Understanding Misrepresentation and Warranty in Contract Law

Q1. Misrepresentation

For a claim of misrepresentation to succeed, the claimant must prove that there was a false statement of fact, which must have induced the claimant to enter into a contract. Thus, not every false statement incurs liability or cause loss or damage. For proving misrepresentation, there must be a statement made to the claimant by the defendant or on behalf of the defendant. Such statement does not need to be through words, written or oral, The point is that a falsehood is communicated. Thus, in Walters v Morgan (1861), it was held that an interpretation of the defendant’s action, hearing or reading of his words, a nod or a wink, a shake of head or a smile can be sufficient to prove inducement of the claimant to enter into a contract.

Misrepresentation can be fraudulent where, as was ruled by Lord Herschell in Derry v Peek (1889), a false statement is made by the defendant without even believing it to be true or recklessly without having any concern as to whether the statement is true or false. Consideration is given to the state of mind or failure to exercise duty of care while making the statement. In case of a doubt over the meaning of the statement, the objective test, as was applied in Smit v Chadwick (1884), is applied to determine whether or not the words or conducts have induced the claimant to believe the statement made and it was reasonable for him to believe the statements from the words or conduct. Inducement entitles the claimant to rescind the contract (Museprime Properties v Adhill Properties (1990)). In case of alleged implied representation, the test, as was applied in I.F.E Fund S.A v Goldman Sachs International (2006), is whether or not a reasonable person would have inferred.

Misrepresentation can be negligently made where the false statement was made without any reasonable grounds for believing it to be true. The claimant can prove this using common law by establishing a special relationship between the parties, especially in purely commercial relationship where defendant represented as possessing special skill ((Democratic Nat'l Comm. v McCord (1976)) or knowledge and represented a false statement knowing that the claimant will rely on the representation (Driscoll v Standard Hardware,Inc. (2010)). There will be no reliance if the claimant does not rely on the misrepresentation, but on self-judgment or investigations (Pearson v Dublin Corp (1907)). The claimant can also prove using Section 2(1) of the Misrepresentation Act 1967 by proving that the false statement induced the claimant to enter into a contract. This does not need to establish a duty of care.

For proving misrepresentation successfully, the claimant must understand the elements properly. The false statement of fact can be a statement of opinion, as to the future, of law, or by silence. Not every false statement of opinion is a misrepresentation of fact. Some statements or expression of opinion can be mere puffs. The claimant must prove that the defendant was in a position to know the true facts and that he could not reasonably have held such a opinion as a result. Hence, the defendant’s opinion will be treated as a statement of fact. If the statement is about something that has an inherent lack of certainty that attracts many different views, then the statement will be treated as an opinion (Irish National Insurance Co. Ltd. V Oman Insurance Co. Ltd (1983)). For proving a false statement as misrepresentation, the claimant must establish that the statement by the defendant about an activity that he will do in the future is incorporated into a contract. The defendant will be liable if he knows that he will not be delivering the promise he made because of which the claimant was induced into entering the contract, then the defendant will be liable (BSkyB v EDS (2010)). If the defendant makes a statement as to the law, it cannot be actionable representation as all statements with regard to law are opinions. The underlying principle is to determine whether or not the statement, under the circumstances it was made and the position of the parties, was one that the claimant was entitled to have taken in seriously and rely on it without having to make any self-inquiries.

A claimant can claim successfully in case the defendant was silent as to a fact. Silence cannot be misrepresentation and a person is not bound to disclose every information. The defendant will, however, be liable in case he does not tell the whole truth and misleadingly tell only part of the truth. Such half-truth carries an implication of a further statement of fact that is false (Thomas Witter Ltd v TBP Industries Ltd (1996). The defendant will also be liable if he does not disclose information about to a change of circumstances that have made the true statement he made has become false by the time he acted upon it (With v O’Flanagan (1936)). In regard to special relationship, such as contracts of insurance and family settlements the claimant must prove that the contract was based on utmost good faith where the defendant has a duty to disclose all material facts, as an example Section 19 of The Marine Insurance Act 1961, as the defendant is in a position to know the truth.

Q2. Warranty

a) Legal basis for claim for compensation

Goods are of satisfactory quality if they meet the standard a reasonable person would consider satisfactory, consideration being given to a description of the goods, price and other relevant factors. (Section 9(2) of the Consumer Rights Act 2015). The quality of goods should include their state and condition including its fitness for all the purposes for which they are usually supplied; freedom from minor defects, safety and durability (Section 9(3)). Satisfactory quality does not cover situation that is specifically drawn to the consumer's attention before entering the contract (Section 9(4)(a)). Goods are reasonably fit for that purpose if before the contract the consumer makes trader know about any particular purpose for which the goods are purchased (Section 10(1) and (3)).

