Misrepresentation - English Law PDF

MISREPRESENTATION- E N G L I S H L AW Essential Reading: McKendrick, textboook: Chapter 13 Additional Reading: McKendrick, casebook: Chapter 17 Jenita Kanapathy (August 2020) 8/18/2020 1  1. INTRODUCTION  Statements made before or at the time o...

MISREPRESENTATION- E N G L I S H L AW Essential Reading: McKendrick, textboook: Chapter 13 Additional Reading: McKendrick, casebook: Chapter 17 Jenita Kanapathy (August 2020) 8/18/2020 1  1. INTRODUCTION  Statements made before or at the time of m a k i n g a c o n t r a c t a r e k n own a s r e p r e s e n t a t i o n s.  The statements may be express (in writing or oral) or implied (deducible from conduct and surrounding circumstances).  Re presentations are made by one par ty so as to induce the other into entering the contract. Jenita Kanapathy (August 2020) 8/18/2020 2   If a representation is incorporated into the contract, it becomes a term of the contract, so that, if it is false, it amounts to a breach of contract.  I n t h i s t o p i c, w e a r e c o n c e r n e d w i t h f a l s e representations that are not incor porated into the ter ms of the contract, and what is the effect of such f a l s e r e p r e s e n t a t i o n s. 3 Jenita Kanapathy (August 2020) 8/18/2020  What is a Misrepresentation? A misrepresentation is an unambiguous false statement of a material fact (usually) or law made by one par ty to a contract addressed to the other during the negotiations which induces that other par ty to enter into the contract. 4 Jenita Kanapathy (August 2020) 8/18/2020 Consequence of Misrepresentation A contract induced by a misrepresentation is voidable at the option of the innocent party. Jenita Kanapathy (August 2020) 8/18/2020 5 Law governing Misrepresentation L aw o f m i s r e p r e s e n t a t i o n i s g ove r n e d by ◦ C o n t r a c t l aw ◦ To r t l aw ◦ L aw o f r e s t i t u t i o n Jenita Kanapathy (August 2020) 8/18/2020 6 Ty p e s o f M i s r e p r e s e n t a t i o n 3 t y p e s o f misrepresentation ◦Fraudulent ◦Negligent ◦Innocent Jenita Kanapathy (August 2020) 8/18/2020 7 Re m e d i e s f o r M i s r e p r e s e n t a t i o n ava i l a b l e t o the innocent party Rescission of the contract/setting up the misrepresentation as a defence Rescission plus Damages (in tort for negligent and fraudulent misrepresentation) Indemnity pursuant to rescission Jenita Kanapathy (August 2020) 8/18/2020 8  2. CONSTITUENT ELEMENTS OF M I S R E P R S E N TA T I O N The representation (statement): 1. Must be Unambiguous 2. Must be False 3. Must be one of fact or law 4. Must NOT be a promise; an opinion; a mere “puff ”; a statement of intention; merely a failure to disclose certain fact or facts(there is generally no duty to disclose). 5. May be an oral statement or a written statement or some kind of conduct but, silence does not necessarily amount to misrepresentation 9 8/18/2020 Jenita Kanapathy (August 2020) 6. Must be addressed to the party misled Directly or Indirectly with intention, knowledge or notice (actual or constructive) that 3rd party will convey the representation to the party misled Jenita Kanapathy (August 2020) 8/18/2020 10 7. Must induce party misled to enter into the contract i.e. there must be a causal connection between the misrepresentation and the entry into the contract But the misrepresentation need not be the only inducement i.e. it must be “an” inducement but not necessarily “the” or “sole” inducement. Jenita Kanapathy (August 2020) 8/18/2020 11  2. 1 Fa c t , n o t P r o m i s e If a statement made by one party during the negotiations is a promise to the other, it becomes a ter m of the contract. Jenita Kanapathy (August 2020) 8/18/2020 12  I m p o r t a n c e o f d i s t i n c t i o n b e t we e n p r om i s e a n d f a ct a t c o m m o n l aw I f t h e p r o m i s e i s f a l s e, a n d i s n o t fulfilled, that will amount to a b r e a ch o f c o n t r a c t. C o n s e q u e n t l y, t h e i n n o c e n t p a r t y ’s r e m e d y l i e s i n d a m a g e s f or b r ea ch of con t r a ct , n o t r e s c i s s i o n. Jenita Kanapathy (August 2020) 8/18/2020 13  A misrepresentation (false s t a t e m e n t o f f a c t ) i n d u c e s en t r y i n t o con t r a ct b u t d o e s n o t b e c o m e a term of the contract i. e. t h e i n n o c e n t p a r t y ’s p r i m a r y r e m e d y i s r es ci s s i on – a restitutionar y remedy – not d a m a g e s f o r b r e a ch o f c o n t r a c t. Jenita Kanapathy (August 2020) 8/18/2020 14  Oscar Chess Ltd v Williams 1 WLR 370, CA Issue: warranty (promise) or misrepresentation? Seller (an individual) misstated year of make of car to the buyer. Buyer (a car dealer) sued the seller for damages for breach of contract i.e. buyer’s contention was that the statement regarding the year of make of car was a warranty (promise). Jenita Kanapathy (August 2020) 8/18/2020 15  Held Seller’s statement regarding year of make of car was NOT a warranty (promise) but an innocent misrepresentation inducing entry into the contract Buyer’s remedy was therefore rescission of the contract, not damages for breach of contract. Jenita Kanapathy (August 2020) 8/18/2020 16  Per Denning LJ “The right course is to let the buyer set aside the transaction if he finds out [that there was a misstatement]…and comes promptly before other interests have irretrievably intervened....” Jenita Kanapathy (August 2020) 8/18/2020 17  D i ck B en t l ey v Ha r ol d S m i t h (M ot or s ) L t d [ 1 9 6 5 ] 1 W L R 6 2 3 , C A Issue: warranty or misrepresentation? Seller was a car dealer. Buyer was an individual. Seller’s representative misstated the mileage the car had run up. Buyer sued Seller for damages for breach of contract.  Issue: was the misstatement a warranty or an innocent misrepresentation?  Held: ◦ Sellers’ statement (on whose expertise it was reasonable for the buyer to rely on) was a warranty (promise). ◦ Buyer was entitled to damages for breach of contract. Jenita Kanapathy (August 2020) 8/18/2020 18  Per Salmon LJ “…what Mr. Smith said [was] intended and understood as a legally binding promise… so, it was a warranty and as such [was] part of the contract of sale or collateral to it.” Jenita Kanapathy (August 2020) 8/18/2020 19  Salt v Stratstone Specialist Limited EWCA Civ 745 The cur rent position in English law U n d e r S. 1 o f t h e M i s r e p r e s e n t a t i o n A c t 1967 it is now possible for the cour ts order rescission even in cases where the misrepresentation has become a ter m of the contract. Jenita Kanapathy (August 2020) 8/18/2020 20  Per Longmor e LJ ‘ In what must now be called the ver y old days, c our ts c ould not award damages for misr e pr esentations which had not become ter ms of the contract. The only available r emedy for non-fraudulent misrepresentation was r e s c i s s i o n … C o n v e r s e l y, i f a m i s r e p r e s e n t a t i o n did become a term of the contract and damages could be awarded, it would usually be said that r escission was not available.’ Jenita Kanapathy (August 2020) 8/18/2020 21  ‘ All this changed with the Misrepresentation Act 1967 (“the Act”). Section 1 of the Act pr ovided that r escission was available even if the misrepresentation had become a term of the contract.’ [NOTE: in Malaysia, as there is no statutor y pr ovision equivalent to the Misrepresentation Act 1967, the common law position – no rescission if the misrepresentation becomes a ter m of the contract – is still maintained.] Jenita Kanapathy (August 2020) 8/18/2020 22  2. 2 Fa c t , n o t O p i n i o n Bissett v Wilkinson AC 177, PC (Appeal from New Zealand). W p u r c h a s e d B ’s l a n d f o r s h e e p f a r m i n g. During negotiations B had said he b e l i e v e d t h e l a n d wo u l d b e s u i t a b l e f o r c a r r y i n g 2 , 0 0 0 s h e e p. In fact the land had never been used for shee p far ming before and even W was awar e of this f act. 23 8/18/2020 Jenita Kanapathy (August 2020)  W l a t e r d i s c ove r e d t h a t t h e l a n d c o u l d n o t c a r r y 2 , 0 0 0 s h e e p. W a l l e g e d m i s r e p r e s e n t a t i o n by B, and sought to rescind contract whilst B argued that his statement wa s a n h o n e s t o p i n i o n. Jenita Kanapathy (August 2020) 8/18/2020 24  Held A statement of opinion, which is honestl y held, cannot give rise to actionable misr epr es entat io n. I n th e a b sen ce o f fra ud, W h a d n o b a sis o n w h ich to rescin d co n tra ct. Jenita Kanapathy (August 2020) 8/18/2020 25  “ I n o r d i n a r y c i r c u m s t a n c e s, a n y s t a t e m e n t m a d e b y a n o w n e r wh o h a d b e e n o c c u p y i n g his own farm as to its carr ying capacity would be r egarded as a statement of f a c t … T h i s, h o w e v e r , i s n o t s u c h a case…[W was] not justified in r egarding anything said by [B] as to the carr ying capacity as being anything more than an expression of his opinion on the subject.” Jenita Kanapathy (August 2020) 8/18/2020 26  Smith v Land and House Property Corporation (1884) 28 Ch D 7 Pe r B o w e n L J: “…if the facts are not equally well k n ow n t o b o t h s i d e s , t h e n a s t a t e m e n t o f o p i n i o n b y o n e wh o k n o w s t h e f a c t s b e s t involves ver y often a statement of a material fact, for he impliedly states t h a t h e k n o w f a c t s wh i c h j u s t i f y h i s opinion.” Jenita Kanapathy (August 2020) 8/18/2020 27 Esso Petroleum Ltd v Mardon QB 801, CA Opinion by a person relating to a matter in which he has the expertise can amount to a statement of fact. M rented a petrol station from Esso based on Esso’s representative’s statement regarding the potential throughput (annual volume of petrol sales) of the petrol station which turned out to be wrong. M suffered severe losses, could not meet rental payments, and Esso sought possession of station. M counterclaimed for damages for breach of warranty and negligent misrepresentation (in tort). Jenita Kanapathy (August 2020) 8/18/2020 28  Held The statement as to potential throughput was a contractual warranty, and Esso was liable for damages for its breach. It was also a negligent misrepresentation. Esso (through its representative) had held itself out as having special expertise in circumstances where a duty of care existed to take care that the representation was correct. However, there would be no double recovery, as the damages suffered for breach of contract was the same as the damages for negligent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 29  2. 3 Fa c t , n o t P u f f Dimmock v Hallet (1866) LR 2 Ch App 21, CA Flourishing description by auctioneer Sale of land described by the auctioneer as “fertile and impr ovable”. In fact, some of the land had been abandoned as being u s e l e s s. I s s u e : Wa s t h e d e s c r i p t i o n a misrepresentation entitling the purchaser to rescind the purchase? 30 Jenita Kanapathy (August 2020) 8/18/2020  Held: no misr epr esentation; mer e puf f “…a mere general statement that land is fertile and improvable, [although] part of it has been abandoned as useless, cannot, except in extreme cases - as, for instance, where a considerable part is covered with water, or otherwise irreclaimable - be considered such a misrepresentation as to entitle a purchaser to be discharged.…the statement is to be looked at as a mere flourishing description by an auctioneer.” Jenita Kanapathy (August 2020) 8/18/2020 31  2.4 Fact, not statement of Intention General rule: misstatement of intention genuinely held when made cannot constitute a misrepresentation  Exception: intentional misstatement of present or future intentions may amount to misrepresentation.  But, a party who truly states his present intention but then changes his mind after the contract is made does not commit a misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 32 E d gi n gt on v Fi t zm a u r i ce ( 1 8 8 5 ) 2 9 Ch D 459, CA State of mind is a fact E, shareholder in company, subscribed to a company’s bonds based on its prospectus, prepared by its directors, which stated that the purpose of issuing the bonds was to utilise the monies raised to improve the company’s property and to develop company’s business. In fact, it was intended to use the monies to meet the pressing liabilities of the company and the monies were subsequently so used. E brought an action in deceit (i.e. in tort) against directors of company based on fraudulent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 33  Held: the statement was a misr epr esentation “There must be a misstatement of an existing fact. The state of a man’s mind is as much a fact as the state of his digestion...It is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.” Jenita Kanapathy (August 2020) 8/18/2020 34  Wa l e s v Wa d h a m [ 1 9 7 7 ] 1 WLR 199, HC Honestly held intention During financial neg otiations between a husband (H) and wife (W) before their divorce, W did not disclose her intention t o r e m a r r y. Pa r ti e s r e a ch e d a n a g r e e m e n t o n th e financial needs of W based on the understanding that she would not remar r y a n d t h i s w a s e m b o d i e d i n a c o n s e n t o r d e r. W subsequently remarried. Jenita Kanapathy (August 2020) 8/18/2020 35  H claimed rescission of the consent order arguing that he had been induced t o e n t e r t h e a g r e e m e n t b y W ’s fraudulent misrepresentation that she would never remar r y because all through her married life she had expressed the opinion that marriage f o l l o w i n g d i v o r c e w a s w r o n g. Jenita Kanapathy (August 2020) 8/18/2020 36  Held T h e c o u r t w a s s a t i s f i e d t h a t W ’s o p i n i o n s were honestly held at the material time. Her stated intention not to remar r y was therefore not a representation of fact. Fur ther, she was not oblig ed, under the law of contract, to infor m her husband of her change of mind after the agr eement had been concluded. As W had not acted fraudulently there were no g rounds for rescission. Jenita Kanapathy (August 2020) 8/18/2020 37  2.5 Representation By Conduct A representation can be made by conduct Walters v Morgan (1861) 3 D F&G 718: ◦ “…a nod or a wink, or a shake of the head, or a smile from the vendor intended to influence the purchaser to believe the existence of a non-existent fact, which might influence the price of the subject to be sold…” can amount to a representation. 