Misrepresentation in Contract Law

In the formation of contracts, parties often make various statements to induce others to enter into contractual relationships. While some of these statements become terms of the contract, others remain mere representations. When these representations turn out to be false, the law must determine what remedies, if any, should be available to the party who has been misled. This is the domain of misrepresentation—a crucial vitiating factor in contract law that can render an otherwise valid contract voidable.

Misrepresentation occupies a unique position in contract law because it bridges the gap between the formation of valid contracts and their enforceability. Understanding misrepresentation is essential for anyone involved in contractual negotiations, whether in commercial transactions, property dealings, or everyday contractual relationships.

What is Misrepresentation?

A misrepresentation is a false statement of existing or past fact made by one party to the contract (the representor) before or at the time of making the contract, and addressed to the other party (the representee) which, while not forming a term of the contract, is yet one of the reasons that induced the representee to enter into the contract.¹

For instance, if a seller states that land being sold is about 50 acres when it is actually only 22.5 acres, this constitutes a misrepresentation.² Similarly, if a seller represents that the profits arising from a certain business have in the past amounted to a particular figure when this is not true, this is also a misrepresentation.

Misrepresentation Distinguished from Contractual Terms

It is crucial to distinguish between a misrepresentation and a term of the contract. A term of the contract creates contractual obligations and remedies for breach, while a misrepresentation, though inducing the contract, does not itself form part of the contract. The consequences of each are different: breach of a contractual term gives rise to an action for damages and possibly the right to terminate, while misrepresentation makes the contract voidable and may give rise to rescission and, in certain cases, damages.

The distinction between terms and representations depends on the intention of the parties and the importance attached to the statement. Where a statement is clearly intended to be binding and forms part of the basis of the contract, it will be a term. Where it is merely an inducement but not guaranteed, it remains a representation.

Forms of Misrepresentation

Misrepresentation may take various forms beyond explicit verbal or written statements.

Misrepresentation by Conduct

Misrepresentation may be inferred from conduct where a person, though not speaking, conducts himself in a manner which suggests that a particular state of affairs exists. If the conduct turns out to be misleading, that person would be guilty of misrepresentation.

In the English case of R v Barnard,³ Barnard entered a shop in Oxford wearing an academic cap and gown. He then ordered goods on credit, claiming that he belonged to Magdalene College, Oxford. When he failed to pay, he was prosecuted for obtaining goods under false pretences. The court held that even if he had said nothing after entering the shop, he could still have been liable for misrepresentation by conduct. His wearing of the academic dress was itself a representation that he was a member of the university entitled to credit.

Similarly, in Livesley v Rathbone,⁴ during negotiations for an employment contract, the plaintiff stated that he would want at least two days a week work from the defendant. In response, the defendant smiled and nodded. The court held that there was a misrepresentation by conduct when the defendant smiled and nodded to the plaintiff’s statement, as this conduct suggested agreement to the terms when in fact the defendant did not intend to provide such work.

The General Rule: Silence is Not Misrepresentation

As a general rule, mere silence does not constitute misrepresentation. There is no duty imposed on any one party to a contract to apprise the other of facts unknown to him which might affect the other party’s inclination to enter into the contract.⁵ This principle reflects the general philosophy of contract law that parties must look after their own interests in negotiations.

Lord Campbell stated the principle clearly in Walters v Morgan:⁶

“There being no fiduciary relationship between vendor and purchaser in the negotiation, the purchaser is not bound to disclose any fact exclusively within his knowledge which might reasonably be expected to influence the price of the subject to be sold. Simple reticence does not amount to legal fraud, however it may be viewed by moralists.”

This principle was applied in the Nigerian case of Percival v Wright,⁷ where a shareholder agreed to sell his shares in a company to three directors of that company. After the sale, he discovered that at the time he agreed to sell his shares to the directors, there was a standing offer by a third party to buy the company’s shares at a much higher rate than he got from the directors. The court held that there was no fiduciary relationship between the directors and the plaintiff and there was, therefore, no duty to disclose.

Similarly, in Keates v Lord Cardogan,⁸ the plaintiff sued for damages arising from the defendant’s fraud in letting to the plaintiff a house which the defendant knew to be required for immediate occupation without disclosing that it was in a ruinous condition. The court held that no such action would lie, as there was no duty to disclose the defect.

Exceptions to the Rule on Silence

However, in at least three sets of circumstances, silence or non-disclosure affords a ground for relief:

1. Where Silence Distorts a Positive Representation

A contracting party may be legally justified in remaining silent about some material fact. However, if he ventures to make a representation upon the matter, it must be a full and frank statement, and not such a partial and fragmentary account that what is withheld makes that which is said absolutely false.

In Dimmock v Hallett,⁹ a vendor of land told a purchaser that all the farms on the land were fully let, but omitted to inform him that the tenants had given notice to quit. The court held that this was a misrepresentation. The statement was literally true but misleading because it created a false impression by the omission of material information.

In the Nigerian case of John Holt & Co Ltd v Oladunjoye,¹⁰ the plaintiffs described one Killa, one of their produce buyers who had incurred a loss of £600, as “a good produce buyer” to the defendant who agreed to guarantee Killa for a new produce buying agreement, after the £600 loss arising from the first agreement had been written off by the plaintiffs. They did not inform the defendant about their earlier transactions with Killa. The court held that to represent Killa as a good produce buyer to a prospective surety without disclosing the fact of his defaulting to the extent of £600 on his previous dealings was definite misrepresentation of such a material nature as to entitle the surety to avoid his obligation under the bond.

