Question: Rebecca owned a film studio. She negotiated with Thomas, who owned a cinema, regarding purchase of the rights to show a film for four weeks at £25,000. Rebecca said that the film was a real bargain and an extraordinary new visual experience, since the film was the only one on the market to use 4D-UHD photography; she also thought that the film could be shown on small screens as well as panoramic ones, although she had never shown it on small screens herself. She pointed to a report on her desk containing the estimated average takings of the film when shown at the Odeon in Leicester Square. Thomas read the report. It stated that, on average, the film had made approximately £75,000 a week. He thought he might send his accountant around to look at the accounts to verify the report, but decided not to. He was impressed with what Rebecca had said and, in any event, he wanted to be the first cinema in his town to show a 4D-UHD film. Thomas purchased the film. It turned out to be a disaster. The photography was ordinary. After the negotiations, but before the sale, three other films were released in London that had 4D-UHD photography, but Rebecca forgot to tell Thomas before Thomas bought the film. The film was not able to be shown on small screens. Thomas made only £7,000 per week over the four-week period. This was not surprising, as the report had been prepared by Rebecca’s trainee accountant Chris, who had got the figures wrong as he was having problems with his new laptop. Had the mistake not been made, the report would have read £7,500 per week. Rebecca had not seen the film nor read the report before directing Thomas’s attention to it. Chris has now left Rebecca’s employment.

This advice will consider whether Thomas has any grounds to take legal action against Rebecca for misrepresentation. For a claim to succeed, Thomas must establish that Rebecca made a false statement of existing fact which induced him to enter into the contract. If this can be shown, we will then consider the type of misrepresentation and the remedies that may be available to Thomas.

Actionable Misrepresentation

An actionable misrepresentation is an untrue statement of fact by one party which has induced the other to enter into the contract (Poole, 2021). We must analyse each of Rebecca’s statements and actions to see if they meet this definition.

Rebecca’s Statements

1. "A real bargain and an extraordinary new visual experience"

Statements that are vague or promotional in nature are often considered to be ‘mere puffs’ and do not give rise to legal liability. In Dimmock v Hallett (1866), describing land as ‘fertile and improvable’ was held to be a mere puff. Rebecca’s statement that the film is a "real bargain" and an "extraordinary new visual experience" is likely to be viewed by a court as sales talk rather than a statement of fact. Thomas, as a cinema owner, would be expected to have some resistance to such promotional language. Therefore, this statement is unlikely to be an actionable misrepresentation.

2. "The only one on the market to use 4D-UHD photography"

This is a specific and verifiable statement of fact. At the time of the initial negotiations, this may have been true. However, the facts state that before the contract was concluded, three other such films were released, making the statement false. When a statement is true when made but becomes false before the contract is finalised, the maker has a duty to correct it. Failure to do so amounts to a misrepresentation, as seen in With v O'Flanagan [1936], where a doctor selling his practice failed to disclose that its value had dropped significantly between the initial statement and the sale. Rebecca forgot to tell Thomas about the other films, but her failure to correct her initial statement means it became a misrepresentation.

Furthermore, the statement contains a core assertion that the film used 4D-UHD photography at all. The facts later reveal the photography was "ordinary". This means the statement was fundamentally untrue from the outset. This is a clear false statement of fact.

3. "Thought that the film could be shown on small screens"

On the face of it, this is a statement of opinion, which is generally not actionable as established in Bisset v Wilkinson [1927]. However, where the person giving the opinion is in a superior position of knowledge, the law may imply that they have reasonable grounds for holding that opinion. In Smith v Land and House Property Corporation (1884), a landlord’s statement that a tenant was ‘most desirable’ was held to be a misrepresentation because he knew the tenant was in arrears with rent, meaning he had no reasonable grounds for his opinion. As the owner of a film studio, Rebecca has special knowledge. By stating she "thought" the film was suitable for small screens, she implies she has a reasonable basis for this view. Since she had never tested it, and it turned out to be false, it is arguable that this is a misrepresentation.

4. The Report on Takings

Rebecca did not verbally state the takings were £75,000 per week, but she pointed to the report containing this figure. A representation can be made by conduct. In Spice Girls Ltd v Aprilia World Service BV [2002], the band taking part in a photoshoot was held to be a representation that they did not know any member intended to leave. By directing Thomas’s attention to the report, Rebecca represented that its contents were accurate. The report was factually incorrect by a factor of ten (£75,000 instead of £7,500). This constitutes a false statement of fact.