38 Jenita Kanapathy (August 2020) 8/18/2020  Spice Gir ls Ltd v Aprilia Wor ld Ser vice [ 2002] E WC A C iv 1 5 , C A In early 1998 negotiations commenced b e t w e e n S G L a n d AW S f o r AW S t o s p o n s o r the Spice Girls’ concert tour in return for promotional work by the Spice Girls for a certain period of time. I n M a r c h 1 9 9 8 , b e f o r e t h e c o n t r a c t w i t h AW S was concluded, GH infor med other members of Spice Girls that she would be leaving the g r o u p b u t AW S w a s n o t i n f o r m e d o f t h i s. All the 5 Spice Girls including GH p a r t i c i p a t e d i n s e v e r a l p h o t o s h o o t s b y AW S between March and May 1998. Jenita Kanapathy (August 2020) 8/18/2020 39  S p i ce G i r l s L t d v A p r i l i a Wor l d S er v i ce [ 2 0 0 2 ] E WC A C iv 1 5 , C A 4 May 1998 SGL signed contract with AW S a n d o n 2 7 M a y 1 9 9 8 G H l e f t t h e S p i c e G i r l s. AW S, c o n t e n d i n g t h a t t h e y h a d e n t e r e d into the contract induced by m i s r e p r e s e n t a t i o n s m a d e b y S G ’s conduct, sought damages for m i s r e p r e s e n t a t i o n u n d e r S. 2 ( 1 ) o f t h e Misrepresentation Act 1967. Jenita Kanapathy (August 2020) 8/18/2020 40  Held: SGL liable for damages under S.2(1)Misrepresentation Act 1967 S G ’s c o n d u c t i m p l i e d l y ( b u t f a l s e l y ) represented that SG did not know and had no reasonable g rounds to believe at or before the time of entry into the agreement that any of the SGs had an existing declared intention to leave the g roup during the minimum ter m of the agreement. Ta k i n g p a r t i n t h e p h o t o s h o o t s w a s a misrepresentation, a false statement of fact made by their conduct. Jenita Kanapathy (August 2020) 8/18/2020 41  3. DUTY OF DISCLOSURE & SILENCE There is a duty not to misrepresent, but there is no general duty of disclosure in English contract law at or before the time of making a contract. i.e. there is no duty to disclose material facts known to one par ty to a contract but not to the other at or before the time of making the contract. Jenita Kanapathy (August 2020) 8/18/2020 42  Thus “mere silence, however morally wrong, will not support an action of deceit” (Bradford Third Equitable Benefit Building Society v Borders 2 All ER 205) But, if infor mation has been asked for, then there is a duty to disclose the truth. Fur ther, there are some circumstances in which total silence or partial silence (i.e. partial non - disclosure) could amount to misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 43  3. 1 S ch n ei d er v Hea t h ( 1 8 1 3 ) 3 Camp 506 Active concealment of a defect in goods to be sold amounts to a misrepresentation Buyer agreed to buy a ship “to be taken with all faults”. The bottom of the ship was worm-eaten and its keel was broken. To conceal this, the captain removed the ship from the dry dock and kept her afloat until sale was over After the sale was concluded, the buyer discovered the defects and sought to rescind the contract on grounds of fraud and misrepresentation. Held: the buyer was entitled to rescind and recover the deposit paid Jenita Kanapathy (August 2020) 8/18/2020 44  3.2 D i m m ock v Ha l l et t ( 1 8 6 6 ) L R 2 Ch App 21, CA Suppression of material facts can render a true statement false and amount to misrepresentation Seller of land represented that all farms on the land were fully let (true) but failed to inform the purchaser that many tenants had given notice to quit. Held: Rescission allowed due to misrepresentation. “The purchaser…[was] led to suppose, as to these farms, that he was purchasing with continuing tenancies at fixed rents, whereas he would, in fact, have to find tenants immediately after the completion of his purchase.” Jenita Kanapathy (August 2020) 8/18/2020 45  3.3 Peek v G u r n ey ( 1 8 7 3 ) 8 L R 6 HL Partial non-disclosure may amount to a misrepresentation “…half a truth will sometimes amount to a real falsehood…a positive misrepresentation.” Jenita Kanapathy (August 2020) 8/18/2020 46  3.4 N ot t s Pa t en t B r i ck a n d Ti l e C o v B u t l er ( 1 8 6 6 ) 1 6 Q B D 7 7 8 Literally true statement may be misleading if maker does not disclose all relevant information When asked by purchaser if land was subject to restrictive covenants, vendor’s solicitor said that he was not aware of existence of any (true) but failed to state that he (solicitor) had not made any checks to verify his belief. Jenita Kanapathy (August 2020) 8/18/2020 47  Held  There was a misrepresentation even though the solicitor’s statement was literally true.  “[He made] statements which were calculated to lead the other side to believe that he was stating facts within his own knowledge, and his statements in fact misled them, so that what he said amounts to a mis-statement of facts.” Jenita Kanapathy (August 2020) 8/18/2020 48  3.5 Wi t h v O’F l a n a ga n [ 1 9 3 6 ] C h 575 There is a duty to disclose a change in circumstances which render a representation which, when made is true or believed to be true, but which subsequently, before the conclusion of the contract, to the knowledge of the maker, becomes or is discovered to be false Jenita Kanapathy (August 2020) 8/18/2020 49  J a n 1 9 3 4 : n e g o t i a t i o n s f o r p u r c h a s e o f D r. O ’s practice. O represented that the takings of his practice were £2,000 annually (tr ue then) However, O then fell ill, and the takings fell substantially but this change in circumstances n o t r e v e a l e d t o W. Contract signed in May 1934. W, u p o n d i s c o v e r i n g t h a t t h e t a k i n g s h a d f a l l e n s u b s t a n t i a l l y, s o u g h t t o r e s c i n d t h e contract. Jenita Kanapathy (August 2020) 8/18/2020 50  Held : W entitled to rescind “…a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation [until the time the contract is concluded]” “…if a statement has been made which is true at the time, but which during the course of the negotiations becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to the other the change in circumstances.” Jenita Kanapathy (August 2020) 8/18/2020 51  Is there a duty to discover the truth of a representation? Redgrave v Hurd (1881-82) LR 20 Ch D 1, CA:  R offered his house and legal practice to H for £1,600.  During negotiations R represented that his practice brought in business of about £300 a n n u a l l y.  He provided H some infor mation on the value of his business which H did not fully investig ate.  H purchased the house and the legal practice, but, later found the practice to be quite wor thless & sought rescission. Jenita Kanapathy (August 2020) 8/18/2020 52  Held: H was not under a duty of diligence to discover the tr uth of R’s misstatement If a man is induced to enter into a contract by false representation, it is not a sufficient answer to him to say: “If you had used due diligence you would have found o u t t h a t t h e r e p o r t w a s u n t r u e. Yo u h a d t h e m e a n s a f f o r d e d y o u o f d i s c o v e r i n g i t s f a l s i t y, which you did not choose to a vail yourself of.” “…the effect of false representation is not got rid of on the gr ound that the person to whom it was made has been guilty of negligence.” Jenita Kanapathy (August 2020) 8/18/2020 53  4. Misstatement of Law may amount to Misrepresentation Until recently, English law was clearly that only a misstatement of fact (and not law) could amount to a misrepresentation capable of vitiating a contract. In Kleinwort Benson Ltd v Lincoln City Council 4 All ER 513 (a case on restitution), the House of Lords in effect held that there was no difference between mistake of fact or mistake of law. Either kind of mistake could render the contract void This principle has since then been extended to misrepresentation. 