4 December 2018
I’m delighted to say there was enormous demand following last week’s Legal Briefing (‘I overpaid because you lied to me‘) for me to send this follow-up Legal Briefing explaining a bit more about the law of tort relating to misrepresentation and how the damages you can claim are calculated differently from a normal claim for breach of contract. So here we go…
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Different types and levels of misrepresentation
If someone is selling something and makes a statement (a ‘representation’) about it which the buyer relies on when deciding to buy at the agreed price there are various possible rights and remedies which the buyer may have if that statement proves to be untrue. These rights and remedies broadly depend on how careless or reckless or worse the seller is in making the statement, and whether and how the statement is somehow brought into the terms of the contract. The law here is rather complicated but can broadly be broken down into the following categories:
o A fraudulent misrepresentation – one which is made either knowing or reckless as to whether it’s wrong.
o A negligent misstatement – one where the maker had a duty of care to the receiver and carelessly says something the receiver relies on as a result of which the receiver suffers loss (whether or not there is a contract involved). So for example a surveyor producing a report for a seller could be liable to the buyer even though there is no contract between them. For contract cases you can ignore this as buyers can instead bring a claim for…
o negligent misrepresentation under the Misrepresentation Act 1967 – one where the maker can’t prove that he had reasonable belief in his statement. Because of the way the Misrepresentation Act is worded it is easier and better for a buyer to bring a claim for negligent misrepresentation than to bring one for negligent misstatement – the damages a buyer can recover are more like those he can recover for a fraudulent representation.
o An innocent misrepresentation under the Misrepresentation Act 1967. It’s not fraudulent or negligent, and there’s no tort against it, but the Misrepresentation Act can give the buyer some protection.
o A representation which is included in the actual contract as a condition – ie a fundamental term which goes to the root of the contract.
o A representation which is included in the actual contract as a warranty – a term of the contract.
Different types of remedies
There are different types of remedies which a buyer might have for each of the above. This gets very messy but in very simple terms the key differences are as follows:
o The first four of these categories can broadly be described as ‘tortious’, and the last two as ‘contractual’.
o For the tort claims, the buyer may have the remedy of rescission, ie ripping up the whole contract and putting the parties into the position they would have been if the contract hadn’t taken place. This can be very messy to do in practice. The position is not the same for contractual warranties, unless they are expressed to be conditions of the contract.
o For tort claims, the basis of calculating any compensation (damages) is different from the basis of calculating claims for breach of contract:
• For negligent or fraudulent tort claims, you aim to put the buyer in the financial position it would have been in if the contract hadn’t taken place at all. This will generally be the difference between the price paid and its actual value – ie the amount by which the buyer is out of pocket.
• For contract claims, you aim to put the buyer in the position it would have been if the contract had been properly performed and if the representation had been true. This will generally be the difference between the thing’s actual value and what the buyer was misled into thinking the thing was worth – ie compensating the buyer for its loss of bargain.
• Contracts can also include specific indemnities aimed to cover particular risks and liabilities. Here the amounts that can be claimed depend on the way the indemnity is worded.
Whether a buyer might want to make a tort claim or a contract claim could therefore depend on how much of a bargain the deal involved. Simple examples:
• You pay £30k for what a seller says is a mint condition 2nd hand car which all the car listings indicate should be worth £40k in that condition. You discover it’s faulty and only worth £20k. Using the tort measure you can claim £10k. Using the contract measure you can claim £20k.
• Perhaps less likely, you really really want that 2nd hand car you’ve always been lusting over which the dealer says is in mint condition. You pay £35k which is £5k more than its listed value of £30k for that condition. You discover it’s faulty and only worth £20k. Using the tort measure you can claim £15k. Using the contract measure you can only claim £10k.
Of course, valuing a company can be a lot more complicated than valuing a car, and there is plenty of scope for argument as to what a company was really worth.
o But the different basis of calculation can work in favour of the misrepresentation claim in other ways. There may be all sorts of other directly consequential losses you can claim that you wouldn’t have suffered if you hadn’t done this deal. For example:
• If you are sold a business as a pup and then throw money into it to keep it going you may be able to recover that money.
• You may be able to claim interest on money borrowed in order to do the deal, or any other costs you wouldn’t have incurred if you hadn’t done the deal.
• If you had passed up an opportunity to do what turned out to be a more profitable transaction elsewhere in order to do this one you might be able to claim the loss of profit you might have made on that transaction!
o There are all sorts of other differences. For example, for fraudulent or negligent misrepresentation claims you can look to recover directly consequential losses even if they were not foreseeable (whereas contract law goes on about being able to claim reasonably foreseeable losses). And there are several differences between fraudulent and negligent misrepresentation claims themselves.
o And there are all sorts of similarities, for example relating to duties to mitigate your loss.
o And depending on what the contract says, and how effectively it is worded, there may be exclusion or limitation clauses which make it harder or impossible to make contract claims, for example because the contract puts time limits on making them, or technical restrictions on how claim notices must be made, or monetary limits on the amounts of the claim.
One final point to bear in mind is that for fraudulent misrepresentation, which is a different type of tort to the others (the tort of ‘deceit’), a person who makes it can’t hide behind the ‘corporate veil’. So for example a director of a selling company can be made personally liable.