Change of Circumstances

Moreover, a party who makes a statement in the belief that it is true comes under an obligation to disclose the truth should he subsequently discover that he was mistaken. Similarly, a contracting party who makes a statement which is true at the time, but which is found to be untrue in the course of the subsequent negotiations, is under an obligation to disclose the change of circumstances.

In With v O’Flanagan,¹¹ the defendant who was negotiating with the plaintiff to sell his medical practice to the plaintiff, informed the latter in January 1934 that the practice was worth £2,000 per annum. By May of the same year when the contract was signed, the defendant was seriously ill and the receipts had fallen considerably to only £5 per week. He did not inform the plaintiff of this change in the practice. When the plaintiff discovered this and brought an action for rescission, the court held that the defendant ought to have communicated the change in his circumstances to the plaintiff. The original representation was made to induce the plaintiff to enter into the contract, and this continued until the contract was signed.

2. Contracts Requiring Uberrimae Fidei (Utmost Good Faith)

In certain contracts where, from the very necessity of the case, one party alone possesses full knowledge of all the material facts, the law requires him to show uberrimae fidei (utmost good faith). He must make full disclosure of all the material facts known to him, otherwise the contract may be rescinded. Such contracts include:

Insurance Contracts

Every contract of insurance, irrespective of its subject matter (marine, fire, life, motor), involves uberrimae fidei and requires full and fair disclosure of such material facts as are known to the assured. In Carter v Boehn,¹² it was stated that insurance is a contract upon speculation where the special facts upon which the contingent chance is to be computed lie generally in the knowledge of the assured only, so that good faith requires that he should not keep back anything which might influence the insurer in deciding whether to accept or reject the risk.

A fact is material if it is one that would affect the mind of a prudent insurer, even though its materiality is not appreciated by the assured. The test is objective: would the fact have influenced a reasonable insurer in deciding whether to accept the risk or what premium to charge?

Family Arrangements

Family arrangements cover a multitude of agreements made between relatives and designed to preserve the harmony, to protect the property or to save the honour of the family. In such circumstances, equity requires the fullest disclosure of all material facts known to each party, even though no inquiry about them may have been made. The parties must be on an equal footing.

In Gordon v Gordon,¹³ a division of property based upon the probability that the elder son was illegitimate was set aside nineteen years afterwards upon proof that the younger son had concealed his knowledge of a private ceremony of marriage solemnised between his parents before the birth of his brother.

Contracts to Take Shares in Companies

A contract to take shares in a company is often made on the faith of the prospectus issued by the promoters containing statements of the company’s financial position, the value of the assets, the state of the company’s business, the profits and dividends declared, etc. These statements are material facts which can help the public in deciding whether or not to buy a share and they are peculiarly within the knowledge of the companies’ boards and officials. Thus, good faith requires that such boards and officials who issue the prospectus disclose all material facts as to the financial state of the company.

Sale of Land and Partnership

Similarly, in contracts for the sale of land and partnership agreements, full disclosure of material facts is required in certain circumstances.

3. Where a Fiduciary Relationship Exists

Where the parties stand in a fiduciary relationship to each other, the law assumes that one person is in a superior position to the other and the trust and confidence of the other is reposed in him. In this instance, owing to the special relationship between the parties, a transaction may be voidable in equity for non-disclosure.

A confidential relationship is deemed to exist between persons connected by certain recognised ties, such as parent and child, principal and agent, solicitor and client, religious superior and inferior, and trustee and beneficiary.

In Tate v Williamson,¹⁴ X, an extravagant undergraduate much pressed by his Oxford creditors and anxious to extricate himself from his financial embarrassment, sought the advice of the defendant. Having recommended the sale of the undergraduate’s Staffordshire estate, the defendant offered to buy it himself for £7,000 without disclosing that, owing to the existence of subjacent minerals, X’s interest was worth at least double that amount. The offer was accepted and the conveyance executed, but some years later the sale was set aside by the court at the insistence of X’s heir. The defendant was constructively fraudulent in the sense that he wrongfully exploited to his own advantage the commanding position in which he stood.

Essential Elements of Misrepresentation

For a statement to constitute an actionable misrepresentation, five essential elements must be present:

1. The Representation Must Be a False Statement of Fact

The representation must be a statement of fact, not a statement of opinion, intention, or law.

Statements of Fact vs. Opinion

A mere expression of opinion which turns out to be unfounded will not invalidate a contract. In Bisset v Wilkinson,¹⁵ the vendor of a holding in New Zealand, which had not previously been used as a sheep farm, told a prospective purchaser that in his judgment the carrying capacity of the land was two thousand sheep. The court held that this was an honest statement of opinion of the capacity of the farm, not a representation of its actual capacity.

However, where it is proved that the opinion was not actually held, or that it was expressed upon a matter of which the speaker was entirely ignorant, or that a reasonable man possessing his knowledge could not honestly have held it, or that he alone was in a position to know the facts much better than the other party, an expression of opinion may constitute a representation of fact.

In Smith v Land and House Property Corporation,¹⁶ a vendor, in the sale of a hotel, stated that the property was let to “a most desirable tenant,” whereas the tenant’s rent could only be obtained under pressure and was currently much in arrear. The court held that such a statement entitled the purchaser to rescind the contract. The statement was not a mere expression of opinion but an implied representation of fact—that there were reasonable grounds for the opinion and that the vendor knew of no facts incompatible with it.

Statements of Intention

Neither a statement of intention nor a promise can be regarded as a statement of fact except in so far as a man may misrepresent the state of his own mind. A person who fails to carry out his stated intention does not thereby make a misrepresentation, provided the intention was genuinely held at the time.

