Mistake vs. Misrepresentation

In brief: Mistake vs Misrepresentation †¢ A mistake is inadvertent and only an error on the part of the person committing it while misrepresentation is often wilful or intentional, done with the intention of gaining wrongfully. The main difference between Mistake and Misrepresentation is that in the case of Mistake one or both parties to a contract or what was intended to be a contract unintentionally or unknowingly made statements not intended to mislead the other. Therefore fraud cannot be implied from these statements or circumstances. At Common law, a mistake can affect the validity of a contract â€Å"operative mistake†, making it null and void. In the case of misrepresentation, false statements of facts are required to be made which knowingly or unknowingly could amount to fraud and remedy or rescission may apply. In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent. Fraudulent misrepresentation Definition Fraudulent† in this sense was defined by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 as a false statement that is â€Å"made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true of false. † The essence of fraud is the absence of honest belief; in Derry v Peek , a share prospectus falsely stated that the company had the right to use mechanical power to draw trams, without explaining that governmental consent was requir ed for this. In fact, the directors honestly believed that obtaining consent was a pure formality, although it was ultimately refused. The House of Lords held that there had been no fraudulent misrepresentation. Lord Herschell however did point out that though unreasonableness of the grounds of belief is not deceitful, it is evidence from which deceit may be inferred. There are many cases, â€Å"where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the court that it was not really entertained, and that the representation was a fraudulent one. † On the other hand, there need be no intention to defraud. An intention to deceive (with no intention to cause the claimant loss) is sufficient. Negligent misrepresentation Negligent mis-statement at common law Until 1963, damages could only be claimed for misrepresentation where it was fraudulent. All non-fraudulent misrepresentations were classed as â€Å"innocent† and damages were not available for such innocent misrepresentations. In 1963, the House of Lords stated, obiter, in Hedley Byrne Co Ltd v Heller Partners Ltd [1964] AC 465 that in certain circumstances damages may be recoverable in tort for negligent mis-statement causing financial loss. The liability depends on a duty of care arising from a â€Å"special relationship† between the parties. It is now clear that a party can claim damages under the principle in Hedley Byrne where a negligent mis-statement has induced him to enter a contract; Esso Petroleum Co Ltd v Mardon (1976) QB 801. Broadly speaking, the special relationship will only arise where the maker of the statement possesses knowledge or skill relevant to the subject matter of the contract and can reasonably foresee that the other party will rely on the statement. Negligent misrepresentation under the Misrepresentation Act 1967 Section 2(1) of the Act of 1967 introduced, for the first time, a statutory claim for damages for non-fraudulent misrepresentation. Section 2(1) provides that where a person has entered a contract after a misrepresentation has been made to him by another part thereto and a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true. It should be noted that the sub-section assumes all non-fraudulent statements to be negligent and puts the burden on the maker of the statement to disprove negligence. Wholly innocent misrepresentation We have seen that before 1963, the word â€Å"innocent† was used to describe all misrepresentations that were not fraudulent. In the light of Hedley Byrne and s. 2(1) of the Act of 1967, the word innocent may now be used to refer to a statement made by a person who has reasonable grounds for believing in its truth. To avoid confusion, â€Å"wholly innocent† is a better description.