contract law

QUESTION;

What are the remedies available to a party who enters into a legally binding contract influenced by misrepresentation?

  

Section 10 of the contracts Act 2010 defines a contract as a legally binding agreement made with a free consent of parties, with a capacity to contract for a lawful consideration and a lawful object, most importantly such parties should have intention to be legally bound.

A legally binding contract can be rendered voidable if it’s discovered either on performance or after that a party made such false statements of fact to another in order to induce him /her to enter into such a contract.

Section 2(a) of the contracts Act 2010 defines misrepresentation as a positive assertion made in a manner which is not warranted by the information of the person who makes it or an assertion which is not true, though the person who makes it believes it to be.

In Edgerton vs. Fitzmaurice (1885) 29 CH.D 459.

It was held that the statements in the prospectus as to the objects of the issue were false in fact and were relied on by the plaintiff, the defendants were liable in deceit even though the matters other than those contained in the prospectus.

Misrepresentation is basically classified into three types:

1)  Innocent misrepresentation: this is where a false statement is made by a person who had reasonable grounds to believe that the statement was true not only when he made it but also at the time the contract was entered into.

Prior to Hedley Byrnes case all misrepresentations that were not fraudulent were considered to be innocent. This type of misrepresentation aims at putting the parties back to the position as if the contract had never taken place.

2) Fraudulent misrepresentation: this occurs when one of the representors makes a representation with intent to deceive and with the knowledge that the subject matter is false.

In Derry vs. peek (1889) fraudulent misrepresentation as a false statement was taken to mean the following:

-The maker has knowledge

-being without belief in its truth

-recklessly, carelessly as to whether it be true or false.

3) Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true.

In Hedley Byrne vs. Heller (1964) AC 465.

The issue was whether Heller owed a duty of care to Hedley, the answer was a duty of care can arise with respect to careless statements that cause pure economic loss, and the court dismissed the case since there was no duty of care based on the facts. Success will depend upon the proof of a special relationship existing between the parties.

In Esso petroleum vs. madam (1976) QB 801.

The court of appeal affirmed the finding of negligence under the principle in Hedley vs. Heller.

A party who alleges misrepresentation in a legally binding contract has the following remedies at his disposal.

a) Rescission

The term is derived from the Latin word rescission rescindere literally meaning to cut or tear open. It’s the process by which a subsisting contract is avoided at the instigation of one of the parties on account of some defect vitiating or otherwise tainting that party’s entry into the contract.

The injured party may rescind the contract by giving notice to the representor; however, this is not always as any act indicating repudiation.

It’s also important to note that rescission releases the party in default from future obligations to perform the contract.

In Buckland vs. farmer & moody (1978) 3 ALLER 929.

An award of damages in respect of loss on resale of property to the third party was upheld by the court of appeal.

However there are circumstances where rescission is not possible (bars to rescission).

Rescission being an equitable remedy is awarded at the discretion of the court, the injured party may lose right to rescind in the following ways:

1) Affirmation of a contract

In Long vs. Lloyd (1958) 1 WLR 753

The court of appeal held that the plaintiff was not entitled to rescission of the contract as he had finally accepted the lorry before he had purported to rescind the second journey amounted to affirmation of the contract .however in peyman vs. Lanjani (1965) Ch. 457 the court of appeal held that the plaintiff had not lost his right to rescind because he didn’t know of the facts which afforded this right, he proceeded with the contract.

2) Lapse of time (doctrine of laches)

If the injured party does not take action to rescind within a reasonable time, the right will be lost.

Where the misrepresentation is fraudulent, time runs from the time when the fraud was or with reasonable diligence could have been discovered.

In leaf vs. international galleries (1950) 2 KB 86

It was held that leaf was barred because of too much time had lapsed.

In an event of lapse of too much time between the making of the contract and the decision to rescind, the right to rescind is lost.

3) Restitution in integrum impossible

The injured party will lose the right to rescind if substantial restoration is impossible.

In vigers vs. pike (1842) 8 cl & f 562

A lease of a mine which had been entered into as a result of a representation could not be rescinded as there had been extraction of minerals since the date of contract. Precise restoration is not required and the remedy is still available if substantial restoration is possible thus deterioration in the value or condition of the property is not a bar to rescission.

