Misrepresentation Fraudulently Disclosure

Actionable Misrepresentation, Good Faith & Disclosure

Section 2(1) of the Misrepresentation Act 1967 provides:

Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time that the contract was made [emphasis supplied] that the facts represented were true.

Therefore, as stated by the Vice-Chancellor in Spice Girls Limited v Aprilia World Service BV (Spice Girls), liability depends on four elements:

• A misrepresentation made by one person to another;
• A subsequent contract between them;
• Consequential loss; and
• An absence, at the time the contract was made, of a belief or reasonable grounds therefor in the truth of the facts represented.

Poole emphasises the necessary nature of the representation:

For a claim based on misrepresentation to succeed, there must have been an unambiguous, false statement of existing fact, which induced the claimant to enter into the contract.

The twin requirements of lack of ambiguity and falsity represent in themselves. It has been held that the falsity of the statement is a matter of degree. In Avon Insurance plc v Swire Fraser Ltd, Rix LJ employed the test long established by s.20(4) of the Marine Insurance Act 1906 of whether the statement was substantially correct. Therefore, a statement may be strictly speaking incorrect but still not amount to a misrepresentation if the difference between the statement and the truth is not sufficient to influence a party into entering into a contract which he would not have entered into had he known the whole truth. Similarly, if a person has entered into a contract as a result of placing an interpretation upon a statement which was not intended by its maker and could not be said to be a reasonable conclusion objectively drawn from the statement, the maker will not be liable for misrepresentation (McInerny v Lloyd's Bank Ltd).

Further problems arise because statements are made in the light of prevailing circumstances which are capable of change. A representation as to the future cannot, by definition, be a statement of existing fact and will not therefore be actionable since a person stating an intention to behave in a certain way in the future may be genuinely and unforeseeably prevented from doing so (Inntrepreneur Pub Co v Sweeney). However, this apparently clear exclusion of liability in respect of statements as to the future is diluted in circumstances in which it can be proved that the intention was never genuinely held as in Edgington v Fitzmaurice in which the directors of a company were held liable after representing that the issue of debentures was to fund expansion and improvement whereas in fact the sums raised were intended to meet existing liabilities. Despite the claim by Bowen LJ in that case that the state of a man's mind was as much a fact as the state of his digestion, it is obvious that substantial practical difficulties of proof will remain. This is further complicated by the fact that, as was demonstrated in Spice Girls, the representation may be wholly or partially derived from or confirmed by a course of conduct.

That case concerned the sponsorship of the well-known singing group by an Italian motorcycle manufacturing company. This was the subject of a written agreement dated 6^th May 1998 which described the group as currently consisting of the then five named members. The number and the identity of the members was of particular significance since the sponsors intended to market scooters bearing a logo in which each of the five letters of the word 'Spice' were a representation of one of the characters in the group. In what proved to be the ill-advised publication of an autobiography in October 1999, one of the members revealed that she had communicated her intention to leave the group at the end of a tour in September 1998 to the remaining four members and the manager of the group on three separate occasions prior to the signing of the agreement. Notwithstanding this, two significant events occurred prior to the signing of the agreement: a fax was sent to Aprilia confirming the commitment of the group to the project and a photo-shoot took place in which all five members participated which was designed to implant in the minds of the public the involvement of the Spice Girls with Aprilia products.

Arden J gave judgment for Aprilia on the narrow basis that Spice Girls Limited was liable under s.2(1) of the Misrepresentation Act 1967 in respect of misrepresentations by conduct arising from the participation of all five members in the shoot and their approval of promotional material depicting all five intended for marketing under the terms of the agreement. Upon appeal, the court had to determine not only whether the judge was correct in holding the conduct to be a misrepresentation (which was challenged by Spice Girls Limited) but also whether in fact there were wider misrepresentations (as asserted by Aprilia). In the latter regard, consideration of the fax was central. The fax sent on behalf of the group addressed concerns about their attitude at press photocalls and proceeded to confirm that the band are totally committed to their involvement with Aprilia. The difference between the judge at first instance and the Court of Appeal on this issue illustrates the difficulty which confronts a defendant even when armed with what appears to be an unambiguous representation. Arden J reached the somewhat schizophrenic conclusion that although she had no doubt that Aprilia would have pulled out at this stage if it had not received this fax, the fax was nonetheless written for the specific purpose of meetingconcerns about photocalls and should not in my view be construed as having a wide and general effect. The Court of Appeal held that this was too narrow a view of the meaning and effect of the fax. The Vice-Chancellor opined (at para.29) that:

the fax of 30^th March 1998 contained express representations by [Spice Girls Limited] as to the commitment of each of the Spice Girls to the future implementation of all the terms of the heads of agreement as subsequently incorporated into the formal agreementThat statement was untrue because SGL knew that the term of the agreement for which provision was made in the heads of agreement was twelve months and that there was a risk that Miss Halliwell would leave after only six of themThe unqualified assurance as to the commitment of each Spice Girl to the entire commercial sponsorship contained in the heads of agreement contained within it the implied representation that SGL did not know of any matter which might falsify its assurance. That was a representation of fact and it was false.

