Question

Jesse is considering buying his aunt Karen’s house as an investment. During the negotiations, Karen states, “This house is worth £200,000 and I’ve had two separate valuations from estate agents verifying that, but since I love you so much I’ll sell it to you for £180,000.” Karen has not received any valuations from estate agents and the house is worth only £120,000. Jesse buys the house for £180,000. Two weeks after Jesse has completed the sale and moved into the house, he discovers that Karen did not receive any valuations from estate agents. The same week, Jesse discovers that the value of the house has been reduced to £80,000 due to serious damage caused by the collapse of a supporting wall. At this point, a buyer offers £80,000 for the house. Jesse does not sell the house until three months later, when Jesse only receives £75,000 for the house because of a general fall of the property market.

Advise Jesse.

Introduction

This is an advice for Jesse regarding the purchase of his Aunt Karen’s house. It will discuss whether the contract can be set aside on grounds of misrepresentation, rather than on grounds of breach of contract. This advice will thus discusses the following: whether misrepresentation is established, the type of misrepresentation, the remedies available to Jesse and the summary of advice.

Term or representation

Jesse’s aunt Karen during the pre-contract negotiations made several statements, the main one being: “I’ve had two separate valuations from estate agents”. The second was the value of the house was “worth £200,000”. The third being silent about the defective wall. The latter two statements stem from the first that a valuation had been carried out. If in fact a valuation had been carried out it would have given Jesse a clear indication of i) the value of the house; ii)  and the condition of the house, thus exposing any defects. Would these statements have become terms? Quite possibly. But the expected market value did not appear on the contact; neither did any defects or the soundness of the house. Therefore this advice advises on the assumption that the aunt’s statements are representations, the following advice thus discusses whether these representation are actionable misrepresentations.     

The misrepresentation

The following statement of Karen gives rise to a potential claim for misrepresentation:“This house is worth £200,000 and I’ve had two separate valuations from estate agents verifying that”. Poole defines an actionable misrepresentation as: “an unambiguous, false, statement of fact made to the claimant, which induces the claimant to enter into the contract with the statement maker.”[1] If the above elements are established Jesse may have an arguable case for misrepresentation which can make the contract voidable.

Unambiguous statement

The statements made by Karen about both the existence of valuations and the market value of the house was unambiguous and did not lend itself to misinterpretation on the part of Jesse. In order to form the basis of a claim the representation must indeed be clear, keeping in mind that the representor may not be liable on the grounds that the representee unreasonably interpreted it. In McInerny v Lloyd’s Bank Ltd[2] the Court of Appeal held that the representor may not be liable when the representee misconstrues the representation[3]. Here Jesse has believed Karen in what she is saying and not unreasonably constructed neither the value of the house or the fact that a valuation has been carried out. He has been categorically been tod this.  

False Statement

Jesse discovers that Karen did not receive any valuations from estate agents. To be actionable misrepresentation the representation must be substantially false, as opposed to substantially correct. In Avon Insurance Plc v Swire Fraser Ltd[4], Rix J stated: “[A] representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts”. Therefore Karen saying the valuations existed to justify the market value of £200,000 was a false statement which ultimately induced Jesse

Statement of existing fact

Poole explains that to be actionable, a representation must be a statement of fact. Factual statements have to be distinguished from statements which are not actionable such as: statements of opinion, future intention as well as instances of silence.[5]

A statement of opinion

Although a statement of opinion is not a statement of fact, it may be considered a statement of fact if it is proved that the representor did not believe in it or if a reasonable man with the knowledge of the representor would not have held. In Smith v Land and House Property Corporation,[6] Bowen LJ held:

“Where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion…But if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of material fact, for he impliedly states that he knows the facts that justifies his opinion.”

As Karen said the house was worth £200,000 she could argue that this was merely her opinion. But using the above authority, Jesse can argue that since her opinion was backed by the fact there was a valuation to verify this. She is saying she has the expert opinion of a valuation; this makes the statement one of fact rather than opinion.

Statement of valuation and silence

Karen’s false statement about the existence of a valuation leads to the non-disclosure of the defect in the wall. These are linked. Indeed, if a valuation was carried out, it would have informed Jesse about the state of the wall and certainly factored it into the evaluation of the market price of the house. As a result, the value of the house has been reduced to £80,000 due to serious damage caused by the collapse of a supporting wall, Jesse may argue that Karen’s lack of disclosure about the state of the wall at the time of the negotiations amounts to silence, which may be considered a misrepresentation under the circumstances at hand. 

Silence does not generally amount to misrepresentation, according to the principle of caveat emptor. Thus a claim on the ground of misrepresentation may not be based on it. The case Keates v The Earl of Cadogan[7] defines this area of law. The Court established the principle that there is no general duty of disclosure and that it is justified that such a general duty would lack precision as it would not be possible to define which facts would have to be disclosed in advance. Thus Karen has no general duty to disclose facts that may impact Jesse’s willingness to enter into the contract. The case Sykes v Taylor-Rose[8] further establishes that the courts will assess what duty of disclosure exists on a case by case basis.