54 Jenita Kanapathy (August 2020) 8/18/2020  Pankhania v London Borough of Hackney EWHC 2441 (Ch) Particulars of sale by public auction negligently described the property as being sold subject to a “licence” terminable by 3 months’ notice. This was a mistaken statement as to law because what was thought to be a “licence” was actually a statutory protected tenancy [a licence may be terminated by notice but not a statutory protected tenancy]. Purchaser of the property sought to rescind the contract on grounds of negligent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 55  Held: contract should be r escinded There was a misrepresentation (of law) by which the claimants were induced to purchase, and upon which it was reasonable for the claimants to rely. “…the 'misrepresentation of law' rule has not survived the decision in the Kleinwort Benson case. Its historical origin is as an offshoot of the 'mistake of law' rule, created by analogy with it, and the two are logically interdependent” Jenita Kanapathy (August 2020) 8/18/2020 56 5. Inducement into the Contract The misrepresentation must be “an” inducement for entry into the contract i.e. the innocent party must have relied on the misrepresentation. To prove reliance, it must be shown that: 1. the innocent party had knowledge of existence of the misstatement; and 2. the misstatement materially affected the innocent party’s judgment such that he was induced by it or relied upon it. Jenita Kanapathy (August 2020) 8/18/2020 57 Horsfall v Thomas (1862) 1 H & C 90 P m a n u f a c t u r e d a c a n n o n f o r D. I t w a s d e f e c t i v e. B e f o r e d e l i v e r y t o D, P p l a c e d a plug in the hole to conceal the defect. If D had inspected it upon deliver y he would have easily discovered the defect and the attempt to conceal it, but he did not inspect it at all and instead accepted i t s d e l i v e r y. D discovered the defect later and he sought to rescind the contract on grounds of misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 58  Held When accepting the cannon D did not know of P’s misrepresentation. The misrepresentation therefore did not induce D to enter into the contract. Rescission not allowed. Jenita Kanapathy (August 2020) 8/18/2020 59  Attwood v Small (1838) 6 CI & F 232 (HL)  Sellers of a mine exag gerated its e a r n i n g c a p a c i t y t o t h e p u r c h a s e r s, b u t the purchasers had the sellers’ statement checked by their own exper ts who did not discover it to be false.  After the sale was completed, the purchasers discovered that the sellers’ statement was false and sought to rescind the transaction for fraudulent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 60  Held  The fraudulent misrepresentation must have the effect of deceiving the purchaser, and the purchaser must have relied on that representation and not his own acumen or inquiries of his own.  Since purchasers had relied on their own experts and not on the representation of the vendors, there was no actionable misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 61  Smith v Chadwick (1884) 9 App Cas 187 (HL) There was an ambiguous representation in a company’s prospectus regarding “turnover or output” of ironworks which the company was being formed to take over Held: In an action of deceit plaintiff must establish (i) actual fraud and (ii) that this fraud was an inducing cause to the contract i.e. the fraud was material, and it produced in plaintiff ’s mind an erroneous belief, influencing his conduct. On the facts, plaintiff had not sufficiently proved that the misrepresentation did influence him because the statement was ambiguous. Jenita Kanapathy (August 2020) 8/18/2020 62  Edgington v Fitzmaurice (1885) 29 Ch D 459 (CA) The representation need not be the only inducement to entry into the contract Per Bowen LJ “…when you ha ve pr oved that the statement was false, you must further show that the plaintiff has acted upon it, and has sustained damage by so doing; you must show that the statement was either the sole cause of the plaintiff's act or materially contributed to his so acting” Jenita Kanapathy (August 2020) 8/18/2020 63  Presumption of Inducement For fraudulent misrepresentation there is a rebuttable presumption that the misrepresentation did induce entry into the contract. Barton v County Nat West 4 All ER 494, CA: “…the presumption is that the representation did induce the act or omission in question…the presumption is one of fact and capable, like any other such presumption, of being rebutted” Jenita Kanapathy (August 2020) 8/18/2020 64  Museprime Proper ties Ltd v Adhill Proper ties Ltd (1991) 61 P & CR 111, HC The test whether there has been inducement is objective. “If the misrepresentation would have induced a reasonable person to enter into the contract then the court will…presume that the representee was so induced and the onus will be on the representor to show that the representee did not rely on the misrepresentation either wholly or in part. If, however, the misrepresentation would not have induced a reasonable person to contract, the onus will be on the representee to show that the misrepresentation induced him to act as he did.” Jenita Kanapathy (August 2020) 8/18/2020 65  6. CATEGORIES OF M I S R E P R E S E N TA T I O N A T COMMON LAW Before Hedley Byrne v Heller After Hedley Byrne & Heller 1. Fraudulent misrepresentation 1. Fraudulent misrepresentation 2. Non-fraudulent misrepresentation 2. Negligent misrepresentation 3. Innocent misrepresentation Both categories gave innocent party the All three categories give the innocent option to rescind the contract party the option to rescind the contract Non-fraudulent misrepresentation Fraudulent and negligent included what is now called negligent misrepresentation both give the misrepresentation and innocent innocent party the additional right to misrepresentation, but was collectively bring an action in tort (called deceit in called “innocent misrepresentation” the case of fraudulent Only fraudulent misrepresentation gave misrepresentation) the innocent party the additional right to Innocent misrepresentation continues to bring an action in the tort of deceit for give the innocent party only the option damages. to rescind the contract 66 Jenita Kanapathy (August 2020) 8/18/2020 6.1 Fraudulent Misrepresentation Derry v Peek (1889)14 App Cas 337 (HL) Directors of company issued prospectus containing statements that the company had the right to use steam power instead of horse power to run their trams. In fact consent of the Board of Trade to use steam power had not yet been obtained. Plaintiff subscribed for shares relying on statements in the prospectus and the Board of Trade subsequently refused consent, and the company was wound up. Plaintiff then brought an action in deceit against directors. Jenita Kanapathy (August 2020) 8/18/2020 67  H e l d : N o A c t u a l Fr a u d P r ove d ; claim for damages dismissed Where rescission is claimed it is only necessary to prove that there was a misrepresentation. But, in an action for deceit it is not enough to prove misrepresentation alone. Actual fraud must be proved i.e. a false