In the Nigerian case of Mohammed v Mohammed,¹⁷ the court held that a misrepresentation must be an unambiguous false statement of existing fact. A statement of intention is not a statement of fact nor is a promise a statement of fact.

However, a distinction must be made between a promise which the promisor intends to perform and one which the promisor intends to break. In the first case, he represents truly enough his intention that something shall take place in the future. In the second case, he misrepresents his existing intention; he not only makes a promise which is ultimately broken, but when he makes it he represents his state of mind to be something other than it really is. Such a misrepresentation is one of fact.

As Bowen LJ stated in Edgington v Fitzmaurice:¹⁸

“The state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but, if it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.”

Thus, in Re Shackleton,¹⁹ the court held that if a man buys goods having at the time formed an intention not to pay for them, he makes a fraudulent misrepresentation.

Statements of Law

A misrepresentation of law does not generally render the contract voidable as against the person making it. Where law is stated in the abstract—for instance, to state that an oral contract of guarantee is not enforceable by action—this is a representation of law. However, where a statement of fact is coupled, expressly or implicitly, with a proposition of law, it would constitute misrepresentation if it is wrongly applied.

2. The Representation Must Be Addressed to the Representee

The representation must have been addressed by the representor to the party misled. In Peek v Gurney,²⁰ the promoters of a company were sued by a person who had purchased shares on the faith of false statements contained in a prospectus issued by them. The plaintiff was not a person to whom shares had been allotted on the first formation of the company; he had merely purchased shares from such allottees. The court held that the prospectus was only addressed to the first applicants for shares and could not be supposed to extend to others. On the allotment, “the prospectus had done its work; it was exhausted.”

However, a statement will also be held to have been addressed to the party misled if he is a person to whom the representor intended the statement to be passed on. In Pilmore v Hood,²¹ the defendant who was negotiating to sell a public house to one Bowner, fraudulently misrepresented to the latter that the takings of the house were £180 per annum. Bowner, who was unable to buy, persuaded the plaintiff to buy by repeating, with the defendant’s knowledge and consent, the misrepresentation about the earnings of the house. The court held that the plaintiff was entitled to bring an action for deceit against the defendant.

Similarly, a person who falls within the members of a class at which the representation is directed—such as the public at large or a particular segment or class of society—would also qualify as a representee. In this case, it is no defence that the representor never in fact intended that he should act on it.

3. The Representation Must Induce the Contract

The representation must form a real inducement to the party to whom it is addressed. Whether or not a person who has entered into a contract was induced to do so by a particular representation is in each case a question of fact. The plaintiff must prove that the alleged misrepresentation had an effect upon his mind.

The Representation Must Influence the Representee

A person cannot be said to have been induced to enter into a contract by a representation which, though false, did not actually influence him. In Horsfall v Thomas,²² Thomas bought a cannon which had been manufactured for him by Horsfall. The cannon had a defect which made it worthless, and Horsfall had endeavoured to conceal this defect by the insertion of a metal plug into the weak spot in the gun. Thomas never inspected the gun; he accepted it, and upon using it for the purpose for which he bought it, the gun burst. The court held that as he never examined the gun, the attempted concealment having had no operation upon his mind or conduct, he could not successfully set up a plea of fraud.

Opportunity to Discover the Truth

The mere fact that the party misled had the opportunity of investigating and ascertaining whether the representation is true or false will not necessarily deprive him of his right to resist its specific performance or to sue for rescission. As Master of the Rolls Jessel stated in Redgrave v Hurd:²³

“If a man is induced to enter into a contract by false representation, it is not sufficient answer to him to say, ‘If you had used due diligence you would have found out the statement was untrue. You had the means afforded you of discovering its falsity, and did not choose to avail yourself of them.’ I take it to be a settled doctrine of equity… that this is not an answer…”

However, where a representee decides to rely upon his own acumen or business sense or upon an independent report which he specially obtained, he cannot claim to have been misled. In Attwood v Small,²⁴ a vendor accompanied an offer to sell a mine with statements as to its earning capacities which were exaggerated and unreliable. The buyers agreed to accept the offer if the vendor could verify his statements and they appointed experienced agents to investigate the matter. The agents visited the mine, were given every facility for forming a judgment, reported that the statements were true, and ultimately the contract was completed. The court held that an action to rescind the contract for misrepresentation must fail, since the purchaser did not rely on the vendor’s statements, but tested their accuracy by independent investigations and declared themselves satisfied with the result.

Knowledge Defeats Reliance

Knowledge of the untruth of a representation is a complete bar to relief, since the plaintiff cannot assert that he has been misled by the statement, even if the misstatement was made fraudulently. Knowledge in this context means actual and complete, as opposed to constructive and fragmentary, knowledge of the true facts.

In the Nigerian case of Nidogas Coy Ltd v Augusco Nig. Ltd,²⁵ the court held that where a plaintiff has knowledge about a false representation by the defendant and yet continues with his contract with the defendant, knowing fully well at the time he decided to continue about that earlier misrepresentation, then the plaintiff cannot succeed in an action for damages premised on the false or misleading misrepresentation.

The Representation Need Not Be the Sole Inducement

The representation need not be the sole or decisive inducement, provided that it did, in fact, materially affect the representee’s intention to enter into the agreement. In Edgington v Fitzmaurice,²⁶ the plaintiff was induced to purchase shares in a company on the faith of certain fraudulent statements contained in a prospectus, and also in the erroneous belief that he would be entitled to the benefit of a charge on the company’s assets. The court held that in spite of his error, he was still entitled to rescind the contract for the misrepresentation.

