Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 14 Materiality and inducement

The general law requirements

14.01 Relief for misrepresentation at law or in equity will be had if it can be proved that the representee was induced to enter into the contract – any type of contract – by virtue of that misrepresentation. The representee must rely1 on the truth of the representation in making his decision to contract with the representor. This statement is beyond dispute.2 Further, the fact that the impugned representation was only one of a number of factors that played upon the mind of the representee in inducing him to enter into the contract will not disentitle him from seeking relief, provided that the misrepresentation in fact influenced his decision.3 14.02 The materiality of the representation and its place within the general law of misrepresentation has caused some awkwardness in that the courts have never been entirely certain what “materiality” in this sense means and whether it is in fact a separate requirement for relief. There have been some judges who have treated materiality as a concept similar to or the same as or part of inducement itself in that there could or ought to be no inducement if the representation was not material.4 14.03 Materiality is a distinct notion and a separate element of an actionable misrepresentation.5 It is a concept that has been defined extensively in the realm of insurance law.

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However, in the general law of misrepresentation as it applies to all contracts, in most, but not all, instances the courts have been shy to define materiality. The meaning of materiality as it is applied to insurance contracts is inextricably tied to a standard of reasonableness or prudence; materiality under the general law is less likely to have such a meaning.6 14.04 The courts have circumscribed relief for misrepresentations by reference to the falsity of the representation, the reliance or inducement of the representee7 and the materiality of the representation. Materiality is therefore a quality possessed by the representation under review. It carries a connection between the subject-matter under negotiation and what is said and done during the discussions leading to the contract. Some judges have sought to hold that the representation must be material to something, namely to the contract itself8 or to inducement of the other party.9 The former suggests that the content of the representation must relate to the contract, while the latter suggests a connection between the representation and the representee’s decision to contract. 14.05 It appears that the latter is closer to the mark. In Smith v Chadwick,10 Jessel MR obliquely referred to that quality of materiality as marking the representation as one that is of such a nature as would or would tend to induce the representee to enter into the contract.11 Unfortunately, the Master of the Rolls goes on to state that materiality may be part of the requirement of inducement. The quest for a meaning seems to have been clarified by Hobhouse LJ in Downs v Chappell,12 who said:

“A representation is material when its tendency, or its natural and probable result, is to induce the representee to act on the faith of it in the kind of way in which he is proved to have in fact acted. The test is objective.”

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