LAWS6021 Principles of Contract

Seminar Guide, Week 8

Term 1, 2023-2024

Week 8
Misrepresentation
Reading: FCLHK Chap 14, pp 589-638.
Core Reading:
False statement of fact FCLHK § 2.1 (pp 590-595).
Misrepresentation by conduct FCLHK § 2.3 (pp 596-600).
Misrepresentation by silence FCLHK § 2.4 (pp 600-606).
Inducement and failure to verify FCLHK § 2.5 (pp 606-610).
Rescission FCLHK § 3.1 (pp 610-622).
Damages FCLHK § 3.2 (pp 622-625).
Misrepresentation Ordinance FCLHK § 3.3 (pp 625-638).
Core Cases:
• Bisset v Wilkinson [1927] AC 177 (PC).
• Green Park Properties Ltd v Dorku Ltd [2001] 1 HKLRD 139, [2000] 4 HKC 538
(CA).
• With v O’Flanagan [1936] Ch 575 (CA, Eng).
• Redgrave v Hurd (1881) LR 20 ChD 1 (CA, Eng).
• Leaf v International Galleries [1950] 2 KB 86 (CA, Eng).
• Long Year Development Ltd v Tse Fuk Man [1991] 2 HKC 393 (HC).

An operative misrepresentation is a substantially false statement of fact (or perhaps of law)

that reasonably induces the representee to conclude a contract with the representor. A
contract thus induced may entitle the representee to rescind the contract in equity and/or
claim statutory damages.

False statement of fact

A statement cannot constitute a misrepresentation unless it was a false statement of past

or present fact or, perhaps, of law (Pankhania v Hackney London Borough Council [2002]
EWHC 2441 (Ch); Oudaille v Lawson [1922] NZLR 259 (HC, NZ)).

Opinion or forecast: If the statement expressed merely a mistaken opinion or forecast,

which was honestly and reasonably believed, it will not be a misrepresentation.

• Bisset v Wilkinson [1927] AC 177 (PC).

Special knowledge, expertise or skill: Sometimes a statement will be expressed in the form
of an opinion or forecast, but it will be made in circumstances in which a reasonable person
would nevertheless regard it as a statement of fact. This will be much more likely where the
representor possesses greater knowledge of the facts relevant to the subject-matter of the
opinion or forecast than the representee (Smith v Land and House Property Corp (1884)
28 Ch D 7 (CA, Eng)). Similarly, an expression of opinion or forecast may amount to a
statement of fact where the representor possesses greater expertise or skill than the
representee such that a reasonable person in the position of the representee would regard
the representation as a statement of fact (Esso Petroleum Co Ltd v Mardon [1976] QB 801
(CA, Eng); Nelson Group Services (Maintenance) Ltd v BG plc [2002] EWCA Civ 547 (CA,
Eng); Ko Ching Fung v Fulltin Investment Ltd [2007] HKCU 1182 (CA)).

False statement of intention and opinion: A statement by a person as to his future

intentions is also not usually to be regarded as a false statement of existing fact. There is,
however, an important exception to this. Where the opinion is not actually held, the
forecast is not actually believed in, or the declared future conduct is not actually intended
at the time of the representation, the representation will be a false statement of existing
fact. The existing fact is the state of the representor’s mind at the time of the representation

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Seminar Guide, Week 8
Term 1, 2023-2024
(Edgington v Fitzmaurice (1885) 29 Ch D 459 (CA, Eng); Chiu Wai Shing v Lau Chi Wai
[2006] HKCU 1825 (CFI); Kwai Tak Ming v KS Capital One Ltd [2017] 4 HKLRD 19 (CA)).

Misrepresentation by conduct

A misrepresentation may, in appropriate circumstances, be constituted by conduct as well

as by words (Walters v Morgan (1861) 45 ER 1056). In determining whether there has
been a misrepresentation by conduct, it is not necessary to establish that the representor
intended to mislead the representee. It is enough that the representation by conduct was,
in all the circumstances, objectively misleading as to a fact which induced the representee
to conclude the contract (e.g., Shum Kong v Chui Ting Lin [2001] HKCU 531 (CFI); Spice
Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15 (CA, Eng); c.f., Bank of China
(Hong Kong) Ltd v Leung Wai Man [2011] 4 HKLRD 707 (CFI)).

• Green Park Properties Ltd v Dorku Ltd [2001] 1 HKLRD 139, [2000] 4 HKC 538
(CA).

An attempt to conceal a defect can also constitute a misrepresentation by conduct. If made

with the intention to mislead, it will be fraudulent (Schneider v Heath (1813) 170 ER 1462
(Assizes); Gordon v Selico Ltd [1986] 1 EGLR 71 (CA, Eng)).

