3. Innocent misrepresentation

Before the Misrepresentation Act 1967, innocent misrepresentation referred to any misrepresentation that was not fraudulent. Now, innocent misrepresentation is only used to describe a misrepresentation made entirely without fault, that is, where the maker can show that it had reasonable grounds to believe its statement was true. If this cannot be shown, the misrepresentation may be fraudulent or negligent.

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 (see Sabine v Ferrari [2010] EWCA Civ 1570).

C. Remedies for misrepresentation

The remedies for misrepresentation are rescission of the contract and/or damages. However, it is necessary to determine whether the misrepresentation was fraudulent, negligent, or innocent in order to ascertain the remedies available.

For fraudulent and negligent misrepresentation, the claimant may claim rescission and damages. For innocent misrepresentation, the court has a discretion to award damages in lieu of rescission or recission; the court cannot award both damages and recission. And this is only if the right to rescind exists. If that is lost damages under section 2(2) Misrepresentation Act 1967 are unavailable.

A misrepresentation makes a contract voidable by the claimant. As the equitable remedy of rescission is available for all types of misrepresentation, the claimant has a choice to rescind the contract or to affirm it.

1. Rescission

Rescission means that the contract is set aside and the parties are put back into the position in which they were before the contract was made. For example, Predator plc purchases the entire share capital of Target Ltd from Vendor plc. Predator plc will have made extensive enquiries, and Vendor plc will have made many statements of fact in replying to the enquiries. If any of these representations are incorrect, Predator plc may claim that it was induced to enter into the contract by the misrepresentation and may want the option to hand back the shares to Vendor plc. Rescission however may be barred due to one of the equitable bars (see below). Vendor plc may also have excluded the right of Predator plc to claim rescission by an express term in the sale agreement.

Rescission may be contrasted with termination of a contract for breach of a condition (a vital term going to the root of the contract). Where the defendant breaches a condition, the claimant may elect to terminate the contract; such an election would mean that the future obligations of both parties under the contract are terminated but they are not released from obligations already accrued at the time of termination (that is, the contract is not treated as if it had never existed and existing obligations remain). Where a contract is rescinded for misrepresentation, the contract is set aside and treated as if it had never existed.

When the right to rescind can be lost

The right to rescind may be lost as a result of one of the following equitable bars:

• Affirmation. As soon as the misrepresentation is discovered, the party to whom it is made can elect either to rescind or affirm the contract. Once affirmed, the right to rescind is lost. The representee is bound by his affirmation. Affirmation may be implied by an act inconsistent with the decision to rescind. For example, with a share purchase, an attempt by the buyer to sell the shares is an act inconsistent with an election to rescind. With a contract to purchase machinery, continued use of machinery would also be inconsistent with rescission of a contract, which would involve handing back the machinery. However, affirmation does require knowledge. Acts done in ignorance of the true facts will not amount to affirmation and will not bar the right to rescind. Affirmation can however be implied if the innocent party knows of the breach and of his right to choose and acts in a manner consistent with treating the contract as continuing. Although the innocent party does have time to elect whether to affirm or terminate, doing nothing for too long may be seen as an affirmation. Once an innocent party has affirmed a contract, the affirmation is irrevocable.

• Lapse of time. The doctrine of laches will prevent a claimant from obtaining the equitable remedy of rescission where there has been undue delay in bringing the claim. With fraudulent misrepresentation, delay will not of itself bar rescission provided that the claimant, without any fault of his own, remains in ignorance of the fraud. However, once the claimant discovers the fraud, time begins to run from the discovery of the truth. Where the misrepresentation is innocent or negligent, time beings to run from conclusion of the contract and not from the date of discovery of the misrepresentation. In one case, the buyer of a picture which was innocently said to be "by J. Constable" sought to rescind for misrepresentation five years after the purchase. The claim was barred for lapse of time despite the buyer acting promptly after discovering the truth (Leaf v International Galleries [1950] 2 KB 86). In contracts for the sale of shares even a few weeks of delay after the discovery of the misrepresentation may be fatal to rescission (First National Reinsurance Co. Ltd v Greenfield [1921] 2 KB 260).

• Where it is no longer possible for the parties to be restored to their pre-contractual position.No precise rule has been formulated for the point at which equity will regard restoration as no longer possible. The degree of change in the property will be relevant, as will the fault of the parties. Rescission is possible on the basis of substantial restoration. Consider, by way of example, the sale of a business; after the sale, new contracts may have been entered into and novation agreements signed. In such a case it may not be possible to restore the seller to the pre-contract position by returning the business to it. However, this is not always the case.

• Where a bona fide third party has acquired rights under the contract. Rescission will usually be barred if the rights of a third party would be prejudiced.

Other points regarding rescission

Section 1(a) of the Misrepresentation Act 1967 provides that a person is not to be deprived of the right to rescind for misrepresentation merely because the representation has become a term of the contract.

Partial rescission is not allowed. The misrepresentee may only rescind the whole contract and not part of it.

Rescission may be effected by legal proceedings or by the claimant giving notice to the other party before any bar to rescission arises. A court order is not essential. If one is sought, rescission is at the discretion of the court and will not necessarily be allowed merely because none of the bars to rescission has arisen.

Recission is only a remedy against the other contracting party.

Where the claimant seeks rescission for fraudulent misrepresentation, the court will dispense with certain usual requirements. For example, there is no requirement that the fraudulent misrepresentation is material (that is, one on which a reasonable person in the claimant's position would have relied) (Rafsanjan Pistachio Producers Cooperative v Bank Leumi (UK) plc [1992] 1 Lloyd's Rep 513).

Where a misrepresentation induces a settlement of litigation and the proceedings are compromised by consent order, the court may set aside the consent order if it is shown to have been based on the agreement induced by misrepresentation (Dietz v Lennig Chemicals Limited [1969] 1 AC 170). The rationale is that, except in matrimonial cases, a consent order derives its force and effect from the contract underlying it, and if the contract can be set aside, so can the order. Whether or not the original proceedings can be resurrected after setting aside of the consent order is a difficult question which will depend on the facts of the particular case.

Where the effect of rescission (for fraudulent misrepresentation inducing a compromise agreement) would put the parties back into a contractual relationship which they had previously agreed to terminate, the High Court has held that it is inappropriate to order rescission, and practical justice would be served by making orders for damages or other financial relief (Crystal Palace FC (2000) Limited v Dowie [2007] EWHC 1392 (QB), 14 June 2007).

In rare situations, rather than awarding damages for misrepresentation, equity may order the representor to pay a sum of money to the claimant as part of the process of rescission, in order that the claimant is restored as far as possible to the position it was in before contract (for example, on rescission, a financial indemnity may be awarded in respect of obligations created by a contract, such as purchase costs (Hart v Swaine (1877) 7 Ch 42; Whittington v Seale-Hayne (1900) 82 LT 49)).

Authority seems to support the view that if the right to rescind has been lost (by affirmation, lapse of time, restitution impossible, third party rights) then damages under section 2(2) of the Misrepresentation Act 1967 (damages for innocent misrepresentation) will not be available either (Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 WLR 2333). However, the right to damages under section 2(1) of the Misrepresentation Act is independent of rescission. If the right to rescind has been lost, this will not affect a claim under section 2(1). Damages in the tort of deceit for fraudulent misrepresentation should also be independent of rescission.