Chapter 9 Guidance on questions in the book

Misrepresentation and non-disclosure

Question

Rook sold Gull, for £50,000, a business which he told Gull was ‘worth £75,000’. At Gull’s request, Rook wrote on the back of the written contract ‘I guarantee the business to be worth at least £75,000’. The contract contained a clause which said ‘the purchaser acknowledges that he has not relied on any pre-contractual statements or representations about the value of the business’. Rook thought that the business was indeed worth £75,000, though he made little effort to check the facts. In fact, although the turnover of the business has been around £75,000, the business has for some years made a net loss of £5,000 a year. Gull has been running the business for three months now and calculates that it will take him about five years and considerable extra expense to make the business profitable, but he would rather do that than rescind the contract if he can be adequately compensated for his loss. Advise Gull.

Answer guidance

Remember you are asked to advise Gull, who is keen to recover damages rather than rescind the contract. There are two relevant routes to damages here: either establishing that Rook promised that the business was worth £75,000 and suing him for breach of contract, or establishing that Rook made a misrepresentation as to the value of the business, which Gull relied on in entering into the contract. The first option (that the statement was a term of the contract) is possible because of the written statement on the back of the contract - this option has the advantage of a more favourable measure of damages (expectation measure) and avoids the need to worry about Rook’s level of fault. Alternatively, the misrepresentation option seems fairly clear-cut here. In either case, the difficulty lies in the purchaser’s acknowledgment in the contract, which operates at common law as a form of ‘contractual estoppel’ to prevent Gull pleading reliance, an essential element of misrepresentation); it is now established that this will be regulated as an attempt to exclude liability for misrepresentation (or breach of contract) since the courts now opt for a ‘substance over form’ approach. This means Gull will be able to invoke section 3 of the Misrepresentation Act and require Rook to show reasonableness (it seems clear from the facts of the question that this is not a consumer contract). So far as the measure of damages is concerned, Rook’s failure to check the facts means that a claim under section 2(1) of the Misrepresentation Act should succeed, bringing the ‘fiction of fraud’ measure for Gull, with its generous remoteness test. But this measure, though generous, is still not as good for Gull as convincing the court to treat the ‘guarantee’ wording as a term of the contract, since this brings the expectation measure (see Chapter 16 for more detail). This puts Gull into the position he’d have been in had the guaranteed statement been true, in other words if he had actually bought a business making £75,000 a year profit, as opposed to the misrepresentation measure which puts him into the position he’d have been in had the statement not been made, whereupon he would not have bought the business and incurred all his expenses and losses.

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