Elements in a Contract 20

The Misrepresentation Act 1967 also governs the law on misrepresentation. S2(1) of the act states that: - 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 the contract was made that the facts represented were true.

Under s2(2) of the act the court has a discretion to award damages instead of rescission. “Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party”.

When there has been a breach of a contract, especially for fraudulent misrepresentation or a breach of s2(1) of the Misrepresentation Act 1967, the courts are more inclined to award damages. In cases of negligent misstatements damages are awarded to put the parties back in the position that they would be in, had they not entered into the contract and it is not to allow the aggrieved party to profit from the deceit of another. Therefore, the damages that are awarded may at times be less than the damage that was suffered or incurred.

In Doyle v Olby (Ironmongers) Ltd 1969 for example, the plaintiff (claimant) purchased a business from the defendant and entered into the contract based on statements made by the defendant that inflated the profits of the business and the scope of the business. When the plaintiff discovered that these statements were untrue he brought an action against the defendants on the grounds of misrepresentation and his claim was upheld. The court held that in instances of misrepresentation the plaintiff was entitled to claim for damages that directly resulted from or was directly caused by the fraudulent misrepresentation regardless of whether the loss was foreseeable or otherwise.

In all the three categories of misrepresentation i.e. fraudulent misrepresentation, negligent misstatement, and innocent misrepresentation the court has a discretion to either award damages or to allow rescission.

In assessing damages, the court will take into account the remoteness of the damage. The common-law test to assess remoteness of damage for negligent misstatements is the test given in the Wagon Mound (1) (1961). The defendant’s vessel the Wagon Mound was docked in a wharf in Sydney and unknown to the defendant the boat leaked oil and the resulting fire caused damage to not only the defendant’s vessel but also to the wharf and to 2 other vessels. The court had to determine the scope of the defendant’s liability. It was held that the defendant was only liable for the damages that he could foresee and the court found in favor of the defendant supplanting or overruling the earlier decision in Re Polemis.

In Re Polemis (1921) one of the men employed to load and unload cargo from a ship dropped a plank into the ship’s cargo hold and the plank struck a flint which caused a spark that came in contact with petrol fumes and the resulting fire spread to the hull of the ship and set the whole ship on fire. The court had to decide as to the extent of the defendant’s liability.

It was held that the defendant was not only liable for the damages that he could foresee but was also liable for all the other damages that resulted as a consequence of his actions regardless of whether the damage was foreseeable or otherwise. It suffices that the defendant caused the initial act which set in motion a chain of events that resulted in damage that would otherwise not have been foreseeable by a reasonable man.