In this case, Nicky told Dan that her studio requires (and also emphasised on this) all the machines to be reliability as they will be in constant daily use. Nick made Dan knew about the particular purpose for buying the machines. Her condition was focussed on the state and condition of the machines, which will serve her studio’s purposes. In this case, during the following 3 months after purchase, all four machines broke down on 12 occasion. After four months of purchase, one of the machines broke down again. This indicates that the machines were not of satisfactory quality as they did not serve the purposes for which they are usually supplied, and they were with minor defects. Further, the number of 12 occasions the machine broke down does not meet the criteria of being safety and durable. Hence, the machines are not of satisfactory quality. However, in regard to ex-demonstration machine, Dan specifically made Nicky know, before the contract, that the ex-demonstration model was 9 months old. Nicky knew before buying that this machine is a model that cannot be put to daily used and cannot expect reliability out of it. As a result, the determination of satisfactory quality will not be applicable to the ex-demonstration model.

Nicky must note that if the goods are not of satisfactory quality, a consumer has the short-term right to reject, including the right to refund (Section 19(3)). However, the right to reject can only be exercised within 30 days from the day the customer has the ownership, the goods have been delivered, and in case installation is required, the installation has been complete. In this case, Nicky cannot exercise this right to reject and refund as it have been more than 30 days since the machines were delivered. The only option left for Nicky is to claim compensation. As a consumer, Nicky can claim damages as in this case she does not have any entitlement to receive a refund or instead of a refund (Section 20(19)).

The breaking down of the machines is a serious material breach of the contract. Nicky, as a consumer, is entitled to claim damages. Such damages are for loss of ordinary business

naturally arising from the breach of the contract, which in this case is the loss of client by Nicky and her studio amounting to £3000. In addition, Nicky can also claim damages in the form of costs incurred to purchase the machine as the goods were not of satisfactory quality considering the condition and the price paid by Nicky and the several defects associated with the goods (Lamarra v Capital Bank Plc & Anor (2006)) Nicky should be restored, as far as is possible, to the position she would have been in had the breach never occurred.

(b) To what extent, if at all, would the clause inserted by Sports Machines allow them to escape liability?

Sellers cannot exclude of limit certain liabilities arising from a defective product (The Consumer Rights Act 2015, S31). Such exclusion term cannot be binding on the consumer if it exclude or limits their liabilities in relation to goods that are not of satisfactory quality; or that do not fit the particular purpose (Section 32(1)(a) – (b)). It means that such term will not be binding on the consumer if the term excludes or restricts a right or remedy in respect of a liability related to satisfactory quality of goods or fit for particular purpose or if the term makes the consumer’s right or remedy subject to disadvantage as a result of pursuing his right or remedy (Section 32(2)(a) – (c)). Thus, any exclusion terms will not be reasonable if a warranty term excludes the implied warranty of satisfactory quality; not reasonable to exclude or limit remedy to replacement or cost of purchase; or excludes consequential loss. A seller cannot escape liability if there is a specific warranty that his products do not contain any defects. They cannot escape liability arising in contract when they themselves breach the contract (The Unfair Contract Terms Act 1977, S3).

In this case, the liability of Sports Machines, as per the warranty clause, is restricted to only free parts and labour warranty and that too within 3 months. This amounts to exclusion of liabilities from defective products, which in this case, are the machines that are not of satisfactory quality and fit for particular purposes. The clause term, ‘’other conditions or warranties, express or implied, are hereby excluded’ has entirely excluded Nicky’s rights or remedy for the broken machines and cannot be binding on Nicky and her studio. Further, Sports Machines, in its warranty clause, does not even warranty that the machines do not have defects. By excluding to warrant this term, it has attempted to unreasonably escape its liability. The warranty clause is limited in nature as it limits Nicky’s right to enforce implied term of satisfactory quality of goods in the form of replacement or cost of purchase. It also limits her right when the language used does not even provide for consequential loss, which is this case is loss of business by the studio when it refund to clients fees paid for their classes. The general wide exclusion of liabilities limiting the rights of Nicky as a consumer subject her and her studio to great disadvantage in regard to their right to seek remedy or enforce their rights.

Looking for further insights on Understanding Exemption Clauses in Contracts? Click here.