Elements in a Contract 17

Misrepresentation is a false statement that has induced another party to enter into a contract. In Curtis v Chemical Cleaning and Dyeing Co. (1951), the plaintiff took her wedding dress into the dry cleaners to be cleaned. She was then asked to sign a document and when she queried the defendants as to the terms in the document, she was told that it exempted the defendants from being liable for the loss of beads or sequins, when in fact the document exempted the defendants from liability for any damage done to the dress.

When the plaintiff went to collect her dress, she realized that there was a stain on it that wasn’t there before. The plaintiff brought an action against the defendants and her claim was successful because she was misrepresented as to the nature of the document that she was signing.

In most instances or under most circumstances a person is bound by the terms of an agreement he or she has signed, unless of course, there was misrepresentation, fraud or some other special circumstances to prevent the signatory from being bound by the terms in the agreement - Wilton v Farnworth (1948) (High Court of Australia).

There are in general three types of misrepresentation: -

1.    Fraudulent Misrepresentation

2.    Negligent Misstatement

3.    Innocent Misrepresentation

Fraudulent Misrepresentation: -

In Derry v Peek (1889) the company had via an act of parliament obtained the approval to operate steam-powered trams subject to further approval by the Board of Trade. The company, under the impression that obtaining approval from the Board of Trade was a mere formality, advertised their intention to operate steam-powered trams and the plaintiff bought shares in the company in reliance of the companies promise. The approval from the Board of Trade was not forthcoming as expected and the plaintiff sued on the grounds of misrepresentation.

The court held that there was no fraudulent misrepresentation and defined misrepresentation in the following manner: -

1.    a false statement that is knowingly made

2.    the maker of the statement did not believe it to be true at the time he or she made it

3.    a statement made recklessly or carelessly without knowing if it was true or otherwise

Negligent Misstatement: -

In Hedley Byrne v Heller & Partners (1964) the plaintiff company had entered into a contract with a company called Easipower. Prior to entering into the contract the plaintiffs contacted Easipower’s bankers to check the company’s creditworthiness and they were given the all clear with an exclusion or an exemption clause that stated that the reference was given “without responsibility”.

Easipower subsequently defaulted on the payments that were due to the plaintiff under advertising contracts and the plaintiffs brought an action against the bankers. Under normal circumstances the bankers would be liable but the exclusion or exemption clause was valid and the bankers were held to be not responsible.

In Esso Petroluem v Mardon (1976) the plaintiff’s representative assured the defendant that his new petrol station would be able to sell at least 200,000 gallons of petrol per year. Following the representation, the local council made some changes to the site and as a result it was estimated that the sales would fall and would be lower than what was initially projected but the plaintiff’s representative failed to communicate the changes made by the local council and the ensuing changes in the estimated sales to the defendant.

As a result, the defendant fell in arrears and Esso Petroleum sued for the outstanding payment. The defendant made a counter claim and he was successful. In addition to negligent misrepresentation there was also a collateral contract in place in that the defendant had entered into the contract based on Esso Petroleum’s estimates and projections.

Innocent Misrepresentation: -

Innocent misrepresentation refers to statements made that are not fraudulent or statements made by parties who believed them to be wholly and substantially true at the time the statements were made.

Silence however does not constitute misrepresentation. In Smith v Hughes (1871) the claimant made inquiries into purchasing some oats which he stipulated must be old because he intended to use it as horse feed and the defendant sold him some oats which in fact were not old as the claimant had stipulated but new. The defendant knew of the claimant’s requirements but kept silent on the matter. The claimant later, after purchasing the oats and realizing that the oats were not old brought an action against the defendant arguing that the oats were of no use to him and that there had been a mistake and that the defendant had made a misrepresentation.