In Armstrong vs. Jackson (1917) 2 KB 822

It was held that the client could rescind on account of the brokers breach of duty.

4) Third party acquiring rights in this property in good faith and for value, the representee will lose their right to rescind.

In Philips vs. brooks (1919) KB 243

It was held that a person is deemed to contract with the person in front of them unless they can substantially prove that they instead intended to deal with someone else.

5) Note: the right to rescind the contract will also be lost if the court exercise its discretion to award damages in lieu of rescission.

b) Indemnity: an order of rescission may be accompanied by the court order, ordering an indemnity; this is money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages.

In Whittington vs. seale Hayne (1900) 82 LT 49.

It was held that indemnities can be claimed for any consequential costs of a contract not turning on an innocent misrepresentation.

c) Damages: In law these are an award typically of money to be paid to a person as compensation for loss or injury. They include punitive and compensatory damages.

In the remedy of damages the plaintiff must establish the following:

1) Causation:

This is an act of the defendant in a sequence of events leading to the loss.

      The monarch s.s co case (1949) AC 196.

Lord Wright said “causation is a mental concept generally based on inference or induction from uniformity of sequence as between two events that there is a causal connection between them after reviewing the court held the general rule is that a party injured by the others breach of contract is entitled to such money compensation as will, put him in the position in which he would have been before the breach.

If there are two causes of the state of affairs resulting in damage and both causes have equal effect one will be sufficient to carry a judgment for damages.

Smith Hogg & Co vs. Black Sea Insurance (1940) AC 997.

The ship owner was held liable to a charterer in damages for loss of a cargo which had been caused by a combination of perils of the sea and the unsea worthiness of the ship, the latter was sufficient enough to carry a claim for damages.

2) Remoteness of damages:

Not in every type of damage causation to the plaintiff as a result of the breach of the contract will be recoverable. If the loss flowing from the breach of such contract is too remote then it can’t be recoverable.

In Hadley vs. Baxendale (1849) 9 EXCH 341.

It sets the basic rule to determine consequential damages from a breach of contract. A breaching party is liable for all loses that the contracting parties should have foreseen, but is not liable for any loses that the breaching party could not have foreseen on information available to him.

Damages are recoverable under:

1) Damages fairly and reasonably considered to have arisen naturally from the breach.

2) Damages reasonably supposed to have been in contemplation of the parties as liable to result from the breach at the time of contract.

In Victoria Laundry vs. Newman Industries (1949) 2 KB 528

Per Asquith L.J in the court of appeal held that Newman industries only had to compensate for the ordinary not the extra- ordinary loss of profits.

3) Mitigation of loss

It’s the duty of every plaintiff to mitigate his losses that is to do his losses that is to do his best not to damages done.

In payzu vs. Saunders (1919) 2 KB 581

It was held that the plaintiff had permitted himself to sustain a large measure of the loss which as prudent and reasonable people ought to have avoided. Therefore not entitled to damages.

d) Refusal to perform part of the obligation of the injured party

In Smith vs. land & house property corp (1884) 28 ch d 7

It holds that a statement of opinion can represent that one knows certain facts and therefore one may have still made a misrepresentation, per Bowen L.J

e) Injured party may demand for the removal of certain bars to rescission most especially under innocent misrepresentation in lieu of rescission.

f) Demand for specific performance; this is a discretionary remedy granted by court to compel a party to perform his contractual obligation. It’s usually ordered when damages are not an adequate remedy.

The general rule underneath is that will not be ordered if the contract requires performance or constant supervision over a period of time and the obligations are not clearly defined .

h) Injection: this is also awarded were damages are not adequate ,it’s a discretion of court and an equitable remedy the rationale is to restrain the defendant from starting or continuing a breach of a negative contractual undertaking.

Its pertinent to note finally that misrepresentation is not only the vitiating factor in contract to render the contract voidable there are other factors like undue influence, duress, illegality and mistake play an equal role to vitiate a legally binding contract voidable thus remedies.