representation made 1. knowingly, or 2. without believe in its truth, or 3. recklessly, careless whether it be true or false. Jenita Kanapathy (August 2020) 8/18/2020 68  To prevent a false statement from being fraudulent, there must always be an honest belief in its truth. If fraud is proved, the motive of the person guilty of it is immaterial. But making a false statement negligently falls far short of fraud. [As the law then stood, there was no liability in damages for negligent misstatements]. Jenita Kanapathy (August 2020) 8/18/2020 69  Basis of Assessment of Damages f o r Fr a u d u l e n t M i s r e p r e s e n t a t i o n General principle 1. In TORT: the claimant recovers such damages as will put the claimant into the position he would have been if tort had not been committed i.e. in the case of misrepresentation, as if the representation had not been made [reliance loss] 2. In CONTRACT: the claimant recovers such damages as will put the claimant into the position he would have been if contract had been performed i.e. as if the representation had been true [expectation loss] Jenita Kanapathy (August 2020) 8/18/2020 70  Doyle v Olby (Ironmongers) Ltd 2 QB 158 (CA) Doyle bought a business relying on certain fraudulent misrepresentations made by the seller. He then sold the business at a loss. He brought an action inter alia for damages for fraud. Issue: what was the appropriate measure of damages? Jenita Kanapathy (August 2020) 8/18/2020 71  Held  Damages for fraud are assessed differently from damages for breach of contract.  The proper measure of damages for deceit is that the claimant is entitled to recover all the loss directly f lowing from the fraudulent inducement which was not too remote whether or not the defendants could have foreseen such consequential loss. Jenita Kanapathy (August 2020) 8/18/2020 72  Held  A p p l y i n g t h i s m e a s u r e, D oy l e ’s position before the fraudulent inducement should be compared with his position at the end of the transaction.  C o u r t aw a r d e d h i m h i s o ve r a l l l o s s up to his final disposal of the b u s i n e s s, l e s s a n y b e n e f i t s h e h a d r e c e i ve d. Jenita Kanapathy (August 2020) 8/18/2020 73  Smith New Cour t Securities v S c r i m g e o u r V i c ke r s L t d [ 1 9 9 7 ] A C 2 5 4 (HL) S N C p u r ch a s e d Fe r r a n t i s h a r e s a t 82.5p per share from Citibank based on fraudulent misrepresentations by C i t i b a n k ’s s t o ck b r o k e r s, S V L , t h a t Fe r r a n t i w a s a g o o d m a r k e t i n g r i s k. T h e m a r k e t p r i c e o f Fe r r a n t i s h a r e s a t t h e t i m e o f t h e p u r ch a s e w a s 7 8 p p e r s h a r e. Jenita Kanapathy (August 2020) 8/18/2020 74  S m i t h N ew C ou r t S ecu r i t i es v S cr i m geou r Vi cker s L t d [ 1 9 9 7 ] A C 254 (HL) In fact, due to an unrelated fraud c o m m i t t e d o n Fe r r a n t i b y a t h i r d p a r t y, t h e value of shares at the date of the transaction was even lower than the market price. S u b s e q u e n t l y, S N C s o l d t h e s h a r e s a t p r i c e s r a n g i n g f r o m 4 9 p t o 3 0 p, t h e r e b y incurring a loss of £11million. SNC sued Citibank and SVL for recover y of the loss of £11 million as damages for fraudulent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 75  S m i t h N ew C ou r t S ecu r i t i es v S cr i m geou r Vi cker s L t d [ 1 9 9 7 ] A C 254 (HL) I s s u e : s h o u l d t h e d a m a g e s p ay a b l e t o SNC be the difference between the price p a i d b y S N C a n d t h e m a r k e t va l u e of the shares as at the date of the t r a n s a c t i o n ( i. e. 4. 5 p p e r s h a r e ) , o r t h e a c t u a l l o s s s u f f e r e d b y S N C ? Jenita Kanapathy (August 2020) 8/18/2020 76  Held The primary rule is that the victim of fraud is entitled to compensation for all the actual loss, including consequential loss, directly f lowing from the transaction induced by deceit (the Doyle test). Thus damages recoverable by SNC were the purchase price paid by SNC minus resale price of the shares i.e. £11 million since this was the actual loss flowing directly from the deceit. Jenita Kanapathy (August 2020) 8/18/2020 77 6.2 Negligent Misrepresentation Historically, all non-fraudulent misrepresentations were regarded innocent for which there was no cause of action for damages at common law. But, equity gave remedy of rescission for all types of misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 78  Since 1964 (Hedley Byrne v Heller) an action for damages at common law for negligent misrepresentation is available. Since 1967 (S. 2(1) Misrepresentation Act, 1967) there is also a statutory right for damages for negligent misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 79  (a) Common Law Right to Damages for Negligent Misrepresentation Hedley Byrne & Co Ltd v Heller & Partners Ltd AC 465 (HL) [Note: there was no contractual relations between parties]  HBC, through its bankers, asked HPL for a credit reference in respect of one of HBC’s clients (E).  HPL , who were E’s bankers, negligently replied that E would be able to meet its financial obligation. Jenita Kanapathy (August 2020) 8/18/2020 80  HBC relied on that response and placed orders for advertisements on E’s behalf.  E failed to make payments to HBC.  HBC tried to recover its losses from HPL through an action for damages for negligence. Jenita Kanapathy (August 2020) 8/18/2020 81  Held  Negligent misrepresentation may give rise to an action for damages for financial loss caused thereby.  This is so even if there is no contractual or fiduciary relationship between the parties because the law will imply a duty of care if there is some other “special relationship” between the parties. Jenita Kanapathy (August 2020) 8/18/2020 82  The liability for negligent misrepresentation arises when: 1. defendant carelessly makes a false statement to the claimant; 2. circumstances are such that it is reasonable to assume that the statement would be relied on 3. the false statement is relied upon; and 4. there is a “special relationship” between the parties Jenita Kanapathy (August 2020) 8/18/2020 83  The special relationship giving rise to the duty of care generally exists, where the maker of the statement: 1. has special knowledge or skill in relation to the subject matter of the contract (Harris v Wyre Forest District Council 1 AC 831) and 2. can reasonably foresee that the other party will rely on his statement (Chaudry v Prabhakar 3 All ER 718] Jenita Kanapathy (August 2020) 8/18/2020 84  (b) Common Law Measure of Damages for Negligent Misrepresentation It is the same as the measure for negligence generally i.e. all damage caused by the negligent act or omission which is reasonably foreseeable. Contrast fraudulent misrepresentation: all direct losses that are not too remote; foreseeability by the defendant is irrelevant. Jenita Kanapathy (August 2020) 8/18/2020 85 The ‘Wagon Mound’ (No. 1) AC 388, PC  Oil was spilled negligently by A in Sydney Harbour.  It was carried by wind and tide to beneath R’s nearby wharf where a ship was being repaired using an oxyacetylene flame.  