Intention to induce

It is common practice to plead that the defendant made the representation with the intention of inducing the claimant to enter into a contract or with the intention that the claimant should rely on it, and that that was the result. Some argue that this is only essential where deceit is alleged. However, it is good practice to state it in every case and is particularly important when intention is, or could be, a live issue, for example, where it is said that the representation was not addressed to the claimant, or to a class of persons of whom the claimant was one, or that it was not intended to be acted on for the purposes of the transaction into which the claimant entered.

In Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm), it was accepted that the requirement of inducement (as discussed in Nautamix and Banque Keyser) was less easy to apply in respect of implied (rather than express) statements because the representor may not, at the time, appreciate what a court later holds to be the implications of the statement. However, if the representor intended what he said to be relied on by the representee in deciding whether to contract, the court must regard the representor as having intended that the representee should rely on the objective meaning of the statement (paragraph 222).

B. Types of misrepresentation

There are three types of misrepresentation:

1. Fraudulent misrepresentation

An action for fraudulent misrepresentation is founded in the tort of deceit. It occurs where a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth (Derry v Peek (1889) App Case 337). In Eco 3 Capital Ltd and others v Ludsin Overseas Ltd [2013] EWCA Civ 413, the Court of Appeal confirmed that the tort of deceit contains four ingredients:

• The defendant makes a false representation to the claimant.

• The defendant knows that the representation is false, alternatively, he is reckless as to whether it is true or false.

• The defendant intends that the claimant should act in reliance on it.

• The claimant does act in reliance on the representation and, in consequence, suffers loss.

An intention to deceive is, therefore, not a separate or free standing element of the tort of deceit, but merely another way of describing the mental element of the tort. There is no fraud if the representor honestly believes his statement to be true. Mere negligence in making a false statement does not amount to fraud. The claimant must prove absence of honest belief to succeed in an action for fraudulent misrepresentation. It is enough to show that the representor suspected that his statement might be inaccurate, or that he neglected to make enquiries, without proving that he actually knew that it was false.

It is not necessary to establish any dishonest motive.

If the statement is ambiguous, the representee must first prove that he understood the statement in a false sense. If the representor intended the statement to have that effect, then he will be guilty of fraud.

Note that sellers of residential property should take great care to avoid making fraudulent misrepresentations on the Seller's Property Information Form (SPIF). A successful claim for fraudulent misrepresentation arose where the sellers had fraudulently indicated on the SPIF that there were no neighbour disputes, and had stated orally that "the neighbours were good and friendly", when in fact this was not the case. The claimants relied on these representations and would not have bought the property if they had known the true position. The simplicity of the questions on the SPIF and the obviousness of the disputes with neighbours led the court to conclude that the answers to the questions were not given merely recklessly or carelessly. The sellers were held liable in damages for fraudulent misrepresentation (McMeekin and another v Long and another [2003] 29 EG 120).

In Renault UK Ltd v Fleetpro Technical Services Ltd and another [2007] EWHC 2541 (QB), the claimant alleged fraudulent misrepresentation/deceit by the defendants in that they had sold cars at a discount to parties outside an affinity scheme, having represented that they would only sell the cars to members of the scheme. The judge found that from a certain point in time the claimant's agents had knowledge of the deceit or "turned a blind eye" to it, but he held that such knowledge could not be attributed to the claimant. This was notwithstanding the fact that the claimant had at no stage pleaded that its agent had been deceiving it. On this basis, defendants alleging knowledge of agents in fraudulent misrepresentation cases need to consider additional claims against such agents for a contribution or indemnity from the outset, regardless of the pleading of a claimant. The case also clarifies that it is possible, in principle, to find a person liable in deceit if the fraudulent misrepresentation was made to a machine rather than to a human being.

In BSkyB Ltd and another v HP Enterprise Services UK Limited (formerly Electronic Data Systems Ltd) and another [2010] EWHC 86 (TCC), 26 January 2010, the High Court found that the IT supplier EDS (now part of Hewlett-Packard) made fraudulent misrepresentations about its ability to deliver a project within the stipulated timescale when it pitched for a £48 million contract to build, design and implement a customer relationship management system for BSkyB. BSkyB's success in establishing even one of the five alleged fraudulent misrepresentations was sufficiently unusual that it may encourage customers to allege deceit and/or fraud against service providers. Service providers of all kinds may therefore need to work harder when tendering for contracts in order to ensure they can justify and provide supporting evidence for sales claims. This may mean that large tendering exercises become slower, or that suppliers raise their prices to reflect an increased perception of risk.

Lord Tenterden's Act defence

In relation to allegations of oral fraudulent misrepresentations, there may be a defence under section 6 of the Statute of Frauds (Amendment) Act 1828 (Lord Tenterden's Act). That section provides as follows:

 " No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade, or dealings of any other person to the intent or purpose that such other person may obtain credit, money, or goods upon, unless such representation or assurance be made in writing, signed by the Party to be charged therewith."

However, following the decision of the Court of Appeal in Roder UK Ltd v West and another [2011] EWCA Civ 1126, considered in Legal update, Clarification of Statute of Frauds (Court of Appeal), the section is to be read as saying "to the intent or purpose that such other person may obtain money or goods upon credit".

