1. Andy wants to buy Billy’s drinks manufacturing business. Accordingly, Billy takes Andy on a tour of his drinks manufacturing factory. A few of the drink manufacturing machines in the factory are broken down and need major repairs, but Billy neither shows Andy these machines nor informs him of this problem during the factory visit.
Billy tells Andy that he has 20 excellent and experienced staff members at the factory. However, Billy does not tell Andy that 15 of these staff have recently submitted their notice of resignation as they will be joining a rival company.
In addition, Billy tells Andy that he is of the view that there will be an increase in sales over the next few months as the economy is improving and consumers are spending more on drinks.
Andy is a professional accountant and asks to see the past earnings statements of Billy’s drinks manufacturing business. Billy then provides Andy with an exaggerated statement of the business’ past earnings. Andy studies these statements of past earnings but fails to notice that the statements are exaggerated.
Andy buys the drinks manufacturing business from Billy. Six months after the sale, the business has many problems and loses money. The 15 staff members have left and started working for a rival company. As a result, Andy is having great difficulty in finding staff to operate the factory and he is unable to meet many of his orders. Andy also discovers that a few of the drink manufacturing machines are broken down and has to spend a considerable sum of money to have them repaired. At the same time, he realizes that consumers spend less on drinks and the statements of past earnings were exaggerated.
Separately, Andy has entered into another contract with Chris to purchase 1,000 cardboard boxes. At the time of entering into the agreement, both Andy and Chris thought that the boxes were in a warehouse in Indonesia. However, unknown to both Andy and Chris, there was a fire in the warehouse a few hours before the agreement was entered into. This fire had caused all the boxes to be completely burnt, and Chris is unable to deliver the 1,000 cardboard boxes to Andy. Advise Andy as to his legal position against Billy and Chris.2. “The distinction between representations and terms is important because different remedies are available in relation to breach of a term as opposed to a misrepresentation.” Discuss the above statement with reference to decided cases.
1. Any untrue statement of fact or law has been made by a party or its agent and when such statement induces the other party to enter the contract with and thereby resulting in a lost to the second party known as misrepresentation. The Action for misrepresentation can be brought regarding a mispresentation of fact or the misrepresentation of law.
In this way, a misrepresentation striped as a false statement of fact or law, other party is induced to enter into a contract. The law provides that when the statement has been made in the course of negotiations, it can be termed as a representation instead of a term of the contract and an action for misrepresentation may be available to the other party where the statement has turned out to be untrue. In this regard it needs to be noted that there are three types of misrepresentation. These are fraudulent misrepresentation, regent misrepresentation and innocent misrepresentation (Smith v Land & House Property Corp, 1884). When it is discovered that a contract has been made on account of a misrepresentation the effect is that the contract is considered as voidable. This means that the contract is present but it can be set aside by the party to such misrepresentation was made. The remedy available depends on the nature of misrepresentation. Generally the remedy consists of the recession of the contract and at the same time the party me also claim damages. However, there are certain circumstances where the right to rescind the contract may not be available to the other party.
A statement can be described as an actionable misrepresentation if the criteria mentioned below is satisfied:-
False statement: A party to the contract should have made a false statement of fact or law as compared to an opinion or an estimate regarding future events (Bisset v Wilkinson, 1927).
The law provides that a statement of opinion may amount to an actionable misrepresentation if the party making the representation was in a position to know the facts (Smith v Land & House Property Corp., 1884).
It is further provided that a statement regarding chain cannot be considered as a misrepresentation unless seeking the Representation had no intention of carrying out the stated intention. The law further provides that silence will not be considered as misrepresentation. Therefore unless the contract is of uberrimae fidei or in other words the contract of utmost good faith like a contract of insurance or where the party making the representation in a fiduciary position, even silence may be considered as misrepresentation. In case of contacts, there is a duty present on part of the representor to disclose material facts and similarly any failure to disclose all the material facts may result in an action for misrepresentation (With v O'Flanagan, 1936).
The significance of a misrepresentation been classified as fraudulent misrepresentation is that the measure of damages may be higher under certain circumstances. As mentioned above, the two remedies that are available in case of fraudulent misrepresentation are the recession of contract and damages.
Criteria for Actionable Misrepresentation
A fraudulent misrepresentation has been defined by the court in Derry v Peek (1889). The court stated that a false statement that has been made knowingly and without believe in the truth this statement organ comment has been made recklessly without caring too it is true or false, can be described as a fraudulent misrepresentation.
In order to decide if a particular statement can be described as made fraudulently, it needs to be considered if the party making the statement was aware that statement made is false and if the party making the statement has reasonable grounds to believe that the statement is true even if the statement is false. Therefore in the first case, this statement will be considered as clearly a fraudulent statement. On the other end in the second case, if the party making the statement has made a false statement but reasonable Grounds to believe that will not be considered as a fraudulent statement. The reason is that in this case the statement is not been made recklessly or carelessly. A statement that has been made recklessly needs to be the statement that has been made by the party without having any believe in the truth of the statement.
In this case, Andy was willing to purchase the drinks manufacturing business of Billy. Therefore Billy took Andy on a tour of the factory. However, Billy did not show Andy the machines that were in need of major repairs. Billy also told Andy that he has 20 experienced staff members while the reality was that 15 out of these staff members had already given notice of resignation as they were going to join a rival company. Billy also made a statement that there was going to be an increase in sales in the next few months with the improvement in the economy and more spending by the consumers. He also provides an exaggerated statement of the past earnings of the business.
All this amounts to a fraudulent misrepresentation.
Andy also entered into a contract with Chris for purchasing 1000 cardboard boxes. However, at the time of the contract, both of them were not aware that the cardboard boxes had a warehouse fire.
This is a case of impossibility of the performance of the contract. Impossibility involves the cases where the party is unable to perform the contract due to a supervening event that has taken place after the contact. In such a case, the law excuses the performance of the contractual duty.
In the present case also the contract between Andy and Chris had become impossible to perform. Under the circumstances both the parties are relieved from their obligations under the contract.
On the other hand, a warranty can be described as a statement of fact that has been made in the contract. If such a statement turns out to be untrue, the other party and bring your claim for the breach of contract. In case the breach is a fundamental breach of the contract, the party gets right to terminate the contract apart from the right to claim damages. However in this case, as against a claim for misrepresentation, the contract is not undone.
In view of the legal position discussed above, it appears that statement is true according to which the distinction between representations and terms of a contract is important due to the reason that different remedies are available in case of a breach of a term as compared to a misrepresentation.
Bisset v Wilkinson  AC 177
Derry v Peek  UKHL 1
Dick Bentley v Harold Smith Motors  1 WLR 623
Oscar Chess v Williams  1 WLR 370
Smith v Land & House Property Corp (1884) 28 Ch D 7
With v O'Flanagan  Ch 575
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