Misrepresentation

Misrepresentation

This part looks at the principles surrounding misrepresentation
as a defence in mortgage proceedings
Information Sheet

What is misrepresentation?

A misrepresentation is a false statement of fact which induces a party to enter into a contract. It applies equally to contracts of mortgage.



The primary remedy for misrepresentation is rescission i.e. the setting aside of the contract (Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745 per Longmore LJ; Chitty on Contracts, 33rd Edition, Volume 1, para 7-112). This is rescission of a contract ab initio, which has retrospective effect, rather than for subsequent breach (Chitty, para 7-115). It is usually used in mortgage cases to reflect a cause of action to set aside a contract of mortgage, although it is also frequently pleaded as a defence to enforcement of a mortgage without reference to a counterclaim for relief.


The mortgage cases involving misrepresentation rarely distinguish between misrepresentations which are fraudulent, negligent, or innocent, or whether the cause of action is relied upon at common law or under the Misrepresentation Act 1967. In practice, they are invariably fraudulent, in that they usually involve deliberately false or misleading statements or the deliberate concealment of material facts which to a greater or lesser extent are intended to induce the other party to enter into the mortgage.



How does it arise?

Misrepresentation may arise in two party cases, that is as between the lender and borrower, and may typically involve a mortgage fraud committed by the borrower (and/or the borrower’s agent, such as a broker) by say misrepresenting the borrower’s identity and/or personal/financial circumstances (e.g. Halifax Building Society v Thomas [1996] Ch 217). More elaborate frauds may involve others, such as valuers and/or solicitors in which the value or extent of the security may be misrepresented, or for example where simultaneous loans are applied for without reference to the other (e.g. Halifax Plc v Curry Popeck (a firm) [2008] EWHC 1692 (Ch). For professional guidance see the Law Society’s Practice Note on Mortgage Frauds (13 January 2020)).


Most of the cases however involve three parties and typically follow the pattern of those involving undue influence with (1) a lender as mortgagee, (2) a husband as borrower and joint mortgagor, and (3) his wife, as surety and joint mortgagor, with the misrepresentation invariably being practised by the husband upon the wife. In fact, most of the cases involve some element of both misrepresentation and undue influence (Both Barclays Bank Plc v O’Brien [1994] 1 AC 180 and CIBC Mortgages Plc v Pitt [1994] 1 AC 200 involved closely related allegations of undue influence and misrepresentation), with the statements relied upon forming a constituent element in the use of actual undue influence, or in the abuse of trust and confidence in cases of presumed undue influence. 


A duty of candour and fairness

Significantly, in the context of misrepresentation, non-disclosure is not ordinarily actionable (even in the context of undue influence, non-disclosure as opposed to the deliberate concealment or suppression of material facts is insufficient by itself to amount to undue influence. More is needed, see Royal Bank of Scotland Plc v Chandra [2010] EWHC 105 (Ch) per David Richards J at [140]). 

However, where there is a relationship of trust and confidence, it will have the effect of requiring the trusted party to disclose information to the other and this has been extended in recent times to take in a duty of candour and fairness. Thus, in Royal Bank of Scotland Plc v Etridge (No. 2) [2002] 2 AC 773 Lord Nicholls said that:

“[32] ... 
Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing hopes or fears, a degree of hyperbole may only be natural. Courts should not readily treat such exaggerations as misstatements. 

[33] Inaccurate explanations of a proposed transaction are a different matter. So are cases where a husband, in whom a wife has reposed trust and confidence for the management of their financial affairs, prefers his interests to hers and makes a choice for both of them on that footing. He fails to discharge the obligation of candour and fairness he owes his wife who is to him to make the major financial decisions.”

In Royal Bank of Scotland Plc v Chandra [2010] EWHC 105 (Ch) David Richards J doubted whether this passage supported a general duty of disclosure, and said that mis-stating the position or misleading the wife is different from inadvertent failure to disclose, and that a statement which, though strictly true, is misleading without qualification will fall within the observations of Lord Nicholls. Likewise, a deliberate suppression of information because the husband knows that, if disclosed, it will deter the wife from [entering into the transaction] will involve an abuse by him of her confidence. 

In Hewett v First Plus Financial Group Plc [2010] EWCA Civ 312 per Briggs J at [28] (a case involving undue influence and misrepresentation) this was regarded as a perceptive analysis of the difference between inadvertent failure to disclose and a deliberate suppression of information in the context of a confidential husband and wife relationship but the court said that it would be wrong to confine a husband’s obligation of candour and fairness when proposing a risky financial transaction to his wife as confined to cases where the wife meekly follows her husband’s directions without question. The purpose of an obligation of candour is that the wife should be able to make an informed decision (with or without the benefit of independent advice) properly and fairly appraised of the relevant circumstances. On the facts, it was held that the obligation of fairness and candour required the husband to disclose to his wife that he was having an affair when he persuaded her to join in a charge to refinance his debts because it carried with it the serious risk that it would lead in due course to his departure from the family and the withdrawal of both emotional and financial support, as eventually occurred. The question whether this was a material fact calling for disclosure was to be decided by an objective test, which was best addressed by asking whether a solicitor, consulted by the wife for advice about the wisdom of the transaction, would have thought it relevant to know that her husband was, while asking for her unqualified trust, at the same time conducting a clandestine affair. There could only be an affirmative answer to that question.

Notice

As with cases of undue influence, a lender may be affected by actual, imputed or constructive notice of misrepresentation, in the same way, and where a lender is put on inquiry, it will be required to take the same steps to protect itself against the risk of being saddled with constructive notice. The same points also apply in respect of remedies and alteration/indemnity at HM Land Registry. For the principles, see under Undue Influence.


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