In order to rely on section 6, the representor must be making the representation with the intention or for the purpose that such other person may obtain money or goods upon credit. In Roder, the Court of Appeal held that the directors of a company, who had made untrue oral misrepresentations to the claimant, could not rely on section 6 because the representation had not been made with the intent or for the purpose that the company obtain credit. The intent had been to prevent the claimant from repossessing its goods or suing the directors for outstanding sums. The directors were, therefore, liable for the tort of deceit.

The mischief which that section was designed to address was that, at the time the Act was passed, potential claimants were seeking to bring actions for misrepresentation against defendants who had made casual statements about other people's financial standing or probity in conversation or otherwise orally. This purpose of the section was explained by Gurney B in his judgment in Lyde v Barnard (1836) 1 M & W 101 at 103.

Although over a hundred years old, Lord Tenterden's Act remains the law and should be applied, albeit in a modern context. Contex v Wiseman [2007] EWCA Civ 1201 demonstrates that the purpose and limits of the section should be clearly understood. As Waller LJ explained at paragraph 16 of his judgment, the section is concerned with proving by evidence the existence of a representation and not with excusing fraudulent behaviour.

In Lindsay v O'Loughnane [2010] EWHC 529 (QB), 95 Flaux J said that in a modern context, the section will clearly be satisfied if the representation is contained in an email, provided that the email includes a written indication of who is sending the email.

Directors

Where a director has made a fraudulent misrepresentation intending another person to rely upon it, and that other person does so, the director will be personally liable. A director in such a case is liable, not because he was a director, but because he committed the fraud (Standard Chartered Bank v Pakistan National Shipping Corp [2002] UKHL 43).

Statements as to the future

In Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, Browne-Wilkinson VC stated: "A representation as to future conduct has no effect unless it constitutes a contract." However, the courts have recognised that a statement as to the future may involve an implied representation as to the present (most commonly, as to the representor's belief in the truth of his prediction). Furthermore, where a statement is true when it is made but ceases to be true to the knowledge of the representor before the contract is entered into, a failure to inform the representee of the change in circumstances will, subject to certain exceptions, amount to a representation (With v O'Flanagan [1936] Ch 575). For example, in Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15, it was held that a pop group had made an implied misrepresentation when they continued with arrangements to publicise the defendant's products when they knew that one member of the group was intending to leave the group shortly, which would prevent the contract being carried out and the defendant deriving any benefit from the arrangement.

In FoodCo UK LLP and others v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), the High Court dismissed a claim by the tenants of a motorway services facility for damages for fraudulent misrepresentation. The claimants alleged that they were induced to enter into their respective leases by various fraudulent misrepresentations made by the defendant relating to the features of the planned development. The judge concluded that the defendant had an honest belief in the predictions it had made and that, therefore, none of the key representations were false when made. He further held that a duty to correct would only arise if the defendant knew that previous representations it had made had become false, or did not care whether previous representations had become false. On the facts, no such duty arose. Lewison J gave the following guidance about statements as to the future:

• In most cases, a prediction about the future (particularly in the context of contractual negotiations) would be understood as implicitly representing that the maker of the prediction had an honest belief in it. If the maker of the prediction does not have an honest belief in the prediction at the time he makes it, he will have made a false representation of fact. In other cases, further implications may be appropriate. It may be that the representation would necessarily be understood as meaning that the prediction is based on reasonable grounds; or that the maker of the prediction has the present intention to do what he can do to make it come true. In a case of fraudulent misrepresentation, however, it is necessary to go further:

"It is not enough that objectively viewed, a prediction would be understood by the representee as implicitly representing that the maker of the prediction had reasonable grounds for making the prediction. It is also necessary to show that the representor understood that representation in that sense."

• Lewison J did not accept that the Court of Appeal decision in the Spice Girls judgment provided authority for the proposition that a person who makes a statement about the future necessarily implies that he does not know of "any matter" which "might" falsify the statement. The correct approach, as held by the Court of Appeal in Jaffray v Society of Lloyds [2002] EWCA Civ 1101 is:

"In each case it is necessary to ask the question ... what would the reasonable person in the position of the representee understand by the words used in the document. In our opinion there is no rule of law that any particular statement carries with it any particular implication. All depends upon the particular statement in its particular context."

• Similarly, the decision in Fitzroy Robinson Ltd v Mentmore Towers Ltd [2009] EWHC 1552 (TCC) did not lay down any general principle of law that a person making a statement about the future was implicitly representing that the representor knew of no fact that would falsify the prediction.

• There is no duty to keep a counterparty constantly updated, and even less so any duty to keep him informed about the ins and outs of negotiations with third parties:

"The duty is to communicate a change of circumstances which the representor knows has falsified a previous representation where the falsity exists at the date when the contract is concluded. What matters is the state of affairs at the date when the contract is concluded."

Changing from innocent to fraudulent misrepresentation during trial

Note that where a claim is pleaded as innocent misrepresentation but during trial, allegations of fraudulent misrepresentation are made, this may be allowed to stand if the court takes the view that the defendant has had an opportunity to address the allegations (Sabine v Ferrari [2010] EWHC 389 (QB)).

Fraud Act 2006

Note that the Fraud Act 2006 created a new general criminal offence of fraud which can be committed in three ways: by false representation, by failing to disclose information, and by abuse of position. It also creates some other new offences, including the offence of obtaining services dishonestly and the offence of fraudulent trading by non-corporate traders.