Molten metal fell from the wharf onto the cotton waste floating on debris under the wharf causing the cotton waste to catch fire. Jenita Kanapathy (August 2020) 8/18/2020 86  Resulting fire caused extensive damage to wharf, etc. Court found as a fact that A did not and could NOT reasonably have known that molten metal would fall on the oil it had accidentally spilt and which was spread on water and thereby catch fire [i.e. damage caused was not reasonably foreseeable]. Issue: Was A liable for all damage caused “directly” by their negligence? Jenita Kanapathy (August 2020) 8/18/2020 87  Held: Kind of damage must be reasonably foreseeable The essential factor in determining liability for the consequences of a tortious act of negligence is whether the damage is of such a kind as the reasonable man should have foreseen. In negligence, liability does not depend solely on the damage being the “direct” or “natural” consequence of the precedent act. Applying the test of reasonable foreseeability, A, who could not reasonably be expected in the circumstances to have known that the oil would catch fire was not liable for the damage caused to R’s wharf. Jenita Kanapathy (August 2020) 8/18/2020 88  (c) Statutory Right to Damages for Misrepresentation S. 2(1) Misrepresentation Act 1967: Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the [misrepresentor] would be liable to damages in respect thereof had the misrepresentation been made fraudulently, [the misrepresentor] shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true. Jenita Kanapathy (August 2020) 8/18/2020 89 S. 2 ( 1 ) a p p l i e s o n l y t o 1. parties to contract 2. misrepresentations that induce entry into contracts (not where misrepresentation becomes a ter m of the contract) 3. non-fraudulent misrepresentation, although damages are recoverable as if the misrepresentation was fraudulent Jenita Kanapathy (August 2020) 8/18/2020 90   S. 2(1) reverses the burden of proof in f avour of the innocent par ty:  the innocent party simply has to show that the statement was false and the maker of the statement then has to prove he had reasonable ground to believe and did believe in tr uth of representation up to time of making contract;  under common law fraud or negligent misrepresentation, the innocent party had to prove fraud or negligent misrepresentation Jenita Kanapathy (August 2020) 8/18/2020 91  Howard Marine and Dredging v A Ogden & Sons QB 574 (CA) AO S ch a r t e r e d 2 b a r g e s f r o m H M D w h o h a d wrongly stated the capacity of the barges based on entries in Lloyds’ Register although s h i p s ’ d o c u m e n t s t h a t w e r e i n H M D ’s p o s s e s s i o n s e t o u t t h e c o r r e c t c a p a c i t y. AO S l a t e r d i s c ove r e d c o r r e c t c a p a c i t y a n d refused to pay full amount of hire. HMD sued AO S. AO S c o u n t e r c l a i m e d f o r d a m a g e s i n t e r a l i a f o r common law negligent misrepresentation and u n d e r S. 2 ( 1 ) M A 1 9 6 7. Jenita Kanapathy (August 2020) 8/18/2020 92  Held (2:1) W i t h r e g a r d t o S. 2 ( 1 ) 1. There was misrepresentation by HMD regarding the capacity of the barges; and 2. HMD had not discharged burden of proving that they had reasonable g rounds to believe in the tr uth of the misrepresentation. AO S wa s t h e r e f o r e e n t i t l e d t o d a m a g e s u n d e r S. 2 ( 1 ) M A 1 9 6 7. Jenita Kanapathy (August 2020) 8/18/2020 93  Per Lord Denning MR “This enactment imposes a new and serious liability on anyone who makes a representation of fact in the course of negotiations for a contract. If that r e pr esentation tur ns out to be mistaken [wrong] – then however innocent he may be – he is just as liable as if he made it fraudulently…unless he proves – and the burden is on him to prove – that he had reasonable ground to believe and did in fact believe that it was true.” Jenita Kanapathy (August 2020) 8/18/2020 94  Per Bridge LJ “If the representee proves a misrepresentation which, if fraudulent, w ould ha ve sounded in damages, the onus passes immediately to the r epr esentor to pr ove that he had r easonable ground to believe the facts represented. In the course of negotiations leading to a contract the statute imposes an absolute obligation not to state facts which the r epr esentor cannot pr ove he had r easonable ground to believe.” Jenita Kanapathy (August 2020) 8/18/2020 95  Ro y s c o t Tr u s t L t d v Rog e r s o n 2 QB 297, CA T h e m e a s u r e o f d a m a g e s u n d e r S. 2 ( 1 ) M A 1967 is the tortious measure applicable to fraudulent misrepresentation (deceit) and not that applicable to common law negligence. T he words “so liable” means the re presentor is liable as he would be if the misrepresentation h a d b e e n m a d e f r a u d u l e n t l y. Therefore the innocent party is “entitled to r ecover…all the losses which it suf fer ed as a r esult of entering into the agreement…even if the losses were unforeseeable, provided they were not otherwise too remote.” Jenita Kanapathy (August 2020) 8/18/2020 96  (d) Advanta ges of S. 2(1) claim over Common Law claims for Deceit or Negligent Misstatement Tort of Deceit S 2(1) Claim Claimant must prove defendant No need for claimant to prove fraud by committed fraud defendant – just has to prove that the statement was false. i.e Claimant bears the burden of proof Burden of proof is on the defendant – he must prove that he had reasonable grounds to believe that his representation was true. Claimant can recover actual loss as Claimant can recover actual loss as damages damages Jenita Kanapathy (August 2020) 8/18/2020 97  Common law claim for S 2(1) Claim negligent misrepresentation Claimant must prove No need for claimant to defendant owed him a prove this. Enough to show duty of care contractual relationship Advantages of Claimant must prove Claimant only needs to S2(1) claim over defendant breached the show that the statement duty of care was false common law claims for Claimant bears the burden Defendant bears the of proving that defendant burden of proving that he negligent had no reasonable had reasonable grounds to misrepresentation grounds to believe the believe the truth of his truth of his statement statement Claimant may recover Claimant may recover damages for reasonably damages for actual losses foreseeable losses only (the fraud measure) (the negligence measure) Jenita Kanapathy (August 2020) 8/18/2020 98 6.3 Innocent Misrepresentation Prior to MA 1967, rescission was the only remedy for non-fraudulent misrepresentation; there was no right to d a m a g e s. There is still no right to damages for i n n o c e n t m i s r e p r e s e n t a t i o n b u t S. 2 ( 2 ) M A 1967 gives the cour t a discr etion to award damages in lieu of rescission in cases of non-fraudulent misrepresentation subject to some requirements being fulfilled. Jenita Kanapathy (August 2020) 8/18/2020 99  Under S. 2(2) the court may order the contract as subsisting and award damages in lieu of rescission instead “…if…it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it [to the innocent party] if the contract were upheld, as well as to the loss that rescission would cause to the other party”. 10 Jenita Kanapathy (August 2020) 8/18/2020 0  2 m a i n i s s u e s u n d e r S. 2 ( 2 ) 1. I s c o u r t ’s p o w e r t o o r d e r d a m a g e s i n l i e u o f r e s c i s s i o n ava i l a b l e where rescission is barred anyway? Conf licting case law on this point. 2. What is the measure of damages t o b e aw a r d e d i n l i e u o f rescission? 