Misrepresentation by silence

Generally speaking, the common law places no obligation on negotiating parties to disclose
facts material to the proposed contract (Bank of China (Hong Kong) Ltd v Fu Kit Keung
[2009] 5 HKLRD 713 (CFI)). Parties are not allowed to make a statement of fact which is
false, but they are entitled to remain silent. A notable exception to this principle is that
parties may be under a positive obligation to disclose material facts where they are
negotiating contracts uberrimae fidei (‘utmost faith’). An issue of misrepresentation by
silence will also arise where a party makes a statement of fact about a continuing state of
affairs that reasonably induces the representee to conclude a contract with the representor,
but before the contract is concluded circumstances change rendering the statement untrue.
The representor is required to correct the earlier statement if he is aware of the changed
circumstances.

• With v O’Flanagan [1936] Ch 575 (CA, Eng).

The requirement to correct an earlier representation does not, however, arise unless the
changed circumstances defeat the continuing accuracy of an earlier pre-contractual
representation that was specifically made. Furthermore, a ‘half truth’ can constitute a
misrepresentation only if the withheld material gives an objectively misleading impression
that falsifies stated facts (Aktieselskabet Dansk Skibsfinansiering v Brothers (2000) 3
HKCFAR 70, [2000] 1 HKLRD 568, [2000] 1 HKC 511 (CFA); Peek v Gurney (1873) LR 6
HL 377 (HL)).

Inducement to conclude contract and failure to verify

A misrepresentation will not be operative (or ‘material’) unless it was one of the
inducements causing the representee to conclude the contract. A misrepresentation will be
rebuttably presumed to have induced the representee to enter into the contract if it would
have so induced a reasonable person in the position of the representee (Master Yield Ltd v
Ho Foon Yung Anesis [2013] 6 HKC 520 (CA); Museprime Properties Ltd v Adhill
Properties Ltd [1990] 2 EGLR 196 (Ch)). In order to rebut the presumption, the
representor must prove either that the representee knew the statement to be false, or that
he otherwise placed no reliance on it in concluding the contract, e.g. because he relied on
his own information (Attwood v Small (1838) 7 ER 684 (HL)). A misrepresentation may,
moreover, be operative notwithstanding that the representee could have checked its

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veracity but failed to do so (Welltech Investment Ltd v Easy Fair Industries Ltd [1996] 4
HKC 711 (HC)).

• Redgrave v Hurd (1881) LR 20 ChD 1 (CA, Eng).

It is not necessary that the misrepresentation, in order to be operative, must have been the
sole inducement for the representee to conclude the contract. It is enough that the
misrepresentation provided the representee one of the reasons for concluding the
agreement (Welltech Investment Ltd v Easy Fair Industries Ltd [1996] 4 HKC 711 (HC);
Edgington v Fitzmaurice (1885) 29 ChD 459 (CA, Eng)).

Rescission

A contracting party who has been the victim of any operative misrepresentation (whether
fraudulent, negligent or innocent) may be entitled to rescind the contract in equity.

Effect of rescission. Whereas rescission for a repudiatory breach of contract terminates all
contractual obligations as to the future (i.e., as from the date the repudiation was accepted),
rescission for misrepresentation terminates the contract from its very inception. The result
will be that all monies paid and property transferred under the contract will be restored
according to the status quo ante contract. Its object is to place the parties in the same
position in which they would have stood had the misrepresentation not been made; this
means, in effect, that the parties are to be placed in the same position in which they would
have stood had the contract never been concluded (eg, Wing Hang Bank Ltd v Kwok Lai
Sim [2009] 4 HKLRD 93, [2009] 4 HKC 71 (CA)).

Bars to rescission. (1) Affirmation: A representee cannot rescind a contract once he has
affirmed it. The representee will affirm the contract where, after discovering the truth, he
expressly states his intention to continue with the contract, continues to accept its benefits,
or otherwise indicates that he regards the contract as subsisting (Seddon v North Eastern
Salt Co [1905] 1 Ch 326 (Ch); Long v Lloyd [1958] 2 All ER 402 (CA, Eng)). However,
affirmation will not bar rescission unless (1) the representee is aware that he has a right to
rescind, and (2) his conduct unequivocally demonstrates an intention to proceed with the
contract (Peyman v Lanjani [1985] Ch 457 (CA, Eng); Okachi (Hong Kong) Co Ltd v
Nominee Holding Ltd [2005] 4 HKLRD 447 (CFI)). (2) Third parties: It is a bar to
rescission that a bona fide third party acquires for value an interest in the contract’s subject
matter. (3) Undue delay: A representee also loses his right to rescind, by virtue of the
equitable principle of laches, where (i) the representee has unduly delayed seeking
rescission, and (ii) the parties’ conduct makes it unjust to grant rescission (Salt v
Stratstone Specialist Ltd [2015] EWCA Civ 745 (CA, Eng)).

• Leaf v International Galleries [1950] 2 KB 86 (CA, Eng).

