Chapter 7 Guidance for end of chapter questions

Misrepresentation

Question

Ann is considering buying a burglar alarm system from Bert who tells her that it still operates even if the mains electricity supply is cut off. Bert genuinely believes this to be true and a week later Ann signs a contract for Bert to install the system which makes no mention of what would happen if the electricity supply fails. During that week Bert discovers that the system will not operate during a power cut but, having forgotten that he ever discussed the matter with Ann, doesn't say anything more about it. Having paid £800 for the system, Ann is burgled two weeks later during a power cut and £5,000 worth of jewellery is stolen. There are other systems on the market which are not dependent on the mains supply but all cost over £1,200.

Advise Ann.

Answer

Paragraph 1 - Term or misrepresentation?

One argument is that Bert's statement to Anna is most likely to be a representation rather than a term of the contract because it was made orally a week before a written contract was signed which did not contain the statement. It is not sufficient for you to simply mention the parole evidence rule and say that written contracts cannot be supplemented by oral terms; you should explain that it is reasonable in the circumstances to assume that Bert and Anna meant the written document to be a final and complete contractual document. You could refer briefly to Routledge v McKay for support that a time gap is important.

On the other hand, you may think that the facts are closer to Bannerman v White where the importance of the statement meant that it was a term of the contract. How important is it that a burglar alarm works without mains power - perhaps the answer depends on what is being guarded; does Ann's house contain many expensive works of art or is Ann very poor with few possessions? It is of course possible that Bert made a representation of fact and also promised as a term of the contract that the alarm would work even if the mains power was cut off.

Paragraph 2 - Actionable?

If the statement is a representation, is it an actionable misrepresentation? The statement was one of fact which was untrue at the time it was made and it was made by Bert to Anna, the parties to the contract. The fact that Bert realises later that the alarm will not work without mains power is irrelevant to the fact that the representation is false at the time it is made; this is not a case where a true statement becomes false and then Bert is obliged to inform Anna when he discovers the true facts. However, it is unclear whether Anna relied upon the representation so that it can be said to have induced the contract. Remember that it is not necessary to show that the representation was the sole reason for entering the contract but that it must have at least been a reason (JEB Fasteners Ltd.).

If the statement is a term of the contract then Bert is clearly in breach of contract because he has provided an alarm that does not work without the mains electricity.

Paragraph 3 - Remedies

If you concluded that there was an actionable misrepresentation then the first remedy available is rescission of the contract; Ann will get her £800 back and will return the alarm to Bert. None of the bars to rescission appear to be relevant here and so it is not necessary to go into detail. It is obvious from the question that Ann is concerned not only to get her money back but also to claim damages for the losses suffered as a consequence of the alarm not working.

Bert has clearly not been fraudulent (applying the definition in Derry v Peak); he genuinely believed in the truth of the statement when he made it and even after he had discovered that the alarm did not work without mains power he did not associate this knowledge with his belief in the truth of the statement. However, if Ann seeks damages under s.2(1) Misrepresentation Act 1967 she will only need to show that she entered into the contract by reason of the misrepresentation and then the burden will be on Bert to show that he had reasonable grounds for believing and did believe up to the time the contract was made that the facts represented were true. Bert will have difficulty proving that at the time of the contract he believed that the alarm would work without mains supply because he had previously discovered that it would not. It is, therefore, likely that he will be liable for damages as though the misrepresentation had been made fraudulently.

This will give the reliance measure of damages and not the expectation measure (Royscot) and so Ann will not be able to claim the difference in value between her alarm and an alarm which would work without mains electricity (at least £400), although this is not her prime concern as she is probable more concerned to recover the £5000 value of the stolen jewellery. You may argue that such loss is foreseeable and therefore not too remote although it is not clear whether damages under the fiction of fraud are subject to the remoteness limitation (discuss Royscott and Smith New Court very briefly).

You could mention that damages may also available for negligent misstatement under the common law but Ann is probably going to find it easier to claim damages under the Misrepresentation Act 1967.

If the representation is also a term of the contract, Ann will be entitled to expectation damages although these will be subject to the remoteness limitation.