101 Jenita Kanapathy (August 2020) 8/18/2020  Thomas Witter Ltd v TBP Industries Ltd 2 All ER 573 (HC) Held: On the facts, rescission was not a practical remedy Power to award damages in lieu of rescission did not depend on the right to rescind still being in existence but on the plaintiff having had such a right in the past. Accordingly, the fact that rescission was no longer a viable remedy was not a bar to the award of damages under s 2(2). Contrast: Govt of Zanzibar v British Aerospace 1 WLR 2333, HC – no power to award damages in lieu of rescission if right to rescind has been lost. Jenita Kanapathy (August 2020) 8/18/2020 102  Salt v Stratstone Specialist Limited EWCA Civ 745 The decision in this case has settled the controversy. The court’s discretion to award damages in lieu of rescission under S. 2(2) may be exercised only if the right to rescind subsists. Jenita Kanapathy (August 2020) 8/18/2020 103  Per Longmore LJ ‘ The words of the statute are “the court... may declare the contract subsisting and award damages in lieu of rescission”…the words “in lieu of rescission” must, in my view, carry with them the implication that rescission is available (or was available at the time the contract was rescinded). If it is not (or was not available in law) because eg the contract has been affirmed, third party rights have intervened, an excessive time has elapsed or restitution has become impossible, rescission is not available and damages cannot be said to be awarded “in lieu of rescission”. Jenita Kanapathy (August 2020) 8/18/2020 104  William Sindall plc v Cambridgeshire CC 1 WLR 1016 (CA) In 1989 WS purchased land from CCC for £5 million. Existence of an underground s e w e r i n t h e l a n d w a s r e c o r d e d i n C C C ’s documents but this was not made known to W S d u r i n g n e g o t i a t i o n s. In 1990 there was a general decline in land prices and the market value of the land in question had fallen to £2 million when WS d i s c o v e r e d t h e e x i s t e n c e o f t h e s e w e r. Jenita Kanapathy (August 2020) 8/18/2020 105  Re m o v i n g t h e s e w e r wo u l d h a v e c o s t W S £18,000. Instead, WS chose to apply to court for rescission on grounds of misrepresentation. High Cour t allowed rescission and ordered CCC to refund £5 million plus i n t e r e s t t o W S, i n s t e a d o f o r d e r i n g damages in lieu of rescission under S. 2 ( 1 ). 10 Jenita Kanapathy (August 2020) 8/18/2020 6  Held, on appeal by CCC On the facts, there was no misrepresentation. Even if there were misrepresentation 1. For cases under S 2(2) the court must consider whether or not to exercise its discretion to award damages in lieu of innocent misrepresentation 2. the court in exercising its discretion under s 2(2) had to take account the matters set out in s 2(2). 3. the misrepresentation here was a matter of minor importance, since it would have cost about £18,000 to put right but the council would have to return about £8m in purchase price and interest in exchange for land worth less than £2m and the CA would have exercised its discretion to award damages in lieu of rescission. 10 Jenita Kanapathy (August 2020) 8/18/2020 7  7. RESCISSION A t c o m m o n l a w, a c o n t r a c t c o u l d b e r e s c i n d e d for misrepresentation only on ground of fraud. H o w e v e r , i n e q u i t y, a c o n t r a c t c o u l d b e r e s c i n d e d even for non-fraudulent misrepresentation (negligent or innocent). The remedy allows all parties to the rescinded contract to be restored to their original p o s i t i o n s e. g. i f a s a l e o f g o o d s c o n t r a c t i s rescinded for misre presentation, both the g oods, and the price paid for them must be returned. 108 8/18/2020 Jenita Kanapathy (August 2020)  The right to rescission may be lost in the following circumstances: 1. if innocent party affirms the contract after discovering misrepresentation 2. if a bona fide purchaser for value acquires subject matter of contract B a r s To before rescission Rescission 3. because of lapse of time (laches) 4. if restitutio in integrum is not possible 5. if court exercises discretion under S. 2(2) MA 1967 to award damages in lieu of rescission in the case of innocent misrepresentation Jenita Kanapathy (August 2020) 8/18/2020 109  (i) Affirmation : Long v Lloyd 1 WLR 753 (CA)  Lor r y sold to B was defective contrar y to S ’s r e p r e s e n t a t i o n t h a t i t w a s i n “ e x c e p t i o n a l condition”.  But after discovering defects B continued u s i n g i t a n d h a d e v e n a c c e p t e d S ’s o f f e r t o pay for som e of t he c ost s of r e pa ir.  Lor r y remained defective even after re pairs, and B then sought to rescind the contract on grounds of misrepresentation. Jenita Kanapathy (August 2020) 8/18/2020 110  Held O n t h e f a c t s, r e p r e s e n t a t i o n wa s n o t f r a u d u l e n t , s o ( b a s e d o n t h e l aw t h e n ) B d i d n o t h ave a r i g h t t o d a m a g e s. F u r t h e r, B h a d l o s t r i g h t t o r e s c i n d because his actions amounted to affir mation of the contract. Jenita Kanapathy (August 2020) 8/18/2020 111  (ii) Laches : Leaf v International Galleries 2 KB 86 (CA) 1944: P bought a painting from D based o n D ’s i n n o c e n t m i s r e p r e s e n t a t i o n t h a t the painting was by Constable. 1949: P attempted to sell painting and discovered it was not by Constable. P then sought to rescind the contract. Jenita Kanapathy (August 2020) 8/18/2020 112  Held Since P had ke pt the painting for 5 years and had taken no ste ps to discover its authorship in that time it was “out of the question that a cour t of equity should grant r elief by way of r escission.” Jenita Kanapathy (August 2020) 8/18/2020 113  ( i i i ) I n t e r ve n i n g t h i r d p a r t y r i g h t s : W h i t e v G a r d en ( 1 8 5 1 ) 1 0 C B 9 1 9  P bought 50 tons of iron from G making payment with a bill of exchang e.  P t h e n r e s o l d t h e i r o n t o W, w h o a c t e d i n good faith.  W hen the bill of exchang e was d i s h o n o u r e d , G, i n o r d e r t o r e c o v e r h i s l os s es, r emoved par t of the i r on whi ch was t h e n i n W ’s p o s s e s s i o n.  W sued G in the tor t of conversion. Jenita Kanapathy (August 2020) 8/18/2020 114  Held Contract between P and G was vo i d a b l e f o r f r a u d b u t G h a d l o s t t h e right to rescind that contract when the goods came into the hands of a b o n a f i d e p u r ch a s e r f o r va l u e ( W ) w h o h a d b e c o m e t h e o w n e r. G was therefore liable to W for the va l u e o f t h e i r o n h e h a d r e m o ve d f r o m W. 115 Jenita Kanapathy (August 2020) 8/18/2020  (iv) Restitutio in Integrum not possible Restitutio in integrum could mean: 1. Restoring both par ties to their exact pre - contractual position; or, where that is not possible 2. Person claiming rescission is in a position to make restitution to the other 1. either by retur ning the ver y benefit that he received 2. or by making a money payment for the benefit that he is unable to give back Jenita Kanapathy (August 2020) 8/18/2020 116  Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, HL  Promoters of a company bought a mine at £55,000 and sold it to the company a few days later at £110,000.  