2. Negligent misrepresentation

The terms "negligent misrepresentation" and "negligent misstatement" are often confused. Generally, an action for any form of "misrepresentation" is between contracting parties, whereas an action for "negligent misstatement" may be invoked whether or not a contractual relationship exists.

Unlike negligent misstatement (where the action is brought at common law in tort), an action for negligent misrepresentation is based on the Misrepresentation Act 1967 (section 2(1)). A concurrent duty may be owed in contract and in tort and therefore a contracting party may bring an action for negligent misstatement in the law of tort instead of an action for misrepresentation under the Misrepresentation Act 1967 (Henderson v Merrett Syndicates Limited [1995] 2 AC 145).

A negligent misrepresentation under the Misrepresentation Act 1967 occurs where a statement is made by one contracting party to another carelessly or without reasonable grounds for believing its truth. The test is an objective one. There is no requirement to establish fraud. Once the representee proves that the statement was in fact false, it is for the maker of the statement to establish that it reasonably believed in the truth of the statement (that is, the representation). The burden of proof is therefore reversed. In Springwell Navigation Corp v JPMorgan Chase Bank (formerly Chase Manhattan Bank) and others [2010] EWCA Civ 1221 the claimant investment company alleged that an employee of the defendant bank had misrepresented the risks relating to certain investments. It, therefore, claimed that the defendant was liable for negligent misrepresentation under the Misrepresentation Act 1967. The Court of Appeal held that the alleged misrepresentation had not been made as the employee was merely giving his opinion on the qualities of the investment rather than stating any fact. In this case, it was clear that the Court of Appeal was influenced in its decision by the fact that the claimant was a sophisticated investor.

The Misrepresentation Act 1967 created a right to damages where a person has entered into a contract as a result of a misrepresentation made by another party and suffers loss as a result, in circumstances where that person (the representee) would have been entitled to recovery if the misrepresentation had been fraudulent, unless the representor can prove that it had reasonable grounds to believe, and did believe, up to the time the contract was made that the representation was true (section 2(1)). This burden of proof may be difficult for the representor to discharge.

An action for negligent misrepresentation may be more favourable for the claimant than an action for negligent misstatement as he need only show that he entered into a contract with the representor after the misrepresentation had been made and he need not establish a special relationship giving rise to a duty of care (which is necessary in a negligent misstatement claim).

Note that section 2(1) of the Misrepresentation Act 1967 does not apply where the representor is not the other party to the contract or his agent. If A makes a misrepresentation to B which induces B to enter into a contract with C, B cannot bring an action for negligent misrepresentation under the Act. His remedy against A is an action for fraud (if he can prove fraud) or an action for breach of a collateral contract or warranty or, if the appropriate circumstances exist, an action for negligent misstatement. However, see the decision in Taberna Europe CDO II Plc v Selskabet AF1.September 2008 In Bankruptcy [2015] EWHC 871 (Comm), where Eder J held that a party that had purchased the representor's subordinated loan notes in the secondary market, therefore from a third party and not the representor, could claim directly against the representor under section 2(1) of the Misrepresentation Act 1967. Such action was held to be possible, even though the reliance loss suffered by the representee was claimed under its contract with the third party, the price had been paid to the third party and the representor was not a party to such contract. However, the facts of the case were quite unusual as the contract between the representee and the third party, also, on the facts, brought the representee and the representor into a contractual relationship and this meant that section 2(1) applied.

In some circumstances, in actions for negligent misstatement, a defendant may be held liable to parties who enter into a contract even though they are not the same as those to whom the representation was made. For example, the Supreme Court has held that if D makes a negligent statement to A and A in turn sets up a company, C, which enters the relevant contract with D, D may be liable to C for loss resulting from the negligent statement. This is because by continuing to make the statement to A (who is the agent of C once it is created), D is implicitly asserting to C the accuracy of the statement. In other words, if once C appears on the scene, D does not withdraw the statement made to A, D will be taken to have assumed responsibility to C for the accuracy of the continuing statement.