.

"A statement of opinion is a misrepresentation if it turns out badly." Opinion and mere commendation are not positive assertions of fact. But an opinion stated by a person who knows the facts and has no basis for it may be treated as a statement of fact.

"Ordinary diligence means the buyer must investigate everything." It means the care a reasonable person would take. The Exception bites where the means of discovery were readily to hand, as in illustration (b), where B actually examined the accounts.

"Misrepresentation makes the agreement void." Voidable, at the option of the misled party.

Quick revision

• s.18, three limbs: (1) a positive assertion of what is untrue in a manner not warranted by the information of the maker, though he believes it; (2) any breach of duty without intent to deceive that gains an advantage by misleading another to his prejudice; (3) causing, however innocently, a mistake as to the substance of the thing that is the subject of the agreement.
• The misrepresentation must have induced the contract: s.14's but for test and the Explanation to s.19.
• Effect: voidable, s.19. Or affirm and be put in the position as if the representation were true.
• NO DAMAGES. That is the practical difference from fraud.
• Exception to s.19: not voidable if the misled party had the means of discovering the truth with ordinary diligence. Illustration (b), the indigo accounts, is the model answer.
• The Exception covers misrepresentation and fraudulent silence, never active fraud.

Test yourself

1. Define misrepresentation and set out its three limbs. Section 18 provides that misrepresentation means and includes the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true though he believes it to be true; any breach of duty which, without an intent to deceive, gains an advantage to the person committing it by misleading another to his prejudice; and causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

2. What is the effect of the Exception to section 19? Where consent was caused by misrepresentation, or by silence that is fraudulent within section 17, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Illustration (b) is the example: a buyer who examined the factory accounts and saw the true figure cannot afterwards avoid the sale on the strength of the earlier misstatement.

3. Can a party who has been innocently misled claim damages? No. Section 18 requires no dishonesty, so there is no tort of deceit, and the Act gives no damages for innocent misrepresentation. The remedies are rescission with restitution under sections 19 and 64, or affirmation with a claim to be put in the position he would have been in had the representation been true.

4. What does "in a manner not warranted by the information of the person making it" mean? That the speaker asserted the fact more positively than his information justified. A person who repeats a second hand figure as though it were within his own knowledge falls within the limb even though he honestly believes it, because the confidence of the assertion was not warranted by what he actually knew.

5. Is a seller's statement that a business is "a great opportunity" a misrepresentation? Ordinarily not. It is an expression of opinion and mere commendation rather than a positive assertion of fact, and limb one requires a statement of fact. It may be different where the speaker knows the underlying facts and has no reasonable basis for the opinion, in which case the statement may be treated as one of fact about the state of his knowledge.