4. The Representation Must Be Material

A representation has no effect unless it is material in the sense that it must be one that would affect the judgment of a reasonable man in deciding whether, or on what terms, to enter into the contract. However, the issue of materiality has no relevance in cases of fraudulent misrepresentation. In Smith v Kay,²⁷ the court held that when a party has practised deception with a view to a particular end which has been attained by it, he cannot be allowed to raise the issue of materiality of his fraud or deception. It is sufficient that the representee has been induced to act on it.

5. The Representation Must Be Made Before or at the Time of Contract

For a representation to be actionable, it must be made before or at the time the contract is concluded, not after. It must be a pre-contractual statement that induced the formation of the contract. Statements made after the contract is concluded cannot be misrepresentations, though they may give rise to other causes of action.

Types of Misrepresentation

Nigerian law recognises three types of misrepresentation, each with different legal consequences: fraudulent, negligent, and innocent misrepresentation.

Fraudulent Misrepresentation

In Derry v Peek,²⁸ the House of Lords established that an absence of honest belief is essential to constitute fraud. In that case, a company incorporated by a special Act of the British Parliament was given the right to construct tramways to be moved by animal power (horses) or, if the consent of the Board of Trade was obtained, by steam power. The directors of the company believed that the consent of the Board would be given as a matter of course, as they had already submitted their plans to the Board without meeting any objection. They therefore issued a prospectus stating that the company had a right to run trams by steam or mechanical power. The respondent took up shares in the company on the faith of the representation. The Board of Trade ultimately refused to give its consent and as a result, the company was wound up. The plaintiff brought an action for deceit based on alleged false misrepresentation. The court held that the defendants (directors) were not liable as there was no absence of honest belief by the directors in their statement and there were reasons which led them to make an untrue statement.

Lord Herschell stated the law as follows:²⁹

“First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made, (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.”

It was further pointed out that making a false statement through want of care falls far short of fraud; so too does a false representation honestly believed, though on insufficient grounds. Thus, negligent misrepresentation will not amount to deceit, however gross the negligence may be.

Absence of Honest Belief

It is not necessary to constitute fraud that there should be clear knowledge that the statement was false. What is essential is the absence of any belief in its truth. In the Nigerian case of Teriba v Adeyemo,³⁰ the Supreme Court held that a statement of fact honestly made by a party cannot be held to be a misrepresentation simply because it turns out not to be quite correct.

If a representor deliberately shuts his eyes to the facts or purposely abstains from their investigation, his belief is not honest and he is just as liable as if he had knowingly stated a falsehood. In Reese Silver Mining Co v Smith,³¹ the directors of a company issued a prospectus setting out the advantages of working a particular mine without having ascertained the truth of their assertions. When the assertions turned out to be false, they were held liable for fraudulent misrepresentation.

Motive is Irrelevant

As a general rule, motive for giving the false statement is irrelevant. Thus, it is no justification to show that there was no intention to cause loss to another by the deception, provided an intention to mislead was present.³²

Nigerian Application

The Nigerian courts have consistently applied these principles. In Afegbai v Attorney-General, Edo State,³³ the respondent had acquired part of the appellant’s land without paying any compensation. While the case for compensation was pending, the respondents negotiated settlement with the appellant to give another parcel of land to the appellant in lieu of monetary compensation. Subsequently, the appellant claimed that he had earlier applied for and was granted the same plot of land contained in the terms of settlement before settlement was reached. The court held that if a statement is true in the sense in which the representor meant it but is so obscure that the representee understands it in another sense in which it is untrue, the representor is not liable if his interpretation is the correct one. The representor in such a case is not guilty of fraud.

In the Nigerian case of Sule v Aromire,³⁴ the defendant put up for sale by auction a piece of land claiming in the advertisement of sale that he had obtained a court judgment in respect of the land. The defendant went further to give the plaintiff a copy of the judgment which showed that the defendant was the owner. In truth however, the judgment did not relate to the piece of land advertised for sale. The plaintiff having bought the land on the strength of the misrepresentation made to him by the defendant made unsuccessful attempts to obtain possession. The court held that provided the purchaser acted on the faith of a false representation made to him by the defendant, it was no defence for the latter that the plaintiff might have found out the truth if he had been more diligent. The court set aside the agreement for fraudulent misrepresentation and ordered the defendant to refund the purchase money to the plaintiff.

Innocent Misrepresentation

Innocent misrepresentation refers to misrepresentations that are made without fraud. In other words, a misrepresentation is innocent where the representor believes his assertion to be true and thus has no intention to deceive.

The main difference between an innocent and fraudulent misrepresentation is the absence of belief by the maker in its truth. This position is well illustrated in the decisions in Derry v Peek and Peek v Gurney. In Derry v Peek, the court held that there was no fraudulent misrepresentation because the directors had an honest belief in its truth even though the statement was actually false.

In Polhill v Walter,³⁵ the defendant accepted a bill of exchange drawn on another person; he represented himself to have authority to accept the bill, knowing that in fact he had no such authority, but honestly believing that the acceptance would be sanctioned and the bill paid by the person for whom he professed to act. The bill was dishonoured at maturity, and an indorsee, who had given value for the bill on the strength of the defendant’s representation, brought against him an action for deceit. The defendant was held liable for fraudulent misrepresentation because, despite his honest belief that the bill would be honoured, he knew he had no actual authority at the time of making the representation.

