Introduction
The law of misrepresentation governs pre-contractual statements that induce a party to enter into a contract. Prior to 1967, the common law offered a fragmented and often inadequate set of remedies for a person who had been misled. The remedies available depended heavily on being able to prove the state of mind of the representor, with the law only providing a remedy in damages for fraudulent misrepresentation, while innocent misrepresentation offered only the fragile remedy of rescission. The Misrepresentation Act 1967 was a landmark piece of legislation, introduced to remedy the defects in the common law. This essay will critically evaluate the changes introduced by the Act. It will argue that while the 1967 Act significantly improved the position of the representee by creating a new statutory remedy and strengthening the right to rescission, its drafting has created considerable complexity and a controversial measure of damages, particularly through the interpretation of section 2(1).
The Law Before the 1967 Act: A Defective Framework
Before the Misrepresentation Act 1967, the law distinguished between fraudulent and innocent misrepresentation. A claimant seeking damages had to bring an action in the tort of deceit, which required proving fraud. The test for fraud, established in Derry v Peek (1889), set a very high bar, requiring the claimant to show that the false representation was made knowingly, without belief in its truth, or recklessly, careless whether it be true or false. This was difficult to prove, leaving many victims of serious, albeit non-fraudulent, misstatements without a remedy in damages.
For misrepresentations made without fraud (innocently), the only remedy was rescission, an equitable remedy that sought to return the parties to their pre-contractual position. However, the right to rescind was easily lost through a number of 'bars', such as affirmation of the contract, lapse of time, or where an innocent third party had acquired rights. Crucially, a significant bar was the rule in Wilde v Gibson (1848), later affirmed in Angel v Jay [1911], which held that rescission was not available for non-fraudulent misrepresentation once a contract had been executed or performed. This meant, for example, that once a lease was granted or a sale of goods completed, the innocent party lost their only remedy. The law was therefore unsatisfactory; it either demanded a difficult proof of fraud for damages or offered a weak remedy of rescission that was easily lost. The development of a remedy for negligent misstatement in the tort of negligence in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] slightly improved the position, but this depended on proving a ‘special relationship’ of proximity between the parties, which was not always present in arm’s-length pre-contractual negotiations.
The Statutory Revolution: Key Changes of the 1967 Act
The 1967 Act, which was based on the recommendations of the Law Reform Committee, introduced three fundamental changes to address the weaknesses of the common law.
Section 2(1): The New Statutory Remedy
The most significant change was the creation of a new cause of action for misrepresentation under section 2(1). This section provides that where a person has entered a contract after a misrepresentation has been made to them by another party to the contract, and they have suffered loss as a result, the representor is liable for damages. The liability is assessed as if the misrepresentation had been made fraudulently, unless the representor can prove that they had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.
This provision had two revolutionary effects. Firstly, it created a remedy in damages for negligent misrepresentation without the need to prove a 'special relationship' under the Hedley Byrne principle. Secondly, it reversed the burden of proof. Unlike in the tort of deceit, the claimant merely has to prove that a misrepresentation was made and that it caused them loss. The burden then shifts to the defendant representor to prove their honesty and the reasonableness of their belief. This is a heavy burden, as shown in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978], where the defendant could not prove they had reasonable grounds for stating an incorrect shipping capacity, despite relying on the official Lloyd's Register. This reversal of the burden of proof makes a claim under section 2(1) far more attractive to a claimant than an action in the tort of deceit or negligence.
However, the drafting of section 2(1), particularly the "so liable… as if the misrepresentation had been made fraudulently" wording (the 'fiction of fraud'), has been a source of significant debate and criticism. In Royscot Trust Ltd v Rogerson [1991], the Court of Appeal interpreted this phrase to mean that the measure of damages under section 2(1) should be the same as for the tort of deceit. This means that the claimant can recover for all direct losses flowing from the misrepresentation, regardless of whether those losses were foreseeable. This is a more generous measure of damages than that available for breach of contract or common law negligence, where liability is limited to foreseeable losses. The decision in Royscot has been criticised by academics (McKendrick, 2020) for creating an anomaly: it punishes a person who was merely negligent as if they were fraudulent. While advantageous for claimants, it can be seen as disproportionately harsh on defendants who were careless but honest. This interpretation, although controversial, remains the binding authority, showing how the Act has created new complexities while solving old problems.
Section 2(2): Damages in Lieu of Rescission
The Act also introduced a new judicial discretion in section 2(2). This allows a court to declare the contract subsisting and award damages in lieu of rescission for a non-fraudulent misrepresentation. This power can be exercised if the court considers it "equitable to do so", having regard to the nature of the misrepresentation, the loss that would be caused by it if the contract were upheld, and the loss that rescission would cause to the other party.
This provision adds a layer of flexibility, addressing situations where rescission might be too drastic a remedy. For example, where the misrepresentation is minor but the consequences of rescinding the entire contract would be severe for the representor, a court can award damages to compensate the representee instead. The case of William Sindall plc v Cambridgeshire County Council [1994] provides a useful illustration, where the court indicated (obiter) that had there been a misrepresentation, it would have awarded damages under section 2(2) rather than allowing rescission of a £5 million land sale contract for a problem that would cost only around £18,000 to fix. This section therefore provides a valuable tool for achieving a just outcome. However, it also introduces a degree of uncertainty, as the remedy is discretionary. A representee cannot be certain whether they will be granted rescission or simply awarded damages, the measure of which is also thought to be less generous than under section 2(1).
Sections 1 and 3: Strengthening the Representee's Position
Finally, the Act made two other important changes. Section 1 abolished the rule in Angel v Jay, meaning that rescission is no longer barred simply because a contract has been executed. This was a straightforward and vital reform which made the remedy of rescission much more robust and effective.
Furthermore, section 3 of the Act addresses attempts to exclude or limit liability for misrepresentation. It states that any such term in a contract will be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977. This prevents stronger parties from using standard form contracts to remove any liability for pre-contractual statements, providing important protection for consumers and weaker commercial parties.
Conclusion
In conclusion, the Misrepresentation Act 1967 was a transformative piece of legislation that fundamentally improved the law. It successfully addressed the major pre-existing defects by abolishing the arbitrary bar to rescission for executed contracts, providing a powerful statutory claim for damages that reversed the burden of proof, offering a flexible alternative of damages in lieu of rescission, and controlling the use of exclusion clauses. From the perspective of the party induced into a contract by a misrepresentation, the Act was a clear and significant success.
However, the evaluation cannot be wholly positive. The drafting of the Act, especially section 2(1), has created its own set of problems. The ‘fiction of fraud’ has led to the controversial and arguably punitive measure of damages established in Royscot Trust v Rogerson, which blurs the lines between honesty and dishonesty in a way that Parliament may not have intended. The interplay between damages under section 2(1) and the discretionary award under section 2(2) adds a further layer of complexity to the remedial framework. Therefore, while the 1967 Act was a necessary and largely effective reform, its legacy is a mixed one. It provided much-needed remedies but also created new areas of legal debate and complexity, demonstrating the enduring difficulty of providing a perfectly coherent and fair framework for pre-contractual liability.
References
McKendrick, E. (2020) Contract Law. 14th edn. Palgrave Macmillan.
Cases
Angel v Jay [1911] 1 KB 666
Derry v Peek (1889) 14 App Cas 337
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574
Royscot Trust Ltd v Rogerson [1991] 2 QB 297
Wilde v Gibson (1848) 1 HLC 605
William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016
Legislation
Misrepresentation Act 1967
Unfair Contract Terms Act 1977
