Legal Briefing

Fraudulent misrepresentation: ‘positive evidence’ needed to rebut presumption of inducement

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Corporate and commercial | 01 February 2015

The High Court’s decision in Richard Edwards v Jahit Ahmet Ashik [2014] has provided useful guidance on what is required to rebut the presumption that fraudulent pre-contractual representations are taken to have induced the recipient into entering a contract. Timothy Fancourt QC, sitting as a Deputy High Court Judge, held that positive evidence that the representee was not in fact induced to act by the misrepresentation is required for such purposes and merely proving on a balance of the probabilities that the representee would have proceeded in the same manner anyway would not be enough. The Deputy Judge also confirmed that, in order to rebut the presumption, a representor does not need to go as far as demonstrating that the misrepresentation played no part at all, but they have to show that it did not play a real and substantial part in the decision to enter the agreement.

MISREPRESENTATION

It is an established principle that, in order to bring a successful claim for innocent or negligent misrepresentation, a claimant must prove that an inaccurate representation induced them to enter into a contract. However, where the representation is proved to be fraudulent, a rebuttable presumption arises that the representee was in fact induced to enter into the agreement by virtue of the representations made. Furthermore, the burden of proof shifts to the representor who, in order to defend the allegation, has to demonstrate that the fraudulent misrepresentation did not in fact 
cause the representee to enter into 
the contract.

EDWARDS V ASHIK

In Edwards v Ashik, the High Court heard the appeal of Mr Edwards against two County Court preliminary issue decisions:

  1. he had not been induced into purchasing a nightclub as a result of fraudulent misrepresentations by the seller, Mr Ashik; and
  2. that, even if he had had the right to rescind the contract, he had lost it as a result of affirming the contract by continuing to make use of the property commercially after he believed the right had arisen.

At first instance, Her Honour Judge Faber directed that if Mr Ashik could:

‘… establish that Mr Edwards would have gone ahead with the acquisition anyway then he [would] have proved that there was no reliance on the representations in the pre-contract enquiries’.

She went on to find that it was more likely than not that Mr Edwards would have proceeded with the purchase in any event and that the answers to the pre-contract enquiries (the fraudulent misrepresentations) played no part at all 
in Mr Edwards’ decision to proceed.

In addition, even though the issue did not strictly arise given her finding that there was no inducement, Judge Faber concluded that Mr Edwards had lost any right to rescind the contract (should it have ever arisen) as he had affirmed it by his continued use of the nightclub.

JUDGMENT ON APPEAL

Mr Edwards appealed the decision to the High Court, where it was overturned.

The Deputy Judge confirmed, as was common ground between the parties, 
that, where representations are established to have been fraudulent, a presumption arises that the representee was materially induced to enter the contract. Accordingly, in the present 
case, the burden shifted to Mr Ashik, who had to prove, on the balance of probabilities, that the misrepresentations were not a material cause of the purchase.

Most notably, the Deputy Judge went on to consider how the presumption could, in practice, be rebutted. In doing so, he relied heavily on the case of Barton v County Natwest Ltd [1999], in which a bank manager was unable to rebut the presumption that his fraudulent representations induced several people to enter into guarantees in respect of a related transaction. In that case, the judge found that it did not matter that he had rejected the evidence of the guarantors who argued that they would have acted differently had they known the representations were inaccurate; that was not enough as it had no impact on the presumption. The burden of proof remained with the bank manager and there needed to be ‘positive evidence that the [guarantors were] not in fact induced by the misrepresentation’; that evidence would need to show that, for example:

‘… the representee (i) never knew of the statement until after he had entered into the contract; (ii) discovered 
before he entered into the contract 
that the statement was false; (iii) showed by words or clear conduct 
that the statement did not influence 
his decision’1.

The Deputy Judge also cited the Court of Appeal decision in Dadourian Group v Simms [2009], in which the test was further refined when the Court held that the presumption of inducement was rebutted by the representor, showing that the misrepresentation did not play ‘a real and substantial part’ in the representee’s decision to enter into the transaction and that he did not have to go as far as to show that the misrepresentation played no part at all.