However, undue delay will not operate as a bar to rescission where the misrepresentation
was fraudulent or in breach of fiduciary duty (Armstrong v Jackson [1917] 2 KB 822 (KB)).
(4) Impossibility of restitutio in integrum: Rescission will be barred where
restoration of the status quo ante contract is impossible (Clarke v Dickson (1858) 120 ER
463 (QB)). Where, however, a deterioration or decline in value results not from the conduct
of the representee but from external causes, rescission is not thereby barred (Armstrong v
Jackson [1917] 2 KB 822 (KB); Hulton v Hulton [1917] 1 KB 813 (KB)). Restitution can also
be made on terms which take into account profits made or deterioration caused by the
representee provided restititio in integrum is substantially possible. In granting rescission,
the court ‘can take accounts of profits, and make allowance for deterioration … whenever,
by the exercise of its powers, it can do what is practically just, though it cannot restore the
parties precisely to the state they were in before the contract’ (Erlanger v The New
Sombrero Phosphate Co (1878) LR 3 App Cas 1218 (HL)).

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 LAWS6021 Principles of Contract
Seminar Guide, Week 8
Term 1, 2023-2024
Damages at common law

Until 1963, damages were not available for a misrepresentation unless it was fraudulent.
Where fraud is established, a claimant may bring an action for damages in the tort of deceit.
The measure of deceit damages is all the losses which the representee suffered as a result
of his reliance on the misrepresentation, even if such losses were not foreseeable. A
misrepresentation will not be fraudulent unless it was made (1) knowingly, or (2) without
belief in its truth, or (3) recklessly, careless whether it be true or false (Derry v Peek (1889)
14 App Cas 337 (HL); Polaroid Far East Ltd v Bel Trade Co Ltd [1990] 2 HKLR 447 (CA)).
In 1963, liability for damages in negligence was extended to certain kinds of negligent
misstatements (Hedley, Byrne & Co Ltd v Heller Partners Ltd [1964] AC 465 (HL)).

Misrepresentation Ordinance

Section 3(1) of the Misrepresentation Ordinance (Cap 284) is a powerful provision. It

provides, in effect, that ‘damages are available in respect of a non-fraudulent [ie innocent
or negligent] misrepresentation which induces a contract, on the same basis as for the tort
of deceit’ (Joytex Development Ltd v Super Homes Ltd [2018] HKCFI 2286). The provision
thereby enables the representee to claim damages as if the innocent or negligent
misrepresentation had been fraudulent. The measure of damages for fraud/deceit is the
tortious measure: the representee is to be placed in the position in which he would have
stood had the misrepresentation not been made, even if his losses were not reasonably
foreseeable. Furthermore, s 3(1) effectively reverses the onus of proof that applies in an
action in tort for negligent misstatement or deceit (fraud) (Lee Yuk Shing v Dianoor
International Ltd [2016] 4 HKC 535 (CA)). This reversed onus of proof applies whether
the misrepresentation is innocent, negligent or fraudulent. Whereas in an action for
negligence the representee must prove that the representor lacked reasonable grounds for
believing in the statement’s truth, and in an action for fraud the representee must prove
that the representor lacked an honest belief in the truth of the statement, under s 3(1) it is
the representor who must prove that he did have reasonable grounds to believe in the
statement’s truth. Where, however, the representor can prove that he had reasonable
grounds to believe that his statement was true, s 3(1) will not avail and the representee’s
only remedy will be rescission in equity.

• Long Year Development Ltd v Tse Fuk Man [1991] 2 HKC 393 (HC).

Section 3(2) enables a court to substitute damages ‘in lieu of rescission, if … it would be
equitable to do so, having regard to the nature of the misrepresentation and the loss that
would be caused by it if the contract were upheld, as well as to the loss that rescission would
cause to the other party.’ The provision operates where the misrepresentation has been
made ‘otherwise than fraudulently.’ This means that it applies to both negligent and
innocent, but not fraudulent, misrepresentations. Where the loss sustained by the
representee is small in comparison to the loss which would be sustained by the representor
were the contract to be rescinded, a court would be more likely to use its power under
section 3(2) (eg, William Sindall plc v Cambridgeshire County Council [1994] 3 All ER 932
(CA, Eng)). Where, however, money damages are unlikely to be able to restore to the
representee that for which he bargained, then a court will be less likely to make an order
for damages in lieu of rescission (Balchita Ltd v Kam Yuck Investment Co Ltd [1983] 2
HKC 333 (HC); Green Park Properties Ltd v Dorku Ltd [2001] 1 HKLRD 139, [2000] 4
HKC 538 (CA)). It is likely that section 3(2) does not authorise an award of damages where
rescission is barred (Government of Zanzibar v British Aerospace (Lancaster House) Ltd
[2000] 1 WLR 2333 (QB); Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745 (CA,
Eng)).

Section 3(3). Whether or not a representee is eligible for an award of damages under
section 3(1), he may be awarded damages under section 3(2). However, section 3(3)
provides that any award of damages under section 3(1) must take into account an award
made under section 3(2).

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