Negligent misrepresentation is a concept of law, a misrepresentation is misleading, untrue, falsified statement made by one party to another, during negotiations. The misleading statement encourages another party to accept the offer of agreement, which may lead to damages due to a falsified image of the situation of the company. Typically the misled party can rescind the contract and further demand compensation for damages. The sources of law of misrepresentation are common equity, law and statute and it was officially amended by the Misrepresentation Act in 1967. The principles of misrepresentation have been adopted by various Commonwealth countries and the USA (Collin Brooks,2008). The case Donoghue v Stevenson in 1932 was a landmark court ruling by the House of Lords, and it laid the foundation for the modernization of law of negligence, creating general principles of the duty of care (Donoghue v Stevenson,1932).
Misrepresentation Act 1967
Before the amendment of the Act, the law considered that there were specifically two categories of misrepresentation: fraudulent and innocent. The effect of the amendment is firstly to create a new section by segregating innocent misrepresentation into two separate groups: negligent and "wholly" innocent; and secondly to define the remedies in respect of each of the categories (Misrepresentation Act,1967).
Categories of Misrepresentation
Categories defined in the Act (Misrepresentation Act 1967):
- Negligent misrepresentation the default category of misrepresentation. When misrepresentation occurs it simply becomes negligent and it is up to the defendant to prove, that it was an innocent misrepresentation and no ill will was behind it.
(There are no words "negligent misrepresentation" in 1967 Act, that term was created and established by practicing academic lawyers) (Hooley R, (1991)).
- Fraudulent misrepresentation is a situation where the guilty of misrepresentation has to:
- knows the statement to be false,
- does not believe in the statement,
- is reckless as to its truth.
It was first defined in the Donohoe v Donohoe case when defendant using this 3-step test was proven to fraudulently misrepresent his client.
- Innocent misrepresentation is "belief on reasonable grounds up till the time of the contract that the facts represented are true" (Misrepresentation Act,1967).
Where statements or information are being negligently supplied, the party has liability where it does not exercise the reasonable care or/and competence in gathering or/and disclosing the information, except the accountability is limited only to losses caused by this misrepresentation to the person or limited group of persons. Another example was presented by Howard B. Wiener - "Where A negotiates with X bank for $50,000 credit and the bank requires an audit by independent public accountants, the accountants will be liable only to X bank for negligent misrepresentation. If fortuitously, A had decided to go to Y bank for credit, the accounting firm would not be liable" (Wiener HN, 1982).
Royal Mail Case
"The Royal Mail Case" or "R v Kylsant & Otrs" was an English criminal case from 1931, when the Lord Kylsant, the director of the Royal Mail Steam Packet Company, with the help of the company clerk had falsified a trading prospectus to make the company look more profitable and to mislead into investing in it, potential investors. After the audit, Kylsant and John Moreland, the company accountant, were promptly arrested, and the company was quickly liquidated and reopened as The Royal Mail Lines Ltd with the British government backing (Brooks.C,2008).
Its impact, the case induced changes in the auditing companies, specifically in methods used for audit, because the case highlighted flaws in the system that company accounts were checked and reviewed. The case was a shock to the industrial and accountancy world as it changed a lot of companies policies regarding financial activities and has also been responsible for reducing the public trust (Edwards J.R.,1989).
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Author: Gabriela Zabawa