Inducement

For a claim to succeed, the false statement must have induced the representee to enter the contract. It does not have to be the sole reason, but it must be a material one (Edgington v Fitzmaurice (1885)). The facts state Thomas was "impressed with what Rebecca had said" and wanted to be the "first cinema in his town to show a 4D-UHD film". This directly links his decision to the statements about the 4D-UHD photography and its exclusivity. The vastly inflated takings in the report would also clearly be a material factor for any businessperson assessing the film's commercial potential.

Thomas’s failure to have his accountant verify the report does not prevent him from claiming he was induced. The case of Redgrave v Hurd (1881) establishes that a claimant is not barred from relief simply because they were given an opportunity to discover the truth but failed to take it. Therefore, the requirement of inducement is satisfied.

Types of Misrepresentation and Remedies

Having established actionable misrepresentations that induced the contract, we must now classify them to determine the available remedies.

Fraudulent Misrepresentation

Fraud is defined in Derry v Peek (1889) as a statement made knowingly, without belief in its truth, or recklessly, careless as to whether it is true or false. This is a high standard to meet as it requires proof of dishonesty. Rebecca had not seen the film or read the report. While this shows carelessness, it may be difficult for Thomas to prove she was dishonest in the sense required for fraud.

Negligent Misrepresentation

A claim for negligent misrepresentation can be brought under common law or statute. At common law, under the principle in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964], a duty of care must exist between the parties. This arises from a "special relationship", which can be found in pre-contractual negotiations. Rebecca, as a business owner providing information, owed Thomas a duty of care. She breached this by not checking the film's specifications or the report's accuracy.

However, a claim under section 2(1) of the Misrepresentation Act 1967 is more advantageous for Thomas. Once Thomas proves there was a misrepresentation that caused him loss, the burden of proof shifts to Rebecca to show she had reasonable grounds to believe, and did believe up to the point of contracting, that her statements were true. Given that she had not seen the film or read the report, she cannot possibly discharge this burden. This "fiction of fraud" makes s.2(1) a powerful tool.

Innocent Misrepresentation

This applies where the maker of the statement can show they had reasonable grounds to believe their statement was true. As Rebecca cannot show this, a finding of innocent misrepresentation is highly unlikely.

Remedies

The primary remedy for Thomas is rescission of the contract. This would involve returning the film rights to Rebecca and Rebecca returning the £25,000 payment to Thomas. This remedy aims to put the parties back in their pre-contractual position. As the film has already been shown, perfect restoration is impossible, but a court could order rescission with a monetary payment to account for the profit Thomas did make.

In addition to, or instead of, rescission, Thomas can claim damages. For negligent misrepresentation under s.2(1) of the Act, damages are calculated on the same basis as for fraudulent misrepresentation (Royscot Trust Ltd v Rogerson [1991]). This allows Thomas to recover all direct losses flowing from the misrepresentation, regardless of foreseeability. This is the most favourable basis for damages and would allow him to claim for the profits he lost as a result of entering into the contract based on the false information. He could claim for the money he spent on the rights (£25,000) and any other wasted expenditure, less the actual revenue he made (£28,000). His net profit was £3,000, but he entered the contract expecting to make significantly more based on the representations. His damages would aim to compensate for the loss of opportunity and put him back into the position he would have been in had the misrepresentation not been made.

Conclusion

Thomas has strong claims against Rebecca for multiple misrepresentations. The statements about the film’s 4D-UHD quality, its exclusivity, its suitability for small screens, and the financial report are all likely to be considered actionable misrepresentations. His strongest cause of action lies in negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967. This is because it reverses the burden of proof, which Rebecca will be unable to satisfy. This would entitle Thomas to rescind the contract and/or claim damages for all his direct losses, which provides the most comprehensive financial recovery.

References

• Poole, J. (2021) Textbook on Contract Law. 15th edn. Oxford University Press.

Cases

• Bisset v Wilkinson [1927] AC 177
• Derry v Peek (1889) 14 App Cas 337
• Dimmock v Hallett (1866) LR 2 Ch App 21
• Edgington v Fitzmaurice (1885) 29 Ch D 459
• Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
• Redgrave v Hurd (1881) 20 Ch D 1
• Royscot Trust Ltd v Rogerson [1991] 2 QB 297
• Smith v Land and House Property Corporation (1884) 28 Ch D 7
• Spice Girls Ltd v Aprilia World Service BV [2002] EWHC 497 (Ch)
• With v O'Flanagan [1936] Ch 575

Legislation

• Misrepresentation Act 1967