What is a Misrepresentation?
A claim for misrepresentation commonly arises where one party to a contract (“Representor”) makes a false statement of past or present fact (or law) to another (“Representee”) with an intention to induce another to enter into a contract and does induce. Such statements are to be distinguished from mere opinion or forecast, where it will usually not be a misrepresentation. However, if the Representor possesses special knowledge or greater expertise or skill than the Representee, then those expressions of opinions or statements may be implied representations which are tantamount to be statements of fact.
In Hong Kong, claims for misrepresentation are governed by both common law and statute, including the Misrepresentation Ordinance (Chapter 284) (the “Ordinance”).
Section 2 of the Ordinance provides :-
Where a person has entered into a contract after a misrepresentation has been made to him, and—
(a) the misrepresentation has become a term of the contract; or
(b) the contract has been performed,
or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters mentioned in paragraphs (a) and (b).
Section 3 of the Ordinance provides for the award of damages for misrepresentation.
For certain misrepresentation relating to securities dealing, the civil liability is codified under section 108(1) of the Securities and Futures Ordinance (“SFO”) which imposes liability on a person who makes any fraudulent, reckless or negligent misrepresentation which induces another person to deal in securities (including the acquisition, disposal, subscription or underwriting of securities), to pay compensation for any pecuniary loss sustained by the Representee.
Misrepresentation can be by Conduct and by Silence
Misrepresentation may be constituted by conduct or by words. Misrepresentation may also occur if the Representor remains silent during the contract negotiations stage, even though there is no general doctrine of good faith in contract (i.e. the common law places no obligation on negotiating parties to disclose facts material to a proposed contract).
An exception to this principle is that parties may be under a positive obligation to disclose material facts when they are negotiating contracts uberrimae fidei (‘of utmost faith’), for example in contracts of insurance.
The Need for Inducement
A misrepresentation will not be material and actionable unless there was material reliance on the misrepresentation by the Representee. As such, the presumption of misrepresentation can be rebutted, if :-
(a)&emspThe Representee knew that the statement made was false; or
(b))&emspThe Representee placed no reliance on the statement when concluding the contract (i.e. the statement played no part in the Representee’s decision to enter into the contract, for example the misrepresentation had not come to the Representee’s notice or was made after the contract was concluded).
Remedies for Misrepresentation
There are 2 remedies for a misrepresentation, (a) the right to rescind the contract and (b) damages.
Rescission in Equity
Rescission is a potent remedy because an order of rescission for misrepresentation terminates the contract from its very inception. In order for rescission to be effective, the Representee should immediately communicate rescission for misrepresentation to Representor to be effective. The effect of an order for rescission will be that all monies paid and property transferred under the contract will be restored to the status quo ante contract, i.e. before the parties entered into the contract. However, note that the Representee cannot rescind a contract if, after discovering the misrepresentation, the Representee expressly convey an intention to continue with the contract or does something which affirms the contract and is inconsistent with the right to rescind. Also, time will be of the essence if the right to rescind is not exercised within a reasonable time of knowing the misrepresentation.
Other considerations for aggrieved parties to consider when exercising their right to rescind, is that it will be a bar to rescission if an innocent third party has obtained a right to contract’s subject matter (whether property or a valuable asset) without prior notice of the misrepresentation. Also, a Hong Kong court would be unlikely to make an order for rescission where restoration of the status quote ante contract (or ‘restitutio in integrum’) is not possible, i.e. where the parties cannot be restored to their pre contract positions due to any reason.
Damages at Common Law
As a result of the Misrepresentation Ordinance, claims for damages by a person who has been induced to enter into a contract by the misrepresentation of another party may now be based either on fraud or on negligence. The burden of proof for fraudulent misrepresentation is the civil standard of balance of probabilities. However, a claimant under an allegation of fraudulent misrepresentation should note that there is a high evidential threshold to satisfy for fraudulent misrepresentation claim.
The Representee may also recover damages for negligence pursuant to principles established under the case of Hedley, Bryne & Co Ltd v Heller Partners (1964) AC 465. The measure of damages will be that which is required to restore the Representee to the position he would have been in had the statement not been made, subject to the tests of foreseeability and remoteness applicable to damages in negligence.
If you have any questions on the above eNews or any dispute matters or is considering to make a claim for misrepresentation under the Ordinance, experienced lawyers in our Litigation and Dispute Resolution department will be happy to assist you further and to answer any enquiries which you may have.