T he company worked the mine for a few years before discovering the promoters’ breach of fiduciar y duty and then sought to rescind contract for breach of the promoters’ fiduciar y duty (a fiduciar y must not make a secret profit). Jenita Kanapathy (August 2020) 8/18/2020 117 Promoters resisted the claim on basis that parties could not be restored to their pre-contractual position because the company had b e e n wo r k i n g t h e m i n e f o r s o m e y e a r s a n d we r e t h e r e f o r e n o t i n a position to return the mine in its original condition. Jenita Kanapathy (August 2020) 8/18/2020 118  Held The court would do “practical justice” even where precise restitution is not possible by allowing rescission and ordering: 1. Company to give up possession of mine to promoters 2. Promoters to refund purchase price to company and 3. Company to account to promoters for any profits made from working the mine Jenita Kanapathy (August 2020) 8/18/2020 119  Salt v Stratstone Specialist Limited EWCA Civ 745 In 2007 H, an employee of SSL, offered on behalf of SSL, to sell a car which she represented to be “brand new” to S. S accepted the offer on the basis that the car was “brand new” for £21,895 In fact the car was NOT brand new – it was manufactured and delivered to SSL in 2005 although no one was registered as its owner; it had been repaired in 2005 and 2006; and it had been involved in a collision. Defects in the car became apparent soon after the purchase. SSL carried out some repairs, but by September 2008 S had had enough and sought to rescind the sale and recover the purchase price. Jenita Kanapathy (August 2020) 8/18/2020 120  In proceedings brought by S, the District Judge took the view that he could not order rescission because he could not put the parties back in their original position, that restitutio in integrum was impossible because the car had now been registered and could not be returned as an unregistered car; there had been a considerable lapse of time since the sale and he could not adjust the amount of the price that would be repayable to allow for the depreciation of the vehicle. He held that S was confined to a remedy in damages only ostensibly exercising a discretion under S. 2(2) Misrepresentation Act 1967. Jenita Kanapathy (August 2020) 8/18/2020 121  On appeal, the High Court Judge reversed the District Judge’s decision. He held it was possible to restore the parties to their original position. The car still existed; the fact of registration could not be a bar to rescission; any difference in value of the car should be at the risk of the misrepresentor not the misrepresentee; and any delay was not so long as to operate as a bar to rescission. He therefore ordered rescission and the repayment of the purchase price in exchange for the return of the car. SSL appealed to the Court of Appeal. Jenita Kanapathy (August 2020) 8/18/2020 122  Held: per Longmore LJ ‘…. Section 2(2), entitling the court to award “damages in lieu of rescission”, applies if a representation is either negligent or innocent. It is then that any discretion arises but it only arises when the misrepresentee “would be entitled... to rescind the contract”. If (as DJ Hickman held) restitution would be impossible and the right to rescission had therefore been lost, it is difficult to say that Mr Salt “would be entitled to rescind” the contract. On that basis damages would not be available any more than rescission was.’ Jenita Kanapathy (August 2020) 8/18/2020 123  Restitution was possible ‘ The first reason given by DJ Hickman is that the car had been registered to Mr Salt after sale and that returning a registered car would be to return something different from the article he bought. If that were right, it would always be impossible to rescind a contract for a car which was wrongly said to be new. I cannot accept that; registration is a legal concept which does not change the physical entity that a car is.’ Jenita Kanapathy (August 2020) 8/18/2020 124 ‘ …neither depreciation nor intermittent enjoyment should, in my view, be regarded as reasons for saying restitution is impossible. It has always been the case that a court of equity, contemplating rescission, could order an account and/or an inquiry to determine the terms on which restitution should be made…’ Jenita Kanapathy (August 2020) 8/18/2020 125  ‘…Rescission is prima facie available if “practical justice” can be done. If “practical justice” requires a representor to be compensated for depreciation, it is for the representor so to assert and prove; likewise if the representor asserts that use of the car is to be taken into account, which may well be difficult if the car was as “troublesome”…as this Cadillac was. The absence of evidence about depreciation or the value of the use of the car should not operate to the disadvantage of the representee who should never have been put in the position of having a troublesome old car rather than a brand new one.’ Jenita Kanapathy (August 2020) 8/18/2020 126 8. INDEMNITY consequent upon RESCISSION ‘Indemnity’ refers to payment of money designed to put a person back to his for mer position upon rescission of a contract.  It is in the nature of a restitutionar y remedy i.e. innocent party may recover his actual out-of- pocket expenses incur red in perfor ming, until rescission, obligations arising out of the contract.  This remedy is available to the innocent party in addition to rescission, but only expenses directly related to the obligations of the contract are recoverable. Jenita Kanapathy (August 2020) 8/18/2020 127  Whittington v Seale-Hayne (1900) 82 LT 49 (HC) P, a p o u l t r y f a r m e r , l e a s e d farm from D who had non- fraudulently represented that premises were in a good state of repair and sanitary condition. 12 Jenita Kanapathy (August 2020) 8/18/2020 8  In fact the premises were in disrepair and the water supply was poisoned. P sought to rescind the lease, and brought a claim for 1. refund of rents, rates paid and cost of repairs carried out in line with local authority requirements that he was obliged to pay under the ter ms of the lease and 2. all his losses relating to medical expenses of his illness, loss of livestock, and loss of profits. 12 Jenita Kanapathy (August 2020) 8/18/2020 9  Held  P was entitled only to an indemnity as to what he had spent under the actual ter ms of the lease.  Therefore P could claim only rent paid, rates paid and cost of re pair work; the remainder of his claim was in the nature of damages, and did not inevitably arise under the ter ms of the lease. 13 Jenita Kanapathy (August 2020) 8/18/2020 0  9. Excluding Liability for Misrepresentation At Common Law: L i a b i l i t y f o r a p e r s o n ’s o w n f r a u d u l e n t misrepresentation cannot be excluded Liability for negligent or innocent misrepresentation may be excluded subject to the strict rules on incorporation and constr uction (covered in Semester 1) Jenita Kanapathy (August 2020) 8/18/2020 131  S. 3 M i s r e p r e s e n t a t i o n A c t 1 9 6 7 l i m i t s freedom of par ties to exclude either “liability” for misrepresentation or any “remedy” available for misrepresentation. Such ter m “shall be of no effect except in so far as it satisfies the requirement of r e a s o n a b l e n e s s ” s e t o u t i n S. 1 1 ( 1 ) U n f a i r C o n t r a c t s Te r m s A c t 1 9 7 7. 13 Jenita Kanapathy (August 2020) 8/18/2020 2