Negligent Misrepresentation

At the time Derry v Peek was decided and for several years thereafter, it was assumed that the House of Lords in that case decided that no action would lie for negligent words, at least where reliance on them produced purely financial loss, as opposed to physical damage. Thus, all non-fraudulent misrepresentations were classified as innocent misrepresentation.

The only exception to this was found in the application of the general doctrine of “constructive fraud” in Equity, whereby an action would lie for negligent misrepresentation if there existed a fiduciary relationship—such as that between a solicitor and a client—between the parties. In Nocton v Lord Ashburton,³⁶ the doctrine was applied by the House of Lords to negligent advice given by a solicitor to his client.

The Hedley Byrne Principle

However, in Hedley Byrne & Co. Ltd v Heller & Partners Ltd,³⁷ the House of Lords held that in some circumstances, an action would lie in tort for negligent misstatement. In that case, the plaintiffs entered into advertising contracts on behalf of Eastpower on terms under which they would themselves be liable if Eastpower defaulted. Wishing to check on Eastpower’s credit, they asked their bank to inquire of the defendants, who were Eastpower’s bankers. Relying on the replies, they continued to place orders and suffered substantial loss when Eastpower went into liquidation. The House of Lords held that the plaintiffs’ action failed since the defendants’ replies had been given “without responsibility,” but they also stated that, but for this disclaimer, an action for negligence could lie in such circumstances—that is, where there was a “special relationship.”

The court held that a negligent, though honest, pre-contractual misrepresentation, spoken or written, made by one party to the contract to the other party may give rise to an action for damages for financial loss caused thereby, apart from any contract or fiduciary relationship, since the law will imply a duty of care when a party seeking information from a party possessed of a special skill trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on his skill and judgment.

Extension to Pre-Contractual Negotiations

In Esso Petroleum Co. Ltd v Mardon,³⁸ the principle laid down in Hedley Byrne’s case (that negligent misrepresentation could give rise to an action in tort) was applied to pre-contractual negligent misstatements, holding that a special relationship giving rise to a duty of care may subsist between the parties negotiating a contract.

In that case, the plaintiffs had let a petrol station to the defendant for three years. During the negotiations for the lease, one L, a dealer sales representative employed by the plaintiffs with over 40 years’ experience, had told the defendant that he thought the potential “throughput” of the station in the third year would be of the order of 200,000 gallons. The defendant suggested that 100,000 gallons might be a more realistic figure but his doubts were quelled by L’s expertise and great experience. In the event, the throughput in the third year was only 86,000 gallons. At this level, the station was uneconomic and the defendant gave up the tenancy. The plaintiffs sued for arrears of rent and the defendant counterclaimed for damages for negligence. The court held for the defendant on the ground that in making statements about the station’s prospects during the pre-contractual negotiations, the plaintiffs owed the defendant a duty of care since they had a financial interest in the advice they were giving and knew that the defendant was relying on their knowledge and expertise.

Nigerian Application

In the Nigerian case of Nidogas Coy Ltd v Augusco Nig. Ltd,³⁹ the respondent, a haulage and plant company, was hired by the appellant on 5 May 1995 to lift the appellant’s gas tanker and tractor which had been involved in an accident. The gas tanker was expressly represented to the respondent to be empty. At the scene of the accident, when the respondent’s operator attempted to lift the tanker, he observed two brackets cut off from the tank, therefore suspecting that the tank was filled with gas. Despite an assurance by the appellant’s engineer that the tank was empty, the operator was reluctant to continue with the rescue operation. The appellant’s manager again repeated to him that the tank was empty and in fact pleaded with him to go ahead and lift same. The appellant’s engineer tapped the top of the tanker to show that it was empty. The respondent’s operator thereafter made to lift the tanker and as he engaged the lift lever, a deafening noise occurred from the tanker and an ensuing inferno consumed all materials in sight, including the respondent’s crane and the appellant’s tanker. The explosion showed that the tanker was filled to capacity with highly inflammable hydrocarbon gas under pressure.

The court held that where there is a contract and there is implicit in the nature of the contract an obligation to tell the truth or represent the true facts of the case, there is implicit in the nature of the contract the duty of care to disclose full particulars. The court held that in a sphere in which a person is so placed that others could reasonably rely upon his judgment or skill or ability to make careful inquiry, if that person takes it upon himself to give information or advice to or allows his information or advice to be passed on to another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise. In the instant case, the court held that there was a false representation which induced the respondent to respond positively to the contract.

Remedies for Misrepresentation

Rescission

The remedy of rescission is common to all classes of operative misrepresentation. When a person has been induced to enter into a contract by a misrepresentation, the effect on the contract is not to make it void, but voidable so as to give the party misled an option either to avoid it or, alternatively, to affirm it.

At Common Law

At common law, no remedy whatsoever was available for innocent misrepresentation. Where the false statement was a term of the contract, the effect would depend upon whether it was a condition or a warranty. If it was a warranty, the sole remedy lies in damages, whereas if it was a condition, the injured party (the representee) could elect to rescind the contract. Where the false statement was not a term of the contract—that is, if it was a mere representation—no obligation was thereby created.

In Equity

However, equity came to the aid of the innocent party by allowing him to bring an action for rescission or plead misrepresentation as a defence to an action for specific performance. In Leaf v International Galleries,⁴⁰ the plaintiff bought a picture from the defendant, which the latter stated incorrectly to have been painted by Constable. The plaintiff sued for rescission for innocent misrepresentation. The court held that he had the right to rescind but that the right to rescind had been barred by lapse of time.

