LAW OF CONTRACT II

MODULE 8

BY NORMAN G. WILLIAMS
VITIATING FACTORS IN CONTRACTS

Introduction

VITIATING FACTORS are factors, which make an apparent contract lose its validity when
it comes to its enforcement.
A contract may be vitiated or invalidated if it is found that there are certain factors, which
negate or nullify the apparent consent of one or both of the parties.
The VITIATING FACTORS which are recognised by the Law are:
 MISTAKE
 MISREPRESENTATION
 DURESS & UNDUE INFLUENCE.
MISREPRESENTATION

Introduction

Before a contract is concluded, various statements may be made by the parties to each other. Earlier on we noted that such pre-contractual
statements may qualify as terms of the contract, if it is ascertained that the party making the statement undertakes or guarantees it to be true.

However such preliminary statements may not be intended to have contractual effect or to be terms of the contract, even though they may
influence the party to whom it is made in deciding to enter the contract.

Such statements, which are intended to influence the other party into entering the contract, but which do not become part of the contract are
normally referred to as MERE REPRESENTATIONS or REPRESENTATIONS.

A misrepresentation is therefore simply a representation which is untrue or false.

The focus of this module

 What constitutes misrepresentation

 The various kinds of misrepresentations

 The remedies available for each kind.

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Introduction

What is a misrepresentation? A misrepresentation is a false statement of law or fact made by one party (party A) to another party
(party B) which induces that other party (party B) to enter into a contract. Such statements of law or fact constituting a
misrepresentation are normally in written words.

For example false statements or promises made by a seller of goods regarding the nature or quality of the product may constitute
misrepresentation

If a misrepresentation is shown to have occurred, the effect will be that the contract becomes voidable. This means that the party
who was induced into the contract as a result of the misrepresentation may choose to rescind the contract, but does not
necessarily have to.
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Elements of Misrepresentation
The law of misrepresentation operates when:
 A pre-contractual statement of fact is made
To a party intending to enter a contract, and
The statement is relied on to enter the contract, the statement must induce the party to
contract
The statement is false.
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What makes a misrepresentation actionable?

In order for a representation to become a misrepresentation, it must be first proven that it
was an unambiguous, false statement of fact. In order to prove that this misrepresentation is
actionable, it must be shown that the representation induced the claimant to enter the
contract.
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Inducement of the claimant

Once it has been proven that a false statement of fact has been made, the next step is to prove that this
statement of fact induced the claimant to enter into the contract. There are three requirements of inducement:
 The representation made must be material
 The representation must be known to the representee
 The representation must be acted upon
 The party actually acted upon it

There can be no inducement when a person:

1. relies upon their own judgement, or
2. made their own investigations to ascertain the true state of affairs.
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 The representation must be material - The representation must not be an inconsequential statement which is of
irrelevance to the plaintiff. In order to be actionable, the representation must be material so that it would positively
influence a reasonable person to enter the contract. This is a relatively easy requirement to prove, as seen in
Smith v Chadwick (1884)

 The representation must be known to the representee - A representation will not be actionable and will not have
induced the representee unless the representee was aware of the representation.

 The representation must be acted upon - The final requirement of proving inducement is that the representation was
actually acted upon. The representor may attempt to prove the representee was induced by another factor, and not the
misrepresentation. It should be noted that the misrepresentation does not have to be the sole inducement for the formation
of the contract, as long as it formed part of the inducement this will suffice - Edgington v Fitzmaurice(1885)

 Actually acted upon: If the claimant relies upon the misrepresentation when entering into the contract, this will amount
to an inducement, even where the claimant did not take advantage of an offer to check the statement made.
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Can silence be a misrepresentation?

The general rule is that silence will not amount to a misrepresentation. There is no duty to disclose facts which
would affect the other party’s decision to enter into the contract.
This general rule has a number of exceptions
 Half truths: Where a statement is true, but does not reveal the whole truth which therefore makes the statement
misleading, it will probably be a misrepresentation
 Change of circumstances: Where a statement is true when made, but due to a change of circumstances or
lapse of time it becomes false, there is a duty on the maker of the statement to correct it. Failure to do so will
amount to a misrepresentation.
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 Contracts uberrimae fidei (of the utmost good faith, such as contracts of insurance): Where a party
is in a strong position to know the truth, there is a duty to disclose all material facts.
The most common type of contract in this class are contracts of insurance.
 Fiduciary relationship: Where a fiduciary relationship exists between the parties, there is a particular
duty to disclose all material facts upon the fiduciary to discharge their fiduciary duties to their
principal.
 Active concealment: This involves going beyond remaining silent and involves concealment of a
defect, such as painting over a cracked wall to hide the defect.
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Forms of Misrepresentation
The misrepresentation will usually be in words, written or spoken. But other forms of communication will be
sufficient to amount to a misrepresentation.
In pre-contractual discussions, statements might be:
 made verbally
 communicated with gestures
 in the terms of draft contracts, which end up being signed, or
 statements that have no legal effect or consequence.
 Conduct of can also amount to a misrepresentation. For example, production of promotional material can
amount to a misrepresentation by conduct.
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Nature of the Representation

