D. Negligent misstatement at common law

Negligent misstatement occurs when a statement is made carelessly and the relationship between the parties is such that it gives rise to a duty of care on the part of the representor.

An action for negligent misstatement is an action in tort which may be invoked whether or not a contractual relationship exists between the parties. This is in direct contrast to an action for misrepresentation which may only be brought between contracting parties.

Negligent misstatement or negligent misrepresentation?

Where a contract exists between the representor and the representee, the representor may owe duties both in contract and tort to the representee. However, there seems little logic in an action being brought at common law for negligent misstatement, as opposed to one for negligent misrepresentation under the Misrepresentation Act 1967.

For negligent misstatement, the burden of proof is on the claimant to establish that a duty of care existed and that the duty was breached. In an action for negligent misrepresentation under statute, the burden of proof is reversed with the maker of the statement having to establish reasonable belief. Further, damages for negligent misstatement will be subject to the normal remoteness test of "foreseeable loss" as is the general rule in the tort of negligence (The Wagon Mound [1961] AC 388). For negligent misrepresentation under the Misrepresentation Act, as the law currently stands, damages are awarded on the same basis as for fraud (so all direct loss is recoverable including that which might be unforeseen) and the remedy of rescission may also be available.

E. Can a representation become a term of the contract?

It is possible for a statement made in negotiations to be a representation that then becomes a term of the contract (for example, where the representation is included in the written contract). Such a term may be a condition (a vital term which goes to the root of the contract) or a warranty (a term of lesser importance). Generally, this will depend upon the intention of the parties, as expressed in the contract or on the seriousness of the failure to perform.

Alternatively, where the statement is not made part of the written contract, it may take effect as a collateral contract. For such a collateral contract to arise, the representor must intend the statement to be binding as a separate contract and not as a term of the main contract, and the claimant must provide separate consideration for it. (Note that a claim for breach of a collateral contract will not be subject to any provisions in the main contract concerning limits on liability and the remedies available unless the limitation of liability clauses are expressly drafted to embrace claims outside the main contract.)

Remedies for breach of contract

Where the representation becomes a condition of the contract, the claimant may elect either of these:

• To treat the contract as terminated and claim damages.

• To rescind, in which case the claimant will not usually be able to claim damages except in the case of a misrepresentation made fraudulently or negligently.

In the event of termination, the contractual measure of damages will always apply, that is, the claimant is entitled to be put into the position as if the contract had been performed. The claimant would therefore receive the difference between the actual value of the subject matter of the contract and the value that it would have had if the representation had been true.

In such cases, the claimant must choose which remedy to pursue. The differences between the tortious and contractual measure of damages may influence this decision.

Where the representation becomes a warranty in the written contract, the remedy for breach of warranty is damages only. Termination of the contract is not available. This may make an action for misrepresentation more attractive as the remedy of rescission may be available.

Damages in contract or under the Misrepresentation Act 1967?

Generally, where the transaction is a good bargain (that is, the claimant has paid less for something than its true market value) then the claimant (the representee) would prefer the contractual measure of damages which would give him his lost profit on the deal. Where the transaction is a bad bargain, the claimant would prefer the tortious measure (obtained in a claim under the Misrepresentation Act 1967).

Where the contractual measure of damages would be higher than the tortious measure, the claimant will still usually plead the misrepresentation claim by including a cause of action under the Misrepresentation Act 1967 as well as a cause of action in contract. This is because of the differences in the burden of proof. In a contractual claim, the claimant needs to prove the contract, the term breached, damage and causation. For a claim under the Misrepresentation Act 1967, the claimant must prove that the representation was made, and that it was false and that he entered into the contract relying on that representation; the burden of proof then shifts to the defendant to prove a reasonable belief in the truth of the representation. Where the representor cannot prove reasonable belief, the claimant will be able to recover losses subject to the rules on causation and remoteness. A claim under the Misrepresentation Act 1967 is therefore generally easier to prove than one in contract in which the claimant must also prove that the representation became a term of the contract (or was a collateral warranty).