However, one line of argument that Karen and her lawyer may attempt to use is that a valuation was being sought, however did not happen in time. As we will see later, this is the only way she can show she had reasonable belief in the statement (an argument she will have to make when arguing remedy). If the court accepts a valuation was sought then at the beginning of negotiations, where a statement is made which is true but which, prior to entering into the contract becomes false, the representor is under an obligation to correct the representation. If Karen then fails to inform Jesse that no valuation has been done and allows Jesse to enter into the contract still believing that a valuation has been carried out then she will be liable for misrepresentation.

In With v O'Flanagan[9] a man selling his medical practice stated at the beginning of the negotiation that it was worth a certain price. During the course of the negotiations the price fell dramatically and the man did not inform the buyer of that fact. The court ruled that by his silence about the change of price he had made an ongoing representation[10].

Using the above authority the fact that Karen has not told Jesse that there is no valuation and this is inconstant with the obligation where a continuing representation is made which becomes false. The same applies to the valuation where one did not materialise at the time of sale. Indeed, had the valuations happened, the defect in the wall would have been exposed. It may be Karen already knowns about the defect in the wall, but remaining silent about it does not constitute actionable misrepresentation because the duty of disclosure does not extend to physical defects in the property itself. It may be that the loss of value to the house because of the wall could still be recoverable as it stems from the misrepresentation about the valuation.

Statement addressed to the party misled

Karen and Jessie negotiated the contract face to face and Jesse is thus aware of the represention. For the misrepresentation to be actionable, the representation must be addressed to the party misled. The authority for the law is the case Peek v Gurney[11]. It is thus established that Karen addressed her statements to Jesse.

Statement inducing the contract

In order to be actionable misrepresentation, the representation must have been at least one of the reasons Jesse entered into the contract. The authority on the law is the case is Edgington v Fitzmaurice[12]. Jesse was induced into entering into the contract and paid the stated price for the house because Karen had stated that the valuations had taken place and that in turn the price of the house was validated by expert opinion. There was no other inducement.

If Karen wishes to prove that Jesse bought the house independent of her representation, the burden of proof is on her to disprove Jesse’s claim. Indeed, the representor has to prove that the representee did not rely on the representation to enter the contract, according to Peekay Intermark Ltd & Anor v Australia & New Zealand Banking Group Ltd[13] (2006).  Based on the facts of the case it is unlikely that Karen would successfully prove that her representation was immaterial in Jesse’s decision to enter into the contract. As we will now discuss, had Jesse conducted his own valuation of the house Karen chances to dismiss Jesse’s claim would have been greater.

Opportunity to discover the truth

Jesse could have carried out his own independent valuation about the house, yet he did not, relying instead on Karen statement about valuations. The case Attwood v Small[14] establishes the principle that when a representee conducts his own independent investigation about the representation, he will no longer be considered to have relied on it but instead on his own analysis.  Since Jesse did not conduct independent valuation of the house, Karen may not claim that Jesse relied on his own judgement. 

Moreover, the fact that Jesse did not conduct his own investigation does not renders his reliance on the representation immaterial. The case Redgrave v Hurd[15], establishes that a representee has no obligation to verify the statement of the representor and that he may have relied on the misrepresentation to enter the contract. In addition, the case, Smith v Eric S. Bush[16], details the law, specifying that the more commercially aware a representee is the more it is expected that he investigates the representation and conversely, the least commercially aware the representee is the less he is expected to investigate the representation. Thus we can conclude using the authorities above that as this not a commercial transaction and Jesse was private buyer purchasing the house from his Aunt he had no duty to conduct own investigations. In addition, it would be reasonable for Jesse to have trusted his aunty. Then again this is the sale of a house as an investment worth £200,000 and this size of investment warrants a valuation through survey in our current volatile housing market. Although any solicitor conducting Jesse conveyance would insist on an independent valuation, this advice nevertheless considers there was no duty on Jesse to carry out a valuation.  

The type of misrepresentation

We must now consider the type of misrepresentation that has occurred, because this will have an effect of the outcome of the remedy available.

Fraudulent misrepresentation was articulated by Lord Herschell in the House of Lords when he decided the case Derry v Peek[17] and defined fraud as follows:

“…it must be shown that a false representation was made (a) knowingly, or (b) without belief in its truth, or (c) recklessly, careless whether it be true or false.”

The burden of proof is on the representee to establish that the elements above are present, that is that the representor knew his statement was not true, or did not believe it was true or was reckless about its truth.  As we do not know what Karen’s state of mind was when she said “this house is worth £200,000 and I’ve had two separate valuations from estate agents verifying that…” it is unlikely that fraudulent misrepresentation may be established. The facts provided do not appear sufficient to base a claim on the tort of deceit.