Not all pre contractual representations have legal consequence if they are false.
Words which are used might include sales talk (aka 'puffery') or laudatory words in respect of the goods or services
such as:
 "Best pies in the UK" or
 "Finest after-sales service this side of Newcastle".
These sorts of statements are vague, not specific and lack any specific contractual meaning and not actionable in
law.
But they may be statements of fact, which are able to be verified. They are actionable, because they to induce the
other party to enter into the agreement.
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Statement of fact distinguished from statement of opinion

Statements of Fact - The representation must be a statement of fact, which relates to an existing or past event.
Statements of Future Intentions - Statements of future conduct or intention can amount to statements of fact, because they
frequently contain implied representations with regard to the present state of affairs, or the knowledge of the person
making the representation.
Statements of Opinion- Statements of opinion don't qualify unless the maker of the statement knows that their expressed
opinion is false or if they have special knowledge, and in a better position to know the true facts regarding the subject matter.
Normally a statement of intention or OPINION does not constitute a misrepresentation, because it is not considered as a
positive assertion of fact.
[Eg. I think the land is worth ¢10 million. I paid ¢10 million for it.]
See: BISSET v WILKINSON
 Misrepresentation Must be distinguished from Mere Puffs

 A mere puff is an exaggerated

claim which do not make a
binding contract eg. Soap
powder that washes whiter
than snow
or traditional medicine that
cures every ailment as
demonstrated by herbal
medicine sellers

 Misrepresentation occurs when one

party makes a statement of fact which
induces a party to enter into an
agreement / contract
 MISREPRESENTATION

Distinguished must be distinguished from statement of intention

Normally a representation of fact (that a thing is) is distinguished from a statement of intention or a promise to do something in the
future.

Caveat - Again it does not follow that a statement of intention can never amount to a misrepresentation of fact. A statement of
intention, even though it relates to the future, may in some cases amount to a misrepresentation of fact, ie. a misrepresentation of the
representor's present intention.

Where a statement of intention is made, it implies at least that the alleged intention does exist. If it turns out that at the time the
statement is made, the maker had no will or intention to put that stated intention into effect, this constitutes a misrepresentation
of the maker's present state of mind.

See EDZINGTON v. FITZMAURICE

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Types of misrepresentations
Innocent Misrepresentation - The pre-contractual statement was false, but the maker of the statement wasn’t negligent in making the statement.
If the maker of the statement reasonably believed that what was stated is true, then, the statement will be regarded as ‘wholly innocent’. An
innocent misrepresentation is an untrue statement made in good faith, with honest belief in its truth, intended to induce a party to enter
into a contract.
An innocent misrepresentation is a representation which neither fraudulent nor negligent.
Remedies
 Repudiation and setting up of innocent misrepresentation as defence - The party misled by an innocent misrepresentation may
REPUDIATE the contract (ie. refuse to carry out his obligations under the contract); and set up the misrepresentation as a defence to any
action brought against him for breach of contract or for specific performance of the contract.
 Rescission and Restitution - Instead of waiting to be sued, the party misled by an innocent misrepresentation may bring an action for
RESCISSION OF THE CONTRACT and in some cases RESTITUTION - but not for damages. The objective of RESCISSION is primarily to
cancel the contract and to restore the parties to their original positions
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INDEMNITY - Where a party is misled by an innocent misrepresentation, he becomes entitled to claim an indemnity against any
obligations incurred by him as a result of the contract even though he is not entitled to claim damages. In other words the plaintiff is
entitled to be indemnified against all losses or liabilities incurred by him in the discharge of obligations created by the contract.
DISTINCTION BETWEEN DAMAGES AND INDEMNITY :
 Generally, damages are all those losses which naturally and reasonably flow from the breach of contract.

 In the case of indemnity, the pliantiff is not to be compensated for all the losses flowing from the breach, but is compensated only
for those losses incurred in the discharge of the obligations created or imposed by the contract he has made.
This distinction is illustrated in the case of WHITTINGTON v SEALE-HAYNE
It must be noted that for all three kinds of misrepresentation, the party misled is at least entitled to rescind the contract. It consists of
the setting aside of the contract. Where a contract is rescinded, it is wiped out from the beginning - ie. it is cancelled both
prospectively and retrospectively. The aim of the Court is to cancel the contract and to restore the parties as far as possible, to the
position they were in before the contract was made.
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Negligent misrepresentation - A negligent misrepresentation is one that is made without reasonable grounds for believing it to be true. A
representation is negligent if it is made carelessly and in breach of a duty owed by the representor to the representee to take reasonable care that
the representation is accurate.
Generally, a misrepresentation cannot be regarded as negligent unless the representor owed a DUTY OF CARE (to be careful) to the
representee i.e. [unless the representor was obliged by law to be careful in his dealings with the representee].
Initially under the common law, there was no liability at all for negligent words or misstatements, especially where the only damage resulting
was financial damages. All misrepresentations were classified either as innocent or fraudulent.
With time the courts recognised that an action for negligent misrepresentation could arise in certain circumstances where the representor owed
a duty of care to the representee to ensure that the statement was accurate.
However the law recognised such duty of care only where there was an existing contract between the representor and the representee or where
there was a fiduciary relationship between them. In these situations the law recognises that a duty of care is imposed on the representor
Remedies
 Therefore where a statement or representation is made without the exercise of reasonable care the representor could be liable for damages
for the negligent misrepresentation.
 Rescission
MISREPRESENTATION

