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Treitel in The Law of Contract (2003) defines a contract as: “An agreement giving rise to obligations which are enforced or recognised by law. The factor which distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties. ” This quote illustrates the basic criteria for a contract.
A contract is a legally binding agreement between two or more parties, it can be written or oral. There is no mention of a written contract between TLC and Answer, therefore we must assume there is an oral contract. The classical approach to determining whether a contact has been created involves agreement, consideration and intention. In order for an agreement to exist between parties there must be an offer that contains the terms of the contract. If the offeree accepts, they accept these terms.
In this case, Answer offers the supply and installation of a new computer system and TLC accept this offer and have the system installed for the sum of ? 100,000. Consideration is the price for which a promise is brought. It’s the giving of consideration for a promise that makes breaking the promise unjust. Defined in Currie v Misa (1875) as- “Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by another”. There must also be intension to create a contract. In commercial situations such as this the intent to create a contract is presumed.
In Edwards v Skyways Ltd (1964)- the defendant was promised on being made redundant, and withdrawing his pension contributions, the company would give him an ex gratia (given out of grace- accepting no liability) payment of the same again. He withdrew his pension but did not receive the extra payment. It was held by the court that the presumption to create a legally binding contract prevailed, and all the term ex gratia means is there is no previous legally binding contract. A representation is a statement made regarding the contract that induces the other party to enter the contract.
A false representation is not a breach of contract but may lead to court action for misrepresentation under the Tort of deceit or the Misrepresentation Act 1967. In an oral contract it is difficult to discern whether a statement is a term of the contract or a representation. A misrepresentation must be a representation of fact not of law (as you are expected to know the law), opinion or intention. In the case of Answer, Valentino categorically states that the computer system is ‘number one for reliability’ a statement of fact. Also it’s ‘proving a success and about to be installed in a number of similar businesses’.
Valentino is not expressing opinions; the statements he made will be regarded fact. Where the representor has expert knowledge it’s reasonable for the representee to rely on the statement and not take action to verify it. Answer has special knowledge that TLC does not, therefore TLC have every right to believe Answers representations. Esso Petroleum Co. Ltd v Mardon (1976). The second statement is an intention to install the system at similar businesses. The representor, when making statements of intent has a right to change their mind unless these intentions are terms of the contract.
Although this action was never carried out, it must be proved Answer had no intention of carrying this out at the time the statement was made. Edgington v Fitzmayrice (1885), directors of a company issued a prospectus inviting debentures saying the money raised would be used for expansion of the company. Money was advanced but was in fact used to pay off debts. This was held as misrepresentation as stating you intend to do something is, at the time you state it as much a fact as anything else. In order for a misrepresentation to occur it must be proved that the representations induced the contract.
For this to happen it follows that the reasonable person would consider it an important fact in entering the contract. Museprime Properties Ltd v Adhill Properties Ltd (1990). Answer are the experts and Valentino is their representative, he inspects the needs of TLC and recommends the Bizarre Pentium IV. Therefore it is reasonable to assume that the statements made regarding reliability and suitability were representations made to induce the contract. The issue is whether Valentino purposefully made false statements, was reckless or innocent in those statements.
A Fraudulent statement is knowing the statement to be false or being reckless to whether it’s false. Defined in Derry v Peek (1889) by Lord Herschell as a “false statement made knowingly or without belief in its truth or recklessly careless whether it be true or false”. Recklessly careless means the representee had foreseen it may be false but did not care. There is an element of dishonesty here. In fraudulent cases the burden of proof is on the claimant, this means the claimant must prove the defendants guilt.
It’s very hard to prove a fraudulent misrepresentation; if unsuccessful the defendants’ representations are presumed innocent. Innocent misrepresentations are made when the representor genuinely believes the false statement. It would be unlikely that TLC could prove Valentino’s statements were deceitful. There is also the possibility of a defamation case being brought against TLC if they were to be unsuccessful in a fraudulent claim. The misrepresentation of negligence under common law (as with fraudulent) places the burden of proof on the representee.