Section 2(1) of the Misrepresentation Act 1967[18] provides:

“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.”

According to the definition of a negligent misrepresentation above, a negligent misrepresentation is a misrepresentation which Karen may believe but has no “reasonable grounds to believe.” Also, the case Howard Marine & Dredging Co. Ltd v A. Ogden & Sons (Excavations) Ltd[19] further details that at the defendant must substantiate his beliefs. According to the authorities above the burden of proof moves to Karen to prove that her belief the house was worth £200,000 was grounded on serious evidence[20]. If she proves this the misrepresentation will be deemed innocent misrepresentation, according to Thomas Witter Ltd v TBP Industries Ltd[21]. To conclude it is likely on a balance of probabilities that the misrepresentation will be negligent because on the papers there is no reason offered for her false statement. Also, where Karen is found liable for a negligent misrepresentation under S(2), Jesse will be able to claim the same level of damages as if it the misrepresentation had been fraudulent. Indeed, the case Royscott Trust Ltd v Rogerson[22] confirms that liability in damages cover all losses consequential to the misrepresentation. Based on the above elements, this advice recommends that Jesse bases his claim on S(2) of the Misrepresentation Act 1967. 

The remedy

According to Poole, the effect of misrepresentation is to render the contract voidable but not void and rescission is available for misrepresentation under the Section 2(2) and generally, rescission will be awarded only where the parties can be restored to their original position by returning all the property transferred between the parties under the contract.[23]As there has been negligent misrepresentation, Jesse would have been entitled to rescind the contract with Karen.

However, this option is not available to Jesse for he has sold the house for £75,000 and according to Clarke v Dickson[24] this prevents him and Karen to be restored to their original pre-contract positions. Thus Jesse can only claim damages, under Section 2(2) of the Misrepresentation Act 1967. Damages for fraudulent misrepresentation are potentially the greatest available for misrepresentation. However, it must be borne in mind that an action for negligent misrepresentation, under s2(1) MA 1967, will often match those that would be available for fraudulent misrepresentation, if Karen cannot prove she had reasonable belief in the statement.

The damages that are recoverable are everything that stems from the misrepresentation. According to William Sindall plc v Cambridgeshire County Coucil[25] liability for damages under section 2(2) are interpreted as meaning “the difference in value between what the claimant was misled into believing he was acquiring and the value of what he in fact received.”  Jesse starting cost was £180,000. He cannot recover what he was told the house was worth because he did not pay this amount (£200,000). He cannot recover loss of profit (£20,000) because it does not stem from the misrepresentation. He can arguably recover for the loss of £40,000 because the wall collapsed and this was the decrease in value, and as this was a direct result of the misstatement about the valuation which would have informed him of the wall and the state of the house. If he knew about the true value and the defect he would probably not have entered into this contract. The shortfall of £5,000 will not be recoverable as this is attributable to the market forces and not the misrepresentation. Therefore, the total he will recoup is £75,000 from the sale of the house plus £40,000 due to the collapse of the wall. This amounts to £115,000. Thus he has made a loss of £65,000.

Summary of advice

The advice proposes that Jesse places a claim for damages for misrepresentation under Section 2(1) of the Misrepresentation Act 1967. If the courts find that the misrepresentation is material, Jesse may be awarded the damages flowing from the misrepresentation that is £40,000.

Footnotes

[1] Poole, Jill. Textbook on contract law. Oxford University Press, 2012. 515

[2] (1974) 1 Lloyd’s Rep 246

[3] McInerny v Lloyd’s Bank Ltd [1974] 1 Lloyd’s Rep 246

[4] (2000) 1 All ER (Comm) 573

[5] Poole, Jill. Textbook on contract law. Oxford University Press, 2012. 523

[6] (1884) 28 ChD 7 (CA)

[7] (1851) 10 CB 591

[8] [2004] EWCA Civ 299

[9] [1936] Ch 575

[10] Bigwood, R. (2005). PRE-CONTRACTUAL MISREPRESENTATION AND THE LIMITS OF THE PRINCIPLE IN WITH V. O’FLANAGAN. The Cambridge Law Journal, 64(01), 94-125.

[11] (1873) LR 6 HL 377

[12] (1885) 29 Ch D 459

[13] (2006) EWCA Civ 386

[14] (1838) 6 CL & F 232

[15] (1881) 20 Ch D1

[16] (1990) 1 AC 831

[17] (1889) LR14 App Cas 337

[18] Section 2(1) Misrepresentation Act 1967

[19] (1978) QB 574

[20] Sealy, L. S. (1978). Contract—Damages for Misrepresentation. The Cambridge Law Journal, 37(02), 229-232.

[21] (1996) 2 All ER 573

[22] (1991) 2 QB 297

[23] Poole, Jill. Textbook on contract law. Oxford University Press, 2012. 536

[24] (1858) EB & E 148

[25] (1994) 1 WLR 1016