Since the Judicature Act 1873, the effect of innocent misrepresentation forming no part of the contract but which forms part of the inducement to enter into the contract is a ground for rescission, but gives no right to damages. However, as established in Whittington v Seale-Hayne,⁴¹ the party misled may obtain an indemnity against any obligation which arises after the contract.

In that case, the plaintiffs, who were poultry farmers, had been induced to take a lease of premises by the defendant’s innocent oral misrepresentation that they were sanitary. In fact, this was not the case, and in consequence of the contamination of the water supply, their manager fell ill and the poultry died. The plaintiffs claimed rescission of the lease and an indemnity to cover various losses. The court held that they were entitled to have the lease rescinded and to recover what they had spent on rent, rates, and the renewal of the drains, since these were expenses incurred under the covenants in the lease or arising necessarily out of the occupation of the property, and thus “obligations created by the contract.” But they could not establish a claim for payment in respect of the other items of loss (value of stock, loss of profit, medical expenses), since these were damages, there being no obligation to carry on a poultry farm on the leased premises.

Damages for Fraudulent or Negligent Misrepresentation

In the case of fraudulent or negligent misrepresentation, the injured party is entitled to sue for damages and rescission of the contract. However, there are specific rules governing how the injured party may proceed:

Election Between Remedies

Fraud, being a tort, the representee may elect to affirm the contract and recover damages in an action of deceit, but the tort is not complete until it is acted upon by him. An election, once made, is binding forever. If he elects to disaffirm, he may:

1. Repudiate the contract without more—that is, without any recourse to legal proceedings, such as where a buyer refuses to accept goods or he returns them after delivery. Either action will be a complete defence to any action by the seller.
2. Bring an action for rescission—especially in situations where the fraudulent party ignores repudiation. An action for rescission would prevent the danger of a third party acquiring rights under the contract.
3. Sue for damages—if the injured party is sued, he may set up the fraud as a defence to an action against him for specific performance or damages and counterclaim for damages on his own account.

Communication of Rescission

As a normal rule, where the representee elects to rescind the contract, he must communicate the decision to the representor within a reasonable time, for the representor is entitled to treat the contractual nexus as continuing until he is informed of its termination. However, the duty to communicate rescission may itself be subject to two exceptions:

1. Recaption of Property: If the result of misrepresentation is that possession of property is delivered to the representor, the recaption of it by the representee is itself a communication of rescission.
2. Impossibility of Communication: If the representor disappears so effectively that it is impossible to find him, the requirement of communication would be satisfied if the representee records his intention to rescind the contract by some overt act that is reasonable in the circumstances.

This was recognised in Car and Universal Finance Co, Ltd v Caldwell,⁴² where the defendant was fraudulently induced to sell a motor car to a purchaser in return for a bad cheque. When the cheque was dishonoured, the defendant immediately informed the police and the Automobile Association requesting them to find the car, but the purchaser had deliberately absconded and could not be found. The court held that the defendant, by setting the police and the Automobile Association in motion, had sufficiently evinced his intention to rescind the contract.

Survival of Right to Damages

Although the remedy of rescission is common to all classes of operative misrepresentation, certain limitations have been placed on this right. However, the loss of the remedy of rescission by the representee will not preclude him from claiming damages for fraudulent or negligent misrepresentation. His right to damages, where this exists, still survives.

Limitations on the Right to Rescind

There are five principal limitations on the right to rescind a contract for misrepresentation:

1. Affirmation of the Contract and Acquiescence

If after becoming aware of the relevant facts and circumstances upon which the contract may be rescinded, a contracting party who has the right to rescind the contract affirms the contract either by express words or by an unequivocal act which shows an intention to affirm the contract, the right to rescind is lost.

In Long v Lloyd,⁴³ the plaintiff was induced to purchase a lorry by the defendant’s representation that it was “in excellent condition.” On the first journey after the sale, the dynamo broke and the plaintiff noticed several other serious defects. The defendant was informed of these and offered to pay half the cost of some of the repairs. On the next long journey, the lorry broke down completely and the plaintiff realised that it was in a deplorable condition. He claimed to rescind the contract. The court held that although the first journey did not amount to an affirmation of the contract as it had been undertaken merely to test the truth of the defendant’s representation, the second journey did constitute such an affirmation since the plaintiff then had knowledge that the representation was untrue.

In the Nigerian case of Taiwo v Princewell,⁴⁴ the defendant had refused to complete a building under a building contract with the plaintiff on the ground that the plaintiff, contrary to the building contract, had failed to make certain payments to him. It was shown in evidence that the defendant later continued to work and receive some payments from the plaintiff. The court held that because the defendant had later continued with the work and accepted further instalments under the contract, he had lost the right to repudiate the contract for failure on the plaintiff’s part to pay the agreed sum, though he retained the right to recover the sum due by action.

The right to rescind may also be lost where the party entitled to the right does any act that is inconsistent with avoiding the contract.

2. Lapse of Time

Lapse of time may in certain circumstances bar the right to rescind. It may be treated as evidence of affirmation where the party fails to exercise his right for a considerable time after discovering the true facts. However, since knowledge is required for affirmation, mere lapse of time does not have this effect and everything depends upon the facts of the case and the nature of the contract.

Exceptionally, the passage of time may operate to preclude rescission. For instance, in the case of an executed contract for the sale of goods, lapse of a reasonable time will be a bar to rescission. In Leaf v International Galleries,⁴⁵ the plaintiff bought from the defendant a picture of Salisbury Cathedral which the defendant innocently represented to him at the time of the purchase to have been painted by Constable. Five years later, when he tried to sell it, he discovered this was not the case. He endeavoured to return the picture and recover the price. The court held that the right to rescind had been lost. The court stated that: “It behoves the purchaser either to verify or, as the case may be, to disprove the representation within a reasonable time, or else stand or fall by it.”