The Hedley Bryne & Co Ltd v Heller & Partners (1964) stated that parties needed to be in a ‘special relationship’, this refers to the requirement for a duty of care. This means giving advise in a professional capacity or having skills and expertise on which the other party can be expected to rely. A test for negligent misrepresentation is whether a reasonable person in the position of the representor, taking all due care could have foreseen the risk of the representees’ loss. TLC would have to prove that Answer and themselves had ‘special relationship’, this shouldn’t be too difficult as Answer are the professionals with expert knowledge, and TLC rely on this expertise. The misrepresentation Act 1967 states that the representor is liable unless he can prove he had reasonable grounds to believe the statement true up to the point the contact was created. This reverses the burden of proof making actions under this Act more desirable. The features of the Bizarre Pentium IV described in the sales literature as ‘part of the package’ could be seen as a term of the contract, and TLC may have a case for breach of contract as these features didn’t work.
However, the most likely remedy is to sue Answer under the Misrepresentation Act s 2(1). Under this Act TLC have the best chance of success. Royscot Trust v Rogerson (1991) stated, the correct measure of compensation is the same as that under the Tort of deceit. The Act states that the representor would be liable as if the statement were made fraudulently, which would mean TLC could claim for rescission and damages. Rescission means returning the parties to the point before the misrepresentation occurred. Damages would mean both foreseeable and unforeseeable losses.
TLC could expect to recover the full amount lost; ? 100,000 for the computer system, ? 20,000 in actual profit and ? 30,000 anticipated profit. If Answer are found guilty for negligence they are morally innocent, the representations were not knowingly deceitful or reckless but made without duty of care to TLC who relies on their expertise. In Smith New Court Securities Ltd v Scrimgeour Vicker (Asset Management) Ltd (1996), Lord Steyn questioned whether it was right to: ‘treat a person who is morally innocent as if he were guilty of fraud when it comes to the measure of damages’.
He also clarified the difference between the Misrepresentation Act 1967 s 2(1) and fraud. Under s 2(1) the damages do not exceed the consequences that arise from the misrepresentation. Unlike fraud where damages could be all costs directly flowing from the fraud. If this were the result in Answer v TLC, damages expected could be; ? 100,000 cost, and the ? 20,000 lost profit, both resulted directly as a consequence of the misrepresentation. The anticipated profit and all further losses expected from the lost customer record and misplaced orders would be irrelevant.
If the misrepresentation were to be found innocent under common law equity is the only rescission. Under s 2(2) of the misrepresentation Act 1967 damages may be awarded in lieu of rescission (not for fraud or negligence as damages are already available). This is however a lower amount, the damages given represent the difference between what the representee thought they were getting and what they actually got. This is the difference in the price TLC paid, and the actual value of the computer system.
Indemnity may also be awarded, this allows for all costs directly attributable to the contract to be recovered, but no extra costs. TLC may receive the original cost of the contact but it’s unlikely they’d receive any lost or anticipated profits. There are many issues in this case. There has clearly been a misrepresentation, whether it was fraudulent, negligent or innocent is uncertain. TLC certainly have a case, and after exploring the facts would be wise to pursue the lesser misrepresentation of negligence under the Misrepresentation Act 1967 s 2(1).
Although there is less stigma attached, the compensation may well be close or equal to that of a successful fraud claim. Because the burden of proof would be on Answer there is a much greater chance of success. _____________________________________________________________________ Bibliography: Slapper, G. and Kelly, D. , 2006. English Law. 2nd ed. London: Cavendish Publishing Ltd. Richards, P. , 2006. Law of Contract. 7th ed. Harlow: Pearson Education Ltd. Mortimer, T. , 2007. introduction to Business Law. Harlow: Pearson Education Ltd. Word Count = 1512 – excluding quotations and bibliography.