One of the grounds for rescission of an agreement is misrepresentation.  This article, firstly, analyses the elements to establish the claim of misrepresentation, secondly, discusses the remedy of rescission under the claim of misrepresentation and, thirdly, investigates the difficulties in establishing misrepresentation in sale and purchase transaction of landed property in Hong Kong.

Importance of Misrepresentation

Misrepresentation is a false representation made by one party to induce another party to enter into a contract.This may give rise to a ground for a purchaser to rescind a contract, i.e. return to the position as if no contract has been made.Rescission of contract is an important remedy for purchaser since damages may not be sufficient in certain circumstances.

A misrepresentation may be either fraudulent or innocent.Fraudulent misrepresentation refers to a false representation made by a representor knowingly, or without belief in its truth, or recklessly or carelessly as to whether it is true or false.Innocent misrepresentation refers to a false representation made by a representor with an honest belief that the representation is true.

Remedies for Misrepresentation

Remedies available to a purchaser depend on the type of misrepresentation made by the vendor or by his agent.Under Common Law principles, representee in the case of fraudulent misrepresentation may rescind the contract and/or claim damages.Pursuant to section 2 of Misrepresentation Ordinance, Cap. 284 (the “MO”), a person may claim rescission under innocent misrepresentation.However, according to section 3(2) of MO, it is possible that only damages are awarded in lieu of rescission as the Court was given such discretionary power to award damages if it is of the opinion that it would be equitable to do so.

The effect of misrepresentations in sale and purchase of property is best demonstrated byYili Concepts (HKG) Limited v Lee Wai Chuen, Hong Kong Property Services (Agency) Limited[2000] HKCU 748 andGreen Park Properties Limited v Dorku Limited [2002] 1 HKC 121, CFA.These two cases illustrate the problems that may arise when a vendor entered into agreement for sale and purchase with a purchaser where the words or conducts of the vendor or its agent can amount to misrepresentations made to the purchaser.

Facts and Issues

In Yili Concepts (HKG) Limited v Lee Wai Chuen, Hong Kong Property Services (Agency) Limited, at the time of the first viewing of a property on 4^th September 1997, the estate agents represented to the purchaser that the enclosed area of the property excluding a garden was 1,200 square feet (the “1^st Misrepresentation”).Before the second viewing of the Property on 13^th September 1997 and the signing of the Provisional Agreement for Sale and Purchase by the purchaser on 15^th September 1997, the estate agents made a representation to the purchaser in the form of a valuation report faxed by the estate agents to the purchaser on 12^th September 1997 to the effect that the value of the Property could be determined by reference to an enclosed area of 1,200 square feet (the“2^nd Misrepresentation”).Relying on these representations, the purchaser entered into the provisional agreement with the vendor.The representations were later found to be false as the “gross area” of the Property was no more than 1,006 square feet.The main issues were whether such misrepresentations were made by the estate agents on behalf of the vendor; and whether the purchaser was entitled to rescind the provisional agreement.

Decision

It is a question of fact in each case whether an estate agent is authorised by and therefore acting for a particular party in providing information relating to a property to another party.Although an estate agent in Hong Kong usually acts as a broker taking commission from both sides, he may assume different roles at different stages of the negotiation leading to the transaction.

The Court held that the estate agents, in the present case, made the 1^st Misrepresentation as an agent for the vendor but the estate agents were acting on their own in making the 2^nd Misrepresentation.The Court further found that the purchaser relied on the misrepresentations in entering into the provisional agreement.Therefore, the purchaser was entitled to rescind the provisional agreement and a return of the initial deposit paid with interests.The vendor and the estate agents were jointly and severally liable to the purchaser.

Facts and Issues

In Green Park Properties Limited v Dorku Limited, the purchaser intended to purchase a shop (the “Property”) from the vendor.The purchaser has inspected the Property twice.During the first inspection, the purchaser together with the estate agent walked to the very end of the Property and the purchaser saw the yard at the back of the Property.There was a gate separating the yard from the scavenger lane which lies beyond the yard.There were two toilets on the left and right of the yard.The purchaser was under the impression that the yard was part of the Property.The purchaser said that there was no reason for him to suspect that the yard was not part of the Property.

During the second inspection, the estate agent showed a tenancy plan to the purchaser.According to the tenancy plan, the Property includes the yard.

After the second inspection, the purchaser signed the Provisional Agreement for Sale and Purchase with the vendor and paid a total sum of HK$10,800,000.00 as deposits.

Title deeds and documents of the Property were sent to the purchaser’s solicitors.One of the requisitions raised by the purchaser’s solicitors was that the vendor had agreed to sell to the purchaser the Property which included the yard.However, according to the assignment plan, the yard was not part of the Property belonging to the vendor.The yard was in fact a common area.The vendor had failed to show a good title to the yard.The purchaser’s solicitors further alleged that the vendor had misrepresented that the yard was included in the Property to be sold to the purchaser.The major issue is whether there was misrepresentation made by the vendor.

Decision

The Court of Final Appeal upheld the decision of the lower Courts that there had been misrepresentation made by the vendor’s conduct that the yard was part of the Property, i.e. by showing the Property to the purchaser and by showing the tenancy plan to the purchaser.The Court found that, in the circumstances of the case, the only way for the purchaser to ascertain the boundary of the Property was to refer to the tenancy plan.The Court held that since the tenancy agreement, annexed to the Provisional Agreement, referred to the tenancy plan to identify the area purportedly under the vendor’s ownership. It was plainly permissible for the purchaser to rely upon that.As the purchaser relied upon the misrepresentation in entering into the Provisional Agreement, the Court reaffirmed the decisions of the lower Courts that misrepresentation had been made by the vendor, the purchaser had relied on the misrepresentation in entering into the Provisional Agreement and hence, the purchaser was entitled to rescind the Provisional Agreement.

Legal Hurdles for the claim of Misrepresentation

To prove fraudulent misrepresentation, a purchaser, as the representee, must show that false representation made by either the vendor or its estate agent, as the representor, was made by the representor knowingly, or without belief in its truth, or recklessly or carelessly as to whether it is true or false.

Where a purchaser seeks to rescind an agreement on the ground of misrepresentation, while it is not necessary for the purchaser to prove that if the misrepresentation had not been made, he would not have entered into the agreement, it is still required for the purchaser to adduce evidence to show that he was materially influenced by the misrepresentation at the time the agreement was entered into.

Effect of Full Agreement Clause in Provisional Agreement

In a Provisional Agreement for sale and purchase of property, there will usually be a clause to exclude the liability of the vendor or its agent based on misrepresentation.One of the examples of such clause is, “This Agreement supercedes all prior negotiations, representation, understanding and agreements of the parties hereto”.Section 4 of the MO stipulates that those terms in an agreement shall be of no effect except it satisfies the requirement of reasonableness as stated in section 3(1) of the Control of Exemption Clauses Ordinance, Cap. 71 (the “CECO”).

The application of the above provisions has been demonstrated in Green Park Properties Limited v Dorku Limited in the Court of First Instance and the trial judge found that the terms in the Provisional Agreement did not satisfy the reasonableness test.However, the Court of Final Appeal casted doubt on the approach of the trial judge dealing with the issue.Although it was not an issue in dispute in the appeal, the position as to the application of the MO and the CECO provisions is not certain.Therefore, it is advisable for the purchaser to ensure that all representations and warranties made by the vendor and/or its agent prior to the Provisional Agreement are fully set out in the Provisional Agreement.