3. Third Party Rights

Since the contract is voidable and not void, being valid until rescinded, if third parties, bona fide and for value, acquire rights or interests in the subject matter of the contract, those rights are valid against the person who has the right to rescind, provided the contract has not before that time been rescinded.

In White v Garden,⁴⁶ Parker bought fifty tons of iron from Garden by persuading him to take in payment a bill of exchange which had apparently been accepted by one Thomas of Rochester. Parker resold the iron to White, who acted in good faith, and Garden made delivery in one of his barges at White’s wharf. Upon discovering that the bill of exchange was worthless since there was no such person as Thomas of Rochester, Garden seized and removed part of the iron that was still in the barge. Garden was held liable in trover. The title to the iron had passed to Parker under a contract that was temporarily valid and, while still undisturbed, had been passed to an innocent purchaser.

Similarly, a shareholder who wishes to rescind his contract to take up shares in a company must do so before winding-up commences, since once winding-up commences, the rights of the creditors become fixed and they stand in the position of bona fide purchasers for value.

Note however that the third party rights rule does not apply to void contracts, since the transferee has no title to pass in such cases.

4. Executed Contracts

Generally, the right of rescission can only be exercised where the contract is still executory on both sides—that is, neither party has performed the whole of his obligation under the contract and both parties, by mutual agreement (express or implied), agree not to be bound or to be discharged from the obligations under the contract. Completion of a contract constitutes a bar to the remedy of rescission.

In the Nigerian case of Mobil Producing Nig. Unltd v Asuah,⁴⁷ the court held that as a general rule, rescission is only available where the contract remains executory on both sides.

The rule in Seddon’s case⁴⁸ provides that there can be no rescission on the ground of innocent misrepresentation after the contract has been performed or executed by an actual transfer of property under it. In that case, the plaintiff, who was a salt merchant and manufacturer, applied to purchase certain shares in the defendant’s company. He alleged that when he was negotiating for the purchase of these shares, a managing director of the company innocently misrepresented the company’s trading loss at £250 when the actual loss had been at least £900. The court held that his action must fail as an executed contract would not be set aside on the ground of misrepresentation unless it could be shown to be fraudulent.

This rule does not, however, apply in cases of fraud, breach of fiduciary duty, or presumably to negligent misrepresentation. In the Nigerian case of Sule v Aromire,⁴⁹ the court held that proof of actual knowledge of a defect, amounting to fraud, is essential before an executed contract could be set aside.

5. Impossibility of Restitutio in Integrum

It has been said in Clarke v Dickson⁵⁰ that when a party “exercises his option to rescind the contract, he must be in a state to rescind; that is, he must be in such a situation to be able to put the parties into their original state before the contract.” Thus, the right to rescind is lost if restitutio in integrum is no longer possible. If the plaintiff cannot restore the defendant to his pre-contract position, the remedy of rescission will not lie.

However, this limitation should not be too strictly construed since the larger basis of the doctrine is to maintain fairness and justice between the parties. The mere fact that the subject matter of the contract may have deteriorated before the truth is discovered is not sufficient to prevent a restitutio in integrum and thus destroy the right to rescind a contract.

Equity’s Flexible Approach

Unlike the common law condition for the operation of restitutio in integrum which requires a complete restoration of parties to their original positions, equity does not require restitution to be complete or precise. Equity strives to achieve practical justice. It attempts to put the parties back, not necessarily in the position they were before entering into the contract, but in a position as good as they were in.

In Spence v Crawford,⁵¹ repayment of the price of shares with interest was held to satisfy the doctrine of restitutio in integrum, as what is ordered to be restored is fair and just and substantially identical to the subject matter of the contract.

In the Nigerian case of Oluwo v Adewale,⁵² one Oluwo, owner of a developed piece of landed property, was fraudulently induced by the defendant to execute a document purported to be a mortgage of the property to the defendant, whereas it was an out and out sale to him. After the death of Oluwo, his heirs and successors brought an action for the rescission of the fraudulent agreement. During the interval between the death of Oluwo and the institution of the action, the defendant had taken possession of the property and had collected rents on it. He had also paid rates and carried out repairs on the property. The court held that the agreement was obtained by fraudulent misrepresentation and that the plaintiffs were entitled to have the deed set aside. In order to effect restitutio in integrum, the court ordered that the fraudulent agreement be replaced by a mortgage in favour of the estate of the deceased. The land would revert back fully to Oluwo’s estate as soon as the £3,200 paid to him by the defendant, plus interest at the rate of 5% per annum, had been paid back to the latter. Moreover, account was to be taken of all the rent collected by the defendant on the property, and after subtracting his expenses (rates, taxes, and repairs), the excess was to be used in discharging the interest on the debt and reducing the principal.

Relationship with Other Areas of Contract Law

Understanding misrepresentation requires knowledge of other fundamental concepts in contract law:

• Formation of Contract: Misrepresentation occurs during the pre-contractual negotiation phase and affects the validity of what would otherwise be a properly formed contract.
• Contents of Contract: The distinction between terms and representations is crucial—representations induce the contract but do not form part of its contents.
• Capacity to Contract: Both capacity and misrepresentation relate to the validity of contracts, though they operate on different grounds.

Conclusion

Misrepresentation is a critical vitiating factor in contract law that protects parties from entering into contracts based on false statements. The law carefully balances the need to protect the innocent against fraud and negligence with the principle that parties must exercise reasonable care in their own affairs.

