Fraudulent Misrepresentation and Contract Termination
A recent English case (Ross River Limited and Blue River LP v Cambridge City Football Club) highlights the importance of being aware whether a duty to disclose information exists in any situation, and (if information is given) the importance of giving accurate information – otherwise the other party may be able to terminate the contract on the grounds of fraudulent misrepresentation.
Although it is an English case, Scots law on recission or termination of a contract on the grounds of fraudulent misrepresentation is very similar.
Circumstances
The Club had an agreement to sell their ground to the Developer. That agreement included an obligation on the Developer to pay overage (or a top up to the price) to the Club in certain circumstances. However before any overage became due the Club needed funds urgently and so decided to enter into a contract with the Developer to give up the Club's right to future overage in exchange for a present payment.
The Developer's agent was asked by Club's surveyor to provide the surveyor with information to assist him in assessing the value of the Club's entitlements under the overage provisions. This included information in relation to the likely density of residential development for which it was expected that planning consent could be obtained and information on progress in resolving an access issue.
The view given to the Club's surveyor by the Developer's agent as to the potential development profit was more pessimistic than the agent actually believed to be achievable; in some areas he concealed information and in others he gave false statements.
The Club's surveyor gave clear advice to the Club as to the position on disclosure of information, his report to the Club going so far as to say that "From our previous experience with [the Developer's agent] it is unlikely that such information or assistance would be given, as at best he is obstructive and worst objectionable."
In spite of this advice the Club proceeded with the contract to give up their overage entitlement but then (having discovered the true valuation position) sought to terminate that contract – and therefore once again become entitled to the overage (when due).
Court's decision
The court decided that the Club were entitled to rescind the contract – because they were induced to enter into it by the Developer's agent's fraudulent misrepresentations.
It was agreed that there was no duty of disclosure on the Developer or its agent as regards negotiations for the contract for the Club to give up its overage entitlement. There may have been such a duty in relation to the original overage agreement, as the parties could be said to be engaged in a joint enterprise, but each case would turn on its facts.
However even though there was no duty of disclosure in this case, it was not acceptable for the Developer's Agent to provide false or misleading information. By doing so the agent was making fraudulent misrepresentations.
When the Developer's agent was asked by the Club's surveyor for information, he should have either:
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Refused to give any information and left the Club to carry out its own investigations or
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Given accurate information and genuine opinions on the position.
Although the Club's surveyor had clearly warned the Club that the Developer's agent's information was not necessarily reliable, this did not get the Developer or its agent off the hook. The court said that:
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If the Club had known for certain that the Developer's agent had lied then they may have sought the information from other sources.
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Had the agent told the truth then the Club's surveyor may have been able to provide the Club with valuation advice which would have resulted in the Club deciding to wait until the overage became payable and meantime to borrow on the security of their contractual rights to future overage.
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The agent's actions had the desired result (for the agent and the Developer) ie it resulted in the Club giving up their overage for a price which was less than its true value. In the court's view, the Developer's agent's fraud was still actively present in the Club's mind when it entered into the contract – and it followed therefore that the Club were entitled to rescind.
Conclusion
The principles in this case have widespread application. When negotiating a contract or providing information to the party on the other side of contract negotiations, parties should consider whether they have a duty of disclosure to one another. And even if there is no duty to disclose, if one party is asked for information by the other, then the response should either be to refuse in clear language or to give full and accurate information to the best of the provider's knowledge and belief.
Failure to adhere to these principles could result in a contracts being rescindable by the person to whom a misrepresentation was made – if that misrepresentation was material and induced the person to enter into the contract.
For further information please contact: Heather Nisbet