The types of misrepresentation are fraudulent misrepresentation; negligent misrepresentation at common law; and innocent misrepresentation. Which category a misrepresentation falls into depends on the state of mind of the person making the statement. The reason why the category matters is that the remedies for each type differ.
This is also known as the tort of deceit. It was defined by Lord Herschell in the case of Derry v Peek (1889) as a false statement that is ‘made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly as to whether it be true or false’. In otherwords, a party makes a fraudulent misrepresentation if they make a false statement, and at the time of making it, do not believe it to be true.
Negligent misrepresentation at common law
A negligent misstatement which causes financial loss can be one of the circumstances that lead to damages recoverable in tort. This was the position of the House of Lords in Hedley Byrne & Co v Heller & Partners Ltd (1964). The House of Lords further stated obiter that there could be liability for negligent misrepresentation on the normal principles of tort, where there was a ‘special relationship’ between the parties.
It is still not completely clear what precisely is a ‘special relationship’ but, broadly speaking, it appears that such a relationship will only arise where the maker of a false statement has some knowledge or skill relevant to the subject matter of the contract, and can reasonably foresee that the other party will rely on the statement. This was held to be the position further illustrated in the case of Esso Petroleum Co. Ltd v Mardon (1976).
Before the Hedley Bryne v Heller case, the phrase ‘innocent misrepresentation’ was used to describe all misrepresentations which were not fraudulent. But after the case, innocent misrepresentation has been interpreted to mean misrepresentation made entirely without fault. Hence where one party has entered into a contract because of the other’s false statement, the other party can avoid liability for damages by proving that at the time the contract was made, they believed the statement to be true, and had reasonable grounds for that belief.