6. Other requirements for an effective misrepresentation

Reliance

For a misrepresentation to be actionable, it must have induced the representee to enter into the contract. If the representee knew the statement was a misrepresentation and did not rely on it, he cannot claim that it was induced by it to enter into the contract. Reliance is a question of fact. The burden of proof usually lies on the defendant to the misrepresentation action.

In Kyle Bay Limited t/a Astons Nightclub v Underwriters Subscribing under Policy No. 019057/08/01 [2007] EWCA Civ 57, it was submitted on behalf of the claimant that the onus of showing why a representation should not be an actionable misrepresentation should lie on the defendant. The Court of Appeal disagreed. The question whether a statement amounted to a representation capable of founding a claim in misrepresentation had to depend on the words involved in the context in which they were used. Until the conclusion is reached that there is an actionable representation, no question of liability for misrepresentation should arise. In that case, which concerned statements made during negotiations for the settlement of an insurance claim, it was held that there was no misrepresentation. The alleged misrepresentation was in fact a contention or statement of position on behalf of the defendant, was understood to be such by the claimant's adviser and was not relied upon by them.

If the representee has the opportunity to discover the truth, this does not prevent the statement from being a misrepresentation (Redgrave v Hurd (1881) 20 Ch. D. 1). The appropriate test is whether there is actual and reasonable reliance on the misrepresentation. Accordingly, if a representee does not know that a representation is false, it is no defence to an action, either for damages or rescission, that the representee might have discovered the falsity of the representation by the exercise of reasonable care. For example in Peekay Intermark v Australia and New Zealand Banking Group [2006] EWCA Civ 386 it was held that it was irrelevant that the true position was stated in a contract signed by the representee, where he was actually unaware of the of the correction in the contract. Damages for misrepresentation may, however, be reduced if it is considered that the loss is partly the fault of the representee. For example, if the contract is complex and the representee would have been expected to read it.

To defeat a misrepresentation claim, it is not necessary to show that any representation was entirely correct; establishing that it was "substantially correct" may be sufficient (Avon Insurance plc and others v Swire Fraser Ltd [2000] EWHC 230 (Comm)). The court will consider whether the difference between what was represented and what was actually correct is likely to have induced a reasonable person in the position of the claimant to enter into the contract. The principle in Avon was reiterated in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm). In that case, the court held that the claimant bank had to show that the "difference between what was represented and the truth would have been likely to induce a reasonable person in its position to enter into the contract" (paragraph 149).

Misrepresentation does not need to be the sole inducement

The misrepresentation need not be the only matter which induces the other party to enter into the contract but (other than in cases of fraudulent misrepresentation or breach of warranty) that party must be materially influenced by the misrepresentation. This means that the misrepresentation must be such that it would affect the judgement of a reasonable person in deciding whether to enter into the contract and on what terms; or the misrepresentation must be such that it would induce the representee to enter into the contract without making inquiries that he would otherwise make.

This requirement of materiality does not have to be shown in cases of fraud or where the contract warrants the truth of the pre-contractual statement.

The Court of Appeal has characterised "material" as meaning relevant to the decision of the representee to enter into the contract (Morris v Jones [2002] EWCA Civ 1790).

Other cases have said that the misrepresentation must be shown to have played a "real and substantial" part in inducing the representee to enter into the contract. It does not have to have been the sole inducement, or to have played a decisive part, but it is not sufficient for the representee to show merely that he was supported or encouraged in reaching his decision by the representation. Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642 established that the misrepresentation must have been an "effective cause" of the representee entering into the contract, and that this requires establishing that the representee would not have entered into the contract but for the misrepresentation. This is referred to as the "but for" test in causation. This was the test used in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm).

In cases of fraudulent misrepresentation, the presumption of inducement may be rebutted if the representor can show, on a balance of probabilities that in fact the misrepresentations were not material in the sense that they did not play a real and substantial part in the representee's decision to enter into the contract (Barton v County Nat West Ltd [1999] Lloyds Rep. Banking 408, Dadourian Group International Inc and others v Simms and others [2009] EWCA Civ 169 and Edwards v Ashik [2014] EWHC 2454 (Ch)).