Duty of Care Arising Out of Fiduciary Relationship

The case of NOCTON v ASHBURN
FACTS: A solicitor advised his client to release part of a mortgage. The client took his advice and the security became
insufficient and the client suffered loss. The client brought the action against the solicitor, claiming that the advice given was
fraudulent and improper and claimed compensation for his loss.
HELD:
 That there had been no fraud sufficient to found an action in deceit or fraudulent misrepresentation.
 However the client could still claim relief since the advice was given without sufficient skill and care. [Constituted negligent
misrepresentation].
 The court found that there was a fiduciary relationship between the parties [solicitor-client]; and by making a negligent
misrepresentation, the solicitor was in breach of the DUTY OF CARE arising from this fiduciary relationship.
The view that an actionable negligent misrepresentation could arise only out of a contractual relationship or fiduciary
relationship between the parties was upheld in the case of CANDLER v CRANE, CHRISTMAS & CO.
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FRAUDULENT MISREPRESENTATION -The accepted definition of fraudulent misrepresentation can be

found in Lord Herschel's formulation in the case of DERRY v PEEK where the law was stated as follows :

 To establish fraudulent misrepresentation there must, first of all, be proof of fraud, and nothing short of that is
sufficient.

 Fraud is proved when it is shown that a false representation was made :

 Knowingly

 Without belief in its truth; or

 Recklessly, careless whether it be true or false.

MISREPRESENTATION

To establish fraudulent misrepresentation, it is essential to prove the element of fraud - i.e.

the absence of any honest belief in the truth of the statement. Note that Simply showing that
the statement was made without the exercise of care is not sufficient to establish fraudulent
misrepresentation.
MISREPRESENTATION

DERRY v PEEK
FACTS: A company obtained permission to run trams by animal power. They applied for permission to run the
trams by steam or mechanical power if the consent of the Board of Trade could be obtained. The Directors of the
Company believed that the Board would give its consent as a matter of course since they had already submitted
their plans to the Board and no objection had yet been made. The Directors therefore issued a prospectus saying
that the Company had the right to run trams by steam or mechanical power.
The Respondents purchased shares in the Company in reliance on this representation. The Board of Trade refused
to give their consent and the company was wound up. Respondent sued for fraudulent misrepresentation or deceit.
HELD: That to succeed the Plaintiff had to prove fraud.
That the element of fraud had not been established here since the pliantiff had not shown an absence of an honest
belief on the part of the Directors. Further the facts show that the Directors honestly believed that the statement
they made was true, since they had sufficient ground to believe that the permission would be granted.
MISREPRESENTATION

Remedies
WHERE fraud is proved the maker of the statement is guilty of fraudulent misrepresentation, which
generally entitles the party misled to
 rescind the contract.
 Action for damages for deceit. It must be noted that once fraud is proved, the defendant is guilty of the
tort of DECEIT
 If the contract has not yet been performed, the party misled may repudiate the contract (ie. refuse to
perform his obligations under the contract) and sue to recover any moneys paid under it.
 Where the innocent party repudiates the contract and is sued by the representor, he may set up the fraud
as a defence against any action brought against him for breach of contract or specific performance of the
contract; and also counterclaim for damages for deceit.
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Remedies
Measure of damages for fraudulent misrepresentation
Principle - Where the action is founded on deceit, the court would normally award the pliantiff damages as would
put him in the position he would have been in if the tort had not been committed - ie. if the representation had not
been made.
Therefore if the plaintiff would not have entered into the contract but for the misrepresentation, then the court will
compensate him for all the losses he has incurred as a result of entering into the contract.
Read on the following
 Restitution
 Affirmation LIMITS TO RESCISSION
 Lapse of time
 Third party rights
MISREPRESENTATION

Conclusion
Misrepresentation in contract law is a cause of action geared to address misleading statements,
whether innocent, negligent or made by fraudulent intention.
REFERENCES

These quick reference guides have been culled from the following authorities:
1. The Law of Contract in Ghana by Christine Dowuona Hammond 2011
2. Law of Contract with Special Reference to the Law of Ghana by Philip Ebow Bondzi Simpson - Second edition 2010
3. Revision Work Book – Obligations: Contract Law Third Edition by Vickneswaren Krishnan
4. Course Outline for the Law of Contract – pages 1-12