Introduction
The Misrepresentation Act 1967 (MA 1967) was a significant piece of legislation that reformed the common law principles governing misrepresentation in contract law. Before its enactment, the remedies available to a party who had been induced to enter a contract by a non-fraudulent misrepresentation were limited and often considered inadequate. The common law primarily offered the remedy of rescission for innocent misrepresentation, while damages were only available for fraudulent misrepresentation or, following Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, for negligent misstatement where a special relationship existed between the parties. This essay will critically examine the rights of action created by sections 2(1) and 2(2) of the MA 1967. It will argue that while these provisions have substantially improved the position of the misrepresentee, they have also created certain anomalies and areas of debate, particularly concerning the measure of damages under section 2(1) and the scope of the court’s discretion under section 2(2).
The Statutory Action for Damages under Section 2(1)
Section 2(1) of the MA 1967 introduced a statutory right to damages for a party who has entered into a contract after a misrepresentation has been made to them by another party to the contract. This provision applies where a misrepresentation is made which is not fraudulent. The representor will be liable for damages unless they 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.
A key feature of this section is the reversal of the burden of proof. At common law, in a claim for negligent misstatement, the claimant must prove that the defendant owed them a duty of care and breached it. Under section 2(1), once the claimant establishes that a misrepresentation was made and that they suffered loss, the burden shifts to the defendant (the representor) to demonstrate that they had reasonable grounds for their belief in the statement’s truth. This is a difficult burden to discharge, as illustrated in Howard Marine and Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574. In that case, the defendant’s manager honestly misstated the carrying capacity of two barges by relying on an incorrect figure in the Lloyd’s Register, rather than the correct figure in the ships' documents. The Court of Appeal held that the defendant had not discharged the burden of proof, as a reasonable manager would have checked the official documentation. This demonstrates the claimant-friendly nature of the provision.
The most significant and controversial aspect of section 2(1) is the measure of damages. The section states that if a person is liable under this provision, they shall be "so liable to pay damages… as if the representation had been made fraudulently". This is known as the 'fiction of fraud'. The effect of this wording was confirmed in Royscot Trust Ltd v Rogerson [1991] 2 QB 297, where the Court of Appeal held that the correct measure of damages under section 2(1) was the measure applicable to the tort of deceit. This means that the claimant is entitled to recover all direct losses flowing from the misrepresentation, regardless of whether those losses were reasonably foreseeable. This is a more generous measure than the standard contractual measure (expectation loss) or the tortious measure for negligence (foreseeable loss).
The decision in Royscot has been subject to academic criticism (McKendrick, 2021). It creates the anomaly that a person who is merely negligent, and perhaps morally blameless, is liable for the same extent of damages as a person who has been deliberately dishonest. The court in Royscot acknowledged the harshness of this outcome but felt bound by the clear statutory wording. This interpretation gives section 2(1) a powerful punitive element, treating a negligent representor as a fraudster for the purpose of calculating damages. While this provides a very strong remedy for the innocent party, its fairness can be questioned. It arguably goes beyond the original intention of the Law Reform Committee, which recommended the new cause of action (Law Reform Committee, 1962), and creates a significant disjunct between the defendant's level of fault and their level of liability.
The Discretionary Remedy under Section 2(2)
Section 2(2) provides an alternative remedy in cases of non-fraudulent misrepresentation (that is, negligent or wholly innocent). It gives the court a discretion to declare the contract subsisting and award damages in lieu of rescission. This power is available if the court considers it "equitable to do so". In exercising this discretion, the court must have 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 was designed to address the potential injustice of rescission. Rescission is an 'all or nothing' remedy which unwinds the contract entirely. This can sometimes be a blunt instrument, causing disproportionate harm to the representor, especially where the misrepresentation was minor but its discovery allows the representee to escape a bad bargain. Section 2(2) introduces a degree of flexibility, allowing the court to achieve a more just outcome by substituting a monetary award for the unwinding of the contract.
The case of William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016 provides a useful illustration of the court's approach. A developer purchased land from a local council for over £5 million. It was later discovered that an old private sewer ran across the land, a fact the council had not disclosed. The cost to re-route the sewer was approximately £18,000. By this time, the property market had collapsed, and the land's value had dropped significantly. The developer sought to rescind the contract. The court held that even if there had been a misrepresentation, it would have exercised its discretion under section 2(2) to award damages in lieu. Hoffmann LJ noted the massive disparity between the minor nature of the misrepresentation (costing £18,000 to fix) and the substantial loss the council would suffer from rescission (having to return over £5 million for land now worth much less). It would have been inequitable to allow rescission in these circumstances.
A key limitation on the availability of section 2(2) damages is its link to the remedy of rescission. The wording "damages in lieu of rescission" suggests that if the right to rescind has been lost (for example, through affirmation of the contract, lapse of time, or impossibility of restitution), then damages cannot be awarded under this subsection. This interpretation was confirmed by the Court of Appeal in Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745. The court held that damages under section 2(2) are only available as an alternative to rescission, so if rescission is no longer possible, the court has no power to award damages under this provision. This can leave a claimant without a remedy for a wholly innocent misrepresentation if, for example, too much time has passed before the misrepresentation was discovered.
Furthermore, the measure of damages under section 2(2) is different from, and less generous than, that under section 2(1). The damages are intended to compensate the claimant for the loss suffered as a result of the contract being upheld. This is typically assessed by the difference between the value of what the claimant received and the value it would have had if the representation had been true (Poole, 2021). This is a less extensive measure than the 'fiction of fraud' damages available under section 2(1).
Conclusion
The Misrepresentation Act 1967, through sections 2(1) and 2(2), fundamentally altered the landscape of remedies for misrepresentation. Section 2(1) created a powerful statutory cause of action that is highly advantageous to the claimant, primarily due to the reversed burden of proof and the generous measure of damages based on the fiction of fraud. However, the fairness of treating a negligent party as if they were fraudulent remains a point of significant academic debate. Section 2(2) introduced a valuable tool of judicial discretion, allowing courts to avoid the potentially harsh consequences of rescission by awarding damages instead. This provides flexibility and promotes equitable outcomes. However, its utility is limited by the fact that it is only available when the right to rescind still exists. In conclusion, while these provisions have created some of their own complexities and questionable anomalies, they represent a clear and substantial improvement on the restrictive common law position that existed before 1967, providing greater protection and more effective remedies for those induced to enter contracts by false statements.
References
Chen-Wishart, M. (2021) Contract Law. 7th edn. Oxford: Oxford University Press.
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.
Law Reform Committee (1962) Tenth Report (Innocent Misrepresentation), Cmnd 1782.
McKendrick, E. (2021) Contract Law: Text, Cases, and Materials. 10th edn. Oxford: Oxford University Press.
Misrepresentation Act 1967.
Poole, J. (2021) Textbook on Contract Law. 15th edn. Oxford: Oxford University Press.
Royscot Trust Ltd v Rogerson [1991] 2 QB 297.
Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745.
William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016.