In the present case, it was held that the first instance judge was wrong to treat the issue of whether Mr Edwards was materially induced by the misrepresentation as depending on the answer to the question 
of what Mr Edwards would have done if he had been told the truth. The issue was whether Mr Ashik had positively proved that the representation did not induce Mr Edwards to enter into the contract. The presumption would have only been rebutted if, for example, the cross-examination of 
Mr Edwards had established an unqualified and clear admission that he did not in fact rely on the fact his solicitors told him to proceed with the transaction in light of 
Mr Ashik’s representations.

The Deputy Judge agreed with the submissions made on behalf of Mr Ashik that Mr Edwards had been shown to have a surprisingly carefree approach to the proposed acquisition. However, he was not persuaded by the argument that on the basis that Mr Edwards was reckless in his approach to buying the nightclubs; that he liked and wanted the nightclub and was not concerned with the details, the presumption should be rebutted. The Deputy Judge emphasised that even where a purchaser was minded and desired to proceed, as Mr Edwards clearly was, a misrepresentation that induced them to continue with their acquisition could be a sufficient inducement. Here, Mr Ashik had presented insufficient positive evidence to demonstrate that Mr Edwards was not induced to enter into the contract as a result of the representations. Therefore 
the presumption was not rebutted.

AFFIRMATION

Mr Ashik had successfully argued at first instance that, even if a right to rescind the contract had arisen as a result of the fraudulent inducement, Mr Edwards’ continued use of the nightclub for six weeks after he discovered the misrepresentation amounted to an unequivocal demonstration that he intended to proceed with the contract.

The Deputy Judge agreed with the first instance ruling that the continued occupation and business use of the property by Mr Edwards would probably have amounted to an affirmation of the contract if taken alone. However, he concluded that the correspondence between the parties during this time clearly indicated that legal action for fraud was about to be taken and accordingly there was no affirmation.

The Deputy Judge emphasised that the test was an objective one and did not depend on Mr Edwards’ intention, or on the impression made on Mr Ashik, but only on what was objectively communicated to Mr Ashik by Mr Edwards through correspondence and by his actions. The objective effect of the continuity of the occupation of the nightclub had to be assessed together with the objective effect of the solicitors’ correspondence between the parties. He concluded that it was clear from the correspondence that Mr Edwards had communicated his intention to claim remedies for fraud from the outset and that the delay was only to see what Mr Ashik had to say about the allegations.

COMMENT

This decision provides clarification and confirmation of the elements of a fraudulent misrepresentation claim, and more specifically, what is required to rebut the presumption that fraudulent misrepresentations induced the representee to enter into the contract. It also demonstrates the power of that presumption and just how difficult it is to overcome that hurdle. Merely discrediting the representee will not be enough even if you can establish that they are not truthful in giving evidence that they would have acted differently had they known of the inaccuracy of the representations; positive evidence that the fraudulent misrepresentations did not play a real or substantial part in inducing the representee to enter into the contract is required.

The case also serves as a reminder of the risks that affirmation potentially poses to those induced. An injured party will be judged objectively when assertions are made that they have affirmed tainted contracts; certain remedies may potentially be unavailable to them as a result of their actions or, more likely, inaction. To avoid such an unsatisfactory result, a party that becomes aware of a possible misrepresentation must (a) take no steps that might be seen to affirm the contract; (b) expressly reserve its rights in any communications with the other parties; 
and (c) take legal advice without delay.

By Henry Stewart, associate, and 
Chimé Metok Dorjee, associate, 
Cooley (UK) LLP.

E-mail: hstewart@cooley.com; 
cdorjee@cooley.com.

NOTE

  1. Taken from paragraph 57 of Morritt LJ’s judgment in the Barton case (and referenced in Edwards v Ashik) in which he cited examples prepared by counsel for the guarantors but stated that, although he could not imagine further applicable categories, that was not a ground for limiting the facts sufficient to rebut the presumption.