The Nigerian courts have consistently applied and developed the principles of misrepresentation in line with both English common law principles and the peculiarities of Nigerian commercial practice. From the landmark case of John Holt & Co Ltd v Oladunjoye to modern decisions like Nidogas Coy Ltd v Augusco Nig. Ltd, Nigerian jurisprudence has demonstrated a sophisticated understanding of the nuances between fraudulent, negligent, and innocent misrepresentation.

Key principles to remember include:

1. Misrepresentation must be a false statement of fact, not opinion, intention, or law (subject to exceptions).
2. The representation must induce the contract and be addressed to the party misled.
3. Mere silence is generally not misrepresentation, except in cases of uberrimae fidei, fiduciary relationships, or where silence distorts a positive representation.
4. The remedy of rescission is available for all types of misrepresentation, subject to limitations including affirmation, lapse of time, third party rights, executed contracts, and impossibility of restitutio in integrum.
5. Damages are available for fraudulent and negligent misrepresentation, but not for innocent misrepresentation at common law.

For students of contract law, understanding misrepresentation is essential not only for academic purposes but also for practical application in commercial transactions, property dealings, and dispute resolution. The principles discussed in this article continue to evolve through judicial interpretation, reflecting the dynamic nature of commercial relationships in contemporary Nigeria.

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Footnotes

Footnotes

1. See generally Sodipo v Coker (1932) 11 NLR 138. ↩

2. Sodipo v Coker (1932) 11 NLR 138. ↩

3. R v Barnard (1837) 7 C&P 784. ↩

4. Livesley v Rathbone (CA.T. No. 574). ↩

5. Walters v Morgan (1861) 3 De GF & J 708. ↩

6. Walters v Morgan (1861) 3 De GF & J 708 at 723. ↩

7. Percival v Wright (1902) 2 Ch 421. ↩

8. Keates v Lord Cardogan (1851) 10 CB 591. ↩

9. Dimmock v Hallett (1866) LR 2 Ch App 21. ↩

10. John Holt & Co Ltd v Oladunjoye (1936) 13 NLR 1. ↩

11. With v O’Flanagan (1936) Ch 575. ↩

12. Carter v Boehn (1766) 3 Burr 1905. ↩

13. Gordon v Gordon (1821) 3 Swan 400. ↩

14. Tate v Williamson (1866) 2 Ch App 55. ↩

15. Bisset v Wilkinson (1927) AC 177. ↩

16. Smith v Land and House Property Corporation (1884) 28 Ch D 7. ↩

17. Mohammed v Mohammed (2012) 11 NWLR (Pt 1310) 1. ↩

18. Edgington v Fitzmaurice (1885) 29 Ch D 459 at 483. ↩

19. Re Shackleton (1875) LR 10 Ch App 446. ↩

20. Peek v Gurney (1873) LR 6 HL 377. ↩

21. Pilmore v Hood (1858) 5 Bing NC 97. ↩

22. Horsfall v Thomas (1862) 1 H&C 90. ↩

23. Redgrave v Hurd (1881) 20 Ch D 1 at 13. ↩

24. Attwood v Small (1838) 6 Cl & Fin 232. ↩

25. Nidogas Coy Ltd v Augusco Nig. Ltd (2001) 16 NWLR (Pt 739) 268. ↩

26. Edgington v Fitzmaurice (1885) 29 Ch D 459. ↩

27. Smith v Kay (1859) 7 HLC 750. ↩

28. Derry v Peek (1889) 14 App Cas 337. ↩

29. Derry v Peek (1889) 14 App Cas 337 at 374. ↩

30. Teriba v Adeyemo (2010) 13 NWLR (Pt 1211) 242. ↩

31. Reese Silver Mining Co v Smith (1869) LR 4 HL 64. ↩

32. Polhill v Walter (1832) 3 B & Ad 114. ↩

33. Afegbai v Attorney-General, Edo State (2001) 14 NWLR (Pt 733) 425. ↩

34. Sule v Aromire (1951) 20 NLR 20. ↩

35. Polhill v Walter (1832) 3 B & Ad 114. ↩

36. Nocton v Lord Ashburton (1914) AC 932. ↩

37. Hedley Byrne & Co. Ltd v Heller & Partners Ltd (1964) AC 465. ↩

38. Esso Petroleum Co. Ltd v Mardon (1976) QB 801. ↩

39. Nidogas Coy Ltd v Augusco Nig. Ltd (2001) 18 NWLR (Pt 739) 268. ↩

40. Leaf v International Galleries (1950) 2 KB 86. ↩

41. Whittington v Seale-Hayne (1900) 82 LT 49. ↩

42. Car and Universal Finance Co, Ltd v Caldwell (1961) 1 QB 525. ↩

43. Long v Lloyd (1958) 1 WLR 753. ↩

44. Taiwo v Princewell (1961) 1 All NLR 240. ↩

45. Leaf v International Galleries (1950) 2 KB 86. ↩

46. White v Garden (1851) 10 CB 919. ↩

47. Mobil Producing Nig. Unltd v Asuah (2001) 16 NWLR (Pt 740) 723. ↩

48. Seddon v North Eastern Salt Co (1905) 1 Ch 326. ↩

49. Sule v Aromire (1951) 20 NLR 20. ↩

50. Clarke v Dickson (1858) EB & H 148. ↩

51. Spence v Crawford (1939) 3 All ER 271. ↩

52. Oluwo v Adewale (1964) NMLR 17. ↩