It is submitted that this was an altogether more consistent and logical approach than that adopted by Arden J. The exclusion of the fax as an actionable misrepresentation on the ground that it was directed at allaying concerns about behaviour at photo calls does not sit easily with the reliance upon the conduct of the group in attending such events as a representation in itself. Indeed, it is perhaps surprising that the conduct was regarded as more compelling and less contentious a representation than that in writing since the commitment of all five members was expressly confirmed in the fax whereas that commitment could only be implied from the presence of the departing member at the shoots. The difficulty inherent in proving an actionable misrepresentation is exemplified by a consideration of the progress of pleadings in the original action. The original defence and counterclaim of the defendants (in response to a claim for unpaid instalments and advance royalties under the agreement) relied upon an express or implied representation and/or implied term or collateral warranty that Spice Girls Limited were unaware of any matter which might give the defendants reason to believe that the Spice Girls might cease to consist of all five members during the minimum term of the agreement. It was contended that there was indeed such awareness and that the defendants would give particulars of this after discovery. Had matters rested there, it might be doubted whether Aprilia might ultimately have succeeded in their defence and counterclaim. Therefore, the publication by Miss Halliwell of her autobiography must have been regarded as something of a windfall since the defendants were then able to amend their pleadings so as to extend and particularise their contention that the agreement had been induced by misrepresentation. While it would clearly have been understood by the Spice Girls and their management that five were about to become four, the proof of this by Aprilia would have been extremely difficult had the detail of the communication of the decision to leave not been published.

In any event, parties in such actions face the challenge not only of having to prove such a misrepresentation but also in establishing that they were induced by it into entering into the contract. This was a further issue in Spice Girls: it was argued on behalf of Spice Girls Limited that the claim based on misrepresentation should fail because no witness had been called explicitly to confirm action upon the inducement. Although this argument failed in that case, the requirement of reliance can represent another significant obstacle to a party pursuing an action for misstatement. Where party tests the accuracy of the statement for itself, it cannot be said to have relied upon the representation but it was held in S Pearson & Son Ltd v Dublin Corporation that this rule does not apply in cases of fraud. The clarity of this rule is further diminished by the principle that a person may be entitled to relief if he had the opportunity but did not trouble to establish the truth. In Smith v Eric S Bush, the claimants purchased a house relying on a valuation provided to the lender. The valuation was negligent and this could easily have been discovered by the claimants had their commissioned their own survey. Nonetheless, the House of Lords held that it was not reasonable to require such purchasers to take this step but then further muddied the waters by opining that the position might be different if the property in question had been commercial or even a residential property of high value. It is submitted that this is a most unsatisfactory decision since it renders subjective the test of when a party should be required to avail himself of the opportunity of testing the truth of a representation.

In the most recent edition of McKendrick, the author opines:

Spice Girls would have been a much easier case for the defendants if English Law had recognised a duty of disclosure or a duty of good faith.

This is an expression of the classic rule stated in Keates v The Earl of Cadogan that there is no duty to disclose facts which if known might affect the other party's decision to enter into the contract. Poole suggests:

The rule reflects the attitude of classical contract law that the parties must look after their own interests in making contracts. It may also be justified by saying that a general duty of disclosure would be too vague, since it would be impossible to specify precisely what should be disclosed.

Nonetheless, examples can be identified of situations in which there may be said to exist such a general duty of disclosure or good faith. An duty of uberrimae fidei (utmost good faith) has long existed in insurance contracts. It was held in Lambert v Co-Operative Insurance Society Ltd that facts must be disclosed which a reasonable or prudent insurer might treat as material. Thus, in that case, it was held that a conviction for handling stolen goods was material to a contract for the insurance of valuables. The issue was recently and not entirely helpfully revisited by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, in which a minority of their Lordships pressed the view that non-disclosure would be material if it had a decisive influence on the formation of the contract whereas the majority held that materiality was dependant only upon the non-disclosure having some influence. The fact that the test of materiality was able to divide the ultimate appellate court in an area in which a duty of utmost good faith was regarded as clearly applicable would suggest that an attempt to impose a more general duty in all contractual situations would be a sorely vexed exercise.

It should also be borne in mind, however, that there are situations in which a duty to disclose can arise notwithstanding the general rule. One such case is that of statements which are misleading because they do not encompass the whole truth. In Dimmock v Hallett, a property which was the subject of negotiations was described as fully let. While this was strictly speaking correct, it disguised the fact that certain tenants had given notice to quit. Accordingly, the statement, while accurate on its face, was nonetheless held to amount to a misrepresentation. Another scenario, which might well have been argued in Spice Girls but for the indiscrete revelations of Miss Halliwell arises where a truthful statement of fact is made but it is subsequently rendered misleading by a change of circumstances. In With v O'Flanagan, a doctor negotiated the sale of his practice on the basis of an income which was genuine at the time of negotiations. However, he subsequently became ill and the practice withered. It was held that the purchaser was entitled to rescission of the contract on the basis that he was entitled to continue to believe the truth of the representation until sale unless it was corrected. The failure to correct amounted to a misrepresentation. Poole regards Spice Girls as an example where a duty arose to correct the representation by conduct that the group did not know of the decision of one member to leave. It is submitted that this is an incorrect analysis since the decision was known before the conduct and did not arise afterwards. It was therefore false ab initio and did not come about as a result of a subsequent change of circumstances. Finally, it is possible to legislate for specific instances in which a duty of disclosure is required. The Trade Descriptions Act 1968 and the Property Misdescriptions Act 1991 render the making of false statements an offence. At present, there is no concomitant civil liability but this could be corrected as in the tort of breach of statutory duty. There is also proposed a European Directive on Unfair Commercial Practices which will seek to legislate in respect of the information to be supplied to consumers by businesses. In the light of the availability of such mechanisms, it is doubtful whether a general duty of disclosure or good faith (which would probably prove unworkable) is what English Law wants (what it really, really wants..).

Bibliography

McKendrick, E., Contract Law, Text, Cases and Materials, (2^nd Ed., 2005)

Poole, J., Textbook on Contract Law, (7^th Ed., 2004)

Treitel, G., The Law of Contract (11^th Ed., 3003)

Westlaw

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